Archive for July, 2012

Backup Offers

Posted on: July 25th, 2012 No Comments

Contracts for the sale of real estate can fall apart for any reason: financing, inspections, title flaws, and cold feet can all sink a deal. If you’re selling your home, make sure to tell your agent that you want to accept backup offers. This can save you time-on-market and provide leverage in negotiations.

A backup offer is an offer that comes in after another has already been accepted. There’s no limit to the number of backup offers in a transaction. The buyer and seller in a backup offer have no contractual obligation to one another until the primary offer has been terminated. The order of each backup offer is clearly stated in the contract (i.e. “Buyer acknowledges that Seller has entered into one or more contracts on this property prior to the execution of this contract. This contract will be in position number __”).

Why accept a backup offer? The majority of activity for a home occurs shortly after it’s listed. After about a month, activity declines significantly. If a home is on the market for a long period of time, it can become stigmatized. As a seller, it’s best to take full advantage of your home’s market freshness (I made that term up). By accepting backup offers, you can capture all that new interest in your home that may not be there in a couple months.

Another reason to accept backup offers is to provide leverage for negotiations with the primary offer. Buyers can often be unreasonable with what they’ll ask a seller to fix or pay for in contract negotiations. With no backup offer, the seller faces the prospect of putting their home back on the market and starting over if they don’t acquiesce to a buyer’s demands.  Having a backup offer in hand puts the seller in a much stronger position since they need just pick up the phone to put their other offers in play.

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Building a Home: The First Closing

Posted on: July 16th, 2012 No Comments

The closing table. If you make it here, you’re good.

It turns out when you do a construction-to-permanent loan, you’re actually going to do two closings. The first closing is to set the terms for the hypothetical home; the second closing sets the terms for the newly built home. If you get to the first closing, you can relax because your home is going to get built.

Our hypothetical home appraised for what we were asking to borrow, which was good. But a lot can happen between design and build, namely a falling real estate market. The bank will try to write a loan to conforming standards, which means they’ll be able to sell it down the road if they wish. If the home loses value while it’s being built or the bank can’t write it to conforming standards, they may have to keep the loan on their books indefinitely. This is known as a portfolio loan, or a loan the bank won’t or can’t resell.

That’s some beautiful grass.

Our initial loan was set up as a portfolio loan. That way, if anything with the home valuation went wrong after the build, the bank would be protected. When I say protected, I mean we would be stuck paying 6% when the prevailing 30 year mortgage rate was 3.62%. Fortunately, we were underwritten to conforming standards so we’ll likely get a rate much lower than 6% at our second closing (when the home is completed), also known as “loan modification”.

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Finalizing Construction Plans

Posted on: July 16th, 2012 No Comments

We’d been tweaking our construction plans periodically to this point and now it was time to give them the stamp of approval. Once you have finalized plans, you can get bids from building contractors. After deciding which contractor you’re going with, you can submit your plans to the bank for approval and final underwriting.

Reviewing specs and signing the construction contract with Daron

Daron with Bridgewater Construction had helped us put our plans together and had come highly recommended. He was always on schedule and never pushy. I would always recommend getting bids for construction, but in this case I knew Daron personally and knew we were getting good value. Also, when getting bids ALWAYS make sure to get detailed Features and Specifications for your build. This is a list of everything the builder will be providing right down to the type of window trim and paint. With construction plans and Features and Specifications, you’ll be able to get an apples-to-apples price quote from different builders. It also insures that you don’t get a cut-rate bid where the builder sacrifices material quality in order to make money or charges you later in the process for upgrades.

We had one final look at the floor, elevation, site and electrical plans and signed off on them. We also signed a construction contract which provides certain particulars that are required by a lender, as well as signing a copy of the Features and Specifications. We forwarded a copy of all these with a formal loan application to the bank for approval and crossed our fingers!

UPDATE: Here are the plans for our elevation.

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Building A Home: The Loan

Posted on: July 16th, 2012 No Comments

To this point, we have a vacant lot under contract and construction plans in the works. We needed financing to get the ball rolling. With an existing home, there is a structure with value to hold as collateral for a loan. That’s not the case with a new build. For new construction, a lender will put together a construction loan or a construction-to-permanent  loan.

Walking to the bank to fill out the loan application

In broad terms, a construction loan is any loan that is used to finance construction of some kind. Before a lender will provide a dime for construction, they’ll want to know that their money is safe. The first step for the lender is to have an appraisal of the proposed home done. Using the home plan designs and the contract for the vacant lot, an appraiser will provide the loan underwriters with the value they think the fully erected home would be worth. If the appraised value exceeds the building cost (builders estimate + land cost), the home will continue through underwriting.

Construction loan proceeds are paid in “draws”. After completion of predefined phases of construction, the bank will pay the builder for the work completed in that phase. This insures that work is actually being done to get the home to completion.

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Building a Home: Soil Testing

Posted on: July 16th, 2012 No Comments

The primary inspection that buyers of vacant land should perform after getting a contract is a soil test. Pipe clay, decaying organic matter and shallow ground water all pose a risk to the foundation of a home.

Daron marking the corners of the foundation.

Most soil testing companies will do four 10 foot borings as part of a standard residential soil test. Each of the four borings should fall within the footprint of the home that is yet to be built. After our initial builder consultation, we had a good working floor plan ready. It had been overlaid with a survey of the lot so we had accurate measurements of the foundation location. Daron (our builder) stepped off four corners and marked each with flourescent paint.

Next, we called a company to come out and test the soil. Using 10 foot augers, three technicians began boring holes on the four corners. Each handful of dirt that was removed from the ground was carefully scrutinized for any sign of trouble. A couple times they pulled what looked like clay from the dirt pile and each time my heart would stop.

Soil technician examining a boring sample.

Fortunately, nothing significant turned up in the test. There are solutions to fixing soil issues, ranging from reinforcing the foundation with additional rebar to excavating the site and back-filling it with workable soil.

 

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Building a Home: Builder Consultation

Posted on: July 16th, 2012 No Comments

To this point, we’ve got a contract on a vacant lot but no idea what our home is going to look like. What’s more, we only have 6o days to get our building plans together and secure financing, or we lose the lot and our deposit. We scheduled a meeting with one of the builders that had been recommended to us.

Putting ideas on paper with the builder.

We met Daron at the Starbucks on Killearn Center Boulevard. After some small talk, Daron began to ask us questions. What size of home were we considering? How many bedrooms? How many bathrooms? Attached or detached garage? He came with sets of his own floorplans and showed us some possibilities. The one thing that struck Sara and I was how Daron could take our random musings and actually put them on paper. Whatever we came up with in regards to design, he had seen 100 variations of it.

After an hour of discussion, Daron felt he had enough to get some designs started. He didn’t ask us to sign anything or to make a decision to go with him right there. Just that if we didn’t go with him, we would pay his designer for the house plans (which you can expect to do anyway if you’re going to design a home). “Fair enough” we said.

If you’re not tied to a builder (i.e. a builder doesn’t own the land you’re going to build on), make sure you interview at least two. We had two highly recommended, very knowledgeable builders to chose from.

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Building A Home: Making the Decision to Build

Posted on: July 16th, 2012 No Comments

My wife and I had been looking for a home near Lafayette Park for nearly six months, but nothing appealing had come to market in that time. As hope dwindled, we considered changing our plans to live in another part of the city. Then someone asked, “Why don’t you just build?”.

We’d never considered building. For one, we like the charm and history of older homes. The more pressing reason was that there were very few vacant lots still available in that part of the city we wanted to live. Nevertheless, we trained our sights on finding a suitable lot to build on while continuing to look for an existing home that suited our needs.

Time came and went. No lots available. As luck would have it, we were out visiting open houses one day and the attending Realtor of a new build asked if we were considering building. “Yes”. Then she asked where. “Lafayette Park”. She asked if we had seen the lot that was for sale by owner. “Huh?”. We lit out for the FSBO lot. It was a great location and the price was reasonable.

Using estimates on cost per square foot to build from a couple contractors, we figured our cost to build. Based on the sales price of the lot and the size of the home we were going to build, we figured a new home was within our means. We wrote an offer for the lot, negotiated over a couple days, and finally got a signed contract.

 

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Wind Mitigation Inspection

Posted on: July 16th, 2012 No Comments

As anyone who lives in Florida already knows, insurance companies aren’t exactly eager to insure our homes. The common occurrence of extreme weather, including hurricanes, has been cause for many insurers to leave the state altogether. To get the best rate possible from one of the remaining insurers, you should consider having a Wind Mitigation Inspection, or Windstorm Inspection, done on your home.

The most expensive and common home insurance claims involve roofs. To get the lowest rates on an insurance policy, a homeowner may need to show that their home, and particularly their roof, is built to withstand extreme weather. Roof deck thickness, deck and shingle nailing pattern, the presence of roof to wall attachments (toe nails, clips or hurricane straps), and the presence of a secondary water resistance barrier are all construction features that have been shown to reduce losses in hurricanes. You can find a completed wind mitigation inspection here.

A wind mitigation inspection in Tallahassee costs between $100-$150, but the cost savings can be up to 45% off the original policy’s premium. To find out if your home may benefit from a wind mitigation inspection, contact your home insurance agent.

 

To view a completed wind mitigation inspection, click here.

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What is a Termite Bond?

Posted on: July 15th, 2012 No Comments

Termite infestations can happen at anytime and they’re not always readily visible. The best way to avoid having issues with termites is to buy a termite bond.

Consider a termite bond before these guys make an appearance.

A termite bond is a service contact between a home owner and a pest management company. Bonds are like termite insurance: for a small annual payment, the pest management company will cover extermination costs for as long as you own your home. It’s also possible to get additional coverage that pays for damages created by an infestation. As part of the annual policy renewal, the pest management company will reinspect the home for termites. Some companies may also do a proactive “perimeter application” of pesticide as part of their annual inspection. The vast majority of homes under termite bonds end up being treated before termites become an issue.

Before a bond can be issued, most companies will require that the home be treated for termites. Some companies may not issue a bond until a home has been infested with termites. Make sure to check the fine print of termite bonds and always shop around for the best deals.

 

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The New Mortgage Credit Score

Posted on: July 12th, 2012 No Comments

Leading real estate analytics company CoreLogic has partnered with Fair Isaac Corporation (FICO) to develop a new mortgage credit score that both companies say will make more people eligible for mortgages. The new score takes into consideration previously unused consumer data when deciding mortgage eligibility.

It’s called the FICO Mortgage Score Powered by CoreLogic and is said to have shown considerable improvement in risk prediction when compared to other scores. From Yahoo!:

The report includes information that other credit reporting agencies, such as Experian, TransUnion and Equifax, don’t factor into your traditional reports. If you were late on child support payments, applied for a payday loan or had trouble paying your rent on time, it could show up on your CoreScore Credit Report and be factored into your new FICO mortgage score. But on-time payments on a second mortgage will also be factored into your score, as well as all those months you paid your rent like clockwork. It’s not intended as a replacement for traditional FICO scores, but as another tool for mortgage lenders to use early on, at the prequalifying stage for borrowers.”It’s simply bringing in additional data,” says Joanne Gaskin, a director of product development at FICO.

Critics think that the score will unfairly harm some consumers. But take heed: in today’s lending environment, tools such as these are likely to find their way to your local mortgage lender. For more information about the new mortgage credit score, this article by Kelly Dilworth on Yahoo! is pretty balanced.

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