Buying That First Home Round Two - Part 2

Hopefully you read the first article.  If not, you should.  There's a lot of good information there:

Do Your Own Research BEFORE Contacting a REALTOR

Assuming you've gotten this far, it's important you understand what you're up against in terms of what's out there.  Depending on your buying power, you may find lots of inventory or very little.  It really does depend on the metro, and in this current economy, a lot of homes are being taken by Chinese investors who are dropping 100% cash to buy the homes as an investment (and in some cases, to hide their income in another country).  What's left over is going to fit into a number of categories, and you should understand the differences.


As such, this section is appropriately called...

Conditions of Home Sales

No, there isn't one "sale".  There are different types of sales depending on five primary factors:

1. The condition of the home
2. The condition of the seller (usually a bank, builder or investor)
3. The condition of the owner (usually a person, bank or auctioneer)
4. The condition of the neighborhood
5. The condition of the region

Let's go through each of these.  Then I'll talk about the sale types on each.

Condition of the Home

You know that there are homes that have been around for some years.  There are also farms.  There's also the new construction when the population increases outweigh the number of homes available to consumers.    In each of these situations the sale type may differ.

In a normal situation with a home that has been in place for years and has had at least one owner, you'll run into a number of possible sale types.  The most common of these will be a normal, non-foreclosed owner sale.  In this case the owner of the property likely owns the property or has come quite close to paying it off, and is wanting to sell it for one reason for another.  Often, the property has been around for many decades, the owner purchased it new and paid it off, and now that the property's value has increased dramatically, they want to collect the equity and move to something nicer.  It may also be that they are moving out of the area and no longer can stay in the home.  It is important to understand that you most likely won't get a deal out of these sales because the owner has all of the power given the equity accumulated in the home and the fact they don't really need to leave it.

The opposite of the above would be a foreclosure.  A foreclosure means the owner failed to make timely payments, and the bank is now looking to retake possession of the home.  This is possible because though you are the "owner" of the home in title, the bank uses the home itself as a security in the event you aren't able to make payments; it allows them to take the home.  That's what's happened here.  Foreclosures are almost always sold lower than the last sale price but somewhat higher than the value, so that the bank can attempt to recoup at least some of what it lost in trying to get the home sold again and the foreclosure proceding expenses.  They can be dangerous, because if the foreclosure was a bitter experience for the owner, they may damage the property before leaving it - resulting in expenses for the new potential buyer (fortunately, you have every right to negotiate that the bank credit you for those damages by way of paying closing costs or a lower asking price).

New construction has a different sale type, because the owner is the builder themselves who are trying to market the home at a price they feel is acceptable.  Going this route has obvious pros and cons.  

Pros

• You're getting a new home that nobody has lived in or "messed up" before.  
• These homes come with the basic appliances, saving you from having to buy them yourself.  
• The builder will often attempt to sweeten the deal by offering tons of credits and incentives to get you to not only buy at the price they're asking, but to also use the financing company that they prefer (which is often the lender that financed the build and is looking to recoup some of the expense and save on paperwork).  
• The homes almost always "look" nicer than older properties (since they're new.  Duh)
• They're covered, protected and managed by an HOA (more on this in a later article) dedicated to the quality of life of the community.
• In some cases you can customize certain elements at the time of build to your individual requirements.
• There is at least the illusion of safety and security due to the association and security that you pay for.

Cons

• new construction is almost always more expensive than a comparable previously owned property.  
• The lot sizes are almost always smaller due to a desire to cram more homes into the same plot (for profit reasons).  
• The quality of newly constructed homes has been called into question in recent years.  Stories of things falling apart 1-2 years after build.
• Traffic will be impacted by any new construction.
• They're always going to be covered by an HOA.  (More on this in a later article)
• The HOA dues, depending on the metro, price of the home and region, may end up costing you thousands of dollars - and they're NOT tax deductible.  It's almost like paying rent, and for a house you "own" this can be a hard pill to swallow.
• Most new constructions don't appreciate or retain value well, for many reasons.

New construction homes will almost always be above market rates (i.e. more cost over time) but will have more bonuses and incentives, and be somewhat easy to qualify for if you have the credit and income (i.e. less out of pocket up front).  However, they have a lot more considerations to them.

If the home qualifies as in an "economically distressed" area, or exists on farm land, you may encounter homes that are sold as HUD - Housing and Urban Development.  These homes may or may not have anything wrong with them, but by nature of this condition they are eligible for many government programs that are designed to spur growth in these often-neglected areas.  If you've always wanted to have a farm this is the way you want to go - but you do need to be aware that the land value is often higher on these properties, and in metros other than California, you may end up paying a pretty penny in property taxes every year, even if the house itself isn't all that pricey.  These houses are mostly for the "get away" crowd - the ones that don't want to live anywhere near anyone else but they want to have more land and spend less out of pocket to get it.  (It may surprise you that many celebrities will buy HUD homes, tear them down and custom build mansions on the land, so as to minimize upfront cost).

Condition of the Seller

Normally, the seller will be the person occupying the property, or if the property has no current owner, the owner of the property (usually a bank) will do it.  If the motivation for selling is profit, you'll have a tougher time purchasing the home because of bid wars, negotiations, and "low ball offers".  If the motivation for selling is the need to get out of the house quickly, there may be underlying issues with the home, which hopefully your inspection agent will discover and report (more on that in another article) and give you leverage to negotiate the price down.

Condition of the Owner

This sounds worse than it is, but in effect, it means that the owner is the one motivated to leave for one reason or another.   Sometimes the seller and the owner are one in the same; sometimes they aren't.  They may have gotten another job in another state, in which case they may be attempting a short sale.  They may have lost their job and cannot afford the home - same thing.  Or the bank may be foreclosing on the property.  In rare instances the seller has paid the house completely off and is selling so they can make a profit.  When you do your home searching, you'll want to discover and note what this condition is.  Depending on what's going on, you may be able to identify a red flag before it becomes a problem.

Condition of the Neighborhood

There's more to a neighborhood than how it looks and how quiet it is.  Some neighborhoods are constructed in a way that makes it problematic to get to and from your home.  Some have limited or no policies against skateboarding, bicycling, etc. where there may be a noise consideration.  The HOA may put speed bumps on certain roads, or if there isn't an HOA, there may be a lack of speed bumps which might cause a dangerous situation.  You'll want to do deep research into the neighborhood; as a general rule, if the home you're buying has had limited owners, and the current owners are not totally underpricing the home, you should be okay, but do your own research regardless.  

• Crime: What's the latest crime reports from the local police department?  What types of crimes are being committed?  What is the quantity and proximity of sex offenders?  How close is the home to prisons?  How close is it to the fire department, police department, sheriff's office?
• Maintenance: Is the neighborhood well kept (as is often the case in an HOA neighborhood)?  
• Safety: Relates to crime.  How well lit is the area?  How safe would it be to walk around at night and/or during the day?  Any reports of pickpocketing or robberies on the street?  Any shootings?  Any drug reports?  Accessibility for the elderly?
• Inclement Weather: If the area gets snow, are there plows to ensure safe driving?  Are there worker crews if/when the power goes out?  Are there emergency shelters nearby?
• Quality of Schools: What's the rating for the nearest elementary/secondary/high school?  Are there colleges nearby?  Is there adequate public transportation to and from school?
• Quality of Life: Is peace and quiet a priority (commonly found in HOA neighborhoods more than non-HOA neighborhoods)?  Would you feel comfortable living in the area for 5-30 years?  Do you anticipate any concerns with any of the people you encounter?

Condition of the Region

Once you've decided on the neighborhood, be sure to consider the larger region's pros and cons relative to your unique living requirements.  Transportation, commerce (shopping), industry (work), schools, flight paths, crime, weather, allergens...all of these need to be taken into proper consideration.  A perfect house in a crime-ridden neighborhood may not be the best decision to take.  As well, an extremely low-priced home may be an indicator of a hidden risk relative to the region that isn't apparent at first glance.

Using San Diego as an example...just because 4S Ranch is a master planned community doesn't mean that all is perfect.  It backs into a valley surrounded by trees, and was threatened by wildfire some years ago with only one real way of getting out and to the safer parts of the city.  This caused a "funnel effect" with tons of cars cramming into a small choke point to try and escape a rapidly approaching fire that ended up causing major damage throughout the region.  While you wouldn't necesarily expect there to be frequent fires, it also neighbors a fire-prone region, with weather that gets extremely hot and windy, and fires have happened many times over the last decade.

The example above is one of many that emphasizes the need to plan where you want to live very carefully, and research beyond the confines of the house or the neighborhood.  Make sure it's a place that does not have significant risk, where possible.