Raymond Kerege - How To Find The Home Of Your Dreams

How To Find The Home Of Your Dreams Without Overpaying In A Booming Housing Market

Your Comprehensive Guide to Buying a Home

• • • By Raymond Kerege M.A., ePro, GRI, ABR, GREEN, Associate Broker

All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. DISCLAIMER AND/OR LEGAL NOTICES: While all attempts have been made to verify information provided in this publication, neither the Author nor the Publisher assumes any responsibility for errors, inaccuracies, or omissions. Any slights of people or organizations are unintentional. This publication is not intended for use as a source of legal or accounting advice. The Publisher wants to stress that the information contained herein may be subject to varying state and/or local laws or regulations. The reader of this publication assumes responsibility for the use of these materials and information. Adherence to all applicable laws and regulations, including advertising and all other aspects of doing business in the United States or any other jurisdiction is the sole responsibility of the reader. The Author and Publisher assume no responsibility or liability whatsoever on behalf of any reader of these materials. If your property is currently listed with a Realtor, please disregard this notice. It is not our intention to solicit the offerings of other brokers.

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Table of Contents

Nine | 60 PROGRAMS FOR HOME BUYERS

PART 3: The Final Steps Ten | 66 THE CLOSING PROCESS Eleven | 78 ORGANIZING YOUR MOVE

Part 1: Finding Your Home

CHAPTER 1

HOW REAL ESTATE AGENTS HELP HOME BUYERS

I’ll come right out at the start and tell you I’m a real estate agent — proudly so! Nice to meet you! I’m not trying to sell you anything, but I’m pleased to be of service. In fact, generally, real estate agents for buyers are paid for out of the listing agent’s commission. So, I’m not looking to part you from your money. I’m giving you the benefit of experience and advice I have picked up in my career selling houses and being in real estate transactions — for both sellers and buyers. Then, if you want me to help you find a house, we can talk. Call me if you need me. Technology has changed the way homes are sought and

bought today. In this “Information Era,” most buyers are first introduced to the home they eventually purchase via the Internet, through Zillow, Trulia, Yahoo! Homes, Realtor.com, and Redfin. These are the top five “Most Popular Real Estate Sites,” as derived from eBizMBA’s Rank, which is a continually updated average of each website’s Alexa Global Traffic Rank, and U.S. Traffic Rank, from both Compete and Quantcast.

So that means there’s no real need for a buyer’s real estate agent, right? If a buyer can find

and visit a home on the web all on their own, why involve another party? The reason to use a real

estate agent is to find a home and show homes available for sale, right? WHY HOME BUYERS NEED A REAL ESTATE AGENT Ah, not so fast, friend. The reasons to use a real estate agent today are as valid as yesterday. The ease of online transactions and proliferation of services to assist buyers in handling their own real estate transactions came recently, arising throughout the last decade. This has caused buyers to wonder if using a real estate agent is no longer necessary, or an expense that can be avoided. While doing the work yourself can save you if you buy a “For Sale By Owner” (FSBO) house and the seller agrees to reduce the price by 3% (half of what a listing agent would receive), for many, a do-it-yourself home purchase might be pricier than a real estate agent’s commission in the long run. Besides, a buyer generally doesn’t directly pay any commission to an agent on a house purchase. On most home sales, there is a “listing agent” (the agent engaged by the seller to sell the property) and a selling agent (the agent who introduces the eventual buyer into the transaction). The selling agent is sometimes called the “buyer’s agent” because he or she is often working on a certain buyer’s behalf and it’s easier than explaining that the selling agent is not the listing agent but really the buyer’s agent . There are some real estate agents that market themselves as “buyer’s agents,” “exclusive buyer’s agents,” or “buyer’s representatives.” These real estate agents have chosen to make a business of finding homes for prospective buyers and handling the negotiations and transactions attendant to the purchase. These agents want to accentuate the reasons a buyer shouldn’t go directly to the listing agent when they purchase real estate. A buyer who goes directly to the listing agent and allows that agent to “manage” both sides of the transaction is dealing with an agent who has conflicting responsibilities. Their job is to get a good price for the seller, and they might not zealously represent the interests of the buyer. Those who market themselves as buyer’s agents indicate they’re only working for the buyer in a real estate transaction.

The buyer’s agent commission is paid by the seller, with rare exceptions. They either get paid directly by the seller or set up the transaction so that the seller provides a “credit” to the buyer for how much the real estate commission is — then the buyer pays the commission. A maxim in real estate is, “No matter how it’s set up, the buyer still walks away with the house and the seller still walks away with 94% of the purchase price.” MORE ACCESS TO THE REAL ESTATE MARKET A real estate agent will have better access to the market, and a special knowledge of local conditions. The agent is a full-time liaison between sellers and buyers. An agent will have ready access to other properties listed by other agents. Buyers’ and sellers’ agents know how to put a real estate deal together. A real estate agent will track down homes that meet your criteria, contact sellers’ agents, and secure appointments for viewing the homes. On their own, buyers have a more difficult time with these things. This is even more so the case when a buyer is moving due to relocation or employment opportunity and engages a “buyer’s agent” to handle matters. NEGOTIATING IS HARDER ON YOUR OWN A real estate agent will keep the transaction “at arm’s length,” such that personalities and emotions do not become involved. Price negotiations take a special skill and understanding of the psychology of offering and counter-offering. Agents keep the transaction dispassionate and rational. For example, a buyer (you) might like a home but despise its wood-paneled walls, shag carpet, and lurid orange kitchen. When you work with an agent, you can express your opinions on the current owner’s decorating skills and complain about how much it will cost to upgrade the home without insulting the owner. Your agent will translate that to the seller that you very much like the property, but can see having to spend $xx in decorating costs, and thus offer that much less.

CONTRACTUALLY SPEAKING…

There are many contracts and documents involved in purchasing a house. The stack is more than an inch thick. Unless you’re a real estate lawyer or title agent, these documents will be foreign to you. Yet, they require detailed and accurate completions. Buying a property is not necessarily a “fill-in- the-blanks” transaction and a mistake, let’s say in title work, could haunt the buyer

well down the line after purchase. This very situation happened. A property that sat on a double lot was put on the market. The neighbor bought it to carve off a bit of the second lot to expand his own yard. The seller then put the home back on the market and it sold. Months later, through a property tax notification, it came out that in preparing new deeds for the properties, the expanded yard area was correctly in the name of the neighbor; however, the house had been transferred to the home buyer. The new homeowner now owned both houses and the neighbor owned his expanded driveway and yard. Fortunately, they were good neighbors and settled the matter with a few signatures. A real estate agent deals regularly with these contracts, conditions, and unexpected situations, and is familiar with which conditions should be used, when they can safely be removed, and how to use the contract to protect you. YOU WON’T NECESSARILY SAVE MONEY The point of not using a real estate agent would be to save money, right? Otherwise, why turn down professional assistance in finding a home to the buyers’ liking without their own effort and dealing with negotiations and the many attendant home-selling duties?

However, it’s unlikely that both the buyer and the seller will reap the benefits of not paying real estate agent commissions. It works like this: An owner selling on his own will price the house based on the sale prices of other comparable properties in the area. Many of these properties will be sold with the help of an agent; therefore, the seller profits in getting to keep the percentage of the home’s sale price that might otherwise be paid to the real estate agent (usually 6%). Buyers looking to purchase a home sold by owners without an agent may believe they can save money on the home by not having an agent involved and so look solely at FSBO houses. They might expect it and make an offer accordingly. Unless the buyer and seller agree to split the savings, they can’t both save the commission — and that’s if the listing price was not already lowered by near the commission amount to make it more market-attractive. Here’s a short list of the advantages that using a real estate agent can bring to your buying experience: ✓ Education and experience ✓ Agents are buffers ✓ Neighborhood knowledge ✓ Price guidance ✓ Market conditions information ✓ Professional networking ✓ Negotiation skills and confidentiality

✓ Handling Volumes of Paperwork ✓ Answer Questions After Closing ✓ Develop Relationships for Future Business

It’s extremely important to know the “ins and outs” of real estate agents before you bring one along with you to help in your search for a home, just so that you might know what to expect, and what will be expected of you.

WHO A REAL ESTATE AGENT IS In short, a real estate agent is someone licensed to list and sell real estate, including homes, multi-family properties, and commercial and industrial buildings. A REALTOR®, however, is somewhat different. A Realtor® is a member of the National Association of REALTORS®. While an agent is always a real estate agent, a real estate agent isn’t always a Realtor®. Real estate agents who work on behalf of the best interests of the buyer are commonly called buyer’s agents (the seller’s agent/listing agent explanation above, aside). All listing agents represent the seller, but other agents who don’t have buyer-agency agreements with prospective buyers — even though they may show homes to those buyers — are working on behalf of the seller and must obtain the best price they can for the seller. In contrast, buyer’s agents work on commission, which is contracted in the listing agreement. When a buyer’s agent brings the buyer, the listing agent must split the contracted commission with the buyer’s agent. HOW TO CHOOSE THE BEST AGENT FOR YOUR NEEDS You might feel the urge to pick the first real estate agent who appeals to or approaches you, but that’s something to avoid. Like with any professional, there are degrees of professionalism, dedication, and experience. The “wow factor” will simply wear off. Meet with prospective buyer agents in their offices. A good buyer’s agent will want to know whether you’re loan-preapproved by a financier, what kind, and the terms of the loan you’re getting. They should spend adequate time to discover what you’re looking for in a house. They should listen as much as talk and ask questions. Watch to see if the agent makes notes. If the agent doesn’t broach the topic, ask for an explanation of his understanding of agency relationships and obligations to you. The law requires agents to explain whether they’ll be working for the buyer or the seller whenever they have substantive contact with a customer or prospective client. If the agent doesn’t offer you a buyer’s agency agreement, that agent is

representing the seller , not buyer . If the agent can’t explain agency concepts to you, then move to the next agent. Be sure that the agent will be showing you all listings or properties on the market that meet your requirements, not only listings that are handled in-house. Buyer’s agents have the legal duty to put buyer’s needs ahead of their own. Even when an agent will be paid more for selling an in-house listing, they must inform you about other available, suitable listings and take you to see those you believe are viable prospects. A good buyer’s agent will provide a home-buying education. The listing agent will point out all the features of a home; a good buyer’s agent will point to the faults — or advise when they can be overlooked. Competent buyer’s agents help their buyers to think clearly as the home- buying process unfolds. For example, if a house is a good buy, a buyer’s agent might suggest looking past the dated bathroom and kitchen and look at the space above the garage that will make the perfect studio you desire. Likewise, a cute house with all the amenities, but with knob- and-tube wiring or a 40-year-old roof might not be worth the asking price. According to the San Francisco Chronicle’s Home Guide, if you decide to buy with the intention of building an addition, the agent should advise you to check the zoning before making an offer. Agree to sign a buyer’s agency agreement after you have met with an agent. Some people sign an agency agreement after attending a showing given by the agent. Working with a seller’s agent is a mistake, according to an article by Amy Fontinelle of Forbes’ Investopedia . Any information you reveal will become leverage that the seller can use in a purchase negotiation. A buyer’s agent is legally required to maintain your confidentiality, disclose material facts to you, and maintain loyalty to you. These are fiduciary duties. LOOK FOR PROPER CREDENTIALS You wouldn’t trust a doctor who doesn’t have the proper credentials and licensing. Don’t trust a real estate agent who doesn’t present theirs or doesn’t have them at all. It’s easy to find real estate agents who can take the job, but finding agents with special credentials, those who have gone that extra step to take additional classes in certain specialties of real estate sales, is worth looking into.

Here are just a few credentials within real estate that you should be on the lookout for: ✓ Accredited Buyer’s Representative (ABR): Completed additional education during representation of buyers in their transactions. ✓ Certified Residential Specialist (CRS): Completed additional training during the handling of residential real estate, such as houses and apartments. ✓ Seniors Real Estate Specialist (SRES): Completed training for the purpose of helping sellers and buyers 50+ years old. Similarly, if you choose to use a real estate agent who’s also a member of the National Association of REALTORS®, it will be a bonus. However, ensure they have credentials that are relevant to your need(s). RESEARCH LICENSING Your state will have a license board for all active real estate Realtors® and agents, which you can easily access. You will also be able to see their information, disciplinary actions, complaints, or any other information that you’ll need to help influence your decision — especially since most of the information is now posted online. TRACK DOWN RECENT CLIENTS Ask the agent to give you a list of sales they’ve made in the past year and a couple of phone numbers for references. A good agent will do so, while a bad agent will give you excuses and essentially shoot the request down. Ask the agent, before you call any of the numbers listed, if the owners were pleased or disappointed with the agent. If the agent beats around the bush or refuses to give a full answer, that’s a red flag that should tell you to move on!

Otherwise, call the numbers and inquire from them the asking price as well as the final sales price. This way, you can figure out the similarities between the properties that the agent sold and yours. After all, you will most definitely want an agent who specializes within the area of what you’re buying. GIVE THE “WHAT ELSE” TEST A good agent will know about all the other properties for sale in the area. Also, a good agent always does their research regarding the events in the current market, and those that are out there for the taking. In short, you want an agent who’s an expert of the current market, and Learning the type of market presence that a real estate agent has is the best way to figure them out. Ideally, you’re going to want an agent who has been in the business for at least five years, specializes in one or two real estate markets, and who understands which types of homes and amenities are available within your price range. You can unearth this information by asking them or by asking the state licensing authority if you’re not comfortable with asking the agent directly. You’re better off with an agent who’s engaged actively in one area and price range — e.g., residential homes around the $100,000 to $150,000 someone who always stays on top of things. RESEARCH THEIR BUSINESS ACTIVITY Once you know the area of specialization of the agent you’re considering working with, check out the available current listings under contract. Browse to the agent’s own website (every “in the know” real estate agent maintains a website today) as well as Realtor.com, a website that builds multiple properties for sale, known as the Multiple Listing Service (MLS), within an online database that you can search. You can search by agent. Most buyers will start searching on the Internet. Therefore, if an agent doesn’t have much of an online presence, or one period, then it’s best range or the $400,000 and up range. CHECK THEIR CURRENT LISTINGS

to move on. The best agents will advertise themselves on multiple platforms, especially the Internet. You want an agent who will use every tool in the book to be successful. GOING THE BUYER’S AGENT ROUTE So, you’re ready to take the plunge and look for a place to call “home.” To get the most out of it, use a buyer’s agent to avoid a flurry of paperwork, stampedes of buyers competing for the same property, and other challenges. Home buying can be exciting and exhilarating; but it can also be complex and stressful — which is why having a pro by your side can make an enormous difference. As discussed, you’ve probably heard of buyer’s agents, seller’s agents, listing agents, and so on. You’re a buyer, so what’s a buyer’s agent? True to the name, buyer’s agents assist home buyers every step of the way; they can also save you both time and money on the road to homeownership. These real estate agents will work day and night, if you listen to the advice above and find the best one for you, to ensure all your needs and requirements are met when it comes to finding the right home for you. WHAT BUYER’S AGENTS DO FOR YOU Your buyer’s agent will have a vast knowledge of the current real estate market for the area, which will include neighborhood amenities and conditions, the law, zoning issues, price trends, negotiations, taxes, financing, and insurance. Once you meet with the buyer’s agent, they’ll generally help you to determine your needs and wants when it comes to finding you a home and a neighborhood. The agent will aid you in learning about what you can afford, help you in setting a budget, provide some insight on the current conditions of the market, and explain what you should expect while shopping for a home. In addition, they will help you find a suitable level of financing. During the shopping-for-a-home period, you’ll probably meet with your agent for tours of homes in which you might be interested.

They will give your insight into the floor plans, the home’s pertinent selling points, and the overall crime rate of that neighborhood. They will also give you the rundown for cultural activities, work centers, shopping centers, and schools nearby. Your agent is responsible for ensuring inspections of the homes are complete, as well as the disclosures therein. They’re also in charge of ensuring coordination and completion is done through the roof inspector, attorneys, lenders, and all other professionals involved with the purchase of the home. If bargains need to be made over the price, you won’t have to negotiate yourself. Your buyer’s agent will do that for you, along with signing the final closing documents. They will be present whenever documents you need to go through and sign any document. DUAL AGENCY: THE BASICS A “dual agency” relationship occurs when a buyer is being represented by a brokerage firm that controls the listing. Once an agent represents both the seller and the buyer within the same transaction, the situation is known as “dual agency.” In multiple states, this is illegal because of the conflicts of interest that can arise regarding the broker. All agents hold the same responsibility, which is to inform their clients of all potential risks that could arise due to conflicts of interest. Legally, agents are not allowed to work on both sides of any transaction without consent from the clients. For example, if you’re selling your home, and you don’t want an agent to be working with the buyer, it’s your right to say so in the listing agreement. This is also true for the buyers. A buyer can get out of a buyer’s agency agreement, but only if their agent has a listing in which the buyer is interested. When it comes to dual agency, there are definite advantages for the seller. • Trust has already been gained with your listing agent, so representation for the buyer has been established. • Your agent brought you the buyer knowing that you’re selling, even if your property has not yet hit the market.

• Your listing agent will already have covered and researched your neighborhood’s market to gain buyer inquiries, which means your agent will be working from all sides of the deal to sell your house faster, and with more incentive. • Your agent works together with corporate relocation buyers who need to find a house quickly, and they will ensure it’s your house that’s bought. There are also cons when it comes to dual agency, and they are: • You can’t be advised by your agent as thoroughly when they must act as a dual agent, because impartial facilitation is required. • Your listing agent is not allowed to negotiate the best or highest price for you if also negotiating both the best and lowest terms for the buyer. • Earning a full commission, if the opportunity arises, may tempt the agent to coerce a deal that you might not accept otherwise. • Your agent may inhibit all access to your listing through buyers with agents. To avoid surprises or anything going wrong in general when going with dual agency, always ensure you properly represent and clarify your full relationship with your agent. You can do this by using an exclusive buyer agency agreement, or a listing agreement. Even with dual agency, one can’t have too many surprises once everything is outlined. There simply can’t be any surprises. HOW REAL ESTATE AGENTS ARE PAID The National Association of Realtors® 2017 Profile of Home Buyers and Sellers states approximately 8% of homeowners opted to put their homes up for sale during 2017 without using a real estate agent or Realtor®. A handful of For Sale By Owner (FSBO) transactions dealt with sellers and buyers who previously knew each other or were directly related; 87% of buyers chose to work with a real estate agent or Realtor®, on the buyer’s side.

Real estate agents and Realtors®, unlike professionals in different categories who bill by hourly rates or at the end of the project, get paid through a transaction (commission) at the end of each sale. For example, if an agent has worked with a seller or a buyer for months, they don’t get paid for the time spent if there will be no transaction during that period. Agents receive a commission once the transaction goes through to settlement (closes) based on the selling price of the home. At that point, the commission is then earned. The commission itself is negotiated — in most cases, between the client and the agent. Typically, an agent will earn a commission of 6% from the sale price, but some brokerages have commission discounts for the sellers with whom they work. Essentially, the listing agent and the buyer’s agent will split the commission. That can bring forth some issues. For example, sometimes the split might not be negotiated evenly. A seller could have agreed to pay a commission of 5.5% that, if further divided, the buyer’s agent would receive 2.5% while the listing agent receives 3% of the commission. Even though some agents are associate brokers, or brokers in general, from positions requiring licensing and extra training, all commission payments are instructed to go through to the broker who’s managing the brokerage where the agent is working. From there, the commission is then split to the agent and the broker according to the agreement that’s been made. The split will vary; sometimes, newer agents will earn a small portion of the commission compared to the experienced or successful agents who generally sell more expensive properties or homes. PAYING THE COMMISSION ITSELF The overall commission is paid for at the settlement period by the seller. The fee is taken from the proceeds of the sale of the home or the property. However, the buyers pay the commission because they’re literally paying to purchase the house, while the sellers take the commission for the agent into account during the process of determining the price for the listing.

From there, the commission is then divided during the settlement process between the buyer’s agent brokerage and the listing agent’s brokerage. Afterward, the agents who made the real estate sale are

further paid by their brokers. KNOWING REAL ESTATE

If you know all the basics, and the technicalities regarding real estate, you’ll have no trouble making the best decision on which real estate professional to hire, you’ll know what to expect, and you’ll how to go about transactions and deals, ensuring a smooth sale. • • •

CHAPTER 2

OWNING VS. RENTING Owning your own home might not be one of the defining qualities of the “American Dream,” the set of ideals that includes opportunity for prosperity and success, and an upward social mobility for the family and children, achieved through hard work. However, home ownership is surely ingrained as one of the strongest representations of that vision — 66% of Americans own their own home, and more hope they will or wish they did. Something about home ownership plucks a strong chord with Americans. Financial security, permanency, status, and pride — whatever the reason for wanting to own your own home — there has never been a time in recent memory when the health of our credit reports meant so much. Lifestyle plays a big role in the decision to own versus rent. Home buying is most often driven by household formation, such as marriage

and childbirth. Less than 40% of people under 35 years old own homes, 60% of people over 35 years old own homes, and more than 80% of people 65 years old or over own homes. Interestingly, for the millennial generation, the primary reason for buying a home? Owning a dog. The U.S. homeownership rate has fluctuated between 62% and 70% since the 1950s. Most young people begin their independent lives renting an apartment, maximizing lifestyle flexibility and minimizing the hefty upfront costs associated with purchasing a home. As they build careers, save money, and start families, many choose to buy a home,

recognizing that home ownership, as opposed to rental living, is more appropriate to their growing family needs. Their needs might be better filled in a single-family house, a condominium, a townhouse, or a duplex of their own. At the other end of the age spectrum are homeowners nearing retirement who may desire to sell their homes, downsize, avoid the maintenance and other obligations of home ownership, and go back to renting. WHICH IS BEST? Is it better to rent or buy a home? Most adults ask themselves this at some point as they form their goals and plan for the years ahead. Before you answer the question, here are some things to ask yourself. Owning and renting each have their advantages, but what’s best for you depends on your circumstances. What will be the duration of your stay in the home? Each market is different, but whether the time you plan to spend in the house warrants its purchase is possible to predict. In general terms, it takes four to seven years to break even on a home (i.e., where there has been enough appreciation to pay back the cost of the transaction and cost of ownership). If you’re thinking about buying a home and selling it in two years, buying is very unlikely to be cheaper than renting. Do you think of or need your house as an investment in your retirement plan? Americans are used to their homes being a store for wealth to liquidate in retirement and downsizing their lifestyle. In 2015, Gallop reported that, for the second straight year, more Americans named real estate than stocks, gold, savings accounts/ CDs, or bonds as the best long-term investment. Real estate leads with 31% of Americans choosing it, followed by stocks/mutual funds, at 25%. A cautionary note though — although home prices have recovered their pre-2006 market slump and continue to rise, the value of your home can fall, as well as rise. Are you financially ready? Owning a home is a financial commitment that requires planning how home ownership fits into where your life

is headed. Ask yourself what your budget is and if either buying or renting would require you to stretch your finances. Crunch all the numbers. A frequent mistake of first-time home buyers is comparing a month’s rent to a month’s mortgage payment. Many people don’t have all the numbers. There are many additional fees necessary to include to make a fair comparison: principal interest, property taxes, property insurance, homeowners’ association (HOA) fees, and ongoing maintenance. Are you prepared for the down payment? This is the lumpsum payment that funds your equity in the property (how much of the property you actually own). Down payments vary; 20% is preferred and gets the best rates. There are some loans that allow down payments as low as 3%. Sometimes relatives help with the down payment. If you have a choice, take a gift rather than a loan, because lenders will add that debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43% to qualify for a home loan. Can you afford the monthly mortgage and its components? Generally, a mortgage includes loan principal and interest (both amortized over the life of the loan) plus homeowner’s insurance and property taxes (pro-rated). These items can affect the monthly loan-only payment by several hundred dollars. Are you emotionally ready? Can you handle the stress? A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life. Four events are specifically home-related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28), and change in residence (No. 32). If someone has recently made other life changes, such as marriage, which is No. 7, switching careers (No. 18), or having a child (No. 14), it might be wise to postpone buying a home. Stress overload can lead to missed payments, which can result in destroyed credit or even losing the home. It’s better to rent if your life is in flux, and then buy when your stress levels are lower.

Are you ready for commitment? Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors? Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate in value and that will serve your needs (i.e., proximity to schools, shopping, recreation, etc.)? Are you ready for devoting the time and attention to maintaining a home (i.e., leaf-raking, grass- cutting, appliance maintenance and repair, etc.)? Taking care of your biggest investment can be gratifying, but only if you’re ready. ADVANTAGES OF BUYING YOUR HOME Control over housing expense. By selecting a fixed-rate 15-, 20-, 25-, or 30-year mortgage, the homeowner has assurance that housing costs won’t increase over the period, and, in fact, will be eliminated at the end of the term (subject to refinancing). You build equity. Some of each monthly mortgage payment goes toward the loan’s interest. Other portions may go to homeowner’s insurance and county taxes. The remainder pays down the loan principal. Every dollar put toward your loan’s principal represents a dollar of equity — actual ownership of the property. Further, the property should appreciate in value each year, further adding to equity (what the house could be sold for versus what is owed on it). With certain blip periods such as the 2006 housing bubble burst, home prices in the U.S. appreciate nationally at an average annual rate between 3% and 5% (home value appreciation in different metro areas can appreciate at markedly different rates than the national average). Improvements increase your home’s value. A homeowner can also increase a home’s value through home improvements, thus both making your home more comfortable and enjoyable while growing its loan-to-value (LTV) ratio. For instance, adding a bathroom or finishing a basement substantially increases the property’s functionality and appeal, while potentially boosting its value. Tax advantages of home ownership. There are significant tax benefits associated with buying a house, both at the time of purchase and for the duration of time you own the home:

• Homestead exemption. Many states exempt owner-occupied homes (homesteads) from a portion of the property tax amount that would normally accrue. For instance, Louisiana exempts the first $75,000 of a home’s value from property tax assessments, so a $200,000 home in New Orleans is taxed as if it were worth $125,000. • Federal tax deductions. When you’re looking to purchase a home, it’s important to understand what can be deducted on your tax return and what can’t. Property taxes and interest paid on your mortgage can be deducted if you itemize your federal income taxes, which can reduce your income tax burden. Many home buyers, unfortunately, overlook the effect of mortgage interest on their federal income tax payments. Mortgage interest can be a powerful financial planning tool. Calculate the amount of mortgage interest deductions you are eligible for and include that in your annual financial planning. Then, make a point of checking Internal Revenue Service (IRS) Form 1098 which you’ll receive from your lender at the end of the year. This form shows the amount of mortgage interest that you’ve paid. The Tax Cuts and Jobs Act (TCJA) applies from 2018 to 2025 and limits the aggregate deduction for state and local real estate property taxes; state and local personal property taxes; state and local, and foreign, income, war profits, and excess profits taxes; and general sales taxes (if elected) for any tax year to $10,000 ($5,000 for marrieds filing separately). This limit does not apply if those taxes are paid or accrued in carrying on a trade or business or in an activity engaged in for the production of income. In other words, if you are just living in your home, you can only claim up to $10,000 in tax deductions on your property, but if you are earning income directly from your home in some way, the limit might be waived. Current mortgage rates are relatively low. Interest rates vary through the years. Several years ago, interest rates were higher, and it was more expensive to obtain a mortgage. Since these costs have been reduced, it’s now easier and less expensive to own a house. Ownership rights and creative freedom. Your decorating and home-improvement choices are just that — yours, provided they don’t break building codes or violate homeowners’ association rules. You

can paint walls any which way, add fixtures, update or finish your basement, or build a patio or deck. Changing your environment to suit whims is a freeing aspect of homeownership. A sense of belonging to the community. Homeowners tend to stay in homes for longer than renters and are more likely to grow roots. They might join a neighborhood association, sponsor block parties or National Nights Out, volunteer at a nearby community center, join a school group, or align with a business improvement district. Renters might not do any of those things, particularly if they know their lease is up in a year and they might move. There’s an intangible pleasant feeling attached to owning your own house, a sense of freedom and independence. The home you live in belongs to you and you only (or your spouse or partner), and you can do what you want with it. You aren’t daunted about increases in rent or risk losing the lease. You’re free to make improvements and changes. Also, owning your home gives your children the guarantee of attending the schools in the area on a more permanent basis; you never need to worry about a notice from the landlord to vacate your rented house or apartment for a variety of reasons over which you have no control. ADVANTAGES OF RENTING

It seems a shorter list, but one man’s pro is another man’s con, and there certainly are advantages to renting to factor into your buy-or-rent decision.

No responsibility for maintenance. Admittedly, this is a big one. As a renter, you’re not responsible for home maintenance or repair costs. If a toilet backs up, a pipe bursts, or an appliance stops working, you don’t have to call an expensive repair person — you just call your landlord or superintendent. Renters in condos, townhouses, or apartments don’t have lawn and grounds care obligations. Relocating is easier. When renting, relocating for work is easier. Though a sudden move may require you to break your lease, you can partially offset the cost by subletting your apartment or talking with your landlord. On the other hand, selling a home takes time and effort.

If you have a short timeline to sell your home, you may be forced to accept a lower price and lose some of your investment. No real estate market exposure. Home values fluctuate and can decline over time. If you’re a renter, that’s not your problem. If you’re an owner trying to sell — it is. DISADVANTAGES OF OWNING Maintenance. The renter’s largest advantage might just be the homeowner’s major disadvantage. While insurance might be available to protect against expense from major catastrophe, usual maintenance items are on the homeowners’ dime. Maintenance and repair can be as simple as repainting the baseboards and can also be as extensive and expensive as replacing a HVAC system or sewer pipe. The expense will vary from year-to-year; however, you can expect to pay about 1% of the value of your home annually toward these expenses. If you live in a $200,000 home for 10 years, that’s $20,000 over the period, and perhaps more if you must replace a costly, long-lived mechanical item, such as a furnace. Keep in mind the usual homeowner’s chores of lawn care, snow removal, gutter cleaning, and other regular home maintenance needs. Upfront and closing costs. Buying a home entails numerous upfront costs. Some are paid out-of-pocket after the seller accepts your purchase offer, while others are paid at closing. These include earnest money, down payment (typically ranges from 3.5% chiefly for FHA [Federal Housing Administration] loans to more than 20% of the purchase price), home appraisal, home inspection, property taxes, and first year’s homeowner’s insurance. Loss of relocation flexibility. It’s much easier to break a lease and move out of town than to arrange for the sale of a residence. Selling the home from out-of-town involves its special logistics and financial problems, such a dealing with the mortgage while the home is on the market. Financial loss potential. Homeownership builds equity over time; however, equity doesn’t equate to profit. If home values in your area go down or remain stagnant during your time as a homeowner, the

appraised value of your home could decrease, putting you at risk of a financial loss when you sell. DISADVANTAGES OF RENTING No equity building. The monthly rent you pay goes to the landlord. It represents the fee you pay for using the property. You gain no ownership in the property, no matter how long you live there. No tax benefits. While homeowners can deduct property taxes and mortgage interest on their tax returns, renters aren’t eligible for housing-related federal tax credits or deductions. Home improvements go to the landlord. Any structural and decorative home improvements that renters make belong to the building owner and will have to stay behind when you move to a different place. Additionally, approval for desired major redecoration will be necessary. After all is said, the decision to buy or rent depends on the prospective home buyer’s circumstances. There’s no denying, though, that a home of your own is a good financial and a great emotional investment. An investment in a home can also mean an investment in the future of your children. Little is better than leaving a home behind as a legacy for your children to enjoy. There is much to consider when you want to buy a home. Switching from renting to homeownership is highly challenging, but an exciting and amazing decision to make. Owning a first house is the first step in the direction toward the home we’ve all been dreaming of. Because, at the end of the day, as we all know, there is no place like home. • • •

CHAPTER 3

BUYERS’ NEEDS AND DESIRES After you’ve decided to buy a home, what sort of home it will be is your next decision point. It’s a better approach to have a rather concrete vision in mind of what type, features, and amenities you want in your home, rather than a “shotgun look” at every listing that’s out there in your price range. Imagine your dream house. It fulfills both your needs and desires. It fits the need for a good roof over your head, a sturdy structure, modern fixtures and appliances, living space (i.e., bedrooms, living room), and functional rooms (i.e., kitchen, bathroom[s]). Your needs fulfilled, you turn to your desires. A home on the beach or in the woods, a gourmet kitchen, wood-paneled den, crystal chandeliers over a banquet table in the manor-sized dining room, and an Olympic- sized swimming pool with a hot tub and sauna. In your first home, you must ensure all needs are met; however, there are probably going to be some desires that you’ll have to let go (for now) due to affordability issues. Decide your needs vs your desires . • Would you like a swimming pool? Enough that a home without one will not be looked at? • In what areas or neighborhoods might the home be located? Where do you want to live? Where might you have to live for work commute or home price reasons? • What features would make it special? • What can you afford and what is out of your budget? Budget usually constrains us most in selecting a home. While some things are necessary for any home (as mentioned, the good roof, a working furnace), others will just stay on the list of desires for now (the sauna or that home in Beverly Hills).

MAKE A LIST; CHECK IT TWICE

You may have an impression of what you want in your new home. Putting that to paper and having a complete checklist can prove useful. Before starting your hunt for a new home, it’s advisable to make a list of all your basic needs and desires, then prioritize the desires, figuring that all needs must be met in any house under consideration. This will make the search easier and help weed out the ones that don’t meet the basics. Realize, however, that it’s nearly impossible to find a home that meets all requirements. Compromises

will be necessary. It’s a good idea to work from outside-the-house factors to inside-the- house. For example, location is perhaps the primary concern and both “needs” factors and “desires” factors might be involved. A “need” would be “must be within 25 miles of work.” A desire might be, “would like Westwood” (a favored neighborhood), while a need might be “on west side of city” (because work, family, friends, and recreation activities are all located there). Location needs may include proximity to schools, frequently used recreation facilities, or mode of transportation (bus or suburban rail access). Whether an item is a need or a desire depends on circumstance. Closeness to family might be a need for a couple with young children or elderly parents to care for or a desire if those factors aren’t involved. It’s items like these that make a checklist most helpful. After location needs and desires are compiled, housing factors can be considered. Needs include having all essential house structures and systems in good working order. Accepting a house with need for a new roof because the owner is willing to knock $7,000 off the listing price — but it will cost $10,000 to replace the roof in two years — is not a sensible deal.

Needs might include a minimum number of bedrooms and bathrooms, no steps, fenced yard (for pet owners), perhaps a first-floor laundry facility, and any feature the prospective buyers have decided they cannot accept a home without. Desires are features that make the home more attractive or enjoyable — an upgraded kitchen, walk-in closets, a master bedroom suite. Of course, one buyer’s need is another buyer’s desire. The point is to know your own needs and desires so you can easily assess potential properties and make the process smoother. Regardless, buying a house is not a simple process. Much of the planning should be done well before contacting a real estate agent or looking at homes. Work the costs as well as your budget. Choose a general location. Contact lenders well ahead of home shopping so that your offers aren’t tied up in getting financial approval. Having the image of your dream home is reality married with imagination. In fact, you may find that some aspects of the house you intend to buy are different. It’s not the same as what your dreams would have told you. Different people have different requirements. It depends on your thought processes as well as personality. We understand important things and potential compromises differently. Needs are basic requirements that just can’t be ignored or compromised. Desires, on the other hand, can be left behind if the situation demands it. You need to make a clear distinction between what your needs are and which items you would classify as desires. No matter how many desires you have unfulfilled now, they can be worked on later. A pool can be added after a promotion or two. Maybe you don’t like the color of the walls or the window frames. Paint color is rarely a need, but not having a garage if you are a shade-tree mechanic is. A NOTE ABOUT PETS Consider your pets in your home shopping. Home buyers who are pet owners have specific requirements — they must provide for their pets. A third of millennial-aged Americans (ages 18 to 36) who purchased their first home (33%) say the desire to have a better space or yard for a dog influenced their decision to purchase the home, according to a survey conducted online by

Harris Poll on behalf of SunTrust Mortgage. Dogs ranked among the top three motivators for first-time home purchasers and were cited by more millennials than marriage/upcoming marriage, 25%, or the birth/expected birth of a child, 19%. It’s essential that the neighborhood in which you’re going to buy a house in has no restrictions on pets. Do you raise American Staffordshire Terriers? There are cities that ban this breed (aka pit bull). Goats? Vietnamese pigs? Have you always had fresh eggs from your own chickens? Include your animals in location planning. Some pet owners choose wood or other hard flooring, not wanting to risk pet damage or odors. An appropriate-sized fenced backyard is on the “needs” list for many pet-owning house buyers. Consider the arrangement of rooms and the structure of the house to ensure it’s suitable for your pets, too. Traffic in the area could be another checklist item. Pet services such as veterinary, grooming, and exercising should be conveniently nearby. LOCATION, LOCATION, LOCATION! You must make sure to limit your search to a neighborhood that offers the closest possible match to the kind of lifestyle that you like and want to live. Trulia recently conducted a survey with Harris Interactive, and the real estate site found 84% of Americans said the neighborhood would be equally important or more important than the house itself if they were searching for a new home. Location is so important that people are willing to give up “must-have” features to buy into their desired neighborhood — 72% would forget about a pool, 55% would lose a finished basement, and 33% would accept less square footage. What matters is living in a safe place with good schools. According to Trulia, 69% would drive through the neighborhood during different times of day to determine if the neighborhood was the right fit.

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