Appraisals - How Much Is This Home Worth?

Appraisals are very easy and simple to understand so we are going to keep this one short. Within the first 17 days of escrow buyers will need to have their lender order an appraisal to prove to the bank's investors that the property is worth at least as much as the loan they will be writing on it. Appraisers work for the lender but are often paid by the buyer via closing costs. The cost for an appraisal can range from $300-$600 depending on size, type, and location of property.

Appraisers are licensed and will visit the house, look at recently sold homes in the area, and combine this information with general market trends to determine a fair market value for the home. There is no need for a buyer to meet an appraiser at the property.

Many buyers confuse appraisal with inspection. Think of it like this:
Inspectors check for physical defect in the property, work solely for the buyer, and do not discuss value of the property.

Appraisers work solely for the lender and speak mainly about the value of the home based on recent sales.

In order for you to get a loan to purchase your home, it will need to appraise at least at the value of the loan you are proposing taking out. If it doesn't, you will either have to make a larger down payment or need to renegotiate the purchase price. If none of the above are possible, you will need to cancel escrow.

Very rarely do appraisals come in way above the purchase price as this can create major problems if the seller then has second thoughts. Since they work for the lender, their main job is to ensure that the lender is secured by property value not to give the seller an accurate estimate of his properties value.

Now that appraisals are out of the way, we are excited to bring you our next article on real estate contingencies.

Repairs - What Can You Ask For? What Can Happen?

So you've been through the comprehensive inspection report detailing all of the shortcomings of your soon to be new home. At this point, it is natural to feel a little apprehensive about proceeding with the transaction as there is undoubtedly more wrong with the home then you initially thought. This is a normal feeling and in most cases a night or two of sleep will help to put it all in perspective. Remember, most all of the homes on the market are used and do have some defects so it will be an impossibility to even find a home with zero areas of concern. The same also goes for new construction and probably even the property you are currently living within.

The real purpose for a home inspection is awareness. That means you, the buyer, now have the knowledge about the various shortcomings with your property and can make the best decision possible.


What Options Are There After A Home Inspection

Ask For Repairs - Most standard sellers will be open to making a few repairs to the property in order to ease buyer concern. Of course, the property is privately owned so the owner does not necessarily have to do any repairs and some will not. All of this depends on the motivation and general disposition of the properties current owner. It is common practice for buyers to ask for items listed as health and safety issues to be remedied before proceeding. Items such as exposed wiring, broken glass, unstrapped water heaters, and other potential hazards are the most commonly asked for repairs.

How much can you ask for? You can ask for as much as you like, and your certainly not limited to health and safety items, but generally 5-10 items is what we would consider average. Again, the chance of you getting these items fixed will depend on many factors including: the negotiations leading up to the escrow, the sellers feelings toward the buyer, market conditions, and the overall condition of the property. For example, a seller who has endured endless price negotiations leading up to escrow may have such ill feelings towards the buyers that he will not do any repairs to the property. This is also known as selling "as-is."

Ask For Credit - Sometimes in addition to or in lieu of asking for repairs, the buyer will ask for a cash credit to fix the problems on their own. Again, good judgement should be exercised here as it is not likely for a buyer to recieve a credit for a broken pool heater when the seller had been crediting the buyer for it in the negotiations leading up to escrow. Cash credits, on the other hand, can be advantageous as the buyer will be able to fix the problems in any manner they like without worrying about the seller picking an unqualified "low ball" contractor for quick fix. The buyer is not bound to use the money for repairs, in fact, they are free to spend it any way they see fit.

Proceed With The Sale - The above solutions can lead to the continutation of sale when both parties can arrive at a mutually beneficial arrangement. Sometimes, there are so few problems with the home that the buyer is just ready to proceed without any repairs. Other times the buyer will know going into escrow that asking for repairs will be pointless and if don't see any major issues, they also elect to continue on with the transaction. After a home inspection it is perfectly acceptable to continue on with the sale of the home with zero talk of repairs.

Cancel Escrow - Every once in a while the inspection will reveal more problems than the buyer can handle and the buyer will simply cancel escrow without penalty and continue on looking for another property.

Bank Owned And Short Sale Property - With bank owned property, the simple fact is that it is often sold "as-is" from outset so any hopes a buyer may have for repairs will be fruitless. Banks very rarely will acknowledge any information about the property given the unique way in which they acquired title to the property. Since it was acquired through foreclosure, they may have never been given any disclosures about the condition of the property and therefore are not willing to vouch for its shape.

Occasionally, banks will offer cash credit for repairs but they certainly are not under any obligation to do so. In fact, many banks price their properties so well that they recieve multiple offers and may be completely unwilling to accomodate a buyer asking for credit because they have so many backup buyers.

Short sale sellers may be more willing to do repairs and credits but this is often overshadowed by the slow process it may become to ask for considerations. Often times, asking for repairs can kill any time sensitive approval the bank has given so it may not be wise to demand them. More often than not, the price on short sales and bank repo homes is so competitive that it just may not matter to a buyer. This is obviously a good time to consult with your real estate agent about the overall value of the deal.


Some Other Ideas

When you do decide to continue on with a transaction, it would be an excellent idea to keep a copy of the inspection report so that you have some idea of problems you may want to look at remedying in the coming years. This advice alone will pay dividends when it comes time to sell your home.

Look for our next article on understanding your homes appraisal.

Understanding Disclosure Paperwork From The Seller Of Your New Home

The beginning of the escrow process is an exciting and very busy time for most home buyers and real estate agents. One of the first issues to attend to is the gathering of all disclosures made by the seller about the condition and overall situation of the property in question. And you thought there was a lot of paper work to sign during the offer process? Just wait till you see how much more is coming down the pipe!

As a home seller, they do have an obligation to provide the buyer with signed copies of these disclosure forms detailing all material defect known about the property within the first seven days of the transaction. As a home buyer, you have an obligation to read, understand, and sign off on any information provided within these disclosures or cancel the agreement if something strikes you as a deal killer.

We will attempt to guide you through these documents so that you have a basic understanding of the information they are trying to convey. The forms making up the disclousure packet include but are not limited to:


Agency Disclosure For Seller and Sellers Agent - Shows that the sellers agent has a fiduciary duty to act in the best interest of the seller.

Transfer Disclosure Statement (TDS) - Filled out by the seller showing A) the current equipment in the systems of the home B) the awareness by the owner of any material defect with any of these systems C) the awareness of any problems in the area or surrounding community/neighborhood and D) the awareness by the agents of any known defects.

Preliminary Title Report - Shows all matters affecting title to the property including but not limited to back taxes, mechanic leins, and past due homeowners association dues.

Supplementary Statutory Disclosures (SSD) - More representations made by the seller as to whether people have died on the property in the past three years, whether the property is located near ammunitions or industrial areas, and a few other items.

Earthquake and other Hazards Booklet - A booklet usually paid for by the seller detailing the extent of risk associated with earthquakes, radon gas, and other hazards, with regards to California real estate. Booklet also provide some advice for things you can do to help mitigate damage from earthquakes and other disasters. The last two pages have a section to be filled out by the seller and signed off on by the buyer. Pay attention to any of the boxes marked that may pose potential hazard risks in the future. You may not be able to renegotiate the deal but at least you will know for the the future.


Sellers Affidavit of Nonforeign Status and Withholding Exemption (FIRPTA) - Sellers disclosure of their citizenship and details of ownership to prevent foreign investors skipping out on paying capital gains taxes after the sale.

Natural Hazard Disclosures (NHD) - A packet usually purchased by the seller stating the presence of various natural hazard risks to the property. Typically, these hazards include flooding, fire, and liquifaction (land movement during earthquake). Most of our coastal real estate will have some flood risk, most hillside real estate will have some fire risk, and nearly all the properties in our area will have some degree of liquifaction risk.

Lead Based Paint Hazards Disclosure - Only used with property built prior to 1978. Disclosure discusses the risks associated with lead based paint, the hazards it can present, and whether the owner knows of the the presence of any lead based paint within the property.

Water Heater and Smoke Detector Statement of Compliance - Discloses State law with regards to the bracing and strapping of water heaters as well as the presence of smoke detectors.

Seller Property Questionaire - More disclosures from the seller with regard to whether they have repaired, replaced, or rebuilt the home or any of its systems plus more disclosure about known defects affecting the property.

Statewide Buyer and Seller Advisory - The catch all form outlining all things real estate brokers are not qualified to advise clients about.


Normally, these disclosures can be returned to the seller within the first seventeen days of the agreement but it is often better to get them to us well in advance of this date. We would personally recommend signing these documents with some other preliminary paperwork such as the inspection authorization, escrow insructions, and loan application to save you some time. We know your hand is probably already beginning to cramp just looking at all of this but we've found it less painful to do as much paperwork as possible at one time while your in "the zone" as opposed to the tedious drip of never ending forms. As always, if you have any questions about these disclosures, please do not hesitate to ask.

We think you will enjoy our next article on home inspections.

Securing Your Financing - Insider Tips for Understanding and Finding Your Home Loan

After being pre-qualified for a home loan, looking at homes for sale in your area, making an offer to purchase, and ultimately entering escrow, it is time for most prospective home buyers to officially arrange some sort of loan in order to purchase a house. Luckily for them, there are a lot of choices in the marketplace and the interest rates for home loans are generally low when compared to hard money and lines of credit loans. The following are a few key points that home loan shoppers will want to clarify with any vendor they are considering obtaining a home loan through:

Interest Rate – This is the rate you will be paying back to the bank on the money borrowed. Ideally, you want as low a rate as possible although there are the following other factors to consider:

Loan Structure - The following are just some of the choices with regards to structure:

Adjustable – The interest rate of the loan will adjust with the money index it is tied to. If that index goes up, so will your interest rate. If it goes down, your interest rate will reduce as well. Adjustable rates are not for everybody as they can lack the peace of mind that a conservative fixed rate loan may provide. They do, however, serve a purpose and may be a good choice at a time of high interest rates or for somebody not looking to hold the property for a long time.

Interest Only – The payment you make is only for the interest on the loan. Your payments will not pay down the principle and reduce your loan balance. Typically, an interest only loan lasts for one to five years before switching back to a principle and interest payment. At this time, you have to pay the entire loan amount in a shorter time frame, say 25 years instead of 30, resulting in a larger monthly payment. The pros and cons are similar to an adjustable rate mortgage.

Fixed – A loan with a fixed or stable interest rate for the duration of the loan.

Conventional – A general term used to describe a loan from a private sector lender with a fixed interest rate.

FHA – A loan subsidized by the Federal Housing Authority, sometimes able to provide 100% financing to qualified buyers. Usually entail a little more paperwork and stricter borrower guidelines.

VA – Loan available to veterans and their spouses with similar guidelines as FHA.

Loan Term - A home loan can be of any term from 0-40 years. The longer the term, the less the monthly payment and the shorter the term, the more you’ll pay monthly. The typical home loan is for 30 years although it is very common for owners to refinance and stretch that term out over many more years.

Points and Fees – Typically, it is wise for buyers to pay a “point” to buy down the interest rate on their loan. A “point” is slang for a fee in the amount of 1% of the loan amount. It is also known as a loan origination fee. For a $400,000 loan, this translates to $4,000. There are zero point loans available to most home buyers but the catch is that you will pay a higher interest rate. You can always pay more than one point to buy the interest rate down further.

Other fees to watch are for processing, underwriting, administration, document preparation, wiring, courier, and notary fees. Typically these extra fees should be substantially smaller than the point charged but you’ll want to have us look at your good faith estimate in order to determine if you are getting a good (or realistic) deal.

Prepayment Penalty – If you plan to sell or refinance the house any time in the near future, you definitely do not want to have a prepayment penalty. In fact, most loans today should not have a prepayment penalty but often lenders will try to slide them in to the unknowing home buyer. A prepayment penalty is a steep fine assessed if you ever want to pay off the entire loan amount before a certain date.

Private Mortgage Insurance – Recently, many lenders are starting to require the payment of private mortgage insurance by the borrower. Private mortgage insurance, or PMI for short, is an insurance policy paid by the buyer in order to protect the bank from the buyer in case of default. PMI can be calculated into the loan and borrowers need to ask their lender if their loan will carry PMI and how much it will cost.

Choices of Lender - There truly are so many choices with regards to mortgage companies that the decision is often overwhelming. Experience has shown that almost everybody promises the world, but few ever deliver. In an effort to save some people future headaches, we've put together a list of preferred vendors for Orange and Los Angeles County home loans. We strongly urge consumers to use these vendors as they have saved many loans for our clients who had originally elected to get a loan elsewhere only to have the company’s claims prove to be empty promises.

Locking Your Loan – The decision to purchase your loan is an orchestration in timing. This is done sometime during the escrow period and is best discussed with your lender and us in order to best weigh the situation and all of its implications. Please avoid procrastinating in the lock of your loan in hopes that interest rates will decline. Unless you have very good reasons for waiting, delaying the loan lock can have disastrous consequences on your home purchase.

Home buyers need to understand that all of these factors weigh into the worth of a home loan, not just the points or interest rate. It is very common for a loan to look terrific when only a few of these factors are considered, only to have it look horrible when all the values are assessed. We urge you to use this checklist, ask lots of questions, have us review your good faith estimate, and ultimately save a big headache by using one of our preferred lenders. After this many years in the business, we have seen it all and have consciously chosen to work only with the best home loan providers. Please take advantage of this.

Short Sales - Starting To See Some Hope

Anybody who has been in the market for real estate in the past year is all to familiar with the pre-foreclosure short sales. They have been the cause for much of the disappointment felt among home buyers in the past months simply due to the fact that the banks were not responding to their offers to purchase, many of which were terrific offers.

All the sitting around has apparently caught up with the banks as we are really starting to see an uptick in the amount of short sale offers that are being quickly (at least quickly for the banks) processed, assigned, and responded to. Many of the banks have apparently gotten the message that it might be a good idea to take the loss now instead of letting it accumulate over a period of months by going the bank owned REO route. This is all culminating in more closed short sale transactions for our clients and us.

This is great news to today's home buyer as it puts a lot of properties back into play. One word of caution is that prudent home buyers still needs to evaluate each property with a little skepticism and have us run comparable sales to see if the price is even realistic. The old cliche still holds true that if it seems too good to be true, it probably is.

Still, we are excited to report that their is some more good news for today's home buyer in that the banks might just listen to some reasonable offers on short sale property. We encourage the banks to keep it up, and home buyers to keep it reasonable!

Why Your Home Isn’t A Retirement Account, and Where You Should Be Using Real Estate To Fund Retirement.

The recent downturn in the real estate market has caused many homeowners who were banking on the equity in their house to rethink their retirement planning. Rather than run from the depreciating real estate market, they should consider investing in properties that will carry them through retirement.

There is a defined distinction between property you would consider as a home and property best suited as an investment. Many times, real estate that would make a great home would be a lousy rental, while similarly, property that provides excellent financials for investors would not be real estate you’d be proud to call home. This is exactly the reason why real estate buyers need define exactly what purpose the property they are searching for will serve, and then use a specialized approach to find properties that would make good candidates for that usage.

Lets first consider real estate used as your primary residence. We will first examine things that make the best homes terrible investments and then how these same shortcomings are huge pluses when viewed through a pair of rental property glasses.

Investing in Real Estate That You Want to Call Home
Uncertain Appreciation – Markets change and no matter how highly desired your location is, there is always zero certainty that appreciation will happen within a short window of time.

Illiquidity – Investing in a bigger home, in lieu of acquiring rental property, has the distinct disadvantage of not being able to be turned into quick cash without selling or refinancing. Since the property generates zero monthly cash flow, the only way to collect income is by taking on additional debt (ie refinancing) or an outright sale which can take months to close.

Impractical – Beside being slow to sell, selling your home to cash in on the equity leaves the big obvious problem of “Where will you live?” Your going to have to live somewhere and this usually requires either buying another home or paying somebody rent.

Tax Consequences – Spending a large amount of money on your home is a rewarding experience and can increase your homes value. You will not, however, discover any new tax breaks even if your tax liability increases. Remember, you are the one paying the taxes in the first place, and deducting them from your income liability does not completely negate those payments. Even if you extend you loan to keep your interest deductions, that additional monthly payment that you picked up during the refinance may have been better used somewhere else, such as in rental property.

Investment in Rental Property
Cash Flow – Investings polar opposite of appreciation is cash flow. Cash flow of an investment property is the real indicator of its value. In short, cash flow can be defined as the amount of money the property generates in rents after all expenses are paid.

Whether a property appreciates or depreciates is really at the whim of the market and availability of buyers. There is not much a homeowner can do to increase the value of their home without taking on considerable costs that may outweigh any gains in value. Income property owners, or cash flow investors, have much more control over their properties value. They can increase rents, decrease expenses, or any combination of these to make the cash flow situation better and ultimately increase their property value.

1031 Exchange – An investor’s response to lack of liquidity is found partly in the above explanation of cash flow and partly in a process known as a 1031 exchange. A 1031 exchange allows an owner of rental property to sell their property, identify a replacement property, close escrow on that property, and defer any capital gains taxes until a future date.

From Impractical to Practically Too Easy – If the investor decides they want to completely liquidate the property in the future, there are even strategies for this that will severely limit their tax liability and they won’t even have to worry about finding a new place to live! There are lots of options open to rental property owners, none of which are available to a primary residence owner.

Additional Tax Benefits – Unlike your home, the value of income rental properties is allowed to be depreciated from most owners tax liability. Also, during rougher rental years, owners are allowed to write off losses directly related to their investment property. Even during a bad year, the tenants that you do have are continuing to pay off your mortgage until you owe nothing.

By delaying a little gratification and looking into purchasing rental properties right now, most people will be able to generate a little income, create peace of mind for their own retirement, and have more assets to pass on to their children. We encourage you to start looking this direction immediately. After all, the timing is perfect: rents are up, prices are down, and interest rates are still historically low. Even in a down market, you won’t care if values ever go up because your property continues to generate income and your tenants continue to pay off your mortgage.

Even though the timing is perfect, please do not use your home for leverage in order to get into the rental market. Save some money every month, get a second job, or ask your boss for a raise. Just please leave the ever fickle equity in your home alone!

We are not advocating living in meager homes and never upgrading your property. In fact, if you have your retirement settled then it may make perfect sense to live a little. We’re speaking more to the people who don’t have a clear plan for their retirement, have a little money to spend now, and want to really invest in their financial future. If that sounds like you, forget the kitchen remodel, the time to get in the rental market is now!

Move Fast, They Won't Last! - Making Sure You Get Your Shot At Today's Bargain Properties

As contradictory as it may seem given the current market and media headlines, todays serious home buyers are learning very quickly that speed is essential in not only finding the good deals, but making sure you get a chance to purchase them. But what can todays motivated home buyers do to make sure they are fast enough? The following is a quick reference guide.


Speed Three Ways

Internet - the Internet has definately changed the way modern home searching is being conducted. The first thing a homebuyer should do is make sure they are set up with an automatic drip campaign to update them when houses meeting their criteria come up for sale. Thet only thing they have to do then is read their email.

Agent Custom Search - If one has an automatic search working for them, they are officially caught up with the pack. This is a good thing, but since we never recommend just being average, the next step is to have a real estate agent looking for properties that will fit the buyers needs. One will be suprised just how often that second set of eyes picks up on properties that home buyers may have missed all by themselves. Some real estate agents are excellent at filtering the good deals from the mediocre which will help a buyer find the best home in the shortest amount of time.

Go Now, Offer Now - Eventually a home buyer will find a property that interests them and it is of paramount importance to go see these immediately. They shouldn't wait until they have nothing better to do. They need to make seeing what may be their future home a top life priority. Only this kind of dedicated motivation will give home buyers the advantage they need in finding the very best deals. Rest assured that there are others buyers who are this motivated and they will be the ones snatching up all the good deals.

Besides being a very effective technique, making it a habit of being the first ones out looking at the hot new deals can be a very exciting process. The buzz is usally very noticeable at these properties as agent after agent and buyer after buyer will be roaming around the property sizing up its features and agonizing over what price they will have to offer to get it. Everybody suffers from this agony, the best advice is to make a reasonable decision and make it quickly. Waiting much more than overnight is usually suicide to ones chances of obtaining one of these distress sales. By learning to act quickly, homebuyers will be able to take advantage of todays discount real estate.