As you’re reading this, we are likely in the middle of unpacking the new house after our (no-doubt-too-long) cross-country road-trip. Here’s a picture…

]]> http://www.123flip.com/closing-on-our-new-home/feed 2 http://www.123flip.com/finding-a-house-part-3 http://www.123flip.com/finding-a-house-part-3#comments Tue, 27 May 2008 07:01:45 +0000 J Scott http://www.123flip.com/finding-a-house-part-3 After a stressful bunch of days house-hunting, negotiating, and getting paperwork signed, we were well on our way to buying our first house. Luckily (and surprisingly), the process over the next several weeks went very smoothly:

• Property Inspection: While the inspection was a bit more costly than I had expected (nearly $600), I was tremendously impressed with the company that did the inspection, both due to their great communication (quick to return calls and offering to speak with contractors, other inspectors, the seller, etc) and their very thorough report that they were able to post on the Internet within 24 hours of completing the inspection. Overall, the inspection came back with very few non-minor issues. Some minor safety stuff here and there (no handrail on the side steps, large gap between one of the railing posts, etc), some fixes to prevent future maintenance issues (gaps in some window paneling, mildew on some front shingles, and some HVAC precautions), and some tunneling through the insulation that may indicate an animal made its way into the attic. Other than that, the house is in great shape at 7 years old.
• Radon Testing: As I discussed in a previous post, this was the big surprise during the due diligence period. Radon levels were indicated at about twice the government recommended levels, and the seller hadn’t previously disclosed this information. Even now it’s unclear whether the seller knew radon levels were high (he had a test done, but says the results were within guidelines — despite the fact that he hasn’t been able to find those results).
• Termite Inspection: The inspection indicated no sign of any current or previous infestation, which was in line with what the seller had disclosed.
• Appraisal: I had no idea what to expect with the appraisal. Given that we bought the house for more than $60K below it’s original listing price, but also that homes in the area were not selling very quickly, I didn’t know if I should expect the appraisal to come in lower than our offer or well above our offer price. In actuality, it came in about $20K above our asking price, giving us about 5% automatic equity in the house. Hopefully once the market picks up, the appraised price (and the selling price of nearby homes) will increase to where it was a year or two ago, but regardless, we’re very happy with the appraisal.
• Loan Rate: After some research on how mortgage rates work, I made the decision to lock in my 6.0% rate early (with another 1/8 point for LPMI).
• Loan Approval: After the initial indication that getting a mortgage loan may be difficult, the financing went off without a hitch, and we were formally approved about two weeks before closing.
• Fence Approval: My fiancee worked her magic (as usual) and found a direct connection to the HOA committee, and personally requested that they expedite their decision about whether we could install a backyard fence. Normally this process takes up to 60 days, but after a couple phone calls, and submitting all the necessary paperwork, we were able to get unofficial approval in less than a week, and a formal approval in under two weeks.

Based on the due diligence we had done, we decided to ask the sellers to fix what we considered the two most pressing issues (at their expense) prior to closing: the radon issue and the potential rodent issue. While the sellers were adamant that there were no rodents in the house (they said they had a rabbit and that was likely the culprit of the tunneling in the attic), they agreed to fix both issues no later than three days prior to closing.

All that’s left now is the closing…

Several hours later I was reviewing the Seller Disclosure form (a standard form the seller fills out that includes basic information about any problems/issues regarding the property), and I noticed that the seller had checked “YES” next to the question: “Has Property ever been tested for radon, lead, mold or any other potentially toxic substances?”

Considering there was no lead or mold disclosure (which I believe is mandatory if the seller knows about it), I had to assume that the “YES” indicated that a radon test had been performed at some point in the past. And because there was no additional information in the “Additional Disclosures” section, I assumed that the results of the radon test had been satisfactory.

It was relatively late at night, but I tried calling the inspector to let him know that the radon test wasn’t necessary, as it appeared one had already been performed satisfactorily. Well, I didn’t get ahold of him, and by the time I talked to him the next day, the radon test had already been started. Oh well, I guess it was a chance to verify that everything was alright in this area.

To my surprise, a few days later I got a call from my agent informing me that the radon test results had come back, and that the levels were above the acceptable range. After reviewing the test results (and doing some Internet research), I found that not only were the radon levels high, they were twice the government-defined acceptable levels! While the seller had seemingly tested for radon, he (very likely) knowingly didn’t pass on the information that the results were very concerning. And clearly I shouldn’t have made the assumption that no additional information indicated that there was nothing to be concerned about.

I guess that’s a good reminder — never assume that a seller is telling the truth (or fully disclosing) in the Seller Disclosure form or any other communication. If something is potentially concerning, verify it for yourself.

As for the radon results, I instructed the agent to ask the seller to correct the problem at his own cost (there are various ways to mitigate high radon levels in homes), and am hoping that this isn’t a deal-breaker…

Well, the first person to get back to me was my mortgage broker. My application had been submitted, and he was ready to lock in a rate anytime I wanted. I had read a little about this previously, so I knew that once my loan application had been submitted, I had the option to lock in my mortgage loan rate at any point between then and a few days before I closed on the house (until I “locked in” the rate, it would be considered “floating”). Locking in the rate would mean that I would set the loan rate to whatever it was at the time I locked it in; if rates rose in the following weeks before closing, I would save some money. If rates dropped over the subsequent weeks, I’d lose out (once rates are locked, they can’t be changed).

I had to decide if I wanted to lock in the rate that first day, or if I wanted to let it float for a while, hoping it would go down, and ultimately driving my mortgage payments down. I knew that the day after my broker called me that the Fed was meeting, and would likely drop interest rates between 3/4 of a point and a full point. Assuming this would push mortgage rates down, I decided to let my rate float for at least another day, and told my broker that I’d call him when I was ready to lock in the rate. Little did I expect that the next day, as soon as the Fed dropped interest rates by 3/4 of a point, mortgage rates rose 1/4 of a point!

Whoa…it was time to do some research to understand why mortgage rates weren’t being controlled by interest rates, and what exactly was controlling mortgage rates…

Apparently, mortgage rates aren’t controlled by the Fed. All the things that I thought might control mortgage rates (10-Year Treasury Note rates, the Federal Funds Rate, the Discount Rate, etc) actually have no impact on mortgage rates. Mortgage rates are specifically correlated to mortgage backed securities (MBS), which are — for the most part — 30-year bonds. As the price of MBS bonds rise, interest rates go down; as MBS bonds go down, interest rates go up.

What I had seen on that day when the Feds lowered the Federal Funds Rate was that this rate cut had spurred the stock market, encouraging investors to pull money out of bonds (including MBS bonds), and thereby driving mortgage rates up. While it’s not necessarily true that interest rates are inversely proportional to mortgage rates, in this case, there was a very short-term inverse correlation; and that correlation had cost me 1/4 point on my mortgage loan rate!

After mentioning this to my best friend (who owns a couple investment properties), he pointed me to this website that provides daily market analysis of mortgage rates, including recommendations on whether to lock in your rates or let them float, depending on how far out your closing is.

While my lack of research had cost me 1/4 point, based on the new information I had, I called my mortgage broker the next day and locked in my rate at 6.125%.

At 3pm we heard back from the Estate House broker. To our surprise, they had another offer that had come in that day that was higher than ours. They also told us that, because the owner had to close on another house that following week, he didn’t want to spend much time negotiating and counter-offering. They asked for our best offer, and said they would decide between ours and the other offer they received. While I wasn’t happy with the lack of good-faith negotiation, we decided to put in an offer about 4% lower than the asking price and see what happened.

Our agent called the seller’s agent, and it quickly came back that our offer was lower than the other offer. Feeling that the seller wasn’t negotiating in good-faith, we refused to change our offer, and asked that they let us know by 5pm whether our offer would be accepted. At 5pm, the seller’s agent called back and told us that there was a new twist – they had received a third offer, and both were higher than ours. Again, we refused to counter-offer any higher, and started to accept the fact that we’d likely not get the house we loved. We were told we’d get a final answer by 9pm Sunday evening.

In the meantime, we decided to start executing on Plan B. We spent an hour putting together an offer for the Mansion house. I signed the offer, and my agent agreed to submit it at 9pm when we officially heard that our offer on the Estate House wasn’t accepted. We left the agent’s office and headed to the airport for our trip home.

At 9:15, while boarding our flight, we got a call from our broker. Our offer had been accepted! Apparently, one of the other buyers backed out on his offer, and the seller chose our offer over the other higher offer because we agreed to close within 30 days. While we weren’t as thrilled as we would have been had negotiation process gone as expected (we felt as if the seller didn’t negotiate in good faith), we were very happy to have a contract on our favorite house, and felt good about the fact that we got the house for well under what it would appraise for.

Only one issue remained…

Our house was on a corner lot of a subdivision with a very strict home owners association (HOA), and we wanted to ensure that we’d have HOA permission to build a fence to fully enclose our backyard. There was no guarantee that we could get this permission within the 21 day due diligence period, and without reasonable assurance that we could build a fence, we would likely have to back out of the deal. The seller had agreed to help obtain permission (and would likely have much more influence than we would), so we’d have to wait and see how that turned out.

Over the next couple days we signed and faxed stacks of papers, arranged property inspections, scheduled appraisals, finalized the loan application, locked in the rate, and my fiancee put together a formal request to the HOA for permission to build a fence.

Then we sat back, just waiting for everyone to get back to us…

On Friday, the house hunting began…though in reality it had begun several weeks earlier. You see, my fiancée had spent literally three to five hours per day for the past month investigating houses online. She had acquainted herself with every REO, MLS listing, and For Sale By Owner (FSBO) available within 30 miles of our desired location.

She had used Craigslist for leads, perused the websites of every bank who owned REO property, used Zillow to get aerial perspective on the land layout, used the local tax assessment website to get tax and owner information, and sent emails to lots and lots of sellers/brokers to get an idea of how flexible they may be in their listing prices. Combined with the various MLS searches that our real estate agent had done on our request, we had about 40 properties that we were very interested in seeing, all “pre-qualified” to our standards.

So, at 9:00am Friday morning in Atlanta, we were picked up by our real estate agent, who brought a nicely bound packet of 21 houses we were to see that day. We didn’t end until after 5pm, but surprisingly we were able to get through 18 houses in those 8 hours. By the end of the day, we had fallen in love with one house (let’s call it the “Estate House”) and had found one other that we would highly consider (let’s call it the “In-Town House”).

The Estate House was in a beautiful hilly subdivision that must have easily had 2500 houses, all stately with decent sized plots of land. This house was possibly the smallest in the subdivision, but with 4000 square feet (including a huge basement), it was plenty big for our needs, and actually felt more “cozy” than any other house we had been in. It was way more than we needed, but the house just “felt right.” The In-Town House was a bit less stellar, but was in a perfect location, and at $100,000 under original asking price (it was owned by a relocation company), it was likely a great bargain.

On Saturday, we decided to visit the remaining half-dozen houses we wanted to see, and also to revisit the two houses that we really liked from the day before. One of the new houses we visited, I fell in love with, but my fiancée was quite convinced (let’s call this one “The Mansion”). While certainly not a mansion, it was bigger than any of the other houses we had seen, and unlike the Estate House, this one was likely the largest in its subdivision. My fiancée found the less-than-tasteful decorating hard to overlook, and had good reason to wonder why we needed 6 bedrooms, 5 full bathrooms, and a huge basement (with another 1200 square feet of unfinished space).

We were both in shock at how far our money would go in Atlanta – and in this buyers market – and were starting to realize that maybe we were thinking a bit too extravagantly.

After revisiting the Estate House on Saturday, we were still very much in love with it. And after revisiting the In-Town House on Saturday, my fiancee had fallen in love with that one as well, though I was still on the fence. And while I loved the Mansion, my fiancée wasn’t yet convinced.

So, having a house that we both loved, we made an offer. The house had been on the market for several months, and had already come down 10% since the original listing. As this was the lowest-priced house in the subdivision (currently on the market), and since it was being listed for under what the seller had paid for it three years ago, we didn’t want to lowball too much, but thought asking for an additional 5% discount would be reasonable. From the records we had, this offer appeared to be less than what the seller likely still owed on the house, so we expected a counter-offer, and gave the seller 24 hours to respond.

We spent all day Thursday meeting with CPAs, hoping to find a firm that could support our businesses. We spent Thursday evening meeting with the mortgage broker to sign papers and prepare for if/when we found a house. We spent all day Friday with our real estate agent looking at houses (21 houses in one day!). We spent Saturday morning checking out the potential location for our upcoming wedding. And then we spent the rest of the weekend continuing our house searching.

I’ll go into more detail on subsequent posts, but here’s the quick summary:

• We found our CPA
• We got our mortgage papers in order and ready to go for when we find a house
• We reserved our wedding ceremony/reception location
• We found two houses we really liked, and put an offer on one

All in all, it was a tremendously productive weekend! More detail to come in my next few posts…

You see, as soon as we found a real estate agent a few weeks back, I decided to ask the agent for a mortgage broker referral — while I wasn’t concerned about getting a mortgage, I figured it was better to get one lined up, get an application submitted, and get a pre-approval letter that we could show to the sellers if we found a house we liked. Well, soon after contacting the mortgage broker, we got some (almost laughable) news…

While I’m planning to quit my job to pursue real estate investing, the fact that I’m quitting my job was making it impossible to get a mortgage loan after I left my job. Despite the fact that both my fiancee and I have 15 year job histories making very high salaries — and the fact that we have more than enough cash in the bank to buy any house we wanted in cash — because of today’s strict lending environment, without jobs we couldn’t get a loan. While I knew that not having a job would likely hurt my chances of getting the best rate on a mortgage, I assumed that with a large enough down-payment and the cash we have in the bank as collateral, there would be some way to get a loan.

While depressing, I wasn’t going to let a little setback like this ruin my adventure. While getting a loan after we quit our jobs would be difficult, we had options. First, we could find a house and close on it before we left our jobs; this way we could still get a loan without too much trouble. This was our preferred option, and the reason why we felt our trip back to Atlanta was somewhat stressful — if we didn’t find a house to buy that weekend, it was unlikely we’d be able to close on something before we left our jobs, and we’d have to figure out a “Plan B.”

Our three best Plan B options were to either: buy a house for cash, have one of us get a job when we moved in order to qualify for a mortgage loan, or continue to rent until we had enough income from our businesses to qualify for a loan. While none of those options were optimal — we wanted to keep our cash for additional RE investing/reserves, having to get jobs would detract from our efforts to start our own businesses, and we really didn’t want to continue to rent — we at least knew that we had a backup plan, and decided to cross that bridge when/if we got to it.

With that in mind, we headed to Atlanta to find a house…

Want to know what happened? I’ll save that for my next couple posts…

Doing some agent research, I came across the term “buyer’s agent.” Remember, I’ve never bought a piece of real estate in my life, so while this concept might be well known to many people, it wasn’t to me. And in case there are others out there who don’t know what a buyer’s agent is (or why they’re valuable), let me explain…

In a typical real estate transaction, there is generally at least one — and often two — real estate agents involved. There is the agent that represents the seller (the listing agent); this is the person who lists the house on the MLS, markets it, shows it to potential buyers, etc. And there is often an agent that helps the buyer; this is the person who pulls listings from the MLS, takes the buyer around to various houses, and — in theory — represents the buyer’s interest when it comes to negotiating and making a deal. Unfortunately, that’s not always the way it works in the real world.

While the listing agent is certainly obligated to represent the seller, the buyer’s agent isn’t necessarily obligated to represent the buyer. Depending on the type of agent, who he works for, the laws of the state, and relationship between the buyers and agent, the agent helping the buyer may actually be representing the seller of the property instead of the buyer. In fact, in many cases, the agent helping the buyer is legally obligated to help the seller get the best price for the house, even if it means getting a worse deal for the buyer he is “representing.” For example, the agent helping the buyer may be legally obligated to tell the seller information about the buyer (for example, telling the seller the highest price the buyer is willing to pay), while at the same time be legally obligated to keep seller information confidential (for example, not telling his buyer how low the seller is willing to go, even if the agent is in possession of that information).

Wow, this was news to me!

So, how do you avoid working with an agent who may not represent your interests or who may have a conflict of interest? You use a “buyer’s agent.”

A buyer’s agent is a real estate agent who contractually represents the buyer, providing the following benefits:

• The buyer’s agent has a legal and fiduciary responsibility to the buyer to ensure he gets the best deal possible;
• The buyer’s agent has a legal responsibility to keep all information the buyer provides confidential ;
• The buyer’s agent has no responsibility to keep the seller’s information confidential;
• The buyer’s agent has a responsibility to not enter into a conflict of interest (for example, the buyer’s agent can’t show you properties that his agency has listed).

So, what are the downsides of a buyer’s agent, you may ask? Based on my research, I’ve only come across two, both of which can be mitigated if handled appropriately:

• The buyer’s agent works on commission (for example, perhaps 3% of the sale price of the property). Generally, this commission is paid by the seller as part of the sale contract (just like any other agent who represents the buyer would receive). But, if the seller isn’t willing to pay the full commission that the buyer’s agent is owed (for example, if the seller is only willing to pay 2.5%), the buyer may have to make up the difference out-of-pocket. If you’re working with a buyer’s agent, make sure you discuss contingencies for if something like this should happen;
• Some buyer’s agents will attempt to get you to enter an exclusive contract. This means that for the duration of the contract, the buyer is legally responsible to pay the buyer’s agent his commission regardless of whether that agent helped the buyer find the property that is being purchased. Worst case, the buyer gets shown the property by another agent, and now both agents expect to get paid. To mitigate this situation, never enter into an exclusive deal with a buyer’s agent. Instead, enter into non-exclusive deals where the buyer’s agent is only obligated to get paid if you purchase a property that he has shown you.

As for us, it was an easy decision to use a buyer’s agent for our first house purchase, and luckily, based on a recommendation from a close friend in Atlanta, we found someone who seems perfect to work with us…

Until recently…

My fiancee and I started looking at houses in Atlanta several months ago (to buy for our personal residence). We spent last Thanksgiving checking out the neighborhoods, getting a feel for what types of properties were on the market at what prices, etc.

Based on our experiences in California, it was only natural that we ask, “What can we get in Atlanta for the same price as a decent house in California?” Well, given that a decent house in California is $1M, we started there. To our surprise, we quickly realized that for that much money, we could literally buy a gated mansion on more than an acre just outside the city. Our imaginations ran wild thinking about the ridiculous house we could buy for that price. Luckily, it only took a day or two before we came to our senses and realized that not only did we not need anything that crazy big, but we also likely couldn’t afford it if we were really serious about not going back to work and starting our new companies.

Still thinking big, we started driving around the suburbs looking at the $700K McMansions. For that price, we could get one of those houses we grew up dreaming about — 6000 square feet, 7 bedrooms, 6 bathrooms, etc. This time it took a little bit longer to come to our senses…but after a couple days, we did. We realized that given the upkeep, landscaping, heating, property taxes and everything else associated with having a house that big (and given that there are currently just two of us), we’d essentially be throwing money out the window to buy something like that.

So it continued…we slowly but surely started to realize that the crazy cost-of-living environment of California had completely desensitized us and clouded our perceptions of real estate reality. We dropped our price range to $500K, and started looking at all the new construction that was selling for $700K a few months earlier, but was dropping in price by the day as over-building and excess inventory flooded the market. A month later, we realized that by dropping our price range to $400K, we could avoid the higher interest rates associated with a jumbo loan, and all we’d be giving up was a fifth or sixth bedroom (oh well, I guess we’ll have to limit our sleepovers to 10 people).

After looking at houses for another month, we realized that while there were a lot of great houses in this price range, we’d probably end up spending a bunch of money on remodeling and upgrades to make it exactly what we wanted. Well, we thought, if we’re going to put a bunch of money in the house to make it what we wanted, why not try going even lower?

So, we started looking at houses in the $300K range, with the goal to spend $25K or so in remodeling/upgrades. For that price, we could find dozens of houses that met all our criteria — less than 10 years old, 4 bedroom, 3 bathroom, with a finished basement (for our offices), and a nice yard for the dog. Add in another $25-30K for upgrades, and we could get our brand new kitchen, all hard-wood floors, remodeled master bathroom, and new landscaping.

I’m not sure where we’ll end up (stay tuned!), but it’s very satisfying to think that by spending some time to get re-sensitized to how far our real estate dollars could go, we’ve cut our anticipated housing cost by several hundred thousand dollars over the past few months, and we’re just as excited about what we’ll end up with now as we were when we were looking at those ridiculously unnecessary million-dollar mansions.