How to Spot Anxious Home Seller for Best Price and Financing Help
QUESTION: My husband and I desperately want to buy a home. But we only have around $15,000 for the down payment and closing costs. We know that isn’t much, but we keep hearing about people who buy a home for little or no cash. As we are not eligible for a nothing-down VA mortgage, we talked to a lender about FHA and 90% financing, but we were turned off by the costs and terms. One of our friends recently bought a beautiful home where the seller carried back the entire first mortgage for 20 years. Any suggestions how we can find a similar deal?
ANSWER: The home sale market has slowed down recently in many cities. I think the reasons include a softening of economic conditions and many prospective home buyers are waiting in hopes that mortgage interest rates might decline further.
Meanwhile, I suggest you jump in and buy a home from an anxious, motivated home seller who must sell. Forget the sellers who are testing the market in hopes they might get their outrageous asking prices.
To spot an anxious home seller, look for the obvious signals. First, ask the realty agent, “Why is the seller selling?” Some obnoxious agents will reply, “It’s none of your business.” Personally, I refuse to do business with those uncooperative agents because it is the buyer’s business to know why the seller is selling, so the purchase offer can be tailored to meet their needs.
Second, get excited when you spot a vacant house for sale. That means the seller is probably making mortgage payments on two houses and will listen to any reasonable offer.
Third, look for homes being sold by retirees. I find retired people often own their homes free and clear, so they can carry back the first mortgage at a reasonable interest rate with no loan costs. For example, several years ago I bought a rental house from a retired lady who told me the $1,083 monthly payment she received from me was more money than she ever earned before.
In today’s market, if you offer a seller an interest rate of 9% to 10%, that is higher than can be earned on most alternative safe investments.
Insure House for the Cost of Replacement
Q: I recently bought a new house. Before buying I called my insurance agent who recommended a $94,000 policy. But my mortgage is for $124,500. The lender will not accept my $94,000 policy. However, my insurance agent refuses to insure for more because he says his company won’t write policies for more than the home’s replacement cost. What should I do? The lender threatens to buy their own policy at a cost of $20 per day.
A: Don’t let that arrogant lender push you around. You are only required to insure the premises for its replacement cost. The amount of the mortgage is irrelevant. Ask your insurance agent to contact the lender to educate him that insurance replacement cost is all that is required.
In some states, it is illegal to insure for more than the structure’s replacement cost because over-insurance encourages arson.
Buy Title Insurance for Vacation Home
Q: We are considering buying a vacation cabin in a rural county. The realty agent seems very anxious to sell it to us. He offered to give us a free “chain of title” report. He said we will need it when we get the mortgage. Although my wife and I have bought several homes, we have never heard of a chain of title report. What is it, and do we really need it?
A: No, you don’t need a chain of title report. It is merely a history of the property’s title from its earliest recorded deed to the present time. While it might make interesting reading, a chain of title report is not needed to obtain a mortgage.
But you will need to obtain title insurance for the mortgage lender. Depending on local custom, title insurance is either arranged by a local attorney, the mortgage lender or by a title insurance or escrow company. Since the property is rural, you also may need to obtain a survey to locate the property’s boundaries.
Incidentally, when you make a written offer to buy that vacation cabin and if you need a mortgage to finance your purchase, be sure your offer contains a mortgage finance contingency clause.
Obtaining a mortgage on vacation or second homes is not always easy. Before you make your offer, please consult at least one lender to find out the mortgage terms, because the interest rate is usually higher than for urban homes and the loan-to-value ratio may be only 50% to 75%.
Paying Extra Principal Trims Life of Mortgage
Q: We are paying an extra $50 every month, which is applied to the principal of our 30-year, $100,000, 8.75% interest-rate home loan. We are into our second year of the mortgage and have been told that doing this only really matters in the last five years of the loan. But other friends say the extra payments in the beginning years shorten the length of the mortgage, plus saving us interest. Please clarify.
A: Extra principal payments will substantially shorten the life of your mortgage, thus saving you significant interest. I calculate your regular monthly payment at $786.70 for 30 years. By adding $50 per month to your monthly payment, you will cut the mortgage term to about 23 1/2 years, thereby saving you about $46,931.48. That’s pretty dramatic.
But if you can add an extra $100 per month and pay $886.70 each month, you will cut your mortgage to 20 years and save $70,404 in interest. Don’t let anyone talk you out of making those extra payments each month.
Try Portfolio Lender for More Flexibility
Q: The first-mortgage conventional loan limit is $187,600. When does this limit go up, and what will be the new amount?
A: You are referring to the Freddie Mac-Fannie Mae maximum home mortgage. Freddie and Fannie are the major home loan buyers in the secondary mortgage market.
Their maximum loan limit is set each January, based on average home sale prices. However, try to avoid dealing with local originating lenders who only sell their mortgages to Freddie Mac or Fannie Mae because they are the toughest lenders, with rigid loan standards.
Much easier lenders are “portfolio lenders” who keep their loans in their loan portfolios rather than selling their loans in the secondary mortgage market. Many of the larger S&Ls; and banks are portfolio lenders that can be very flexible as to maximum loans and borrower qualifications.
Tenant Improvements Belong to Landlord
Q: About two years ago, with permission of our landlord, we installed new wall-to-wall hallway carpet in our apartment. It cost us about $500. When we were preparing to move out at the end of our lease, the building manager cautioned us not to remove the hallway carpet. She said if we did, we would have to pay for refinishing the hardwood floors. Since we left the carpets, shouldn’t we be paid the $500 cost by the landlord?
A: No. When a residential tenant makes permanent improvements, in the absence of an agreement with the landlord for removal at the end of the rental, if the improvements cannot be removed without damaging the property they become the landlord’s property. The building manager was correct that if you had removed the carpets you would have to pay for restoring the floors. Ask your attorney for further details.
Avoiding Profit Tax Requires Planning
Q: I live in half of my two-family duplex and rent the other half to tenants. My purchase price was about $35,000 and the building is worth at least $175,000 today. If I sell, can I use that “rollover residence replacement rule” you often discuss to avoid profit tax if I buy a $175,000 single-family house?
A: Owners of residential rental real estate who live in one unit and rent the balance of the property to tenants can qualify for the “rollover residence replacement rule” of Internal Revenue Code 1034. But this tax-deferral benefit only applies to the net (adjusted) sales price of the unit you occupy. Incidentally, the “over 55 rule” $125,000 home-sale tax exemption also applies to the value of your unit, but not to the rental portion of the property, if you are eligible.
If your duplex sells for $175,000 net and the two units are of equal value, your residence unit’s sale price will be $87,500. If you buy a replacement principal residence costing at least $87,500 within 24 months before or after the sale, then you can defer tax on the about $70,000 profit from your residence unit’s sale. However, you will owe tax on the $70,000 profit on the sale of the rental unit.
Make a Written Offer; Seller Might Say ‘Yes’
Q: The homes in our town seem to be terribly overpriced. I noticed they don’t seem to be selling as fast as they did a few months ago. But the prices haven’t come down. How can my husband and I find a home to buy that is fairly priced in today’s marketplace?
A: When you find a home you want to buy, make a written purchase offer. The asking price is only the seller’s “dream price.” Some correctly priced homes sell for their full asking price, but others sell for thousands of dollars less.
Until you make a written offer at the price and terms you want, you will never know if the seller will accept. Or the seller may counteroffer at a price you like. To find the bargains, look for sellers, such as those who are anxious to sell due to divorce, job transfer, death or financial problems. Your realty agent can usually steer you to the best bargains, but also read the newspaper classified ads every day, especially on weekdays when the most anxious sellers’ homes are advertised.
Don’t Accept Appraisal That You Don’t Like
Q: Shortly after we contracted to buy our home, we applied for a mortgage with the S&L; where we have our savings accounts. But the appraisal was about $12,500 below our purchase price for the home. The S&L; would approve our loan if we would raise our down payment by $12,500. When I protested, the loan officer tried to intimidate me into accepting the loan. So we went to the bank where my company does business and we had no trouble getting the mortgage we needed. However, the loan fee was about $1,100 higher. I am thinking of suing the S&L; for the extra cost. Do you think I should?
A: Yes. Presuming you can handle the matter yourself without an attorney, you have everything to gain and nothing to lose. However, your big mistake was not protesting that low appraisal. If I am unhappy with an appraisal, I protest loud and clear if I can prove the appraiser is wrong.
Borrowers are unaware that appraisers are often instructed by lenders to appraise very conservatively. One of the worst examples occurred when an appraiser valued my residence at $50,000 less than I knew it was worth. I refused to accept the low appraisal. The loan agent then hired another appraisal company which came in with a valuation $50,000 higher and I obtained the loan I wanted. As a result, that lender not only earns interest on my first mortgage, but on my home equity loan too.
Believe it or not, most lenders want your loan business. If they don’t make loans, they don’t earn profits. Of course, if your property is in a bad part of town where the lender unofficially “redlines,” then the lender may have instructed the appraiser to come in with a very low value, so you will take your business elsewhere. Please let me know if you win your $1,100 lawsuit.
