How to figure out if we can afford to buy?

Hello. I feel really stupid asking this, but I am not really sure where to start. I think my husband and I should buy a house, and are finally in a financial position to do that. Before now, I've been in grad school, but now I'm done, and we have a better idea of neighborhoods, our needs for the next few years (we have a 2 y/o and one on the way), etc. So, I guess my question is - how do I tell what I can afford, and whether it makes sense, tax-wise, expenses-wise, etc. for us to buy versus keep renting? I have heard, for example, that we can borrow against our 401K, but I have no idea how this works. Is that something a mortgage broker would help with? Or are they just salesmen? Do I need a financial planner? Or a bank? Some other service?

Can I just use my Fidelity guy (we have a good chunk of money in mutual funds there)? Ideally I'd like someone to look at our incomes, our investments, our expenses, our tax situation, and say ''boom, here's the amount of money you can/should spend on a house without taking unreasonable risk.'' Do financial planners do that? Just on an hourly fee? Or maybe, what I need is a realtor? Gosh, I am embarrassed to say that I really have no idea. Thanks in advance for your help. Clueless

Get some recommendations for a mortgage broker from friends and family (or BPN!) Gather all your financial info (current debts, credit scores, checking, savings and investment accounts, and assets). Talk to your spouse about your comfort level as far as monthly payments before you go. You can also talk to your financial planner about what accounts you may be able to cash in penalty-free as first time home buyers. Good luck! Jennifer

Regarding the mortgage broker, banker, real estate agents...your instincts are correct...they are salespeople. They earn their living on making a sale, not giving objective advice. Also, Fidelity can help with how to invest, but that's about it. They're not going to do the job of a good, objective, comprehensive financial planner in looking at all pillars of your financial lives.

With a growing family and possibly a home purchase, you're going to want to be sure the following areas have been reviewed, and consolidated into usable advice by a professional:

1. Budget: How it looks now and after major life changes have occurred. Budgets are great for determining how your family would deal with a job loss, increased or unplanned expenses, etc.

2. Retirement plan and College plan: What should you be saving for yourselves vs. what your goals are for the children.

3. Tax situation - can it be improved now, and how does purchasing a home affect your finances?

4. Insurance - analysis of property, casualty, life, disability, medical, etc. You want to be sure you're getting the best coverage for the lowest premium cost.

5. Estate plan - with children, this is a very important issue. Having a will, trust (if needed), health care directives, and powers of attorney set up will ensure your loved ones are cared for in the event of your untimely deaths or severe disability.

6. Investments - are they aligned properly with your goals? Choosing great investments are one part of the problem. When to sell, how to structure your acts for maximum returns, minimal taxes and expenses, and rebalancing are vital parts to your investment strategy.

Pulling this together into a comprehensive plan of action is what a financial planner will do for you. I know of NO mortgage broker, banker, real estate agents or even Fidelity reps who do this.

Once you're ready to get serious you can work with a realtor and when the time comes they can put you in contact with a mortgage broker or you can get recommendations from friends.

Financial professionals will always tell you that you can afford more than you actually should. It's much safer to be conservative. You'll sleep better at night. Happy house-hunting! anon

Track where you spend every penny - get a real strong understanding of what you spend and what you would need. Be prepared that one of you may, by choice or not, be out of work for a while.

And yes, the tax benefits are great and should be included in your planning. I decided how much I could afford

Some financial planners offer this kind of assistance, and you're probably best off to go with a fee based person. The ones offering 'free' services get paid by selling you products, so I'm not always sure that they have your best interests at heart.

I saw a great financial planner, Megan Rouse (www.MeganRouseFinancialPlanning.com) who has reasonable rates. She helped me calculate a maximum amount that I could spend on a house without getting into trouble. I'm so relieved that I went to her - it was during the crazy go-go years. Of course, my house has lost value, but I'm in great financial shape because I never got in over my head. Megan is really down to earth and gave me great advice that allowed me to make sound, thoughtful decisions.

Good luck. You are not asking crazy questions - you are asking sensible questions! Jennifer

Neither a financial advisor nor a mortgage broker is going to tell you whether you can afford the payments or not (although the financial advisor will usually be the better bet).

YOU need to know YOUR bottom line. What are the TOTAL costs - principle, interest, taxes, insurance, HOA fees, utilities, maintenance, etc.? Does your cash flow allow you to pay all costs AND eat, AND save for your future, AND maintain an emergency fund AND ...? How secure is your job? What do you anticipate in pay raises (or cuts)?

Also, don't be fooled: BOTH of them are in sales!

The mortgage broker works to make a living. Maximizing the loan maximizes the income. Not all mortgage brokers will push you beyond your capacity, but know that their interests may not be aligned with yours.

Financial advisors don't work as a hobby either. Whether ''fee-only'' or ''fee-based'' (terms too often abused by those in the industry - more about that later), or whatever, expect to pay them in one way or another. They too wish to maximize their income and their opinions may also be biased. Managing your assets, not sinking them into real estate is how they do that.

BOTTOM LINE: 1) Create a budget. 2) Hire an advisor to make sure you're looking at the big picture, to hold you accountable, to guide you. 3) Hire a mortgage broker to provide the loan.

What's the difference between ''fee-based'' and ''fee-only''?. True ''fee-only'' advisors make money ONLY on plan fees and asset management. When you buy a house, that's money they won't be managing. (Be careful with anyone claiming to be fee-only: if a fee-only advisor recommends someone from whom to buy the insurance they recommend, ask if they share in commissions or get paid referral fees.)

''Fee-based'' advisors are identical to fee-only advisors except that they may earn commissions. They may get paid on your investments up front rather than over time; they may be able to sell you the insurance themselves.

Neither is better or worse than the other. Arguments can be made in favor of one over the other - aligned vs conflicts of interests, higher vs lower cost, etc. But every situation is unique and requires its own evaluation.

A good advisor will explain the options and make a recommendation based on YOUR situation. - Anon

Watch outs for older homes in Bay area?

Hello, We just moved to the Bay area and are looking to buy a home in Piedmont or Montclair. Most of the houses we are interested in are from the 1920s and 1930s, however we are not sure what key ''watch-outs'' we should be aware of. We know that all buildings should be seismically retrofitted. Are there other structural things to beware of? Are there pros and cons to stucco houses? When it rains are mudslides a concern? new to east bay

Generally, each town has its own list of disclosures as well that you should see in advance--view protection ordinances, education parcel taxes (Piedmont), special landlord-tenant laws (for instance if you had any potential to rent in the future), and so on. Both Piedmont and Montclair have some school space issues, so if you join the community after school starts, you may end up in an excellent and (very) nearby school for the first year (with the option to stay thereafter, usually, if you'd prefer).

That would give you a starting point.

In addition, most homes, especially older homes, sold in the area have pest inspections offered by the seller. For termites but more often the dry rot that is endemic in this moist area. Is the inspector reputable? There's one that's very commonly used and the gold standard here in the East Bay.

And even if the seller offers a recent home inspection, I'd definitely suggest that you get your own, tell the inspector that you're new to the area, and they'll be sure to give you as much background (and important perspective--in the scheme of things, is it a dealbreaker that the electrical system is largely 70 years old?). I've worked with a number of inspectors, and while their attention to detail might vary, they seem to tend to be in the business because they love explaining things to other folks.

Hope this helps Maureen Kennedy

Is the electrical system grounded? What kind of wiring does the home have? A lot of older homes have knob and tube wiring which some people consider to not be safe.

Check the piping. Most older homes have old piping and it often needs to be replaced with copper.

Have the foundation thoroughly checked. Our home inspector told us that our home had a lot of cracks in the foundation, which while not uncommon in older homes, can be serious if they're severe enough.

The heating system: A lot of older homes have asbestos insulated ductwork. We had ours replaced, but were told if the ducts are in good condition and there is no asbestos leaking out, this isn't necessary.

I highly recommend that you have a thorough inspection done. Knowing what needed to be done on our older home BEFORE we purchased it was tremendously helpful. Latonya

One Realtor or Two?

We are planning to sell our home and buy in another city in the Bay Area. Is it the norm to use the same realtor for the sale of your home, as well as to buy the new home? I have found a realtor I like to help me sell our home, but I don't think she knows the area where we want to buy well enough. I have found someone who does know the area, but is that just not done, hiring two realtors? Any thoughts on the matter would be greatly appreciated anon

If I have a client moving outside the immediate area (i.e. Berkeley/Oakland/Piedmont), I would personally always suggest that they work with a realtor who's experienced in that other area (and then work hard to get them a great agent with a compatible personality). Real estate is localized enough that local experience is hugely important--prior relationships with the agent selling the house you want to buy, or at least an understanding of his/her approach to negotiation, closing traditions, disclosure requirements, local ordinances (e.g. if you wanted to preserve the option to rent in the future, but together you didn't realize that the target city had rental limitations), school boundaries (Walnut Creek is a total maze on this), and so on. In fact, our brokers often emphasize the legal liabilities of working outside your area of knowledge.

One final item--it's common in the real estate business for one agent to ''refer'' a buying client to an agent working in the target area. In that case, the receiving agent would normally pay a 20-25% ''referral fee'' to your original agent. In this case, it sounds like you've moved past that moment, but again, your current agent's job is to do what's best for you/what you feel most comfortable with, so go for the two agents! Maureen K

Buying a dump and fixing it up

Seeking advice and war stories from those who underwent extreme makeovers for their homes---structural and cosmetic. We are thinking about buying a dump, something that needs not just TLC, but major surgery. I would love to hear anything about the process, from pros and cons, to unexpected experiences, to cost (like how much to multiply the original projected figure...). thanks. Anon

5 years ago, I thought this would be a good idea (actually, it was the only house we could afford). Most days, I am still thrilled that I was able to become a homeowner, but sometimes I still wonder if it was the right choice. As far as cost, start with the price you originally paid for the house, and double it. No kidding.

We're still living out of boxes in a house that would definitely not be considered livable by the public housing authorities, sometimes coping, sometimes not, and trying to work ourselves out of this mess while managing to keep our day jobs and our sense of humor.

I started out optimistic and confident, subscribed to "This Old House," hired a design/build general contractor that was recommended on the BPN, took classes at the Building Education Center, and was very willing to build sweat equity on the grunt work portions. We ended up firing that first contractor and feeling quite swindled. We are more cautious now but still learning the hard way. We're learning to navigate the permit process and bidding out specific components of the work. I've heard this is called Owner-Contracting, or being your own general contractor. ALL of the books say NOT to do this, for the inexperienced. But-- it is the only way that getting the job done might be remotely affordable. Progress is being made, slowly.

If you choose to go this route, may the force be with you. It is a character-building and skill-building experience, no doubt. Linden

First-time homebuyer and CalHFA Loans

I am looking for more recent recommendations for a Realtor who specializes in first time home buyers working with CalHFA Loans. We are also looking for an AWESOME lender who specializes in these loans. We were working with one lender and he just stopped calling us! This has been really frustrating and I'm starting to think that our dream for homeownership is not going to happen. It seems that all the homes that we can afford are in less than desirable locations. If you go through the city first time home buyer programs you have to give them back so much of the equity, that you don't have much left over. How are people buying these expensive homes and still staying afloat? It's unreal. Frazzeled Future Homebuyer

What is a fair commission?

Looking through the advice on realtors reveals that many folks feel they got a "good" or "reasonable" or "fair" commission rate from their realtor when they sold houses in the area. However, no one specifies what "good" is. Can we share this information in this anonymous format to throw some much needed light on this tricky negotiation process?

Ok, I'll show you mine first. I interviewed two agents who work in the Oakland (Montclair, Piedmont, etc.)-Berkeley area. Both offered to represent the sale for gross of 5% (2.5% for buyer agent; 2.5% for themselves as selling agents). Both presented this as something of a deal, though I believe 5% is becoming the new standard (what was once 6%).

I'm also curious what terms people have negotiated for buying and selling with the same agent. Were agents willing to give any additional considerations for doing both with them? Clueless on commissions

So, although it seems as though Real Estate agents are over-paid and should be willing to negotiate their commissions, consider all that they are providing for you to realize the desired result (the sale or purchase of your home). Dedicated Realtor

Buying in another area - two realtors?

We are looking at houses in Montclair, we currently own in Berkeley. Our Berkeley-based realtor (he helped us buy our current house) says that he can sell our house and help us look in Montclair. Although it's becoming more and more apparent to us that he doesn't know Montclair as well as we would like him to. He's a great realtor and we're sure he'll do a great job in selling our house, but should we go with a Montclair-based realtor instead? It seems like houses in Berkeley are easy to sell, so maybe we get a Montclair realtor to do both? I'd like to work with the realtor we have now for the sale of our house, but will it cost more to have two realtors? If it's best to go with one in Montclair, how do I let our realtor down easy?

As the wife of a real estate broker in Contra Costa, I can tell you that financially, you will likely be better off using the same realtor, whichever one you choose, to both sell your existing house and help you buy a new one. At least in this area, many realtors will list your house for a very favorable percentage if they know they will also be able to help you buy a house (a more favorable price than if you were relocating outside of the area, let's say). If you truly like and trust your current agent/broker, my advice would be to be as specific as possible with him/her about what you are looking for in your new neighborhood. One thing my husband does for people who are actively looking for property is that he sends them a weekly report of everything new that has come onto the market with the buyer's preferred criteria, along with a summary of market activity for the past month (with the same criteria). This report is generated from the MLS, which is the most reliable and up-to-date source for listing information. You might think of asking your realtor for a report like this, unless it is already being provided. Good luck! Lisa

Leaving the Bay Area - rent or sell our old house?

My husband and I are close to deciding that we'll be moving back east (where we are from.) This decision to move came about due to several factors: -most of our family lives back there. -none of us like to fly on a regular basis and the parents are getting older, less healthy -we just had twins -we need a bigger house, which would cost less (not a lot, but still...) where we're moving -neither of us are tied to our jobs

Now we're thinking about the logistics involved. Has anyone out there done a home exchange or rented their house to ''test out'' their move, so that you have a place to come back to if it turned disasterous? Or is it a bad idea to have that escape clause so to speak? And is the benefit of having that backup plan outweighed by needing to come back, and fix up the house to sell?

A little history: we are somewhat leery about moving because in the past, when we were childfree we moved to Portland and to Washington DC only to suffer culture shock and move back. The difference this time is: we have kids, our parents are older, we have a house (and hence equity). Also, we won't be moving to Portland or DC! Any input on moving, especially east coast v. west coast, home exchange, being near family as they age etc is appreciated.
Possibly moving

Select your tenents very carefully. And, depending where you live, you will need to be VERY careful how you write up the rental agreement so you will not have to evict an unwilling-to- leave tenant. Be very clear from the start that it is for one year (or whatever time frame you decide). You will also want to consider how you will manage it from a distance. You might want to get someone local to manage it.

I suppose, in a way, not cutting totally loose made it ''too easy'' to return. We could have stayed in our new home (in central New York state, closer to family), and it was not an easy decision to return to the bay area. However, in the long run, we're really glad we kept our options open. R.K.

Im excited about my move, and it sounds like you are too, and you have all the right reasons. When you have a child, your priorities change. If you embrace that, and look forward to the new life you will be creating for yourselves and your child, much less the support you will be able to give to your parents, I don't think the transition will be difficult at all. Good Luck and God Speed
Lori

Home purchase on limited funds

I would like to know if there are single mothers out there, who would like to purchase a home on limited funds. Any advice?

How to buy a house

Based on our fairly recent house-buying experience, here's what we
found: 
(1)     You have to trust your agent to do the right thing, and you have
to do your homework as to what people have been paying for the various
types/qualities/sizes of houses in the various neighborhoods you're
looking at.  We found that our agent was concerned if she thought we
were overbidding, which inspired us to trust her and her judgment on
many issues. 

(2)     We found that a number of sellers would have been happy to let
us do pre-offer inspections, because we could then write a cleaner
offer.  We only pre-inspected at one house, though, which we didn't get
and so lost $400. The market has been so competitive that a number of
potential buyers do a pre-inspection, which sort of cancels out a lot of the 
advantage it might otherwise confer on you  I don't think not
pre-inspecting on later houses (we looked for a long time and wrote a
number of offers) was a big deal, except in one instance with a very
nervous seller.  I'm afraid that we found it generally boils down to
money, money, money.  If you offer more $$, the seller will probably
take your offer over a lower one with a pre-inspection, unless the
difference is pretty darn small.

(3)     If your agent feels the seller-provided inspection reports were
done by a reputable company, and the reports are fairly recent, sure,
you can trust 'em.  But you need to be aware that those reports are
written with GIANT loopholes.

(4)     Foundations are a pretty big deal.  This is earthquake country.
We got under contract for one house, had it inspected and found the
foundation was returning to sand.  There was some negotiation back and
forth after that, but ultimately that house fell through.  With the
house we did buy, dry rot from leaky garage roof and pipes has been the
big problem.  If you buy on a hill, landslides can be an issue.  You
should check with the city to see what sort of permits have been issued
for your property in the last 5 years or so, and you should also have
your sewer lateral inspected if it's an older house you're thinking of
buying.  Replacing a sewer lateral is about $10K, so it's better to know now.  
Again, your agent should be able to advise you as to what might be a good idea
for the individual property you're considering.
Wendy  8/99

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Go to Nolo Press in West Berkeley and buy their book on buying a house.
They are a coop of lawyers who write books for the average person.  This book 
will get you up to date with current CA law, as well as give you lots of tips.  
It was great for us!!  In general, CA protects the buyer very well.
-Lisa  8/99

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My husband and I recently bought a house in Vallejo and relied heavily
on the book, "Home Buying for Dummies." The book tells you about all
the factors involved in buying a house and what to look out for, and
it does it all in non-realtor English, so normal people can understand
it. Our house-buying experience turned out to be relatively
painless. We also had an excellent realtor who did a lot for us
without pressuring us into anything.
Karyn  8/99

--------------

There are a couple good books on the market to help you with answers
to your questions.  One is "Home Buying for Dummies", which is part of
the "for dummies" series; another is "How to Buy a House in
California," which is published by the local, legal self-help
publisher, Nolo Press.  Your agent will guide you through much of
this, and it pays to take some time selecting a competent agent.
However, as an inactive (but licensed), realtor-associate who is in
the housing market daily, I'll take a shot at some of your questions:

1) The incentive agents have to get you the best price is repeat
business from you and referrals.  Agents count on referrals and repeat
business and the best agents hardly need to market their services to
outsiders once they have a good pipeline going of satisfied customers.
Unfortunately, in this crazy time of overbidding on houses, the market
is driven much more by what buyers are doing to each other than by
what good agents will advise.

2) You can always make your bid contingent upon this or that type of
inspection and your approval of the results or willingness to pay for
repairs up to a certain amount. This is common.  Again, however,
because of the current trend of houses being over-bid on, some buyers
may be willing to purchase "as-is" with no inspection contingencies
just to get the house.

3) Look at the date of the inspection report and the party that
provided it.  Ask your agent whether he or she has hear of the
inspection company before.  There are many pest control companies and
roofers that agents should be familiar with and an experienced agent
will have run across these firms before.  If it's an unknown company,
look at the report carefully and decide whether it seems realistic
based on the apparent condition of the house.  If you can't make a
judgment call, then you should talk with your agent about ordering
your own inspection.  Just remember that once you have two conflicting
reports, the chance for an argument with the seller that can blow the
deal dramatically increases.

4) Other types of work--it depends upon what the problem is and how much the
seller is willing to correct. 
You can also get an overall contractor's inspection and have someone give you his
or her opinion of whether 
the house is generally solid despite this or that.

5) Although this is no guarantee the seller will be completely honest,
there is a LAW that the seller must disclose all known defects of the
property in written form & this becomes part of your purchase contract.
his should include material facts that could affect the property's value, such as
noisy neighbors or lots of theft in the neighborhood.

Good luck!
Becky 8/99
----------------
House-buying: We bought four years ago and used a helpful book called
Buying and Selling a Home in California (or something like that). It's
by the person who writes the home news column for the SF Chronicle,
off the top of my head her name is Dian (?) Hyman.  I've lent it to so
many people, I don't even know if I still own it!

Nicole  8/99

--------------
We did this about 3 years ago, and landed in San Leandro.  We liked
the area because it was family friendly, had pretty good schools, and
was more affordable than Berkeley (the same house in Berkeley would
have cost 1/3 to 1/2 again as much).

Your realtor might not have much incentive to get you the lowest
price, other than losing your business altogether (which he doesn't
want to do). There are some agreements you can make with your realtor
that don't have them on commission, but I'm not sure how to do it.
Make sure they are working for *you*, and not for the seller (it's bad
to have the same office representing both you and the seller, for
instance).

We did inspections either right before making a bid, or right after,
with a contingency that the offer was null and void if the inspection
turned up bad stuff.  This really saved us on one house, which turned
up more than $60K worth of work needing to be done....

Should you run screaming at major foundation work?  Probably. Depends
on whether or not you can afford to do the repairs, or get the seller
to do it before lending. The problem is that many lenders will not
lend on a house needing major structural repairs such as this.  (This
was the problem in the house we backed out of, BTW, in addition to
other goodies like a toxic furnace.)

What can go wrong?  You've mentioned the biggies.  Other stuff to watch out for:
*Really old (knob and tube) wiring that's frayed and unsafe
*sinkholes in the yard (bad drainage; potential of slides)
*old and bad plumbing (can be REALLY expensive to repair)
*really uneven floors (can indicate foundation problems, and can cause
damage to the walls and entire structure)


Good luck!

Dawn 8/99

--------------------
"You should check with the city to see what sort of permits have been issued for
your property 
in the last 5 years or so".

I HIGHLY RECOMMEND looking at all the permits issued over the history
of the house.  It is not difficult (they are usually all in one file)
and can be WELL worth it.  The ones for our house told us a lot about
the quality of various jobs, and revealed the presence of a landslide
that took place 10 years previous.  We discovered that the work to
repair the slide was substandard.  You want to know this kind of thing
before you buy a house. There are some excellent books on house
buying, and as this is likely to me your major investment and asset,
it is well worth looking at them.  I believe that you should not let
the market rush you into doing anything haphazardly.  

Lynn
8/99