The neighbors have enjoyed an enclosed patio on their home for the last 10 years. They are moving and putting the house on the market and have listed the home to include that patio as a fourth room. Now it is time to face the music. Was the work done to expand the patio into living space permitted work?
Permits to do work on your home are required by cities or counties if you are doing an addition, an alteration, enclosing a carport, putting in a pool or spa or building a fence to name a few. A permit guarantees that the work will be done to code, and each phase of the construction will be inspected to assure that the job is done right and the home is safe.
But why do it right when you can save a few bucks? Do the work yourself! Have your handyman pal do it! Don’t tell the county about the added square feet, your taxes will go up! Plus the county will make you wait forever while they schedule their inspections. So easy to just fly under the radar and let it slide. Until you sell the house.
The seller is required to disclose to the prospective buyer if they are aware of anything that materially affects the value of the property, and unpermitted work can impact the value of the home in many ways. In addition, if the seller knowingly does not disclose the unpermitted work, even after closing the buyer can seek damages.
So what are the potential financial ramifications of buying/selling a home with an unpermited addition?
- Homeowner’s insurance may not cover any liability due to faulty construction, or cover the repair or replacement if needed.
- The county may seek back taxes and fines and the new buyer is on the hook.
- The discrepancy in square footage may be discovered by the appraiser, and the home may not appraise if square feet and number of rooms does not jibe with county records.
So what are the clues that work may not be permitted?
- The square feet indicated in county records does not match the actual measurements.
- You notice changes in grade when entering a room, such as a slight step-down when a garage was turned into an extra room.
- A wall air conditioner when existing duct work could not be added.
- Funky electrical or plumbing connections.
- The listing states that the buyer is to verify the square footage.
- The listing boasts that the county is unaware of the extra square feet and thus tax savings!
Sometimes the work is of high quality, and the seller may have unknowingly purchased the house with the unpermitted work and they never knew about the problem. They may have paid cash for the home, thus it was never appraised and the square feet error was never found. Inspectors may suspect something is amiss, appraisers will notice size discrepancies, but the Title Company and the Real Estate Agent could be totally unaware. If the unpermitted work is an alteration such as a big kitchen re-model, the square feet would not be altered, so it would be part of the buyer’s due diligence to ask the seller to provide receipts and invoices to verify who did the work. Once a buyer suspects there may be a problem, time to dig deeper.
When offering a contract on a home, a buyer wants to make their offer as attractive to the seller as possible. While offering to pay a higher price seems the obvious way to please the seller, it is not the only way.
Here are five strategies you can apply to make your purchase offer stronger, and none of them involve a higher asking price.
- Put forth a significant amount of money for the earnest money deposit. It is a show of strong intent to go forward with the seller. Customary amount is 2-3% of the purchase price, yet many buyers think 1% is plenty. They call it earnest money for a reason. The buyer should not fear putting down earnest money. The contract makes it easy, or at least reasonable for a buyer to get their money back if the property does not appraise, the buyer is unable to get a loan, the property does not pass the buyers inspection, or if the seller pulls out of the deal to name a few. You are not throwing the money away, it goes into the monies used to buy the house.
- Work with the seller on a closing date that is most beneficial to the seller. If you have flexibility, use that to your advantage by co-operating with the seller on a date to close that helps them.
- Try to reduce any contingencies brought to the table. Paying for the home in cash removes any loan contingencies for the buyer, and that is why cash is king for a seller. If you have a home to sell before you can buy your new home (not unusual), the closer you are to completing your home selling process the better your contingency offer will be to the seller. It is best to have a contract in hand for the sale of your home, and know the closing date. Now you are bargaining from a position of strength instead of telling the new seller that you are going to put your home on the market within three weeks of your return home, once you complete your exhaustive search to find the right Realtor. Asking the seller to wait it out with you is not what the seller had in mind.
- Get pre-approved, not just pre-qualified for your loan. What is the difference? Pre-qualified means that a lender has reviewed your creditworthiness and believes you would be eligible for a loan based on the information you have provided to the lender. It is a snapshot of where you are and is a great place to start to build the relationship with your lender. Pre-approved is a deeper inspection into your credit report with a full review of your financial information. To be pre-approved you need to have started the application process and have paid the application fee. Now you will have a letter that tells the seller that you are approved for an exact amount of money, and to buy the home you will only need to have the property appraise. Most buyers do this shortly after they have a contract, but how much stronger is it to have this already done! Here is a good article from Realtor.com about the differences.
- Offer to buy the property “as-is”. This means you are telling the seller that you will not ask them to fix anything found in the inspection. Whoa! This one can be a little scary. This would be a tactic if you were in a multiple offer situation, with a property you believe you have to have, or felt confident about the history of the property. By no means does this mean you give up your right to an inspection, and you should go forward with your due diligence during your inspection period. Always reserve the right to cancel if the property is not what you thought it was, and the amount of money to make the repairs would exceed the amount of money you think you are saving by making this offer. Make sure that is made clear in the offer.
Many consumers and real estate junkies are turning to the website Zillow and their proprietary home value estimate feature Zestimate to arm themselves with real estate market knowledge. Many Realtors face clients with a Zillow listing firmly clasped in their hand as they meet to discuss a possible transaction. So how does Zillow get their real estate information? How do they come up with the Zestimate? Understanding how Zillow works and their business plan can shed a new light on the use of Zillow in the home value process.
One hundred million homes nationwide have a Zestimate on the Zillow website. Zillow is a slick, well presented website that has brought Real Estate listing information to the consumer. The Zestimate is a feature of the website that gives an estimate of the value of a property. This information is used by some home owners to track the value of their home, and can impact decisions about selling. It is important to know that Zillow never claimed to provide this information as a substitute for a professional appraisal, and is now defending itself in a class action lawsuit in Illinois that the Zestimate is being viewed as an appraisal by the public. Zillow has always stated that the information provided is a “starting point” for determining value. Don’t forget that Zestimate rhymes with estimate.
So how does Zillow calculate the Zestimate? Zillow uses an algorithm that takes public record information to crunch the numbers. Public records include a recent sale of the subject property, tax records, permits pulled to renovate the property (change in square footage or number of rooms) and sales of other similar properties. The algorithm is not perfect, is being updated constantly. Zillow is offering a $1 million bonus to anyone who can offer the best solution to make it better.
Zestimate quick highlights:
- They do not use foreclosure properties to estimate value. Appraisers do the same as they do not represent market value.
- The more transactions on a property, the more accurate the Zestimate.
- The algorithm is a neutral unbiased model, so homeowner comments and updates are not always taken into consideration.
- Zestimates cannot be used to get a loan.
- The algorithm does not always understand nuances of a neighborhood or area. The size of the data area pulled to find the value of a home can be as large as an entire county, or intermingle newer/older construction phases in a subdivision.
- MLS does not syndicate information to non-members such as Zillow. Zillow uses a third party such as ListHub to get the listing information you see on their website. That can create a time lag with accuracy of the status of a listed property.
- Tax appraisal information used in the Zestimate algorithm may not be accurate, and can be off by a significant amount.
- Zillow accuracy is within 5% of the actual market sale value 54.4% of the time. They are within 10% of value 74.5% of the time, and within 20% of the value 86.9% of the time. The Phoenix market has better accuracy within 5% of value 67.3% of the time.
- More information is available on the Zillow website.
The top take-away is this: Zillow’s business plan is to sell ads on their website. A Realtor’s business plan is to sell Real Estate. There is no substitute for the “boots on the ground” work of a licensed Realtor. To find the market value of your property, contact a Realtor to have a comparative market analysis run on your home or hire a professional appraiser. If you want to know the latest up-to-date information on a listing, contact a local Realtor who subscribes to MLS. Realtors use MLS for a reason.
During the process of purchasing a home the residential purchase contract allows for the buyer to have a period after the terms of the contract has been accepted to go into the house to have the home inspected. In Arizona, it is normally 10 days, although it may be extended as an additional term of the contract. This is the only time that the buyer may “peek under the tent flap” and take a free look at the property. It is now that the buyer will use these inspections to determine if the condition and value of the property meet expectations set forth in the contract.
This inspection period may pass quickly, so management of the time and order of inspections is imperative. The first person to inspect should be a good reliable home inspector licensed to do this type of work. They will do a complete overview inspection of plumbing, electrical, structural, drainage, roof condition, mechanical and appliances. If qualified they can also inspect for termites and inspect pools and spas. One thing to be aware of: they cannot pull apart, cut open or dig down to inspect the home. For example: if there is evidence of a possible leak in a wall they are not allowed to cut open the wall to make sure. In addition to the general inspector, a termite inspector and a roof inspector need to follow up, or any additional inspections to follow up anything unusual found in the general inspection. These inspections are to confirm the condition of the property.
If the buyer is purchasing the home with cash, they may want an appraisal done to verify the price/value of the property. The lender for the buyer using financing will order an appraisal, but this appraisal is part of the loan process and doesn’t fall in the inspection timeline. The inspection period is the time for a cash buyer to go forward with an appraisal if needed to confirm the value of the property.
Once this information has been gathered by the buyer, the buyer decides which items found in the inspection are troubling enough to be brought to the seller’s attention, and to request the seller repair those items as a condition of going forward with the contract. This can be a delicate negotiation and both Realtors need to balance being an advocate for their clients and a mediator as well. Buyers need to realize that when they viewed the property before putting in their offer they likely built into the offer the age and general condition of the property, and the seller may have taken the condition and age into consideration when they priced the property in the first place. Sellers need to realize that an unknown expensive hidden repair (such as the condition of an air conditioner on the roof) now brought to their attention needs to be addressed. I have counseled buyer clients that a low-ball offer accepted by a seller will have little tolerance for repairs. On the other hand, a buyer’s offer close to asking will produce a buyer expecting repairs to bring the home value up to the offer price.
There are many different tools and considerations in setting the price of a home to sell. It is a fact that the seller or a real estate agent eager to obtain a listing may believe they get to set the price of a home for sale based on their needs. The truth is that the buyer gets to set the price. Anything for sale will only sell for what a buyer will pay, a seller will accept, and what a bank will loan.
To set the market price for a property agents will gather information about comparable properties in the neighborhood, evaluate the condition of the property, and consider the market conditions (supply and demand). When the lender sends an appraiser out to appraise the property, they do the same thing. Price is what you pay for a property.
How does the price impact the marketing? How does marketing a property impact the sale? Marketing needs to do two things. First, drive traffic to the property. Second, showcase the features that add value to a buyer. Once the buyer gets into the home to view the property, price and value take over. This is when the house “sells itself” or fails to deliver market value and sends the buyer to another property.
But what about value? What is the difference between value and price? If price is what you pay, value is what you get. Value is based on the buyer’s opinion of the functionality of the property. This is where the seller and the buyer may drift off the same page. What the seller values, the buyer may not. An example is a seller putting a new roof on the property last year. He thinks this has added value, while the buyer may view having a good roof as expected maintenance, and sees no additional value. The size of the lot can be another example of the seller finding value and the buyer maybe not so much. An appraiser will give $1 a square foot in value for a bigger lot, yet the buyer may be more interested in the views, location or how the home sits on the lot, not the additional square feet.
In a sellers market, when supply is low and demand is high prices will rise and value will contribute to that rise. When the buyer is paying a higher price, they will be willing to pay for value and expect it! In a buyer’s market, where supply is high and demand low, prices will decrease. Getting a great price trumps value for the buyer in this case.
It’s about time someone stood up for the issuer of tough love: the HOA. Lovers of the right to own property in a free society will screw up their faces at the mention of a Home Owner’s Association. Who needs someone telling you what 12 colors of dirt you can use to paint your house, and then charging you for the privilege? Maybe I want to paint my house purple, or never weed the yard, or leave my car in the driveway since I have exercised my right to exercise and my garage is a gym.
One of Home Owner’s Associations greatest values is they help the homeowner maintain the value of their property. A healthy HOA, with reasonable by-laws and competent leadership can add great value to your investment. Those home buyers who don’t want to be told what to do have the option to live in another area, and those who want a consistent experience should not fear the HOA.
Home ownership! You have found your dream home, and before you close the Title Company calls to ask you how you would like to take title. What? How can you know! If this is your first home, or your first in Arizona, this question may be puzzling. What are your choices? What can happen if you die? What about your heirs? What about estate taxes? What if you own a home with someone you are not married to? What if you and your neighbors want to “go in” to buy the vacant lot behind your houses to preserve your view and privacy? Taking title may have significant legal, estate planning, and tax consequences. You should seek legal and tax advice from qualified professionals.
Oh no, not a dry article about getting a loan. I promise to keep it short, and lay out the important changes to Truth in Lending Act and Real Estate Settlement Procedures Act. Yes, the government that brought you regulations to govern your purchase of light bulbs, the EPA and Obamacare has actually brought a new regulation that may actually be helpful! But it may take some getting used to.
There is evidence to support that borrowers who are not presented with clear and understandable information about their mortgage loans may not understand the risky business of taking out a home loan.
In leading up to the financial crisis, many consumers took on loans that they could not afford, and confusion about terms (when your adjustable rate mortgage adjusts sticker shock for example) piled on the risk. To add even more confusion, mortgage lenders would provide two different documents, the early Truth in Lending Statement and a Good Faith Estimate. At closing the title company provides a final Truth in Lending and HUD-1 Statement. Four different documents from two different agencies with overlapping information.
Starting August 1, 2015 here are a few of the changes: Continue reading