$15,000 Home Buyer Credit - What's the Deal?

2/14/09: Credit has been reduced to $8K. See my updated post here.

The big headline is the news of the most recent stimulus package with a special home buying credit. So what's the story? In short, we don't know yet. It's still in Committee because the House version and the Senate version are different (Remember "I'm just a Bill, on Capitol Hill..." if there two versions don't match--and they never do--then it goes to a committee.)

As of right now, according to CNN:

The Senate bill would double the size of an existing temporary home buyer credit to $15,000. It would also allow all home buyers to claim it and remove the requirement under current law that the credit be paid back. The House bill also removes the repayment requirement but leaves the credit maximum at $7,500 and would offer it only to first-time buyers.

If the Senate version wins out - that is HUGE! $15,000 of free money to ANY home buyer with NO income restrictions! The current Senate version has the credit going into effect the day it is signed and lasting for one year. The Senate version is also non-refundable, meaning that if you don't owe at least $15,000 in taxes, you can't take advantage of the full credit (it does, however, let you spread it over two years.) In that way, the Senate version has been criticized as being disproportionately favoring the wealthy.

This WSJ blog has some interesting detail though -- again, this is all preliminary, so don't get too excited--or disappointed--just yet.

Stay tuned!

Update 2/12: Still in committee, but word on the street is that the latest draft contains a provision for First-time home buyers to get a tax credit of up to $8,000. The bill is expected to hit the President's desk by Monday.

Update #2 2/12: Coming out of committee is the compromise of $8000 credit, does not need to be repaid, available through the end of November, and available only to first time buyers (those who have not owned a primary residence in the last 3 years.)

Ready to start your search for a home in the DC or Northern Virginia area? Consider attending one of my free first time home buyer classes - details are here.

Or start searching for homes in the MLS here.

Free First Time Home Buyer Class in Washington, DC

UPDATE> Classes are ongoing (even though this post is old.) You can always see the most current calendar of classes posted at http://www.newhomebuyerclass.com

The first classes of the year are now scheduled at Martin Luther King Library. As with our other classes, there is absolutely no cost or obligation to attend this one hour educational session where we will recap the current market conditions, discuss the future outlook, and provide an overview of the home purchase process. We'll also discuss the impact of the banking system collapse and bailout, the home purchase process and common pitfalls, financing basics and a how to get started checklist.

Simply contact us to register (enter seminar and the date in the comments) so that we may have materials available for you. Space is limited.

$5000 Credit for DC First Time Home Buyers

Here's a little known add-on to the 2008 Emergency Economic and Stabilization Act - aka the $700 billion bailout bill: the $5000 credit for DC first time home buyers.

Area residents are familiar with this credit, and know that it had expired on Dec 31, 2007. Though typically every year it's passed in a last minute rush of bill approvals, there's never a guarantee and 2008 home buyers had their fingers crossed that it would once again find its way into a bill before year end. Well, DC home buyers, start celebrating: The bailout bill approved the $5000 credit retroactively for all 2008 purchases, and approved its use for all 2009 purchases as well!

To use the credit:
- You must buy a home in the District of Columbia (and not have owned a home in the previous year)
- You must occupy the home as your principal residence
- You must meet the income requirements (up to $70K AGI for single filers, phased out until no credit for AGI above $90K; up to $110K AGI for joint filers, phased out until no credit for AGI above $130K).

Note that this is an actual $5000 credit (not a deduction--an actual dollar for dollar offset on money owed!) on your Federal Taxes. That's the same as Uncle Sam giving you $5000 of your hard earned money back just as a 'thank you' for buying in the District. But you can't take advantage of both this credit and the new Federal $7500 "credit"--not really a credit at all, but rather an interest free loan. For almost all buyers, you're much better off taking the DC credit and passing on the Federal loan.

If you're interested in buying a DC property and want to learn more, contact me.

What Does the Fannie & Freddie Bailout Mean To Home Buyers?

Big news over the weekend and today is that the Federal government is 'bailing out' Fannie Mae and Freddie Mac, who lacked enough access to capital to keep the secondary mortgage market going. While buyers and sellers might initially think that this is bad news, it's actually good, as evidenced by the 300 point market rally at the opening bell today. The markets are glad that what was an 'implied' guarantee is now an explicit one and the markets like transparency.

This is critical to the mortgage industry: Freddie and Fannie buy mortgages that are originated by banks, then package those loans up, slaps a guarantee on them, and sell them to investors. This helps transform what would normally be a very illiquid and long-term investment (30 year mortgages) into a very liquid asset: mortgage-backed securities. This keeps access to capital for borrows high, and interest rates low. Both Fannie and Freddie were chartered by Congress for specifically this purpose.

Before you start slamming this as another taxpayer funded bailout, remember that Congress has control of both their charters and heavily regulates what they can buy and sell. Both companies, though publicly traded, have many restrictions on how they operate their businesses. (The government, for example, sets the conforming loan limit of $417,000, now $729,750 in our area, but due to drop back down to $625,000 at year end). If the governments wants the right to legislate how a publicly traded company--presumably accountable to shareholders--is going to operate, then it's only fair that when things get mucked up the government needs to help out.

In terms of rates, we should expect to see conforming/jumbo-conforming rates drop in the coming weeks by as much as a percentage point.

If you're on the fence about buying, this means the (possibly temporary) return of rates in the 5.5% range! For those of you who recently purchased, keep a close eye on rates -- if rates drop to a full percentage point below what you have, it may actually be worth it for you to refinance. Discuss this with your lender.

North Arlington Condo Market Update - July 2008

Zip Codes 22201 and 22203 (includes Ballston, Virginia Square, Clarendon)

	1 BR Units	2BR Units
ACTIVE LISTINGS as of Jul 22
Average List Price	$353,716	$518,239
Number of Active Listings	49	74
Average Property DOM(P) – Actives	69	90
SOLD LISTINGS
Average Sold Price for Previous Month (does not include seller subsidies)	$346,651	$452,120
Number of Sold Listings in Previous Month	26	16
Average Property DOM(P) - Solds	54	79

Absorption Rate (Balanced Market = 6)

1 Bedroom Condos = 1.9 Months

2 Bedroom Condos = 4.6 Months

* Statistics exclude retirement communities

Click here to see the previous North Arlington Condo Market Update

Source: MRIS data as of 07/22/2008. All data deemed reliable but not guaranteed.

Northern Virginia Real Estate Statistics - June 2008

June's Northern Virginia (Arlington, Alexandria, Fairfax, Fairfax City, and Falls Church) inventory and home sales proved to be an interesting story: Despite the spring timing, inventory dropped (slightly) for the first time since December 2007...



While sales simultaneously rose for the 5th consecutive month.



For the second month in a row, inventory has dropped below the "balanced" level of 6 months. Is this just a seasonal bump? Whether yes or no, a drop in inventory means fewer choices for buyers, and I can tell you from first hand experience that a lot of the inventory out there is junk that most people would never consider buying. So the market may present fewer choices than you think if you're serious about finding a home.

With the Fall right around the corner (though it's 90 degrees out as I write this), we can expect lower prices, but we can also expect even fewer choices. So you might get a great deal, but on a home that's already been picked over by all the Spring buyers.

There's a 'sweet spot' in the early Fall though, where there are homes on the market with sellers who are getting increasingly anxious about the end of the season -- I believe buyers will have a lot of opportunity and leverage in the August October timeframe. Contact me to discuss whether this is the right time for you to begin your search, and whether the neighborhoods you're interested in have rising or falling inventory.

How Do I Start My Home Search?

If you read my recent post "Why I May Not Be Able to Represent You" then you know that it's imperative that you choose an agent early in your home search process. But what happens when you meet with an agent for the first time?

Everyone is different of course, but here is a general idea of how many of my first meetings with clients go. Typically, we'll spend about an hour to go over the basics:

1) Go over the home purchase process.

2) Get an idea of needs vs. wants (i.e., 'must haves') - Bring any listings that you are already interested in.

3) Discuss neighborhoods, what you get for the money, etc.

4) Discuss the financing process. Before we go out to look at properties, you will need to be pre-approved by a lender. If you have already spoken with a lender by this point, bring your Good Faith Estimate(s) and I will go over some key points on them.

We'll also briefly discuss buyer agency agreements, and our mutual obligations.

Depending on the situation, we may even go out to tour properties following this initial meeting. If not, then we'll work together to identify some properties that might fit your needs. If/when we have a few properties (about 6-8) that you wish to view, we'll set up a block of time that we can go see them.

I find that most buyers need to see 8-10 properties (through a combination of open houses and agent tours) in a given neighborhood before they have a good idea of what they like and what they get for the money. Typically during our first few weeks working together we get you "caught up" to homes that are already on the market. Following that, it's easy to keep up to date and see what's new via open houses and brief (1-3 property) tours.

The search process may take longer than you think, though it varies widely by person. The search process itself takes anywhere from a few weeks to a few months. I've had buyers make an offer after just one or two days of looking--it's part focus, part preparation, and part luck.

From contract to settlement (for loan processing, appraisal, home inspections, etc.) then takes 30-60 days additional. You should count on at least 3 months from start to finish.

Shoot me an email today if you'd like to discuss starting your search!

FAQ: If the Seller Pays the Buyer's Agent, How Do I Know My Buyer Agent is Doing Her Best for Me?

If buyer agents are paid by the seller, how do I know they are working to get me the best deal?

I’m often asked this question, especially by readers of Freakonomics (a great book!). It’s a fair question; it seems that it’s an inherent conflict of interest.

Let’s discuss how agents are compensated. Sellers don’t hire an agent, they hire a broker, though in reality sellers often choose a broker based on the agent they like. Let’s say it’s Long & Foster. Long & Foster then has individual contract agreements with many, many agents. (Agents are NOT employees—we’re all 1099, or individual contractors. That means we get to deal with the joys of finding our own health insurance, funding our own retirement, paying our own marketing expenses, and dealing with our own quarterly tax filings, not to mention the 7.5% self-employment tax! But I digress.) Each agent has their own agreement indicating how they will be compensated on every transaction, whether it’s a flat percentage, sliding scale, etc.

A seller agrees to pay a listing broker a compensation of what we’ll call X% or $X. Further, that agreement says that the listing broker will pay a co-operating broker (who represents the buyer) Y% or $Y of that total. That portion gets paid if and only if the buyer has representation. If the buyer does not have representation, then the listing broker keeps the whole thing. Similar to the listing broker and his agents, the co-operating broker (who represents the buyer) has similar agreements with their own agents.

So far, we have x%/$ being split 4 ways: the listing broker, the co-operating broker, the buyer agent, and the seller agent.

So if I, as your buyer’s agent, am getting paid by the seller (though technically it’s the co-operating broker getting paid by the listing broker), and one way or another it’s tied to a percentage of sales price, then how do you know I’m doing the best job I can for you?

I wish I could give you a checklist of “How To Know Whether To Trust Your Agent” but it’s not that simple. Buyers need to choose an agent they trust to have their best interests at heart. It’s a combination of experience, education, and your gut. One thing is for sure: if you are asking yourself this question, you probably don’t trust the agent you’re with.

Here’s another way though: Know whether your agent is building their business based on referrals. Do they keep in touch with past clients? Do they communicate often with you? Do they have events throughout the year designed to thank clients for their business? Are past clients satisfied? These are all indicators that they depend heavily on referrals to build their business, and it’s therefore very important that they do a good job.

These are qualitative ideas though, and I know people want numbers – so let me give an example of why a smart agent knows more important that I do a good job representing a buyer to get future business rather than get a higher commission on a single transaction. Let’s say a buyer overpays by $10,000—that’s real money. Once the transaction is recorded and the buyer lives there for awhile, it will become very clear whether they’ve overpaid. Neighbors talk, and tax records are public information. And if they have overpaid, they obviously will not be pleased with their agent, and will not send any future business. That $10,000 in sales price represents—after splitting four ways, accounting for taxes, etc., about a few tanks of gas in my pocket as a buyer agent. Seriously, no joke. Why on earth would I jeopardize a client relationship, future referrals, and even a future sale (after all, you’re likely not going to stay in that house forever) for such a small amount? For two tanks of gas I’d give up a future revenue stream worth thousands, or maybe tens of thousands? I think not. One of my clients—who happened to be amongst my smallest dollar transactions, by the way—sent me TEN referrals last year!

And therein lies your goal: Find an agent who values the relationship, and builds their business for the long term. Then you can be confident they have your best interest at heart, regardless of who is paying them.

How to Read a Good Faith Estimate or HUD-1

It can be difficult to compare apples-to-apples when looking at closing cost estimates from lenders. There are lots of tricks that a lender can pull to make themselves look better, and there are so many expenses that’s it’s difficult to know which ones are “junk fees.”

Let’s review terminology first. When you make a loan application, a lender is required to provide you with a Good Faith Estimate (GFE). Most lenders provide you with this estimate even if you haven’t made a full application yet. The GFE contains three main parts: your rate/point combination, your monthly housing payment estimate, and an estimate of your closing costs. Though lenders are required to give you an estimate of closing costs—which run 2.5% to 3% in this area—they actually have no control over most of the fees shown! So be warned: do NOT compare lenders based on total closing costs! There are too many places they can under-estimate to make themselves appear more competitive.

The GFE closing cost estimate is an estimate of what will ultimately be shown on the HUD-1 at closing. The HUD-1 is a standard government form with each line item numbered for easy comparison. GFEs, on the other hand, come in a variety of format, further complicating comparisons.

Generally the expenses on GFEs and HUD-1s will fall into these categories:

Total Sales/Broker’s Commission	Section 700 on the HUD-1, and usually not shown on the GFE because this section is an expense of the seller.
Items Payable in Connection With the Loan aka “Lender’s Fees”	Section 800 on the HUD-1. These are your lender fees, and the most important part of your GFE because this is the part your lender actually controls, and is, at least in part, negotiable. This section will also include any points that you are being charged to get your loan rate. So you must compare this section in conjunction with comparing the interest rate charged.
Items Required by Lender to Be Paid in Advance	Section 900 on the HUD-1. This section is primarily driven by the day of the month you close. Lenders require that you ‘pre-pay’ the interest between settlement day and the end of the month. So if you close on the 1st, you owe 30 days of interest. If you close on the 30th, then you owe one day. If you’re comparing lenders, make sure they all use the same assumption for purposes of the GFE. As long as you’re comparing apples to apples in rates and points across lenders, you can ignore this section.
Reserves Deposited by Lender aka “Total Prepaids/Reserves”	Section 1000 on the HUD-1. Most lenders are the same in what they require—a year of hazard insurance, a few months of property and other local taxes, mortgage insurance, and possibly a month of condo fees. The lender doesn’t actually control this section of the estimate, so it’s safe to ignore it in your ‘shopping’ of loans.
Title/Settlement Charges	Section 1100 on the HUD-1. The settlement company determines this section, so it’s safe to ignore it in your comparison of lenders. This is a big chunk of your fees because it includes title insurance.
Government Charges	Section 1200 on the HUD-1. The local jurisdiction determines this section, so it’s safe to ignore it in your comparison of lenders.
Miscellaneous	Section 1300 on the HUD-1. Contrary to popular belief, this is not where the “junk fees” are. Instead it tends to be actual costs incurred for couriers, the survey of the property, and other fees that don’t fit into one of the above categories.

Read more: "Junk Fees"

Read more: Title Insurance

Out: Exotic Loans, 100% financing; In: FHA, VHDA!

FHA is back with a vengeance. It's a key tool in the current lending environment for getting buyers qualified with only a 3% down payment (with gifts permitted in certain circumstances.) There are a few extra hoops to jump through, but I find more and more buyers are utilizing FHA now that the lending limits have been increased in our area.

The Virginia Association of REALTORS has this webcast "Mortgage Lending in 2008: Back to the Future, How FHA can help you and your clients," for agents, but I think it provides a good overview of FHA for anyone thinking of buying. At about an hour, it's a bit long, but worth it.

Some Restrictions on Condos
FHA won't work in some instances, though. Sometimes condos--especially new construction--gets tough. Condos must be on the FHA-approved list to qualify. If it's not on the list, it's still possible to get a spot-approval, but it must meet certain other criteria, e.g., more than 60% owner-occupied, which sometimes is problematic with condos. Some of the criteria may be streamlined as part of an expected upcoming FHA modernization, though, so stay tuned.

VHDA Loans
Another great option for first time buyers in our area are programs through VHDA (Virginia Housing Development Authority), which provides a variety of low-interest loan programs and low-down payment options for buyers who meet certain maximum income limits and property price restrictions. You also must not have owned a home in the previous 3 years unless you're buying in a designated target area, must attend a VHDA-approved educational seminar, and meet certain other guidelines.

Read more: Mortgage Loans: Jumbo, Conforming, FHA, and Jumbo Lights

Read more: Why Don't Fed Cuts Always Cause a Drop in Mortgage Rates?

Read more: What is Private Mortgage Insurance (PMI)?

Want to learn more or have more questions? Attend a free first time home buyer seminar that I teach.

Buyer FAQ: Do I need to hire an attorney?

In Virginia, buyers have the right to choose their own settlement attorney. The settlement attorney represents neither the buyer nor the seller though. So buyers often ask me if they need to hire their own attorney as well. Marcus Simon of Ekko Title, a well respected settlement attorney in the area, has written this special "guest post" to address the ins and outs of attorneys during the real estate process here in the DC area. (I highly recommend Marcus for anyone looking for a real estate attorney, by the way!)

Many real estate sellers and purchasers wonder if they need to hire an attorney to represent their legal interests during the course of the transaction. The answer - predictably - is it depends.

In some parts of the country it is routine for both parties to a real estate transaction to engage counsel. I know this because clients coming from New York and Boston expect to need a lawyer. In California and other west coast states, the real estate transaction is treated more like a financial transaction and there is little attorney involvement, with closing or "escrow" services provided by the bank or mortgage lender.

In the Washington D.C. Metropolitan area a sort of middle ground approach as evolved over the last 20 years or so. Most real estate settlements are handled by non-attorney Settlement Companies or Title Companies. Most of these companies affiliate with law firms to provide certain necessary legal services, like the drafting of Deeds, Powers of Attorney, and other legal documents.

In the vast majority of cases, neither the Purchaser or Seller hires their own attorney, but both agree to allow the Title Company’s affiliated attorney to provided certain legal services and acknowledge the potential that legal conflicts of interest may arise. Contract negotiations, both before and after ratification, including home inspection and other issues, are handled by the Real Estate agents. Occasionally issues arise that the agents cannot resolve without attorney involvement. For instance, there may be a difference of opinion about whether a lien on the property is a cloud on title that would allow the Purchaser to get out of the contract, or what responsibility a Seller has to remedy an encroachment shown on their house location survey. In those cases, the Title company attorney should have provided a list of three independent attorneys for the parties to engage.

In some cases attorneys are engaged from the start. In many Estate cases, for instance, attorneys are hired to handle the sale of property where there are a number of heirs involved in the transaction and there will be additional documentation require to convey clear title. In commercial transactions the parties almost invariably use attorneys throughout the process to draft contracts (as opposed to form contracts usually used in residential transactions) deeds and loan documents.

For most sales, however, from the $300,000 condominium, to the $3 million mansion, the parties rely on their real estate agents and an experienced, competent, and professional Title Company attorney to guide them through the process and help mediate any issues before they become disputes.

Marcus Simon

Founder, Ekko Title

Partner, Leggett, Simon, Freemyers & Lyon, PLC

What is the State of The Housing Market? (Multiple Choice)

What is the State of the Housing Market? Please choose the best answer.

A. Looks like the start of a recovery. NAR Q3 2007 Report indicates roughly half of US markets show an increase in median home prices.

B. About flat, plus or minus 1%...OFHEO reports Home Prices down 0.4% in Q3 2007

C. We have years of decline ahead of us…start keeping cash--strike that, better make it Euros--in your mattress, folks! Case Shiller reports “The Sky is Falling, The Sky is Falling!” (Ok, that wasn’t really a headline attributed to them, but that’s basically the message in all of their press releases…pick which ever press release you want.)

Ok, pencils down. You all get a gold star. No matter which one you choose, you're correct. Why? It comes down to the methodology.

The National Association of REALTORS® statistics captures the median value of home transactions that come from all of the Multiple Listing Services nationwide. They cover all home sales at all price points, and release data in a relatively timely manner.

OFHEO, the government agency that works with Fannie Mae and Freddie Mac, also releases its quarterly analyses. They cover 287 markets, but because they are primarily concerned with the conforming loan market, the track only resales that meet that criteria (until recently, loans under $417,000. See my post on Conforming Loan Limits.) It also includes refinancings, which arguably have more generous appraisals. FYI, OFHEO does typically include an attempt at reconciling their numbers to Case Shiller. Because CS is a privately owned index, the exact methodology is impossible to duplicate.)

Case-Shiller, which is probably the most widely quoted analysis, covers only 20 US markets BUT includes ALL price points and loan types—exotics, sub-prime, and limited documentation. Of course the 20 metro areas covered are very large ones, which typically have more expensive homes (anyone ever compare a 4BR colonial on an acre in North Arlington to a 4BR colonial on an acre in Cleveland?) It excludes 13 states completely and has limited information on 29 others—so incomplete or missing data from 42 states! It also weights transactions—a $700,000 home gets weighted twice as heavily in their index as a $350,000 home. But isn’t a 10% decline a 10% decline, regardless of the baseline? Apparently not.

Dramatic headlines sell papers--remember all the 2004-2005 headlines screaming Buy! Buy, Before You're Priced Out Forever! Doesn't sound like a great idea in hindsight, does it?) While I’m definitely not saying that those in the industry can’t spin stats better than a Maytag, I did find this little tidbit from the NAR pretty interesting:

“Another factor that rarely gets attention is that Dr. Shiller, a Yale professor, has a side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to “scare” the market.”

So what’s a buyer to do? Whom to believe? First, understand the methodology and if one matches up with your situation, pay closer attention to that one. Are you in one CS’s 20 markets and looking to use a no doc loan for a $600K home? CS may be the better measure for you. Are you looking to buy below $417,000? OFHEO may be a better report for you. Want the broadest measure possible? Use NAR. I find that with statistics, perception is reality, and no one calls a market bottom until it’s months behind us, and in the meantime, life goes on. If you’re buying a home, as opposed to an investment property, then do what's best for you, pick a time that works with your life, plan to stay there at least 3-5 years, and buy only what you can afford.

Read more: See my post from last year on Yes, the Market is Down 7% AND up 1%

Read more: from one of my favorite mortgage blogs on spin in the mortgage industry headlines: How Ignoring Adjectives Can Improve Your Understanding of Mortgages

Read more in the Carnival of Real Estate, which included this post. They make the extremely important observation that all real estate is local, so national trends don't mean very much in the first place! Read my posts making similar points here and here. This one is also interesting to look at the very different foreclosure stats, even from county to county, in our area.

Sign up for my newsletter to keep up with DC area trends

Sign up for a first time buyer seminar to learn more about the market

WSJ: "Beyond Auctions" Article on Buying Foreclosures

There's a fantastic article today online in the WSJ: "Beyond Auctions: Ways to Buy Foreclosed Homes."

It explains why there are actually very few bargains to be had in foreclosure auctions, and why buyers (especially first time buyers) need to instead focus on bank owned property (REO). There's a good list of do's and don'ts too. It goes on to say--and I find this to be true--that "Some of the banks will sit [on a property] until they hit their target number -- they may get 20, 30, 40 offers before they're ready to take one....Potential buyers should...put in a realistic bid. You can't expect to bid 50% of the asking price and hope to get it."

Of course there are tons of foreclosures in the Northern Virginia area as a whole, but painting the entire area with one brush stroke can be dangerous. Take a closer look at the foreclosure stats below.


















On the bottom, you can see where Washington, DC, falls compared to other major metropolitan areas. But even that average (about 88 per 10,000 homes) is misleading...Looking at the top part of the chart, I've broken it out by county. You can easily see that DC, Arlington, and Alexandria are a very different market than PG, Stafford, Loudoun, and PW. Are there parts of Arlington that have more foreclosures? Of course. But the moral of the story is to make your decisions based on your specific situation--where you want to live, what type of property you want, etc....and not by a perceived "bargains" of price or availability. You may be surprised at the details behind those "opportunities."

Read more: Blog Post - "I want to buy a foreclosure."

Data Source: GMU Center for Regional Analysis

Read more: Alexandria Real Estate News

Read more: Falls Church Real Estate News

FAQ: Buyer's Closing Costs

Many buyers are aware that they have fees related to the purchase of a new home—a rough guide is 2.5%-3% of the transaction value--but what are these fees, and are there ways to minimize them?

First, a few clarifications. Both buyers and sellers have closing costs in a transaction; the sellers’ are typically much higher (because they pay both real estate brokers) than the buyers’. These fees are typically paid at closing—they come out of the sellers’ proceeds, and the buyer can either pay cash, or can negotiate to have their portion of the closing costs paid by the seller (read more here.)

For this post, I’ll focus on the buyer’s fees. A lender should provide you with a Good Faith Estimate (GFE) when you apply for a loan. This GFE is essentially an estimate of your “HUD-1” form, which you will receive at closing. Each lender has their own preferred format, but you should be able to compare apples-to-apples by looking at the section headers, or, even better, the line item numbers. It’s important to note, though, that lenders only control certain sections, while others may be simply based on their own experience. When comparing lenders, it’s important to focus only on the line items that the lender actually controls.

The fees vary by jurisdiction, broker, and settlement attorney, but a good way to categorize them would be:

• Prepaids – These are generally required by the lender, and may include prepaid insurance, prepaid property taxes, and prepaid interest. Another common prepaid item is condo/HOA fees. These vary based on the day of the month that you close, since they are pro-rated between buyer and seller.
• Points – A point represents 1% of the loan balance and are charged by lenders. This, along with the fees, can easily amount to thousands and thousands of dollars, so it’s important to discuss this with your agent and your lender.
• Fees – These are fees charged by real estate brokers, settlement attorneys, and lenders, and are the toughest to judge for "reasonableness" without experience. These vary widely, particularly among lenders. Some real estate agents will pay their broker’s fee on your behalf—be sure to ask them. For lenders, whose fees can be substantial, it’s important to know early in the process what they’ll charge. These fees can generally be found on your Good Faith Estimate in the 800 section, but look in the 1300 “Additional” section too. Broker's and attorney’s fees are scattered throughout the closing statement sections.
• Title Insurance – This is paid by the buyer and, depending on the policy, can amount to thousands of dollars. It’s a one time charge that covers you in the event of a problem with the chain of ownership. See my post on how to save some money with title insurance here. This is in the 1100 section.
• Government and Transfer Charges – Paid to the local jurisdiction. These can be quite substantial—for example, in the District of Columbia, the transfer (paid by the seller) and recording taxes (paid by the buyer) are 1.1% each. Northern Virginia sellers just had big increase (from $1 per $1000 in value to $5 per $1000) in their transfer taxes.

Read more about how to spot “junk fees” in my post here. This is just a high level summary of some of the most common items on a HUD-1, so be sure to ask your agent to walk you through the expenses and strategize with you on how to keep them to a minimum!

FAQ: Seller Subsidies/Contributions to Closing Costs

I'm often asked how seller subsidies, (also known as “seller contributions” or “closing cost assistance,” work. When a buyer purchases a property, he can expect closing costs of about 3% of the transaction price. (This varies widely by jurisdiction—consult a local REALTOR for more details.) The closing costs are a combination of (1) fees to lenders, brokers, appraisers, and attorneys, and (2) prepaid expenses, e.g., paid-in-advance property taxes or hazard insurance. Many of the prepaid charges vary depending on the day and month in which you settle. For example, if you settle on the 25^th of the month, you typically pre-pay 5 days of interest, whereas if you settle on the 10^th of the month, you typically pre-pay 20 days of interest. For this reason, if a buyer needs to keep closing costs low, it sometimes pays to negotiate an end-of-month settlement. As a general rule, buyers cannot finance closing costs, so a buyer needs to show up at settlement with funds for both their down-payment as well as their closing costs.

Closing costs come off of the seller’s “net” or the amount of proceeds after expenses. Let’s say the seller is listing his home for $450,000 and his selling expenses (fees, etc.) are equal to 8% of the transaction. If he were to receive his full asking price, his “net” would be 92% of the total, or $414,000. In this example, the buyer would need to pay $13,500 in closing costs (3%) + his down-payment.

One negotiation tactic that is very common in this buyer’s market is to ask the seller to pay a buyer’s closing cost ($13,500 in our example), so that the buyer minimizes the amount of cash they need to spend to get into the house. The buyer may actually have the cash, but might prefer to hold onto it as savings, or apply to his down-payment, remodel a bathroom, to buy furniture, or whatever. Tip: You may see “seller contribution” clearly advertised in a listing—don’t let this drive your decision too much—in this market, almost any seller would be happy to contribute to your closing costs whether they advertise it or not. By stating it in a listing, though, in essence these sellers are simply saying “I’m willing to take less than list price.”

Now, getting back to our example, let’s say that a buyer wants to make an offer on that $450,000 home, but after discussing it with his agent, wants to pay only $430,000. (And for purposes of this example, let’s assume that the seller wants to “net” the fair market value of $430,000.) The buyer may offer less, or may ask for closing cost assistance, or a combination. So if the buyer wants his closing costs paid for, he might offer $443,500 and ask for a seller contribution to closing costs of $13,500. The seller then nets $430,000. The buyer would borrow the full $443,500—in essence “financing” his closing costs across the life of the mortgage—but would only need to write a check for the down-payment at closing.

Taking it one step further, if a buyer were to ask for both a price concession AND closing cost assistance, the seller would apply both to his net. In our example, it’s unlikely the seller would accept an offer of $430,000 AND provide a full $13,500 contribution because his net would only be $416,500 rather than the market value of $430,000.

From a buyer’s perspective, asking for closing costs is a good way to minimize cash out-of-pocket in the short term, but the trade off is that the buyer is paying interest (via the higher mortgage) for potentially years. Be careful, though—many lenders have a limit of how much a seller can contribute; they want you to have some “skin in the game” in today’s market! Additionally, review your contract carefully—sometimes any excess contribution is returned to the seller.

From the seller’s perspective, the financial difference of giving a price concession or a closing cost contribution is usually immaterial—the impact to the net is essentially the same. (The only difference is that any fees that are based on a percentage of the transaction price will be slightly higher; in our example, they would be based on the $443,500, and not the net of $430,000. Still likely a very small price to pay to get a buyer to the table!)

2008 Regional Outlook: "Fundamentals Sound"

George Mason University has updated their 2008 Outlook for the Washington, DC, metro area. It’s fairly consistent with previous presentations (perhaps slightly more positive, in my opinion.) Here are the key findings:

• Local job market continues to be very strong, with Washington, DC, having the lowest unemployment rate of the largest 15 job markets (US average = 4.4%, DC = 3.1%.) (See slide 5.) As I have commented here before, the job market is a great indicator of the housing market to come—people go where the jobs are, and they need a place to live. Because this area doesn’t have particularly high vacancy rates in rentals, that translates into pressure on rents (thus providing an incentive for renters to buy), or more demand for homes.
• This area has significantly fewer foreclosures (as measured per 10,000 units) than most large metropolitan areas in Florida, California, and the rust belt. DC (22), Arlington (27), and Alexandria (34) have the fewest foreclosures of any local county. (See slide 13) Think about those numbers for a minute. For every 10,000 homes in the District, just 22 are in foreclosure. This is consistent with other posts I’ve made about this area having two different markets—close in neighborhoods versus outlying suburbs.
• Days on market has increased significantly. (However, this can easily be misinterpreted—see my post on “Some Sellers Get It—And Get It In 30 Days!” Total units sold have declined (duh). Total active listings have increased (again, duh.)
• Percentage change in inventories has slowed dramatically and is consistent with 2003 levels. (See slide 23). We still have quite a backlog to work through, but at least for now it doesn’t appear to be getting any worse.
• Outlook: “Fundamentals are sound, 2008 will be moderately better than 2007.” (And by “better,” of course, they mean better for sellers.) “Housing prices will be flat until at least Spring & will be a mixed story across the region—some jurisdictions will be negative and others showing increases.”

So in summary, all real estate is local, and the DC market is, all things considered, not a bad place to be right now.

(If you found this interesting, see my related post: When will the DC real estate market turnaround?)

Some Sellers Do "Get It" - And Get it in 30 days!

The average Days on Market (DOM) is a good yardstick to measure whether housing inventory is moving. Generally, the higher that number goes, the more leverage a buyer has in negotiating. As the number ticks up, sellers get more and more anxious; buyers start to think: “What’s wrong with that house that it’s been on so long?”

There are two DOM statistics – Days on Market (MLS) and Days on Market (Property), or DOMM and DOMP. DOMM measures the days that a property has a particular MLS code attached to it. The MLS code is a two letter county abbreviation and 7 digit number, so something like AR1234567. DOMP measures the days that a physical address has been listed (though there are ways to cheat the system on this.) DOMP is a better indicator for buyers to use.

The average DOMP for active listings in Arlington right now is 107. (The average DOMM is 87, FYI.) That means, on average, each listing has been sitting for over 3 months. Looks pretty heavily in the buyer’s favor, right? Sellers appear to just not understand that they’re priced too high. But let’s look closer.

Looking at the 174 successful settlements for October 2007 in Arlington, I’ve graphed how long they were on the market prior to sale. We can see from this chart that the average of 107 (which would fall into the last column) isn’t a good representation of “successful” sellers. In fact, 45% of successful sellers had a contract in under a month, and almost 60% had a contract in under 60 days!

What are the implications of this?

• There are buyers out there for properties that are priced correctly.

• If a property is priced correctly—that is, the sellers “get it,” there is a good chance it will be under contract in 30 days, and a very good chance it will sell in under 60.

• On the other hand, for those sellers that don’t “get it”, the property will very likely sit for a long time—over 4 months. Right now there are 295 active listings in Arlington that have been on for over 4 months. In October, 34 settlements had a DOMP of that long. That means only 34 of 329, or about 10%, sold. Sellers, if you've been on for over 4 months you have only a 10% chance of selling. If you list a home and think, well we'll have an offer in 3 or 4 months--you're just not getting it!

In summary:

• Sellers – Price it right quickly, and it will sell quickly. There are buyers out there, but they are savvy and demanding.

• Buyers – Don’t assume that you have 3 months to make up your mind on that home you love—it could very well be gone if the seller already "gets it." If it’s priced well, the market will respond accordingly. How will you know if it’s competitively priced? Work with an agent, track micro-markets, and be actively looking in those micro-markets. Looking at an “average” won’t be enough.

Tax Tips for Home Buyers

Buying a home can bring a number of changes into your life, including financial ones. But for first time home buyers, those financial changes can be good news, especially at tax time. Most people know that there are significant tax benefits to buying a home, but often aren't clear on exactly what's deductible. So as 2007 winds down, I've compiled this brief list of tax benefits related to a home purchase. Not all deductions apply to every situation, of course, so think of this as a list of things to discuss with your tax advisor.

Mortgage Interest – Most homeowners are well aware of the mortgage interest deduction, as this is typically a large amount that makes the decision to itemize on Schedule A a no-brainer. You’ll receive a Form 1098 from your bank with the amount you can deduct on Schedule A. For most first time borrowers, but bulk of your mortgage payments for the first few years are mostly interest, so this one adds up quickly! Interest on second trusts and Home Equity Lines of Credit (HELs or HELOCs) are also deductible within certain guidelines. (Note: If you find that you are receiving a very large refund, you may wish to adjust your withholding using the IRS’ calculator here. )

PMI - Private Mortgage Insurance (PMI) is now tax deductible. But look out - this only applies to loans originated in 2007, so not everyone will benefit. There are also income limitations, and at least so far, this is just a one-year deal, so don't assume you can deduct it in 2008 and beyond. (Update Dec 2007: Congress extended the deduction for mortgages originating between 2007 -2010. Families with AGI up to $100K are eligible for the deduction, with the deduction being phased out up to an AGI of $109K.)

Points – Points—that is, mortgage interest that you prepaid at settlement—are also deductible. A point is equal to 1% of the amount borrowed. This one may or may not be on your 1098, but will be on your HUD-1 settlement statement from your closing. Can’t find your settlement statement? Ask you agent or settlement attorney for another copy. Some agents (myself included) automatically mail another copy to clients in the beginning of the year following the purchase. If you refinanced this year, then points can be deducted over the life of the mortgage.

Property Taxes – Your real estate taxes will also be deductible on Schedule A. It's easy to forget this deduction because most lenders collect it from borrowers as part of their monthly mortgage payment, and pay the local jurisdiction on their behalf. If you’ve prepaid, then the payment is deductible in the year of actual payment. So don’t forget to check that settlement statement to see if you prepaid any taxes that your lender may not be reporting!

District of Columbia First Time Buyers - First time buyers that settle on a purchase in DC before December 31 may get a $5000 credit (not a deduction--an actual dollar for dollar offset on money owed!) on your Federal Taxes. That's the same as Uncle Sam giving you $5000 of your hard earned money back just as a 'thank you' for buying in the District. Use IRS Form 8859. Also, DC buyers—don’t forget to apply for the homestead exemption that exempts the first $60,000 of value of your primary residence from property taxes.

Relocations – If you moved as a result of a job change, many of your unreimbursed moving costs may be deductible.

Upgrades and Updates to Your Home – If you made certain energy-efficient updates to your home in 2007, including high efficiency HVACs, new windows or doors, or tankless hot water heaters, you can qualify for a tax credit. Read more here.

Capital Gains – The first $250,000 in profits from the sale of your home ($500,000 if married filing jointly) is generally tax-exempt if the property was your primary residence for two of the last five years.

Now for the bad news: Some costs are yours alone—don’t try to deduct these expenses: HOA or Condo dues (though the property tax portion of co-op fees may be deductible--consult a tax advisor), property insurance, depreciation, general closing costs, repairs and maintenance, or local assessments that increase the value of your neighborhood (like installing sidewalks.) But hold on to any receipts; certain property improvements add to the basis of your home, and can help exempt profits when you sell.

While organizing all of the paperwork may take a little more time than was required when renting, the result is well worth it for most new homeowners. You may be pleasantly surprised with the difference in amount owed versus what you paid as a renter. Think of it as Uncle Sam's way of subsidizing your housing payment.

General disclaimer: This advice is not intended to apply to all situations, as exceptions and limitations apply. Please consult a tax advisor for your personal situation. IRS guidance can be found at www.irs.gov

When Will the DC Real Estate Market Turnaround?

March 22, 2008.

I'm just kidding, of course. I wish I had a crystal ball to be able to answer that directly. No one knows for sure, of course; it ranges from the NAHB's projection of 2008 (ever notice how industry projections are always six months from the date of the projection??) to this Barron's projection of 2011.

Lots of people are confident that this is part of a normal and predictable cycle. Everyone knows that real estate moves in 7 year cycles as in this article. Or maybe you believe in Hoyt's 18 year cycles, as described here. On the other hand, you can be confident this is part of the 50-60 year cycle, shown here. This one is my favorite: it's all aligned with the nodes of the moon, which means it's an 18-20 year cycle.

So there you have it: the market will turn in either 1, 3, 7, 18, 20, 50 or 60 years. Everyone all clear on that?

But when do you start counting the years? This article from May 2005 says that the bubble won't pop at all until 2009-1010. My point is simply that you can read predictions far and wide, and they're just that: predictions--but no consensus, at least not yet.

National projections don't mean much to an individual market though. In our case, the good news in this area is that the Washington, DC, area is often considered a contender to be the first to turn around (see article here) because of its extraordinarily strong job market and relative, i.e., long-term, housing shortage (see slide 38 of GMU study here.) and also my commentary here.

So is this a good time to buy? Maybe, maybe not. It depends on your particular situation. Buyers should think of the following criteria:

(1) Renting as an alternative: Do the financial analysis of rent-vs-buy using this calculator. Consider the mortgage interest and property tax deductions, the alternative use of funds (assuming you invest them, not spend them), and capital gains exclusion on sale.

(2) Stability: Is your financial situation stable for the next 3 years? e.g., Is your job secure? Are you expecting any life changes like marriage or children that might prompt a move? If you're not going to live in the property at least 3 years, it's nearly impossible to break even in this market due to transaction costs.

(3) Responsibility: Do you want the responsibility of owning a home? The maintenance headaches all become yours, but so do the benefits like stable payments (depending on your mortgage type), the ability to paint or remodel, permission to have a pet, getting away from your current neighbors, and building a "home" with furniture that you didn't have in college. (I moved 10 times in 10 years prior to buying my home--boy was I ready to not move again!)

Once a buyer has considered these points, it may make sense to at least start the process. Depending on which areas you are searching, you may find that the market is trending flat or even up. This is particularly true in areas that are close-in to major job markets (e.g., parts of Northwest DC and Arlington). It takes a buyer months to get to know a particular neighborhoods they're searching, and after that it gets easier to recognize a property that is a good value versus the other inventory--the trick is that you have to be ready to jump on it when you see it, and that takes some prep time.

If you're considering starting your search, contact me to discuss specifics on neighborhoods, and whether it makes sense to buy now or wait.

Negotiating a December or January Settlement?

Then this post will tell you how to potentially save a few thousand dollars in closing costs. Beginning January 1, 2008, the grantor's tax (charged to the seller) will increase from $1 to $5 per $1000 in value (so on a $500,000 home, the seller will pay $2500 to the state, rather than $500.

The localities affected by the increase are: the City of Alexandria, Arlington County, City of Falls Church, City of Fairfax, Fairfax County (including the Towns of Clifton, Herndon and Vienna), Loudoun County, City of Manassas, City of Manassas Park, and Prince William County.

So sellers, push for a 2007 closing. And if you're a buyer who is indifferent about when to settle, offer to settle in December and ask for half of that savings back as a closing cost credit - it's win-win!

Thanks to Marcus Simon at MBH for this reminder!