Call us nuts, but we’re looking to scale up our house. Our family has grown, we’ve saved enough for a sizable down payment and we want a better school district/location. While we’ll be taking a hit on our current home since we bought in 2005, there’s plenty of equity in there (yes, we were in the minority that put 20% down and took on a conventional 30 year mortgage) and we’re under no pressure to move so we’re taking a wait and see approach to trying to match up a decent offer on our home with scoring a great property (dream home) from a motivated seller in the top district in the area.
As part of our financial assessment, I set up a rather detailed spreadsheet outlining all transactional costs, as well as future costs in a larger home, potentially with a pool, etc. As part of this exercise, I scrutinized each and every category of costs to see if there were any opportunities for savings – and I found several.
Realtor Fees (Don’t Pay 6% !!!) – We’re all well aware of the lock realtors have on the market. During the housing boom, we were able to pull off selling our first home without a realtor, but these days, houses are sitting months and even years even with a realtor. At this point in time, if you want to play, you’ve gotta pay – realtors just won’t show a house to their buyer if the seller isn’t “playing by the rules”. Historically, the norm was a 6% fee based on your home sale price. Regardless of how ridiculous it is to pay someone a percent of the sale price even though they do pretty much the same amount of work regardless of sale price, this is what you’re going to be working with. These days, with the anemic market, there’s an unwritten rule that 5% is the new 6%. At this point, don’t agree to pay anyone 6%. If they force the issue, dump them and find a new realtor. To take this a bit further, we’re only listing ours for 4.5%. Here’s the rationale we used with our realtor and you can use the same:
Our realtor (before his fees of course), will get 2% from our sale and likely 2.5%-3% from the home we buy. Since we’re scaling up, the additional money from the higher priced home we’re buying will more than make up for the .5% less we’re offering him on our sale. It’s listed publicly as a 5% commission so the opposing realtors won’t balk or cause confusion. So, we’re “playing by the rules” in the eyes of opposing realtors, but saving ourselves an extra $2K or so in the process.
Closing Costs – While it may sound cliche, you should definitely get 3 or more quotes from various local banks, large banks, and a mortgage broker to find the best combination of rate and closing costs. With several quotes in hand, you have the leverage to identify the ones you want to work with and play them off each other to either shave off a few hundred bucks on transaction fees, or get 1/8 of a point knocked off your rate. It works! I’ve done it before. Rates are at record lows, but you can still throw away money on closing costs if you don’t protect yourself. Demand a full good faith estimate up front and build all these costs into your calculations. You’ll likely owe a full year of taxes and insurance up front, and you may owe a couple months mortgage payments as well. These sizable upfront fees all impact how much excess cash you’ll have the day you move in and you definitely want an emergency fund, so ensure you capture everything up front and be conservative with your estimates.
Short Sales and Foreclosures Offer Incredible Value – Since we have to time the sale of our home with the purchase of the new home, we’re probably not able to take advantage of this situation. Reason being, these deals will sit with the banker or bureaucrat for months, and then, boom – they say “go” and you’ve either got to close or the home goes into foreclosure. It’s a bit odd, but in talking to my realtor and also reading about these online, the timing is anything but predictable. But…if you’re renting or living with mom and dad and time is on your side, you can really achieve absolutely incredible deals on foreclosures even in very ritzy areas. As an example, there’s a neighborhood where our friends live where recent home sales are in the 700-800K range, but a foreclosure just went for $500K. It looks like it’s an investor because the house is already back on the market for $650K. Now, they may not get it, but if they do, even net of costs, they’re looking at a damn nice return if they only put $100K down. Now, we’re not in the business of flipping and if you’re reading about this for the first time, you probably shouldn’t be either. But if you want to save 30-40% off an already depressed fair market value for your prospective home, check it out. You can find foreclosures and short sales on sites like realtytrac.com, trulia.com, foreclosures.com and others.
Realistically Assess Increased Monthly Costs – I am continuously annoyed when I hear about people saying how they’re house poor and totally underestimated how much it would cost to live in their new home. You’d think with the months leading up the transaction, they’d have taken the time to do some rough calculations on how their costs will change. I’m fully aware that if we buy a place with a pool, we’re looking a a few hundred per month in extra costs for energy, chemicals and closing, even if I do most of it myself. Some other considerations include the fact that it will likely be a bit more to heat and cool a larger home. Finally, my commute to work will be a bit longer, so I included increased costs for commuting to the tune of about 50 cents per mile to capture both gas AND depreciation/maintenance. I also got a homeowner’s insurance quote from our agent based on our top house candidate. Taxes will be higher. All these facets are built into a spreadsheet so it’s clear as day that our monthly expenses ARE going to increase above and beyond the 1st tier approach of just a higher mortgage payment.
You’re Going to Lose Even More Money by Closing – Since this is such a buyer’s market, there are seller horror stories out there about nitpicking buyers coming back and nickel and diming desperate sellers at every turn. Aside from the fact that any initial offers you get will be well below your asking price, buyers are also likely to try to extract any additional money out of you that they can. They may try to nail you with something that wasn’t listed on your disclosure form, the fact that you’re taking appliances or lighting with you, or worse, when the inspection’s done, they can make unreasonable demands. Examples I’ve heard of include mandating that a professional painter perform minor touchups when the homeowner could have, as well as demanding that a certified electrician re-connect the exhaust fan in the bathroom that the seller disabled for the showing (to exclude noise during walkthroughs). As unreasonable and ridiculous as these examples are, the sellers wanted to see receipts and the buyers had a closing on the new home in the works and had to get their home sold no matter how ridiculous the demands were. With this in mind, it would be best to try to identify and agree on as many possible liabilities as you can up front. This might include actually pointing out things that will turn up on the inspection BEFORE you sign the contract – even listing them in there as “as is” accepted conditions.
Conversely, if you’re slimy, you could try to extort the homeowner you’re purchasing from at the last minute as well, but that’s not my style – it’s only money after all. And surely, the sellers will talk trash about you to their departing neighbors and you’ll be known as a slimy cheapskate when you move in.
These are just some of the key assumption and savings strategies you’ve got to perfect in order to ensure you’re getting the best value for your transaction and also, to ensure that you’re not getting in over your head. The market’s fraught with risk, why add more to your transaction?
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