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Buyer's Guide

Everyone wants a home of their own – it’s the American dream. Gone are the cranky neighbors and snooping landlords. Being a homeowner gives you the freedom to express yourself and enjoy a great deal of privacy. You can do virtually anything you like with your living space and that includes cranking up your stereo and painting the kitchen walls chartreuse – if that is what you want to do. And if you’re like most Americans, a home purchase is the single largest investment you’ll ever make, which someday can be sold in a deal that nets a decent profit. On average, a home’s value annually increases by about 5 percent.

Are you ready to settle down and take on the financial responsibilities and lifestyle changes that come with homeownership? Or might you be better off renting? Spend some time evaluating your near-term goals. Might a better job opportunity send you packing to another city or state? Is your income likely to remain the same, increase or could it decrease and jeopardize your ability to meet your monthly housing costs?

Homeownership is best viewed as a long-term commitment because selling a house is a costly and time-consuming endeavor. The serious homebuyer plans on staying in the house for at least two years – though that’s a minimum and a better rule of thumb is at least five years. It’s simply not profitable and it could be costly to buy and then sell a home within less than two years. Even if a red-hot housing market allowed you to turn a nice profit, the proceeds would be subject to capital gains taxes.

Making the transition from renting to homeownership is both exciting and challenging. The homeowner is the landlord and that means when a repair is in order, it’s up to the homeowner to either personally fix the problem or hire and oversee a contractor who will remedy the situation. The same goes for maintenance and overall property upkeep.

But for those who’re willing to take on the challenge, the benefits are many. Homeownership is a form of forced savings; mortgage interest and property taxes can be deducted from income taxes. Homeowners can rest easy knowing their housing costs will remain relatively stable (depending on the type of mortgage loan), and long-term owners build valuable equity.

So you’ve decided to buy a home – now what? Knowing what to expect and having a solid game plan will help keep you and your objectives on track. Here is an overview of the buying process and how you can prepare for this exciting transaction:

1. Make sure that you have a thorough understanding of whether you’re ready to buy a home. Create a list that outlines each of your reasons for homeownership, you may need it later if you get cold feet. If you’re trading up or down, or if you’re a first-time homebuyer, make sure you have a thorough understanding of how the change will impact your lifestyle.

2. Get pre-approved for a mortgage loan. The process will increase your creditability as a serious buyer and will determine how much home you can afford so that you don’t waste time shopping properties that are out of your price range.

3. Hire a Realtor! Purchasing a home is likely the largest financial investment you’ll ever make so it’s only prudent to seek guidance from an experienced professional. Your Realtor can show you properties and neighborhoods that meet your criteria, help you formulate a reasonable purchase offer, and help you understand the disclosure laws pertinent to your purchase transaction.

4. Start shopping for homes. It’s a good idea to be armed with a list of must have features and those that you’d like to have. Now also is the time to research prospective neighborhoods.

5. Once you’ve found the perfect home and submitted a purchase offer, don’t forget to include the home inspection or inspections contingency. Prepare for negotiations by outlining the concessions you’re willing to make and those that you won’t even consider. The list will come in handy when you’re involved in price negotiations.

Now that you’ve decided to buy a home, it’s time to identify the neighborhoods or communities you plan to shop. If you’re looking for a home in a community that you know well, you probably already know exactly which neighborhoods you’d like to live in. For those of you who aren’t sure, determining which neighborhoods or communities will best suit your needs will require some research.

It’s time to create another homebuyer’s checklist and rank by importance the community amenities you must have and those you’d like to have. The list will help you remain focused on the important features while you look at a variety of neighborhoods and communities.

Some of the factors that will impact your quality of life include the condition of the local economy; local amenities such as libraries, parks, entertainment and shopping; school quality and test scores; and crime rates. There are many community resources that you can tap to learn more about a neighborhood.

The local chamber of commerce can bring you up to speed on the condition of an area’s local economy, inform you of any anticipated major changes such as a large employer that’s about to downsize or expand, or news of any new businesses that will soon move into the area.

Pay a visit to the local police departments and ask for detailed information about neighborhood and community crime statistics. In many cases, you can ask the department about a specific street and get informal but pertinent information about crime rates specific to the street/block and other related issues.

Hit the streets and obtain first-hand knowledge about an area’s access to transportation, and its proximity to schools, shopping and entertainment. Consider parking and hanging out for an hour or more during peak commute hours to get a feel for traffic conditions and other related issues.

Chat with homeowners in the area; they can provide you with detailed information about their neighborhood and community and related amenities, crime rates and any other issues that could impact your decision to settle down in that area.

Keep in mind that your Realtor is your number one source for neighborhood and community information. In addition to providing you with comparative market analysis data, he or she can let you know how long home listings stay on the market – which can indicate a neighborhood’s desirability. Your Realtor also is a neighborhood and community expert who can inform you on issues and amenities specific to the neighborhoods you’re interested in, bringing to your attention suitable neighborhoods you may not have known about or otherwise considered.

Now you’ve done it – the legally binding purchase offer you’ve submitted has been accepted and you’re officially committed to closing on your dream home. What have you done? Did you overpay? Did you overlook some ghastly and expensive structural flaw? Is this really the neighborhood you want to live in for the next several years – or the rest of your life? Can you really afford the mortgage payments?

Being gripped by fear and doubt regarding the home you’ve committed to buy is normal, it’s called homebuyer’s remorse. The best defense against a paralyzing case of homebuyer’s remorse is to have a thorough understanding of why you decided to buy the home in the first place and to know that you paid a fair sales price.

Here are some tips that can help you battle homebuyer’s remorse:

Get out that list of wants and needs you made back when you first starting the home shopping process. Does the home include the important features? Provided that you saw a number of homes and thoroughly evaluated what each home had to offer, it’s likely that house you’re about to buy is the best choice for you.

Create a new list that itemizes the pros and cons associated with your home purchase and more generally, with homeownership. Remember that the pros will include income tax deductions, building equity, the freedom to decorate as you wish and any other items specific to your transaction, such as amenities or features that cinched the deal for you – the home’s fabulous view, new roof or fully loaded master suite.

In the cons column, jot down your fears and the general disadvantages of homeownership. This list likely will include financial and home maintenance obligations and issues specific to your transaction – for example the green shag carpeting you’ll have to replace or the ugly wallpaper you’ll have to tear down. Chances are the lists will reaffirm your decision to become a homeowner, and more specifically, why you chose the home that you’re about to buy.

While it may be difficult to stop shopping for homes and visiting open houses, try to resist the urge to window-shop other properties. Unless you have a very solid reason for backing out of the deal, it won’t do you any good to pine for the home that went on the market just days before your closing. Get over it and get on with preparing to move into your new home.

Discuss your concerns with your Realtor. He or she has seen plenty of cases of homebuyer’s remorse and can help put your fears and doubts into perspective. If you’re sweating the price you’ve agreed to pay for the home, your Realtor can again go over with you the comparative market analysis and other data on which you’d initially based your offer price, pointing out any new comparable sales that have closed.

Because a home purchase most likely is the largest investment you’ll ever make, it’s essential that you have a thorough understanding of the property’s condition. A comprehensive professional home inspection will provide you with a detailed and much better understanding of the property you intend to buy.

The standard home inspection is an objective visual examination of a home’s physical structure and systems from top to bottom including: the heating and air conditioning systems, plumbing and electrical systems, roof, walls, ceilings, floors, windows, doors, foundation, basement and attic, and other visible structures.

A house can’t fail a home inspection, the inspector simply evaluates the home’s physical condition and reports on what may need to be repaired or replaced. No home is perfect. Try to refrain from being persnickety and forget the small stuff. If any major issues arise, it’s common to negotiate a remedy. It’s also likely that the home inspection will give you a piece of mind by pointing out a property’s positive attributes.

It’s a good idea to accompany the inspector. Tagging along will give you an opportunity to engage the inspector in a conversation about his findings, to ask questions about the home’s systems and maintenance, and to learn other useful details about the house like the location of gas and water shut-off valves and other utility connections. Having first- hand knowledge of the inspection will also help you better understand the written inspection report.

In addition to the basic home inspection, you may want to consider a pest inspection to check for termite or dry-rot damage, or an environmental inspection to check for radon, lead or asbestos. Your home inspector or Realtor can help you determine which, if any, additional inspections may be recommended.

Taking a final walk-through the home you’ve agreed to purchase prior to closing is an essential step in the home-buying process. By now the property should be vacant and you and the seller have completed all of your negotiations and have agreed on the terms of the purchase transaction.

In many cases, the negotiations included some repairs or other terms that specified which appliances or other items, such as window treatments or lighting fixtures, were to be included in the home sale. At the very least, it’s best if you confirm before closing that the home is in the same condition as it was when you entered into the purchase contract.

Now is also the time to make sure that any items the seller agreed to remove are gone. Taking the walk-through prior to closing is crucial because you haven’t yet paid for the home and during this pre-close time, the seller will likely be motivated to remedy any problems.

You may want to compile a list of the agreed upon repairs and items or appliances the seller agreed to include as part of the home sale. The list will help you remain focused on the agreed upon terms while you check for any new problems or damage that may have occurred during the seller’s move or while contractors were making repairs.

If you and the seller agreed on some major repairs, such as for pest damage, dry rot, or to heating or air conditioning systems, it is a good idea to have an earlier walk-through, and possibly an additional inspection, to verify that the major issues have been corrected.

A lender will not sign-off on your mortgage loan unless you have secured adequate homeowner’s insurance. The policy protects your financial interests and the lender’s investment in your home. Don’t wait until the last minute to begin shopping for a homeowner’s insurance policy. Annual premium costs and coverage options vary widely between insurance companies.

A typical homeowner’s insurance policy provides protection for casualty, liability and personal property. Your insurance broker can help you determine how much coverage you need for each of the three standard protections.

Casualty coverage provides protection for common hazards including fire, wind, lightning or other incidents that can cause structural damage to your home. If the house is damaged or destroyed by a covered peril, the casualty insurance should cover the cost to rebuild. Ask your insurance broker about a guaranteed replacement cost provision. The provision ensures that your insurance will cover the cost of rebuilding your home even if the cost exceeds your policy limits.

Homeowners can be subject to a host of legal liability issues. The liability coverage provision in a homeowner’s policy provides protection against lawsuits that can result if a guest or some other visitor is injured while on the property. One rule to consider is that your liability limits should total at least twice the property’s value.

Personal property coverage protects the contents in your home. The limits and terms of this coverage can vary widely. For example, a replacement cost provision can provide reimbursement for your possessions based on today’s market value. Conversely, the coverage may value your possessions based on what they were worth when initially purchased minus depreciation. In the event that you file a personal property claim, it’s a good idea to have a detailed catalog of your possessions. The easiest way to document and itemize your personal property is to go from room to room with a video recorder and methodically record your home’s contents.

For many Americans, the best way to build wealth is to pay down a mortgage. The multipurpose investment essentially is a ‘forced savings account.’ The homeowner lives in the house and pays down the mortgage, over time the property appreciates, and eventually it can be sold and potentially net a tidy profit. In the meanwhile, mortgage interest rate and property tax payments are tax deductible.

Mortgage payments help build a homeowner’s net worth because a portion of the payment goes toward building equity. The hard-earned equity can be saved for the big sale, or it can be tapped to obtain low interest home equity loans. The lower interest loans can be used for a variety of expenses including college tuition, home improvement or car payments.

Mortgage interest rates and property taxes quickly add up and, the combined itemized deductions can result in a hefty tax deduction. In some cases, the amount could elevate the taxpayer beyond the minimum itemized deduction, allowing for even more itemized deductions.

Homeownership also can pay tax-wise when it’s time to sell. Through the Capital Gains Tax Exclusion, homeowners qualify for a hefty tax break if they’ve owned and lived in the home for at least two of the five years preceding the sale. Married couples filing jointly and single owners can earn up to $500,000 and $250,000, respectively, in tax-free profit on the sale of their home.

Taking the time to identify and categorize what you’re looking for in a home is an important first step in the home-buying process. Lists that rank your must-haves, wants and dislikes will help you stay focused on your ultimate goal – finding the perfect house – and help you keep a cool head while touring open homes.

Sit down, relax, and spend some time thinking about and itemizing the features your dream home or your perfect first home will include. The lists aren’t scored in stone and likely will change as your home search evolves and you get a better idea of what’s on the market. As you tour open homes, you may identify additional must-haves, wants and dislikes.

The must-have list is essential. It should include and rank by importance the features your home absolutely must include. A good rule is to list features that you can’t easily change: type of home (craftsman, split-level, a home with sufficient storage space or a fireplace), location/neighborhood, school district, proximity to transportation and shopping, closet space, number of rooms or square footage, and the home’s overall condition (move-in or fixer-upper).

Your wish list should be flexible, and should include cosmetic features and of course, your dream amenities. Wall-to-wall carpeting, hardwood floors or a meticulously landscaped yard are features you can implement yourself.

Tour as many homes as possible and don’t forgo a house sight unseen simply because it doesn’t include all the features on your must-have list. Finding a home that includes every essential may not be realistic, but it’s entirely possible to find a home that includes enough must-haves and just enough wants to strike that perfect balance. The house that doesn’t include a fireplace may include a view that you simply must have.

You’ve finally found the perfect house and now it’s time to jump into the fray and make a purchase offer. The offer is a legal document, so it’s imperative that the contract is well planned and thoroughly protects your interests. At this point in the real estate transaction, your Realtor is an invaluable advocate and resource.

There are many items listed in a typical purchase offer including the buyer’s and seller’s names, the property’s address, offered purchase price, the closing date, the amount of the down payment, mortgage and good faith deposit, financing terms, and the date the offer expires. The purchase offer will also include an itemized list of items that will be included in the purchase price, e.g., drapes, light fixtures and appliances, as well as any certain conditions or contingencies that must be met before the contract is finalized.

Common contingencies include secured mortgage financing, a satisfactory home inspection report, a satisfactory appraisal or the sale of another property. Determining the offered purchase price is perhaps the most tricky and stressful purchase offer task. Your Realtor can help you come up with a fair and reasonable offer and will guide you through a number of considerations including the final sale price for comparable properties in the same area. Your Realtor can provide you with a comparative market analysis (CMA), which compares the list price and final sale price of like properties in the neighborhood.

The conditions specific to your local real estate market also will factor into your offered purchase price. Is the market in the throes of a red-hot bidding frenzy? Or is the market slow enough to warrant a lowball offer? In either situation, the information in the CMA can help you determine a reasonable offer. For example, if comparable properties have been selling for 5 percent below or above list price you can reasonably consider presenting a similar offer.

How motivated is the seller? Several factors can help you determine the seller’s motivation: how long the home been on the market, whether its list price has been reduced, why the seller is selling, how much equity the seller has in the home, and when the seller bought the property and for how much. A motivated seller is more likely to seriously consider a fair but lower-than-list-price offer.

It’s typical to enter into a spate of negotiations following your initial purchase offer. The home seller may decline your initial offer and present a counter-offer; or, once the home inspection process has been completed, you may present a second offer that requires the seller to make some repairs.

Since purchasing a home is likely the single largest and most complex investment you’ll ever make, it’s wise to utilize the help of a Realtor who can guide you through this monumental step in your life.

A Realtor has a fiduciary duty to work as an advocate on your behalf, representing your best interests in the real estate purchase transaction. This means helping you find the best house, negotiate the best terms and price, and making sure the property disclosure requirements applicable to your real estate transaction have been met. An experienced Realtor also has invaluable knowledge about the community and the real estate market.

Realtors have access to comprehensive for-sale home listings data via a cooperative arrangement known as the Multiple Listing Service (MLS), which combines and markets virtually all of the for-sale home listings in a given area or region. Additionally, Realtors typically share new listing information with each other. Access to this inside track provides you the most up-to-date listings information that’s available, and could lead you to a for-sale home that has not yet been posted on the MLS.

An experienced Realtor is a pro when it comes to negotiating the home purchase terms and price. The home seller’s goal is to get the highest possible price for his property and your goal is to get the lowest possible price for the same property. It’s in your best interest to enlist the help of an experienced and effective negotiator. Other issues likely to be negotiated can include the property’s condition and needed repairs, the closing date, and the home’s contents that will be included in the purchase price. Working with an expert negotiator is the only way to ensure that you and the seller reach a compromise that is reasonable and efficient, and results in the best possible deal for you.

Home sellers are required by law to disclose certain types of information about the for- sale home that could impact the property’s appeal and your decision to buy it. The disclosure requirements can be complex and the laws vary by state. Only an experienced Realtor can help ensure the requirements pertinent to your real estate transaction have been met.

As a homebuyer, you have nothing to lose and everything to gain when you utilize a Realtor because it’s the home seller who pays all of the commissions and fees associated with the home sale/purchase transaction.

Having ship-shape credit and a healthy debt-to-income ratio is essential if you’re planning to buy a home. Your mortgage lender will scrutinize your credit score, how much debt you have and how you manage that debt, so it’s a good idea to keep it clean and simple and avoid the common pitfalls that can ding your credit score or blemish your overall credit-worthiness. Here are a few tips that can help keep your credit in shape:

Don’t make any major purchases. The last thing you need factored into your ability to meet a monthly mortgage obligation is a sizable car payment or some other comparable debt obligation. Any purchase that could increase your debt-to-income ratio should be avoided, so simply hold off on any major purchases until after you’ve closed on the home purchase.

Be sure to check with your mortgage professional before you start moving around your money and credit card balances. It may be tempting to transfer some credit card balances from one card to another that offers a lower interest rate. But if you’re getting in shape to purchase a home, this move may max-out some of your available balances and maxed-out credit cards can ding your overall credit score.

On the flip side, paying off all your credit card debt also can ding your credit score or impact your overall credit-worthiness. Paying off your balances may eat up your savings and lenders like borrowers who have some cash in the bank. Additionally, carrying a zero balance on your credit cards means you have the option to take advantage of your credit limits and lenders may factor your ability to accrue that much potential credit card debt.

Your employment history also can affect your credit-worthiness, so keep your day job. Lenders prefer borrowers who have a solid work history, this usually means at least two consecutive years of employment. Some exceptions to this rule include trading up – leaving your current job for one that pays more money – or changing careers within the same field. If a career change is in order, discuss with your mortgage professional how the change may affect your ability to qualify for a home loan.

Turn on any financial news program and at some point you’ll hear the experts extolling the virtues of diversification. Real estate, even through the market downturn, has long been considered a conservative, long-term strategy to growing wealth. In fact, that very downturn has created a historic buying opportunity for potential homebuyers and investors alike. The combination of lower home prices across American and historically low mortgage rates, two essential factors that usually don’t trend in the same direction, have triggered a buyer’s market in many areas of the country. For real estate investors who want to rent their properties, this can make the difference in achieving positive cash flow sooner or right off the bat. While some seasoned real estate investors make it look easy, to be successful, beginners should follow some basic principles.

Learn all you can. Before committing your cash, you should have a fundamental understanding of real estate. For example, be aware that, in general, investment properties are not liquid investments. Barring exceptional circumstances, real estate does not sell at a moment’s notice. It could take days or months to sell a property, depending on the strength of the market in a particular region.

Consider cash flow. You’ll need to have enough capital on hand to cover any short-term losses due to vacancies between tenants.

Start small. Look into buying a condominium, single-family home or a duplex. Leave large apartment buildings and commercial properties to the pros.

Inquire at the local Chamber of Commerce about companies relocating into or out of the area. Company movement is one indicator of demand for rental and/or office space.

Find a property that will be in demand. Look for a moderately priced home with three or four bedrooms, two bathrooms, and a garage that sits on a quiet street.

Research the property. The most common way first-time investors lose is by failing to investigate a property thoroughly. Look beyond the front door. Investigate the reputation of the school district, the crime rate, and plans for expanding a nearby highway or developing vacant land. Ask a local real estate professional about the area, its history, and how fast (or slow) properties are moving.

Inspect the home you’re considering for signs of water damage, such as stains on the ceiling and crinkling or gathering wallpaper; open and close every door and window; and check all electrical sockets by plugging in an appliance. Get an independent home inspection, roof inspection and termite inspection. Unexpected repair costs can eat away your cash flow. Because even the best inspection can’t always predict problems, try to set aside some of the rental income for unexpected repairs.

Spend time driving the streets of the neighborhood noting the condition of other properties. Are lawns maintained? Are roofs in good shape? Are homes kept up? Be ready to make fixes quickly and respond to the renter’s needs. If you’re not prepared to be a hands-on landlord, consider hiring a property management firm.

See your tax advisor for related planning and laws that can affect your investment decisions. Remember, investing in a property is much different than living in one, and while emotion and attachment can be prime motivators when it comes to homes, it is return on investment that counts when investing in real estate.

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