August 2006 Topic - "Real Estate"

01.  Should you buy or rent?
02.  Tips to finding the right realtor & Questions to ask a realtor.
03.  Things not to do before buying a house
04.  Reasons not to buy & the benefits to actually owning a home.
05.  Mistakes to avoid about real estate
06.  Four steps to selling by owner
07.  Questions and Answers

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1.Should you buy or rent?

If your thinking about buying a home you must decide if you are buying for the right reasons. If you are buying a home simply for an investment you might not be pleased. Homes (especially lately) might not give you the best return on your money. Actually, the stock market has proven to give a higher return on your money than real estate. Of course the stock market is also riskier. On average the stock market's average rate of return is 8%-10%, whereas real estate is generally 4%. On the flip side, when you own you can usually claim your real estate taxes and mortgage interest to Uncle Sam which helps out a lot. This could mean that you are getting the majority of your money back at the end of the year.

Aside from getting money back you are also making money on your home. As you live in your home it is building equity. You also do not have to worry about your living expenses going up. Mortgage companies do not raise your payments, unlike landlords. If you chose to rent your landlord is allowed to raise your rent periodically. On the other hand, when renting you are not responsible for anything that breaks. If your washing machine or air conditioner breaks it is not your responsibility to fix it or pay for it.

Renting is often a good choice for young people who are not quite sure what lies ahead. Renting allows you the freedom to move without many consequences. If you are just starting out and do not quite know if you will be in the area for a long period of time renting sure will save you money. It is a lot cheaper to rent than to buy and sell in a short period of time. In order for a home to be an investment it must build equity. Generally that takes a couple of years. Buying a home is expensive in the beginning with closing costs and down payments. If you sell right away it is unlikely you will make money or break even. Often times you will end up losing money. There are more advantages and disadvantages to buying and renting that we have not covered. Truth of the matter is that only you and your family can make the right decision for you.

It is a very important decision and something that should be considered from all angles. Many people contact financial advisors to discuss this decision. Be sure that you have thought long and hard before deciding. In this month's newsletter I will discuss some topics that have to do with buying and selling real estate. I do not go into much detail about mortgages since a previous newsletter was all about mortgages. If you have any specific questions about mortgages please feel free to contact United Financial for a copy of the newsletter. Thank you and enjoy August's newsletter.

2. Realtor 101
Tips to finding the right realtor & Questions to ask a realtor.

Tips to finding the right realtor

Ask people you trust for referrals.

Ask people you trust for referrals.

Decide what is important to you in picking a realtor. Is saving money the concern? Is timing the most important to you?

Decide the general area that you are interested in before finding a realtor. Drive through the area and see which realtors have listings in those areas.

Make sure that the realtor you pick is up to date with all licenses and check out the firm's credentials such as ABR which is an accredited buyer representative.

Interview the realtor and ask specific questions which I have listed in the section be-low.

Questions to ask a realtor

If you are selling ask for a CMA (comparable market analysis) and how they plan to establish a price.

Ask the realtor how your property would be marketed.

Find out what the stipulations of the contract are. In other words how long you are obligated to stay with the realtor if the property does not sell, and the commission you will owe to the realtor.

Find out how long the realtor has been in the business.

3.Things not to do before buying a house

1. Do not move your money around.
While applying for loans the lender will need a lot of financial documents which may include but are not limited to bank statements, 401K,stock options, mutual funds and any other liquid assets. It is a requirement by law for the lender to know where all assets are coming from. A paper trail is usually required for a loan to be approved. To avoid any extra headaches leave the money in the accounts that they were already in. It makes it easier on the lender rather then trying to trace back where money came from. Also try to avoid switching banks.

2. No major purchases.
A major purchase is usually considered a car, wedding, or even a nice vacation. When you are considering buying a home you should not make any major purchases even if you can afford them. The reason is it will lower your debt to income ratio. Your debt to income ratio is something that lenders consider before approving loans. It is simply how much money you owe versus how much you have coming in. Avoiding big purchases prior to applying for a loan will lower your dtr, which will mean you get approved for a larger loan.

3. Do not switch jobs.
The lender looks at your job history, as a way to see how dependable you are and to make sure that you will be able to pay back the loan. Lenders do not like it when the applicant has switched jobs many times in a short period of time. It makes the lender question if you will be employed long enough to pay back the money borrowed. However, if you held a job for a long period of time and then got offered a better job that is understandable and overlooked for the most part.

4. Reasons not to buy real estate & the benefits to actually owning a home

1. Not enough funds.
If you are living paycheck to paycheck now is not a time to buy. Though you may be able to afford the mortgage you are responsible for many other things come up when buying a new home. Some of these things may include but are not limited to electricity, homeowner's fees, assessments, repairs, insurance, maintenance and utilities. You do not want to be house poor.

2. New to the area.
People who are new to the area may want to hold off on purchasing a home. You want to get to know the area and the people and decide if this is somewhere you intend on staying for a while.

3. Job transfer or downsizing.
If your job is downsizing or making changes within the company that may cause you to have to relocate, or even get laid off, now is not a time to purchase a home. You want to wait until your job and location are secure before investing in a home.

4. Marriage problems.
If your marriage is on the rocks please do not buy a home together. Too many times couples think that by purchasing a new home together everything will get better. Often times this is not the case and the couple sells the home and takes a loss in profit.

The benefits to actually owning a home

1. Income tax savings
The government allows you to claim your interest and taxes as a deduction. By being able to do this your tax obligation is lower which means you will owe less at the end.

2. Fixed payments
Assuming that you have a fixed rate mortgage your payments will be the same every month. They will never increase over time unlike rent. Landlords can raise rent on their tenants over time, whereas the lenders do not have that option.

3. Best investment
Owning a home has proved year after year that it is the best investment anyone can make. A home appreciates 4% to 5% each year on average. Some years it is more. In 2004 homes in south Florida and other areas appreciated 30% within 6 months! Though it is not likely that will happen very often it is possible. Homes give you the best return with little risk on your money.

4. You can borrow against your home
Often time's homeowners take cash out of their homes. This is often referred to as a HELOC or home equity line of credit. This amount varies depending on your current home value. The amount that the house is worth according to the appraised market value is then subtracted from the outstanding mortgage owed on the property to equal the equity or amount you can borrow. You then pay a monthly payment for borrowing the money. The interest is usually lower than most credit cards. You can pay the money off over time. Some people don't pay it off completely until after they sell the home.

5. Good stability
Owning a home shows a good commitment of staying in a certain area for a long period of time. If you have children it is in their benefit to know that they will be in the same school district for more than one year.

6. Get to know the community
Renters are not guaranteed that the landlord will renew their rent therefore they may not be in the same community for a very long time. Owners generally get more involved in the community and its activities.

4. Mistakes to avoid about real estate

Assuming there will be a bubble bust. In real estate people assume that if prices go dramatically up they are bound to come "crashing" down. This is often not the case if you look back at the real estate history. In 2005 and the beginning of 2006 real estate took a huge jump and increased prices in some areas up to 40%. Right away you had all the critics claiming that the prices of real estate were going to drop. Obviously this never happened instead the market leveled off. Prices will go up slowly and it is very possible that we can have another year where they all the sudden take a jump up again. Always consider real estate as a long term investment because the real estate market is just too unpredictable.

Do not assume that the buying and selling process is a quick one. The day I bought my first house a good friend told me "expect nothing and be prepared for everything". Of course I shrugged him off thinking everything would go fine. Well, that was probably the best advice I ever got because I had a closing that caused me more headaches than I ever dreamed. There are so many things that need to be considered like finances, the walk through, legal documents and much more. Do not get upset if something happens that causes a delay. It is very rare that everything goes smoothly. The best approach to take is to not set a deadline. Give yourself some extra time so if you run into problems you will not get agitated.

Do not get too excited when you find the perfect place. I know that it is hard to contain yourself, especially if you have spent months searching for the right place. A big mistake that buyers do is let the seller or the seller's agents know that you love their place. The second they know that you are determined to make this house your home they are suddenly less negotiable. If the seller or the seller's agents think that this is only one of your choices they are more likely to work with you so that you pick this place. It works in your favor not to show too much excitement.

Be sure to not skip the preapproval step. Getting preapproved will prove to buyers that you are serious about buying and not wasting their time. It also lets you know where you stand financially and how much house you can afford.

Do not assume that the appraisal will meet what the seller is asking for. Appraisals are a way for the mortgage company to be sure that the home is worth what is being lent. It is also a way to be sure you are getting a good deal. However, do not expect the appraisal to meet or exceed the sale price. Often time's appraisals are lower. Truth is the value of a home is what people are willing to pay for it. The majority of the time it is more than the appraisal.

Not realizing that a contract is a legal binding. Too many people just sign on the dotted line. They just assume that all is well and are too trusting. This is something that should be read very well. Anything that could cause you concern should be noted in this contract. Anything that has been verbally agreed upon should be written down.

Not selling your old house before purchasing the new one. It is a story that is told too many times. Someone found the perfect house and then suddenly the buyer of his or her old house backed out. Now they are stuck with two mortgages and a lot of financial problems. Be sure that your old house is sold before signing a contract on the new one. Now there is a way to avoid the hassle of two mortgages and still make an offer on a new house before selling the old. It is considered a contingency. In the contract for the new house it must be stated that the sale of this home is contingent upon selling your old home.

Do not forget to research your neighbors. It is not a realtor or seller obligation to inform you of your neighbors. Be sure to do a criminal check in your area. I would want to know if I had a sex offender or murderer next to me, wouldn't you? Nowadays with all the things available to us it is free and easy to see who your neighbors are.

4. Four steps to selling by owner

I. Find out how much the home is worth.
This is possibly the most important step of all. Many people price their homes too high and then they do not sell them. Upgrades that you make in your home must be taken for street value not what you paid for them. For instance the kitchen that you redid may have cost you $15,000 but it may only add $5,000 to the value of your home. You will need to do some research. The best way to find out how much to sell your home for is to look at other homes in your area. You can ask your title company or a realtor for a list of comparable homes that have sold recently. These lists are often referred to as comps. Realtors are likely to give you this list because many times people give up on selling their homes and turn to realtors so they look at it as free marketing.

II. Get your house in showing condition.
It is often recommended that you hire an inspector. The potential buyer is going to hire an inspector before sealing the deal. The theory is that if you hire one you will be able to fix any problems prior to the deal and it will go a lot smoother. You will also want the place to look presentable. Remember first impressions last. A lot of people have a hard time visualizing places without furniture or clutter. A room that is big but cluttered with furniture or other things may appear small to the potential buyer. Kitchen counters and closets should be emptied as much as possible. It is also recommended that you make the house feel homey with lights and scents. Obviously you do not want to overdo it but a scented candle and dimmed light does make a difference.

III. Market your home
Marketing your home is very critical in how quickly and effectively you sell. You want to give as much as information as possible. You have many options in marketing. You can use the newspaper, yard signs, open houses and more. Be sure to put critical information in whatever form you chose. Critical and specific information should include price, square footage, and number of bedrooms and bathrooms. By giving out this information you will avoid people who do not fit this criteria. Often time's people like to say roomy, or other descriptions like that. Though they sound nice it is not descriptive enough. Roomy means something different to everyone. Another option is to require a preapproval letter from a lender. This scopes out the serious prequalified buyers.

IV. A hassle free closing.
It is very important to have a title company that you trust. A title company can foresee any problems before they affect the closing in a major way. A title officer is a real estate attorney who is trained to deal with any issues. They also make sure that all paperwork is delivered on time and will do any title searches or other things that are needed to legally sell a home.

4. Questions and Answers

Do realtors get a commission or kickback from mortgage companies, title companies and inspectors for recommending them?

No, realtors never get a financial kickback for referrals. It is actually against the law in some states. Realtors work with these companies on a daily basis so it is in their benefit to recommend the good companies. In turn it makes their job easier because if you use a time efficient company then the realtor can close and receive their commission quickly.

Should a seller lower the price of the home if it does not sell?

This is a tough question to answer. Obviously every situation is different. In general though it may not be the price of the home but possibly marketing the home. Selling your home mostly depends on price, marketing, square footage, condition and location. If there is any obvious home repairs that need to be made go ahead and make them. Truth is you will need to make them after the inspection anyways. Prior to lowering your home price compare homes in the areas that have sold recently.

How do I know when to lower my home price?

It really depends on your situation. It is recommended that you show your home at least 20 times and have had it on the market at least one month.

When should I start talking to a mortgage broker about getting financed?

You should get your finances in order before you even start looking at homes. Some sellers even require a preapproval letter prior to showing their houses. Having your finances in order will help you steer in the right direction when looking for your home.

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Got a question? Then contact our Education Team on 561-883-2398 Ex.310 United conducts regular seminars on financial education, including "How to Budget", come along and join us. To reserve your seat contact our Education Team on 561-883-2398 Ex.310

Newsletter 08
Rev.1
August, 2006