If you’re like most first time home buyers, you’ve heard terms like closing costs, prepaids, escrow accounts, title insurance, mortgage insurance, but you may not be sure what they really are.

You may have questions like:

How does a mortgage payment work?

When is the best time to close?

What’s the best loan for me?

How do I take advantage of being a buyer in this market right now?

Doug Olson @ HelpUSell initiates a plan with a first time buyer: “I usually spend time with my clients right up front explaining all of these items and creating a personal real estate plan for them.  If you like, I’ll be glad to do that for you.  It’s free.  Is that something you would be interested in?”

 $8,000 Tax Credit

Doug asks more questions: “Will this be your first home?  (If answer is “No”, Have you owned a home in the last 3 years?)

I’m sure you’ve heard of the $8,000 tax credit.  There are some misunderstandings about it:

It’s not a loan.  That was a previous program.  This is cash to you.  You don’t have to wait until next year to claim it.  Most people are receiving their check just weeks after purchasing their home. You don’t have to pay it back, as long as you stay in the home for at least 3 years.  Keep in mind that there are some restricitons.”

How Is The Market?

Doug Olson:  “This is a great market, especially for first time buyers throughout the Twin Cities.  We’re helping first time buyers purchase homes with little or no money out of pocket, where they can have instant equity in the home, receive $8,000 from the government and get a historically low interest rate.

We’re also showing people how to improve their personal cash flow by hundreds of dollars each month by taking advantage of the current market and programs.  Let me show you how we’re helping one client own a home and save over $400 more a month over what he’s currently doing.”

Big Concern For The Buyer- Cash

Doug Olson: “If you’re like most first time buyers, one of your biggest concerns is cash.

You need cash for 3 reasons:

      1)       Down Payment

      2)       Closing Costs

      3)       Prepaids (insurance, property taxes…)

The down payment is a buyer’s responsibility.  This means you have it or I have to figure out a way you don’t need it.  The closing costs and prepaids are negotiable.  Either the buyer can pay for them or the seller can.”

When negotiating, most buyers and REALTORS go after the price.

Let’s use a simple illustration of $1,000: 

The benefit of getting the seller off the price $1,000 only reduces monthly payment by $6.  If that’s a big deal, the buyer is in the wrong price range.

Doug Olson:  “With my clients, I focus on TERMS.  Instead of worrying about saving $6/month, I’ll have the seller pay $1,000 towards the buyers closing costs.  That’s a $1,000 the buyer doesn’t have to come in with.

I’m sure you’d rather keep $1,000 now than save $6/month.  Of the $1,000 the seller pays for you, if any of those items are tax deductible – even though the seller paid them – you write them off your taxes, not the seller.

Here’s an example: The buyer negotiates to have the seller pay all of the closing costs and prepaids.  That will be around $5,000.  If the seller pays all of the closing costs and prepaids, then the buyer is only responsible for the down payment.

By focusing on terms instead of price, you may be concerned that you may pay too much for the property.  We’re still going to try to improve on the price, but the first objective is to get the home with little or nor money out of your pocket.”

 Two ways to make sure you don’t pay too much:

Doug Olson: “I’ll research the home before we make the offer.  I should be able to tell you when the sellers bought the property, what they paid for it, how long it has been on the market, if there has been a price change, and if the property went under contract and went back on the market.

I’ll then find homes in the area that have sold recently and give debits and credits for things they have or don’t have compared to the home you’re interested in.  I’ll then know a truer value of the home.  Just in case I miss something, we may make the offer subject to the home appraising.

In summary, the idea is, you pay no more than what the property is worth, hopefully a lot less, but let’s have the seller pay all of your out of pocket costs.”

How it works out:

Buyer’s debt balance          $8,700

Payment on debt                  $685

Current Rent                         $700

Rent plus debt                      $1,385

Comfort payment                 $900

Plan:  When the buyer closes on their new home, they will not have a house payment for the first month. For instance, if the buyer closes on the home on May 31^st, the mortgage payments don’t start until July.  The buyer is able to pay the $700 they would normally pay in rent towards the $8,700 debt.  Now the debt balance is $8,000.

When the buyer receives the tax credit, apply it to the remaining debt balance and eliminate all debt except for the mortgage.

Proposed Cash Flow:

Current                                   $1,385 (Rent & Debt)

Proposed                               $900 (House payment only- debt has been paid off)

Savings                                  $485

Under this plan, the buyer is saving $485/month, owns a home and is receiving additional tax benefits. Plus, they’ve found a foreclosure where there’s a minimum equity position of $20,000.

SUMMARY:

The client will get into the property with little to no money out of pocket by negotiating the closing costs and prepaids to be paid by the seller.  We would look for a minimum to no down payment loan program.

The client now owns a home, keeps $485/month, has immediate equity in the property plus additional tax deductions.  We then would encourage the client to take a major portion of the monthly savings and apply it directly towards the principal of the mortgage.

Out of the $485/monthly savings, if buyer applies $350 towards the principal:

                Interest saved                       $82,970

                Pay off mortgage                  16 years

Doug Olson is a very experienced and reliable Twin Cities real estate agent and co-owner of the HelpUSell Real Estate office in Minneapolis.  Doug holds many professional designations including e-Pro, ABR, and SRES.

_Brian 29 OCT 2009

If you’ve bought or sold a home in the Twin Cities area in the past ten years, chances are you paid an administration fee to your real estate broker when you closed.  How can you find out?  Review your HUD-1 settlement statement/s and refer to the 700 numbered section, usually #704.  If the line item is blank, your broker did not charge you.  If not blank, you will know what you paid.  Now if you’ve arrived at wondering what the fee is all about, you’re not alone considering buyers and sellers in many states are organizing to ask the same question.

According to a recent United States District Court class action ruling against a real estate company in Alabama, a broker administration fee that does not account for a service provided at settlement is a violation of the Real Estate Settlement and Procedures Act (1974).

(RESPA) Section 8(b) states:   “No person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service… other than services actually performed.”

Similar action in several states has raised responses by National and State Associations of REALTORS. From the NAR website:

Laurie Janik, NAR general counsel, put it this way: “The court found that the ABC Fee represented an additional charge to the buyer to defray the overall costs of the brokerage services she received, including the broker’s overhead and administrative costs. However, because the ABC Fee was separately itemized on the settlement statement from the percentage brokerage commission, and not specifically justified as compensation for other discrete ‘real estate settlement services’ provided, the court viewed it as a duplication of the percentage commission charges, thereby rendering it an unearned fee in violation of RESPA.”

My office has never charged a broker admin fee although I’ve attended hundreds of closings where the fee was charged at the other end of the transaction. On the occasions when a buyer or seller spoke up during the closing and questioned or refused to pay the fee, the agent usually defended the fee as necessary to cover the costs related to maintaining records.  So the question I always wanted to ask is:  If maintaining records (the contracts, etc we’re required by law to maintain) equates to charging a fee in exchange for a real estate service provided at settlement, why don’t they just call the fee a commission (considering the same companies are still capable of convincing some people that a 7% commission is a good deal)?  

Anyway, if 7% still isn’t quite enough, why not promote the fee up front?

_Brian 17 AUG 2009