Buying a Home - a Buyers Guide

Whether it's an acreage hidden in the hills or a townhouse in the middle of a bustling city center, most of us are searching for a special place we can call home.

We devote immeasurable hours imagining what we want, but may not know exactly how to find it and buy it. When a perfect Craftsman bungalow, or spring-fed five acres finally does appear, we need all the advice we can get about how to make the wisest possible purchase. After all, buying a house or land is certainly one of the biggest single expenditures most of us will ever make. And once you've bought it, there are no refunds or exchanges. It only makes sense to be cautious and know as much as possible before you buy.

First, forget the Joneses and home in on what you want--and what you can afford. Be realistic and you won't be disappointed. Examine your budget and figure out exactly how much money you can comfortably invest. Most people borrow money to buy a house, and most loan agencies will require you to pay at least 5 percent down in cash. They usually will loan you an amount that results in monthly payments between 27 percent and 33 percent of your net income, depending on your debt-to-income ratio,. Which they will help you determine. If you expect to apply for a loan, now is the time to amend a poor credit rating or establish your credit history. These factors determine how much interest you'll pay and what kind of down payment the bank will require. And don't forget to consider closing costs, inspections and miscellaneous expenses, which usually add at least a couple thousand dollars payable at closing.

If you're planning to buy undeveloped land, you should expect to pay at least 20 percent to 50 percent down in cash. Interest rates for a loan on the remaining 50 percent to 80 percent probably will be higher than for home loans.

When you're ready to buy, shop around to get the best bank loan terms you can. Credit unions may offer competitive rates and usually are easy to join. Mortgage companies have become aggressive, creative marketers for loans.

Check with your lending agency about obtaining pre-approval for a mortgage loan, so you're confident of what you can afford.

HOW BIG THE MORTGAGE?

A lot of people fantasize about paying cash for a home. True, you can't beat the security of knowing that you own your place, free and clear. However, keep in mind that the interest you pay on your home is fully tax-deductible. You may be better off, financially, investing your bankroll and mortgaging the house.

Most of us buy as much house as we can afford. For that reason we often end up with a 30-year mortgage on 95 percent of the home's value. But an unexpected change in your ability to make loan payments could put you in dire straits if you've borrowed, as much as you can afford. Even in active markets, homes may take months--or even years--to sell. When you can't make the mortgage, payment, those months move agonizingly slow.

You may warn to choose a less expensive home, and down a higher percentage of the home's value up front. This lets you avoid mortgage insurance, a big hidden expense that is often required on mortgages above a certain percentage of the home's value. And it offers no benefits to the buyer--it only protects the bank! If your credit is good, your banker may be willing to supplement your mortgage with a home-equity loan (essentially a second mortgage), thereby avoiding the cost of mortgage insurance.

An added benefit to home-equity loans: If you're buying an expensive home worth more than, say, $300,000, you may be stuck paying higher "jumbo" interest rates. A home-equity loan could bring your mortgage balance below the limit, and secure a cheaper rate. And the interest you pay on home, equity loans is generally tax-deductible--just like, your mortgage.

If you expect your income to drop within the next 15 years, you might prefer a higher monthly payment now and a paid-off home in 15 years. If you think you will retire in that period, your income may decrease to a level where the mortgage-tax deduction isn't that beneficial. Many banks offer 15-year mortgages at rates preferable to those on 30-year mortgages.

Remember, though, if you are going to have debt of any kind--car loans, revolving credit, whatever--you probably want to secure it with your home. You'll generally pay less interest, and the interest will be deductible.

Or if you decide not to be tied to a loan, read Rob Roy's book, Mortgage-Free, which offers sound steps to financial freedom. To order, see MOTHER'S Bookshelf, Page 129, or visit www.motherearthnews.com.

TO AGENT OR NOT TO AGENT

A lot of us idealize the "handshake deal" between two trusting, like-minded individuals. Nothing can spoil that vision quicker than a property-boundary dispute or toxic runoff from the neighbor's manure containment. Many real estate deals self-destruct before the papers are signed, just because communication breaks down during negotiations.

If you're a seller, you may want to hire a lawyer and put together your own transaction with a buyer. It can be a lot cheaper.

But if you're a buyer, there's not much logic in avoiding the real estate specialists. In fact, with the way the business works these days, you should probably start your search for a home with a trusted "buyer's representative" who is a licensed real estate agent. Their fee will likely come from the commission paid by the seller.

Here's what an agent can do for you:

* Access the multiple-listing service in your area to give you the widest possible choice of properties.

* Share expertise regarding valuations and locations, schools, amenities and other important background.

* Share experience of other deals, and help you make the right moves in negotiations.

* Negotiate directly with other real estate agents, who probably have a lot more experience than you do.

One important no-no: If you find a house and don't already have an agent, do not let the seller's agent select a buyer's representative for you. Interview some real estate agents and choose your own, based on your personal rapport.

NINE STEPS TO SUCCESS

1. Know your budget and stick to it. Even if you've pre-qualified for a certain amount, you don't have to shop for a house or property that meets the loan's maximum. It's better to be conservative.

2. List your "needs and wants," such as square-footage requirements, lot size and proximity to work. Your budget largely will determine your choices; prioritize your list and be prepared to make some concessions.

3. Check weekly for new listings. Most real estate finns have Web sites and are multi-listed, enabling you to all available home and land listings in a particular area. Read the local newspaper for new listings and open houses. The more you study the market, the better idea you'll have about what's a "fair price." Don't depend solely on your agent.

4. Get the listing sheets for any houses you are interested in, and check each listing against your "needs and wants" list. Besides giving you the property's pertinent information, such as lot dimensions, room sizes and the age of the house, the listing sheet also may tell you how long the property has been on the market, which may give you some bargaining leverage.

5. Get the seller's disclosure sheet for each property you visit. In many localities, a seller must fill out a multi-paged disclosure sheet, assessing the house from foundation to roof. If a disclosure sheet is not required by law, ask the sellers to complete one anyway. Although not as reliable as an independent inspection, seller's disclosure sheets are very useful tools for determining any current deficiencies known to the owners. If you purchase the house and then discover a defect that the seller should have acknowledged on the disclosure sheet, have your real estate agent address the issue.

6. Make an appointment to view the property. Take a friend along to help you make an objective examination and spot any existing or potential problems.

7. Take notes. Viewing prospective properties is both energizing and exhausting. You may think you'll remember every unique feature of each property, but after Viewing even a few, most people can't keep track of all the pros and cons unless they take notes. Take the listing sheet and disclosure form with you to each property and jot down your observations directly on the listing sheet.

8. Make sure to view the properties during the day, when you can thoroughly inspect property boundaries, the house exterior, etc. When you're perusing a property, also request the owner not be present. It's much easier to poke in closets and cupboards and ask questions of the real estate agent without the home owner on site. A house may look great with fresh paint and new carpet, but any potential long-term problems will be hard to detect. Check out closets and cupboards, under the sink, behind the furnace, in crawl spaces and attics. Flush the toilets and run the faucets. Open the windows. Look for leaks and cracks.

9. Most importantly, ask lots of questions. You need to learn as much as you can before you make an offer. For major concerns, get the answers in writing. If it's a property on which you want to make an offer, don't hesitate to visit it several times. Besides inspecting and reinspecting the property, spend some time walking and driving around the neighborhood and chatting with neighbors. Visit at various hours of the day and during different days of the week. Investigate the zoning around the property, especially if it sits near undeveloped land. That sweet wildflower meadow that lies behind your dream house may be slated to house an industrial hog farm.

WHEELING & DEALING

Buying a house involves more than just offering a certain price and having it accepted. Only part of the offer is about the price. The rest of it relates to inspections, repairs, and what is or is not included with the purchase of the house. When you're ready to make an offer, you should have a real estate agent representing only your interests (a "buyer's representative"). If you're negotiating a private transaction, consider retaining an attorney. Remember: Buying a house is the largest single investment most of us ever make. Better safe than sorry.

If you find what you think is your perfect property, beware of becoming too enamored with it. Be ready to walk away from a deal that doesn't meet your needs. Remember that you're in control: Set the terms the way you want them.

Before your agent writes up your offer (your realtor will provide the appropriate paperwork), ask for copies of any prior house-inspection reports that were done. If none have been done, we strongly recommend that you make your offer contingent on a whole-house inspection: At $150 to $500, it is well worth the investment. An independent contractor will inspect the house and provide you with a written, detailed report on the house's structure, roof, wiring, plumbing, foundation and windows. Consider including a clause in your offer stipulating that the seller must pay for any necessary repairs exceeding a certain amount. Even if no major problems are discovered, you'll learn a great deal about the home when you review the report with the inspector.

Not everything is covered in most "whole-house" inspections. Other specific inspections, such as termite, chimney, well or septic, should be negotiated with the seller, and should be stipulated in your offer to purchase.

Real Estate Terms

Deed: A written instrument by which title to land is conveyed. If there is a mortgage on the house, the mortgage company holds the deed until the final payment, then the owner receives the deed.

Earnest money: A deposit made by the buyer as evidence of good faith when offering to purchase real estate. Earnest money is typically held in an escrow account during the period between acceptance of the contract and the closing of the sale, at which time it is credited to the buyer.

Easement: A right to use another person's real estate for a specific purpose. The most common type of easement is the right to travel over another person's land, known as a right-of-way. In addition, property owners commonly grant easements for the placement of utility poles, utility trenches, water lines or sewer lines.

Land contract: A contract where the buyer makes payments directly to the seller, who is still financially responsible for the property. Beware: If the seller defaults on his mortgage, you could lose your property.

Title Insurance: Protection for lenders or homeowners, provided by a title company, against financial loss resulting from legal defects in the title, which is a history of the ownership of the property.

Home, Old Home

The house I fell in love with was a four-story, century-old Kansas farm house with a great old barn, granary and a 30x70-foot outbuilding on 10 rolling acres. Only 15 miles from the city and my office, it seemed like the perfect find. The owners were selling the house privately, and, due to my financial situation, I didn't have to deal with a bank. I came, I looked, I bought.

I soon discovered a few wee problems: no central heat or air conditioning on the second floor; one of the breakers blew each time I ran the clothes dryer and air conditioner simultaneously; and the storm windows didn't fit flush with the window frames. None of these problems were a major hindrance to my life.

Although I enjoyed the rural life and my country home, my priorities changed a year later, necessitating a move into the city. Instead of trying to sell the house myself, I hired a real estate agent since I was not available to show the house during the day. While buying the house had been relatively painless, selling it was not going to be so easy. First, I faced answering--honestly--the questions on the required seller's disclosure form. Although I had tolerated the house's peculiarities, it was difficult to admit them to people looking at the house. And folks did come and look--and just look. Finally, after lowering the price, I had an offer--contingent on a whole-house inspection. My momentary glee turned to gloom.

By this time, I was aware that the house had some significant defects. After a hard rain, water pooled in one corner of the basement. The bedrooms, tolerable in wintertime under a heavy comforter, were insufferable during the sultry summer months, even with the room's air conditioner blasting away. My other inspection concerns included the jerry-rigged wiring in the basement, the very steep and worn stairs to the basement, the narrow doorways and the absence of wall insulation.

Fortunately, the inspector was familiar with the realities of older homes. He was wise enough to tailor his expectations for a 113-year-old structure, and wrote an honest report about a house that was not capable of meeting current building codes. Even with its shortcomings, the buyers were satisfied and the house sold.

I know I was lucky, and have learned from my mistakes--especially the biggest one: emotion. My Kansas country house not only resembled my childhood home in upstate New York, but its attic smelled exactly like that house. I was hooked before knew what hit me. Next time, my house-shopping will be by committee--lots of knowledgeable friends and professionals who will help make sure that my decision not only stirs my heart, but also is based on buying smart.

--Heidi Hunt

Selling on your own

If you end up buying directly from a seller who is not using an agent, hire a buyer's representative or a real estate attorney to assist you with the paperwork, from the initial offer to closing. Get everything in writing.

You can find fill-in-the-blank offer-to-purchase agreements and contracts at your local library or on the Internet. When I was ready to sell my first house, to save money for both the buyers and myself, I customized a standard contract template and then paid a small fee to have an attorney review it.

Buying a parcel of land directly from the owner is sometimes done with a land contract. Leo and Carol Schen's book, Finding and Buying Your Place in the Country (on MOTHER'S Bookshelf, Page 129), gives the pros and cons of land contracts and other negotiations.--Claire Anderson

Buying in the Country

If you've decided that you want to plant your roots in a rural area, you'll need to consider these additional issues.

Water. How is the property supplied with water? If there's a well, make your offer contingent on inspections to confirm the well is in good condition. You may want to specify that the well provide a certain number of gallons per minute. Have the water tested for nitrates, bacteria and any other possible contaminants that may endanger your health. (Ask the health department what problems may be present in the local water supply.)

If there is not a water source on the property, be sure to take that into account when you decide how much you're willing to offer. If you plan to drill a well, realize there is always a chance the driller will not be able to locate water on the property. You may be able to get some idea in advance of the odds you'll find good water by checking with hydrologists at the agency that regulates water use in your state.

Sewage. Most country properties use a septic system to process graywater and sewage from sinks, showers and toilets. The homeowner's disclosure may indicate the septic system has worked well in the past, but you should still request an inspection as part of the purchase offer agreement. If you're buying land, the seller should have conducted a preliminary "perc" test to determine if the soil and site are suitable for a conventional septic system. Check local rules; be sure you know what will be required before you make a purchase offer.

Electricity. Today, the utility grid supplies most rural homes with power. If there's currently no electric service to the property and you want to tap into grid power, you'll need the electric company to give you a bid on bringing in lines. If a pole is already on the property, only a line has to be dropped to the buildings and a meter installed, a relatively inexpensive procedure. If there's no pole adjacent to the property, the cost easily may run into thousands of dollars, depending on how far the line must be run from the nearest pole. Investigate installing underground lines, which may be more attractive and dependable--and sometimes not much more costly.

Producing your own energy using solar or wind generation may be your best bet, but be sure to research any zoning regulations that might limit their use. (Putting in a photovoltaic system usually is not limited by zoning rules, but putting up a 100-foot wind tower may be.)

Water and mineral rights. It's not uncommon for a property to have mineral or water rights attached to the deed. The title should list these rights, and you should have the title company or your attorney explain the ramifications and limitations these rights can impose on the property--before you make an offer.

Zoning. Zoning ordinances and building permits vary from state to state, county to county and even between municipalities. If you have a certain project in mind for your property, check with the local building inspector to see if it can be permitted. Zoning ordinances designate land for certain functions, such as farming, industry or housing, and can limit how your land can be used. Local building codes govern how you can build. Some locales may permit unique projects under an "experimental" clause, but this can be costly, especially if an engineer is required to review your plans. If you intend to use green building techniques or want to have a Dr. Doolittle farm with lots of animals, investigate potential zoning or building permit limitations.

Rights-of-way. Roads, power lines and gas lines frequently cross parcels of land and may interfere with your plans for the property. If a neighboring property has no road frontage, it may have a permanent, deeded easement through the property you are considering. Or if you have to drive on a private road to reach the property you are considering, make sure that you retain this permanent easement on the title. If there is a road on the property that you can't account for and no mention of an easement on the deed or title, ask the current owner if an easement agreement exists with any neighbors.

Survey. In most cases you should know the exact boundaries of the lot or acreage you are considering. If survey markers are not in place, request a survey be done.

For more advice, we recommend How to Find Your Ideal Country Home and Finding Your Place in the Country. To order, see MOTHER'S Bookshelf, Page 129, or visit www.motherearthnews.com.

Posted by jonathan on February 01, 2005 at 10:12 PM

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