Should I Work with a Real Estate Agent?

You can decide to either buy or sell on your own or you may choose to have a real estate agent give you assistance.  In this current type of market, most Sellers are working with a real estate agent. The agent provides them with the type of exposure needed in today’s market conditions to get their property sold.  There is nothing comparable to the Multiple Listing System in providing up to date information on the housing market and providing thousands of professional agents access to that system and consequently to that Seller’s property.

Highly productive real estate agents, whose time is their most valuable resource, are honed into the Multiple Listing System in their property searches.  If your property is not exposed in the MLS, even if you do sell, you are probably throwing away equity. And Buyers understand that most motivated Sellers choose to contact a real estate agent to sell their home, and also most  motivated Buyers are being represented by a real estate agent. Actually a majority of homes are sold by a relatively small number of top producing agents, and in this fast paced world, if your home is not in the MLS, you will miss this resource of agents.

Additionally, an experienced agent has been involved in a wide variety of real estate negotiations, and his guidance can result in a better price for you, either if you are a Buyer or a Seller. By working with experienced agents, Sellers can be somewhat strategically indifferent – they can have a normal life, while the agent handles the marketing, advertising, and the myriads of paperwork involved in the listing and the sale of a property. A standard offer for a purchase in Utah is about 15 pages of small print and the agent will guide you as to which documents need to be properly prepared, signed and delivered.

Also, when you use an agent you get protection that their Errors and Omissions Insurance provides, and should there be a mistake or a missed deadline in the transaction this extra level of protection will be a real blessing. Even though this is a rare occurrence, it can be very expensive when it happens.  Your agent also has a fiduciary responsibility to protect you, and this includes your interests and your money in a transaction. Top agents are dealing with real estate contracts every day, and they can guide you through the details.

Relating to Buyers, it is difficult to come up with disadvantages of working with an agent. Agents are a third party to the transaction, and because they are not emotionally involved they can prevent problems from developing in negotiations. They can help you determine what price range you can afford, in beginning your home search. They can also guide you to lenders to get you pre-qualified for the financing.  And most important, they can give you access to the Multiple Listing System (MLS) properties, that is the most extensive, up-to-date list of homes that are available for sale. And when you decide to make an offer, they will be there to guide you and protect your interests and negotiate on your behalf.  The agent does all of this at no cost to the Buyer, since the agents fee is normally paid by the Seller.

The only disadvantage that sticks out to me of working with an agent would perhaps be selecting the wrong one. Sometimes Buyers or Sellers decide to work with a relative or a friend, rather than treating the decision as a business decision. Things to examine could be the agent’s level of experience with the type of property that you are interested in, their educational background, and their knowledge of the area that you are interested in.  If you are Selling, what marketing channels does the agent access to get your property exposed, and how is it exposed and what, specifically, is their step-by-step approach to getting your home sold. It can be useful to interview several agents, in order to determine which one feels right – in how they treat their clients and how they would relate to your situation.

NAHB Housing Index Reaches 4 1/2 Year High

January 18th, 2012

The National Association of Home Builders (HAHB) Housing Market Index (HMI) rises in January to a reading of 25. This is up 4 points from the previous December reading of 21 and marks the 4th consecutive month of increases. The last time the HMI had a reading of 25 or more was in June of 2007. Though moving in an encouraging direction, readings over 50 are considered positive, a level last reached in April of 2006.
The NAHB Housing Market Index is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next 6 months as well as the traffic of prospective buyers of new homes.

Qualification Guidelines for Mortgage Loans

FHA Loans

FHA loans are the most popular loans for first time homebuyers, and they offer relatively easy qualification requirements. If you don’t have much of a down payment saved, FHA loans only require a down payment of 3½% of the price of the home, and that money can come from a variety of sources. Thus, for a home costing $200,000 you would need a down payment of $7,000 and your loan amount would be $193,000.

FHA doesn’t make loans. FHA or the Federal Housing Administration insures loans made by an FHA approved lender.  It a good idea to contact several lenders or mortgage brokers that originate FHA loans – and since lenders set their own rates and terms, shopping for the best rates and terms is advisable. Your real estate broker can be of assistance in this area.
FHA loans require MIP or a mortgage insurance premium which varies depending on the terms of the loan.  There is always an upfront fee of 1% of the loan which is normally paid to the FHA by the lender and added to the buyer’s loan amount. Then there is a monthly mortgage insurance premium that varies depending on the terms of the loan, but typically is 1.15% when the loan is for 30 years and the down payment is less than 5%. So, an FHA loan is a little more expensive than Conventional loans, but with today’s low rates, with FHA loans rates hovering around 3.75%, even with the extra 1.15% MIP you’re still at a relatively low 4.9%.


One of the great things about FHA loans is the easy credit qualification requirements, but lenders do take a look at your payment history on other debts. You can have credit scores below 600 and still get an FHA loan but you will need to provide at least 3 sources of credit – however, even utilities and cell phones meet the requirements. If little or no credit exists, the FHA will let a parent or any other blood relative co-sign for the loan even if they don’t live in the home – this is termed a Non-Owner-Occupied Co-Borrower. When you make your loan application, the lender may ask for a credit report fee of about $35 to $40 – and when you have made an offer on a property, the lender will also ask for an FHA appraisal fee – typically around $400.

Lenders also determine what type of home a buyer can afford based on their monthly income and their expenses. So if you know your total mortgage payment, including principal, interest, taxes, hazard insurance, homeowner association fees ( if a PUD or a Condominium), and monthly mortgage insurance (if any). Divide that amount by the gross monthly income – they would like that to be less than 30% (debt to income ratio).

Other FHA requirements are that a Bankruptcy should be more than two years old and a Foreclosure at least three years old, with no credit problems afterward. FHA lenders also like a stable job history, preferably with your current employer or in the same line of work, and also with a steady or increasing income.  Students, may, however, use time in higher education like time on the job.

Here is a checklist of information that you should gather when making application for an FHA loan:

• Social Security number
• Address to your place of residence (past two years)
• Employment information including names and addresses of employers for the last two years
• Gross monthly income with two recent paystubs and two years W-2 forms
• Most recent bank statements for checking and savings accounts
• Information on current debts, including account numbers, balances and monthly payment amounts
• Information on any property that you own
• Estimated value of your personal property
• If you are self-employed - tax returns for the past two years along with a business income statement and balance sheet

Conventional Loans

If you have good credit and a down payment of at least 5%, I would advise looking into a conventional loan.  For example, conventional rates are now around 4.125% compared to FHA of say 3.875% - but there is no 1% upfront fee like FHA loans, and the monthly PMI or Private Mortgage Insurance is only 0.66% compared to 1.15% for FHA. Therefore, your total rate for a conventional loan would be only 4.79% (4.125%+.66%= 4.79%) compared to FHA of 5.03% (3.875%+1.15%= 5.03%).

The other benefit to a conventional loan is that you can do away with the .66% monthly mortgage insurance after only two years, if you have either paid down your mortgage balance to 80% or less of your original mortgage, or get an appraisal or a tax notice showing a higher value for your home that would have your mortgage balance at less than 80% of the new value.  FHA loans require a minimum of five years before you can eliminate your mortgage insurance.

I will get more into the various conventional loans in a later blog, but suffice it to say, by getting a shorter term loan, for example, 15 years instead of 30, you can get a lower initial interest rate – right now it’s about 3% on a 15 year 80% loan – and you will save thousands over the lifetime of the loan.

First Time Homebuyers

Is it wise to buy a home rather than rent? - especially in these times when we have seen real estate values fall in most areas of the country.  My advice is to make the leap to home ownership.  It’s a scary decision, but check out my previous blog on the subject.  When you pay rent, the money is down the drain.  When you buy a home, even if the home does not increase in value, you are building a nest egg, because eventually as you continue to make your monthly payments, the home will be paid for.  And there are lots of other financial benefits - but most important, you’ll have a home that is your own – you can improve it and fix it up the way you want.

Is it a good idea to use a real estate agent?   I would definitely advise it because a good agent can lead you through the rather complicated process, and as your agent, he has a fiduciary responsibility to protect your interests as well as making your buying experience easier.  He can save you a lot of time and hassle in locating and viewing properties, and guide you through the paperwork.  Many properties, like short sales and bank owned properties require that you be represented by an agent.  And the nice thing is that you don’t have to pay the agent – they receive their commission from the seller.

How do I locate a good agent?  Start by choosing to work with a Realtor that has agreed to work with the Code of Ethics and Standards of Practice of the National Association of Realtors.

How much cash will I need to have for a down payment and closing cost? This really depends on the type of mortgage you choose – FHA loans require 3 ½% of the purchase price as the down payment – so that would be $5,250.00 on a $150,000 property.  You can reduce your monthly payment by making a larger down payment – and if you have as much as 20% down, you can obtain favorable conventional financing.  Also, when you decide to make an offer on a home, your agent will have you make an earnest money deposit, that is a deposit that you make with your offer to buy, that is usually held in a trust account and applies toward the purchase of the home if your offer is accepted.  If your offer is not accepted, this deposit is returned.  Additionally, when you obtain a mortgage, you will have closing costs that can amount to around 3% of your loan that are paid at Settlement – but if you are low on cash, it is possible that the seller could pay these costs.  Your agent would structure that in your offer to purchase.

Can I get a loan?  It is good advice to get pre-qualified by a lender before making an offer to purchase.  Letters of qualification are required on HUD homes, Short Sales, and Bank Owned properties.  It also makes any offer much more attractive to have an accompanying pre-qualification letter accompanying it.

Where do I locate a good lender? Banks, mortgage companies, credit unions, savings and loans, or in some cases even government agencies can help you get financing to buy your first home. In shopping for a loan, your Realtor can help guide you through the process – but it is basically comparable to shopping for anything else.  You want to compare prices which on your loan are the interest rates and the fees for closing costs.  You would be amazed how much they vary.

How do I find the right home? This is where the Realtor becomes invaluable – about 80% of home searches are started on the Internet.  On the Internet, you can search through hundreds of homes, many with virtual tours showing you interiors, in order to narrow your choices.  Your agent can even input your search parameters into the MLS so that as soon as a property is listed that matches your criteria – it will automatically be sent to your Email. 

How many homes should I see? The average individual is in memory overload when he or she sees more than six homes in a day.   By doing most of their weeding out on the Internet, many home buyers often see just a few homes before they find the one that seems right for them.  And when you do find that home, don’t hesitate too long – even though home prices have remained low, inventories are declining steadily, especially here in Utah.  It might cost you a night’s sleep, but for the sake of your long term future – make the jump.  And good luck!

Why Should You Buy A House?

Now after we've experienced the economic downturn where home prices have tumbled over the last four years, it is quite common to hear people say that houses are poor investments, and folks should now rent.  They point out that real estate doesn't appreciate as fast as the stock market, and it's not advisable to have all your investment eggs in one basket - after all, homes are not liquid investments- you can't just call your real estate broker and tell him to sell and have your money in a few days, like you can with your stocks.


You know what - they're correct.  But they are also wrong in a big way!


Recent statistics from the Federal Reserve show the median net worth of homeowners is $234,000, and for renters it is $5,100.  Buying a house may be like a forced savings plan, where you can not only shelter your money and your family but also build up your net worth.


Most folks are going to have to spend their money on rent, if they don't buy - of course unless they are still staying with Mom and Dad, or a generous friend.  And that rent expense is most likely their major expense.  But when you buy a home you have the opporturnity to make your housing expense serve two purposes - you not only have a place to live and keep you warm in the winter, you have the opportunity to build up a nest egg.  Your stock and bond investments don't protect you from the weather and don't give you an asset that has real value for your family!  And it takes discipline that many folks just don't have to pay rent and also invest in stocks and bonds.  With your home, because of its value as your place to live, you are kind of forced into making those payments every month, and over the long term you are building a substantial investment.


Right now, in Salt Lake County, the average purchase price of a home is around $250,000, and since I became a real estate agent in 1968, property values have increased about 6 percent per year.  The first homes that I sold were priced in the $12,000 to $20,000 price range.  I purchased my first home in 1970 in Sandy for $17,500.  It was a ranch style home with a little more than 2,100 square feet.  I just checked the tax records and that home is currently assessed at $196,900 (January 2012) - which is down from where it was valued a few years ago.  I put that value into my HP calculator and that comes to an average annual appreciation rate of 6.24 percent, a little more than the average rate of 6 percent that the National Association of Realtors said that property values have increased throughout the US since 1968, when I started working in real estate.


There are significant financial benefits to buying - first, unlike renters, you lock in your housing payment.  You also get some substantial tax deductions, and you have the opportunity to cash in on some tax-free profit when you sell.


As an example, let's say you buy that home in Sandy for $200,000 and you pay a 20 percent down payment of $40,000.  Let's look at your return if the home goes up in value 6 percent or $12,000.


The Principal of Leverage
Purchase Price of Home          $200,000
Initial Investment                         40,000
Increase in Value (6%)                12,000


Return on Investment                   30%


Your return on investment is 30% - not bad.  Makes you wonder why it is that the average homeowner has a net worth more than 45 times that of the average renter.  But the above example does not take into account the substantial tax benefits of home ownership.  By itemizing their taxes, homeowners can deduct the interest and taxes they pay on their mortgage from their federal income taxes.


With a $188,000 mortgage at 5 percent annual interest for 30 years you'd have principal and interest payments of $1,009.22, and say you're in a 20 percent tax bracket here's what you would save in taxes each year"


Tax Savings Each Year
Interest Paid in Year 1            $9,337
Taxes Paid in Year 1               $1,564
Total Deductions                   $10,901


Tax Savings (Based on 20% Bracket) $2,180


You would get $2,180 in tax savings that you wouldn't get if you were renting!  Additionally, when you sell your home at a profit, that profit is not taxed as long as you've lived in the home as your primary residence for two of the last five years - up to $250,000 of profit tax free if you're single and up to $500,000 tax free if you're married filing joint returns.


When you buy, your monthly payments stay relatively constant, when you obtain a fixed rate loan.  Adjustable loans are usually fixed for 5 to 10 years.  I remember my first home that I bought in Sandy for $17,500 - my payments were $153 per month, and I remember trying to sleep, unsuccessfully, concerned that I would not be able to make those payments.  As time passed, however, those payments of $153 seemed like a piece of cake to make.  However, if you rent, it is almost guarenteed that your payments will go up.  Recently, rents have been increasing at about 4 percent per year - but over the past 20 years they have been averaging closer to 3 percent per year annual increases.  By keeping payments constant when you buy, you are controlling inflation and saving over the long term - and say you spend $1,200 per month to either rent or purchase a home - and assume your rent only increases 2 percent per year for the next 10 years, so your rent would increase from $1,200 to $1,434 in year 10 - this is how the rent versus buy comparison would look:


Rent or Buy Comparison
Rent Expense for 10 Years               $157,676
Mortgage Expense for 10 Years       $144,000


Total Savings                                      $13,676