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Are there standard ways to determine how much a home is worth?
Yes. A comparative market analysis and an appraisal are the two most common and reliable ways to determine a home’s value.
Your real estate agent can provide a comparative market analysis, an informal estimate of value based on the recent selling price of similar neighborhood properties. Reviewing comparable homes that have sold within the past year along with the listing, or asking, price on current homes for sale should prevent you from overpricing your home or underestimating its value.
A certified appraiser can provide an appraisal of a home. After visiting the home to check such things as the number of rooms, improvements, size and square footage, construction quality, and the condition of the neighborhood, the appraiser then reviews recent comparable sales to determine the estimated value of the home.
You also can check recent sales in public records, through private firms, and on the Internet to help you determine a home’s potential worth. [/expand]
What about appraised value and market value?
The short answer: a home is ultimately worth what is paid for it. Everything else is really an estimate of value. Take, for example, a hot seller’s market when demand for housing is high but the inventory of available homes for sale is low. During this time, homes can sell above and beyond the asking price as buyers bid up the price. The fair market value, or worth, is established when “a meeting of the minds” between you and the buyer takes place.[/expand]
What about appraised value and market value?
A certified appraiser who is trained to provide the estimated value of a home determines its appraised value. The appraised value is based on comparable sales, the condition of the property, and several other factors.
Market value is the price the house will bring at a given point in time, once you and the buyer establish a “meeting of the minds” on price.A certified appraiser who is trained to provide the estimated value of a home determines its appraised value. The appraised value is based on comparable sales, the condition of the property, and several other factors.
Market value is the price the house will bring at a given point in time, once you and the buyer establish a “meeting of the minds” on price.[/expand]
What is the difference between list price and sale price?
The list price is your advertised price, or asking price, for a home. It is a rough estimate of what you want to complete a home sale. A good way to determine if the list price is a fair one is to look at the sale prices of similar homes that have recently sold in the area.
The sale price is the actual amount the home sells for.[/expand]
Are agents responsible for disclosing material facts?
They can certainly be held accountable, particularly if they had prior knowledge of a material fact or should have known about it.
For example, if the seller has to use pans to collect water after a heavy rain, it is the agent’s responsibility to question the seller about the integrity of the roof, and then relay this information to potential buyers. However, if the seller deliberately hides a defect from the agent for which the agent had no prior knowledge, then the agent is not accountable.
Experts say agents are not home inspectors, but they are expected to use their best judgment when something appears suspicious.
Do I have to disclose information about my home?
Disclosure could protect you from a lawsuit. Today, home sellers in most states must now fill out a form disclosing material facts about their homes. Material facts are details about the home’s condition or legal status, as well as the age of various components.
If your state does not require a written disclosure, the real estate laws probably require sellers to disclose any known problems with the home they are selling.
What kinds of things are considered material facts?
The following examples include details that would qualify as material facts that must be revealed by sellers about their homes:
- Damage from wood boring insects
- Mold or mildew in the home
- Leaks in the roof or foundation walls
- Amount of property taxes paid annually
- Problems with sewer or septic systems
- Age of shingles and other roof components
- A buried oil tank
- Details about any individual who claims to have an interest in the property
- Information about a structure on the property that overlaps an adjacent property
Some things are not material facts and do not have to be disclosed. They include personal information about the seller and the seller’s reason for moving.
Among those things that may or may not be material facts: whether a death took place in the home or whether a home is considered haunted.
How does the seller determine what rate to provide?
The interest rate on a purchase money note is negotiable, as are the other terms in a seller-financed transaction. To get an idea about what to charge, sellers can check with a lender or mortgage broker to determine current rates on mortgage loans, including second mortgages.
Because sellers, unlike conventional lenders, do not charge loan fees or points, seller-financed costs are generally less than those associated with conventional home loans.
Interest rates are generally influenced by current Treasury bill and certificate of deposit rates.
Understandably, most sellers are not open to making a loan for a lower return than could be invested at a more profitable rate of return elsewhere. So the interest rates they charge may be higher than those on conventional loans, and the length of the loan shorter, anywhere from five to 15 years.
What are the benefits of seller financing?
Seller financing is a viable option when the seller does not immediately need the entire cash equity they have accumulated in the home.
In return for providing financial assistance to the buyer, the seller receives tax benefits, attracts a larger pool of potential buyers, generally completes the sale sooner, and gets good interest earnings.
As for the buyer, seller financing offers less rigid qualification requirements and cost savings by eliminating nearly all loan fees.
Fear of default often makes many sellers reluctant to take back a second note or finance the entire purchase. A thorough credit check should help to dispel many of these fears, although the mortgage also allows the seller to foreclose on the property in case of default.
A seller may also require the buyer to carry hazard insurance on the property and include a due-on-sale clause, a provision in the mortgage note that allows the seller to demand full repayment if the borrower sells the property. Other financing, disclosure and repayment-term requirements also will need to be met.
It is a good idea to consult an attorney when putting together this kind of transaction.
What is a bridge loan?
It is a short-term bank loan of the equity in the home you are selling. You may take out a bridge loan, or interim financing, to help with a knotty situation: closing on the home you are buying before you close on the property you are selling. This loan basically enables you to have a place to live after the closing on the old home.
The key to a bridge loan is having a qualified buyer and a signed contract. Usually, the lender issuing the mortgage loan on the new home will write the interim financing as a personal note due at settlement on the property being sold.
If, however, there is no buyer for the property you have up for sale, most lenders will place a lien on the property, thereby making that bridge loan a kind of second mortgage.
Things to consider: interest rates are high, points are high, and there are costs and fees involved on bridge loans. It may be cheaper to borrow from your 401(K). Actually, any secured loan is acceptable to lenders for the down payment. So if you have stocks or bonds or an insurance policy, you can borrow against them as well.
What is seller financing?
Also known as a purchase money mortgage, it is when the seller agrees to “lend” money to the buyer to purchase and close on the seller’s home. Usually sellers do this when money is tight, interest rates are high or when a buyer has difficulty qualifying for a conventional loan or meeting the purchase price.
Seller financing differs from a traditional loan because the seller does not actually give the buyer cash to complete the purchase, as does the lender. Instead, it involves issuing a credit against the purchase price of the home. The buyer executes a promissory note or trust deed in the seller’s favor.
The seller may take back a second note or finance the entire purchase if he owns the home free and clear.
The buyer makes a sizeable down payment and agrees to pay the seller directly every month.
Can a home be sold for less than its mortgage?
Sometimes. But it is a complicated process and a lot will depend on the lender. This process is called a “short sale,” which occurs when a lender agrees to write off the portion of a mortgage that’s higher than the value of a home. But, usually, a buyer must be willing to purchase the property first.
A short sale may be more complicated if the loan has been sold in the secondary market.
Then the lender will need permission from Freddie Mac or Fannie Mae, the two major secondary-market players.
If the loan was a low down payment mortgage with private mortgage insurance, the lender also will need to involve the mortgage insurance company that insured the low down payment loan.
The short sale can keep the homeowner from landing in bankruptcy or foreclosure. But it is not an easy procedure to approve, and it involves as much, if not more, paperwork than an original mortgage application.
Instead of proving your credit worthiness and financial stability, you must prove you are broke. And any remaining difference between your home’s value and the balance on your mortgage is considered a forgiveness of debt, which usually means it is taxable income.
How long do bankruptcies and foreclosure stay on a credit report?
They can remain on your credit record for seven to 10 years.
However, a borrower who has worked hard to reestablish good credit may be shown some leniency by the lender. And the circumstances surrounding the bankruptcy may also influence a lender’s decision. For example, if you went bankrupt because you were laid off from your job, the lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, it is unlikely the lender will readily give you a break.
If faced with foreclosure, what are my options?
Talk with your lender immediately. The lender may be able to arrange a repayment plan or the temporary reduction or suspension of your payment, particularly if your income has dropped substantially or expenses have shot up beyond your control. You also may be able to refinance the debt or extend the term of your mortgage loan. In almost every case, you will likely be able to work out some kind of deal that will avert foreclosure.
If you have mortgage insurance, the insurer may also be interested in helping you. The company can temporarily pay the mortgage until you get back on your feet and are able to repay their “loan.”
If your money problems are long term, the lender may suggest that you sell the property, which will allow you to avoid foreclosure and protect your credit record.
As a last resort, you could consider a deed-in-lieu of foreclosure. This is where you voluntarily “give back” your property to the lender. While this will not save your house, it is not as damaging to your credit rating as a foreclosure. Exhaust all other viable options before making a decision.
What types of foreclosures are there?
There are two types – judicial and non-judicial. A foreclosure that results from a court action is a judicial foreclosure. The mortgage deed or trust does not have a power of sale clause, therefore the lender, trustee or another lienholder must take the borrower to court to recover the unpaid balance of a delinquent debt. By contrast, a non-judicial foreclosure is one in which a foreclosure can be completed outside the court system. Real property can be sold under a power of sale in a mortgage deed or trust that is in default, but the lender is unable to obtain a deficiency judgment.
Are there tips for selling a vacant home?
Yes. Once furniture is removed from the home, you will notice all kinds of imperfections you never paid attention to before – rips in the carpet, holes in the walls, and dinginess. In an empty house, everything stands out. What you see is what potential buyers will also see. So you may need to paint, tear up old carpet, and replace the kitchen floor.
To get rid of the “empty house” feeling, leave a few pieces of furniture behind – simple things like a lamp, chairs, and a table will do.
Pay special attention to maintenance. Someone will need to dust and vacuum, leaves will need to be raked, and the grass cut.
In the winter, consider having the heating system shut down and drained to save money.
But keep the electricity running because lights will be needed to show the house.
Watch out for that musty smell, particularly during the summer months, that settles in from having the windows sealed and locked. And beware of pests such as mice, squirrels, ants and bats.
Do I need an attorney to sell a home?
Although most sellers can handle routine real estate purchase contracts, some experts say it is a good idea to be represented by an attorney, particularly if you are selling on your own. You should choose one with expertise in real estate transactions. Before hiring someone discuss all the details of the transaction, including all legal costs you will incur.
A good attorney will assist you in completing the deal swiftly and with confidence.
How can I get a quick sale, particularly in a slow market?
One of the most important things to consider is price. You may want to reduce the price of your home or, at the very beginning, set it at a low price that will generate more buyer interest.
Cash is often an incentive, both for the buyer as well as the agent. You could offer the buyer a $1,000 to $2,000 decorating rebate upon closing the deal. It is also not uncommon to offer the selling agent a $500 bonus. However, some brokers – who supervise agents and run real estate offices – may prohibit such incentives, as do some Realtor boards. Check to find out.
Other common incentives: paying for the property inspection and warranty policy and getting your home preliminarily approved for FHA and VA loans, thereby making it more attractive to a larger number of buyers. Contact a lender who writes FHA-insured and VA-guaranteed loans.
Should I sell my home first or wait until I have bought another home?
This is a tough decision, but the answer will depend on your personal situation, as well as the condition of the local housing market.
If you put your home on the market first, you may have to scramble to find another one before settlement, which could cause you to buy a home that does not meet all your requirements. If you cannot find another home, you may need to move twice, temporarily staying with relatives or in a hotel.
On the other hand, if you make an offer to buy first, you may be tempted to sell your existing home quickly, even at a lower price.
The advantage of buying first is you can shop carefully for the right home and feel comfortable with your decision before putting the existing home on the market.
On the flip side, the advantage of selling your existing home first is that it maximizes your negotiating position because you are under no pressure to sell quickly. It also eliminates the need to carry two mortgages at once.
Talk with your agent for advice. Discuss the pros and of each and whether certain contingencies written into the contract can ease some of the pressures.
What are some costs associated with buying a new home?
Basically, the costs are no different from when you purchased your existing home. They include moving expenses, loan costs, the down payment, a home inspection, title work and policy, and paying for a new hazard insurance policy. Your lender can give you a disclosure of estimated costs when you apply to be pre-approved for a home loan
What are some costs associated with selling my home?
Besides the costs related to making repairs and improving the overall appearance of the home, as the seller you will also need to pay the following:
- A real estate commission, if you use an agency to sell.
- Advertising costs, marketing materials, and other fees if you sell the home yourself.
- Attorney, closing, or other professional fees.
- Title insurance
- Excise tax for the sale.
- Prorated costs for your share of annual expenses, such as property taxes, homeowner association fees, and fuel tank rentals.
- Any other fees normally paid by sellers in your area, including points, survey, and appraisal fees.
To get a better handle on all costs, ask a real estate agent. Agents deal with this information daily and can give you a pretty good estimate of the closing costs you can expect to pay.
What else should I know?
Once your home is available to be shown strive to keep it in tip-top shape. This will require a lot of effort on your part, but you want buyers to feel welcomed and not turned off by unmade beds, cluttered floors, and grungy bathrooms.
Realize, too, that your life will be temporarily inconvenienced. When an agent – yours as well as others – calls wishing to bring a buyer to see the home at the last minute or on the same day, respond favorably. Remember your goal is to get the home sold, and that can only be accomplished if people get to see it. Flexibility is the key to a quick sale.
Plan not to be present when buyers pass through. It is awkward and unsettling for them to have the owners present. If you cannot leave, sit in the backyard. But do not attempt to have conversations with the buyer. Speak only when spoken to; be brief and polite.
Finally, pay special attention to pets, particularly dogs. They can be intimidating. Put them on a leash and in the backyard. Better yet, when possible, take them with you. And be keen to pet odors. They can turn buyers away.
What should I do to prepare my home for sale?
Start by finding out its worth. Contact a real estate agent for a comparative market analysis, an informal estimate of value based on the recent selling price of similar neighborhood properties. Or get a certified appraiser to provide an appraisal.
Next, get busy working on the home’s appearance. You want to make sure it is in the best condition possible for showing to prospective buyers so that you can get top dollar. This means fixing or sprucing up any trouble spots that could deter a buyer, such as squeaky doors, a leaky roof, dirty carpet and walls, and broken windows.
The “curb appeal” of your home is extremely important. In fact, it is the first impression that buyers form of your property as they drive or walk up. So make sure the lawn is pristine – the grass cut, debris removed, garden beds free of weeds, and hedges trimmed.
The trick is not to overspend on pre-sale repairs and fix-ups, especially if there are few homes on the market but many buyers competing for them. On the other hand, making such repairs may be the only way to sell your home in a down market.
When is the best time to sell a home?
The best time to sell is when you are ready, or when you must. That is, when you have outgrown the space in your current home, or you prefer to trade down to something smaller. Perhaps your martial status has changed, which necessitates a move, or you need to relocate for a job.
Market conditions also play a role, as do seasonal conditions. For example, your chances of getting top dollar for your home are more likely in a seller’s market, when demand outweighs supply, than in a buyer’s market.
Local and national economic factors also may dictate when to sell.
How does a lease option work?
A landlord agrees to give a renter an exclusive option to purchase the property. The option price is usually determined at the outset, but not always, and the agreement states when the purchase should take place – whether, say, six months, or a year or two down the road.
A portion of the rent is used to make the future down payment. Most lenders will accept the down payment if the rental payments exceed the market rent and a valid lease-purchase agreement is in effect.
Before you opt to do a lease option, find out as much as possible about how they work. Talk to real estate agents, read published materials, and, in the end, have an attorney review any paperwork before you and the tenant sign on the dotted line.
What is a lease option?
It is an agreement between a renter and a landlord in which the renter signs a lease with an option to purchase the property. The option only binds the seller; the tenant has a choice to make a purchase or not.
Lease options are common among buyers who would like to own a home but do not have enough money for the down payment and closing costs. A lease option may also be attractive to tenants who are working to improve bad credit before approaching a lender for a home loan.
A lease option also may be a way for the seller to move property in a slow market. Seller advantages include earning above-market rent, retaining all the property income tax deductions during the lease-option period, and attracting tenants who will care for the property as though they owned it.
Any advice on negotiating?
Be patient, know your home’s worth, adopt a positive attitude, and do not let emotions – anger, pride, greed, or prejudice – get in the way of negotiating the best deal.
Your home obviously means a lot to you, but you have already made the decision to move on, so begin to think of your home as “the house” or “the condo,” instead of “my home.”
When reasonable offers come along, take them seriously. You can always counter any offer made by the buyer that comes near your asking price. Do not spoil a good deal over a few hundred dollars.
Can the seller also include contingencies in a contract?
Yes. For example, if you decide to sell your existing home first before buying another one, you can make the sale of your home contingent on finding a replacement home.
Some sellers opt for this contingency to avoid a double move, such as moving to a hotel or rental until a new home is found and made available.
However, there is one problem with this type of contingency: it can inconvenience the buyer, particularly if his own home is in escrow. He may not be willing to wait for you to move.
This strategy has a better chance of working when the market is relatively strong, your home is a rare find, the price and terms of the transaction are very favorable for the buyer, or the buyer is in no hurry to move.
Do I have to consider contingencies made by the buyer?
You can reject, accept, or counter any offer that is presented to you. Most offers include contingencies, which protect the buyer in case something goes wrong.
The two most common contingencies deal with financing, which makes the sale dependent on the buyer’s ability to obtain a loan commitment from a lender within a stated time period, and an inspection, which allows the buyer to have a professional inspect the property to their satisfaction.
There really is no reason not to consider these contingencies because they are quite reasonable and standard.
However, think twice about a contingency that is predicated on you making expensive home repairs, such as a kitchen renovation. Now, if the roof is caving in, that is an entirely different story. You may need to spend money to replace it or lower the asking price of the home.
How do I respond to a low-ball offer?
Let your agent know it is too low to warrant a counteroffer and that you are willing to negotiate but only once a more reasonable offer is made. Ask the agent if the buyer was shown comparable market values of similar homes that have recently sold in your area; and ask if the buyer was ever properly qualified. You do not have to settle for less if you are realistic about your chances of getting more.
Are home selling costs deductible?
If you sell your home and realize a taxable gain even after the exclusion, you can reduce your gain with selling costs.
Your gain is defined as your home’s selling price, minus deductible closing costs, minus your basis. The basis is the original purchase price of the home, plus improvements, less any depreciation.
Real estate broker’s commissions, title insurance, legal fees, administrative costs, and inspection fees are all considered to be selling costs.
Are seller-paid points deductible?
For the buyer, yes, but not the seller – even though the seller pays them. Since January 1, 1991, homebuyers have been able to deduct points paid by the seller whereas, previously, they could only deduct the actual points they paid on the home loans themselves.
Can I deduct a loss on the sale of my home?
No. A loss from the sale of personal–use property, such as a home or car, is not deductible. They are considered nondeductible personal losses, and you cannot reduce your tax bill by deducting them the way you would deduct stock and investment losses on your tax returns.
Can I deduct improvements made to my home?
Yes, but only after you have sold it because improvements add to the basis of your home. Remember your gain is defined as your home’s selling price, minus deductible closing costs, minus your basis. The basis is the original purchase price of the home, plus improvements, less any depreciation.
The IRS defines improvements as those items that “add to the value of your home, prolong its useful life, or adapt it to new uses” – such as putting in new plumbing or wiring or adding another bathroom.
How do capital gains work when you sell your home?
If you sell your primary residence, you may be able to exclude up to $250,000 of gain – $500,000 for married couples – from your federal tax return. To claim the exclusion, the IRS says your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale.
You also must not have excluded gain on another home sold during the two years before the current sale. However, special rules apply for members of the armed, uniformed and foreign services and their families in calculating the 5-year period.
If you do not meet the ownership and use tests, you may use a reduced maximum exclusion amount. But only if you sold your home due to health, a change in place of employment, or unforeseen circumstances.
If you can exclude all the gain from the sale of your home, you do not report it on your federal tax return. If you cannot exclude all the gain, or you choose not to, you must use Schedule D of Form 1040, Capital Gains or Losses, to report the total gain and claim the exclusion you qualify for.
What about repairs made to get the home ready for sale?
If you realize a taxable gain after you sell your home, even with an exclusion, you can reduce your gain with selling costs. These selling costs may include items that are otherwise considered to be repairs – such as painting, wallpapering, even planting flowers – if you complete them within 90 days of your home sale and provided they were completed to make the home more saleable.
What if you have more than one home?
For more than one home, you can exclude the gain only from the sale of your main residence. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most often.
Do I really need an agent?
Most home sellers hire real estate agents to list and sell their homes. Most of those who do not are known as For Sale By Owners, or FSBOs. They market and sell their homes themselves.
However, a small number of people sell without marketing their homes. They include homeowners who transfer property to family members or landlords who directly offer tenants the first right to purchase property before they place it for sale on the market.
In the end, most FSBOs eventually hire an agent because the agent will handle all the details of a successful home sale – including the contract, forms, and disclosure statements – and expose the home to the widest range of prospective buyers through the local Multiple Listing Service (MLS).
How do I find the right agent for me?
To begin with, think local. Select someone who is very familiar with your neighborhood and the properties for sale in it. Then, if you are selling, say, a condominium, choose an agent with expertise selling apartments to potential homeowners.
Because you will want the widest possible exposure for your home, you also will want a real estate firm that works with other agencies to get your property sold. The Multiple Listing Service (MLS) used by Realtors, licensed members of the National Association of Realtors, is still the most common and effective form of cooperation used today.
Beyond these parameters, select an agent who is competent, efficient, and ethical.
Perhaps the agent who first sold you your home would be a perfect candidate. If not, ask family, friends, and neighbors for recommendations, or choose a firm headed by an individual who is known in your community.
Is the commission negotiable?
Yes. There is no standard commission. They are not set by law and vary depending on service, customer needs, and company policy. In general, agents charge between 4 percent and 8 percent for full service. Some agents prefer not to offer sellers the option of paying a fee for an individual service.
If you insist on overpricing your home, an agent may well insist on a higher commission to cover the added marketing expenses and time that are needed to sell it.
Think of a commission as a point you must negotiate and evaluate.
What if I am not happy with the listing agent and want to terminate the contract?
Experts say unhappiness is not a legal reason to terminate a valid home sale-listing contract. Legally, to cancel a listing, you must be able to prove the agent’s lack of “due diligence.” This means the agent isn’t taking the normal steps to properly market your home, such as putting your listing into the Multiple Listing Service (MLS), advertising on the Internet and in local newspapers, and posting a for-sale sign on the property.
If your home is overpriced, perhaps you need to consider reducing the price to spark buyer interest. Otherwise, you may need to meet with the listing agent and his or her supervising broker to discuss the problem. If the agent is doing an awful job, you might suggest the listing be transferred to a more effective agent within the same brokerage firm.
Remember, limit the listing contract to 90 days, in case you become unhappy and would like to get another agent after the contract expires.
What is the most common type of contract for listing properties?
The exclusive right to sell. It gives the real estate broker the exclusive right to sell your home during the term of the listing. If a sale occurs – even if you sell the home yourself – the broker gets a commission. The broker may share the listing with other brokers on the Multiple Listing Service (MLS) to get the widest possible exposure for your home. If you request that the property not be listed on a multiple basis, only the broker named in the contract and his or her sales agents can market and show it.
What questions should I ask an agent interested in selling my home?
Interview at least three local agents who sell homes in your community. Grill them about the following:
- The worth of your home. The agents should inspect the home and prepare a written comparative market analysis.
- Marketing plans. These are a must. Make sure they include regular newspaper ads, the local Multiple Listing Service (MLS) – which gives your home maximum exposure to all local agents – and Internet marketing through the agent’s Web site.
- Length of the listing agreement. A 90-day listing is reasonable for marketing your home. Experts advise against signing a listing for more than 90 days unless it contains an unconditional cancellation clause. If you like, you can always extend the contract later.
- Number of listings. Find out how many listings the agent now has and how many she normally sells. Too many listings – more than a dozen – with a low sales rate, may not be a good sign.
- Get references. Ask for the names and phone numbers of recent home sellers. Call them and ask if they were satisfied with the level of service delivered by the agent.
How to Buy
Are there standard ways to determine how much a home is worth? Yes. A comparative market analysis and an appraisal are the two most common and reliable ways to determine a home’s value.
Your real estate agent can provide a comparative market analysis, an informal estimate of value based on the recent selling price of similar neighborhood properties. Reviewing comparable homes that have sold within the past year along with the listing, or asking, price on current homes for sale should prevent you from overpaying.
A certified appraiser can provide an appraisal of a home. After visiting the home to check such things as the number of rooms, improvements, size and square footage, construction quality, and the condition of the neighborhood, the appraiser then reviews recent comparable sales to determine the estimated value of the home.
Lenders normally require an appraisal – which runs between $200 to $300 – before they will approve a mortgage loan. This protects the lender by ensuring the home is worth the money you want to borrow.
You also can check recent sales in public records, through private firms, and on the Internet to help you determine a home’s potential worth.
How do you determine how much a home is worth? The short answer: a home is ultimately worth what is paid for it. Everything else is really an estimate of value. Take, for example, a hot seller’s market when demand for housing is high but the inventory of available homes for sale is low. During this time, homes can sell above and beyond the asking price as buyers bid up the price. The fair market value, or worth, is established when “a meeting of the minds” between the buyer and the seller takes place.
What about appraised value and market value? A certified appraiser who is trained to provide the estimated value of a home determines its appraised value. The appraised value is based on comparable sales, the condition of the property, and several other factors.
Market value is the price the house will bring at a given point in time, once the buyer and seller establish a “meeting of the minds” on price.
Is it possible to save on closing costs? Certainly, once you get past the sticker shock. Closing costs are expensive. They can average between 2 to 3 percent of the total home purchase price. But here are a few ways to save:
- Haggle with the seller. He may pay all or part of the closing costs.
- Nab a no-point loan. You may have to pay a higher interest rate, but if you are strapped for cash and can qualify for a higher interest rate, you may find this type of loan can significantly reduce your closing costs.
- Grab a no-fee loan. Although the fee is usually wrapped into a higher rate loan, it does offer one advantage – you get to save on the amount of cash you would need up-front.
- Secure seller financing. These loans typically avoid the traditional fees or charges imposed by lenders.
- Shop ‘til you drop for the best deal. Every lender has its own unique fee structure; you are bound to find one that works for you.
Is there anything I should know about closing day? Yes. The following to-do list can help save you a few headaches and keep the closing on track:
- Keep extra money in your account. Something unexpected can pop up during the closing that will require more money out of your pocket. Take your checkbook. Even better, find out how much you will need to pay and write a certified check for the total amount.
- Take your loan commitment letter. Use it to verify loan approval in case of a mistake or misunderstanding with the lender.
- Take your contract to purchase. Pull it out if something a little suspicious comes up.
- Take your personal ID. A driver’s license or other personal identification will do.
- Do a before-closing inspection. It is always a good idea, when possible, to walk through the property to make a list of any problems.
- Arrange in advance to have the water and electric meters read on closing day and the service switched to your name to prevent interrupted service. The same applies for the fuel tank.
What are closing costs? Closing, or settlement, costs are expenses over and above the price of the property. Both the buyer and seller incur some of these expenses when transferring ownership of a property. Who actually pays, however, often depends on local custom and what the buyer or seller negotiates. Closing costs normally include title insurance, loan points, escrow or closing day charges, property taxes, and document fees. The lender provides an estimate of closing costs for prospective homebuyers.
How do you decide whether to add on to an existing home or purchase a new one? There are a few things to consider, including cost, individual needs, and what will add value down the road. Also important: your emotional attachment to the existing home.
As designer and builder Philip S. Wenz, the author of Adding to a House: Planning, Design & Construction, notes, an addition is much cheaper than building a new home and can offer a “new” home without the heartache of moving.
- Can you finance the home improvement with your own cash or will you need a loan?
- How much equity is in the property? A fair amount will make it that much easier to get a loan for home improvements.
- Is it feasible to expand the current space for an addition?
- What is permissible under local zoning and building laws? Despite your deep yearning for a new sunroom or garage, you will need to know if your town or city will allow such improvements.
- Are there affordable properties for sale that would satisfy your changing housing needs?
- Explore your options. Make sure your decision is one you can live with – either under the same roof or under a different one.
How much can I afford? It can take a long time to save for that perfect dream home. Meanwhile, the market has been flooded with some of the most favorable mortgage interest rates in years. Low rates make housing more affordable, which is why so many buyers have jumped on the home buying bandwagon.
Home-price appreciation has also been strong, making very solid gains in communities across the country. In fact, home prices are expected to increase 2.5 percent to 3 percent annually over the next five years.
If you purchase a starter home today, you can potentially begin to build value that can lead to the purchase of a larger, or more desirable, trade-up home in the future.
What are the advantages of owning a home? There are many. Among the most appealing: you own it, which gives you, instead of a landlord, control of your living space. Other benefits stem from potential tax savings and the buildup of equity as your property likely appreciates in price over time. Equity can be used to help put children through college, purchase a second home, or make home improvements.
The mortgage interest paid on a home loan is tax deductible, as is the local property tax. If you get a fixed-rate home mortgage loan, you also can invest more wisely knowing your monthly mortgage payment, unlike rent, will not change substantially.
What is the first step to buying a home? Make sure you are ready – psychologically and financially. Ask yourself the following questions: Do I have steady income? Is my debt lower than my total income? Do I have enough money to pay for the down payment and closing costs? Am I working hard enough to improve bad credit?
A house needs constant care and attention. Also ask yourself if your budget will allow for unexpected repairs and upkeep. Once you can honestly answer “yes” to these questions, you are several steps ahead of the game and that much closer to becoming a homeowner.
Do I need to be at the inspection? No, but it is a very good idea to be there. Following the check-over, the home inspector can answer your questions and discuss problem areas with you. This is also an opportune time to get an objective opinion about the home from someone who does not have emotional or financial ties to the property.
How do I select a home inspector? Begin by only hiring one who is qualified and experienced, someone who belongs to an industry trade group, such as the American Society of Home Inspectors (ASHI). This organization has developed formal inspection guidelines and a professional code of ethics for its members. Also, membership in ASHI is not automatic; members must have demonstrated field experience and technical knowledge about structures and their various systems.
Should I hire a home inspector? By all means. Buying a home without getting expert advice is risky. Once a home inspector uncovers major plumbing and electrical problems, for example, you may decide you do not want to spend several thousand dollars on repairs.
Always include an inspection clause in your written offer. This clause gives you an “out” from buying if serious problems are detected. It also gives you another chance to negotiate the purchase price if repairs are needed. The clause can even specify that the sellers fix any problem that is uncovered before you settle, or close, on the home.
You also may want to consider hiring experts to inspect the home for a number of health-related risks like radon gas, asbestos, or possible problems with the water or waste disposal system.
What does a home inspector do? A home inspector is a paid professional – often a contractor or an engineer – who checks the safety of a home. Home inspectors search for defects or other problems that could become your worst nightmare later on. They focus particularly on the home’s structure, construction, and mechanical systems.
It is not the inspector’s job to determine whether you are getting good value for your money. He does not establish value, only whether the home might collapse in a storm or if the roof might cave in.
A home inspection typically takes place after a purchase contract between the buyer and seller has been signed.
Is private mortgage insurance necessary? Lenders require private mortgage insurance (PMI) on most conventional loans with less than a 20 percent down payment. They believe there is a correlation between borrower equity and default. They have found that the less money borrowers put down, the more likely they are to default on a loan. PMI guarantees the lender will not lose money if this happens and a foreclosure is necessary.
The buyer pays this insurance, usually a small fee at the outset and a percentage of the face amount of the loan that is added to the monthly payment.
What most homeowners do not realize is that the insurance is usually no longer necessary after enough equity has built up in the property. Contact your lender if you meet this requirement and want to drop PMI.
A precaution: do not confuse PMI with mortgage life insurance. The latter pays all, or a portion, of your mortgage in the event of your death.
What about title insurance? Title insurance protects the lender against unclear title to the property you are buying. It is almost always a requirement for closing on a home. If you desire coverage as well, buy an owner’s policy, which will protect you against any title-search errors and losses that arise from disputes over property ownership. The cost of title insurance is usually a set value per thousand of dollars of the total loan amount.
What does homeowners’ insurance cover? It protects against disasters – whether natural, manmade or mechanical. A standard policy insures the home, as well as your possessions. Because this insurance is packaged, it covers liability for any harm, loss, and property damage that you or your family members cause others. And it includes additional living expenses in case you are temporarily displaced because of damage from a fire or other insured disaster.
While you are not legally required to purchase homeowners’ insurance, mortgage lenders require you to do so.” or “mortgage lenders stipulate that you must.
If your mortgage is paid up – or you never had one – it is still a good idea to have homeowners’ insurance to protect your home and your belongings.
What is condo and co-op insurance? This insurance protects your investment and personal belongings from most disasters. As an owner, you will need two insurance policies – your own to cover liability, living expenses, your belongings and structural improvements, and a master policy provided by the condo or co-op board. The master policy covers the common areas that you share with others in the building. It is paid for using the monthly condo fee that you and other owners pay.
What kind of home insurance should I get? A standard policy will do in most instances. It protects against several natural disasters and catastrophic events. However, it will not guard against earthquakes, floods, war, and nuclear accidents. The policy can be expanded to include these disasters as well as coverage for such things as workers’ compensation. In fact, the lender may require that you purchase flood or earthquake insurance if the house is in a flood zone or a region susceptible to earthquakes.
You also can increase coverage beyond the depreciated value of personal property such as televisions and furniture by purchasing a replacement-cost endorsement. Home-based business-coverage, once overlooked, is an ever-increasing popular rider. It does not cover liability associated with the business but rather contents such as home office equipment and general liability to cover injuries to clients and employees.
Other considerations: an inflation rider, which increases coverage as the home’s value rises, and getting insurance that is equal to the full replacement value of the home.
Insurance companies usually require an amount equal to at least 80 percent of the full replacement value. Otherwise, only a portion of the loss would be covered.
How does a lease option work? A landlord agrees to give a renter an exclusive option to purchase the property. The option price is usually determined at the outset, but not always, and the agreement states when the purchase should take place – whether, say, six months, or a year or two down the road.
A portion of the rent is used to make the future down payment. Most lenders will accept the down payment if the rental payments exceed the market rent and a valid lease-purchase agreement is in effect.
Before you opt to do a lease option, find out as much as possible about how they work. Talk to real estate agents, read published materials, and, in the end, have an attorney review any paperwork before you sign on the dotted line.
What is a lease option? It is an agreement between a renter and a landlord in which the renter signs a lease with an option to purchase the property. The option only binds the seller; the tenant has a choice to make a purchase or not.
Lease options are common among buyers who would like to own a home but do not have enough money for the down payment and closing costs. A lease option may also be attractive to tenants who are working to improve bad credit before approaching a lender for a home loan.
Are impound accounts required for all mortgage loans? They can typically be waived on a conventional loan if the loan amount is 80 percent or less of the purchase price. But the lender might charge you an additional 1/4 point for this option to waive the escrow.
One way to avoid an impound account on an owner-occupied mortgage is to raise your down payment amount slightly. The exact amount necessary to avoid the escrow will vary with the lender.
In some states, lenders let buyers set up separate accounts in which they place specific funds and then pay the insurance and property taxes themselves. These are called pledge accounts, and they must be set up before you close on the home.
An impound account can usually be dropped on an owner-occupied loan once the loan-to-value ratio equals 80 percent or less. But restrictions apply: payments will have to be current and your record of making on-time payments pretty solid. Contact your lender if you meet these requirements and want to drop your impound account.
Are property taxes deductible? Yes. Like the mortgage interest paid on a home loan, property taxes are fully deductible from your income. You may deduct them every year on your primary residence, second home and other investment properties.
However, escrow money held for property taxes cannot be deducted until the money is actually used to pay the property taxes.
Can I contest my property taxes? Many people do, mainly because determining value can often be tricky. This is especially true in a changing market when local prices either take off dramatically or plunge precipitously, like during the Texas oil bust of the 1980s.
While it is up to a professional assessor to evaluate property value for tax purposes, property owners are usually allowed to contest their assessment until a certain date after they are made public.
Once you contest, you will have to prove why you think your property is worth less – few homeowners contest hoping to pay more taxes! The two most popular ways for determining value are an appraisal and a comparative market analysis. With an appraisal, a professional estimates the property’s market value based on recent sales of comparable properties. A comparative market analysis is an informal estimate of market value performed by a real estate agent based on similar sales and property attributes. Most agents will offer free analyses to win your business.
Contact your local tax assessor’s office for procedures on appealing your property tax assessment.
How are individual tax bills figured? Unlike the income tax and the sales tax you pay, the property tax is not based on how much money you earn or how much you spend. It is based solely on how much the property you own is worth.
The real property tax is an ad valorem tax, or a tax based on the value of property.
Ideally, the owners of property of equal value pay the same amount of property taxes, and the owners of more valuable property pay more in taxes than the owners of less valuable property. The tax is calculated using a variety of formulas and is based on a property’s assessed value – its full market value or a percentage thereof – and the tax rate of the taxing jurisdiction, minus any property tax exemptions, such as those offered for the elderly or veterans.
What is an impound account? It is a special bank account held by the lender to collect monthly payments from the borrower to pay property taxes, mortgage insurance, and hazard insurance. These accounts also are called escrow or reserve accounts.
Lenders like to set up impound accounts to ensure the property taxes and insurance will be paid on time. They typically also collect a two-month cushion for taxes and insurance at the closing. A few states require the lender to pay interest on funds held in these accounts.
Why do homeowners have to pay property taxes?Property taxes are assessed by city and county governments to generate the bulk of their operating revenues. The taxes help pay for such public services as schools, libraries, roads, and police protection.
Re-valuations of the tax are often done periodically, although the time interval varies from state to state or, in some states, from town to town, and can range from annual reassessments to periods of ten years or more.
Are fees and assessments owed a homeowner’s association deductible? Generally not because they are considered personal living expenses. But if an association has a special assessment to make capital improvements, condo owners may be able to add the expense to their cost basis when the property is sold. Another exception may apply if you rent your condo – the monthly condo fee is deductible every year as a rental expense.
Are there tax credits for first-time homebuyers? Yes, thanks to the many city and county governments that offer Mortgage Credit Certificate (MCC) programs, which allow first-time homebuyers to take advantage of a special federal income tax write-off. The credit reduces the amount of federal taxes paid by the buyer each year, if he keeps the same loan and lives in the same house.
An MCC also makes it easier for eligible buyers to qualify for a mortgage loan. The lender can reduce the housing expense ratio – the percentage of gross monthly income applied toward housing expenses – by the amount of the tax savings. Normally, lenders reject loans if the housing expense ratio is too high.
Program requirements for MCCs vary, although most adhere to the following guidelines:
- The buyer must live in the home being purchased with an MCC-assisted mortgage.
- Total household income cannot exceed certain limits.
- The buyer cannot have owned a principal residence within the past three years. This restriction may be waived if a property is purchased within a certain targeted area.
- The purchase price must fall within an established limit.
More information is available by calling your local housing or redevelopment agency, or contacting your real estate agent.
Are up-front fees and closing costs deductible? Many of the costs paid at closing are not immediately deductible.
The exception is points you pay to purchase your home loan. They are deductible for that year. Points paid when you refinance an existing mortgage must be deducted over the life of the new loan.
Some fees – including loan application, appraisal, document preparation and recording fees – that are assessed when purchasing a home can be recouped by adding them to the adjusted cost basis, the starting point for figuring a gain or loss when selling the home.
Significant home improvements also can be calculated into your cost basis.
How can owning a home pay off at tax time? A home provides many tax benefits, literally from the time you buy to the time you sell. The mortgage interest paid on a home loan up to $1 million for a primary residence or second home is tax deductible every year, as is the local property tax. Other mortgage costs – including late-payment charges and early-payment penalties – are also deductible.
And if you use a portion of your home for business purposes, you can take a depreciation deduction as well.
Many federal tax benefits are also available from local and state tax agencies. Contact your local tax agency for more information.
Are buyers protected against housing discrimination? By law, real estate agents may not discriminate on the basis of race, color, religion, sex, disability, familial status, or national origin. They also cannot follow spoken or implied directives from the home seller to discriminate. If you suspect you have been discriminated against, a complaint may be filed with the local Department of Housing and Urban Development (HUD) office nearest you. You may call HUD’s toll-free number, 1-800-669-9777, or visit its web site.
Can I use an agent to purchase a newly built home? Yes. In fact, some builders pay agents to find prospective buyers. But you also can use a buyer’s agent to help negotiate the price and upgrades on a new home. An agent can be particularly valuable directing you to newly built developments that match your needs, as well as helping you select reputable builders who are financially sound and respond promptly to buyers’ concerns.
Builders normally require an agent to be present on your first visit to the site. This is a sensible procedure that allows the agent to be paid a commission should you decide to buy. Otherwise, if you find a development on your own, make a first visit without the agent, and later make a purchase, the builder may refuse to pay the commission – even if, at some point, the agent became involved in the process.
What can I expect from a good real estate agent? Competence, efficiency, and ethics. According to the All America’s Real Estate Book by Carolyn Janik and Ruth Rejnis, good agents take the time to qualify buyers and show properties in their price range. They plan showing routes carefully and have pre-inspected most properties. They have a thorough knowledge of financing options, are up on the latest housing trends, and share with prospective buyers data on the local housing market and home sales.
Good agents also adhere to a strict code of ethics. They avoid high-pressure sales tactics, refrain from showing properties that do not fit your needs or goals, and alert you to problems about the condition of the property. And they show respect for other agents and real estate firms by not “bad mouthing” them.
What is the best way to find a real estate agent? Begin by asking someone that you know. Friends, relatives, co-workers, or neighbors who have recently purchased a home can give you a firsthand account and attest to the agent’s professional abilities. Sometimes an agent you contact will refer you to another one who works more closely with buyers and sellers in your neighborhood. Once you have a list of names, interview at least three agents and ask questions about their community knowledge, professional experience, and commitment – some agents work full time; others only work at nights and on the weekends.
Why do I need an agent if I can find a home by myself on the Internet? While more buyers now use the Internet to gain access to listings, or available properties for sale, it is still a good idea to use an agent. The agent brings value to the entire process: he or she is available to analyze data, answer questions, share their professional expertise, and handle all the paperwork and legwork that is involved in the real estate transaction.
What to Buy
Are condos good investments? They are a good way to enter into homeownership. The high price of single-family homes and the influx into the housing market of more single homebuyers have made condos relatively hot national investments. They have held their value as an investment despite economic downturns and problems with some associations.
Condominium associations have also worked hard in recent years to clean up their image. Disputes and lawsuits were once rampant. But now associations have become savvier about property management and have taken steps to prevent legal problems and disputes.
How do townhouses differ from condominiums? While most condominiums are apartments, a townhouse is attached to one or more houses and can run the gamut from duplexes and triplexes to communities with hundreds of homes. Buyers separately own their homes and the land on which the houses sit. With a condominium, the unit owners jointly own the land and this common interest cannot be separated from the others.
Townhouses can be structured in many ways. Some, particularly huge communities, have common areas – such as swimming pools – that are similar to condominiums.
How do you choose a good condo? Seek ownership in a well-maintained building, and pay special attention to the financial health of the condo association. Lax maintenance may be a sign of financial trouble, which could result in higher maintenance fees and problems trying to resale the property later.
Things to consider:
- Get a copy of the latest financial statement from the condo association.
- Ask the board of directors – which is elected by the unit owners from among themselves – if major repairs or improvements are imminent. If so, find out how much they will cost and whether there is enough money in the reserve to cover them.
- Check the by-laws, rules and the covenants, codes and restrictions (CC&Rs). You may find, among other things, that they prohibit or restrict pets and the renting of units. Some may require that the board have the right of first refusal on the sale of any unit.
- Learn everything you can about the homeowners association, including legal disputes and conflicts. Start by reading the minutes of the association meetings.
- Find out the owner-to-tenant ratio. Because many condominiums are often purchased as investments, there could be a high percentage of tenants in the building.
What are the pros and cons of owning a townhouse? On the plus side, exterior maintenance and repairs are minimal; there are no neighbors above or below the home like in an apartment; and because the homes are attached, they may offer a greater sense of security.
As for the disadvantages, if there is a homeowner’s association, buyers will have to pay a homeowner’s fee. There is also less privacy than with a detached single-family home. And there are limits on how you can make exterior changes to the home.
What is a condominium? Condominiums are buildings in which individuals separately own the air space inside the interior walls, floors and ceilings of their unit, but they jointly own an interest in the common areas that they share – such as the land, lobby, hallways, swimming pool, and parking lot.
In addition to paying a mortgage, each owner is responsible for paying a monthly fee to the condo association, which is made up of the unit owners. The fee covers maintenance, repairs, and building insurance.
Most housing condominiums are apartments, although there are mobile home condominiums as well.
Why buy a condo? They are an appealing way to enter the housing market if the cost of a single-family home is out of your reach. Condos are especially popular among single homebuyers, empty nesters, and first-time buyers in high-priced housing markets.
Unlike a house, condos offer a lifestyle that is free of yard work and exterior maintenance and repairs. Many condominium communities also offer amenities such as exercise rooms, tennis courts, and swimming pools that you might otherwise be unable to afford if you purchased a single-family home.
What are co-ops? Cooperative apartments – known as co-ops – are not really owned by people as real property. Instead, people own shares of stock in the company that owns the building in which they live. But for all practical purposes, the experts say owning a co-op is almost like owning real property. Personal loans to “buy” a co-op apartment are written almost like mortgages. And the IRS treats co-op owners much like real property owners. They can deduct interest paid on their apartment loans and on their portion of the municipal taxes and mortgage interest paid by the corporation.
Shareholders in a co-op are entitled to occupy specific units, use the common areas, and have a vote in the corporation. To maintain this right, they must pay a monthly fee that covers their share of operating expenses.
As for governance, a board of directors, which is elected from among the residents, runs the co-op. Under most bylaws, the board may evict any tenant/shareholder who fails to pay the monthly maintenance fee. Everyone is expected to abide by the rules, which may prohibit pets or even children under a certain age.
What are the benefits of having a co-op? In addition to being able to take advantage of tax deductions, the National Association of Housing Cooperatives (NAHC) says shareholders will find that co-ops have low turnover rates, lower real estate tax assessments, reduced maintenance costs, resident participation and control, and the ability to prevent absentee and investor ownership.
Also attractive: housing cooperatives come in all shapes, sizes, and types. They include townhouses, mid-and high-rise apartments, garden apartments, single-family homes, mobile home parks, artists’ cooperatives, and senior housing.
For more information about co-ops contact NAHC at (202) 737-0797, or log on to www.coophousing.org.
Are special tax breaks available for historic rehabilitation? Certified historic structures now enjoy a 20 percent investment tax credit for qualified rehabilitation expenses, if they are income producing properties. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district that is certified by the government. The tax code does not allow deductions for the demolition or significant alteration of a historic structure. For more information, contact the National Trust for Historic Preservation at (202) 588-6000, or visit its web site at www.nationaltrust.org.
Many states offer tax incentives, reductions and abatement programs for owners of residential historic homes. These programs are described on the National Trust’s web site.
Does the federal government offer home improvement programs?Yes. Among the most popular:
- Title 1 Home Improvement Loan. HUD insures the loan up to $25,000 for a single-family home and lenders make loans for basic livability improvements – such as additions and new roofs – to eligible borrowers.
- Section 203(k) Program. HUD helps finance the major rehabilitation and repair of one- to four-family residential properties, excluding condos. Owner-occupants may use a combination loan to purchase a fixer-upper “as is” and rehabilitate it, or refinance a property plus include in the loan the cost of making the improvements. They also may use the loan solely to finance the rehabilitation.
- VA loans. Veterans can get loans from the Department of Veterans Affairs to buy, build, or improve a home, as well as refinance an existing loan at interest rates that are usually lower than that on conventional loans.
- Rural Housing Repair and Rehabilitation Loans. Funded by the Agriculture Department, these low-rate loans are available to low-income rural residents who own and occupy a home in need of repairs. Funds are available to improve or modernize a home or to remove health and safety hazards.
How can I finance work needed on a fixer-upper? According to the Millennial Housing Commission created by Congress, few lenders are willing to administer home improvement loans. Most prefer to make home equity loans or unsecured consumer loans because they are easier to manage. Home improvement loans usually require inspections and irregular draws on the loan amount as work is completed, which requires regional or national lenders to find local partners to provide oversight.
Financing repairs and improvements with home equity is okay for most homeowners, but it is difficult for many first-time buyers. They have lower-incomes, smaller savings, and have made lower down payments on their homes than first-time buyers a decade ago. So they have little equity to borrow against. Unfortunately, it is often lower cost older homes purchased by first-time buyers that need the most work.
Unless you have a cash reserve, you will have to shop around for the best borrowing terms. In addition to the options listed above, you can ask relatives for a loan. Borrow against your whole life insurance policy. Refinance your existing mortgage. Get a second mortgage. Contact the government about home improvement programs. And – only as a last resort – borrow from a finance agency, which generally tend to charge high rates.
How do I determine the value of a distressed property? One of the best ways is to get your hands on a comparable market analyses. See what price similar properties have sold for in the past and find out the listing price of others currently on the market.
It is important to examine the fixer-upper carefully and figure out how much it will cost to fix any defects or repairs. If you are unable to get in, talk with nearby neighbors about the home’s condition.
You can also do your own cost comparison by researching comparable properties recorded at the local county recorder’s and assessor’s offices, or at Internet sites specializing in property records. If the property is in foreclosure, you should get as much information as possible from the lender.
Is buying one a good idea in “bad” areas? It depends. So-called “bad” areas – often described as those that are residentially unstable or poor – have offered an affordable means of homeownership for many – particularly young, first-time buyers and low- to moderate-income families interested in a home they can call their own. Whether it is right for you to buy a fixer-upper will depend on your personal threshold for risk and your level of tolerance. That said, however, many run-down neighborhoods, particularly those close to downtown, are benefiting from a residential resurgence as an influx of newcomers jump-start what were once staid, unsafe, or depressed areas.
What about state and local governments? Just about every state now offers loans for renovation and rehabilitation at below-market interest rates through its Housing Finance Agency or a similar agency. Call your governor’s office to get the name and phone number of the agency in your area.
At the municipal level, many cities also have programs for special improvements to certain blocks and neighborhoods they are trying to spruce up. Call City Hall, as well as a Community Development Agency in your city.
What guidelines should I use to find a contractor? Chances are you will need plenty of help making those major repairs and additions. But the last thing you will need is someone who fails to complete the job or botches it up. Finding good, responsible help is imperative.
Here’s what you can do:
- Avoid the Yellow Pages. Check with family, friends, neighbors and co-workers for recommendations.
- Deal only with licensed contractors. The state licensing board and local Better Business Bureau also can tell you if there are any outstanding complaints against the license holder.
- Interview each contractor, request free estimates, if possible, and ask for recent references.
- Ask for proof of worker’s compensation insurance and get policy and insurance company phone numbers so you can verify the information. If the contractor is not covered, you could be liable for any work-related injury that takes place during the project. Also check to make sure the contractor has an umbrella general liability policy.
- Never hand over a deposit at the first meeting – you could end up losing your money.
What kind of return can I expect from home improvements? This will vary depending on the type of work that is done. Remodeling magazine publishes an annual “Cost vs. Value Report” that can answer this question in more detail, based on the top 15 home improvements. A recent study it conducted says the highest remodeling paybacks have come from siding and window replacements, major kitchen remodeling, bathroom and family room additions, and mid-range master bedroom suites.
An important point to remember is that remodeling not only improves a home’s livability, it also enhances its curb appeal with future buyers.
Where can you find fixer-uppers? They are literally everywhere, even in wealthy enclaves. What sets them apart is price. They have lower market value than other houses in the immediate area because they have either been poorly maintained or abandoned.
To determine if a property that interests you is a wise investment will require a lot of work. You will need to figure out what the average home in the area sells for, as well as the cost of the most desirable ones.
Experts suggest that novices avoid run-down properties needing extensive work. Instead, they recommend starting with a property that only needs minor cosmetic work – one that can be completely refurbished with paint, wallpaper, new floor and window coverings, landscaping, and new appliances.
Also, keep in mind that a home price that looks too good to be true probably is. Find out why before pouring your hard-earned money into it.
When looking for a fixer-upper, some experts suggest you follow this basis strategy: find the least desirable home in the most desirable neighborhood. Then decide if the expense that is needed to repair the property is within your budget.
How do I find government-repossessed properties? The Department of Housing and Urban Development (HUD) acquires properties from lenders who foreclose on mortgages that it insures. These properties are then available for sale to potential homeowner-occupants and investors only through a licensed real estate broker. HUD will pay the broker’s commission up to 6 percent of the sales price.
The Department of Veterans Affairs (VA) also acquires properties as a result of foreclosures on VA guaranteed loans. These acquired properties are marketed through a property management services contract with a federal bank that then lists them for sale with local real estate agents. [/expand
What about guidelines for VA foreclosures? If you have the cash or can qualify for a mortgage, you can buy a HUD home. Down payments vary depending on whether the property is eligible for FHA insurance. If so, the down payment can be lower than the 5 to 20 percent required on conventional loans.
HUD requires that all accepted offers be accompanied by an earnest money deposit equal to 5 percent of the bid price, not to exceed $2,000, but not less than $500.
Foreclosure properties are sold “as is,” meaning limited repairs have been made but no structural or mechanical warranties are implied. If a HUD home needs to be fixed – and not all of them do – it can still be a bargain. HUD adjusts the asking price to reflect the fact that the buyer will have to invest money to make improvements. The agency also might offer special incentives such as an allowance to upgrade the property or a bonus for closing the sale early. And buyers can request that HUD pay all or a portion of the financing and closing costs. Contact your real estate agent for more details.
To learn more about HUD foreclosures, visit their web site at www.hud.gov.
What are the disadvantages of buying foreclosures? Buying directly at a legal foreclosure sale is risky. Among the disadvantages:
- There is no financing. You need cash and lots of it.
- The title needs to be checked before the purchase. If not, you risk assuming a seriously deficient title.
- It may not be possible to inspect the property’s interior before the sale. So you have no idea of the property’s condition.
- Foreclosures are routinely purchased “as is,” which means you cannot go back to the seller for repairs.
- Also, estate and foreclosure sales are the only property sales that are exempt from some state disclosure laws. In both instances, the law protects the seller – usually the heir or financial institution – who has recently acquired the property through adverse circumstances and may have little or no direct information about it.
What causes a foreclosure? A lender decides to foreclosure, or repossess, a property when the owner fails to pay the mortgage. Unfortunately, thousands of homes end up in foreclosure every year.
Many people lose their homes due to job loss, credit problems, divorce, unexpected expenses, and during periods of economic instability.
Failure to pay property taxes may also cause a homeowner to lose his home. Trouble can also arise when owners neglect to pay local water bills and home insurance premiums.
What happens at a trustee sale? When a homeowner falls behind on three payments, the bank will record a notice of default against the property. When the owner fails to pay up, a trustee sale is held, and the property is sold to the highest bidder. The lender that initiated the foreclosure proceedings will usually set the bid price at the loan amount. Successful bidders receive a trustee’s deed as proof of ownership.
Trustee sales are advertised in advance and require all-cash bids, which can include cashiers’ checks. Normally, a sheriff, constable, or lawyer conducts the sale and acts as the trustee. Because these sales typically attract savvy investors, inexperienced buyers should come extremely prepared.
Where can I find foreclosure properties? Look in the legal notices section of your local newspaper. A notice is also usually posted on the property itself and somewhere in the city where the sale will take place.
However, real estate agents are the best source for information about foreclosures before they begin. Often a property will be listed and the agent will know if it is approaching foreclosure. Perhaps the best way to get the information is to have your agent put the word out that you are looking for properties with pending foreclosures.
Another source can be the bank or financial institution that holds the mortgage. Of course, they generally will not give you the names of those who are facing foreclosure, but they may give the property owner your card or phone number.
Buying foreclosures is not easy. Savvy investors are highly skilled at nabbing these properties. Inexperienced buyers may find themselves surrounded by pretty stiff competition. They will need to get as much information as possible, including a “foreclosure inspection report” and an appraisal from the lender.
Can you negotiate the price of a new home? In real estate, almost everything is negotiable, so it is certainly worth a try. Now, this does not mean the builder will fall down and roll over. It is very common for builders to claim that their prices are based on fixed construction costs. Perhaps, but timing is everything.
A builder is more likely to be flexible on price at the very beginning and end of a project. Early on, most developers want to move people in quickly so the project builds momentum. In the end, they may be more inclined to accept lower offers when only a few units are left.
If you are unable to negotiate on price, negotiate for a better lot location or amenities, such as a carpet upgrade or light fixtures. A developer will rarely pass up a deal over a few hundred dollars’ worth of carpeting.
Do builders provide financing? Many builders offer financing incentives to help move more buyers into a project. In fact, major building companies often have their own mortgage brokerage subsidiaries, while many other builders routinely refer buyers to “preferred” local lenders. If it is a buyer’s market in your area, you can be sure developers will offer incentives such as low-down-payment financing or interest rate subsidies.
Should I buy a vacation home? The second home market has more ebbs and flows than the primary home market. Sales are iffy in a bad economy except, perhaps, on the high-end. That said, there is a growing trend toward the purchase of vacation homes. They are being bought for investment purposes, enjoyment, and/or retirement. In the latter instance, some people are buying with the idea of turning a vacation home into a permanent retirement haven down the road, a move that puts them ahead of the game now.
Some of the tax benefits mirror those for a primary residence. Mortgage interest and property taxes are deductible, which helps to offset the cost of the home payment. And if you treat your second home as a rental property, you can fully depreciate it as well. But you are only allowed to occupy it for two weeks a year, or 10 percent of the total rented time, whichever is less.
Before taking the leap, ask yourself if you can afford to carry two mortgages, maintain two households, and pay the extra utilities and maintenance costs. Also, learn about financing requirements and options, which can differ slightly from those on a primary residence.
Should I hire a home inspector for a new home? You would think not since it is new and the developer has to adhere to local construction guidelines. However, err on the side of caution – always hire an inspector, whether the home is old or new.
You can ask the builder to provide copies of any inspection reports on the property, architectural plans, surveys and pertinent construction documents for your inspector to review.
The inspector should either be a professional home inspector, an engineer, an architect or a contractor. When hiring a professional inspector, look for one who belongs to a home inspection trade organization, such as the American Society of Home Inspectors (ASHI).
This group has developed formal inspection guidelines and a professional code of ethics for its members. Membership in ASHI is not automatic. Proven field experience and technical knowledge about structures and their various systems and appliances are required.
As for rates, they vary greatly. Many inspectors charge about $400, but costs increase based on the scope of the inspection.
What about a vacation home as an investment? Like any investment, it can be risky. Location and current market conditions are extremely important when deciding whether to buy.
Other things to consider:
- Will you be able to afford repairs, maintenance, insurance, and utilities?
- What about fees to pay agents who rent the property for you?
- If you live several miles away from your vacation home, who will clean up between tenants and take an inventory of household items once the tenants leave?
- What if you are unable to rent your second home? Can your pocketbook withstand the strain of paying the mortgage?
What else should I take into account when buying a new home? You can find out more about an existing property and neighborhood before you buy than you can a new home in a newly developed community.
When the home is on the outskirts of town, ask the developer about future access to public transit, entertainment venues, shopping centers, churches, and schools. Also review local zoning ordinances. A remote area can quickly turn into a fast food haven.
You want to ensure the neighborhood will not spiral out of control and lose its residential appeal.
Other things to consider:
- Ask homeowners already living in a development about the builder. If none currently live there, find out where the builder has previously built and speak to those owners to find out if the builder followed through on promises and needed repairs.
- Ability to make changes. Most homes in a development resemble each other. But the developer may impose restrictions on house color, landscaping, renovations, and other items that a homeowner may want to alter.
- Do not buy into the glamorous images created by marketing experts. Form your own opinions about a property and only buy where you feel comfortable. After all, you are the one who will be living there.
Many terms in real estate are universal throughout the nation. For example “title insurance,” which protects your property against hidden liens or potential ownership issues, always means “title insurance.” However, words describing or relating to the same thing often differ considerably in various parts of the country. For example, “closing” in one area is sometimes called a “settlement” or “escrow” in another.
The Home Closing 101 Real Estate Glossary provides simple definitions for some of the most common terms you can expect to hear during the closing process. (For more information go to www.HomeClosing101.org)
This glossary is not exhaustive and may not be 100 percent accurate in all jurisdictions. These definitions are for general purposes only and should not be used for legal purposes. Please consult with your local title company, real estate agent or lender to see if these terms apply in your area.
ABSTRACT – An abbreviation of the cardinal aspects of all recorded deeds, mortgages, leases and other instruments affecting the title to a particular piece of land.
ABSTRACTING – The process of making and compiling an abstract.
ABSTRACTER – The person or company engaged in making abstracts.
ADVERSE POSSESSION – The unauthorized occupation of land belonging to another, by a person who does not have the consent of the owner. Said occupier is said to hold possession adversely to the rights and interests of the owner. In most states, by operation of law, title to the land becomes vested in such occupier after a fixed number of years of peaceful occupancy.
ALL-INCLUSIVE RATE – This is a rate that includes the insurance premium, and at least some part of the cost of the title search, examination and the cost of conducting the closing/settlement.
ALTA – American Land Title Association, the national trade association for the title insurance industry. ALTA member companies include businesses that conduct your closing and issue you an Owner’s Policy of Title Insurance.
AMORTIZATION – This term has developed through French and Old English from the Latin words “mors” or “mort” meaning death or dead. It is the killing off of an existing debt by regular partial payments. The word “mortgage” is also derived from the same Latin root.
APR – Annual Percentage Rate. The yearly interest percentage of a loan as expressed by the actual rate of interest paid.
APPRAISAL – An estimate of value of property from analysis of facts about the property; an opinion of value.
ATTORNEY’S OPINION – The written statement of an attorney setting forth what he believes to be the condition of a real estate title.
BASIC RATE – When referring to title insurance, the basic rate is the rate charged to a consumer who does not qualify for a reduced rate.
BROKER – One who acts as an agent for another in negotiating sales or purchases in return for a fee or commission.
BROKERAGE – A fee or commission paid to a broker.
CERTIFICATE OF TITLE – In areas where attorneys examine abstracts or chains of title, a written opinion, executed by the examining attorney stating that title is vested as stated in the abstract.
CHAIN OF TITLE – Beginning with a conveyance out of an original source of title such as a government, each succeeding deed, will or other medium which conveys and transfers the title to succeeding owners constitutes a link in the chain of title. The chain of title is the composite of all such links.
CLAIM – A right to assert, or the assertion of, a demand for payment of money due; or the surrender or delivery of possession of property or the recognition or some right. A demand for something as one’s rightful due.
CLOSING – In some areas called a “settlement.” The process of completing a real estate transaction during which deeds, mortgages, leases and other required instruments are signed and/or delivered, an accounting between the parties is made, the money is disbursed, the papers are recorded, and all other details such as payment of outstanding liens and transfer of hazard insurance policies are attended to.
CLOSING DISCLOSURE – The five-page Closing Disclosure must be provided to the consumer three business days before they close on the loan. The Closing Disclosure details all of the costs associated with their mortgage transaction.
CLOSING STATEMENT – A summation, in the form of a balance sheet, made at a closing, showing the amounts of debits and credits to which each party to a real estate transaction is entitled.
CLOUD ON TITLE – An irregularity, possible claim, or encumbrance which, if valid, would affect or impair the title.
COMMISSION – The amount due a real estate broker, mortgage loan broker or real estate professional for services performed in such capacity.
CONDITIONS – This refers to provisions in deeds and other real estate instruments that make a particular right contingent upon the occurrence of some future event.
CONSUMMATION – Consummation is not the same thing as closing or settlement. Consummation occurs when the consumer becomes contractually obligated to the creditor on the loan, not, for example, when the consumer becomes contractually obligated to a seller on a real estate transaction.
CONTRACT – Same as “agreement,” but usually more formal.
COVENANT – A formal agreement or contract between two parties in which one party gives the other certain promises and assurances, such as covenants of warranty in a warranty deed.
DEED – A written document by which title to real estate is conveyed from one party to another.
DEED BOOK – A book among the public records in which deeds are recorded.
DEFAULT – Failure to perform a promised task or to pay an obligation when due.
DEFECT – A blemish, imperfection or deficiency. A defective title is one that is irregular and faulty.
DEPRECIATION – Loss in value occasioned by ordinary wear and tear, destructive action of the elements, or functional or economic obsolescence.
EARNEST MONEY – Down payment or a small part of the purchase price made by a purchaser as evidence of good faith.
EASEMENT – A right held by a person to enjoy or make limited use of another’s real property.
EGRESS – The right to a path or right-of-way over that a person may leave or go away from his own real estate.
EJECTMENT – (1) Eviction or dispossession. (2) A law suit to regain possession of real estate held by another.
EMINENT DOMAIN – The right of a government to take privately owned property for public purposes under condemnation proceedings upon payment of its reasonable value.
ENCROACHMENT – The extension of a structure from the real estate to which it belongs across a boundary line and onto adjoining property.
ENCUMBRANCE – A claim, right or lien upon the title to real estate, held by someone other than the real estate owner.
ENDORSEMENT – Addition to or modification of a title insurance policy that expands or changes coverage of the policy, fulfilling specific requirements of the insured.
ESCROW – Technically, this term strictly refers to a deed delivered to a third person to be held by him until the fulfillment or performance of some act or condition by the grantee. In the title industry, it means the depositing with an impartial third party (typically an escrow agent or title company) of anything pertaining to a real estate transaction including money and documents of all kinds. The money and documents are to be disbursed and delivered to the rightful parties by the escrow agent or title company when all conditions of the transaction have been met.
ESCROW AGREEMENT – A written agreement usually made between buyer, seller and escrow agent, but sometimes only between one person and the escrow agent. It sets forth the conditions to be performed incident to the object deposited in escrow, and gives the escrow agent instructions with respect to the disposition of the object so deposited.
ESTATE – (1) A sizable piece of rural land usually with a large house and other pretentious improvements. (2) The whole of one’s possessions, especially all of the property, assets, debts, and liabilities left by a deceased or bankrupt person. (3) The nature and extent of an owner’s rights in real estate.
EXAMINATION – In title industry terms, to peruse and study the instruments in a chain of title and to determine their effect and condition in order to reach a conclusion as to the status of the title.
EXAMINER – Usually referred to, in title industry terms, as title examiner. One who examines and determines the condition and status of real estate titles.
EXCEPTIONS – Insurance policies include a list of items excluded from coverage. Items excluded from coverage can be found in section two of Schedule B of the policy.
FEE SIMPLE – The highest degree of ownership that a person can have in real estate. An interest in real estate that gives the owner unqualified ownership and full power of disposition.
FIRST MORTGAGE – A mortgage having priority as a lien over any other mortgage or lien on the same property.
FORECLOSURE – A legal proceeding for the collection of real estate mortgages and other types of liens on real estate, which results in cutting off the right to redeem the mortgaged property and usually involves a judicial sale of the property to pay the mortgage debt.
GENERAL WARRANTY – A warranty provision in a deed or mortgage or other real estate instrument containing all of the common law items of warranty. Also known as a full warranty.
HAZARD INSURANCE – Real estate insurance protecting against fire, some natural causes, vandalism, etc., depending upon the policy. The buyer often adds liability insurance and extended coverage for personal property.
HEIR – A person who inherits or who is entitled to inherit real estate by provisions of law or under the provisions of a will.
INGRESS – The right or permission to enter; also the means or place of entry such as a right-of-way across adjoining land.
INTESTATE – Dying without leaving a legal will.
JOINT TENANTS – Two or more persons who hold title to real estate jointly, with equal rights to share in its enjoyment during their respective lives with the provision that upon the death of a joint tenant, his share in the property passes to the surviving tenants, and so on, until the full title is vested in the last survivor. A joint tenant cannot legally sell or encumber his interest without the consent or joinder of all of the other joint tenants.
JUDGMENT – A conclusion or determination by a court of law usually awarding the payment of money or relief of some kind to one of the parties to a lawsuit.
LEASE – An agreement granting the use or occupancy of land during a specified period in exchange for rent.
LIEN – The liability of real estate as security for payment of a debt. Such liability may be created by contract, such as a mortgage, or by operation of law, such as a mechanics lien.
LIS PENDENS – A pending lawsuit. A lis pendens notice is legal notice to the world that a lawsuit is pending.
LOAN ESTIMATE – A three-page Loan Estimate must be provided to the consumers no later than three business days after they submit a loan application for most mortgages. The Loan Estimate provides information about key features, costs and risks of the mortgage loan for which the consumer is applying.
LOAN POLICY – A policy of title insurance issued to the mortgage lender insuring against loss by defects in, liens against, or unmarketability of title.
MARKETABLE TITLE – A title that a court of equity considers to be so free of material defects and liens that it will force the title’s acceptance by questioning purchaser. Also known as a merchantable title.
MARKET VALUE – An average between the highest price that a buyer, willing but not compelled to buy, would pay and the lowest price a seller, willing, but not compelled to sell, would accept.
MECHANIC’S LIEN – A lien on real estate, created by operation of law, which secures the payment of debts due to persons who perform labor or services or furnish materials incident to the construction of buildings and improvements on the real estate.
METES AND BOUNDS – Describing boundaries by using courses, directions, distances and monuments.
MORTGAGE – A temporary conditional pledge of property to a creditor as security for the payment of a debt that may be cancelled by payment.
OPINION – In title industry terms, referred to as title opinion. The conclusion and judgment of a skilled person as to the status of a title, based upon a title examination.
OWNER’S POLICY – This policy is purchased for a one-time fee and protects a homeowner’s investment in a property for as long as they or their heirs have an interest in the property. Only an owner’s policy protects the buyer should a covered title problem arise with the title that was not found during the title search. Possible hidden title problems can include errors or omissions in deeds, mistakes in examining records, forgery and undisclosed heirs.
POWER OF ATTORNEY – A legal instrument authorizing one to act as another’s agent or attorney.
PRELIMINARY TITLE REPORT – A report prepared prior to issuing a title insurance policy that shows the ownership of a specific parcel of land. It includes information about liens and encumbrances that will not be covered under a title insurance policy.
PREMIUM – The amount payable for an insurance policy.
PROBATE – A legal procedure in which the validity and probity of a document, such as a will, is proven.
PROMISSORY NOTE – A written promise to pay or repay a specified sum of money at a stated time, or on demand, to a named person. In addition to the payment of principal, a promissory note usually provides for the payment of interest.
PUBLIC RECORDS – The transcriptions in a recorder’s office of instruments that have been recorded, including the indexes pertaining to them.
QUIET TITLE SUIT – A lawsuit brought by an owner of real estate for the purpose of cancelling, wiping out, and putting a quietus upon supposedly immaterial, inconsequential, and unenforceable claims and interests that cloud the owner’s title.
QUIT CLAIM DEED – A deed that does not imply the grantor holds title, but which surrenders and gives to the grantee any possible interest or rights that the grantor may have in the property.
REALTOR – A copyrighted trade name that can be legally used only by those belonging to the National Association of Realtors.
RECORD TITLE – The aspects of a title that appear in the public records as distinguished from unrecorded title aspects and interests.
REFINANCE RATE – When referring to title insurance, the refinance rate is the reduced rate for a loan policy issued on the new loan in a refinance transaction, in which the original loan was previously insured within some period of years.
REISSUE RATE – When referring to title insurance, the reissue rate is the reduced rate for an Owner’s Policy of title insurance issued on a property that was previously insured within some period of years. In some states, the term is also used for a refinance rate.
RIGHT OF WAY – (1) The right to pass over property owned by another, usually based upon an easement. (2) A path or thoroughfare over which passage is made. (3) A strip of land over which facilities such as highways, railroads, or power lines are built.
RIPARIAN RIGHTS – The many rights of a person in, to, and over the banks, bed, shallows, shore, and water of a stream or body of water upon which his land borders.
RISK RATE – When referring to title insurance, the risk rate is a rate that does not include the cost of researching the title or the cost of conducting the closing.
SEARCH – A careful exploration and inspection of the public records in an effort to find all recorded instruments relating to a particular chain of title.
SECOND MORTGAGE – A mortgage ranking in priority immediately below a first mortgage.
SETTLEMENT – In some areas called a “closing.” The process of completing a real estate transaction during which deeds, mortgages, leases and other required instruments are signed and/or delivered, an accounting between the parties is made, the money is disbursed, the papers are recorded, and all other details such as payment of outstanding liens and transfer of hazard insurance policies are attended to.
SIMULTANEOUS ISSUE RATE – When referring to title insurance, the simultaneous issue rate is the reduced rate for a loan policy or owner’s policy issued on the same property or loan at the same time as another policy. The term usually refers to a loan policy issued at the same time as an owner’s policy when a property is purchased.
SPECIAL WARRANTY DEED – A deed that warrants the title only with respect to acts of the seller and the interests of anyone claiming by, through, or under him.
SUBDIVISION – An area of land divided into lots, blocks and building sites, and in which public facilities are laid out, such as streets, alleys, parks and easements for public utilities.
SURVEY – (1) To determine the location, boundaries, area, or the elevations of land and structures upon the earth’s surface by means of courses in relation to the North Star, and the measuring of angles and distances by using the techniques of geometry and trigonometry. (2) The map or plat drawn by a surveyor that represents the property surveyed and shows the results of a survey.
TAX LIEN – The lien that is imposed upon real estate by operation of law that secures the payment of real estate taxes.
TENANCY BY ENTIRETIES – An estate or interest in real estate predicated upon the legal fiction that a husband and wife are one person. A conveyance or devise to them (unless contrary intent is expressed) vests title in them as one person. Upon the death of either husband or wife, full title passes to the survivor.
TENANT – (1) Usually one who holds possession of real estate under a lease. (2) In a broader sense, one who holds or possesses lands and tenements by any kind of title.
TENANTS IN COMMON – Two or more persons in whom title to a single piece of real estate is vested in such a manner that they have a common or equal right to possession and enjoyment of the property, but each holds a separate individual interest or estate in the property. Each owner may sell or encumber his respective interest or dispose of it by will, and if he dies without leaving a will, his heirs inherit his undivided interest.
THIRD PARTY – A term usually applied to persons who are not principal parties to a contract or other instrument, but who have some right, interest or duty that such contract or instrument affects. For example, where a sale contract between buyer and seller of real estate provides that the money and documents involved in the transaction will be deposited with a title company pending the closing of the deal, the title company becomes a third party to the transaction.
TITLE – (1) A combination of all the elements that constitute the highest legal right to own, possess, use, control, enjoy, and dispose of real estate or an inheritable right or interest therein. (2) The rights of ownership recognized and protected by the law.
TITLE COMMITMENT – An offer to issue a title insurance policy. The title commitment will describe the various conditions, exclusions and exceptions that will apply to that particular policy.
TITLE COVENANTS – Covenants ordinarily inserted in conveyances and in transfers of title to real estate for the purpose of giving protection to the purchaser against possible insufficiency of the title received. A group of such covenants known as “common law covenants” includes: (a) covenants against encumbrances; (b) covenant for further assurance (in other words, to do whatever is necessary to rectify title deficiencies); (c) covenant of good right and authority to convey; (d) covenant of quiet enjoyment; (e) covenant of seisin; (f) covenant of warranty.
TITLE DEFECT – (1) Any possible or patent claim or right outstanding in a chain of title that is adverse to the claim of ownership. (2) Any material irregularity in the execution or effect of an instrument in the chain of title.
TITLE EXAMINATION – To peruse and study the instruments in a chain of title and to determine their effect and condition in order to reach a conclusion as to the status of the title.
TITLE INSURANCE – Is insurance that protects purchasers of real estate and mortgages against loss from defective titles, liens and encumbrances.
TITLE PLANT – (1) In many areas, synonymous with abstract plant. (2) A geographically filed assemblage of title information which is to help in expediting title examinations, such as copies of previous attorneys’ opinions, abstracts, tax searches, and copies or take-offs of the public records.
TITLE SEARCH – A search and perusal of the public records for recorded instruments that affect the title to a particular piece of land. (See also Abstract and Examination.)
TITLE SEARCHER – One who searches titles.
UNDERWRITER – An insurance company that issues insurance policies either to the public or to another insurer.
VESTING – How ownership of title is taken. Common methods of holding title include sole ownership (such as a single man or woman) or co-ownership (such as community property, community property with right of survivorship, joint tenancy or tenancy in common). How title is vested has important legal consequences and tax consequences. The tax consequences may be different for same sex legally related couples. You may wish to consult an attorney or tax advisor to determine the most advantageous form of ownership for your particular situation.
WAIVER – The voluntary and intentional relinquishment of a known right, claim or privilege.
WARRANTY DEED – A deed containing one or more title covenants. (See Title Covenants.)