Monday, June 29, 2009

Lessons Learned

Now that we've moved into the new house with newly chipped glazing and newly scuffed/gouged paintwork, I thought I'd offer some lessons learned from our experience in buying our home, with the understanding that we made our purchase in a market where mortgage rates had hit record lows.

Know the market

DC's market is segmented by quadrant, zip code, neighborhood, and price range. For example, we were looking for a place with a minimum 2 bedrooms in NW DC, preferably not a fixer upper. I searched in zip codes 20005, 20007, 20008, 20009, 20011, 20015, and 20016. The magic number appeared to be $600K: below it, condos; above it, rowhouses or semi-/detached housing. Detached homes generally started in the $700s, although there were a few in the mid to upper $600s.

I know people are waiting for home prices to fall. I did. However, understand that not all homes are alike. My experience was that condo prices are falling; wait and see is probably a good strategy. For single family homes, I found that if it's priced right and in move in condition, it'll sell in a week at list price. Homes with problems - original 1930s kitchen, oddly flowing rooms - will sell, but not at the original list price and they'll take longer to sell.

But, I never met anyone who simply wanted to give away their house. Base your offer on your estimate of the home's market value, not on some "always offer 20% less than asking price" rule your old Uncle T-John used to tout.

Condos are Challenged

The main problem I had with condos, size and design aside, was the condo fee. I can't possibly imagine facing a non-deductible, open-ended [in the sense that it could increase ad infinitum] monthly fee ranging from $500-800/month on top of my monthly note. If I can swing a note and that fee, then maybe I can afford a house. I have to believe many buyers are turned off when they discover the beautiful condo fee attached to the gorgeous condo.

And then there are the poor folks in these massive complexes in the Cathedral/Mass Ave area whose units are reasonably priced, but carry monthly fees in excess of $2000.

Get Data

You can never get too much information. Use all the internet resources available. I relied heavily upon FranklyMLS.com, Redfin, and Sawbuckrealty.com to understand current price trends, to track specific properties, and to be alerted when new properties hit/left the market or took pricing actions. FranklyMLS.com rocked: I could slice/dice the data any way I wanted and the email alerts were very handy.

Money

Talk to a loan officer before you start your search, before you talk to a real estate agent. Know what you can truly afford and what your options are.

You gotta have cash. The days of second mortgages are gone for a while so you must be able to put at least 10% down. When I applied for a mortgage, second mortgages were out of the question - the market had dried up. And don't forget that you'll still need cash for closing; I was told to expect closing costs equal to about 3% of the transaction value.

Which leads to seller subsidy! Talk to your real estate agent, it may be a way to get the seller to help pay for your closing costs. Include it in your pricing strategy.

Know what you can borrow and what it's going to cost you. Your credit score really does dictate your options.

Find out if you can get lender paid mortgage insurance; my loan officer suggested it and although it cost me a few points on the front-end, it's saving me thousands in PMI every year.

It's a business transaction

Buying a home can be an emotionally trying time. However, you have to drop the emotion or you'll make bad decisions. Treat the purchase as a business transaction. Develop a pricing strategy and set limits before you look. Know the property's comparables before you make an offer. Be willing to walk. When I bought my home in Dallas, I walked away from the deal when the sellers became too intransigent after I'd conceded on almost every point of their counter. They were shocked when I walked, they were scolded by their agent, they conceded on the "walking" point, and I got the house.

Which also leads to: it's about getting the house, not putting the screws to someone. Win-win, good; win-lose, no deal.

Ignore the drapes

You're buying a house, not the seller's furniture, art, and drapery. You have to turn a blind eye to it - look at the room sizes, the flow of the house, and its condition. That brown bathtub - it can be replaced. That pink bathroom - it can be reglazed and re-equipped for less than $2500. That cranberry dining room - it can be repainted. That awful furniture - it'll be gone once the seller leaves. I didn't care for the house we bought when I first saw it. When I saw it the second time, I realized it was a solid house, all the problems were cosmetic and easily fixable. The home's true value was that it offered a relatively low entry price into a desireable neighborhood. If I have to paint a bathroom "Belgian Sweet" to get that, show me the roller!

Other stuff

Know that reported sales data may not be telling the entire story. Seller subsidies result in overstated market pricing data. In other words, a home that's recorded as selling at $700K may actually have sold for $650K with a seller subsidy of $50K. The home's true market value is $650K, the rest was necessary to seal the deal.

When you write a contract, for any event that must occur within a set number of days, specify "business days", e.g., "15 business days." Better to be specific than not. One part of my transaction - the appraisal - took an inordinately long time and we blew past the 15 day limit. While my agent said not to worry, I worried thanks to the Dallas couple I'd dealt with in 1993.

Don't assume your real estate agent or loan officer is tracking your transaction's progress once it's gone to contract. You have to manage it and stay on top of it.

Don't assume that the loan documents are error free. Read them and question anything that doesn't seem right. Are recordation fees included in the Good Faith Estimate (GFE)? What about escrow amounts? Don't be afraid to ask questions.

Good luck!

5 comments:

Anonymous said...

If I could add another lesson I picked up buying my first home in Columbia Heights last month---verify that all renovation work is up to DC Building codes, ensure all renovations have been inspected by the city and passed, and obtain the seller's contractor's contact information and warranties on work/appliances. I just closed on a "renovated property" (leaving a sum of money in the escrow for repairs the seller still had to make), only to discover significant construction flaws within the home, the absence of any city inspections despite the seller's assurances the property had been inspected, and then lastly, a forged gas inspection notice.

While this probably isn't typical, the onus was on me to file a Freedom of Information Act request to obtain all the documents on my property. Without filing this, I would never have known that the seller had deceived me about the inspections, possibly putting my safety at risk, since the gas line had never been inspected (and has not been turned on nearly a month later). I wish I would have had time to get the FOIA information BEFORE closing.

My only solace is that the seller is willing to address many of the problems I've discovered. Trust no one and make sure you've done your research on your property!

Keith said...

And I thought a home's FOIA was what you walked into upon walking through the front door!

I got a million of 'em, folks!

Brandon Green said...

Keith--your "know the market" section sums up the current market as well as anything I've read.

Anonymous said...

Hi Keith, thanks for writing this advice as well as all the regular updates on the DC real estate market. Based on all your quantitative and detailed neighborhood research what areas do you see as up and coming or as a solid long-term investment in DC? My wife and I are looking in the 350,000 range and that does not go far in DC. The main neighborhoods that come to mind are Columbia Heights, H St/NOMA, and Petworth. Do you see these as any more viable or better than the other? Any suggestions and thoughts would be appreciated.

tom veil said...

Great post, thanks!