Nolo's Essential Guide to Buying Your First Home
Alayna Schroeder, J.D.; Ilona Bray, J.D.; and Marcia Stewart,
December 2012, 4th Edition
Say goodbye to landlords and laundromats with Nolo's Essential Guide to Buying Your First Home. This timely title will help you find the right place to live and invest in -- and even enjoy doing it.
Filled with interesting facts, real-life stories and insights, and common pitfalls to avoid, this book provides everything you need to select the right type of home for your family, the right mortgage, the right agent, the right inspections -- and much more. Get the inside scoop on:
- deciding between a house, condo, co-op or townhouse
- exploring your local market for the best value
- creating and managing a realistic homebuying budget
- qualifying for and securing financing
- getting the right inspections and insurance
- negotiating with sellers or new home builders
- successfully closing the deal
Read through the real-world experiences of over 20 first-time homebuyers, as well as valuable insights from a team of 13 real estate professionals, including:
- attorneys who specialize in real estate
- a home inspector
- a neighborhood researcher
- a mortgage specialist
- and more!
Along with this step-by-step handbook, you'll get The Homebuyer's Toolkit, including dozens of forms and MP3s to help you find the right place, crunch the numbers, interview real estate professionals, and even borrow down payment money from your parents.
The brand new edition is fully updated to reflect the dramatically changed housing market, with emphasis on how to do the right kind of research before deciding on a price and the terms of your offer. It also includes a new discussion of what to expect when you're looking for financing.
Are you a California resident? Check out
How to Buy a House in California
“Takes the guesswork out of home buying…two thumbs up.”
-Elizabeth Weintraub, Home Buying & Selling Guide, About.com
“Nolo’s excellent guide for novice home buyers provides fresh, updated information about the whole process that even those in the know will find useful.”-Library Journal
“Coming from a gal that knows tools, this book is a must-have tool for any home buyer.”
-Norma Valley, Host of "Toolbelt Diva" (Discovery Home Channel)
- Tools for Househunting
- Dream List Directions
- Dream List
- Questions for Talking With Locals
- Common Real Estate Abbreviations
- House Visit Checklist
- Questions for Seller Worksheet
- First-Look Home Inspection Checklist
- Condo/Co-op Worksheet
- Cobuyer Discussion Worksheet
- Homeowners’ Insurance Terminology
- Financial Tools
- Debt-to-Income Ratio Worksheet
- Financial Information for Lenders
- Gift Letter
- Private Loan Terms Worksheet
- HUD-1 Settlement Statement
- Tools for Choosing Professionals
- Real Estate Agent Interview Questionnaire
- Real Estate Agent Reference Questionnaire
- Mortgage Broker Interview Questionnaire
- Mortgage Broker Reference Questionnaire
- Attorney Interview Questionnaire
- Attorney Reference Questionnaire
- Home Inspector Interview Questionnaire
- Home Inspector Reference Questionnaire
- Tools for Evaluating a House’s Physical Condition
- Indiana Seller’s Residential Real Estate Disclosure
- California Real Estate Transfer Disclosure Statement
- California Natural Hazard Disclosure Statement
- Sample Home Inspection Report
- Final Walk-Through Checklist (Existing Home)
- Final Walk-Through Checklist (New Home)
Ilona Bray, J.D. is an award-winning author and legal editor at Nolo, specializing in real estate, immigration law, workplace wellness and nonprofit fundraising. Many of her books are consistent Nolo bestsellers, among them Effective Fundraising for Nonprofits, U.S. Immigration Made Easy and Nolo's Essential Guide to Buying Your First Home. Her latest book is entitled The Volunteers' Guide to Fundraising. She particularly enjoys interviewing people and weaving their stories into her books.
Bray's working background includes solo practice, nonprofit, and corporate stints, as well as long periods of volunteering, including an internship at Amnesty International's main legal office in London. She received her law degree and a Master's degree in East Asian (Chinese) Studies from the University of Washington. In her spare time she enjoys hiking, going to open houses and gardening.
Bray also blogs on ideas for raising money for your nonprofit at Nolo's Fundraising Tips for Busy Nonprofits and provides tips for anyone buying or selling a home at Nolo's Real Estate Tips for Home Buyers and Sellers -- winner of the 2012 "Best Blog" award from the National Association of Real Estate Editors (NAREE). She is also an author on a popular Immigration Law Site and writes Nolo's Immigration Law Blog.
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1. What’s So Great About Buying a House?
- Investment Value: Get What You Pay For…And Then Some
- Tax Breaks: Benefits From Uncle Sam
- Personality and Pizzazz: Your Home Is Your Castle
- No More Mr. Roper: Say Goodbye to Renting
- You Can Do It…If You Want To
2. What Do You Want? Figuring Out Your Homebuying Needs
- Know Your Ideal Neighborhood: Why Location Matters
- Know Yourself: How Your Lifestyle, Plans, and Values Affect Your House Priorities
- Know Your Ideal House: Old Bungalows, New Condos, and More
- Would You Like Land With That? Single-Family Houses
- Sharing the Joy, Sharing the Pain: Common Interest Properties
- Factory-Made: Modular and Manufactured Homes
- Putting It All Together: Your Dream List
3. Does This Mean I Have to Balance My Checkbook? Figuring Out What You Can Afford
- Beyond the Purchase Price: The Costs of Buying and Owning a Home
- Spend Much? How Lenders Use Your Debt-to-Income Ratio
- Blasts From the Past: How Your Credit History Factors In
- What’s Your Monthly Budget? Understanding Your Finances
- Getting Creative: Tips for Overcoming Financial Roadblocks
- The Power of Paper: Getting Preapproved for a Loan
4. Stepping Out: What’s on the Market and at What Price
- What’s the Buzz? Checking Out Neighborhoods From Your Chair
- See for Yourself: Driving Through Neighborhoods
- On Foot: Talking to the Natives
- Sunrise, Sunset: Getting Day and Night Perspectives
- Got Houses? Finding Out What’s Locally Available
- How Much Did That One Go For? Researching “Comparable” Sales
- Hot or Cold? Take the Market’s Temp
- Just Looking: The Open House Tour
- Nothing to Look at Yet? Finding Your Dream Development
5. Select Your Players: Your Real Estate Team
- Your Team Captain: The Real Estate Agent
- Your Cash Cow: The Mortgage Broker or Banker
- Your Fine Print Reader: The Real Estate Attorney
- Your Sharp Eye: The Property Inspector
- Your Big Picture Planner: The Closing Agent
- Strength in Numbers: Other Team Members
6. Bring Home the Bacon: Getting a Mortgage
- Let’s Talk Terms: The Basics of Mortgage Financing
- Who’s Got the Cash? Where to Get a Mortgage
- Narrowing the Field: Which Type of Mortgage Is Best for You?
- Getting Your Cash Together: Common Down Payment and Financing Strategies
- Where Do I Look? Researching Mortgages
- I’ll Take That One! Applying for Your Loan
- Unique Financial Considerations for Co-op Buyers
7. Mom and Dad? The Seller? Uncle Sam? Loan Alternatives
- No Wrapping Required: Gift Money From Relatives or Friends
- All in the Family: Loans From Relatives or Friends
- A One-Person Bank: Seller Financing
- New-Home Financing
- Backed by Uncle Sam: Government-Assisted Loans
8. I Love It! It’s Perfect! Looking for the Right House
- How Your Agent Can Help
- The Rumor Mill: Getting House Tips From Friends
- Planning Ahead for House Visits
- Come on In: What to Expect as You Enter
- Do We Have a Match? Using Your Dream List
- All the World’s Been Staged: Looking Past the Glitter
- Recent Remodels: What to Watch Out For
- Walk the Walk: Layout and Floorplan
- What Do They Know? Reviewing Seller Disclosure Reports
- Reviewing the Seller’s Inspection Reports (If Any)
- Poking Around: Doing Your Own Initial Inspection
- Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House
- Buying a New or Old Condo or Co-op? Research the Community
9. Plan B: Fixer-Uppers, FSBOs, Foreclosures, and More
- Castoffs: Searching for Overlooked Houses
- A Foot in the Door: Buying a Starter House
- Have It Your Way: Buying a Fixer-Upper or House You Can Add on To
- Share Your Space: Buying Jointly
- Subdivide Your Space: Renting Out a Room
- Hey, Where’s Their Agent? Looking for FSBOs (For Sale by Owners)
- On the Auction Block: Buying Short Sale, Foreclosure, or Probate Properties
10. Show Them the Money: From Offer to Purchase Agreement
- Start to Finish: Negotiating and Forming a Contract
- More Than Words: What’s in the Standard Purchase Contract
- Too Much? Not Enough? How Much to Offer
- Keeping Your Exit Routes Open: Contingencies
- Putting Your Money Where Your Mouth Is: The Earnest Money Deposit
- Divvy It Up: Who Pays What Fees
- Deal or No Deal: Picking an Expiration Date
- Think Ahead: Closing Date
- Strategies in a Cold Market: What to Ask For
- Strategies in a Hot Market: Making Your Offer Stand Out
- Contracting to Buy a Brand-New Home
11. Toward the Finish Line: Tasks Before Closing
- Wrappin’ It Up: Removing Contingencies
- Will It Really Be Yours? Getting Title Insurance
- Yours, Mine, or Ours? What to Say on the Deed
- Get Ready, ’Cause Here I Come: Preparing to Move
12. Send in the Big Guns: Professional Property Inspectors
- Inspection Overview: What, When, and at What Cost?
- House Calls: Your General Inspection
- Tagging Along at Your General Inspection
- Say What? Understanding Your General Inspection Report
- Termite or Pest Inspections
- When to Get Other, Specialized Inspections
- Trouble in Paradise: Inspecting Newly Built Homes
13. Who’s Got Your Back? Homeowners’ Insurance and Home Warranties
- Damage Protection: Hazard Insurance
- Protection for Other’s Injuries: Liability Insurance
- Your Out-of-Pocket: Homeowners’ Insurance Costs
- Shopping Around for Homeowners’ Insurance
- Jointly Owned, Jointly Insured: What Your Community Association Pays For
- Home Warranties for Preowned Houses
- Home Warranties for Newly Built Houses
14. Seal the Deal: Finalizing Your Homebuying Dreams
- Preview of Coming Attractions: What Your Closing Will Involve
- Is It Really Empty? Final Walk-Through of an Existing House
- Is It Really Finished? Final Walk-Through of a New House
- Your Last Tasks Before the Closing
- The Drum Roll, Please: Attending the Closing
- Closing Documents, Part One: Your Mortgage Loan
- Closing Documents, Part Two: Transferring the Property
- Can I Move In? Taking Possession
15. Settling Into Your New Home
- Tell the World You’ve Moved
- Home, Hearth, and Hors d’Oeuvres: Settle in Socially
- The Safest Home in Town: Yours
- Cozy Up … Without Breaking the Bank
- There’s a Place for It: Organize Your Records
- Back to the Future: Get Your Finances on Track
How to Use the CD-ROM
- Installing the Files Onto Your Computer
- Using the Word Processing Files to Create Documents
- Using PDFs and Government Forms
- Listening to the Audio Files
- List of Files on the CD-ROM
I Love It! It’s Perfect!
Looking for the Right House
The brakes are off, and you’re ready to visit houses that seem to match your Dream List, and choose one. “Whatever you do, don’t settle,” says Realtorâ Maxine Mackle (after 20 years of experience in the Connecticut market). “You should be really enthusiastic about a house before you make an offer on it.”
But first, breathe deeply and cultivate some nonattachment. Sellers of beautiful houses usually know they’ve got a gem and price it accordingly. Meanwhile, the market contains its share of duds: houses with dark rooms, weird layouts, and repair nightmares. This doesn’t mean your perfect house isn’t out there, just that you’re unlikely to find it on day one. So to make your search productive, we’ll show you how to:
• get help from your real estate agent, friends, and neighbors
• compare each house with your Dream List, looking past the fancy furniture or staging, the need for fixing up, or the shininess of a recent remodel
• see whether you can live with the layout
• review disclosure and other information you receive from the seller
• do your own, informal inspection for repair issues, and
• understand how to approach buying a not-yet-constructed house, or one in a common interest development (CID).
How Your Agent Can Help
While you should take an active role in househunting, your agent’s expertise will be invaluable in several ways.
Diving deep into the Multiple Listing Service (MLS). Using this database, your agent can access far more information than the general public (unless you work with a brokerage like ZipRealty, which gives its clients full access). Adviser Nancy Atwood explains, “Not only does the MLS provide basic information about the house’s price, features, and current status (‘active,’ ‘under contract,’ ‘sale pending,’ or ‘closed’), it allows us to check out a home’s complete market history (how long it’s been for sale, previous offers, offers that fell through, and so forth). For example, the current listing might say that the house has been on the market for only 64 days. But with a little digging, we can see that it has actually been on sale for two years, having previously been listed with another broker. That tells us that the place is overpriced; I’d want to question the current listing broker about what’s going on. Or, if a previous offer fell through, we’d ask the listing agent why. Termites? A bad inspection? The MLS can also access public records. For example, we can look at whether a house has been heavily refinanced—which might be important if it’s causing the seller to refuse to lower the list price to its current market value. The seller may have used the place as a credit card during the boom years, and is now close to being underwater on the mortgage. I’d ask the listing agent whether the sellers have considered a short sale. Sometimes they’ve started the process—important to know, because the price may come down dramatically if the buyers are willing to wait. Having all that information handy is really good.”
No need for embarrassment, your agent has heard it all. Some agents’ stories might as easily have come from a therapist: homebuyers they’ve counseled about whether to have children, couples whose divorces they predicted. Get used to your agent knowing your private concerns, but try to work out any disagreements on your own. A house visit isn’t the place to argue about whether you need an extra bedroom for your mother-in-law to live in.
Knowing the inside scoop. Apart from the MLS, the agent has been watching the market for longer than you and may hear about houses coming up for sale long before they’re advertised—valuable even in a down market, where the most desirable houses become the focus of buyers’ interest. You’ll be driving along and hear your agent say, “If you can wait another week, that house will be on the market.”
Identifying reasonable sellers. When the market is dropping, some sellers may be stuck in the past, or bent on getting a certain price. Your agent may be able to find out which houses’ sellers are worth negotiating with or are ready to drop their price.
Arranging showings. Your agent should take you to tour homes you’re interested in—more than once per house, if need be.
Helping evaluate houses. Another set of eyes can be a great help when visiting houses. Your agent may point out defects that you missed or possibilities you hadn’t imagined. Just don’t let your agent’s judgment overtake your own. And don’t be shy about visiting houses without your agent—you can always bring the agent back for a second look. (And you absolutely should bring your agent back into the process when it’s time to prepare an offer.)
And more. Some agents find creative ways to help. For example, homebuyers visiting from out of town may find their agent is willing to pick them up at the airport and make hotel reservations. Realtorâ Mark Nash keeps five umbrellas in his car for rainy days. And agents regularly work evenings and weekends, showing you houses, reporting back on houses they’ve previewed, and more.
Visit open houses without our Realtor®. Although Pat and her husband loved their Realtor® (their second one, after they’d fired the first), she was extremely busy. And, says Pat, “We knew finding an affordable house in a good school district, with yard space for our children, wasn’t going to be easy—so we spent Sundays looking at every open house we could. By a stroke of luck, an agent at an open house told us that a nearby house would be up for sale soon. Its owner lived out of state and needed to sell in a hurry. Our Realtor® made some calls, and we put in a bid. On Christmas Eve, we found out that our bid had been accepted, and we got the house!”
What’s Better? Open House or Individual Appointment?
The answer may actually be “both.” Open houses are great for scoping out the possibilities quickly and anonymously, particularly on an action-packed Sunday. Visiting open houses unaccompanied by your agent can be nice for gauging your own reactions with no outside influence. But a quick visit is never enough—if a house looks promising, it’s worth revisiting, with your agent.
The Rumor Mill: Getting House Tips From Friends
People planning to sell their house don’t usually make a big secret out of it—they tell friends and neighbors, long before they formally list the house. If you can tap into the same network (most likely if you already live nearby), you may find out about a house before it’s up for sale.
Tell friends, neighbors, your hair stylist, the florist, your dentist, and more. Some home seekers even print up letters explaining exactly what they’re looking for and promising a treat or reward to anyone who helps them find a house.
Planning Ahead for House Visits
Don’t get too ambitious—most buyers find that visiting between four and eight houses per day is all they can handle before their brains fry. To make the most of your visits, do some prep work. Make sure you’ve got not only the complete list of houses you want to visit and a map, but all the items on the House Visit Checklist shown below.
You’ll find a blank version of the “House Visit Checklist” on the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.)
While you’re looking at a house, the seller’s agent (and the seller if present) are evaluating you. Dress comfortably but professionally, without overdoing it. As Illinois Realtorâ Mark Nash puts it, “A lot of bling or overdress means the seller or agent will think you can afford full price. You want to be well groomed, understated, and home-price-range appropriate. This is a business transaction—don’t give them a negotiating edge by allowing them to overread you.”
If the house has a rental unit, never tell existing tenants what you will or won’t do as owner. For instance, saying “I’ll keep the rent low” could create false expectations, leading to later arguments. But be friendly, and ask tenants for information concerning roof leaks, sewer backups, break-ins, and more. Tenants may reveal things you’d never learn any other way.
Unless your child is small enough to carry in a sling or backpack, leave the kids at home for the first visit. Most parents can focus better without chasing a toddler or hearing choruses of “This will be my bedroom”/“No, mine!” You can (and should) get your kids’ okay later. And this should go without saying, but don’t bring your pets.
House Visit Checklist
Tuck the following into your bag:
your Dream List (from Chapter 2)
your list of Questions for the Seller or Condo/Co-op Checklist
(from later in this chapter)
your First-Look Home Inspection Checklist (from later in this chapter)
a pen and paper, for taking notes
binoculars (handy for examining the roof)
a camera or camcorder, preferably digital, to remind yourself of what
a tape measure and notes on the type and size of your furniture.
Come on In: What to Expect as You Enter
Okay, your feet are crossing the welcome mat, and you’re getting your first peek inside. The agent is probably in one of the front rooms, happy to greet you and to answer questions. If you’ve made an appointment, either the seller’s agent will let you and your agent in, or the agent will get a key from a lockbox. In rare cases (and with FSBOs), the seller will be there as well.
If it’s really awful, you can leave! No need to be polite and do the full tour. While some aspects of a house can be changed, such as filthy blinds or old cabinets, trust your instincts and don’t waste your time.
Picking Up the Paperwork
Your first task is to see what paperwork the sellers have made available to you. This might include a property fact sheet, with basic information like the house’s size and amenities; a disclosure form that details what the seller personally knows about the condition of the house’s features, appliances, and environment; and/or a pest report and possibly a general inspection report, including details discovered by a professional.
You probably won’t get all three of these—you may get none, or only the basic fact sheet or a flyer. How much information a seller is legally required to give potential buyers varies from state to state (though they may give more).
“As-is” on a fact sheet equals red flag. It normally means the seller wants you to buy the house without requesting payment for any repairs, perhaps without even doing a home inspection. Ask what it means to this seller.
First Questions to Ask
If the house looks promising, you and your agent should ask some basic questions concerning repair needs, utility costs, neighbors, and more. You’ll most likely ask these of the seller’s agent, but if the seller is there, or is selling without an agent, ask the seller directly.
Use the “Questions for Seller Worksheet” in the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.) A sample is shown below. Tailor this worksheet to your interests, for example, adding a question on whether there’s hardwood flooring under any carpets. (Also, if you’re buying a condo or co-op, the Toolkit contains a separate checklist for you.)
Do We Have a Match? Using Your Dream List
Even the “right” house probably won’t be just as you imagined. Carrying your Dream List (with the first two columns filled out) will help you stay organized and avoid getting distracted—for example, being so impressed with stainless steel appliances that you forget that one bathroom won’t be enough. Fill out your Dream List before leaving each house. At the end of a day’s househunting, when you can barely remember your own name, it will answer questions like, “Was it the brick house that had the patio?”
Get organized. Keep a file for each house that seems like a possible match. Include your filled-out Dream List, property fact sheet, and other paperwork.
Questions for Seller Worksheet
Here are some basic questions you and your agent will want to ask about a particular house, in terms of repair needs, utility costs, and neighbors. Add anything else to this list of interest—for example, if you have specific questions about the garden. You’ll most likely ask the seller’s agent these questions, but if the seller is there, or is selling without an agent, ask the seller directly.
1. How long has the house been on the market?
2. What repairs have been done in the last few years?
What are the house’s major or most immediate repair needs?
3. Does the seller use a particular repairperson, plumber, electrician, or pest control person? If so, please provide their names: _____________________________________________________.
4. How much money does the owner pay for monthly utilities (gas, garbage, electricity, water) and, if applicable, for association fees?
Are there any other ongoing costs? $ ___________________
5. Has the owner had any problems with water or dampness in the basement or any other part of the house?
6. Is there a furnace and a central A/C system, and if so, when was it installed?
7. How are the neighbors? Are there issues regarding fences, trees, or property lines?
Questions for Seller Worksheet, continued
How to evaluate the answers:
1. If it’s more than a few weeks (depending on how fast houses are moving in your market), ask whether there’s been a price drop and whether any offers have fallen through and why. Maybe it’s overpriced and ripe for you to make a lower bid on.
2. Some of these repair problems may be stated in the pest or other inspection report, but it’s helpful to have the agent summarize them for you. Don’t hesitate to be direct and ask things like “Have there been any roof leaks?”
3. Any use of repairpeople can reveal repair issues the seller didn’t mention when answering Question #2. The information will also be useful if and when you move in!
4. If you’re stretching just to buy the house, make sure it doesn’t come with unusually high ongoing costs.
5. The basement and attic are likely suspects here. Moisture problems are hard to repair and hard to insure.
6. Installing a new furnace or A/C can be another major expense—and one that’s important to deal with soon, for the sake of your personal comfort.
7. Difficult neighbors can’t be repaired. Specifically ask about their level of noise; cooperation regarding fence, tree, or parking issues; and any behavioral problems or oddities.
All the World’s Been Staged: Looking Past the Glitter
In the old days, you’d see houses for sale pretty much as the sellers lived in them—with their furniture, dishes, and clutter. But the real estate industry has learned that by emptying out and then gussying up a place, with rented furniture, flowers, curtains, artwork, and more, buyers will be wowed into paying more—often tens of thousands more—for a home.
The resulting makeover job goes by the trade name “staging.” And it’s your job to look past it, to see whether the house has good bones or is just wearing a lot of cosmetics and concealer. To avoid being hypnotized:
• Figure out whether each room has all the furniture it needs. Stagers usually remove most of the owner’s furniture and then bring in a select few pieces—some smaller than normal. As you look at a bedroom, for example, picture it with your queen-sized bed, nightstands, and bureau, not the twin bed and delicate side table.
• Notice where flowers and knickknacks have replaced functional objects. In a normal laundry room, you’d expect to find detergent, laundry baskets, and a drying rack. Not in a staged house—you’re more likely to see a wicker basket filled with fluffy, lavender-scented towels.
• Observe what your eyes are being led toward—and therefore away from. If the entry hallway is small and dark, you can bet you’ll see a glorious display of flowers on a nearby table.
• See whether your stuff will fit into the closets and cabinets. With the owners having moved out their clutter, you might not immediately notice that there’s no hall closet, linen closet, medicine cabinet, basement, or attic.
• Figure out what style the house is without the staging. Stagers can make a ranch house look like a Victorian, or a 1950s drab home look like an Arts and Crafts bungalow.
• Turn on all the lights, including table lamps. Stagers often set lamps next to beds or couches, even though there’s no electrical outlet. A lack of outlets is a common defect in older homes. Also, check that kitchen and laundry appliances actually have a source of power and other connections needed for operation.
• And smell that apple pie. If the house smells dreamy or the music sounds divine—well, someone made it that way. And they don’t come with the house.
Staging isn’t all trickery—if it’s well done, you might pick up some ideas for how you’d do up the place yourself. Just don’t pay more than the house is worth simply because it looked gorgeous after the staging job.
Recent Remodels: What to Watch Out For
If you can afford a house that someone else has fixed up, great—you can save a lot of effort and ongoing maintenance. But not all sellers have good motives, judgment, or taste. In particular, watch out for houses where the seller has:
• Never lived there, but fixed it up to make a profit. This is called “flipping.” Unfortunately, since the seller had no personal stake in the house, you can’t count on good materials or workmanship. If you get as far as making an offer, you’ll of course hire an inspector. But before things get that serious, save yourself a heap of trouble by making sure the necessary permits were issued and getting an independent appraisal before relying on appraisal reports the seller shows you. Fraud cases involving flipping are surprisingly common, where the appraiser is in cahoots with a seller and overvalues the house based on superficial or low-quality improvements.
• Made fix-ups to suit unique tastes. Overcustomizing can be detrimental to a house’s value, like if the seller was a sports fan who did the whole house in team colors. If you and the seller are kindred spirits, great—but good luck finding the next buyer.
• Overimproved the house. A property can actually be made so fabulous that it’s no longer comparable to surrounding homes. Unfortunately, surrounding homes set the standard for home values in that area. You might enjoy the house while you live there, but be prepared for slow rises in value and difficulty reselling.
Walk the Walk: Layout and Floorplan
The physical layout of a house can make a huge difference in whether you’re comfortable living there. When visiting a house, imagine going through your daily activities. For example, “I’m opening the refrigerator—it bumps the oven door, and I’ll have to chop vegetables on this tiny countertop across from the sink.”
Not buy the house with the weirdly placed bathroom. Kurt, an avid gardener, was close to bidding on a two-bedroom Victorian. He says, “It was on a corner, with a lot of garden space around it. I was already visualizing planting roses. The problem was, the one and only bathroom was stuck right between one bedroom and the kitchen. It just had a door on each side. Imagine being a guest and having to worry about locking both doors! I’m hugely relieved I held off.”
What Do They Know?
Reviewing Seller Disclosure Reports
One of the most important pieces of paper in this process is the disclosure report, which most—but not all—states require sellers to give prospective buyers. (Exceptions are sometimes made for certain properties, such as those in probate, where the original owner has died.)
Most state-required disclosures are made using a standard form, upon which the seller will check off features of the property and rate or describe their condition. If the house hasn’t yet been built, the developer obviously won’t have much to disclose—but may still need to tell you about things like the type of soil; previous uses of the property; possible future uses of surrounding land; and the developer’s intentions regarding existing trees, streams, and natural areas.
What you read may affect your decision whether to make an offer. To find out more about a topic mentioned in the form, ask for it in writing. And if you receive the disclosure form after making an offer, you can cancel the sale if you don’t like what you read. Even after the sale has closed, if a problem pops up that you believe the seller knew about and didn’t disclose, you can sue the seller on that basis.
Exactly when you’re given the seller’s disclosures varies by state. In a few states, such as Alaska, Kentucky, and New Hampshire, sellers must give you disclosures before you’ve made an offer. But most states don’t require the seller to do this until after you’ve made an offer, often just before the two of you sign the purchase agreement.
What’s in a Typical Disclosure Report
The typical disclosure form is a few pages long and describes features like appliances; the roof, foundation, and other structural components; electrical, water, sewer, heating, and other mechanical systems; trees, natural hazards (earthquakes, flooding, hurricanes); environmental hazards (lead, asbestos, mold, radon, or contamination by use as a meth lab); and zoning.
Some disclosure forms also cover legal issues, such as ownership problems, legal disputes concerning the property, or community association fees. Strange but true, the forms might also require information about suicides, murders, and other deaths on the property; nearby criminal activity; or other factors, such as excessive neighborhood noise.
See the sample disclosure forms in the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.) They’re from Iowa and California, representing a range between short and long versions of the form. (California’s disclosure laws are among the most demanding in the country and require sellers to also fill out a Natural Hazard Disclosure Statement, also included.) A page from the California transfer disclosure form is shown below.
Understanding Your State’s Disclosure Requirements
Disclosure requirements vary among states, and some sellers try to wiggle out of the requirement altogether. Your agent should make sure the seller complies with the law—but the question will remain, how much did the law require the seller to tell you about in the first place? If the standard form doesn’t mention past flooding, the seller doesn’t have to, either (but shouldn’t lie if asked). You might want to read your state’s law, or at least the form, to look for holes.
As of this printing, the majority of states require sellers to either fill out a disclosure form or disclose material facts about the property.
But even in nondisclosure states, buyers can negotiate to make seller disclosures a part of their purchase—or may get them without asking. Law or no law, your state Realtorâ’s association has probably created a standard disclosure form for sellers to use. In Massachusetts, adviser Nancy Atwood says, “Our MLS listings tell us whether the seller is providing a disclosure form. Most sellers know that if they don’t, the buyers will think they’ve got something to hide.” Beyond these possibilities, “It’s buyer beware,” says New York attorney Richard Leshnower.
To find your state’s law, talk to your real estate agent or state regulatory agency. You can find yours at www.arello.org (under “Resources” click “Regulatory Agencies”). Or you can search online for “real estate disclosure,” “disclosure form,” or “disclosure statement” and the name of your state.
Buying a house built pre-1978? By federal law, the seller should, before you buy, give you a form disclosing whether there might be lead-based paint in the home and a pamphlet called “Protect Your Family From Lead in Your Home.” For more on lead hazards, see www.epa.gov/lead/pubs/leadpdfe.pdf.
Penalties for Failing to Disclose
Most states put some teeth into their disclosure laws, by allowing buyers to cancel the sale if the seller doesn’t provide the disclosure form or doesn’t fill it out completely and honestly. Some states also charge monetary penalties to sellers who violate the law, or punish sellers’ real estate agents for failing to disclose problems that they observed or were told of by the sellers.
Fraud happens. “One of the most blatant cases I’ve seen,” says Massachusetts attorney Ken Goldstein, “was one where, a couple of weeks after the sale, the new owners heard a crash from the basement. The ceiling—one of those drop structures with a metal framework and tiles fitting in the grid—had just collapsed. The tiles were all soaking wet. Suspiciously, an old kitchen pot was sitting within the wreckage. It turns out there was a leaking pipe up there, and the sneaky seller had apparently removed a tile and put in the pot. That worked to hide the problem through the closing date—but then the pot overfilled.”
Can You Trust the Disclosures?
Now comes the question of how much to believe of what the seller discloses. There’s no nice way to put it: Sellers are just people, and some of them lie. Even some upright citizens lie, after rationalizations like, “The basement hasn’t flooded in years (never mind the drought).” And a less-than-honorable seller—for example, someone who’s been running a methamphetamine lab within the home—is hardly going to admit it on the disclosure form. (The toxicity levels created by meth manufacturing are enough to make the home unsaleable.) If meth seems like a possible concern, ask the neighbors what they’ve observed, and get a separate inspection.
And lying isn’t the only problem. Even honest sellers may be allowed to keep quiet about something they only suspect. Some state’s forms may offer handy escape hatches, like a box saying “don’t know,” or “no representation.” In Oregon, for example, sellers need only disclose problems of which they have “actual knowledge.”
That can lead to situations like one described by Oregon real estate agent Debbie Stevens: “A buyer I represented moved into a house where, within one month, the water line from the street failed. Of course, we immediately wondered whether the seller had failed to disclose something. It turned out the seller’s neighbors had had repairs done on their water line, and the repairperson had actually told our seller, ‘Your water line is old, too; I can fix it while I’m in here.’ But the repairperson couldn’t predict when the seller’s water line would fail, and the seller didn’t want to pay for repairs. Unfortunately, we had to conclude that the seller wasn’t necessarily wrong to say nothing, since he didn’t know how close the water line was to failing.”
Also, in most states, sellers aren’t required to poke around for problems—just to tell you what they already know. A house’s owners can remain blissfully unaware of many serious problems—a cracked foundation, termites deep in the walls, or a roof on the verge of leaking—and won’t be held responsible.
Reviewing the Seller’s Inspection Reports (If Any)
Some sellers voluntarily provide copies of inspection reports they’ve commissioned themselves, either pest reports (common in California) or general inspections. In theory, this is no mere subjective opinion—the report was drafted by a trained professional, right? The answer is a not-so-resounding “maybe.” The quality of home inspectors varies widely, and are you going to gamble on the seller having chosen the most nitpicky one in town?
That’s not to say the seller is trying to pull a fast one. But inspectors who are regularly hired by sellers describe feeling pressured not to be “deal-breakers,” but rather to downplay problems they find. They tend to use fuzzy words in their reports like “worn” or “serviceable.”
see an expert
Go to the source: Call the inspector directly. There’s no law saying you have to rely solely on the inspector’s written words. According to California inspector Paul A. Rude, “If you’re seriously thinking about making an offer, call and ask the seller’s inspector for details and for information about his or her background. Better yet, ask the inspector to come back and do a walk-through with you. Many will do this for a reduced fee.”
So, if you’ve got a report in front of you, how do you evaluate its worth? Start by reading it carefully, following the advice on understanding inspection reports provided in Chapter 11. Also check whether the inspector is a member of ASHI (the American Society of Home Inspectors). And you can ask your real estate agent about the reputation of the inspection company—and of the seller’s agent, who probably selected the company.
Learn to decipher the pest report. Because Abby was looking for a fixer-upper, she knew it would have problems. But when the seller gave her the pest report, she says, “I almost called off the deal—the fix-up was going to cost almost half of what I’d be paying for the house. Then I took a closer look. The report said things like, ‘cellulose fiber near foundation—$200 to repair.’ It turned out that just meant there was a big piece of wood leaning on the foundation—all I had to do was brave the spiders and drag it away. I found a lot of items that weren’t as major as they’d seemed.”
Finally, no matter how reputable the seller’s inspector, if the report was written more than a few months ago, it’s too old. New problems can crop up in a day. And the seller might have already tried to repair some of the problems—for better or for worse. A professional inspection is important, but it’s best to rely on the one you’ll commission yourself, later.
Here’s what to look for in your initial house visit, and why it’s important to take a special look at these items. Jot down your findings on the little form that follows.
- Examine the roof. If the roofline is sagging, be prepared for foundation problems. Ask how old the roof is. A roof ten years old or older will probably need replacing soon, a $10,000-plus job. Loose, curling, or missing tiles or shingles also indicate a new roof is needed, as do shafts of light in the attic. Complex roofs with lots of gables, intersecting surfaces, and multiple roofing materials are difficult to maintain and expensive to replace.
- Listen for squeaks when you walk. Squeaks are caused by loose nails, often loosened by sagging or movement in the structure, which may mean settling problems.
- Take cues from your feet. They’ll tell you whether the flooring feels unstable, or the house has started to settle unevenly. As you walk up stairs, make sure the heights feel uniform. And step close to the toilet and tub. If the floor feels soft, leakage may be occurring, possibly caused by the owner’s failure to change the seals on the toilet or caulk the wall tiles.
- Use your nose. At worst, fusty odors or your sudden sniffling may mean a mold problem. Other odors, such as cat urine or cigarette smoke, are also a bother to get rid of and reduce the value of the house. (Or maybe you’ll just smell a lot of air freshener, which should make you wonder what’s being covered up.)
- Turn on the faucets. What does the water look like? If you see rust particles or discoloration, the pipes may be rusted, and need replacement. What do you hear? Knocking sounds may mean old, leak-prone pipes. Try turning the faucet to its maximum. If the underlying problem turns out to be low water pressure, this is tough to solve—but should be fixed if you plan on enjoying your showers. Also make sure the hot water arrives within a reasonable length of time.
- Open windows and doors. If you can’t do so easily, that too may be a repair issue.
- Look for signs of water damage. Look for stains or puddles on the ceiling, around the window frames, by the water heater, under the sink, and all over the floor of the basement, if there is one. Not only are these repairs costly, but because of scares over toxic mold, they can make a house expensive to insure.
- Find the electrical panel. Is it an old style one, small, and with fuses rather than circuit breakers? That’s a several-thousand-dollar upgrade. If you suspect old wiring, look at the plugs near the bathroom and kitchen sinks. If they’ve been modernized at all, you’ll see special plugs with little rectangular “TEST” and “RESET” buttons (these help protect you from water-related electrocution).
- Take note of peeling paint. A paint job is an easy, cosmetic repair—but nevertheless can mean your paying someone several thousand dollars. And peeling paint can be especially problematic if it’s old and lead-based or contains asbestos texturing material.
- Turn light switches on and off, or try turning on many lights and appliances at once. If the lights flicker, or the electricity goes, there may be a bad connection or a circuit overload. These aren’t expensive fixes, but are safety priorities.
- Examine the appliances. Ask whether the refrigerator, stove, dishwasher, washer and dryer, and other appliances come with the house. Then look to see whether they add value or will require a trip to the dump. Test to make sure they’re functional; open the refrigerator door, and light the stove’s burners.
- Ask whether the house has a furnace or air conditioner. You’d be surprised at how many houses still operate on small units that work in only a few rooms. Ask that the furnace or A/C be turned on.
- Look for unprofessional repairs or upgrades. If the house has been in the hands of unqualified do-it-yourselfers, some work may have to be redone.
Item or Area
Water and plumbing
Paint and walls
Poking Around: Doing Your Own Initial Inspection
From the first moment you look at a house, you should be taking stock of its physical condition. If there’s a chance you might make an offer, you’ll want a clear idea of how much the house is worth, based partly on its state of repair.
Bring along the “First-Look Home Inspection Checklist,” found in the Homebuyer’s Toolkit on the Nolo website. (See the appendix for the link.) A sample is shown above. It details both the easiest and most important issues to look for.
The checklist won’t lead you through an in-depth inspection. But there’s a lot you can look for on an ordinary open house visit, like sagging rooflines and leaking pipes. Wait for an individual appointment to do things like turning on heat and stove burners. And again, if you’re really interested in the place, you should hire a professional inspector, normally after making an offer.
Check it Out
Eager to take on more-difficult inspection tasks? Get guidance from:
• The American Society of Home Inspectors website at www.ashi.org. Click the “For Homebuyers/Sellers” tab, then “Virtual Home Inspection” to get a fun visual tour of what your inspector will eventually examine.
• The Complete Book of Home Inspection, by Norman Becker (McGraw-Hill Professional). Written for the layperson, this book includes helpful checklists and photos.
• Local community colleges, adult schools, and home improvement stores, many of which offer excellent and inexpensive classes in home repair.
Hey, Nice Dirt Pile! Choosing a Not-Yet-Built House
If you’re buying a new home from a developer, a number of choices lie before you: which lot you want, which type of model house you like, and which upgrades you’d like inside. All of this can require imagination if you’re buying before the house is built (though some developments are nearly fully built in advance).
Don’t forget to bring your agent along on the first visit! If you show up unrepresented, the developer may take the position that the agent should not be able to take credit for or be involved in the sale.
Choosing Which Lot Your House Will Be Built On
They may all look like squares on the map now, but walk around, and examine the map for the following:
• Likely water flow. Improper grading leads to poor drainage. It’s a common complaint in new developments and difficult to fix, so avoid lots located at the neighborhood low spot or the bottom of a hill. A lot on a creek may sound nice but end up flooded by next year’s “100-year storm.” Also look for concrete-lined drain channels in hillsides above your lot, which are often poorly maintained, leading to flooding or even a landslide.
• Roadways. If your house will be next to a major roadway, expect extra noise and traffic.
• Services. While it’s convenient to have services close by, being immediately adjacent to a grocery store, fire station, or school can raise levels of traffic, litter, and noise.
• Lot size and position of neighbor’s houses. How big is the lot in relation to the size of your house-to-be? In many new communities, homes are built so tightly together that owners can hear their neighbors’ television or see in their windows.
• Location. You’ll pay more for a house that sits on a lakefront and less for one that backs up against the freeway. The more desirable the location, the less negotiable the price.
• View. If a view is an important asset on your lot, find out whether you have a right to prevent downhill neighbors from blocking it with new homes, additions, or trees. Many trees grow fast enough to block a scenic vista within five to ten years.
• Remaining undeveloped land. If there’s a big, open field nearby, find out from the local zoning or planning department what it’s zoned for and what kind of development is planned. Unless it’s a park, you can be sure that something will be built there eventually.
Choosing Your House Design and Upgrades
For the house itself, you might be choosing which model type you want and whether you want upgrades. This is where that low, advertised price can change dramatically. The modest-sized model may look tiny compared to the model mansion next door, and the simple, standard kitchen may look shoddy next to the glossy custom cabinets. To help rein in your choices, consider:
It’s possible to negotiate for free upgrades, at least in slower markets. Because it doesn’t cost the developer nearly as much to make the upgrades as you’d probably be charged, they use them as incentives.
• What the model home includes. Some contain the upgrades, so that buyers mistakenly think that’s what the final house will look like. Realtorâ Mark Nash says, “Ask how much the house you’re looking at would cost with everything you see in it.” Others contain cheap and tacky basics, to steer you toward the upgrades. Either way, look closely at the quality of woodwork, flooring, appliances, and more; decide which you’re willing to pay to upgrade; and get the developer’s promises in writing.
• Your Dream List. If you’d never thought about needing a wood-burning fireplace or an outdoor barbecue, why add them now?
• What corners the developer will be cutting. Watch out for so-called “value engineering,” in which developers maintain the luxury look of a house without the actual quality—for example, by installing windows that don’t actually open, or decorative beams that are made of foam, not wood. Examine the model home carefully, and ask lots of questions.
• The retail cost of possible upgrades. No need to pay a developer more to add high-quality materials than you’d pay for them yourself. Double-check the cost of big-ticket items like cabinetry or floor coverings at your local home improvement store. Then negotiate with the developer to bring the price down, or plan to hire a local contractor for upgrades.
• What upgrades will add resale value. If you ever sell your home, the less flashy, more practical upgrades will attract the most buyers. For example, swimming pools don’t always add value to a house, while extra office or storage space will. Other practical, valuable upgrades include more electrical outlets, a fenced-in backyard, and wiring for high-speed Internet.
• The tax impact of your house size and upgrades. You may have seen a property tax estimate in the seller’s written materials. If the house hasn’t yet been built and assessed, however, that figure means nothing more than the value of the land. Call your local tax board for information.
Don’t Fall for the Hype!
Watch out for these developer sales tactics, many designed to encourage an impulse buy on your first visit:
• The luxury tour. You may be whisked around lovely house models by
an attractive professional, maybe even with tasty treats or drinks along
• The “now or never.” You may be told that a building or development is almost sold out—or is sold out. Whaddya know, you receive a call a few days later saying that a deal has fallen through, and a unit or house is now available.
• The moment of silence. If you’re buying with someone else and find yourselves alone in an office, resist the temptation to do what the seller wants: Talk about what you just saw, and whether it’s a good idea to buy it right that minute.
• The “today and today only.” “Today only, upgraded granite countertops,” or “We’ll pay your closing costs.” We can’t say it’s not true, but it’s a favorite sales tactic.
• The freebies. As if buying a house weren’t enough, some developers throw in motorbikes, cruise trips, and flatscreen TVs. Try to remember that these are minor extras compared to what you’ll be paying to buy the property.
If you back out, your upgrades won’t be refunded—you pay for them up front. “I’ve seen people lose $50,000 in upgrades because of a job transfer,” says Realtor® Mark Nash. “The reason for this policy is that the property is less marketable with your personal choices stamped on it—it’s more like a resale.” Plan ahead!
Buying a New or Old Condo or Co-op?
Research the Community
If you’re buying in a community interest development, such as a condo, co-op, townhouse, or planned unit development (“PUD”), its physical state shouldn’t be the only thing on your mind. You should also be asking, “How how stable is this organization, how much power will the community association have over my life, and will it exercise that power?” Although the term “community association” may sound like a social club, the reality is that you’re relying on all of your neighbors to do important things like pay their monthly dues. A few of your neighbors, whose personalities are up to chance, will serve in leadership roles. They’ll make important decisions about your living environment. Some associations are responsible minigovernments, but many are like dysfunctional families. So, it’s well worth your time to:
• read all the paperwork describing its governance and current situation, and
• ask questions of the sellers, the neighbors, and the governing body.
Read the Large and Fine Print
Community associations normally put their main rules into documents called the “bylaws” and “master deed” or “Declaration of Covenants, Conditions, and Restrictions” (CC&Rs). As soon as you’re seriously interested, get a copy of these, as well as of this year’s budget, and read them carefully (at the least, you can make receiving these documents a contingency of your purchase offer, as described in Chapter 10). If you’re buying a newly built home, the builder may include these as part of your disclosures.
You’ll learn about things like the permission process if you want to add on to your house, what color you can paint it, limits on pets, types of allowable landscaping, how high the association dues are, when the association can decide to charge you special assessments for projects affecting the entire community (like the pool or common room), whether the builder will charge you a transfer fee when you sell (a new and noxious clause), and more. This isn’t abstract stuff—it will have a real, direct impact on your daily life and finances.
You may find that the association owners don’t want to cough up these documents until you’ve made a purchase offer. For condos, however, anyone can go to the county recorder’s office and get a copy of the CC&Rs. (They’re part of the deed that’s recorded to publicly show who owns the property.)
Unless you’re buying into a completely new development, these documents are just the beginning. You’ll also want to research what the association or board has been up to lately. Ask for minutes from recent meetings, and review these for signs of internal disputes, financial troubles, or planned new projects.
See whether they’ll let you attend a meeting of the condo association or board. If the discussion is about what to do about recent lawsuits or the high vacancy rate, or whether it’s time to foreclose on a certain member who hasn’t paid his or her dues, proceed with caution.
Here are some basic questions you’ll want to ask the seller, seller’s agent, and neighbors about a particular condo or co-op. Tailor this list according to the particular property
(Hawaii homebuyers can delete the question about snow removal!), and add other
questions of interest—for example, if you have specific questions about waste disposal or want more details about use of a pool.
1. Do you enjoy living here? What are the best and worst things about it?
2. What percentage of the properties are rented out to tenants?
3. Are you happy with the community association and management? Are there any particular problems? What do you wish it would do differently?
4. What exactly is included in your monthly association or maintenance fee? (Some might include heating, parking, storage facilities, and use of the clubhouse, while others charge separately for these services, if they’re available at all.)
5. Where is your parking? Indoor? Outdoor? Reserved? Private garage?
6. What amenities are included in your membership (for example, a clubhouse or laundry room)? Are there any waiting lists?
7. Are any special assessments planned? When was the last one? What was it for?
8. What taxes can you expect—for example, local school taxes?
9. For co-ops: How much is the mortgage on the property itself? (This may affect your monthly maintenance fees and whether they are deductible because they pay the underlying mortgage.)
Condo/Co-Op Worksheet, continued
10. In the event of snow, by what time can you expect it to be shoveled or plowed? Does this include parking areas?
11. Are there any annual surcharges, such as for fuel?
12. How high is the reserve fund (of emergency money)?
13. Who determines how much is spent on various things?
14. Are meetings of the board or association open or closed? How do members or shareholders have input into decision making (for example, by submitting questions in advance of meetings)?
15. If people will be living above you, is there a rule saying the floor must be carpeted? Are the walls well insulated?
16. Are any of the neighbors difficult or inconsiderate?
17. How are package deliveries handled in the building if there’s no doorman?
18. Do you have a right to sublet your unit?
19. Are there many vacancies in the building or development? How long does it take for the average unit to sell—are they in demand, or does it take a while?
20. When are workpeople allowed to enter and work on your unit? Saturdays, Sundays, evenings? Must they be licensed?
21. What kind of repair or construction work can be done without the approval of the association or board? What’s the procedure for approval? How long does approval usually take?
Signs of association money troubles: Ask further questions and think twice about buying if you spot evidence that:
• more than 15% of the units are in foreclosure or have been on the market for several weeks and remain unsold
• more than 15% of owners are overdue on their homeowners’ fees (known as the “delinquency rate”)
• the association’s reserve account is almost empty, or
• major litigation is pending.
According to adviser Paul Grucza, “Shrinking hourly wages have seriously impacted people’s ability to pay their dues and assessments. A delinquency rate of between 5% and 7% is average and realistic, but I’ve heard of associations where up to 70% of the homeowners can’t pay what they owe. That puts a huge burden on the other homeowners—they’ll likely either have to pay more themselves or watch the property decline. Several associations that I know of have even had to file for bankruptcy protection.”
Also check on the ratio of units that are, or are allowed to be, rented out. The more units that are owner-occupied, the better the community usually is at attending to details like the budget and maintenance. Also, in a down market, investors are often the first to go into foreclosure.
Why so much research early on? First, if there are restrictions you can’t stomach, or common sources of major disgruntlement among fellow owners, you’ll know the place isn’t for you. Don’t assume that the rules will change, or that an exception will be made for you! Second, you want to know how well funded the association is. If there isn’t enough cash in reserve, your monthly dues may go up, you may have to pay special assessments, or you may find your property’s value plummeting because neighboring homes are in foreclosure or sitting vacant.
Ask Lots of Questions
As with any neighborhood, it’s worth finding out how people like living there, and who your neighbors will be. But you should also ask more-targeted questions, from your first interaction with the seller or seller’s agent, and continuing on with people you meet within the community. Ask about everything from governance policies to package delivery to the neighbors’ characters.
Use the “Condo/Co-Op Question Worksheet” in the Homebuyer’s Toolkit on the Nolo website for suggested questions. (See the appendix for the link.) A sample is shown above.
Check it Out
For more about community living: See the resources offered by the Community Associations Institute (CAI, www.caionline.org). Your state’s website should also link you to your community association law.