Helping Buyers and Sellers with North Texas Real-Estate

Posts tagged “mortgage interest deduction

House Hunting Part 7 – Negotiations

Negotiate as defined by Merriam-Webster is to confer with another to arrive at the settlement of some matter. The hunter has done their homework and found the perfect abode, the one he/she cannot live without, and the excitement builds. He/she has their Realtor write an offer they sign and submit to the Seller’s agent annegotiation-strategies-trainingd wait. Sometimes word gets back fast or drags on seeming like an eternity. When it does arrive, the offer is not in the form of a contract but a counter offer.  The counter is a good thing; it means the original offer is not too low.  If the price is much lower then what the Seller is expecting he may just reject the offer and ask the Buyer to submit another more reasonable offer. However, the counter means you are in the game and now the fun starts. Everything in the offer is negotiable; however, in Texas, a few things are customary for the Seller to purchase, such as title insurance and a home warranty.  When buying a house the Purchaser is not actually purchasing the property, he /she are buying a title to the abode, the right to occupy and use the space. Title insurance protects the document from claims and limitations placed on the title by others. This can save the Buyer a lot of heartache and financial loss. The home warranty is a one-year contract with a home warranty company and is different from homeowner’s insurance in that the warranty covers major appliances such as air conditioners, heaters, pools, and plumbing fixtures etc.

The typical negotiation points in an offer are price, repairs, closing costs, survey, closing date, and possession. Sometimes the option period is included and on rare occasions, escrow/earnest money.  In order to determine a reasonable offer price, a good Realtor will perform a comprehensive market analysis (CMA/comp). This is the same procedure used by the Seller’s agent to set a price on the home so makes sense for the Shopper to do the same. A CMA compares similar properties in the same or comparable neighborhoods that recently sold, and averaging price per square foot of the abode. The house hunter will have a better understanding of the market value. Market value is a very important concept to understand when purchasing.  Market value is the cash price that a willing buyer and a willing seller would freely agree upon, given reasonable exposure of the property to the marketplace, full information, and no undue compulsion to act.

The goal in all negotiations to find the true market value and this is hard, because many times the Seller has an over inflated assessment of his/her castle and on the other side the Buyer is unrealistic. A good house-hunting guide educates the Client while showing listings and explains the price differences of listings and coaches the Consumer on pricing. Sometimes repairs are needed and often are negotiated twice, once at the initial offer and a second time during the option period after a home inspection. Safety hazards are the number one concern for Buyers; these repairs are typically accepted by the owner, others such as updating and taste, not so much.  Closing costs are also on the table. Certain loans have particular limitations on how much a Seller can contribute to closing costs. The well-informed house hunter must be aware requesting payment of closing costs reduces the overall bottom line of the house for the Seller, when negotiating both need consideration. The survey is required by the Title Company, sometimes the Seller has a copy of a good survey the Title Company can use, however if the owner has changed the foot print of his abode or has added a permanent fixture to the yard then a new survey is required.  The time to close takes at least twenty-one days but depends on the lender or the type of purchase. Cash for instance quickens the closing time. Possession after closing depends on if the Seller requires more time to vacate the property. The option period is the time allowed by the Seller in which the Buyer can get out of the contract and not lose his/her escrow/earnest money. Typically, the length is ten days at a minimal cost. Escrow/earnest money guarantees the Buyer will come to the closing table; the cost is normally $1,000 per $100,000 of price, and both money for the option period and escrow/earnest money refunded at the closing table.

The current tight housing market has created the semi-new phenomena of multiple offers. In this case, several Buyers are after one castle and the Seller has many offers to consider.  This almost creates a bidding situation however a Realtor is not a licensed auctioneer and it is illegal for them to create an auction, so the Seller’s agent cannot give the price of the highest offer to another Purchaser.  Multiple offers create a nerve-wracking circumstance for house hunters and true market values can go out the window. Although, if he/she loves the house and no others are available, the Buyer may be tempted to offer a price above market value. If the Client is using cash, there is no problem, but when a loan is involved, especially FHA and VA loans then the house-hunter could find themselves with a low appraisal. The lending institute financing the loan typically does an appraisal of the home’s value to determine if the abode purchased provides enough collateral for the loan. If the loan is higher than the lenders appraised market value of the house, either the Buyer or the Seller must pay the difference. The house hunter may not have enough cash so it falls onto the Seller to lower her/his price. If this does not happen, the deal is dead.

Negotiations do not need to be difficult. As long as both parties are realistic and have good representation, this portion of the real estate process should be easy. One good hint for all potential house hunters is to be emotionally unattached to the abode prior to closing, easier said than done, but can produce a smarter purchase.  See ya down the road.


Multiple Offers…What Will You Do?

Your Realtor has driven you around for miles. You have searched and searched for that perfect abode and there it is, like a castle sitting on a cloud. Your Realtor puts together the paper work required to make an offer. You sign the documents. Give a copy of two checks, one for escrow money and another for an option period. Your Realtor rushes to get the offer to the Seller’s Realtor and oh no! There are two more offers on the property ahead of yours. Dreams of sitting by the poolside of your new home dashed!  Unfortunately, that is today’s housing market. With a lack of inventory and a plethora of Buyers, when a good home is released you can expect multiple offers. What happens next?screenshot_224

The Seller’s Realtor can only do one of two things. Tell you there are other offers or not tell you there are other offers. The choice is up to the Seller. However, the Seller’s Realtor must give that same information to all perspective Buyers. A Seller cannot give you the price of the highest offer because it would create a bidding situation and since Realtors do not have an auctioneer’s license it is against the law. The Seller has four options in this situation:

  • He can accept one offer and simply ignore the rest.
  • Reject all submitted offers.
  • Counter one offer and ignore or reject the others.
  • Send TAR form 1926, Seller’s invitation to Buyer to Submit New Offer to each buyer.

The first two options are easy.  Accept only one and reject the others or reject them all. The Seller must not negotiate on more than one offer at the same time for the same home since you cannot sale that home to more than one Buyer at a time. The Seller’s Invitation to Submit a New Offer form is a great solution for the Seller if he/she receives multiple offers that are all too low, with the form the Seller is rejecting all offers however the Seller is also giving the Buyer a chance to submit a realistic price that the Seller can consider. The downside to this approach is rejecting all offers. Some Buyers will walk when rejected. The Seller can break off negotiations at any time up to when the offer becomes an executed contract. Today’s Buyers must be willing to come to the table with good offers however. There is a balancing act for both the Seller and the Buyer. If the offer is too high and the Seller accepts the offer, there is a possibility that the appraisal will be too low. If that is the case then both the Buyer and the Seller has another problem. Buying in today’s market is tricky yet with interest rates still historically low and the threat of rising prices in the future now is the time to buy. The Buyer must be prepared immediately to place an offer on the home they want before someone else snatches it away. Happy house hunting and see ya down the road!

So, You Want to Make an Offer?

You toured house after house. Searching for that perfect abode, eliminating the homes which do not meet your stringent criteria and you find the right one. Like a majestic castle sitting on some far away green hill not a house but a home. Now is the time to make the offer. So many things to consider and do, the prospect can seem daunting. Making an offeEdinburgh_Castler really is not hard if you are prepared.

An offer on a home is a contract only signed by the Buyer. In Texas we use the “One to Four Family Residential Contract” created by the Texas Real Estate Commission for either new or resale properties. This contract can be used for single family homes up to a quadruplex.  Anything larger needs a different agreement.  This document contains the identification of the subject property, including the legal description as well as the Seller and the Buyer. All the exclusions are also included. Exclusions are the objects in the home that may appear to stay but the Seller takes with them as they vacate the home. This is all done upfront so there is no mistake what the Buyer is buying.

The offered price for the home is written on section 3 “Sales Price”.  After a thorough review of a market analysis (comp) of the subject property and consideration of how much the Buyer can afford an initial offer price is determined.  This offer price is broken into two parts, if you are financing the home, the down payment  and the financed portion.  How you plan to finance is also shown. It is very important to have your financing planned out prior to showings. When you are ready to buy you do not want the delay before making the offer.

Earnest money is also shown. This money is held by the title company and guarantees the Seller that the Buyer will show up to close on the home. If the Buyer does not fulfill his contractual obligation the Buyer looses that money to the Seller. If the contract is closed then the earnest money is given back to the Buyer. Usually the title company applies the funds to the purchase of the home. Earnest money typically runs $1,000 for every $100,000 of sale’s cost.

Negotiations are not limited to sale’s price. Title policy and surveys must also be worked into the equation. Usually the Seller pays for the title policy however the survey is 50/50 on who pays for that. Sometimes the Seller has a good copy of the survey showing current conditions of the property.  A good survey can be used in lieu of ordering a new one. However if not, a new survey is required and is negotiable on who pays for the survey. A survey can cost around $400 depending on the surveyor.

Property condition is also a major factor. Repairs and upgrades are negotiable. Remember the cost for repairs and upgrades come off of the Seller’s bottom line. If you are buying a home for $100,000 and request $20,000 in upgrades, the Seller is only making $80,000 on the sale. Upgrades and repairs must be considered as a part of the sale’s price.

The closing date must give time for both the loan institution to process the loan as well as the title company to order all the legal documents required for the sale. At the very least a month should be given between the initial offer and the closing date. If the loan is through a large bank such as Chase or Bank of America more time may be needed to secure the loan.

Closing costs are another factor to consider. Along with sale’s price and renovations and upgrades closing costs are negotiable and also diminishes the Seller’s bottom line. Closings costs can be as much as 3% of the sale’s cost and depending on the loan there are limitations on how much closing costs the Seller is allowed to pay.

The final aspect is the option fee. The option fee usually runs $150 for ten days. The option period starts at the time the offer becomes an executed contract and runs for 10 continuous days including weekends. The option period gives the Buyer the opportunity to cancel out of the contract for any reason what-so-ever and have the earnest money returned. During the period the Buyer should hire a home inspection and have the house inspected. If anything major is discovered than the Buyer has the right to re-negotiate the contract with the option of canceling if the Seller is not willing to cover the cost of the repairs. Of course you can cancel the contract for absolutely any reason during the option period and get your earnest money back. Once the period expires, not meeting lender’s requirements is the only way to cancel the contract and get your earnest money returned. As soon as the option of the option period is used the $150 check is given to the Seller. If it is not used then option money is given back to the Buyer.

A good realtor will go over all of these points with you.  Other things you are required to submit, a pre-approval letter from your lender if you are financing or a proof of funds letter from your bank if you are paying cash. The reason why this is important is because you are showing the Seller you are a serious Buyer. The Seller does not want to waste time negotiating with someone who may not be able to afford the home. Why should he waste his time? The Seller will simply reject the offer. You will also have to submit a copy of the check for the earnest money and the option fee. When the offer becomes a contract then the earnest money check must be given to the title company and the option money goes to the Seller.

The process seems harder than it really is. A good Realtor can help you through all the stages of the transaction. I hope this bit of info helps you with your future purchases. See ya down the road.

The gamble – Eliminating the Home Mortgage Deduction

As the golden and amber leaves of autumn begin to fall on our yards here in North Texas, about 1,364 miles to the east, something is brewing in Washington D.C. In order to bring our outrages deficit down to a reasonable sum, one proposal that appears sure to pass is the elimination of the mortgage interest deduction.  Is this really a good idea? What effect will it have on the housing market? What about mortgage rates and home prices? What seems odd is they are considering cutting the things which did not get us into our current situation in the first place. Many argue eliminating the mortgage interest deduction will not change much. That the mortgage interest deduction benefits mainly those with higher incomes. Which is partially correct, but the rest of the story is a little different. First time Buyers will also feel the brunt of this cut. High income people who live in high-priced homes obviously pay a lot in mortgage interest however first time buyers with a thirty year fixed mortgage pay most of the mortgage interest within the first few years of the loan. Now granted most first time Buyers are not thinking about the deduction when they are shopping for homes. However for some, those who are on the border of renting versus buying may be more persuaded to go with renting. The high income folks might find it more advantages to rent then buy. Why put up with the hassle and expense of owning if you can rent for the same amount? What about construction? Will this deduction place an additional burden on the construction industry? Will contractors be reluctant to build new homes? Those questions are yet to be answered however they are worth considering. The construction industry is on shaky ground with the current economic state. At the very least investors might be reluctant at least at first to invest in new developments.

Some say the elimination of the mortgage interest deduction will have a minimum negative impact on housing prices. They say it might be as little as a 3% decrease in home prices however others say the amount will more likely be in the 6% range. Home prices are already depressed. Sure there has been a modest upswing but even if eliminating the deduction decreases prices to 3% home owners will be hit hard. A home worth $200,000 could be worth $6,000 to $12,000 less. Those are big bucks, especially to those who live on a fixed income. Mortgage rates are an unknown factor. The decrease in home prices may perhaps mean interest rates stay low. Unfortunately we have no crystal ball to gaze into, interest rates are a question. What will they do? I understand we must tackle this ridiculous deficit and we are heading towards a financial cliff. What we need is a strong honest economy. Where people are employed, the country is producing goods and services and where we are competitive with the rest of the world. That coupled with sensible cuts, only then will the deficit shrink. However as I write this it appears as if both sides are in agreement with this proposal. Some are floating a different one. Only eliminating the deduction for second residences, home equity loans and homes with prices higher the $500,000. Which is a better solution however with the housing market so fragile can we really afford this gamble? I guess time will tell. See ya down the road.