Bottom Dollar for a Tip-Top House
When it comes to buying a house, Tom and Maryann Byrne are a pair of shrewd Yankee traders. Last October, the Byrnes, both Boston schoolteachers, purchased the 1840 Pembroke, Mass, farmhouse at right for $6,900 less than the $79,900 that the seller was asking. As part of the deal, they also persuaded him to throw in two adjacent acres and to accept a $15,000 second mortgage at 10% interest instead of a full down payment. “We got a bargain,” says Tom Byrne.
Like the Byrnes, more and more house hunters are being pleasantly surprised these days. High mortgage rates have dampened demand for houses for the moment, giving buyers a small edge over sellers for the first time in years (see “Where There’s Hope in Housing,” page 42).
No buyer now needs to say, “I’ll take it,” without scrutinizing the house to make sure the price is justified. The Byrnes discovered that their house needed new shingles and repairs to a chimney cap — items they figured into their offering price. Had they employed a professional house inspector, as Money later did for them, they would have discovered a score of other problems that could have helped them strike an even better deal: six of them are pictured on the preceding pages. They also would have learned of several safety hazards; the badly sooted chimney that our inspector noted caused a fire on the day they moved in.
The first step in shopping for any house is to look at a lot of them — a minimum of a dozen similar houses in the same community, experienced real estate buyers suggest. Shopping around helps you decide what you want. And since most sellers still begin by asking more for a house than even they think it’s worth, shopping teaches you to distinguish between an outrageous asking price and one that’s only slightly inflated. With the real estate agent on the seller’s side, it’s up to the buyer to assess a house’s fair value before the haggling starts.
Sellers under pressure
This assessment is partly subjective, but it should allow for a number of factors: the neighborhood; the house’s condition, style and appearance; its energy costs as shown on the past year’s bills; proximity to commuter roads and public transportation; the quality of local schools; the heft of local property taxes.
When you’ve zeroed in on the house you want, try to find out why the owner wants to sell it. Real estate dealers say that sellers fall into two groups: those who are under pressure to sell quickly and those who aren’t. Only when you deal with those under pressure are you apt to get a real bargain. If you find out that the seller is being transferred by his employer, has already bought another house and is carrying two mortgages, or is getting a divorce and needs cash badly, then you know you’re dealing with someone who has other things in mind besides maximizing profits. Unfortunately for house hunters, real estate brokers say that the owners of three-quarters of the houses on the market are under little compulsion to sell.
As price negotiations begin, remember that selling a house is as emotional an experience for its owner as acquiring it is for the buyer. Telling the seller you think his rosebushes are lovely may do as much to soften the price as pointing to the corroded gutters. Jay Lamont, director of Temple University’s Real Estate Institute, suggests that you let the broker do most of the talking. While the broker is technically the seller’s agent, his primary goal is to close the sale rapidly and collect his fee.
When a seller has reasonable knowledge of the local real estate market and is not under pressure to sell, says Lamont, the best price a buyer can hope for is the house’s fair market value. That doesn’t mean the initial asking price, nor even the price struck in the sales contract, provided you insist on two conditions: First, the contract should automatically become invalid if the buyer can’t line up a mortgage with terms he can afford. Second, the sale should depend on the buyer’s receiving a satisfactory inspection report, made at his own expense. Then if the house has physical defects, or if mortgage money is tight, or if the bank thinks the sale price way out of line, you can go back to the seller and argue that the fair value of the house is lower.
In recent years, houses typically have sold for about 5% below the asking price. But now, says Kenneth J. Kerin, research vice president for the National Association of Realtors, a potential buyer with a strong chance of obtaining financing should aim for a price about 10% below the asking.
Only buyers loaded with cash should negotiate solely over price. The vast majority of buyers have just enough cash for the down payment. They can often do better by negotiating other concessions that leave more in their pockets.
For instance, only tradition says that the buyer pays all closing costs, such as title searches, the bank’s legal expenses and title transfer fees—costs that frequently mount to $2,000 or more. If the cash-strapped buyer can persuade the seller to pay closing costs in lieu of a $2,000 price reduction, he’ll keep $2,000 in cash to help pay moving expenses. Had he negotiated the lower price instead, the savings would have come out of the mortgage, giving him only a marginally lower monthly payment.
An imaginative buyer can haggle over a variety of items. If the drapes, the crystal chandelier and the wrought-iron lawn chairs all look great, ask the seller to include them in the sale. If the lending institution is demanding a stiff down payment, the buyer may be able to convince the seller— as the Byrnes did — that the sale won’t go through unless the seller gives him a second mortgage.
Lenders nowadays demand around nine or more “points” — finance fees each equal to 1 % of the loan — on government-insured mortgages. Legally sellers must pay all but one of the points; in practice sellers raise prices to pay for them. If you’re in a strong position, you can stop the seller from passing on the expense.
The last area for negotiation is the condition of the house and everything in it. Few house buyers can conduct a thorough physical exam by themselves. Most people need a professional inspector, preferably a trained engineer.
Some real estate dealers try to discourage buyers from using inspection services or try to steer them to inspectors with a talent for downplaying problems. Similarly motivated, sellers may offer to foot the bill. In both cases, refuse. Insist on finding your own inspector.
House inspectors are listed in the Yellow Pages under “Building Inspection Services,” but the best way to find one is to ask a bank, savings and loan, or a local home builders’ association for names of inspectors they use to arbitrate disputes. Top inspectors generally charge $125 or more, but they can often save you more than they cost. An inspection can stop you from buying a house of cards. Even if the structure is sound, the report may alert you to minor deficiencies, so that you can negotiate a lower price or force the seller to fix them.
Some new houses now come with warranties backed by the Home Owners Warranty Corp., a subsidiary of the National Association of Home Builders.
They give the house buyer a substantial amount of protection against defects for up to 10 years. Warranties that sellers buy to cover old houses seldom cover structural problems and are good only for a year or two.
What to look for
Since house hunters can’t afford to have every house that interests them inspected, Money asked experienced inspectors to list what you should check before calling in a pro. Their advice:
Next to a fire or an earthquake, water in the basement is about the worst thing that can happen to a house. It can weaken foundations, rot timbers, damage furnaces and water heaters, ruin stored goods. A damp, musty smell, watermarks or mineral deposits on the walls are signs of trouble. A sump pump shows that seepage is a problem, perhaps solved and perhaps not.
Fresh paint or new wood paneling in the basement should make you suspicious. Open the front panel of the furnace or boiler and look for rust inside. The most comforting signs, says house inspector Arthur Tauscher of Rockville Centre, N.Y., are “stacks of old magazines and furniture that have been collecting dust on the floor for years.”
If the house has a crawl space instead of a basement, look for signs of inadequate drainage and poor ventilation, such as spongy wood, stains and mustiness. The basement or crawl space is also the place to check for rot in beams and joists. If a screwdriver easily sinks in half an inch or more, the wood probably needs replacing.
Besides being the most expensive appliance to replace, the furnace or boiler can be a safety hazard if defective or improperly installed. Unless the heater is obviously rusty and decrepit, it takes an expert to diagnose problems. You can make a guess, though, if you can discover the age of the heating plant. In general, a hot-air furnace lasts about 15 years, a steel boiler 20 to 25, and a cast-iron boiler 40 to 50.
Unless you’re an expert, don’t get too ambitious when you inspect the electrical installation. Frayed, fabric-covered wiring, of course, tells you that the system belongs in a museum. If the service panel has fuses rather than circuit breakers, the wiring is at least 25 years old and was probably designed for an era when a household needed only about 60 amperes of current, rather than the 100 to 200 amps needed now. If the fuse box is crammed with 25- and 30- amp fuses, it may be dangerously overloaded. Another tip-off: extension cords strewn all over the house.
Structural stability. Most houses develop thin, vertical settlement cracks on the inside of foundation walls. They’re harmless. But any crack the width of your little finger, or a zigzag crack inside the fireplace, or any horizontal or diagonal crack is cause for concern. So are sloping floors and crooked door frames. Outside the house, sight along walls to see if brick or siding is bulging, leaning or sagging. Also look for crumbling mortar and rotten wood.
If shingles are beginning to curl or if black felt shows beneath the mineral grit on an asphalt roof, the roof may need replacing. If you spot a gap between the chimney and the roof, the chimney footing may need repair — a job for a foundation engineer.
Turn on the cold water full force in the bathtub and sink, then flush the toilet. A pronounced drop in flow could mean inadequate water pressure or corroded pipes. Rust-colored water is another sign of corrosion.
The attics of houses in cold climates should have at least nine inches of fiberglass or professionally installed foam insulation. Few houses built before World War II have any wall insulation, and installing it may cost plenty. To check for wall insulation, turn off the power, unscrew an electrical outlet plate and look to the side of it.
In shopping for any house — new or used — the best sources of information may be the next-door neighbors. If the builder cut corners, if the local schools are a mess or the garbage pickup sporadic, you can expect them to complain. Should you decide to move in despite minor flaws, at least you’ll have plenty to gossip about.
Where the mortgages are
At California’s Wells Fargo Bank, a young family buying an $83,000 house can walk in and get a $75,000 mortgage. There’s just one hitch: the bank won’t talk to the couple if their income is under $46,000 a year.
Stiff income requirements are just one of the obstacles pricing many home buyers out of today’s mortgage market. Other barriers are down payments that can stretch to 30% and double-digit interest rates, which over the past year have raised average carrying costs nearly 25%. Still, mortgage money has loosened up considerably since Dec. 28, 1979, when Congress whisked the state usury ceilings off mortgage interest rates for three months. As a result, almost anyone can track down some sort of financing if he’s willing to pay top price. Here’s how to get help — and possibly a better deal — from the main sources along the mortgage trail:
If you’re being transferred, ask your company to swing its weight with lenders where you’re moving. Some firms even put up part of the down payment on a mortgage.
Large real estate firms generally have good connections with local lenders. Such firms may also arrange “bridge” loans that advance money for closings.
The typical down payment these days is 20% to 30%. If that’s too much, look for a savings and loan, commercial bank or savings bank that offers private mortgage insurance. For an additional quarter of a percentage point on the loan’s interest rate, this can cut the down payment in half.
Many lenders still give government-backed loans. Loans guaranteed by the Veterans Administration require no down payment. Loans insured by the Federal Housing Administration can be had for 3% down, although banks often ask for more. There’s an interest ceiling, recently 12%, but the lender tacks on “points” — 1% of the mortgage from the buyer and more from the seller, who tries to get it back from the buyer. On conventional loans, lenders often charge three or four points. In the end, the seller may agree to absorb some of this cost. To ease monthly payments for a while, FHA-backed lenders can offer graduated-payment mortgages.
Mortgage bankers, also called mortgage companies, may offer better terms than other lenders. Because these companies can tap capital from other cities, they often have more funds available when money is tight. Brokers can steer you to a mortgage banker.
Buyers and sellers of houses arrange all sorts of financing gambits when traditional methods fail. One of the simplest, if the seller’s mortgage contract allows it, is for the buyer to take over the existing mortgage.
If you can’t assume the seller’s mortgage, he can give you a “wraparound” mortgage. In this kind of financing he either becomes the mortgage lender or arranges a loan from a bank. But he keeps making the payments on his old mortgage. Sellers’ terms for wraparound mortgages have been attractive lately: 10% to 11% interest with payments based on a 30-year loan. Often, however, the entire loan comes due when the old mortgage is paid off. At that point you may—or may not—find it easier than now to arrange bank financing. In some states the buyer in this kind of deal can’t take title to the property until the seller’s mortgage is paid off. But whether title changes now or later, insist on a title search, just as a bank would. There’s always a risk that the seller does not have clear title to give.
Selling into a buyer’s market
To anyone selling a house these days, condolences. With interest rates up, interest in buying is down. “Whenever there are crises, people just stop what they’re doing,” declares Ralph Pritchard, president of the National Association of Realtors. “In houses right now, it’s a slower market.”
Advises John M. Moore, executive vice president of Merrill Lynch Relocation Management Inc., a real estate affiliate of the brokerage firm: “If he can, a seller should hold off until May or June. By then mortgage rates should come down a little, and after that, pent-up demand will drive prices back up.”
People who find themselves in a bind because a job transfer is forcing them to sell now may find their employers willing to help out. But if you have to sell on your own, consider these strategies for a buyer’s market:
Price your house accurately.
“Your aim right now is just to sell, not to make a killing,” says Carolyn Janik, whose book Selling Your Home will be published in April by Macmillan. Cautions Ms. Janik: “If you overprice today, you run a terrible risk of not selling at all.” She suggests inviting five different real estate agencies to make a market analysis of your house, which they’ll usually do free, before you set a price. Going one step further, Harvey Auger, a vice president of Homequity, a firm that helps companies buy and sell houses for transferred employees, advises paying the $150 to $250 that a professional appraisal of your house is likely to cost. Besides setting a realistic price, says Auger, “the appraiser will tell you the unvarnished truth about what you’ll need to fix up in order to sell.”
Use real estate agencies wisely.
First try to sell the house yourself. But in two to four weeks you will have exhausted the local market. To attract out-of-towners—and perhaps to help a buyer find financing—you’ll need to sign with a real estate agency. Don’t haggle over the broker’s commission when you sign the listing contract, advises Carolyn Janik. The time for that is when a sale is being negotiated, she says. You may have agreed to a 6% commission, but the broker can accept less in the contract that clinches the sale of the house, she notes, and “that’s when he’s most likely to give.”
Help the buyer with financing.
One way is to lend him part of the purchase price (see page 50). But there may be other ways you can help. Recent industry surveys indicate that buyers are willing to pay mortgage interest rates up to 12% but bridle at higher rates. Since the national average was recently 12.68%, a seller who can reduce a buyer’s mortgage rate has a competitive advantage, at least psychologically.
First try to persuade your own mortgage holder to make your buyer a loan at less than the going rate. You might be able to if yours is a low-interest loan he could then clear off his books. Or your buyer might be able to assume your mortgage, although the less you owe, the more he’ll have to find elsewhere. If none of this works, find a lender who’s willing to write a mortgage on your house. Then you can garnish your ad with “financing available.”
“If you have to sell now,” concludes Carolyn Janik, “do it as fast as you can. Then you get to the good part: finding all those bargains as a buyer.”