You’ve probably seen distressing news reports about the failure of the new home appraisal process (called the Home Valuation Code of Conduct) for loans eligible for purchase by Fannie Mae and Freddie Mac. It doesn’t apply to FHA loans or jumbo loans. Since the new system went into effect on May 1, 2009 it has sent home appraisals into chaos. Some deals are falling apart, and appraisers, loan officers, consumers, and real estate agents alike are complaining about the whole process.

The New Appraisal Rules
Under the old system, your loan officer would review a list of approved or known appraisers familiar with the location of the home and then choose one to schedule the appraisal. It usually cost the consumer about $300 and took about 3-5 days. The appraiser, the lender, and the real estate agents could all communicate with each other. Some large banks did use appraisal management companies (AMCs), but loan officers could still contact the appraisers assigned by the system. If your bank didn’t approve your loan, you could take the appraisal to another bank without paying again.

Under the new system, the loan officer can’t speak to the appraiser. Instead, the lender orders the appraisal from the AMC. The AMC assigns the next available appraiser in the geographic region. The appraiser conducts the appraisal and enters the report into the system within 24 hours. The appraisal is reviewed be a supervisor who may not be local. It is then sent to the loan officer.

Why the New System is Bad for Everyone
Consumers:
the major reason this new system is bad for consumers is the cost. Instead of the average $300, it now costs at least $400. Ours cost $540 because our home is worth more than $500,000. In addition, we had to pay that up-front via credit card rather than pay it at closing.

Appraisers: Rather than receiving the bulk of the appraisal fee, most appraisers now receive $200 or less and have to turn it around faster. In addition, they may have to conduct an appraisal far outside of their area of expertise. In our case, the appraiser came from a different county, nearly 40 miles away.

Real estate agents: Real estate agents are concerned because the appraisals are derailing contingency periods, while REO sellers (banks) are pushing for shorter contingency periods. They’re also concerned that appraisals are coming in low. Low appraisals may be valid if they reflect the market, but they’re a problem if the low value is based on inaccurate comparables.

Lenders: Finally, lenders don’t like the new system because they’re cut off from the process. The loan officer can’t call the appraiser to check on a late report. If there’s a problem, they can’t contact the appraiser to have it corrected or supply more accurate comps.

I spoke to our loan officer today and he said about 2% of appraisals come in high. 70% come in on target. Nearly 30% come in low.

Our Appraisal Story
We’re buying an REO, which means the bank insisted on a 10-day contingency period for our inspection, appraisal, and loan application. Traditionally, appraisals are conducted before inspections to avoid wasting money if the appraisal comes in low. Initially, were going to have to do our inspection immediately because of the short timeframe, but the bank was slow to assign an escrow company, which bought us enough time to get the appraisal done first. Here’s the timeline from the day our offer was accepted.

Day 1: Offer accepted. Interest rate locked. Appraisal ordered.
Day 2: Updated financial documents delivered to complete loan application.
Day 3: Appraiser calls our agent to confirm appraisal.
Day 5: Appraisal conducted.
Day 8: Escrow opened. Contingency period starts.
Day 9: Appraisal returned. It came in exactly at our purchase price, and our file was sent to underwriting.

From what I hear, this was a relatively quick process. Some people wait 10 days or more to get an appraisal.

Why the New System Was Introduced
As we all know, there was fraud in the system. Washington Mutual had a cozy relationship with appraisers and would demand that they “hit the number” or risk not being assigned another appraisal. This led to the rapid increase in valuations, many of which were not sustainable or were tied to fraudulent loans.

New York Attorney General Cuomo threatened to sue over this fraud unless the new system he created was instituted by Fannie Mae and Freddie Mac. The irony is that Washington Mutual was using an AMC it owned. Furthermore, AMCs are unregulated. Independent appraisers are regulated. So he took a regulated system with some bad actors and replaced it with an unregulated system that does little more than reap massive profits for AMCs, most of which are owned by banks.

We were lucky. Our appraisal was returned quickly (but not without a week of stress for me.) The appraiser did a good job and pulled appropriate comps. Most of all, we can afford to pay the appraisal fee up-front. Although it will be credited back to us at closing by the lender, but we’ll have to pay our credit card bill before we close.

If you’re in the process of buying a home, you need to be aware of this new system and plan accordingly. You may also want to ask your agent to pull his or her own comps in case you need to make a case for your purchase price.

You’re probably familiar with the warranties your electronics came with – those convoluted promises it’s impossible to make a claim under. A home warranty is not exactly the same, and it can be issued on a house of any age. If you’re a new owner, you should get one. Current owners should consider it.

What a Home Warranty Is
A home warranty is a service contract on the appliances and systems in your house. If your dishwasher breaks down, you can file a claim under the home warranty to have it repaired or replaced. You’ll have to pay a service fee for the initial visit to diagnose the problem.

What It Includes
The warranty is not for items like the foundation or roof, although you may have a separate warranty for these if you’re buying a home directly from a builder or the home was built very recently. If you have an older home, those items would be included in the homeowners insurance policy. This warranty typically covers the systems, which are often excluded by your insurance policy:

  • HVAC
  • Appliances
  • Water Heater
  • Plumbing
  • Electrical

Before buying a policy, review it carefully to make sure the systems in your home are included. For example, well pumps aren’t usually automatically included. If your systems aren’t included, ask if there’s a policy or add-on that does include them.

How Much You’ll Save
It depends on the problem. If it’s a minor problem, your service fee may cover the cost of the repair. However, if it needs replacing, you could save thousands of dollars on a new heating system or major plumping repairs.

How to Get a Home Warranty
If you’re shopping for a home, include the home warranty in your offer as one of the items paid for by the seller. The seller may not agree to this cost, but most will. If the seller won’t, you can buy it yourself. Some real estate agents will buy it as a gift for you at closing.

If you already have a home, you can add a home warranty at any time. You can renew it annually.

Warranty Costs
The cost of a home warranty varies by region. It can be as low as $250 and as high as $500. Service fees also vary by region and service, but can range from $25 to $100. If you have a new appliance with an existing warranty, that should be your first call. However, if you have an older appliance, the home warranty may extend the coverage without the added expense of an appliance-specific extended warranty. As someone who spent a year fighting a major appliance dealer to have the extended warranty honored, I can tell you the high cost of the extended warranty isn’t worth it. Just get the home warranty.

Why New Owners Need It
If you’ve been living in your home a while, you know the issues that generally occur and about what it costs to fix them. You know how old your systems are and when you can expect to replace them. As a new owner, you don’t always have this information, and haven’t had time to save up the money for the needed repairs or replacement. You don’t want to be five months into your new home and discover the heating unit has broken at the start of winter, and then have to come up with $2,000 to fix it.

Even though it seems like one more expense to add to an already expensive process, a home warranty is key for new h

Many people have noticed an interesting phenomenon in the housing market: tons of would-be buyers are flocking to low-priced homes. Some speculate that the first-time buyer credit is the cause. But is this really true? Is the new car tax deduction having the same result?

Does the First-Time Buyer Tax Credit Motivate You to Buy?
I think the answer here is: it depends. My husband and I are happy to accept the tax credit if the government is going to give it to us, but it didn’t change our target price range or goad us into buying this year. We’d always planned to buy this year. We have, however, seen more people out looking. At the same time, prices in Los Angeles have fallen precipitously, to the point where first-timers can now afford to buy, so I’m not sure if the credit is fueling sales as much as the low prices.

You also have to consider that the tax credit isn’t anywhere close to 10% of the purchase price in Los Angeles. Here it’s no more than 5%, and it’s probably closer to 1-2% of the price for first homes in the popular areas.

However, if we were buying a place like Kansas or Michigan, that extra $8,000 could be a very important consideration. There it could potentially be 8-10% of the purchase price. Since the FHA is also now allowing buyers to use the money as part of the down payment, it’s suddenly become possible for people in lower-priced regions to put down a substantial down payment. It’s also made it easier for people shopping in the low-end of higher-priced regions to make it to the required 3.5% down.

Apparently Congress believes the credit has been effective enough to warrant boosting it to $15,000, but that may be more of a gambit to boost home prices for current owners who want to sell. There’s been speculation that prices have risen as a result of the credits.

Does the New Car Tax Deduction Motivate You to Buy?
It certainly doesn’t seem like people are rushing to buy cars the way they’re rushing to buy homes. That could partly be because most people don’t need new cars – most cars on the road are less than three years old, which is hardly dire. It could also be that the deduction is worth a few hundred bucks at most – hardly the thousands that could actually alter your finances.

The deduction is unrelated to my reason for buying a new car. In my case, my car will be twelve by the time I replace it. It’s time. The deduction is just a nice bonus for something I already planned to do, like the new home tax credit.

Does the Cash for Clunkers Program Motivate You to Buy?
Since my clunker doesn’t qualify for the voucher, I certainly wouldn’t consider this a motivation to buy a new car. For some people, it might, but the majority of people who qualify under this program have cars that will fetch more than $3500 or $4500 as a resale or trade-in. It might get some of those 1970s-1980s boats off the road, but many of those have already died.

What do you think? Will you trade in your SUV for a more efficient car because of the Clunkers program? Will the new car deduction motivate your purchase? Has the first-time buyer tax credit caused you to rethink your home purchase plans?

From my point of view, they shouldn’t. If you want to buy a home and can afford to buy a home, then buy a home. If you want a new car and can afford a new car, then buy a new car. However, stretching your limits to take advantage of tax credits may lead you down a dangerous road.

We finally got an offer on our first house accepted, but before we accepted the acceptance (weird, but that’s how it works in California), we decided to get a second opinion. My parents came down for the weekend and we went to the house for an hour and a half to check it out. It was the best thing we could have done to make sure it was the right house for us.

They Helped Us See Potential Issues with the House
My dad is analytical, so he pointed out potential flaws and checked things we hadn’t previously checked, like air-conditioning, water heater, etc. Since it’s a foreclosure property, it’s unoccupied and there’s no telling what surprises the house may hold. We didn’t see anything major, but having my parents there to check for flaws and give the benefit of their experience helped. For example, they pointed out that the refrigerator space is too small for a standard-sized refrigerator, but we were able to find an affordable solution to that problem while we were in the house.

They Helped Us See the Potential Advantages
There were a couple things we were concerned about. My mom has a designer’s eye, so she automatically saw affordable changes we could make and pointed out design issues and advantages that we hadn’t seen before.

They Were Unbiased
This is very important. Their primary concern is making sure we get a house we like and that won’t turn into a money pit. If it was a terrible house, they’d be more than willing to tell us because they’re not invested in the property.

We Had More Time to Consider
Most people spend about 15 minutes in a house before making an offer. We had about 30 minutes – long enough to know we liked it. But this is a major commitment. Now that we’ve spent more time at the house, I’m more confident in our decision. Some rooms were smaller than I remembered, but other rooms were bigger than I remembered.

If you’re thinking of buying a house, I highly recommend that you take someone to see the property before going into escrow. Preferably, this person should be an experienced homeowner who won’t be rooting for you one way or the other. You don’t want a cheerleader, you want someone who will scrutinize the property.

Last night my husband I looked at our 50th house since our home-buying odyssey began. I knew the moment I walked in the door that it wasn’t the right house. I couldn’t do that when I first started looking, but now I know. If you’re not quite sure you’ll know when it’s right, here are 9 signs that it is, and one that it isn’t.

You Get the Flutters
Remember when you first fell in love? Every time you saw your beloved, your stomach fluttered. It’s the same with a house. If I get the flutters when I’m in a house, I know it’s right for me. With some houses, the flutters are strong, like the second house we made an offer on. With other houses, the flutters are softer, but still noticeable, like with the house we currently have an offer on.

You Forgive Flaws
In some houses, I see flaws and refuse to consider them. However, with other houses I’ve been willing to overlook the flaws. An example is oven-size. Since we’re looking at older homes, many of them have small ovens. The second house we offered on had an oven that was a little smaller than I would like, but I was willing to overlook it. I wasn’t willing to do that with other houses.

It Doesn’t Have Your Dealbreakers
Even if I’m willing to bend on some things, my dealbreakers are still my dealbreakers. For example, even if it has updates and decent-sized oven, a too-small kitchen is still a too-small kitchen. I can’t overlook that, and houses with too-small kitchens don’t give me flutters. A house without AC is still a house without AC. I don’t even bother to look at those.

You Feel Pride in the House
Would you feel proud having people over to this home? Can you imagine yourself coming home to the house and feeling happy? Then it’s your house. We’ve looked at some houses that needed work and I could see the potential, but there were certain factors, like the location, that would always embarrass me. That meant it wasn’t the house for me.

You Can Imagine Putting Your Stamp on It
No house is perfect, not even a mansion. You’ll still need to put your own stamp on it – things like furniture, paint color, landscaping, etc. Can you see how you’d arrange your furniture? Can you see how you’d like it to look, and is that image affordable?

Recently we saw a gorgeous house that was nearly 2600 square feet (huge for LA, and massive for our price range.) Ultimately, we didn’t make an offer. We just couldn’t see how we’d live in it, despite the size.

It Meets Your External Criteria
Even if the house is perfect, it may not be right for you if it doesn’t meet your external criteria. I don’t even bother to look at a house if it doesn’t meet my school or commute standards. No matter how much I love a home, I can’t change traffic patterns or schools and those are important to me.

The House is Emblazoned in Your Memory
After looking at fifty houses, you’d think they’d all run together. The homes we like enough to make offers on stand out. I can still picture the details of those houses. I can remember how I felt in them and I obsess over them while we wait for responses on offers.

You Can Afford It
This is key. Sure, I could look at a $2 million house and see all of the above, but I can’t afford the house, so it’s not right for me.

You Want the House – I Mean Really, Really Want
Plain and simple, you walk away wanting the house. You want to make an offer right away. You can see your bidding strategy and know what you’re willing to pay. That said, make sure you don’t lose your head in a bidding war and overpay, especially in this market.

At a certain point, say when you’ve looked at 46 houses and have been in the market for six months, you might be ready to throw in the towel and just buy something, anything. Remember this sign that this isn’t the right house for you:

You Sort of Like It
Sort of liking it isn’t enough. You have to live here for a long time. You can’t just move in a year as you can with a rental. Don’t just buy a house because you’re tired of looking. My husband and I looked a house two weeks ago that we sort of liked, and could sort of see ourselves in. There were aspects we loved, but not enough to win us over. With the help of our agent, we realized we were capitulating. At this point, I can’t even remember what the house looked like or where it was.

People who aren’t married ask how you know when he or she is the “one.” It’s the same with a house. You know when you know, it’s as easy as that. Don’t settle until you find that feeling.

“Bidding war?” you may say. “No one gets into bidding wars anymore.” Au contraire. If you’re trying to buy in a real estate market where prices have fallen significantly and the market is loaded with foreclosures and a few traditional sales, any well-priced home in good condition will generate multiple offers and potential bidding war. If you’re bidding in a multiple offer situation, here’s how to keep your head.

Make Sure You Really Like the Property
We just went to offer in a multiple offer situation, but we thought carefully about it first. We like the home, but we don’t totally love it. We still love another home that was foreclosed before our offer was accepted, but we can’t wait around for it to come back on the market. The home we just submitted an offer on is a good home we can see ourselves in for a long time. It’s just not our “dream home.” Unless you hit the lottery, your first home rarely is.

Check the Comps
The next step is to carefully review the comps. If you’re buying in a development, comps are easy. See what similar homes closed for in the last three months and use that as your price guide. If you live in an older region like LA where every home is different, then comps are tougher. I generally use an average of the price per square foot for properties with similar square footage, upgrades, bedrooms, and bathrooms within in mile of the house in question.

Determine What It Will Appraise For
This is key. Your agent should be able to offer some guidance here. You could offer 20% over asking if you want to, but it won’t matter if the home doesn’t appraise for that amount. Unlike the bidding wars of the mid-2000s, homes really do need to appraise now, and standards are strict.

Set Your Maximum Price
This is the second key. Once you’ve checked the comps and have some idea of the value, then you can set your maximum price. This is the price you can afford at current interest rates and that you’re comfortable paying for the home. That might be 10% over asking, it might be 5% over asking. It might be asking price. Remember that price. If the bidding goes to multiple rounds, be prepared to drop out if it goes too high. This isn’t a $40 googaw on eBay. You’re spending many thousands of dollars – this is one time you can’t afford to lose your head in a bidding war. There will be other homes.

Choose Your Bidding Strategy
If yours is the first offer and you think the home will go to multiple offers (your agent will have a feel for this), then you can probably start right around asking price. If there are already multiple offers, and some are over asking, you might want to consider making your best offer out of the gate. If the seller comes back to all offers with “submit highest and best,” you don’t have to do more paperwork. Or, if yours is already the highest, they might just accept it.

Don’t Be Talked into Overbidding
With traditional sales, it sometimes happens that the seller will respond to several offers with a minimum price to start the next round of bidding. If that number is above your max, then let it go. Don’t try to sweeten the pot because you’re feeling competitive. Again, there will be other homes. Frankly, I’m relieved we were outbid for the first property we made an offer on. We’ve seen much better homes since then.

If the requested number is below your max, and higher than your initial offer, then you could offer up to your max, or you could choose to walk.

Don’t Assume the Seller Will Renegotiate Later
Some buyers assume that bidding over the market value is okay, because the seller will be forced to come down if the house doesn’t appraise. Maybe, maybe not. Remember, you’re dealing with real people. As a species, people are stupid. We may be smart as individuals, but we often make stupid decisions. The seller could decide to wait and see if it will appraise higher later (it won’t anytime soon, but see my previous sentence.) The seller could ask you to make up the difference in cash (you’re under no obligation to do so if you included an appraisal contingency in your offer.) The upshot is this: the seller might come down, or they might not and everyone’s time has been wasted, along with the $450 you just shelled out for the appraisal.

Buying a home is exciting, and if you fall in love, you might do desperate things to make sure you get it. So, I’ll say one final time: there will be other homes. They will be in your price range. You will have an offer accepted eventually. If you wait long enough, you may even save more money so you can qualify for better terms.

Since we started this process, we visited 30 open houses to determine our needs before we hired our agent. In that time, we saw four that we could imagine ourselves making offers on. Since hiring our agent, we’ve looked at 19 more and made just three offers. Every week there are more homes on the market. So be patient. When it’s the right house, you’ll make the right offer and the home will be yours. You just need to have a little faith.

Over the course of the last two weeks, mortgage rates “skyrocketed” from 4.85% to 5.45%. Some people are acting like this is the end of the world, but really it’s not. Although it will affect people’s bottom lines, in the long run it’s probably good for the economy.

Higher Interest Rates and Your Current Mortgage
If you already have a fixed-rate mortgage, then higher interest rates have no immediate affect on you. If your rate is already around 5.5% and you were trying to refinance, there’s no point in doing that now. However, it probably doesn’t really affect you because most people were unable to complete a refinance when rates dropped – the banks were too swamped to close the loans during the lock period.

If you have a rate above 6%, then it’s still worthwhile to refinance, and it may actually be easier to close now because there are fewer people trying to do it.

If you have a variable-rate mortgage, now is still a good time to try to refi into a fixed rate. Ultimately, mortgage rates will have to move higher. I don’t think we’ll see the double-digit rates of the 1980s, but 6-7% is not unthinkable.

Higher Interest Rates and Prospective Buyers
If you’re trying to buy a home, then higher interest rates could impact your ability to buy. When my husband I were first approved for a loan, rates were around 5.5% and we had 15% down. We set our max price at $600K. When rates fell to 4.85%, we could have pushed our limit up a little, but chose not to. With rates higher again, we’re back to where we started. The difference for us is about $270 a month, but we had already budgeted that amount.

If you don’t have 20%, or are trying to do an FHA loan with 3.5% down, then higher interest rates could reduce your price range. These loans have PMI, which is already $200 a month extra (in the $600K price range). Add an extra $310 a month in mortgage costs, and you may not be able to afford that anymore.

However, if you can still afford to buy, you may see less competition for homes, and you may actually be able to close your loan in 30 days because loan processors aren’t overburdened with refi applications.

Why Did Interest Rates Rise?
Interest rates rose because they were so low that it was inevitable. Rates only dropped as low as they did because Treasury was buying up bonds. The US can’t afford to continue that forever. Non-Treasury bond buyers were demanding higher yields at the same time that a stock market rally was decreasing demand for bonds. Bond buyers were also concerned about inflation, which is another reason rates moved higher. The economy needs bond buyers in order to make a complete recovery.

In addition, the short-term Fed rate is currently 0%. It can’t stay there. Some experts expect the Fed to increase it by the end of the year, which is a hopeful sign that the economy is improving. When that rate rises, other rates will probably rise with it. It’s not a direct correlation, but it has an effect.

Some mortgage experts predict that rates will rise a little more and then come down again. Probably not as low as 4.85%, but I consider anything below 5.5% to be a great rate, and 6% to be completely reasonable.

What Should You Do?
Rather than setting a price based on the lower interest rate, figure out what you can afford to pay each month regardless of the current rate. Ask your mortgage broker to use the current interest rate to give you an estimate for the home price that correlates to the monthly payment you can afford, but also ask what you could qualify for if rates went up to 6%. Use that number as a guide to what you can afford. Then you’ll be in an even better situation if rates fall again.

Also keep in mind that higher interest rates often result in lower home prices, because people can’t afford to overbid by quite as much. You could end up getting the same home with the same payment for a lower price if this trend continues.

Several counties have begun sending out updated property tax assessments to request declining home values. You probably received notices of increases while property values were rising. Many people don’t know that they have the right to appeal the assessed amount if they feel it’s not right. If you’re successful, you could save thousands of dollars, but there are risks, too.

How Property Tax Reassessment Works
It partially depends on your state, but basically, your county assessor annually reviews property values and either increases or decreases property taxes based on estimated current value. However, this is done by a formula, not by a personal review unless you’ve requested a reassessment, bought a new home, refinanced a mortgage, or made permitted home improvements that prompted a reassessment (for increased square footage.)

When you receive your notice, it will indicate the current assessed value, the tax, and a due date. The notice should also indicate a deadline to appeal your assessment.

Reasons for Appeal
You can appeal your assessment if you feel it overvalues your home, but not simply because you can’t afford to pay the tax. Some reasons why your home may be overvalued:

  1. Local sale prices have significantly decreased in your neighborhood
  2. Your home is not upgraded
  3. The listed square footage is wrong
  4. Changes to the neighborhood have depressed the value.

How to Appeal
Find the forms. The notice should provide instructions for appeal. If not, visit your county assessor’s website to download the proper forms. If you miss the deadline for appeal, your property tax won’t be adjusted in time to reduce your payments this year, but you may receive a refund later.

Build Your Case.
When requesting the appeal, state your case clearly. For example, if the square footage is wrong, indicate that. It’s possible that the assessor saw your enclosed porch and assumed it was fully finished. They may be working off a set of plans for your neighborhood that your home deviates from. It’s very common for older homes to be recorded with an incorrect number of bedrooms, bathrooms, or square footage.

You will also need to find comps for your home. Check the MLS for recently sold homes with the same square footage, number of bedrooms, and number of bathrooms. If you live in a recently built subdivision, it should be easy to find homes like yours. It’s more difficult in older neighborhoods, but it can be done. Look for the comps with lower values than yours to prove your case. If all the comps are higher, then you run the risk of having your taxable value increased instead.

Finally, consider any changes to your neighborhood that could negatively impact your resale value. For example, new train tracks, a freeway expansion, or a new high-traffic development could be cause to reduce your value, even if they don’t actually bother you.

Schedule the hearing. Some counties require you to visit the assessor’s office for a formal hearing. Others will send an assessor to you. Some will even handle the whole thing by mail. If your county’s process is very complicated, or notorious for refusing appeals, consider hiring a real estate appraiser or lawyer to make your case for you.

Watch Out for Scams
Property tax reassessment scams have been around for decades, but they’re becoming more prevalent as property values decline. If you receive a notice about your property value, review it carefully. Watch out for the following red flags:

It’s not an official document from the county assessor’s office. Scammers will send official-looking documents that reference “tax adjusters” or “tax review.” Check the address on the document. It should match that of your county assessor’s office, not a PO Box or business address.

The reassessment requires a fee. There is no cost to have your property reassessed by the county, so you shouldn’t pay a dime unless you hire a private appraiser or property tax lawyer to plead your case.

Most of these aren’t true scams in the sense that they’re trying to steal your tax payment. In most cases, they just want to be paid for doing something you could do for free.

Risks of Reassessment
There is always a risk to being reassessed. Your tax bill could go up, especially if you’ve done extensive remodeling without being reassessed or your home has been incorrectly recorded and is larger than stated.

Property tax values rise and fall every year. If your tax is reduced this year, and property values start to rise again next year, your bill will go up, but at least you’ll have save some money this year.

If you’re in the housing market right now, you have to make a major decision about whether you’re willing to buy fixer-uppers. Due to the foreclosure crisis, there are a lot of homes on the market with half-finished projects, or no upgrades. The previous owners either bought more than they could afford or got started and then ran out of money.

How to Get a Feel for Fixers
When you first start going to open houses, include some fixer uppers on your tour list. That way you’ll get an idea of what sorts of fixes are typical and what you’re really prepared to handle. It will also give you a feel for your budget. If fixers are all you can afford, you might need to scale down your other needs or wait to save more or prices to fall. If you can afford a spruced-up house, but are willing to do some work, a cheap price on a fixer could be a good opportunity.

On your tours, note things like run-down kitchens and bathrooms. What’s the dealbreaker for you there? Is it the ancient oven? The cramped shower? We’ve seen some that just needed cosmetic upgrades, but we’ve seen others that weren’t habitable. Where do you draw the line?

If the house is in a serious shambles and this is your first purchase, I would keep looking. Save that one for the investors with the money, resources, and experience to do the job right.

What Are You Willing to Do?
We’ve made two offers so far. One had been fully upgraded and needed no work. We were outbid (the buyers overpaid, we feel.) The other was most of the way there, but would eventually need new appliances and cabinets. The bank foreclosed before considering our offer there, so we’re watching for it.

We also considered making an offer on a fixer, but the location stopped us. The rest I saw as a canvas. The kitchen, bathrooms, and floors needed upgrading, but it was livable in its current condition and had a lot of potential.

Ideally, I’d like to get a low enough price that I could do the kitchen and floors before I moved in. I can wait a few years to upgrade bathrooms. Landscaping is a great summer project.

For the kitchen, are you willing to do a teardown or simply upgrade the current arrangement with new cabinets, counters, and appliances? If you don’t want to do a major renovation, then make sure the current layout will work for you.

What’s Your Budget for the Purchase and Repairs?
During the boom, buyers would use all of their money for the purchase and assume they’d get a home equity loan for upgrades right away. Unfortunately, many couldn’t do that because they’d already bought the house with a 100% loan.

If you’re considering buying a fixer-upper, you need to be able to put 20% down and then have cash left over to do immediate upgrades before move-in. That means you’ll also need sufficient cash to cover a mortgage and rent for a couple of months while the work is done.

In our case, I would look for a price-point that allowed us to put 20% down and left us with $40,000 in cash for an immediate kitchen remodel and flooring upgrade. (If necessary). Those are two of the most common failings we see. Sometimes the floors just need buffing, but others need to be replaced. Then I would see what I think it would cost to upgrade the bathrooms in two years and make sure we could save the cash for that, too. In our area, that means looking for a home that’s about $160,000 less than our upper price limit.

How Much Work Does the House Need?
Some upgrades are common and affordable. Others should probably stop unless you’re a professional. That includes relocating walls, major foundation repairs, and new systems. Many homes need a copper re-pipe, which is common. But a copper re-pipe, new roof, new kitchen, new bathrooms, new floors, new wiring, and foundation repairs is too much for the average homebuyer to do on one house.

Is An Upgraded Home Better?
If you don’t have a cash-cushion, then paying a little more for an already upgraded home is probably the better option. In this case, your purchase price and mortgage will be higher, but you won’t have other costs to deal with. If you don’t have 20% at the highest-price point you’re considering, then this is really your only option.

What’s the Advantage of a Fixer?
There are four advantages of fixer-uppers, at least in my mind.

  1. They’re cheaper. You can save tens of thousands on the purchase price by buying a fixer. This will reduce your mortgage, monthly payments, and property tax.
  2. You can put your own stamp on it. An already upgraded home was done to someone else’s taste. If you do the upgrades, you can make it into your dream.
  3. Immediate equity. If you buy a fixer-upper and then put in $40,000-$50,000 of improvements, you could easily increase the value of the home by $75-100,000.
  4. If your local market is still declining, a cheaper home offers more protection against losing money when you sell.

Fixer-uppers aren’t for everyone. You need to have a good eye for potential, a willingness to find and work with contractors, and a strong stomach for setbacks. If you’re not that type of person, stick to an upgraded home and try a fixer later in life.

Not all short sales are good deals. Sometimes a listing agent will price the home way below market value to attract multiple offers, and it’s completely reasonable for a bank to reject an offer that is half the market value. However, some banks will reject ALL short sales, regardless of how good the deal is. Why? Because they’re greedy and stupid. And that’s why the government has had to step in to nudge them along, again. It’s also yet another reason why banks are arousing my stabbiness.

Why Reject Short Sales?
There are a few basic reasons why banks reject short sales:

  • The offer is way below market value. In this case they may actually be able to make more in foreclosure, but this is rare.
  • The homeowner can afford the payments, but doesn’t want to anymore. If the homeowner is trying to claim hardship and there isn’t a hardship, then the bank should rightly focus on homeowners who really are suffering.
  • Greed. If a bank still owns the loan, they may have it insured. If they settle, they won’t get as much as they will if they foreclose and the insurance kicks in. Unfortunately, then they’ll be stuck owning a house and may not get full value for it even with insurance.
  • Short-sightedness. It’s simple: banks are short-sighted. There’s no communication between departments and sometimes within departments. No one stops to think: if we sell this house at foreclosure, can we get more than this offer? That’s because the people in the short sale department don’t really know what the foreclosure department is doing.

The Downside of Rejecting Short Sales
When a bank goes to foreclosure, they incur a whole slew of additional expenses that they wouldn’t have with a foreclosure, including property tax, maintenance costs, listing fees, attorney’s fees, etc.

In addition, they automatically net more money if the short sale offer was decent. Let’s take an example where the market value is $650,000. The short sale offer is $600,000. After commissions and a credit for closing costs, the bank will net $558,000. Not bad.

In the area I’m considering, the average short sale price per square foot is $305. The average foreclosure price per square foot is $295. Right there you can see a difference. Assuming the house is 2000 square feet, they automatically net $20,000 less on the deal if they go to foreclosure, and that’s before factoring in the additional costs of foreclosure. I’ve seen reports of banks receiving short sale offers of $600,000 and selling the house at auction for $455,000! That’s nearly a $150,000 loss that can only be chalked up to short-sighted stupidity.

I’m sure the staffer rejecting the offer thinks, “This house is worth more. We’ll easily make $650,000 if we sell it as a foreclosure,” but the foreclosure department doesn’t have the same mandate. That department just wants to get rid of the house.

Other Stupid Bank Tricks
Of course, this isn’t the only way banks are stupid. They continue to offer big bonuses to CEOs who lose money. They continue to refuse to lend despite government pressure and funding. They continue to employ too little staff to manage the incredible workload of all these foreclosures and short sales. They continue to advertise themselves as your friendly neighborhood bank while screwing over everyone in the neighborhood. They continue to fail to establish uniform procedures and standards that are based on logic and efficiency.

And they wonder why we hate them?

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