Denver Home Buyer Mistakes
Skipping past photo-less listings
Calling the agent listed on the sign
Buying a house based on one visit
Waiting for prices to come down
Not preparing for a delayed closing
Not reading the restrictive covenants
Buying the most expensive home in the neighborhood
Failing to increase insurance coverage
Using the seller's termite inspection
Failure to ask for a cash credit for repairs
Failure to do a final walk through of the home
Failing to have the locks re-keyed
Counting on the USPS to forward your bills in a timely manner
Inadequate inspection of the septic system
Not talking to your future neighbors
Holes where pictures used to be
Failing to consider pre-existing conditions
Skipping past photo-less listings
Looking for a good deal? They are aplenty on MLS—just make sure to pay particular attention to the photo-less listings. If you want a good deal, zone in on poorly marketed homes. A lot of listing agents are too lazy to take pictures, so they post the listing to MLS without pictures. When most buyers see a photo-less listing, they skip past it thinking that the home must be junk. That isn't at all true. A lot of photo-less listings are the result of lousy listing agents. Other agents get so dickered down on their listing commissions that they aren't making enough on the listing to bother putting any effort into it, but the house is still a fine piece of real estate. An agent named Frank Llosa did some interesting research on the correlation between sales price and number of photos in MLS. He surveyed 268 listings in the Fairfax, VA area in the $400k to $500k price range. The final sales price on listings with only one photo was 91.2% of the original price. Listings with 6 or more photographs sold for 95% of the original listing price. On a $400,000 home, that amounts to over $15,000! If you are looking for a bargain or hoping to grab instant equity with the purchase of a home, focus on photo-less listings or listings with only one photograph. At a minimum, do not skip past photo-less listings—you may be skipping past your dream home.
Calling the agent listed on the sign
You and your honey are out house hunting on a sunny Saturday afternoon. With Starbucks in one hand and the other hand on the wheel, you drive the streets until you come across a home that sparks your interest. Your spouse quickly dials the number on the sign and asks the listing agent to scoot over for a showing. The mistake here is that the smiling agent on the sign is the listing agent. That means that he or she represents the seller and may or may not have your best interests at heart. Instead, pick out an agent to work with before you start the house hunting process. That way you can call that agent (who is familiar with your situation, needs, likes and dislikes) when you want to look at a house. You do not have to sign a buyer's agent agreement. Call a few well-known real estate companies and ask who specializes in the area where you want to live. Interview those agents and pick the one you hit it off with. When you want to see a house, call that agent to avoid the obvious conflict of interest involved in working with the seller's agent.
Buying a house based on one visit
A lot of open houses take place on Sunday afternoons, and often buyers make their decision to purchase based on these open houses. Sunday afternoon usually provides the best light and least noise. If you visit a house on Sunday afternoon, make sure to check it out on Friday and Saturday night too.
I once lived in a picturesque small town that was a weekend tourist destination. The town had a quaint downtown full of antique shops and trendy restaurants as well as a river walk. There were plenty of hip condos and luxury lofts available, and these properties showed great during the day. But Friday and Saturday nights were a whole different story. The Harley-Davidsons roared into town on Friday and Saturday nights to hit the in vogue bars, and the noise level was a real problem. It's hard to sleep with a group of five Harleys driving by. Fortunately, I didn't live anywhere near downtown.
When I was first married I also rented a house in a trendy area known as "Swan Lake." It was a historic area, and my wife lamented the fact that we weren't actually on the lake, just one block removed. We quickly realized that being right on the lake was a very bad deal on Saturdays and Sundays. On the weekends the cars were parked so thick around the lake that the homeowners had to jockey just to get out of their own driveways. There were dogs on leashes galore, people jogging, talking, walking … and the cars were aplenty. The point is that it was better to be a block off the lake rather than right on the lake.
When shopping for houses it's important to look at a property at many different times of the day as well as different days of the week. You don't want a bus stop right in front of your house where the buses stop every 10 minutes during the week, for example. The buses may run infrequently on Sundays during the popular open house timeframe, but what about during the week when your kids are playing in the driveway? Sirens can also be a problem if your home is anywhere near a fire station or hospital. If there is a YMCA, park or library at the end of your street, plan on people parking in front of your house all the time. Also be careful about living right across the street from a beautiful turn-of-the-century church. Those church bells at 8:00 a.m. on Sunday mornings could be a nuisance.
The first home I purchased was a 1927 Spanish style adobe house that had been completely refurbished by an artsy type. It was a really fabulous property, 1,400 square feet, quaint and historic. What I didn't know, however, was that a drug dealer lived two houses down. He had inherited his house, giving him the ability to pursue his profession full time. The drug dealer never caused us any significant problems, but I sure would liked to have known something like that before buying the house. I guess that I should have taken the time to talk to a few of the neighbors before making the purchase.
When looking to buy a home, a lot of things matter other than just purchase price and granite countertops—noise, traffic, bus routes, door-to-door commute time, children or lack thereof, neighbors and the list goes on. Don't just see a house at its best; see it for what it really is before you sign for that big mortgage.
Many times buyers find their dream home right off the bat but pass it up because they feel like they haven't spent enough time looking. Most buyers expect the home buying process to take a long time, but sometimes it doesn’t. If you find a property early on that fits your needs, be careful to pass it up. Just be thankful that you were at the right place at the right time. Make an offer, and be glad that the house hunting part of the process went so smoothly.
Waiting for prices to come down
If you're waiting for prices to drop in order to get a good deal, you'd better stop waiting. The reality is that prices trend upward. They always have and hopefully they always will. It's rare to get a steal in the real estate market. Sitting around could cost you money if interest rates go up. In recent times interest rates really have been at all time lows. Some of that "lowest rates in 30 years" sort of advertising really was true. Rates were really low in 2003, but they are still relatively low today.
Let's say that you really want a certain house listed at $450,000, but you're waiting for the price to drop. For simplicity sake, let's pretend that you plan to borrow the entire amount with no down payment. A $450,000 loan at 6.3% makes the payment $2,785 per month (principal and interest only). While you've been waiting for house prices to drop interest rates have jumped to 6.75%. Now that same payment will only buy $428,000 worth of house. This is a simple example designed to show how waiting for prices to drop can be costly. Rather than waiting for prices to come down, make an offer. The worst that can happen is that the seller will reject your offer or make a counter offer.
In a nut shell there are two components to home price—purchase price and interest rate. Rising interest rates can put that now affordable house out of reach. Your father told you, his father told him, and now I'm telling you too—it's better to own than to rent. If you are renting, it's best to get off the bench and get into the game.
Not preparing for a delayed closing
Closings can be delayed for a variety of reasons. Everything that can happen has happened in real estate closings. Sometimes the closing documents come up missing! Other times buyers show up to closing without an official check. Sometimes the wire transfer from the lender doesn't go smoothly. If your lease ends on Friday and your closing is also on that Friday, you had better hope that everything goes perfect. If the closing is delayed, you could wind up homeless! A lot of buyers make the mistake of thinking they can move out of one place and into their new home on a very tight schedule. Allow a 5-7 day overlap just in case something goes wrong. Even if your closing goes off without a hitch, you could show up to your new home to discover that the sellers have not moved out as promised. Some sellers are still packing after closing! In order to prepare for the unexpected, give yourself some wiggle room; don't try to close and move on a tight time schedule.
Not reading the restrictive covenants
A restrictive covenant is a deed restriction that applies to a group of homes or subdivision. These covenants are often written and put into place by the original developer. The benefit of restrictive covenants is that they tend to give a neighborhood a more standard appearance. However, restrictive covenants can limit buyers looking to make improvements or alterations to a property.
Covenants often contain rules about pets such as no breeding for profit, no livestock or no cats. Many covenants limit what type of fencing can be used. Others prohibit fencing altogether with the exception of invisible dog fencing. Covenants often prohibit owners from parking recreational vehicles in their driveways. It sounds surprising to some, but homeowners must often obtain permission to paint their own house. Many neighborhoods want the houses to adhere to a certain architectural "look," so paint colors must first pass a review board. Some covenants also prohibit painting your house a certain color if another house in the neighborhood already has a similar color scheme. These neighborhoods don't want the houses to look too much alike. Numerous other restrictions can apply to additions and renovations. Improvement plans may be required to be submitted months in advance, so don't think that you are going to move into a house and make changes right away.
Covenants can sometimes be cumbersome, but most often they are in place for good reason. Historical neighborhoods often have the most restrictive covenants. It's important to read the covenants before making an offer on a home so that you know what you are getting into. Your real estate agent can provide you with the restrictive covenants of a particular property before you make an offer.
Never rest on a verbal agreement, no matter how seemingly insignificant the issue. Sometimes handshake deals are made on details such as the final cleaning of the house. A seller might say something like, "We're going to have a professional cleaning company come in and do the final clean, and we've got some guys coming tomorrow to haul away those extra building materials at the back of the lot." If it's not in the written agreement, don't count on it. Don't be embarrassed to ask that something seemingly insignificant be put in the purchase agreement. Every detail should be included in the written agreement.
"What is the one home improvement that you wish you had done that you never got around to?"
This is a great question for a home buyer to ask. It will help you identify a home's greatest weakness. If you aren't dealing with the seller directly, have your real estate agent ask the question on your behalf.
Buying the most expensive home in the neighborhood
Be hesitant to buy the most expensive house in the neighborhood. If the houses in a particular neighborhood are selling for $450,000 to $550,000 and you want to buy the most expensive house in the neighborhood for $575,000, that's fine. However, if your dream home is a $750,000 house nestled amongst $500,000 homes, think again.
The first problem with buying the most expensive house in the neighborhood is resale. Let's pretend that you've owned this home for a few years and now have a purchase agreement with a buyer for a price satisfactory to you. These buyers like the home just as much as you loved it when you first purchased it. The problem is that your buyers could have trouble obtaining financing if the appraisal doesn't come in at your agreed upon sales price. When real estate appraisers value a house they use what are known as "comps" or comparable properties. After you've owned the property a while and you turn around to resell the house, the appraiser could have trouble finding comparable properties to justify your sales price. When you bought the property, the appraiser found comparable properties to justify the sales price, but that doesn't mean that the next appraiser will be able to do the same.
The truth is that appraisals are relied upon too heavily. Appraisals are highly accurate if you are buying an average-priced house, but if you are talking about a house that is unique, a particular appraisal might not do it justice. If the house doesn't appraise for the purchase price, the deal is blown unless the buyer can put down a large amount of equity. Even if the buyer has a stack of cash, he or she might be scared off by the low appraisal.
Another problem with buying the most expensive house on the block is that you are limited as to improving the property. If you want to make a $50,000 improvement to the property, it might only add to the value by $10,000.
Also remember that buying the most expensive house in the neighborhood isn't a mistake if you get it at the right price. It also might not be a mistake if the home fits your needs and you plan to live in the home for a very long time. But always remember that buying the most expensive house in the neighborhood is risky, so tread carefully.
Failing to increase insurance coverage
Most new homeowners never think to increase their insurance coverage even though their home appreciates every year. You don't want to find yourself in the position of being underinsured. Every year houses burn down and homeowners find themselves in the position of receiving only a percentage of what it would cost to rebuild the house. It's bad enough to lose family photos, you don't want to see your equity go up in smoke too.
Homeowners forget that their property increases in value every year, but they also forget about home improvements they have done, which add to the value of their home. Homeowners should make sure that they have adequate coverage by reviewing their policy on a regular basis. Also remember to call your insurance agent and increase your coverage any time that you make a major home improvement.
Using the seller's termite inspection
It is common for the buyers to have a pest service that performs an annual inspection. Sometimes buyers choose to use the seller's termite inspection in order to save money. I made this mistake myself when buying my first home. In my situation the sellers had bought the home and did a complete renovation in a short period of time. It was explained to me that the termite inspection was still "good" because so little time had elapsed and that I was free to use their inspection in order to save myself a little money. Having befriended the husband and wife who were for-sale-by-owner sellers, I appreciated their generosity.
After living in the home a couple of years, we put the house up for sale, obtaining a buyer quickly. The buyers' termite inspection revealed a lot of termite damage. What's more, the termites had long since moved on. The inspector informed me that the damage was done years before. I found out that a lot of termite inspectors are on the shady side. Many inspectors are known for having "bad eyes" when working on behalf of sellers. In our case, fixing the damage cost $1,500. The repair guys had to crawl underneath the house and replace a bunch of boards that the termites had eaten for breakfast, lunch and dinner. Our buyers also got cold feet, worried that we wouldn't complete the repairs as agreed. We assured the buyers that we would have the work completed as promised, and the deal went through. However, picking up the tab for a $1,500 termite feast was unexpected and aggravating. It could have been worse—termite damage can run into the tens of thousands of dollars.
Now I know that a favorable termite inspection isn't a hard thing to come by. My advice to buyers: hire your own independent termite inspector to inspect the property for wood destroying insects and wood damage. Be present when the inspection is done for two reasons: 1. It puts a little heat on the inspector to do a thorough job and 2. The inspector can point out possible problem areas.
Despite what anyone tells you, we DO have termites in Colorado, although not as severe as more humid states. Colorado also has other nasty wood eating insects other than termites. Colorado is home to the subterranean type of termites that live under and on top of the ground. They are social creatures who live in colonies, although you will rarely see them because of their small size. They look a bit like white ants. Termites are actually useful creatures. They break down dead trees. Check out my Termite Prevention Tips.
Failure to ask for a cash credit for repairs
Home inspections often turn up a laundry list of needed repairs even if a home is relatively new. The buyer can either ask for the seller to have the repairs completed or ask the seller for a cash credit. It is sometimes better to request a cash credit for repairs. Because the seller does not have a vested interest past the date of sale, the seller is sure to accept the low-bid contractor. If the contractor gives the homeowner the option to simply fix the problem or to spend a little more money and really fix it right, you can guess which option the seller will choose. The seller will always choose the cheapest option, and the quality of workmanship might not be up to your standards. Asking the seller for a cash credit is sometimes a better option.
Realize, however, that lenders usually limit the amount of cash credits to the lower of 3% of the purchase price or the appraisal value. In some cases the lender may require the seller to make the repairs before the loan closes. One more benefit to a cash credit is that it frees up money for cash-strapped buyers. Another advantage is that some buyers are capable of doing the repairs themselves and pocketing the cash. Obtain your own estimate and have your real estate agent submit a request to the seller's agent to provide a cash credit at closing. Sellers often try to negotiate at this point, many wanting to split the repairs 50/50. A lot of good old-fashioned negotiation takes place in these situations. Also remember that, if you got a good deal on the home, the seller may refuse to contribute anything to repairs. Negotiate the best that you can, and take the deal that works for you and your family.
Failure to do a final walk through of the home
I have to admit that I feel like a dope—I didn't do a final walk through on either of my first two home purchases. Fortunately, both sellers delivered the home as promised. One of my weaknesses is that I am too trusting. I'm an honest guy, and I expect people to deal honestly with me. Unfortunately for all of us, the world isn't honest enough to skip the final walk through.
Shortly before closing you (and your real estate agent if you have one) should do a final walk through of the property. The purpose of this final inspection is to make sure that the items you have contracted to buy are there. You don't want to show up after closing to discover an empty spot where the Sub-Zero used to be or a wake of debris left by the sellers during their hasty exit. When the house is empty—and before closing—is also the best time to discover any major defects in the flooring and carpeting. You might be surprised to discover that the seller's beautiful china cabinet was actually camouflaging a giant dark spot on the hardwood floor. Rugs and furniture are also routinely used to cover up carpet stains. It is also usual for sellers to do a lot of damage to a home when moving out. Getting a large sofa out of a doorway can literally rip the hinges off a door. Scooting furniture across floors can scuff hardwood floors, and walls can get pretty dinged up by movers trying to hurry to make it to their next gig. Another seller trick is to replace expensive fixtures and appliances with cheap substitutes. Check the house from top to bottom.
Crazy things sometimes happen after people move out of homes. A group of teenagers might vandalize the house just after the sellers move out. A wicked streak of lightening could blast a hole in the roof allowing the rain to flood your beautiful wide plank wood flooring. It has been known to happen where someone—who knows who?—overflows the toilet and leaves the mess for someone else to clean up. Be aware that crazy things can and do happen after a house becomes vacant. Doing a final walk through mitigates the risk for the home buyer.
Make sure to take a lot of pictures of the property at the time you sign the sales contract. These pictures will be your proof of what was in the home at the time you came to terms with the seller. Go to the final walk through with your sales contract and pictures in hand so that you can make sure that everything is as it should be.
Don't blow your top if something is missing or damaged. There are official ways to address grievances should they arise, and an experienced real estate agent should be able to handle these sticky issues. The final walk through should be done as close to closing as possible. It is, of course, easier to do the final walk through if the sellers have already moved out. If the sellers are still in the home, do your best. This is also your chance to make sure that repairs have been completed as promised. Real estate contracts often include stipulations such as, "HVAC system must be professionally serviced and filters replaced." Ask your realtor to have the seller leave the repair and servicing bills on the kitchen counter for your inspection. The final walk through is a crucial step in the home buying process. If the seller hasn't abided by the terms of the contract, you may need to delay the closing or back out altogether. A home is a huge investment, so be vigilant but reasonable during the final walk through.
Instead of making an offer that is less than the asking price, consider asking the seller to pay part of your closing costs. Some loans have restrictions on how much of the closing costs can be paid by the seller; others allow the seller to pay all of the closing costs.
Consider this: if you ask the seller to pay all of your closing costs instead of negotiating on price—and you qualify for a 100% financing—you could literally show up to closing without needing to bring any money! But remember that many loan programs restrict the amount that a seller can contribute to closing costs by a fixed number—say 3%. The amount of seller concessions allowed on non-conventional loans varies from lender to lender. Many lenders will allow seller concessions as high as 6% and some as high as 9%.
Paying for part or all of the buyer's closing costs is known as a seller concession, and seller concessions are subtracted from the appraisal price. That means that the home must appraise for the asking price less the amount the seller contributes to the buyer's closing costs in order for the lender to approve the loan.
If the loan-to-value on your first mortgage exceeds 80%, you will be required to pay for private mortgage insurance (PMI). If the seller pays part of or all of your closing costs, more of your cash will be freed up for the down payment, possibly enabling PMI to be avoided altogether.
Another savvy negotiation strategy is to ask the seller to pay "points" instead of negotiating on asking price. One "point" is one percent of the loan paid up front to reduce the borrower's interest rate. Seller-paid points are tax-deductible for the buyer, so the buyer hits a double by getting a lower interest rate and being able to deduct the points paid by the seller.
Having the seller buy down your interest rate can be of more benefit than simply having the seller pay your closing costs. If the seller pays $5,500 towards the buyer's closing costs, the buyer benefits by exactly … $5,500. But if you take that same $5,500 and use it instead to buy down the interest rate from 6% to 5.375%, for example … let's ballpark how much the borrower would benefit. On a $250,000 loan with a 30-year term … if the borrower kept the loan for 7 years … the benefit would be in the neighborhood of $11,000! And that doesn't include the fact that the points are tax deductible for the buyer.
Make sure that the contract stipulates the amount paid by the seller as "seller concessions" instead of "$5,500 seller-paid closing costs," for example. If your closing costs come in at $5,000, for example, you might be leaving $500 on the table. If the sales contract states, "$5,500 seller concessions," you'll be able to use the money as you wish.
Failing to have the locks re-keyed
You have no idea who the previous owners gave keys to. Maybe the previous owners gave a key to their drug-addict cousin a few years back. If a guy like that finds out the house has sold he might stop by when no one is around, stick the key in the lock and relieve you of your plasma television. He might also stick the key in the door at 3 a.m. looking for a place to crash. More likely is that the sellers gave keys to neighbors and cleaning people. The rule here is that it is better to be safe than sorry. Have the locks re-keyed so that you know exactly who has keys to your house.
Counting on the USPS to forward your bills in a timely manner
Don't count on the postal service to forward your mail (most importantly your bills) in a timely manner when changing your address. Make a list of your bills along with due dates so that you can pay your bills on time, regardless of whether or not your mail gets forwarded as it should. Remember that one late payment can send your credit card rate through the roof, in accordance with the fine print on your credit card agreement.
Inadequate inspection of the septic system
Obtain a copy of the original septic permit to make sure that the system is the appropriate size for the house. Some homeowners are surprised to discover that their septic tank is too small for the size of their home. Make sure that the system meets code. Many people don't know that codes change all the time. A septic system that was compliant with the local codes one month ago may not be up to current code today. Most importantly, obtain an inspection from a full service septic contractor, not a home inspector. Traditional inspectors simply aren't equipped to evaluate a septic system. The inspection should be done by a contractor who does more than just pumping septic tanks. Choose a contractor who designs, installs and services septic systems.
Not talking to your future neighbors
One of the biggest home buyer mistakes is not taking the 15-30 minutes to chit chat with some of the neighbors. Neighbors can save you a lot of heartache. Don't be embarrassed to knock on doors and ask questions. After all, they don't call it a closing for nothing. Once the closing is over, the house—and all its problems—are yours. If you are considering making an offer on a home, take the time to chit chat with the neighbors.
Holes where pictures used to be
When the seller takes down their pictures (think Pottery Barn collage), most buyers forget that huge holes will be left after all the dust settles. Home buyers really should insert a "patch and paint" clause into their purchase agreements. Sellers should take down their pictures, patch and paint. Depending upon the wall type, some damage cannot be patched. The more smooth the surface, the more difficult the holes will be to patch. As a house shopper, keep that in mind. Insert a "patch and paint" clause into the purchase agreement; make sure that it specifies that the work will be done by a professional painter. The seller may want to negotiate on this point. If the home is tidy and well cared for, perhaps the sellers can perform the patch and paint work themselves. What you want to avoid is walking into your new home for the first time after closing only to find that your living room looks like someone used it for machine gun practice.
Failing to consider pre-existing conditions
Get a CLUE before you make an offer on a home. Insurance companies swap information using a system known as the Comprehensive Loss Underwriting Exchange (CLUE). If the seller of the home or a previous owner has reported problems with the property such as water or mold, you may have trouble getting insurance. It's comparable to a pre-existing condition in the health insurance world. To be on the safe side, make your offer contingent upon a healthy CLUE report provided by the seller.
Wade Young | Denver Mortgage Broker
Red Door Home Loans
650 South Cherry Street, Ste 100
Denver, CO 80246
303.800.3648