Can You Afford to Buy a House?
Wednesday, December 31, 2003
Credit Blemishes May Be Gone, But Not Forgiven
by Lew Sichelman
Beware any credit counseling or repair service that promises to rid your credit record of late payments, past due accounts and other negatives, even when the black marks are legitimate.
They may be able to get derogatory items removed from your files, but only for a brief period. Within 30 days or so, the benchmarks by which your ability to handle credit issues are judged usually find their way back into your folder, and that can trip up a borrower who's about to close on a mortgage.
Sometimes known as credit doctors, these credit repair firms are successful in getting negative items removed because they flood credit bureaus with dispute letters on behalf of their clients. Under the law, the credit agency must respond to inquiries within 30 days or remove the disputed items from their records.
But these scam artists don't deal with creditors, who are the source of the data contained in your credit files. So when it comes time for the credit card company or department store to report late payers to credit bureaus, the disputed items once again become part of your record.
"Credit repair companies charge people a ton of money," says Eileen O'Neill of Gold Key Credit Consulting in Milford, Conn. "But if they don't take the consumer's beef to his creditor, it's a waste because the item pops back up again on the credit report."
You may qualify for a mortgage at a good rate while the items are gone from your records. But if they are back when the lender re-runs your credit score just prior to settlement, you could not only lose your rate, you may even lose your loan.
Here are a several other tips that might help you achieve a higher credit score:
Make sure that when you pay up tardy accounts, the creditor tells the credit bureau to strike the fact that you were late from your record.
"Updated as paid is not enough," O'Neill advises. "When an item is paid but not removed, the (credit scoring) software looks at it as an admission of guilt, and your overall score will go down for about four months."
If a paid account is not going to removed from your record, O'Neill suggests that you pay the creditor directly rather than through a collection agency and obtain a letter that saying the outstanding balance has been paid in full.
If credit issues are caused by someone on your account other than yourself, contact the creditor to request that person's name be removed from the account.
Legally, says Mari Gottdiener of Outsource Solutions in Menlo Park, Calif., only the primary account holder -- that's you -- is financially responsible for the account. If the name of an "authorized user" who is responsible for a delinquency is not part of your record, your credit score should go up.
Don't wait until the last minute to make your payments. Otherwise, creditors may invoke the "universal default" clause buried in the fine print of your credit card agreements, warns Paul Richard of the Institute of Consumer Financial Education in San Diego.
Under this clause, creditors reserve the right to jack up your interest rate if you are overdue with a payment -- not just to them, either, but to any creditor.
"Essentially it means if you are in default with one lender, you are in default with us, too," explains Richards, noting that creditors and lenders are now more closely monitoring credit reports and often doubling or even tripling their rates at the first sign of trouble.
"Being late on a payment, even to the phone company or a book club, can be very costly if it makes it to your credit report. It is now more than a $30 or $40 late fee, because not only does it trigger higher interest charges, it also will lower credit scores."
To protect yourself, pay your bills at least a week in advance of the due date to give your creditors time to process your payment and post it to your account.
No credit history? No problem. At least not if you have four-to-six months before you want to buy a house.
That's how long you need to establish a credit record or re-establish your credit standing and qualify for financing, advises Gottdiener.
If you have no credit record whatsoever, all you need is a secure credit card account, a gasoline card and a small personal loan. As long as you pay your account balances on time each and every month, you should be good to go, the California attorney says.
Meanwhile, folks who have had previous credit issues shouldn't rely on time alone to cure the impact past delinquencies will have on their credit scores. Rather, the attorney says they should re-establish their standing by charging $1 per month on an old credit card.
Again, though, the bill must be paid promptly to create a good, current credit record.
Published: December 31, 2003
Ask Realty Times
by Peter G. Miller
Question: I recently listed a bank-owned property and received an offer for the asking price, as is and for cash. After sending the offer to the bank they refused to sell it for the listed amount. They did not sign the final contract but called to say it was accepted. Do they have the right to refuse to sell at listing price?
Answer: There are three issues here.
First, the question is not whether the offer was at the asking price, "as is" and all cash. The question is whether the precise terms and conditions of the listing agreement were met. Were there other requirements in the listing that were not accepted by the prospective purchaser?
Second, real estate agreements count when they're in writing. Without a signed acceptance, a verbal okay is worthless.
Third, sellers (whether banks or not) have a right to refuse an offer, even one that meets all terms found in a listing agreement. However, there are two major caveats:
The refusal must not be for discriminatory reasons.
If the terms of the listing have been met then the seller can be responsible for the entire commission. After all, the broker was hired to sell the property under certain terms. If those terms were met then the broker, just like any other professional who completes a task, should be paid.
For details, please review with your attorney.
Question: What is your opinion regarding tax and insurance escrows for a mortgage with a 62% loan-to-value ratio and an A+ rated borrower who prefers to pay their own bills?
Answer: When lenders make a mortgage the loan is secured by the property so it's in their interest to assure that taxes and insurance are properly paid. When a borrower puts up less than 20 percent of the purchase price (an 80 percent loan-to-value ratio), lenders typically insist that the borrower pay 1/12th of the annual cost for taxes and insurance with each mortgage payment.
The money paid to a lender for taxes and insurance is held in an "escrow" or "trust" account and used by the lender to pay insurance and property tax bills when due.
In your situation there is now a strong loan-to-value ratio, but was this the original LTV? Let's say it was. In that case a borrower typically has the option of paying taxes and insurance costs through a lender.
Many borrowers prefer to pay their taxes and insurance directly. They can deposit the money in an interest-bearing account and better control their funds.
Alternatively, borrowers who have the option of paying their taxes and insurance directly often make deposits with a lender, even though they may lose some interest. Why? The money is collected regularly each month, so it's a kind of forced savings that many people find comforting.
In the end, if you have the option to escrow or not escrow, it comes down to a matter of personal preference.
Question: I am getting ready to purchase my first home from a private seller. No broker is involved. I am renting the house and it needs a lot of work.
When we first moved in it was agreed that it would be rent-to-own and now it has turned into a you have to get a mortgage. Since the neighborhood is popular the owners now want $30,000 more than they did before and they don't want to fix anything.
One of the major problems is that the house has mold spores in the closets. We were told someone would be out to fix this and we have yet to see this problem fixed. The roof also leaks and we don't want to buy it unless they fix at least one major problem.
Can they sell this house to us without having to fix these problems?
Answer: A rent-to-purchase arrangement usually means that some or all of the rent will be applied to the purchase price if the tenant elects to buy -- however, a buyer will still need a mortgage for the balance of the purchase price in most cases. The purchase price, incidentally, is typically set and known in advance.
Do you have a written agreement which describes the sale price and rent-to-buy arrangement? If not, what do you have?
What is the attraction of this property? You say it leaks, has mold, and the price has increased.
Three thoughts: First, show whatever written agreement you have to an attorney or legal clinic to determine what rights, if any, you have to purchase. Second, call the local housing department to determine if the property meets code standards. Third, get a real estate broker and see what alternatives may be available in your community. Interest rates at this writing are low compared to several years ago, so you may be able to borrow more and buy a better property.
Question: I have been searching for a house for more than four months but unfortunately haven't found one that meets my needs; prices are constantly rising and now I see that interest rates have started to increase. Now I am afraid of buying a house because most of the properties are over-priced in the market and I wonder if the prices will fall after interest rates climb. Please suggest whether I should buy the house right now or wait, and if I should hold off, how long.
Answer: If properties are "over-priced" why are values rising?
It's best to look at real estate as something you will own for the next five or ten years and perhaps longer. Were homes "over-priced" five years ago? Would you now like to buy at those levels?
Homes in need of repair are routinely sold. Savvy buyers often like such properties -- especially after the sale price has been suitably adjusted.
Real estate is a commodity. Property values rise and fall and there are no guarantees that prices will only rise in the future, especially after inflation. In considering whether to purchase, look at your current and expected housing needs, tax benefits and local trends such as job and population growth. See what makes sense for you in the context of your community.
Question: If a new tenant moves into an apartment should that tenant be entitled to new carpet and blinds? If a tenant's electrical power goes out is the landlord at fault? Also, what if the tenant had a large amount of food stored in the refrigerator and it got spoiled because of the electrical power outage. Should the landlord reimburse the tenant for all the food they had to throw away? My last question: When should landlords get back to you when a housing matter has taken place? If the landlord has personal problems should they put that before tenant matters?
Answer: Many tenancies only last a year or two while carpets and blinds have a far-longer lifespan, so -- no -- unless there is a ridiculous local rule to the contrary a landlord is not required to replace such items with each new lease.
General power failures are rarely a landlord's fault. Power is sometimes lost throughout large areas -- as an extreme example, consider the 2003 blackout that impacted several states. A landlord can't go down to the generating station to pull a switch or string wire on your block -- thus a landlord has no liability when such general problems occur. If the cause of the failure is inside the house, then the landlord has a responsibility.
Lastly, a landlord is not on call 24-hours-a-day. Health and safety emergencies are typically resolved by calling proper personnel such as the police, fire department or an ambulance. Non-emergencies, of course, do not require immediate feedback.
Like all of us, landlords have personal obligations and not all tenant issues can be resolved instantly. Alternatively, landlords should be courteous and responsive to tenant concerns, as would any business person.
Use Of Repurchase Agreement Is Growing
by Benny L. Kass
Question: We are purchasing a newly created condominium unit in an upscale project. When the developer presented us with the sales contract, there was a document entitled "Repurchase Addendum." As best as I can understand the legalize, it states that should we sell or rent the unit within one year after going to settlement, we must give the developer the right to buy back the unit. Although the developer will pay all closing and recording costs, the repurchase price is the same price that we will pay for the unit. Is this a legal document?
Answer: This appears to be a growing trend among condominium developers. Basically, the document that I have seen provides a representation by the potential purchasers that they are buying the unit as their primary, year round residence, and that they do not plan to sell or rent the unit for at least one year after closing takes place.
Furthermore, should the purchaser decide to sell or rent within that one year period, the developer must be given a right of first refusal. As you have indicated, the re-purchase price is what the purchasers paid for the property.
While I personally do not like this concept, it appears to be a valid, legal document. No one is forcing you to buy the unit or sign the repurchase agreement. Under the condominium laws in the Washington metropolitan area (and indeed in many states throughout the nation), developers are legally required to provide a potential purchaser with a Public Offering Statement (POS) which spells out the important aspects of the condominium purchase -- such as the budget, the rules and regulations of the association, and the rights and responsibilities of the unit owners. As a potential purchaser, you have a fixed number of days (usually 15) from the time you get the POS in which to opt out of the deal, at no expense to you.
Thus, if you really want to buy this condominium unit, you sign the repurchase agreement at your peril. After all, you are representing -- both to your lender and to the seller -- that you plan to live in the unit as your personal residence.
Why this apparent trend toward repurchase agreements?
I can understand the rationale regarding renting. The secondary mortgage market (FNMA and Freddie Mac) as well as HUD and the Veterans Administration, impose restrictions on the percentage of investor owners that can own units in a condominium project. If the percentage gets too high (it ranges from 40 to 60 percent), potential purchasers may have difficulty obtaining good loans from their lenders.
Thus, the developer want to make sure that its purchasers will be able to get loans at reasonable rates, so that all of the units in the project will sell out quickly. This repurchase agreement will also provide a level of comfort for the condominium owners that the building will not be overrun by investors who will rent out their units.
However, the sale aspect of this agreement is disturbing. Why should the developer have the right to buy back the unit should the owner -- within one year of purchase -- decide to sell? Clearly, unit owners are entitled to the same measure of profit as the developer, and yet the Repurchase Agreement allows the developer to pay only the initial purchase price.
It is interesting to note that the Repurchase Agreement I have seen gives the developer the right -- but not the obligation -- to repurchase. As we all know, if the unit has gone up in price, there is no doubt that the developer will want to grab it back. On the other hand, I strongly suspect that if the value of the unit declines, the developer will exercise its option not to repurchase.
The only logical reason for such a repurchase agreement, in my opinion, is that the developer believes that the unit may have been underpriced in the first place. But that's the developer's problem. It set the initial price in the first place.
Nevertheless, such an agreement appears to be legal, and will be binding on you should you decide to buy this unit.
However, you should try to get the following additional language inserted into the Agreement:
Notwithstanding anything to the contrary, should the Purchaser have an emergency -- such as a health problem -- which requires the relocation of the purchaser, or should the Purchaser be obligated to move to another location as a result of employment conditions or hardship, this repurchase agreement shall be null and void.
This is a fair compromise. You will represent that you plan to live in the unit as your principal residence for at least one year, and you should be bound by this representation. However, should circumstances arise which are out of your control -- such as health or employment conditions -- you should be permitted to either sell or rent your own property, and make the profit instead of passing it back to your developer.
If the developer agrees to this additional language, make sure that it is reduced to writing in the Repurchase Agreement. Verbal representations will not bind the developer and are generally unenforceable in a Court of law.
Published: December 29, 2003
If You're A New Homeowner, Resolve To Have A Safe House, Secure Finances In 2004
by Michele Dawson
If you are a new homeowner, then 2004 will be filled with new responsibilities, projects and home maintenance to-dos.
Instead of the tired "I'll lose 10 pounds and go to the gym every day" resolution, you could dedicate your efforts to making your house safe and your household financially secure.
One of the most important things you can do is ensure you've adjusted to your new mortgage payment and the slew of other payments you make as a homeowner -- property tax, insurance, utility bills, maintenance services, and the list goes on.
"In the first twelve months after purchasing a newly built home, owners spend an average of $8,900 to furnish, decorate and improve their homes -- more than twice the $4,000 spent by non-movers," the National Association of Homebuilders says in its report, "Housing: The Key to Economic Recovery."
As a new homeowner, it's sometimes easy to get lost on spending sprees and ultimately increase your debt and potentially reach the point at which you get behind in your mortgage payments. That gets even more overwhelming if you're carrying holiday debt.
While you are probably anxious to buy furniture for every room of your new house and decorate everything all at once, financial experts suggest you:
Keep your budget updated. Include all your new bills and expenses.
Create a grand plan for your decorating projects. Map out which rooms you'll conquer over the course of the year. Plot out what needs to be done, whether it's painting, new flooring, or decorative accessories, and set a budget for each room.
Be sure you set aside enough money for savings and for your long-term financial goals -- retirement, your kids' college fund, vacations, etc.
Resist credit card offers. While they may tempt you as they flood your mailbox, don't open new accounts. If you must have a credit card, limit it to just one and pay it off each month. If you buy furniture on a no-interest-for-a-year or similar plan, be sure to pay off the balance in the specified time frame or you'll be hit with interest for the full term of the loan.
Meanwhile, the Consumer Product Safety Commission says all homeowners should resolve to make the new year a safe one. Specifically, it recommends:
Installing and maintaining smoke and carbon monoxide alarms.
Buying a fire extinguisher for the kitchen.
Hiring an electrician to inspect your home's wiring system -- something that should be done every 10 years.
Having the electrician install ground fault circuit interrupters in rooms where water might be present.
And if you have children, the CPSC says you should:
Install safety latches and locks on cabinets and drawers.
Avoid using accordion-style safety gates, which can be an entrapment and strangulation hazard.
Equip your windows with guards. Safety netting for balconies and decks can help prevent serious falls.
Use outlet covers to keep your kids from getting shocked.
Use safety tassels if you have window blinds. The safety devices will help prevent strangulation in the loops of the cord. Also, never place a crib below a window with blinds.
Meanwhile, you should also resolve to keep your house unattractive to burglars. The Insurance Information Institute says nine out of 10 home break-ins could have been prevented if homeowners knew how to burglarproof their homes.
Some of the things you can do to thwart would-be burglars include:
Avoid placing valuables in front of a window -- they can probably be seen from the street and entice burglars.
Make sure all doors and windows have locks. Doors should be equipped with deadbolt locks with a one-inch throw and reinforced strike plate.
If you have sliding glass doors, place a metal rod or piece of plywood in the track to prevent an intruder from forcing the door open.
Always lock the door to your attached garage.
Examine your outdoor lighting system. If your house isn't well lighted, you can install low-voltage outdoor lighting.
If needed, trim the shrubbery near your home's entrance and walkway. This prevents a would-be burglar from hiding in tall, bushy foliage.
Find out if your neighborhood has a community watch program. If it does, join it; if it doesn't, think about starting your own. Visit usawatch.org for more information.
Consider a security alarm. If your house already has an alarm system, ask a professional to examine it to make sure it's working properly. If you don't have one, think about getting one. The International Association of Police Chiefs says a professionally installed, monitored alarm system is useful in deterring crime and providing peace of mind to homeowners.
Published: December 29, 2003
Tuesday, December 23, 2003
Analyzing Real Estate So You Can Make Money
by Clifford A. Hockley
Last night I was reviewing income and expense analysis reports for three different properties, and once again I realized how hard it is for the average investor to make head or tails of the information.
Investing in real estate is a tricky business, and like the stock market, every investment will not be a great one. As a matter of fact, what makes a great real estate investment is keyed as much to timing and interest rates as it is to the true operating costs of a property.
What disturbed me most as I was reviewing the cash flow information on these properties, was that the tax assessor had significantly overvalued the properties. In one case a listing broker wanted to sell his client's building for $1,600,000. The building was half-empty (no real revenue there), the projected income at about 10% over the market, and yet also had expense estimates (yes, estimates, not real numbers) that were 10% to 15% below market for similar buildings. In addition, the broker did not include any estimates for tenant improvements for new tenants, or leasing commissions for brokers that would be procuring new tenants.
The location of the property was good -- close to freeways and major arterials -- but that did not justify his price. After I completed my adjustments to bring the pro forma into some sort of reality, I arrived at a potential purchase price of $1,250,000. Even with adjustments, the cash return was only 5% on the down payment.
I will grant you that every marketplace is different, and market conditions may force you into overpaying for a property you really want, but if return on investment is what you want, you cannot afford to overpay for real estate investments if you expect to retire on the income. Sure, there is a lot to be said for leverage and appreciation, but at the end of the day the cash flow is what counts.
So how does an investor assure himself that s/he is making the right decision and assembling an income and expense statement that is accurate?
1. Examine many similar properties at the same time.
It is helpful to examine similar pro formas at the same time. You will see what one owner or broker may include, and what another may leave out. Look at the market to see how long it is taking to find a new tenant. Talk to other real estate brokers, lenders and property managers in the market to establish a baseline.
2. Review operating numbers for the past three years.
Most financial analysis reports will exclude capital expenses. Bear in mind that you must reserve for capital expenses. The roof will leak, the HVAC will fail, and the main water line will break. I guarantee things will happen that you do not expect. Prepare financially for potential problems. Remember that real estate is an asset that wears out: doors need to be painted, carpets replaced, new faucets installed, etc. By reviewing three years of income and expenses, you will have a much better idea of vacancy rates as well as real expenses.
3. Obtain comparable rent income numbers.
Drive around the neighborhoods where your potential property is located. Call the brokers and the managers to find out what the rents are. Are there any concessions being given to rental units or lease space? Use this information to verify the figures you received for the property you wish to buy.
4. Examine the vacancy rate in the market place.
Each market and specific type of real estate investment has a vacancy rate. Some locations are better than others, and will perpetually have a higher occupancy rate. Look for concessions that have been offered. How will they affect your cash flow when you own the property? Why is your property full? Did the seller hastily rent to tenants from emergency aid shelters (yes, this has happened in weak markets). Banks will not loan on buildings with more than a 5% vacancy rate. They will, however, offer construction loans if you are renovating the building. This may give you some time to find tenants to fill a building, otherwise you will be forced to guarantee the rents, which means your hard-earned cash will not be at work making more money for you.
5. Talk to an appraiser regarding common incomes and expenses in the marketplace.
This seems like common sense, but no one seems to do it. The agent representing you is motivated to close a transaction. They may not be experienced, or may not provide all of the information you need. You need accurate information to make an informed decision.
6. Review the BOMA and IREM expense analysis books for the marketplace.
These books are updated every year and can give you an in depth look at how properties are operating.
7. Ask for schedule "E" tax return information for the property.
Many sellers will refuse to supply the schedule, but in my mind, the proof is in the pudding.
In my conservative opinion, cash flow is what the investor seeks. If your property has an 8% -10% positive cash flow after all of the adjustments discussed above, it should make sense. Many buyers also use CAP rates as an indicator of value; I find it to be a lagging indicator if you compare your property to others in the marketplace. Just because other investors are buying a 4% CAP property, does not mean you should. Maybe the market is overheated, perhaps there is more demand than supply, maybe you should look in a market with 8% - 11% CAP rates, or perhaps low interest rates give you the opportunity to buy something with a low CAP rate and still make money.
You should look at comparison indicators as you pursue your investment strategy:
CAP rate, cash-on-cash return, debt coverage ratios, price per unit (or price per square foot for comparable properties in the same marketplace), percentage of expenses (are they inline or understated). Don't forget to look at the financing and due diligence costs as part of your transaction.
All this analysis may mean that you will make lower offers than another investor. It may mean that you will not be willing to pay as much as a seller wants.
On the other hand, do you want to buy a property that will not appraise, or worse yet, not have a positive cash flow? I do not think so.
Published: December 23, 2003
Friday, December 19, 2003
Home Prime Source Of Wealth For Some Groups
by Broderick Perkins
Lower-income and minority homeowners are better off financially than comparable socioeconomic groups who don't own homes.
But that's not news.
The finding in a new study also applies to other groups, given the fact that a home banks equity for anyone, regardless of their their status.
What's key to the finding in "Home Ownership's Path To Wealth," prepared for the Consumer Federation of America, is that a greater portion of the wealth of lower-income and minority home-owning households is in their home, compared to other groups.
Based on data from the Federal Reserve Board's Survey of Consumer Finances and analyzed by Professor Catherine Montalto, an associate professor with Ohio State University, 97 percent of all homeowners held at least some home equity, and the typical homeowner had accumulated $70,000 in equity.
For all homeowners, home equity represented 42 percent of their net wealth, but for lower-income and minority households, the percentage was much higher.
For lower-income households, home equity represented 80 percent of their net wealth, 63 percent for Hispanic households, 60 percent for moderate-income households, and 52 percent for African-American households.
Low-income households are the one-fifth of the population with the lowest incomes, while moderate-income households are the one-fifth with the next lowest incomes.
For the one-fifth of all households with the highest incomes, only 26 percent of their net wealth was represented by home equity.
That indicates home ownership appears to be an easier way for minorities and lower-income households to build wealth.
"Most lower-income and minority households hold few financial investments, including retirement accounts, so they depend on home ownership to accumulate personal wealth," said Stephen Brobeck, CFA executive director.
In 2001, the typical low-income homeowner had a net wealth of $50,000, while the typical low-income household without home ownership had net wealth of only $7,900. Low-income households are the one-fifth with the lowest incomes.
"Paying off the mortgage on a home has been, and will continue to be, the easiest way for lower-income and minority households to build personal wealth," said Brobeck.
CFA and other national housing groups announced a new "Build Wealth Through Homeownership" initiative to help more low- and moderate-income households save and build wealth.
The initiative includes wealth-building strategies and services throughout a network of many housing and consumer advocacy organizations including the CFA, Fannie Mae, Freddie Mac, Mortgage Bankers Association of America, National Community Reinvestment Coalition, National Council of La Raza, Neighborhood Reinvestment Corporation, New Economies for Women and others.
As part of the initiative the "Build Wealth Through Homeownership brochure" offers advice with five themes:
Prepare yourself for home ownership. Pay down consumer debt to increase your credit score. Higher scores get lower rates and more loan choices. Develop a saving plan to build up money for your down payment.
Purchase a home. A home fosters economic empowerment. Get qualified for a home loan before you look for a house, condo, or coop to learn whether you can afford to purchase a home and at what price. On your own and with references from those you trust, contact at least three lenders. Ignore uninvited loan offers you receive through the mail, by e-mail, by telephone, or at your doorstep.
Once in the door, make home loan payments on time. On-time payments build wealth and good credit records and they avoid costly fees.
Seek help if trouble appears. As soon as you are aware that you might miss a payment, contact the lender, contact the counseling agency or service that helped you with your purchase and otherwise seek out accredited, nonprofit consumer credit counseling agencies.
Use equity wisely, typically for major emergencies, capital investments like home improvements and education, or to consolidate high-cost consumer debts -- provided you don't generate more new high-cost debt.
Published: December 19, 2003
Thursday, December 18, 2003
Homeowners Insurance Shopping Update
by Broderick Perkins
Buying homeowners insurance for the first time? Renewing your policy? Trying to increase coverage? Thinking about filing a claim?
Think again.
Obtaining and retaining homeowner insurance isn't what it used to be. Moisture and mold, mounting natural disasters, and perhaps even California's fires could play a role in your coverage and what it costs.
Experts are advising a staunchly proactive approach to keeping your most valuable asset well protected from damage or loss.
Here's the most current advice for acquiring and retaining insurance for your home.
Get "preapproved" for homeowner insurance. Just as home buyers need to make sure they have the financing necessary to buy a home -- before they go shopping -- they also need to make sure they can find the insurance they need in the neighborhood where they are shopping. There could be new policy moratoriums in areas where disasters have hit.
Seek full disclosure. If a home is difficult or costly to insure because of its location or history of claims, age or other factors and the seller is aware of that condition, the seller may be legally obligated to disclose it, depending upon laws in your state. While there is no law specific to insurance claims disclosure, disclosure is required when there is some condition that could affect the value or salability of a property.
"(The problem) might have been remedied, but if there was a problem, you may have to disclose it," says Mike Donohoe, president of the Santa Clara County Association of Realtors in San Jose, CA.
A home with many insurance claims or repairs that could indicate the need to file claims later, may affect its salability and as a result its value. Even if there is no disclosure about insurance claims or conditions that could spark them, potential buyers should ask the seller directly about any insurance issues. Buyers should also consider property inspections to discover potential problems.
"Property inspections can help prevent possible conditions that could lead to water-related claims and they can identify any active problems. Significant water damage or active water leaks can be identified by a competent inspector. This is why general home inspections are not only desirable prior to purchase but are a good idea on a periodic basis -- maybe every three to five years," said John H. Kunz, of John Kunz & Associates in Hollister, CA.
Check a home's record of claims. If a homeowner honestly isn't aware of previous insurance claims he or she obviously can't disclose them. "CLUE" knows better. CLUE is the Claims Loss Underwriting Exchange, a database for insurance claims available from Alpharetta, GA-based Choice Point, an identification and credential verification service.
When a customer files an insurance claim or inquires about filing a claim, it gets reported to the CLUE database. Insurers use the database to decide whether to issue a new policy, renew or raise rates.
California state law, and perhaps others, prevents insurers from using CLUE inquires alone in adverse underwriting decisions, but the reports can tell a potential buyer what to expect when attempting to insure a specific home.
Only the homeowner can obtain the CLUE report, but buyers have the option of making a home sale contingent upon receiving a copy of the CLUE report from the seller and accepting the results.
"CLUE is full disclosure and something that consumers should demand. We recommend it as part of transactions. It's not a statute, but real estate agents are requesting it," said Peter Moraga, a spokesman for the Insurance Information Network of California.
Upgrade your home. Modernize heating, plumbing and electrical systems to reduce the risk of fire and water damage and related insurance claims. Eliminate deferred maintenance on systems that could trigger an insurance claim. Earthquake retrofits, fire resistant building materials and other structural bulking-up also add marketing value when it's time to sell.
Determine what coverage is adequate, including maximum payouts and deductibles. Shop for enough coverage to avoid a major financial loss in a fire or other catastrophe. Most homes are under-insured because market values have grown, owners have conducted value-boosting home improvements and they hold more possessions.
Shop for replacement cost coverage, not home value-based coverage. True replacement cost coverage is based on what it will truly cost to rebuild a home and replace its contents at current prices. Home value-based coverage can fall short of that amount.
Cut costs. Reduce costs by raising deductibles to affordable levels. Small discounts are available for home fire safety and security systems, but check with the insurer before buying or installing such systems. Even without a discount, consider the extra layer of protection and value the systems provide. Also, buy multiple policies (auto, life, health, etc.) from one company for an additional discount.
Clean up your credit act. Insurers increasingly use credit-based insurance scores to set premiums and to approve or reject new and renewed policy applications.
Understand what's necessary to file a claim and what can happen to your policy if you do. Keep detailed property and contents records with both written descriptions and visual records, say, photographs, video tapes or digital images to document property conditions and the scope of its contents.
"Generally, most insurance agents I have talked to about this topic have indicated that it is a good idea, if the water-related claim is small, not to submit it due to the CLUE report and the potential hurdles it can create down the road," said Kunz.
"I think that the insurance industry should soften their position a little with regards to this CLUE report. With a competent water damage restoration, air sampling before and after (mold testing), I feel their risks are lower," he added.
Get help from an independent insurance agent. He or she can search multiple companies and should be aware of a company's current rating with A.M. Best Co., Standard & Poors or other firms that rate insurers based on their financial status -- an indicator of how they can handle widespread claims after a disaster.
Get more assistance and stay informed about the latest homeowner insurance issues by visiting your state or jurisdiction's department or office of insurance. Additional resources are available from the Insurance Information Institute and Insure.com.
Published: December 18, 2003
Monday, December 15, 2003
What Is A Power Of Attorney?
by Benny L. Kass
Question: When my father died, my mother moved out of the family home and moved in with my sister in Colorado. She is now selling the family home, which is located a considerable distance from where she currently resides in Colorado. She has entered into a purchase and sales contract and settlement is to take place at the end of this month.
Although my mother is mentally competent, she cannot fly back for the settlement. She lived in this house for almost 35 years and has a strong emotional attachment to it; I really don’t want to put her under more stress and strain. What can she do to avoid this unnecessary expense?
Answer: The answer is quite simple. Have your attorney (or the settlement company where settlement will take place) prepare a document known as a "power of attorney," whereby your mother would authorize you to sign all legal documents in order to convey the property. A power of attorney is a written document whereby one person -- as principal -- appoints another as his or her agent, (attorney) and gives that agent the authority to perform certain acts on behalf of the principal. The written document itself is the power of attorney. In many parts of the country it is called a "letter of attorney."
The power of attorney can be general, special or mixed. A general power of attorney gives the agent the broadest possible powers to act on behalf of the principal. The attorney acting under this general authority usually can sign deeds or other legal papers, and the principal will be bound by the acts of the agent.
In a special power of attorney situation, the principal authorizes the agent to take certain actions -- actions which are specified in the document itself. The agent holding the power of attorney must be quite careful not to exceed or deviate from the specific authority spelled out in the written instrument.
The rules for powers of attorney vary from state to state. Here is a summary analysis of the power of attorney laws in all of the three surrounding jurisdictions.
In Virginia, as long as the agent has a general power of attorney, the agent has authority to sign a deed -- and a deed of trust -- on behalf of the principal. There are specific rules and requirements as to how the agent should sign, and these should be reviewed before the power of attorney is executed by the principal.
In Maryland, a deed can be transferred by a power of attorney, but the attorney-agent must act under authority of a special power of attorney. This document must authorize the agent specifically to sign a deed for the property in question. Additionally, the power of attorney must be recorded among the Land Records in the appropriate county in Maryland before the deed signed by the attorney will be valid.
In the District of Columbia, powers of attorney for the sale of real estate only recently became the law. However, there is special language that is required to be on the top of the power of attorney document, and the Recorder of Deeds will not accept the document without this important language.
Thus, your mother does not have to make the trip back to this area. A power of attorney can be prepared, which should be sent to her as soon as possible. She will have to sign the document, have it notarized, and then returned to you.
When you go to settlement, you must give the settlement attorney the original, signed and notarized document. The attorney will have to record it among the land records where the property is located before recording the deed of conveyance.
Not everyone wants to give a power of attorney for the sale of real estate. Some people like to sign their own documents -- especially the deed to their property. Thus, you can also make arrangements with the settlement attorney to send your mother -- by one of the special courier services -- all documents which she will have to sign. Those documents will also have to be notarized and specific, clear instructions must be put on every page where a signature is required. Your mother should then send the papers back to you -- not the settlement attorney -- so you can bring them to the settlement.
Here's a tip, however: You should be present at settlement to make sure that all of the papers are in order. Make sure that your mother is available near a telephone if questions come up. Settlements, in my opinion, are the beginning and the end of a process. Many times, questions come up which can only be answered by the owner -- such as when the fence in the back yard was installed, who services the boiler, or who are the neighbors.
All too often, buyers and sellers take the settlement proceedings for granted. However, it is a very important step in the home buying (or home selling) process, and must be treated with respect.
You have indicated that your mother is mentally competent to sign a power of attorney. That is important. If she were not competent, you would have to go to court -- most likely in Colorado where she is currently living -- and have a conservator appointed to handle the financial affairs of your mother. This is a time consuming -- and often expensive -- process, and thus it is recommended that everyone prepare a "Durable Power of Attorney" authorizing a relative or a friend to handle your affairs should you be out of town or incapacitated.
Published: December 15, 2003
Thursday, December 04, 2003
Conquer Closet Woes Before You Move In
by Diane Benson Harrington
Moving out of an apartment and into a nice, big house? You may think your closet crisis has been solved. But whether you have the smaller closets of an older home or the spacious storage areas of a newer house, it's important to use the space wisely.
Options abound for closet organization systems, from companies that create personalized designs to do-it-yourself kits from home improvement stores. Americans clearly are taking advantage of all they offer: The International Housewares Association says we spend nearly $9 billion each year on space organizers and products for closets and clothing care - almost 12 percent of total U.S. retail houseware sales.
Since an empty closet can be as frightening to a homeowner as a blank piece of paper is to a writer, here are a few tips for strategic storing:
Don't store things you don't need. Before you put hanger to rod, assess whether you really need or wear everything you own. If you store warm- or cold-weather clothes for half the year, figure out what needs to be hidden away now. Under-bed boxes and vacuum-sealed plastic storage bags are great space-savers. Find room outside the bedroom - in the garage, attic or basement - for things like ski boots, scuba wet suit, and holiday clothing that you rarely need.
Once you have the excess out of the way, you can better design your closet. Write down what you have - 5 sweaters, 10 blouses, 6 pairs of pants, 8 pairs of shoes, etc. - and take it to a closet-design company or a home improvement store. It's easier to buy what you need if you can see all the options and match them to your clothes. Consider defying tradition; just because your closet has a rod doesn't mean you have to hang everything. If you prefer your clothes folded, invest in a closet system with more shelves and drawers than hanging space. Plan to give clothes plenty of room: Freshly ironed clothes, if squashed together, don't stay wrinkle-free for long.
Choose a flexible system. Lots of bulky sweaters? Shelves or shelf dividers may serve you best. Nothing longer than dress shirts and trousers? Add a second, lower bar to take advantage of that unused space. Just keep in mind that if you buy more sweaters next year or if skirts get longer (or shorter!), you'll want to be able to reconfigure your closet.
Aim for order. Being greeted each morning by an orderly closet somehow seems to make the rest of the day less chaotic. Most closet experts recommend hanging clothes by category (work or casual, and pants, dress shirts, casual shirts, skirts, dresses, etc.), then organizing those sections by color.
Tackle accessories. How you store shoes depends on how many pairs you have and what else you have in your closet. If you don't have many hanging items, a hanging shoe organizer might be best. If you use all your rod space already, horizontal shoe racks on the floor or over-door shoe organizers may work better. If you don't have many pairs, invest in see-through shoe boxes so you can stack them to save space. Specially designed racks or hangers for belts, ties and scarves, attached right near the hanging clothes, make it easy to pick out these accessories. I keep a large, flat, multipocket organizer on the inside of my closet door to hold all my jewelry, so I can pick those out as I get dressed.
Make it simple. My life got better - and the avalanche of clothes ceased - when I put a simple step stool in my closet. Now I can reach the stacked sweaters and folded jeans on the shelf above the rod without a struggle.
Though it may be a tempting, don't put a laundry hamper in your closet. Dirty clothes smell stale (or stink, if they're socks!) quickly, and the odor will permeate your clean clothes.
Beyond the bedroom. Try to store bath towels in the bathroom instead of a hallway linen closet. Save that for sheets - putting each full set inside its coordinated pillowcase. Unless you travel often, keep suitcases in the attic or basement or in the closet of a spare bedroom.
SEE what you've organized. Invest in ample lighting for your closet so you aren't mismatching clothes in the dark.
Here are only a few of the many sources for closet organization items:
ClosetMaid (www.closetmaid.com)
Hold Everything (www.williams-sonomainc.com/com/hld/)
Elfa (www.elfa.com)
California Closets (www.calclosets.com)
Container Store (www.containerstore.com)
Published: August 19, 2003
