Negotiating an offer

Let’s look into the offer process from a negotiating standpoint to see how Buyers can improve their offering skills.

I believe in making offers. I believe the only way a Buyer and a Seller can get to the “nuts and bolts,” of the purchase/sale of a house is through the offer process. Too often the Buyers delay on this most important tool. When you make an offer in New York, it doesn’t commit you to anything. You’re not legally obligated to complete the transaction until you sign the contract. Up until that moment—I have always advised—Buyers should use the offer as a negotiating tool.

On the other side of the table, Sellers could behave better with offers, too. Problem is, the Buyer has no way of knowing what’s going on with the Seller in regards to an offer because there is a “middleman:” the Realtor.

Let’s look into the offer process from a negotiating standpoint to see how Buyers can improve their offering skills.

1. Make offers early and often. If you see the house Thursday evening and you “kind of-sort of-maybe-possibly” like it, make an offer anyway. This will give you some time to change your mind. The offer doesn’t commit you to buy the house (more on that below).
2. A NYS Licensed real estate agent must present all offers. The agent can’t say things like, “Oh, no, I can’t possibly present that offer, it’s too low,” or, “The Seller will never accept this,” or, “You’re going to have to come up some more in price for me to present your offer.” The fact is, even if you offer $1.00 for a house, the agent must present your offer. Mind you, the offer won’t be accepted, but still it must be presented.
3. Make offers in writing. Yes, I know the offering form says, “This is a Legal Document. You should consult an attorney before signing.” I know it says that. But the legality of the document has all to do with the real estate agent protecting a potentially earned commission from the Seller and nothing to do with binding the Buyer to the purchase transaction. You can sign 32 offer forms for 32 different houses on a Sunday afternoon and you don’t have to go through with a single one of those purchases until you sign the contract.
4. Be prepared to act quickly after you make your offer. There are two ways to move. First action is away from the house if they don’t accept your offer and you really don’t think you’re willing to pay more than you offered. The second action is to offer more than your opening bid. If the Seller counter-offers, have your backup or next-step-price ready to go. You can choose to meet the Seller’s counter offer or raise your bid somewhere in between your open and their counter.

This backup plan is very important and requires your careful consideration, to wit:

5. Set a Maximum Price you’re willing to pay. What you want to do is realize the maximum price you are willing to pay for a house. That shouldn’t mean it’s your opening bid. This is the price you set and negotiate towards. DON’T COMPROMISE ON YOUR MAXIMUM! If you are getting tossed around in a bidding joust with the Seller, the transaction can get you heated and emotional. That’s the worst time for a Buyer to make pricing decisions. You must have a maximum number in advance (before you present your opening bid) and adhere to that price. This will help you remove as much emotion as possible from the negotiating process (you can’t eradicate emotion: it’s what homebuying is all about, but you can control it!).

6. Timing is everything. No, you don’t want to appear too eager. Yes, you want to appear enthusiastic, prepared, and paint the portrait of the best possible buyer for that house. You’re better than all those other Buyers! Yes, you KNOW you are!

When the Seller counters you have to decide how long you will wait before increasing your offer. If you are the diligent buyer who shows up on time for the appointment, returns the Realtor’s calls in a timely manner, and has your prequalification letter lined up, then you can be sure you look pretty good in the eyes of the Realtor and the Seller. Remember that as you consider how long before you raise your offer.

7. Walk away. Harvey Mackay in his book, “How To Swim With The Sharks Without Being Eaten Alive,” says, “Lesson 24: The Single Most Powerful Tool For Winning A Negotiation Is The Ability To Walk Away…” This is so difficult to do when you’re negotiating on a house. The homebuying experience is so emotional that a Buyer gets wrapped up in the momentum of buying the house. That emotion makes it really tough to walk away when you have to.

Harvey goes on, “…walking away from the table is not just for when you don’t want to deal. Sometimes it’s the only way you can make the deal you want. If you have to have a deal, then all the other side needs to do to win the negotiation is to outwait you.”

I can’t emphasize enough how important this tool is for a Buyer. It works. It gets results. I know because my clients do it and we have seen the results time and again.

Closing Costs in NY: Arrrgghh!!!

Closing costs, expensive as they are, are a “fact of life” when financing a home in New York.

Yes, it’s a teeth-grinding, heartburn-inducing, stomach-churning experience buying a house in NY with closing costs being so high.

I am not going to go into the long winded and detailed explanation of the breakdown of closing costs. That’s for another time. I really want to express for you the reality of what the closing costs are: HIGH.

(NOTE: I am referring here to the purchase of houses and condominiums, NOT Co-OPs)

First, the average closing costs total out to about 4.5%-6% of the mortgage amount. On a $400,000 loan, that’s $18,000 to $24,000. WHOA! That’s an awful lot of money. I came to realize a long time ago how difficult it must be for the average New Yorker to save up the money for a downpayment on a house, only to later learn they would need all this extra money for the closing costs. That’s why I have always helped my clients obtain financing high enough to allow the minimum down payment (or recently NO downpayment). In this way, the money they’ve saved up is used for the closing costs.

In New Jersey and Connecticut, closing costs are half of the norm here in New York.

I don’t know why that is, or why the costs are so danged high here in NY. I just know that’s the way it is. If you are getting ready to get out there and shop for a house: get used to this idea. It’s painful, I know, but it is what it is.

Next, let’s talk about disclosure. Federal regulations require disclosure of closing costs to the borrower. We Lenders have to send you an estimate of your closing costs as soon as you make your loan application. The problem is these estimates, being estimates, are subject to the discretion of the party preparing them.

Without complicating the issue, let’s just say that it is entirely possible you could receive an estimate of closing costs that is woefully short. Even if the costs disclosed to you are substantially short of what you actually pay, it’s perfectly fine.

At my office, the company prepares the most accurate estimate possible.

For my part, I have ALWAYS given my clients the ugly numbers right from the get-go. I hate surprises and I want my clients to know well in advance how much money they’ll need. My estimates include things that aren’t even listed on the standard Good Faith Estimate: Purchaser’s attorney; adjustments to the Seller for taxes, water, fuel; the “tip” to the title closer, even!

My estimates are usually within less than $1000 of the final cost to my clients.

Finally, beware of “NO CLOSING COST” advertising come-ons. Unless the loan is a Home Equity second mortgage, the borrower has to pay closing costs. This cute advertising gimmick could be perfectly truthful and mean any number of things. Without breaking them down, understand that you will pay closing costs one way or another.

Closing costs, expensive as they are, are a “fact of life” when financing a home in New York.

How To Buy a Home: Preparing to go “out there”

Getting prequalified helps you make better decisions about the house and the Realtor you choose to work with to buy that first house.

Before you go out into the field to search for your home, before you make a phone call to a real estate office or a Craigslist ad, know your mortgage qualifications. To my mind, not preparing in this way is a recipe for disaster.

1. You can make better decisions. When you are prequalified you know your “limits.” This helps you decide if a house is right for you based on monthly payment. Just because it has sufficient bedrooms for your needs, the two car garage and the fireplace you desire, doesn’t mean it’s the right house for you.

If you can’t afford it, you can’t buy it.

Your mortgage professional should be guiding you in advance by providing benchmarks to help you determine the monthly payment on a house. Better still, your mortgage person should be available to answer questions and calculate monthly payments when you’re most likely to be out and about: evenings and weekends. My clients know they can call me while they’re standing in the kitchen of a prospective house to ask me to run the monthly payment/downpayment figures.

When you are prequalified you know how much cash you will need to buy a particular house: both for the downpayment and closing costs and for the monthly payment. If you find the “right” house, and you know your financing information, you will be certain it is the house you can buy.

2. Experienced Realtors will work with you. It’s true you can call forty-seven different real estate offices, speak to twenty-three different real estate agents and make appointments to see twelve houses next Saturday. That’s easy to do.

Consider how much of your time you might be wasting making those appointments if you’re not qualified.

You’ll look at houses that you’re not qualified to buy. You’ll fall in love with the huge living rooms and the formal dining room and the finished basement. Then, two weeks later you’ll discover you’re not qualified for the loan to buy that house. How discouraging will that be? That’s huge! You might not even want to go out and look at homes again! A letdown like that can really ruin your day and make this homebuying experience more difficult and heartbreaking than it needs to be.

Inexperienced real estate agents probably won’t even ask you if you’re prequalified. The agent is happy to have a customer. If you’re not prequalified you’ll waste your time and the agent’s time.

An experienced agent won’t make any appointments if you’re not prequalified.

Don’t take it personally, in fact, you should mark it as a sign of professionalism. Further, that’s an agent you WANT to work with! That’s the sign of an experienced agent who will listen carefully to your requirements of the house you wish to buy. This agent won’t waste your time showing you homes that you’re not the least bit interested in. How do you know this? Because she has already demonstrated her unwillingness to waste your time.

This is an agent who wants to spend her time carefully. She wants to sell you a home and earn a living!

When you are prequalfied and you call real estate offices, this is the kind of agent you need to speak with. Use your mortgage prequalification as a test. If an agent doesn’t ask you that most important question, “Have you been prequalified?” hang up the phone. Your time is too precious to waste; this is the biggest purchase of your life! Buying your first home is too important to you and your family to waste time dealing with inexperienced agents.

It is not only the home-searching which can be frustrating when you work with inexperienced agents. There’s so much more that’s invovled in buying a home, and so many things that can go wrong. Experienced agents watch out for problems from the beginning.

Ask yourself, “Do I want to spin my wheels working on a home purchase that might never actually happen?” Just because you found the house, agreed on the price, and had a good engineer’s report doesn’t guarantee you’re getting the keys to the house. What happens if the agent calls you up one day and says, “Oh, I have some news. The Seller can’t close for another three months because their house down in Florida isn’t ready yet.” WHAT?

An experienced agent would have asked these questions from the get-go. Why? She doesn’t want to waste her time!

So, before you make that call to a real estate office, get prequalified for mortgage financing. Getting prequalified helps you make better decisions about the house and the Realtor you choose to work with to buy your first home.

Co-Op Loans: Yes and No

Co-Op loans can be difficult to deal with and many good, experienced mortgage pro’s don’t want to touch them.

I just had the most interesting conversation with an account executive at a national wholesale Cooperative loan bank. I’m working on creating a relationship with them so that my company can sell loans directly to them. This is how mortgage banking works: we process and underwrite the loan, close it in our name, then sell the loan into the secondary market.

In this case, I’m looking to expand the options available to my clients for Co-Op loans. The company I spoke with today offers Co-Op loans with 5% downpayment, which is unheard of in the business.

In any event, the young woman doesn’t know me from Adam. When I finished introducing myself and the explaining the purpose of my call, she responded rather oddly.

“You know that we are NOT a Sub-Prime Lender? We don’t do those types of loans, so…” I cut her off and said, “Yes, I know that, that’s not the reason why I called you.” I repeated the purpose of my call. She still seemed a little guarded, but eventually explained the automatic reply. “I get calls all day from mortgage brokers who want to send me loans with low credit scores. I’m tired of explaining to them we don’t do those loans.”

We chatted some more, about my experience in the business and the kinds of customers I work with for Co-Ops and she warmed up. She then regaled me with horror stories of mortgage “professionals” who don’t know a Co-Op questionnaire—“…a what?”—from a snowtire. It was a great chat and reinforces what I tell my wife quite frequently: “Any idiot can get into the mortgage business.” So many mortgage “professionals” out there are driving people crazy: both the customers like you and the Lenders they try to do business with. Bottom line: these folks just don’t know what they are doing!

I’m happy to report that as I’m writing this I have just received the email with the registration information so that I can sell loans to her company.

As a rule for Co-Op’s this is what you should know:

1. Maximum LTV (Loan To Value) is 95%. That means you need 5% down. There is no 100% financing available.
2. There will be PMI (Private Mortgage Insurance) on the loan. You can’t break Co-Op loans into 80/15’s to avoid the PMI.
3. You must verify—I usually do it for my clients—with the Co-Op if they will accept financing with only 5% down. Many Co-Ops require at least 20% downpayment, regardless of what a Lender is willing to give.
4. When I work with you to qualify for a Co-Op I do the following:
-Qualify YOU: Income, Assets, Credit
-Qualify the Cooperative: I contact the management company directly and have them complete a standard questionnaire.
-Advise you on making an offer (when necessary I check with my staff appraiser to comp a property for my clients) both on price and how to negotiate
-All that other “mortgage stuff” necessary to approve and close your loan once you have a real deal in contract

Co-Op loans can be difficult to deal with and many good, experienced mortgage pro’s don’t want to touch them. Too much work involved and too great a chance the loan doesn’t close. The loan might not close through no fault of the Lender, the Co-Op board might reject the buyer, or worse (and more commonly) the Cooperative corporation may not be qualified.

Do’s and Don’ts of the Loan Process

A short list of Do’s and Don’ts while the bank is working on your application

When you make your loan application for a mortgage loan, we in the bank “process,” your application for approval and closing.

Here’s a short list of Do’s and Don’ts while the bank is working on your application:

1. Don’t establish new credit accounts. Don’t open any new credit cards, apply for a car loan, or consolidate your credit accounts and transfer balances. Doing so may affect your credit score.

2. DO keep your bank accounts in order. Maintain the balances as they are on the day of your loan application. If you need to deposit money other than your regular paycheck, or transfer from one account to another, contact your loan officer.

3. DO pay on time. Keep paying your bills on time until closing day. That includes your rent.

4. DO advise about trips. Vacation alert. If you are planning a vacation during the loan process period, please advise your loan officer immediately.

5. DO ask questions. Questions are good. Please call anytime you have questions about anything involved in the process of buying your first home.

More reasons to own rather than rent

People get lost in discussions about interest rates, market values, and locations. I try to steer clear of those topics; if I do participate, then I always express the reasons I believe owning your own home are important. Owning a “piece of the rock,” changes you both personally and financially for the better. As Martha Stewart would say, “It’s a good thing.”

One of the reasons I think it’s better to own than rent is the problem with landlords.

Today on both Craigslist Housing Forum and in the NYTimes.com real estate section there are stories of people having problems with their landlords.

In Craigslist, the person is worried about being evicted from his apartment. Why? Because he turned on the heat when his landlord refused to! More here:

CL Housing Forum Eviction thread

A young couple renting an apartment in Fort Greene finally had enough of bad conditions; they purchased a Co-Op apartment. Here’s a quote from the NYTimes.com article, and a link to the same:

“Two years ago, they moved together to a one-bedroom rental in Fort Greene, Brooklyn. It was in bad shape, with flaking paint and crooked windows. The basement storage room was dank and moldy. With one shared closet, ‘I had so many more clothes that Harry felt he was having short shrift,’ Ms. Marquez said. Considering the apartment’s condition, it seemed expensive, at $1,580 a month.

Ms. Marquez, health editor at Woman’s Day magazine, was sick of ‘dumpy apartments with landlords who were not leaping to fix things,’ she said. ‘I wanted my own place where I could do whatever I wanted, and if something went wrong I could rely on myself to get it done.'”

http://www.nytimes.com/2005/11/06/realestate/06hunt.html

Waiting to buy your first home

There are two schools of thought when it comes to buying your first home:

1. Wait until you save up enough money for a large downpayment and closing costs. This way you get a lower monthly mortgage payment.

2. Don’t wait: buy your home today, enjoy the personal and financial benefits of homeownership now. Finance as much of the price of the home as the bank will lend you: use very little of your own money.

You might be surprised to hear that I subscribe to the first concept. I believe it’s a fantastic idea to save up the money, and get the lowest monthly payment. Who wants a large monthly mortgage payment? The choice of course is that your struggle is in the years it takes to save up the money. I definitely believe in that idea: you see a real benefit from your years of hard work, sacrifice and saving.

Here’s the problem with that line of thinking: we live in the NY Metro area, one of the highest cost-of-living areas in all the United States. Even if you were to live on the most absurdly frugal budget, work three jobs seven days a week, and absolutely bank every penny of your money, it could really be a long while before you save up the considerable monies needed for a “large” downpayment and the closing costs for your home purchase.

Start with the closing costs: New York State has among the highest closing costs in the nation. On average, 6% of the purchase price is money allocated JUST to closing costs. That money does nothing to lower your monthly mortgage payment.

Now to the “large” downpayment: because rates are so low, if you are like most of my clients and you want to see a substantial reduction in your monthly mortgage expense (let’s say, oh, $600 or so) then you’re going to need a LOT of money down. In dollars and cents that means, if my proposed mortgage payment is $3100 a month and I want to pay no more than $2500 a month, I’ll need a whopping $94,900 towards the downpayment! Holy cow!

Even if you could work three jobs, seven days, live super-frugal, and bank every penny, the average family would still need to wait 4 years or more to save up that kind of money (assuming you could put away $30,000 a year).

So, while I love the first concept of waiting/saving, I live in the real world. It’s the rare individual or family that can come up with that kind of strict lifestyle to save such money. That’s why I’ve always specialized in low down payment (and now NO downpayment) mortgages. Because in the real world of the NY Metro area, we just can’t get that kind of a leg up on housing. Prices go up, interest rates change, etc, etc.

Financing the whole shebang (purchase price and some of the closing costs) seems like a crazy idea when you see the numbers (monthly payment), but realistically it works to your benefit.

The mortgage interest is tax deductible. Your take home pay actually increases because you own a home! You don’t have to live a no-frills lifestyle sacrificing for something that seems so far away and unattainable. You can have your home, improve your life both with the real financial benefits and the intangible benefits (pride of ownership, financial awareness) that come with homeownership.

It’s not complicated, it’s just the way it is.

Confusing Credit Issues: to pay in full or not to pay in full?

There is general confusion regarding the issue of paying credit card balances in full every month.

There is general confusion regarding the issue of paying credit card balances in full every month.

Sure, avoiding fees and interest is a great concept, but there’s more to the story.

In the mortgage industry, when we review a credit report, our loan decisions are not based solely on the score. We actually read the report. We want to see that an applicant actually uses the credit available to her.

If an applicant is in the habit of sporadically using credit, and then paying the balance in full when she does, then her report—while it may have a good score—may reflect this lack of use of the accounts. We get a bit skittish when we see that.

You might say, “But if I show I use my credit conservatively isn’t that good for the bank? It means I have more resources to pay my mortgage, thus I’m a good risk.” While that’s perfectly logical thinking, you must remember we are rating your entire set of qualifications based on the risk factors for making a loan to you. Therefore, we really do want to see that you use your credit on a consistent basis (and you pay on time, of course).

If you use your card(s) every month, paying them in full as you go, then this isn’t really an issue because we’ll see the activity. It’s those big holes of several months at a time when you don’t use credit that you want to watch for.

That all having been said, truly the only time you want to “worry” about your credit scores and this crazy useage issue is when you are planning on buying a home or a car. Since those are two big purchases, you want to have all your ducks in a row. Otherwise, worrying about your score all the time is a waste of time. Your score will always be good if you pay your bills on time, use your credit wisely and conservatively, and in general maintain an even keel in your credit life.

If you go to my “Links” page, there’s a link to MYFICO.com which explains how credit scores are determined. There are also other good resources there regarding credit.

Homeowners Insurance

The final premium depends on the type and construction of the house and the amount of coverage required for the mortgage.

I prefer to be conservative when estimating costs and monthly payments. Right now, when I qualify a client and calculate the monthy payment, I’m using the following figures for homeowner’s insurance. These numbers are based on an average of what my clients have obtained for closings over the past two years. Certainly it is possible to locate insurance that is cheaper, and, on the contrary, more expensive. The final premium depends on the type and construction of the house and the amount of coverage required for the mortgage.

1 family: $1200 a year ($100 a month)
2 family: $1800 a year ($150 a month)
Although for some two family homes I might increase the estimated premium to $2400 if it’s a larger house, or a brownstone.