Are you a doctor who's looking tobuy a home? With interest rates atall-time lows, it's as good a time asany to take the plunge. Thinking aboutselling your home? Existing home saleshit a record high in 2002, and real estateprofessionals say the market, while softeninga little, is still strong.
Worried about the rise in homeownersinsurance rates? There are steps youcan take to help keep your rates affordable.And if you're thinking about renovatingyour current home, you'll wantto make certain you're happy with thefinished product.
Despite the costs involved, many peoplelooking to buy, sell, or renovate a home failto do their homework. Knowledge ispower, and information is readily availableto help individuals make wise purchasing,selling, or renovating decisions.
"A housing transaction is 1 of the 3most stressful transactions a person canexperience," says Stephen Roulac, PhD,JD, CPA, CMC, a location assessmentexpert and real estate professional."People have a limit as to how muchstress they can take on, especially in viewof the ongoing economic situation."
The better you're prepared, the lesslikely your venture will be stressful, and thegreater the chance your purchase, sale, orrenovation project will be rewarding.
1. Purchasing Real Estate
Since 1999, the real estate market hasbeen phenomenal. The first quarterof 2003, however, indicated a slightslowdown. "Buyers will probably experiencea little more movement in price,which should be appealing," says MarlaSchneider, the top-producing agent atGlenview Real Estate (847-657-3790;www.movewithmarla.com). "There's alsomore inventory than in recent years, sobuyers have more to choose from."
Bruce Taylor, president of ERA KeyRealty Services (www.era-home.com),suggests that the information that canhelp most in making a purchasing decisionfalls into 3 categories: budget, location,and personal taste. When thinkingabout a budget, Taylor notes, it's importantto buy a home that meets all ofyour family's needs but doesn't requirea mortgage so large that you can't keepup with the payments.
Too often, however, emotion cancloud better judgment. "There's anold school of thought that says youshould look at the purchase of a homeas an investor would—strictly as abusiness decision," says Barry Kramer,CRS, principal at Keller Williams Realty(www.kw.com). "Because once you'reemotionally involved and emotionallyattached, your sense of what is a gooddeal goes out the window."
Don't forget to consider propertytaxes, Taylor adds. Tax rates can changefrom year to year, and if a significantnumber of new homes are being builtin an area, the tax rate is likely toincrease. That can have a dramaticimpact on your mortgage payment.
2. Shopping for a Mortgage
Speaking of mortgages, Phil Russo,chairman and CEO of ArlingtonCapital Mortgage (www.thinkarlington.com), offers insight on shopping for amortgage. Rather than viewing themortgage as a cost, Russo says, it shouldbe part of a strategy to build wealth andsecurity. Thus, a mortgage should bedesigned to complement the rest of yourpersonal financial planning strategy.
For a homebuyer in their early 50s, amortgage with a large balloon paymentin 10 or 15 years might be a bad strategy,strapping the individual with a large,lump-sum payment at a time when earningshave usually decreased. But, Russosays, that same balloon mortgage couldbe the perfect vehicle for someone else.
"Suppose you have an individual age55, anticipating retirement at age 65,and looking to buy a vacation home,"Russo explains. "That individual mightbe enrolled in a retirement savings programthat affords the option of takinga lump-sum distribution. The timing ofthat distribution could coincide withthe due date on the balloon payment.So that's an opportunity to enjoy lowermortgage payments for 10 years, putmore money into retirement savings,then pay off the mortgage with thelump-sum distribution."
Inevitably, people make purchasingdecisions for emotional reasons,Russo says. "We don't tell people toignore what they're feeling, just tomake sure that when they make theirultimate decision, they do so withgood knowledge of their alternativesand their possible implications."
3. Selling the Homestead
While today's market is still strong,it's unlikely you'll find the type ofbidding wars that were common in thepast. Sellers, Schneider says, are goingto have to be a little more aggressive inorder to get their homes sold.
Taking a proactive approach could bebeneficial. Mike Kuhn, director of fieldservices for HouseMaster, a home inspectioncompany, suggests that sellers startby considering the following question:Would you buy your house again? Toanswer, Kuhn suggests doing a carefulwalk-through of your home.
"Don't look at your house with rosecoloredglasses," Kuhn advises. "See itfor what it is before putting it on themarket. Despite what many people say,the aroma of fresh bread in the ovenwon't warm up house hunters to a homewith troubling and costly problems."
In order to avoid surprises that couldcrop up from a buyer's prepurchase inspection,many sellers are opting tohave their own prelisting inspectionsdone. The benefits are significant.
"You want your home to show as wellas possible," Kramer says. "If someonewalks into your home and sees that it'sclean, they'll look at it in a differentlight. They'll look at everything througha microscope. It's human nature. Havingan inspection done lets the seller knowwhat issues need to be dealt with."
If you're hesitant to put your homeup for sale because the market has softened,Roulac suggests otherwise. Hisadvice is that if you want to move upand trade, one of the best times to sell isduring the worst market conditions. Thereason, Roulac says, is that if you recognizeit's a difficult market and price yourhouse aggressively, you'll be in a powerposition once you complete the sale.
"You'll have cash in hand," Roulacnotes. "You'll find a greater selectionof homes, have time to evaluate themarket, and be able to make veryaggressive offers. I would argue thatyou can get a better house on muchbetter terms in a weaker market."
Rule of thumb:
Don't commit tobuying a house until you have a similarcommitment to sell your existinghome. Failure to follow that advicecould leave you stuck with 2 homes onyour hands. And in this particular case,2 homes are not better than 1.
4. Ensuring Good Coverage
In case you hadn't noticed, homeownersinsurance premiums are rising.According to a survey of 50 state insurancedepartments by magazine,premiums rose an average 8% nationallyin 2002, but as much as 30% in somestates. In addition to rising premiums,prospective homebuyers are finding itdifficult to obtain insurance on a homeif it has seen more than its share ofclaims. And some current homeownersare being dropped by their carriersbecause they've filed too many claims.
"We don't want people to think thatthey can't ever put in a claim," explainsMary Ann Avnet, vice president andmarketing manager of Chubb personalinsurance (908-903-2000; www.chubb.com). "One claim is not going to causea problem. But if you put in a $250claim, then something happens thatresults in a $5000 claim, and the nextyear something else arises, you mightbe wishing you had never put in that$250 claim. Recognize that in the overallperspective, when insurance companyunderwriters review profitabilityissues, they're going to look at frequencyand severity."
What many real estate experts suggestis that you remember that homeownersinsurance is meant to protectyou and your family against big losses,not small ones. By raising yourdeductible from $250 to $1000, you cansave 20% on premiums. Some insurersoffer significant credits for taking ahigher deductible.
When it comes to insuring yourhome, Avnet says you want to makesure you have the right amount ofinsurance. "People think about the purchaseprice or how large a mortgagethey have, but they need to consider athird element. What would it cost toreplace their house?" Avnet says a goodoption for homeowners policies is whatChubb calls "extended replacementcosts." That means you start with thebest estimate of what it would cost toreplace your home today. Then, in theevent of a catastrophic loss, you'll beable to replace your house even if itcosts more than what you've insured itfor. "The key is to make sure you startwith the right number. Your insurancecompany or agent can assist in determining that number."
Another key factor is contentscoverage, something Avnet says iseasy to undervalue because there'sno clear-cut formula to use. Whenyou think contents, it means everythinginside your home, from furnitureand window coverings to dishesand computers. "People tend tounderestimate their own personalbelongings," Avnet explains. "Eventheir clothing could cost more toreplace than they had anticipated.Use the same theory as you do withyour house, and think about the‘what if' catastrophic occurrence andneeding to start over again."
5. Remodeling Your Home
Home remodeling projects, just likethe homes themselves, come in allshapes and sizes. Make surethat your project fits both your budgetand your personal taste.
For big-budget, complex designprojects, your best bet is to employ anarchitect to prepare the design, andthen hire a construction firm to carryout those plans. Going this route, however,will require the greatest timecommitment from you. First you'll haveto find an architect you feel comfortablewith, then hunt down a contractorwho is comfortable working withthe architect you select. Never underestimatethe importance of that chemistryin a large remodeling project.
In this type of scenario, the homeowneroften has to act as the chiefexecutive officer of the project.However, most homeowners don'thave the time to ride shotgun over aproject on a daily basis. To protectyourself, it's recommended that youwrite into the contract exactly whatgrade and type of windows, roofing,and flooring you want. Where possible,list brand names and model numbers—the more specific, the better.
A second and very cost-effectivealternative, particularly for smallerprojects such as adding on a bedroomor bath, is to hire a design/build firm.According to the magazinearticle, for a retainer of about $500, adesigner will prepare a basic design or2 for your consideration. Once youagree on a design, you must commitup to several thousand dollars fordetailed plans to be prepared.
Going the design/build route cansave you considerable dollars comparedwith an independent architect'sdesign fees. However, if you break offthe relationship with the design/buildfirm after the designer has developeddetailed plans, you usually forfeit anyright to build using those plans.
A critical factor that many peopleoverlook when remodeling is insurancecoverage. For example, Chubb's Avnetpoints out that if the project is bigenough that it will cause you to moveout of the house for a while, that couldnegate your coverage, change your eligibilityfor coverage, or increase yourdeductible. If you have to move out for abrief period of time, you'd better alertyour insurance agent.
In addition, there's always the chancethat accidents could happen while renovationwork is being done. Make surethe contractor you're working with hasa certificate of insurance, as well as liabilityinsurance that is at least in excessof what your home is valued for. Also, ifyour contractor doesn't have workers'compensation, then any worker in yourhome becomes your employee andyou're responsible for anything thatmight happen to them.
A good rule of thumb when remodeling,Kramer says, is not to overbuild."You'd still rather have the least expensivehome in a more expensive neighborhoodthan the most expensive home in aless expensive neighborhood," he pointsout. "A neighborhood will increase thevalue of the home much more so than anindividual home will impact the value ofthe neighborhood."