QUESTION: After about six months of searching, our best friends recently bought a home. They claim it cost about $10,000 under market value. As we are looking for a home to buy, how can we really know how much a home is worth? Should we have an appraisal made before we make a purchase bid? Buying a home is so confusing. Please tell us how we can avoid paying too much.
ANSWER: Fortunately, determining the market value of a home is not as complex as it may seem. Your first step should be to become very familiar with the marketplace. Bill (Tycoon) Greene developed the famous "100 house" rule, which says you should inspect at least 100 houses before making a purchase offer.
I think that is a little excessive, but you should inspect at least 25 houses in the vicinity before making an offer to buy one. The more houses you inspect the more confident you will become. Your second step, after inspecting many houses and finding one you want to buy, is to ask the realty agent to prepare a written comparative market analysis form for you. This is the same form the listing agent gave the seller when the home was listed for sale.
Of course, it will be updated to reflect any recent nearby home sales. The form will show recent sale prices of similar nearby homes. Then you can add and subtract value for the pros and cons of the home you want to buy before you make a purchase offer.
While it would be nice to have an appraisal of the house you want to own, it is not feasible to hire a professional appraiser before making a purchase offer. However, if you do not feel confident of your purchase offer you could make your offer contingent upon obtaining a satisfactory appraisal after the offer is accepted by the seller. But this should only be done in unusual situations where the house is unique and not easy to value.
Why It Doesn't Pay to Wait to Buy a Home
Q: With home mortgage interest rates rising, do you think it will pay to wait to buy a home until interest rates drop? My wife and I badly want to buy our first home, but with rising interest rates the high monthly mortgage payments will take a big bite out of our income. I have heard forecasts that interest rates may fall later this year. Do you think we should wait to buy?
A: No. As mortgage interest rates rise, theoretically home prices should drop because fewer people can afford to buy homes. But that rarely happens. Instead, home sellers don't sell unless they can get their price. A few highly motivated sellers, such as job transferees and others who must sell quickly, may drop their prices slightly, so you may be able to pick up a bargain from an anxious seller.
When mortgage interest rates drop, more people can afford to buy homes so home prices go up because supply cannot keep up with increased demand. The result is rising home prices.
Either way, home buyers who wait to buy lose out. Today is always a great time to buy a home, however yesterday was better and tomorrow will be a worse time to buy. By purchasing a home now you lock in today's price and interest rate. If interest rates fall significantly in the future, you can refinance to reduce your interest cost. You may then be able also to take out some cash from your home at the same time.
Why Seller Should Require Big Deposits
Q: We thought we sold our home. When we phoned our realty agent to see how the buyer was doing getting a mortgage loan, she said she didn't know because neither the buyer's realty agent nor the buyer returned her phone calls. The scheduled closing date has come and gone. We only have a $500 deposit from the buyer, being held by the other agent so we think the buyer decided not to buy. What should we do?
A: Your situation shows why it is so important for a home seller to obtain a large earnest-money deposit from the buyer. The bigger the deposit, the better the chances that the buyer will go through with the sale.
If the other realty agent doesn't return your listing agent's phone calls, something is seriously wrong because agents will usually level with each other as to the true situation.
Your suspicions are probably correct, and you should put your house back on the market. As for getting your hands on the $500 forfeited deposit, don't get your hopes up because the buyer's agent probably won't release the money to you. Please consult your attorney for further details.
No Tax Benefits for Buying Vacant Land
Q: I want to invest in vacant land, which I would hold several years until it appreciates in value. Are there any tax benefits of land investments?
A: No. Vacant land is probably the worst investment unless you are 100% certain that it will go up in market value. There are no special tax benefits. Of course, you can deduct mortgage interest and property taxes, but land is not depreciable.
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