Buying a Home: Make Sure it's the American Dream, Not the American Nightmare!
So you want to buy or build a house. Really? Are you sure? Once you do, you can kiss goodbye living in a hut on a beach in Belize and throwing away all of your shoes: you’re stuck. And I don’t think that James Bond ever had a house payment. But if you decide to join us, the pathetic millions trudging to work every day to pay for that new roof or that new wallpaper, worrying about moles and crabgrass as we revel in the glories of home ownership, there are some rules you need to follow.
Rule #1: How Much House Can You Afford?
When you think you’ve found your dream home or dream house plan, prospective lenders will provide you with what’s called a Good Faith Estimate that will give you the information you need in order to compare loans and choose the one that is the best fit for you. A good rule of thumb is that your total housing expense should not exceed 1/3 of your income. Don’t buy too much house - you’ll regret it later as you slave away 24/7, never take a vacation, and eat Top Ramen every day all just to pay a banker.
Rule #2: Check Out Your Contractor
If you are building your home, make sure your contractor is licensed, bonded, and insured. You can verify that these things are in place by contacting your state Department of Labor & Industries. Check and see if the contractor belongs to the local Master Builders Association or the like - they have education programs that keep their member builders up to speed on latest developments in the industry. Ask questions of your contractor - how long have they been in business, what kind of work they typically do, etc. Ask for and check out their references from other customers, as well as their suppliers to see if they do good work, stand by their work, and pay their bills. Also, any bids submitted by contractors should be in writing - and be careful of bids that are waaaay lower than all the others. Substandard materials or inexperienced workers may be the reason. Lastly, be sure that you are only paying the contractor for work he has performed, which usually means that you will be paying the contractor on a schedule in stages throughout the contract. Don’t pay a bunch of money for stuff the contractor is going to do later; once you write the check, it’s amazing how the contractor’s interest in your project can evaporate, leaving you to chase the contractor around, demanding work be done for which you have already paid.
Rule #3: Put It In Writing
When you decide to bite the bullet and buy or build your castle, be sure that the entire transaction is in writing. All real estate transactions must be in writing and signed by the parties - if not, the transaction is unenforceable. Handshake deals in real estate don’t count: get it in writing! Also, read and understand everything in the contract- things like terms for repayment that you didn’t understand, adjustable rates that you didn’t know were adjustable, or acceleration clauses are just a few things in the fine print that can ruin your life later on. The devil is in the details - if you don’t understand, ask. Don’t worry about feeling stupid; it’s better than actually being stupid later as The Man kicks you out of the house because you can’t follow the terms you didn’t understand.
Rule#4: Fill Out The Purchase And Sale Agreement Correctly
The Purchase and Sale Agreement - also called the Earnest Money Agreement - is the document that gets the ball rolling when you buy real estate. It is your offer to the seller. Be sure that you have all contingencies in this document! Example: If your financing isn’t in place, make sure that the deal is contingent upon you receiving financing. Also, things like home inspections, roof inspections, pest inspections, and the septic tank being pumped, as well as all problem areas that the inspections reveal being corrected, are common contingencies that are in the Purchase and Sale Agreement.
Rule #5: Read The Seller’s Disclosure
Most state laws require sellers to disclose any known problems with the house that fall under a long list of issues. Go through that list in detail. Make sure you know what you are buying. If there are questions about any item that is unclear - get a written explanation!
Rule #6: Have The Home Inspected And Fix Any Problems
Even though have you read the disclosure, have the home inspected by a professional - and, if possible, accompany the inspector on the inspection. Your purchase and sale agreement has deadlines for inspections and for fixing problems that the inspection reveals. The deadlines mean business! If you don’t have the inspection and/or fix the problems by the stated deadline, any claims against the seller because of the problems can be deemed as waived. In other words, if you have to inspect the house by a certain date and you miss the deadline, you may lose the right.
Rule #7: Read the HUD Statement At Closing
Closing is when you sign the final papers and doom yourself to making payments for the next 30 years. At closing, one of the seemingly hundreds of documents you will have to sign is the HUD statement. The HUD statement is the form that shows how much money you pay and where it goes. Have the closing agent explain each line. If the closing agent can’t explain a number, you might get some money back. It is not uncommon for there to be errors - sometimes hundreds of dollars worth of errors - that may mean you were charged for something you didn’t order or need. That means money back in your pocket!
Rule #8: Keep Current On Permits
If you are building your home, make sure all permits and inspections are done as the work progresses. They are their for your protection; that way, you won’t end up with a 1967 Dodge Dart with plywood over the windows serving as your septic tank.
Rule #9: Look Out For Nosy Neighbors
You’re in your new palace. Congratulations. Welcome to the neighborhood and the Homeowner’s Association, which is generally a bunch of neighbors who want to tell you how to live your life. Before you close this deal, make sure you read the association’s CCRs, which are the Covenants, Conditions, and Restrictions, to make sure you can live with all the rules. Maybe you want to keep the family elephant in the back yard, but the CCRs say no pets. Maybe you want to paint your house a lovely purple with lime green trim, but any paint job must be approved by a committee. Maybe you can’t build a razor-wire fence, or plant those lovely monkey trees without first getting permission from yet another committee. These items are usually governed by the CCRs. If you don’t read the CCRs and abide by them, you could be sued by the association. And that’s never good.
Rule #10: Damages
Look for things like water damage, cracks, stains, termites, and other signs that your home isn’t holding up too well. If you stay on top of it, many problems can be fixed inexpensively and can add years to your house. Also, even if you think the contract says that the seller should have fixed a problem that you discover after you move in, you still have a duty to mitigate damages. This means that you can’t just sit there and do nothing while the problem gets worse: you have a duty to step in and try to stop the problem from getting worse. If you don’t, you may be limited in any damages you hope to collect from the seller.
Rule #11: Warranties
Your house is full of all kinds of warranties, from the washer and dryer to the real estate deed. (Sorry, no warranties on the kids. You take what you get there.) If you had your home built, your builder may also have provided warranties. The law also provides for an implied warranty called the implied warranty of habitability. This warranty is only between the original builder and the original purchaser, and covers only habitability issues such as plumbing, heat, leaks, etc. If the house wasn’t up to snuff in a way that effects your ability to live in it, this warranty may have been breached. So be aware of your warranties!
Rule #12: Contractors, Construction And Liens
If you don’t pay your contractor, the contractor may lien your home. If the contractor doesn’t pay a sub-contractor, the sub-contractor may lien your home. If your contractor or your sub-contractor doesn’t pay the supplier, the supplier may lien your home. Your home is the big bulls-eye for all of these guys if they don’t get paid. So, if you are building your home, make sure everybody is getting paid at every step in the process. Also, state law generally requires that contractors provide you with a pre-claim notice prior to any lien. The notice explains how to avoid liens.
Rule #13: Realtors, Contracts And Lawyers
A good, experienced realtor can help in this whole process and is a good person to have in your corner. On your own there are often hidden perils you’ll never see until it’s too late. Is there an acceleration clause? When exactly will the rate adjust? What exactly is the zoning for your property? What is the contractor’s deadline for having the roof on? What is that black stuff on the walls in the bedroom that smells like rotting flesh? Is it normal to have mushrooms growing on the siding? Is the moisture all over the walls of the living room a bad thing, or is it a special indoor water feature? And don’t sign any document you don’t understand - in fact, even if you think you do understand it, don’t sign it without seeking counsel first. Most lawyers will charge a very modest fee to review contracts and related documents.
Well, that’s enough. If you aren’t too scared to abandon this idea by now, you’re hopeless. Follow the above rules and you will probably be ahead of the lion’s share of most home/land buyers out there in the real estate wilderness. Good luck!