Archive for October, 2007
It seems at times that we are more focused on energy efficiency than ever before. We currently taking alternative energy sources seriously, although we are still heavily reliant on traditional fuels. The mayor of Houston has revealed a new plan to improve recycling and energy efficiency initiatives to begin next month. With all of this attention, more people are putting forth their ideas and beliefs on the subject.
In a way it reminds me of a similar array of articles about our health ten years ago. Talk of the different kinds of fats seemed to be everywhere. My clearest memory was of movie theater popcorn butter flavoring. This artery clogging oil has been a staple on popcorn. Movie theaters stopped having their own staff put it on, and they started allowing their customers to serve themselves. The staff did not put too much flavoring on the product, so hence not too much of this problematic oil. One day when standing in a lobby of a theater, I watched as this man poured maybe as much as ten times the amount of oil that the staff would have. He proceeded to the manager to complain about the oil, and how unhealthy it was. He wanted to know what the manger was going to do about it. After his confrontation, he went back to put more oil on his popcorn. Movie theaters switched to a healthier oil. Customers then complained about the awful taste. After some experiments, theaters went quietly back to the original oil. No more stories dealt with how awful the oil was. In a way, I can see this happening with energy efficiency.
Energystar products are great, but they are not necessarily energy efficient. You see it depends on how you use them. I could wash my dishes by hand in an extremely energy conservative way, but if I buy an Energystar dishwasher, and I use it all the time, my net energy usage has increased. Some products may be even more energy efficient than those rated by Energystar, so you have to be on the look out for how many kilowatts an appliance uses, before making the purchase. Many new technologies like solar may be fickle in your area, so ask an expert in installing the system what would work for you. My point is that you should not rush out to change your life, without taking the time to evaluate all of your options.
One way to check on what you can do is by having an energy audit. Many utilities will provide you with a free audit, and there may be some incentives given to you if you take some steps to being more efficient. Everyone is hopefully aware of the tax break on federal taxes for insulating your home. There is a new type of inspection taking hold in some markets, and that is the energy inspection. I have toyed with the idea of becoming an energy code inspector, but there is no market for it yet in Houston, and I do not want the marketing expense to teach people of this style of inspection right now. A related inspection is the thermographic inspection, which can be a big benefit to homeowners concerned with energy efficiency.(I wrote a post on this inspection type on HoustonTexasRealEstate.com) As for energy code inspections, you can look at what is involved for yourself by going to energycode.gov. You can review the material for the courses there.
Before being sold on or scared by the idea of energy efficiency take some time to learn about easy steps that you can take, and then look at the appliances and equipment that you want to install in your home. Maybe there is an energy code inspector in your community, and this may be a great option for you. If money is tight because of the holiday season, check into an energy audit from your utility. Any step towards efficiency could save you money in the long run.
Closing is the tieing up of all the loose ends of the contract negotiations which have taken place between all of the parties. The paperwork included at this step will be any papers that need to be completed to have the transaction go through. For this reason, the paperwork can be different from closing to closing. Another difference in the documents will be due to the regulations of the state in which the contract is taking place. The participating parties at this event will (or could) be the buyer, the seller, the Realtor, the lawyers, the title company representatives, anyone holding the power of attorney for someone else involved, the lender, and possibly any contractors who are expecting to be paid at this point.
There are five common sets of papers to be dealt with at this stage: mortgage documents; the sales contract; the tax certificate; the title insurance forms; and the earnest money agreement. I dealt with the mortgage paperwork in the last post of this series, so let us go over the basics of the other forms that you will be initialing and signing on this day.
When negotiating for the purchase of high dollar value goods like a home, the seller, as well as other parties to the deal, will want to know that you are serious about the purchase. To show your willingness to proceed with the negotiations, you will be asked to set up an escrow account with a third independent party to hold money in earnest. This escrow account is not the same as the one that the lender will establish for paying the taxes or (maybe) the insurance. It is just for this good faith money. The idea is that you could loose this money if you do not behave honestly in the negotiations. The independent party holding this account will be a title company. The document which states how much money is being held in earnest, and what could cause you to loose it, is called the “Earnest Money Agreement”. This money can either be returned to you or applied to an expense at closing. The only way that you could loose this money is if you act in a rash manner by not negotiating in good faith when pulling out of the contract.
The Tax Certificate is a simple form by the governmental authority overseeing the property taxes for that home. In most cases, taxes are paid to the county, who distributes it to the different agencies who will receive tax money from a property. This form will show the tax identification number for the property, who will be obtaining money from the tax, how much tax was paid in the last tax period, and if the tax was paid. There will also be a technical description of where the property is located. This will be a lot number, block number, subdivision name, and maybe some other code used to distinguish the property on a map.
The Title Insurance Form or maybe a Title Search Form will be presented to you. A title company oversees the transferring of the title from one owner to the the new owner. To accomplish this task without problems, they need to make sure that there is no one else laying claim to the home involved in the sale. They will also check that no firm has a lien placed against the property. A lien is a means for a lender to collect a debt when a house is sold. A title search goes through official records of the home to see what might be out there. Title insurance takes the protection a step further. Once the search has been done, and it has been found to be clear, title insurance will protect you from anyone showing up at a later time claiming that they own the land. In cases of divorce or inheritance, there may be records that are not filed with the county that may give another person claim to your home. With title insurance, your legal costs are covered. Title Insurance documents go over everything that was discovered during the search, and they will deal with information about the company that is providing the insurance.
The last set of papers that I want to discuss are the forms for the sales contract. These contracts will be worded and presented in such a way that they comply with the regulations of the state. You or your Realtor or your lawyer will have been negotiating with the seller or his representatives to what will be involved in the sale of the home. In theory and practice, you should already be aware of all of the terms of the contract when it comes to the day of closing. If negotiations are still taking place at the time that you are signing these papers, something is terribly wrong. I mention this fact because closings can be contentious, and arguments can erupt at this point, but this is not the standard, and it is not the way to do business. When I am closing on a deal, any deal, and I find myself facing this situation, I walk away, for I know that something can come up later. The sales contract will list of the points dealing with the sale. There will be forms stating the terms that you have agreed upon, and about the price and financing of the home. If there are any special considerations to the deal, there will be a form covering what those considerations are. They could be that the refrigerator stays in the house, or the seller agrees to purchase a home warranty plan. There will be statements about the lawyers or Realtors role in these negotiations. The property being sold will be detailed. There should be no surprises in this contract.
What forms should you take the time to read during this process? Under normal circumstances, you will not be doing a complete reading of any of the documents at this time, and you probably do not need to read them. I would suggest taking the time to glance over them to check that this is what you thought you were agreeing to buy. Whoever is handing you the forms, and whoever is assisting you, will be giving an explanation of the paper that you are being asked to sign. No one should be rushing you through forms. If they are, then you should stop to see what it is they do not want you to examine. You can expect closing to take as much as four hours. They will be making copies of everything that you have signed, as well as any cashier checks that you provided to make payments.
In the next post in this series, to be done on Friday, I will go over insurance forms. The final article of this series will be about what to do with the paperwork after everything has been done, which will come out next Monday.
Do you not love the phrase “It is grandfathered in.”? It is such a wonderful way of escaping responsibility. The idea that something is fine, because that is the way it was done, is one of the biggest challenges for an inspector. Someone who has been living in a house knows that they have been perfectly safe all this time, but here comes this inspector telling his clients that his home is not acceptable. The fireworks begin.
Building codes and what inspectors look for are always evolving as we find new areas of concern. My house which was built in the early sixties does not have GFCI outlets, but I know very well how important these units can be. I have seen people trip on stairs; children fall through railings; and light bulbs burst when in contact with water. My reports reflect my desire to inform my clients of these safety concerns. What they choose to do with that information is up to them.\
For my part, I am working at updating my home, and I have bigger projects before I come to the GFCI outlets that I will need in the kitchen and bathrooms, but I will eventually get there. Realize that no product is grandfathered in. If you are undergoing a major renovation to your home, the city will require that you update to the current building codes that are followed in their jurisdiction. You may well live without incident in an older home, but you can never know for certain.
I can think of no question which is more frequently posed to an inspector, and that can cause more ire on an inspector’s part, than “does the house pass or fail the inspection?” If you wish to push me for an answer, I would have to say that any house that I inspect fails, if we want to look at this query in such black and white terms.
The funny thing to me is that other real estate professionals posit this inquiry to me, and I would think that they would know better. I guess the idea of passing or failing an inspection comes from the fact that a great deal depends on inspections. True professional inspections have been around for twenty years now, and the belief that a home buyer should have one is becoming more important, due to the idea that they should know everything about the home, since it is such a major purchase. Here is the rub though: a home, wether newly built or not, will have something wrong with it. Older homes will not match current standards of building, and newer homes may be produced so quickly by craftsmen who may not understand the equipment that they are installing, or someone may have just made a mistake. An inspection is a process of discovery, to guide the (future) owner in the direction of concern. Additionally, each inspector in every state will have his own minimum standards that he is meeting, and then he will have his own standards that he will want to reach. I was a certified food service manager for twelve years, so I bring my experience from that field when looking at a kitchen. Another inspector may very well not know about this field, but he may have been a contractor who knows more about framing than I, so he may see some issues that I would miss. However, we both would deal with a poorly structured wall due to framing.
If the house suits your needs, fulfills your desires, then the inspection should inform you of what you may have to take of to ensure that the home is maintained. If there is too much for you to deal with, then you should not buy a particular home. If you still want the home, but there is a serious concern on the inspection report, then you should negotiate with the homeowner on that matter. If it is an issue that would cause the home to not sell at the price offered, the homeowner should reasonably consider either making the repair or lowering the price. If he refuses, you should consider if the home is worth it. Buy it if you value it. I have seen too many times where a buyer attempts to use an inspection report to have the priced lowered. If the price was too high in the first place, why did they offer that amount of money?
Personally, I am fairly strict on trying to find defects. This is not because I want the house to look bad; it is because I want my client to know everything possible, so they will make a wise decision. The great majority of items that I mark down as being in need of repair can be fixed with inexpensive parts or labor. I suspect that this would be the case with most home inspections around the country. We inspectors mark these items down, because they may cause serious harm at one point. If an electrical outlet has no cover, and a child pokes a metal object into the bow where the wiring is, electrocution is possible. A cover costs under $2, and it takes seconds to install, but what if you did not know about it? That is why I write it down.
Do not ask if a house passes or fails. You should ask your inspector about what the concerns are.
I am taking the title of this post from a song by the group Love. I really thought that this would be a great title, and I have been waiting to use it. Arthur Lee was inspired to write the song when he was unable to go to his own kitchen one morning for breakfast. Too many people were sleeping on the floor between his bedroom and kitchen. A trend which I noticed among some college students (or those who have just graduated) is to buy a home to live in during their student years. This is not a bad investment, considering that home prices do trend upwards over time. However, when it comes time to sell, these properties can have some issues.
Home staging becomes a priority for these sellers. No matter how mature or knowledgeable these young adults are, these homes find a way of becoming the center of social life for their friends. Furnishings are general whatever is cheapest. The garden is the last on the list of things around the house that is tended. Although the house may see some abuse, I have never seen a house inhabited by students that is so run down that it is unlivable.
If I was a student (or group of students) who purchased a home, I would set aside an account for future repairs or home staging. You will not need a lot of money, but you should have a few thousand dollars in the account. Here is a list of the typical items that I see which need to be taken care of in these homes:
Painting- walls are easily damaged, and a fresh coat of paint is a simple chore. Just remember to prepare the walls properly by taping areas that should not be painted. Fill holes with a spackling compound. Clean off any mess. You may need to use a primer, but a couple of coats of some type of white paint is your best bet.
Flooring- carpets generally take a lot of abuse with heavy traffic. If the carpet does not look too damaged, have a professional carpet cleaning company come in. You could rent a machine, but a firm may do a better job. Consider replacing the carpet if there is any damage. Purchase a basic beige carpet from a home improvement center. Installing a carpet is hard work, so plan on hiring someone.
Appliances- most students do not care what type of appliance is in the house, and I see these units as being neglected. A good cleaning may take care of this problem. You may find repair parts at a hardware store. You could plan for a slightly lower price to compensate for unacceptable appliances. If you buy new units, shop around for the cheapest new units or refurbished units. New appliances can eat into your budget quickly, so finding a way to make the existing appliances look good is your best option.
Furnishings-concrete blocks and wood planks make great shelving for a college student, but they will turn off potential buyers. If you are not living in the house, I think leaving it devoid of furniture is a good option. If you are moving to another location in the same city, consider upgrading your furniture for the new home and using it to make your property look good for the buyer. If you are living in the house, try making sofas and chairs look better with slip covers. Paint damaged tables and chairs to make them into new pieces (I like faux finishing tables for a new look). If this is not possible, you may find places in the town which sell used hotel furniture for little money. Hotels regularly update their look, so this furniture is in pretty good shape. Some home stagers rent furnishings, but I would not go to a rent to own store, since this can hurt your credit score.
Lastly, tell your friends that they cannot crash at your pad (I wonder if that is still the terminology). The place needs to stay clean for the sale.
I thought going over some tools that an investor could use when they are looking at a home could make a good post. Some of my clients are surprised when they see that I do not drive a truck. They believe that I should have a lot of tools. Well, I do have a lot of tools, but I do not need them for an inspection. An inspection is defined in most states as being a visual inspection, but in reality, you are using all of your senses to make a determination if something is wrong. It is not in the inspector’s purview to say specifically what is wrong, but that a certain area is in need of attention. The main tool that an inspector has is his knowledge, and you can only obtain that by going through the training, which I have known some investors to do. But let us get back to the physical tools.
A Leatherman Multi-tool- I try to avoid mentioning name brands, but in this case, I have found no acceptable substitute. Pliers, different screwdriver heads, a knife, a saw, and more come on a standard multi-tool. Everything you need to help you peer into outlet covers or coverplates on various pieces of equipment. By lightly tapping the tool on tile, you will be able to hear if the mastic was done right. You can use the awl for probing wood.
A RayTec Mini-Temp – alright another name brand, but this is the best one about. This will give you an accurate reading of the temperature of the vent and return of the HVAC system, the temperature of an electrical panel before you touch it, the temperature of an oven once it has time to heat up, or any surface you may want the temperature of. RayTec makes various temperature guns that work well at different distances. The Mini-Temp is affordable, and it works over the distances you may want to check.
An outlet tester (specifically for GFCI)- outlet testers are easy to use. They give a clear reading of what could be wrong with the wiring of a receptacle. The GFCI version lets you test this type of outlet too. These tools can be found at home improvement centers or hardware stores in the electrical section.
A collapsible or telescoping ladder- you can fit these ladders in your trunk. Depending on the size, first story homes are always accessible, but two story homes may not always be. Since they fold into different shapes, they can be used as a step ladder too.
A good 25FT tape measure- there will always be something to check, so it is good to have around.
Auto mechanic work gloves- this type of glove gives you some grip and maneuverability. Pest control workers use a Nitrol glove, which is even better, but the mechanics gloves can be obtained at any auto supply shop.
A good checklist- No inspector walks onto a property without a specific rehearsed routine or a good list to follow. Any list is just the starting point, but by going down the list, you will make sure that you checked everything that you need to see. My list is based on the standards of practice for inspectors in Texas (and that standard is supposed to be the minimum that we do). On the additional help page is my e-mail if you want to request a pdf file version of my list, just send me a note.
These tools should get you started. They are the ones that I pull out at every inspection. Hopefully you will use a good inspector or contractor to assist you further.
In the last post of this series, I mentioned that each loan is different. This is due to the lender having his own papers that he needs signed, but states also develop forms that they want you to have. Currently many states are reviewing what you should be informed of when accepting a loan, and the federal government has their say too. This makes it hard for me to write here it is, this is what is in all of your mortgage forms. I do want to give you a clue, since I know from experience, you will not have enough time to go over all of these documents.
The vast majority of the papers that have been set in front of you are disclosures. These disclosures will be explaining how the lender will handle your loan, who may be helping them administer the loan, what are different features in the loan, and what will happen in case of certain events in the loan (like prepayment or foreclosure). These documents are written by lawyers or legislators who want you to know your rights as well as the lender’s rights, so there is a balance between legal terminology and plain English. Since these disclosures are required by a state government, the lender has to verify that you obtained a copy, so there will be a lot of signing of disclosure acceptance verification forms. Many of these disclosures relate to items you may have already discussed with your lender or you may realize is a consequence of some other aspect of the loan that you are aware of. For example, the lender will have to check your credit history for a loan, so one disclosure will be about how this was done. The lender may have spoken to you about an appraisal or survey, so you will find one disclosure informing you of these services. There will be a disclosure explaining a feature of the loan like the borrower’s insurance. Do you need to read all of these disclosures? If you feel that your lender has been giving you forthright explanations of the terms of your loan, you can read these disclosures after you close on the house. However, if you are feeling lost, and your lender has not guided you enough, then you should read these before you sign.
All documents associated with a loan have to be signed, but not necessarily by everyone involved with accepting the loan for the house. Different states have their own rules, but usually only one person has to sign. Some documents will have to have both signatures. If the loan is only in the name of one person, but there is another involved, the lender may require a document to be signed by this person stating that they are aware of what is occurring.
The next large set of documents will probably be from the lender going into details of the loan, or even details of other types of loans that they offer. Since this comes from the lender, there will be no signature requirements. Since the disclosures above were mandated by a government entity, these documents will deliver the lender’s view of the loan, and how they will handle it. This package is general information, so it could be that much of it is irrelevant to you at this time, so I would say that you can hold off reading this till later.
There are four documents that you should understand, and that you should study. I mentioned in the last post of this series about how to evaluate loans by using two of these forms: HUD-1A and the Good Faith Estimate. The Good Faith Estimate is a two page form going over the likely charges that you will incur when you accept and use the loan to purchase a home. On the top of this estimate will be a section describing what type of loan you have, the interest rate, how much you are borrowing, the dates of the estimate and closing, and the percentages for the fees associated with originating the loan. The sections below this go into items which need to be paid to make the loan happen. An example of one of these items would be an appraisal or an inspection of the property. The next section will have items that need to be paid in advance of the loan, such as insurance or some interest. This is followed by a description of money that the lender will hold in reserve. This can be for property taxes and possibly insurance. The next section will deal with charges connected with the title of your home. The fees here can be a search to see that the title will be your alone, or they could be for those people who worked on the title like an attorney or notary. The next part will state the charge involved with transferring the title to you. You will then be informed of additional charges that may come with the loan, like a pest inspection. The final segment of this form gives an estimate of all these costs combined, so you can settle (obtain) the mortgage.
The HUD-1 or HUD-1A is similar to the Good Faith Estimate. Much of the information given is the same on both forms, but there are two key difference: 1) presentation of the data; and 2) the detail provided. The Good Faith Estimate is easier to read, but neither document is difficult. You need to take the time to learn the terminology, and then these forms can make sense. Go through my term’s list on my website, and you will then have a pretty good understanding of the references being made on these forms. The HUD form uses the government’s general ledger codes for an item; it then describes what the code is ; then there is a column stating the charge that you will have for that item. You will find that there could be a lot of blank spaces where a charge should be listed. That means you will have no expense for that item. When I purchased my home, the lender decided not to have a survey done, since there had been a survey made two years earlier of the property, so consequently I had no charge in that space.
All of these fees can be questioned. Go over each line in these two forms, and see if the fee looks reasonable. Lenders may pad the numbers to make a little more money. Sometimes you may find that lenders you will charge you for the high end of possible fees. Individual inspectors, lawyers, notaries or appraisers can charge vastly different amounts for the same service. The charge depends upon our costs added to our desired profit. You could try to negotiate with your lender on these costs. Ask family or friends how much they paid, or do a search for providers in your area to find out what they charge.
The third document that you should review is the Federal Truth In Lending Disclosure Statement. This is a two page form. Page one has the quick breakdown of your loan, while page two contains an explanation. The top section of this form has the APR, the finance charge, the amount, and the total payments of your mortgage. Compare the APR to the interest rate from the lender. Differences here mean you have extra fees on your mortgage. These fees are detailed on the HUD-1 form. If you cannot discover why there is a difference, then you should ask your lender for an explanation. You can get a great rate from your lender, but it is the APR that you will pay. The remainder of this form goes over your loan basics: payment schedule; security and property insurance; late payments; prepayments; assumption policy; variable rates; required deposit; and some notes about interest charges and what to look for when you do not pay. Most of this should be easily comprehended, but I want to write a bit three items. The assumption policy details if someone can take over your loan from you. Basically, if you decide that you cannot pay anymore, the lender will say if another person can take up where you left off, transferring everything to this new borrower. If the interest rate can change, the lender needs to explain this to you in a disclosure. If the variable rate box has been checked, then you should have this disclosure. If your lender is requiring you to make some type of deposit for the loan, then you will have this box checked.
The last document is one that you may or may not receive, but I would request it if you have not obtained a copy. It is the amortization table. This breaks down your loan payments between what you are paying towards the principle and what you are paying in interest. I suggest you look at it,because it is a good wake up call. When you start paying your mortgage, you will find that most of your payment is going towards the interest. Eventually the balance changes, to where you are paying more towards the principle in the end. Here is the secret to paying off your loan early and for less money: you want to pay more towards the principle each month than the interest. The lender will not let you pick the split between interest and principle, so each month you need to pay something extra towards the principle. The quicker the principle goes down; the less total money that you will pay in the end.
None of these documents are truly hard to understand. Even with some legal jargon and unfamiliar terms, you can take some time to master them. My experience was that so much was going on in my life outside of the loan itself that when presented with so much, I did not know what was important to review. In the next post, which will be on Wednesday, I will go over the documents that you may see during the closing, which have nothing to do with the mortgage.