Bob Bruss

Home Buyers Week: April 22-26 2002 • Discussion Schedule • Buying Guide (special advertising supplement) Bruss talked about buying and selling real estate: • September 2001 • June 2001 • March 2001 • October 2000 • Real Estate Section • Home Values and Recent Sales Info • Home & Garden Section • Talk: Real Estate message boards • Live Online Transcripts • Subscribe to washingtonpost.com e-mail newsletters

Buying and Selling Real Estate
Hosted by Bob Bruss
Syndicated Columnist
Thursday, April 25, 2002; Noon EDT

Buying a house -- or even thinking about buying one -- is a complicated process, particularly if you haven't done your homework. What should you look for in a piece of real estate? How do you get the best financing? And how is the process different when selling property?

A native of Minneapolis, Minn., Bruss is a real estate lawyer and broker in California. He holds a business degree from Northwestern University in Evanston, Ill., and a law degree from the University of California's Hastings College of the Law in San Francisco. Bruss has taught real estate law at the College of San Mateo and for the the University of Southern California's College of Continuing Education. He has owned investment properties in California for more than 33 years, gaining experience in renovating old fixer-up houses, which became his hobby.

The transcript follows.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

washingtonpost.com: Hi folks, got a lil technical problem at Bob's office. Stay tuned, we'll be with you shortly. Sorry for the delay!

washingtonpost.com: Ok folks, sorry about that Bob is on now, he's answering your questions right now.

Vienna, VA: No question, I just wanted to say thanks! I read your column every week and I've learned a lot from it.

Bob Bruss: Hi! Thanks for your kind words. Bob.

Alexandria, Va.: Bob, we recently lost out on a house in a competitive bidding situation, and were very disappointed. I haven't entirely given up hope though, I'm hoping the contract falls through. What percentage of all contracts fall through before settlement? And what are the most common reasons (besides financing--in this market everyone is pre-approved, or inspection--if they don't want it, it probably has such major problems that we wouldn't either)? Thanks, your column is very helpful.

Bob Bruss: The home buying situation is VERY competitive in hot markets all over the nation. In fact, last week's LOS ANGELES TIMES (that other great newspaper, besides THE WASHINGTON POST!)last Sunday ran their top story about multiple offers on well-priced homes. So you're not alone. I have no statistics on how many home purchases fall through. Common reasons are (1) low appraisal for a mortgage, (2) unexpected defects discovered by the buyer's professional inspector which the seller won't pay to have repaired, and (3) buyer can't qualify for the mortgage (this problem can be eliminated by buyers getting pre-approved in writing for their mortgage -- you are preapproved by an actual lender, aren't you?). My suggestion is to let the realty agent know you're still interested in the house. That way, if a problem develops with the first buyer, the seller can say "We'll cancel your purchase as we have an eager back-up buyer." Good luck.

Vienna, Va: Hi and thanks for taking my question.

I plan to sell my house next year and have had a couple of Realtors in to assess and tell me what to change etc. One bathroom and one bedroom had very dated/fussy wallpaper (from previous owners) and they cited those - I have now taken off both those papers and painted the rooms and added a trim and they look great. My question, that same bedroom plus the upstairs hall has dated scalloped carpeting. They are not in bad shape. Is it worth the investment to update them before putting the house on the market?

Thanks

Bob Bruss: Yes. New carpeting isn't very expensive. Be sure to buy a top quality pad so it feels comfortable to walk on. It's amazing how many homeowners buy top quality carpet and they put it over the old pad or a cheap new pad. Of course, I presume you're going to paint the house completely, inside and outside before putting it on the market. Fresh paint is the most profitable and least expensive improvement you can make.

Woodley Park, DC: Help!
My fiancee and I have decided to start looking to buy a house or condo in the District. One big question: do we get prequalified for a mortgage first, or find a real estate agent first? It's difficult to take that first little step. Also, how the heck do you pick a real estate or mortgage company? I have a couple of tips from friends, but not much to go on. It's so daunting!

Bob Bruss: Yes. Get pre-approved in writing first by an actual lender, not just a mortgage broker. However, a mortgage broker can arrange your loan pre-approval. Before you contact a lender, you might want to invest in getting your credit report and FICO (Fair Isaac & Co.) score. Go to www.myfico.com. The cost is $12.95 per credit report. If your FICO scores are over 700, you are highly qualified for a mortgage. Anything above 620 is considered very good and you will probably have no problems. Below 620, however, maybe you're not ready to buy a home yet! After you have written mortgage pre-approval, then look for a buyer's agent. In addition to asking friends and business associates for agent recommendations, start going to weekend open houses. In addition to looking at the houses and condos, talk with the realty agents. You'll probably find one you like, who likes you, and you wants to work with you to find your "perfect home." Good luck!

Manassas, Va: I have bought land and plan to retire to it after building a house on it. The funds for the to-be-built house will come from selling my current house. Can you tell me about construction or bridge loans?

Bob Bruss: Most banks eagerly make construction loans. Try to find a bank which specializes in construction loans, especially the smaller banks near where your land is located. They will tell you what is needed, such as approved plans, building permit, and a contract signed with a general contractor. If you are planning on being your own contractor, many banks will refuse to make a construction loan (because of the high risk a do-it-yourself home builder will make a costly mistake). Some lenders offer combined construction-permanent mortgages so, when your house is completed, then you will have a permanent mortgage. Ask banks if they offer such combination loans.

Fort Washington, Maryland: whats the best way to purchase a home, when you have little down payment and a FICO score of 560?

Bob Bruss: Before buying a home, I suggest you work on improving that low FICO score. If you go to www.myfico.com and order your credit report with your FICO score for $12.95, you will be given suggestions what to do to raise your FICO score. It might take six months or so, but it will be worthwhile. Next, work with a mortgage broker who specializes in subprime mortgages. Ask about adjustable rate mortgages because it's easier to qualify for an ARM than for a fixed rate mortgage if your FICO score is low. Before shopping for a home, get pre-approved in writing by an actual lender so you'll know you can get a mortgage. Another possibility is to buy a home with a large existing mortgage that you can assume, usually for a one or two point assumption fee. Still another alternative is to buy a home which the seller will help finance by carrying back a mortgage for you. It's hard to find such homes in today's market, but all you need is one. Still another alternative is to lease a home with an option to buy within the next two years. That will give you time to work on improving your FICO score so you can qualify for a new mortgage in a year or two at a good interest rate.

Alexandria, Va.: Can you explain what a good faith deposit is? My realtor told me we will have to make one when we make an offer on a house but I didn't understand why or how much is average. Thanks.

Bob Bruss: Virtually every home buyer makes a "good faith deposit," sometimes called an "earnest money deposit" when submitting a purchase offer. The deposit shows the buyer is serious. If the seller accepts your offer, but you don't complete the purchase, the seller can keep your deposit. A substantial deposit shows you are really serious. A low deposit isn't very convincing to a home seller, especially in today's competitive home sales market. A rough guideline is to make a good faith deposit of 5 percent of your offer price. Some buyers make a low deposit, such as $1,000, but provide in the purchase offer it will be increased when the contingencies, such as a professional inspection, are removed. However, if you are making a low offer substantially below the seller's asking price, a large deposit can often convince the seller to accept a low offer.

Bethesda: How long is a pre-approval good for? Is there a set time or is it negotiable? I am thinking of buying in the next 6 to 8 months. Should I think about it now? Or wait a few more months while I check out the market, go to open houses, and save a bit more toward closing?

Bob Bruss: My experience with mortgage pre-approvals is they are usually valid for only 30, 60 or 90 days. Talk with your mortgage lender about their policy. A very few lenders will give six-month pre-approvals if you pay them a fee. During your pre-approval period, be sure not to do anything to change your credit status. DON'T go out and buy a car, change jobs, or get a credit card, for example.

Arlington, Va.: I'm interested in buying a "fixer upper" house. I know that loans are different for this type of house, can you tell me what the difference is? Also, what's the best way to find such a house, through a real estate agent or auction? Many thanks!

Bob Bruss: Financing each fixer-upper house is different. I've bought some where a bank appraised and made their loan based on the after-fix up valuation. If you're buying a foreclosure, such as a VA or FHA repo, the selling agency will often have financing available. Ask. The best way to finance purchase of a fixer-upper, of course, is to get the seller to carry back a mortgage. Even if it is just for a few years, that will give you time to fix up the house and then either refinance or sell it. My suggestion is to look for "fixers" which just need cosmetic fix-up, such as paint, carpets, landscaping, kitchen cabinets, windows, etc. Avoid fixers which need major expensive work, such as foundation repairs, which add little or no value. Watch for my article on fixers on my website www.bobbruss.com in a week or two.

Fairfax, Va.: My fiance and I are getting married next year, but I am buying a house soon and we are going to live together. I have significantly better credit than she does, and we're wondering if we should go in together on the loan, or maybe have her as a co-signer, or just tell the mortgage companies that her share of the monthly payments is "rent". Is there a good way to handle this?

Bob Bruss: If you can qualify for the mortgage and home purchase on your own, without her co-signing, that's best and easiest. If all works out well, you can later add her on the title, maybe as a wedding present!

Washington, DC: I recently met with a realator she told me that I had $80-98,000 buying power. She wasn't very encouraging. I have a good salary and good credit. With the prices of the houses in the area It seems that I can't afford anything. For tax reasons I would like to buy a house this year. What do you suggest?

Bob Bruss: Look into buying a condominium. Our first homes are rarely our dream homes. But we all start somewhere. If you buy a sound, well-located condo which appreciates in market value, then you can gradually build equity so you can later sell the condo and buy something you like better. But don't take that realty agent's word. He or she knows about selling homes and is not an expert on mortgage financing. Get pre-approved in writing by an actual lender. You'll probably be pleasantly surprised to learn you can qualify for a larger mortgage than you thought. Mortgage shopping comes first before home shopping.

PG: At what point are you obligated to use a certain lender, when you complete a formal application package or sometime after? I have been preapproved by a lender but want to shop around. Earlier posts suggests I may be obligated to use the lender who preapproved me.

Bob Bruss: No. You have no obligation to that first lender who preapproved you. However, you will forfeit any application fees you paid. Lenders who issue pre-approval letters hope you won't continue mortgage shopping, but many borrowers continue "money shopping" to see if they can improve on the first lender's mortgage offer. You're the boss! Not the lender!

Tenleytown: Can you define "carry back" the mortage?

Bob Bruss: Yes. A "carryback mortgage" means the property seller becomes the "banker" and helps finance the buyer's purchase. For example, suppose you want to buy a $250,000 residence with $25,000 cash down payment. You find a free and clear house and offer $250,000, $25,000 down, with the seller to carry back a $225,000 first mortgage at (in today's market) 7 percent interest. You might ask for a 30-year mortgage, but expect the seller to want a balloon payment due in, perhaps, 10 years. Another seller carryback mortgage possibility occurs if you get a new 80 percent first mortgage, make a 10 percent cash down payment, and the seller carries back a 10 percent second mortgage to fill the finance gap. That's called an 80-10-10.

washingtonpost.com: Hey folks, Bob is going to stay on till about 1:15. Stick around!

Re: Fixer-uppers: I agree that major ones are not always worth it. However, my husband and I fixed up a rental property for sale (after the tenant had skipped out on us), and I have a couple of suggestions that are not so very hard but are more than cosmetic. In the basement, my husband moved a nonstructural wall about 4 feet, making a larger rec room and a smaller laundry room. The effect was incredible. We also got rid of acoustical tile ceilings, both in the rental and when renovating the basement of our own house. That extra bit of head room makes the whole place look enormous.

Bob Bruss: Congratulations. It sounds like you are "pros" at fixer-uppers because you know which improvements will add more value than they cost. My goal is to add $2 of increased value for each $1 spent.

Alexandria: Hope this can still get in. Where would you see the best chances for appreication, in a 20 year old home in a good neighborhood, close to DC, or a brand new home about 20 minutes south?

Bob Bruss: Either choice can do well. However, I like older homes because then you know what you're getting in terms of the neighborhood, schools, shopping, transportation, etc. With new houses out in the "boondocks," sometimes the development doesn't turn out as planned, especially if the developer downsizes houses in larger phases. Also, I think older neighborhoods have more charm and stability. As an investor, older neighborhoods are easier to project what they will probably be like in 5 or 10 years, whereas brand new neighborhoods are harder to predict.

Washington, DC: Bob - I was wondering if you know anything about the ACORN program. I am a first-time homebuyer with perfect credit, but I do not have much for a downpayment. The ACORN program allows a 3% downpayment, no PMI, and a low interest rate (this week, it is 7 1/8%). Almost sounds too good to be true? Any words of wisdom about the ACORN program (fyi - I fit the income levels, etc. for participation in the program). Thanks!!

Bob Bruss: I've heard about that program, but I don't have any first-hand experience. It sounds like that might be a good choice for you.

Takoma Park, Md.: Hi -- A silly elementary question for you.

How do you raise the money for a decent downpayment? I know the savings part, but do people take out loans to make up the difference? I really can't imagine how long it would take to save a 20% downpayment on the homes around here.

Thanks!

Bob Bruss: It's not a silly question! You don't need a 20% cash down payment. Fannie Mae and Freddie Mac offer home loans up to $300,700 with 10%, 5%, 3% and even 0% cash down payment if you have good income and good credit. Talk with a mortgage lender about the zillions of mortgage alternatives. Stop trying to save for a down payment because, in good areas, home prices are going up faster than you can save! Get pre-approved in writing by an actual lender so you'll know what price home you can afford with little or no down payment.

Washington, D.C.: Can a spouse be names as a co-owner on a home at the time of settlement if the spouse is not listed on the mortgage?

Bob Bruss: Most mortgage lenders will insist a co-buyer of a home also be a co-borrower on the mortgage. You might ask the lender if you can qualify for the mortgage alone without a co-borrower and a co-buyer. Also ask if the lender would have any objection to your adding your spouse to the title to the house as a co-owner later.

Arlington, Va.: How competitive is the mortgage industry? We are first-time home buyers, and after calling a couple of companies, I felt like I had jumped into shark-infested waters with an open wound! One lender, in particular, called a zillion times, and when we decided to go with another, lower deal, berated us as "unethical". Is this typical? His company did give us our pre-approval, but did that obligate us (or justify his near-harrassment)?

Bob Bruss: The mortgage business is VERY competitive, especially among mortgage brokers who work mostly on pure commissions. Shame on the lender for bothering you. You had every right to keep shopping for a better mortgage, even after you were pre-approved.

Alexandria Va: good faith deposit--5% of the purchase price??!! on a 300K house, that's $15,000! I think the norm in the Baltimore area has been about 1-1.5% of the purchase price.

Bob Bruss: Look at it from the seller's viewpoint. If you were selling a $300,000 house, would you feel very confident of a buyer whose purchase offer included only a $3,000 good faith deposit? Yes, it's done. But in a competitive market where there are often several purchase offers the first week on a well-priced home, the offer with a substantial deposit often gets accepted. There is no right or wrong rule on deposits. I once had an offer on a $100,000 property accepted although I only made a $100 deposit. I still marvel at how anxious that sell must have been.

Washington, DC: Hi Bob - My husband and I have a dilemma that I'm hoping you can shed some light on. We recently bought a condo (new construction, less than a year old), but with a baby on the way next year (not initially planned), we need more room. we've been looking at houses in the area, but abruptly stopped when we realized that we'd have to pay a capital gains tax. We bought for $160K, the last condo of our size went for $210K+. How much of a loss are we looking at if we sold at $210K, in terms of the tax we'd have to pay? We make below $120K combined. Should we just bite the bullet and stay for the two years?

Thanks!

Bob Bruss: Wow! Congratulations on your profitable condo purchase! Maybe you should become full-time real estate investors if you can keep making such profitable purchases. The maximum federal capital gains tax is 20%, perhaps lower if you are in a lower tax bracket. As you know, Internal Revenue Code 121 provides up to $250,000 (up to $500,000 for a married couple filing jointly) principal residence tax-free sales profits. But you must own and occupy the home at least two of the five years before its sale. There is a partial exemption for a sale sooner than 24 months, but I don't think "having a baby" qualifies as a health reason. Before you decide what to do, please consult your tax advisor.

ACORN: To the person interested in the ACORN program: I bought my condo in Dupont Circle under this program and recommend it highly. 3% down, no PMI, no points, and 1% off the market rate. You have to qualify under their income or price cap, but if you meet their qualifications, it's one of the least expensive ways to buy your first home.

Also check similar programs by NACA(Neighborhood Assistance Corporation of America; www.naca.com) and HomeFree USA (www.homefreeusa.org). I'm told that these programs allow 0% down purchases and even pay closing costs.

Bob Bruss: Thanks for the information. I'm sure we'll all benefit.

Davis, Calif.: I'm thinking about buying a house and I'm wondering if I can afford a monthly mortgage. Is there any place I can get information on how the tax incentives and mortgage rates will affect my net income and monthly payments.

Bob Bruss: Get pre-approved by an actual mortgage lender, such as a bank, S&L, or mortgage banker. They won't pre-approve you for a mortgage you can't afford. Also, there are some on-line mortgage calculators at a zillion mortgage websites.

Columbia, Md.: I am looking into buyig a house in the DC metro area. Do you thing there will be a Bubble Burst in Housing (like what happened in the stock market)? Most people I talked to say this would not happen in the DC area. Your thoughts, thanks

Bob Bruss: Good times or bad, the Washington, DC housing market is usually very stable due to the high government employment. Nobody can predict the future. There will be real estate ups and downs, with plateaus along the way, but the long-term trend is always up.

washingtonpost.com: Sorry everyone, we're out of time. Thanks to all who participated!

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