A Final Walk Through Is Not Always A Walk in the Park

So your home inspection went well. The pest inspection came out all right. Everything is a go with your financing, and the title is clear. Settlement is two weeks away, are you excited about your home purchase? You should be-congratulations! Although everything looks perfect, don’t take your final walk through lightly.

As a home buyer, you have the right to inspect your purchase prior to settlement. As a matter of fact, both the Maryland Association of Realtors (MAR) contract and the Greater Capital Association of Realtors (GCAAR) regional contract have clauses that state your right as a homebuyer to receive the home in the same condition as the day you contracted to purchase the home.

Each clause, although worded slightly differently, states that the home will be delivered to the home buyer free of debris and that all mechanicals, cooling, heating, plumbing, electrical systems, and smoke detectors to be in operating order at time of possession (usually settlement). The MAR contract states that the home buyer can inspect the property up to five days prior to settlement. Both contracts’ make allowances for additional provisions which include home and environmental inspections.

Ok, so there are provisions for the final walk through in my contract, but what is the purpose of having a final walk through and what should I be looking for? The general reasons for having a final walking through is to ensure (among other things) that the home has not been damaged between contract ratification and settlement, that all the seller’s possessions and all trash are removed, items to remain are actually in the home, all mechanical systems and appliances are operational, and that all repairs listed from your home inspection were completed.

Your Realtor should provide you with a checklist of items to be checked by both of you during the final walk through. Generally, you should be looking for cosmetic and structural changes to the home which include damage to walls, staircases, and doors that occurred during the seller’s move prior to settlement; any items that should have been removed by the seller but left behind; and any item that was removed by the seller but should have remained in the home. Additionally, you should check the operation of appliances, air conditioning or heating (depending on the time of year), and any electrical devices including smoke detectors. Finally, you should check that the seller has completed all repairs as agreed in the home inspection addendum.

A Final Walk Through Is Not Always A Walk in the Park

Having a final walk through is just as important when you are purchasing a new home as when purchasing an older home. The builder will schedule a final walk through with you and your Realtor. When having your final walk through on a new home, the builder will check that all the mechanicals, heating, cooling, appliances are operational. Additionally, they will check that any customization that you ordered is correct. You should point out any cosmetic defects, such as dings in the wall, unevenness in paint colors, or any thing else that is not satisfactory. The builder is usually happy to repair or replace items until satisfactory.

If while conducting your final walk through you notice a problem with the dishwasher, what can you do about it? Occasionally, when conducting a final walk through, there are some problems. For example, it is not uncommon for the air conditioning to fail in the summer, or one item from the home inspection addendum was not repaired. If that happens, you have a couple of options. Your first option is to ask the seller for a monetary credit at settlement so you can make the repairs after settlement. Your other option is to delay settlement until the seller makes the necessary repairs.

Finding a real estate bargain

Many first-time home buyers and investors whom I encounter typically ask about foreclosures and handyman-specials. Essentially they are looking to buy a real estate bargain. When is the best time to by a real estate bargain?

A foreclosure is a home that has been repossessed by the holder of the mortgage note, usually a bank. The process of foreclosure varies depending in which state the foreclosed home exists and what type of mortgage document exists on the home. To make a long story short, the home is either auctioned to the highest bidder, or the home is taken over by the bank to be sold on the market. The foreclosed homes that are put on the market are also called REO, which stands for real estate owned by bank.

Foreclosed homes can also be bought at auction. Auctions are usually conducted at the courthouse by a local auctioneer. These types of auctions are also known as a trustee’s sale or substitute trustee’s sale. If you are interested in attending an auction, you can find the advertisements for the auctions in the local papers’ classified section. To bid on the home, you must have the minimum deposit in the form of certified funds. The minimum deposit is usually posted in the advertisement. If you are buying a foreclosed home at auction, you are essentially buying it “as-is” without the ability to do a home inspection prior to close.

When the bank has taken title to a foreclosed home, a Realtor is usually hired to list the home on the Multiple List Service (MLS). In this scenario, you have an opportunity to view the home before you decide to submit your offer. The home is generally sold “as-is.” Hopefully, you will have a Realtor of your own to advise you of the value and general condition of the home.

Generally, the process of buying a foreclosed property can be bumpy due to foreclosure process. Sometimes the previous owner will damage the home (sometimes on purpose), or take valuable materials out of the home such as copper or other fixtures. Additionally, the home is locked up for months, often without utilities. Mold growth is typical due to water penetration, and/or other structural and environmental concerns.

A handyman special is a term that is often used when a home is sold by the owner. The home can have deferred maintenance or other damage.  The home could be a rental property in need of “TLC.” Many times, a handyman special will require mostly a great deal of cosmetic work, such as painting, carpet, etc. Sometimes, there are some structural concerns, such as (but not limited to) replacing a roof, or fixing walls.

Overall, when considering a real estate bargain whether you will have to determine if the home is worth the price you want to pay. In addition to the acquisition cost, you will have to consider the total cost to repair the home, as well as the costs to make updates. It is also important to look at the recent neighborhood comparables to see if the price or adjusted price (price plus costs for repairs) is in line.

If the market is depressed or a buyers’ market, there may be some choices in a real estate bargain.  However,  if the market favors the seller, there are fewer bargains. In a sellers’ market, distressed properties can sell for close to market value.

by Dan Krell © 2005

Searching for your home on the internet

Most home buyers do the internet home search. These home buyers are either looking at websites to find homes that are still on the market, or are receiving listings from their Realtors by e-mail. This is no different with my clients. Clients that I work with always find a discrepancy or two on the homes that still say “active” (meaning they are available to see and place an offer). Sometimes the home that is marked “active” will actually be under contract, or “off the market” for one reason or another. The question that is asked is, “if the home is no longer available to show, why is the status still active?”

That is a very fair question. The answer lies in several factors. The first factor is the technology itself. The second factor lies in procedure and etiquette for entering information in the Multiple List Service (MLS). The third factor is human error.

Many Realtors and Brokers have web sites where home buyers can search for homes that are for sale. You can get an idea of the abundance of these sites by going to an internet search engine and type in “home search Silver Spring.” The thousands of sites that exist all are run by different forms of technology. Although these websites pull information from the local MLS, the nature of the software running the websites will update the listings at different times. Some websites are actually a day or two behind the actual MLS. So, a home showing “active,” may actually be under contract.

Some internet home search websites are updated sooner than other websites, however, some are easier to navigate. If your desire is to find the home and jump on it before anyone else, relying on internet listings is not the way to go.

So much for technology. How about the human element? Realtors inputting information into the MLS also must follow a precise procedure and etiquette. The reason for the procedures is to ensure the accuracy of the information. A Realtor must input their listings within twenty-four hours of obtaining the listing, and must input all subsequent information accordingly. When the status for a home changes, such as having a contract or settling, the Realtor must input this information as well. It gets a bit sticky when the Realtor is working on final negotiations for a contract, but the contract has not been ratified. There is no contract yet so the status can not be changed. The Realtor won’t change the status until the final signatures are on the contract, and this limbo time will create some confusion and frustration for some home buyers and Realtors.

The final reason for discrepancies to exist is human error. There are times when the listing agent (Realtor who represents the seller) will forget to change the status of the home. This is mostly unintentional, however, it does add to the home buyer’s frustration.

The internet home search is helpful, fun and convenient. It is not perfect. Before running out to look at the home of your dreams, make sure it is still available by asking your Realtor to check the status. This will reduce your frustration and make home buying a more pleasant experience.

This column is not intended to provide nor should it be relied upon for legal and financial advice.

by Dan Krell © 2005

How your interest rate effects you

Last week, I was in Starbucks talking about interest rates and the current real estate market. It was not unusual that I was in Starbucks nor conducting business there, as it seems that Starbucks, these days, maybe second to the golf course in the culmination of business. This day, I happened to be talking with Ken Cusick. Ken and I were discussing the vulnerability of those homeowners who purchased their home with adjustable mortgages, primarily interest only mortgages and their mortgage rates. Ken had a lot to say about this topic. Ken is the principal of Cusick Financial, LLC, a financial consulting firm located in Olney, MD specializing in residential and commercial financing.

Ken and I agreed that many homeowners have a great mortgage rate because of the historically low interest rates we have had recently. I expressed my concern about the many homeowners who have bought their home with an interest only or variable rate mortgage to either allow them to buy more home than they normally could afford, or to keep payments down. After all, the interest rates for these mortgages usually started between three to four percent. This cut the mortgage payment by at least a few hundred dollars a month, if not more.

Ken had a few things to say in response, as well as a few words of advice. First, Ken asserted that because the interest only and variable rate mortgages are tied to short term indices, they usually tend to be a better deal than 30-year mortgages (which are tied to long term bonds and indices). Depending on the type of index the mortgage is tied to, the interest rate can change annually or even as frequently as monthly. He stated that the unusually low interest rate environment we have had in the past five years has made housing more affordable, which paradoxically led to the significant increase in home prices we have experienced.

Second, Ken stated that those homeowners who have a fixed rate mortgage would always be able to afford their home as long as their income never decreases and they never need to sell their home. Even if there is a correction in the real estate market to lower home prices, these homeowners are in good shape.

Third, homeowners who have interest only or variable rate mortgages are subject to the volatility of the market as rates rise and fall, and are at significant risk. As interest rates rise, their monthly mortgage payments rise. Additionally, as interest rates rise, the cost of housing rises and housing demand decreases. This creates difficulty for those who were betting on interest rates to stay low because the affordability of the mortgage becomes an increasing burden on those who may not be able to afford higher payments. Add that to the possibility of their home being devalued increases the burden of loss.

Ken’s advice was simple. If the homeowner could not afford the mortgage payment with an increase of of interest by two to three percentage points, then they should refinance into a fixed rate mortgage. He admits the payment will be higher, but the comfort that the payment will not change should be peace of mind in an uncertain future.

If, however, the mortgage rate does not adjust in three to five years and the homeowner intends to sell in within that time period, Ken says to hang in there. The logic is that the only risk the homeowner takes is the possibility of the home depreciating in value. If the mortgage balance is 70% to 80% of the current home value, then the risk is much less.

To many, Ken’s advice would seem a bit too conservative. I, however, believe that this advice to be the consensus of good financial planning.

by Dan Krell © 2005

This column is not intended to provide nor should it be relied upon for legal and financial advice.

Why you need to conduct a home inspection

A home is the largest investment most of us will make in our lifetime. It seems, then, unwise to spend so much money without having a professional opinion of the status of the investment. For example, would you purchase company stock without looking at the status of the company? Wouldn’t you at the very least look at the recent performance, cash on hand, leadership, etc.-and possibly discuss the purchase with a professional investment counselor? So too it is with a home. A home inspection can reveal much about the home you are about to buy.

A typical home inspector will check the status and condition of the home structure including the foundation, basement, roof, gutters, attic, chimney, siding, windows, doors, ceilings, walls, floors. The inspector will also check the operation and condition of the mechanical systems in the home, which includes the heating system (furnace), central air conditioning, ventilation, hot water heater, plumbing and pluming fixtures, electrical system (including electrical outlets). Additionally, the inspector will check all appliances that will convey as well as checking the condition of cabinets and countertops. Other factors checked include the exterior grading around the home, excess moisture in and around the home, any additional structure or system that conveys with the home.

A good home inspector will be able to give you a list of concerns that need to be addressed. Additionally, the inspector may be able to give you an idea of price for any necessary repair or replacement. Recently, it has become popular for home inspectors to provide home maintenance manuals. The manual provide repair and replacement timetables for various items around the house, as well as general Mr. Fix-it tips if you need to make a minor repair.

When choosing a home inspector, you should interview them and make sure they have credentials. Although the state of Maryland does not license home inspectors, there are several bodies that do provide training and certification. The most popular organization that provides training and certification is the American Society of Home Inspectors or ASHI. ASHI has been around for twenty-eight years, and was the first to provide home inspectors with a code of ethics and standards of practice. You can search on the ASHI website for ASHI certified home inspectors as well as getting additional information about the home inspection process. AHIS’s website is www.ashi.org.

Up until the past few years, it was almost a given that a homebuyer would have a home inspector conduct a standard inspection on the home they were going to purchase. However, because of the recent seller’s market providing much competition among buyers, many people have waived their right to have a home inspection.

At what cost are you willing to pay for future structural repairs and/or systems replacement to get into that home? It is not uncommon for defects in mechanical systems to show themselves within the first couple of years of ownership. The furnace or air-conditioning compressor is the first to go on older homes. Whether you are a first time homebuyer or a seasoned homeowner, you might want to think twice before waiving that home inspection.

by Dan Krell
Copyright Dan Krell 2005.