Home Buying 101 (edited on 19 Nov 2020)

 Some hints and tips based on 40 years of buying three homes and building one. This is in no particular order (stream of consciousness):

KNOW YOUR MARKET: Find a realtor willing to be patient and work with you. Remember that even though the realtor may appear to be working for you, he/she is paid a commission by the seller, so ultimately the realtor works for the seller.

Get a copy of Robert Kiyosaki's "Rich Dad, Poor Dad" and read it. Invaluable! One of his pearls of wisdom is that in real estate you make your profit when you buy, not when you sell. In other words do not overpay.

BUY VS LEASE: One way to determine a home's value, besides the numbers you see on Zillow, Trulia, Redfin and eppraisal.com, is a buy vs lease analysis. For "BUY" you take the total purchase price of the house, including closing costs. For "LEASE" you take the annual cost to lease the same home. You can choose to add property taxes and H/O insurance to "BUY" and renters' insurance to "LEASE". When you divide BUY / LEASE you will get a ratio. If the ratio is 15 or less it means you could buy the house for what it would cost to lease for no more than 15 years and that is a good deal. The house is inexpensive. On the other hand if the ratio is 20 or more, the house is expensive to buy compared to lease.

Here is an extreme example. In 2010 and 2011 we leased an 1800 sq ft townhouse in Wailea, Maui for $2500/month ($30,000/year). The townhouse was on the market at the time for $1,350,000 ($1.35 million). That's a ratio of 45. We would have been insane to buy it, even had we been able to afford it.

REALTOR CONTRACT: A home seller using a realtor must sign a contract, typically for 90 days. During this time the seller must pay the listing broker a commission even if he/she sells the house FSBO (For Sale By Owner - see below). And ethically, even if a potential buyer waits for the listing contract to expire, the commission must be paid.

DISCLOSURE OF HOME CONDITION: The home seller is supposed to tell the listing broker anything about the home that could materially affect its value. Lawsuits can result of something is hidden that should have been disclosed. But this is also why you as buyer want to have a full structural inspection (see below).

BUYER'S BROKER: If you want a realtor to work for you, you can hire a buyer's broker, typically for a 3% commission. This is usually on top of the standard 6% commission the seller pays. By the way, that commission is usually broken down as follows: 2.7% to the listing broker and 3.3% to the selling broker. Of course those commissions are also split in half between the office broker and the realtor who does the actual deal. So, just as an example, let's say you are buying a $500,000 home. The total commission paid by the seller would be $30,000 and the selling realtor who represented you would get around $7-8,000

HOME INSPECTION: Definitely have this done, even if the home you are buying is brand new. You would be amazed at what turns up. The home my parents built in Santa Barbara had a tub drain left unconnected and the crawl space was a swamp.

QUALIFYING FOR A LOAN: You must have employment history, down payment, etc. to satisfy a potential lender, and typically there is an upper limit to how much you can borrow. It is usually a percentage of your total monthly income. Any other debts (car loan, boat loan, college loan, personal unsecured loan, etc.) also have to be noted on the loan application.

The terms of your home mortgage should include the right to make additional payments and to pay it off early, both without any penalty. For example, a 13th monthly payment reduces the length of a 30-year mortgage to 25 years 9 months. One value of paying down your mortgage is that it increases your home equity and when you get to 20% you can stop paying PMI (private mortgage insurance). Here is a link to a BankRate piece on prepaying your mortgage.

HOME OWNERS (H/O) INSURANCE: This is insurance you buy to protect your home and yourself. Typically it includes fire and theft insurance and public liability. It typically does NOT include earthquake or flood insurance, both of which must be purchased separately. We have our H/O insurance through USAA. It is not a bad idea to contact them and get an idea of what the annual insurance cost will be. Cost factors can include, home age, materials used, proximity to a fire station, etc., etc.

MAKING THE OFFER: Make sure you have contingencies to cover yourself. Typically they include contingencies like securing acceptable financing and passing a full structural inspection to the buyers' satisfaction. If your home inspection discovered something and you want the seller to fix it before you sign the deal, make sure that is fully understood.

When we sold our Wilsonville home, we had just received a $12,000 settlement from Louisiana-Pacific to replace defective siding. But we had also just had the house painted so the siding was protected. We agreed to drop the selling price by $12,000 and NOT replace the siding, and the buyer was happy.

CLOSING AND POSSESSION: This is typically something like ROD+1 or ROD+2 where ROD is recording of the deed of title.

CLOSING COSTS: It's a good idea to find out what these will be. One closing cost can be mortgage points. A point is 1% of the value of the mortgage and you can buy down the mortgage interest rate by paying points. 

PITI: Principal, Interest, Taxes and Insurance. Unless you buy a house for cash and do not have a mortgage, your lien holder will set up an escrow account into which you will make a payment every month of PITI. Then when H/O insurance, property taxes, mortgage payment (principal and interest), PMI (private mortgage insurance), HOA dues (homeowners association) and anything else is due, the lien holder takes the money out of the escrow account to pay it. It may seem like a lot, but you will be able to deduct mortgage interest and property taxes from your annual federal and state taxes. By the way, when the lien holder estimates that you have 20% equity in your home, PMI goes away. That is determined by the ratio of the remaining mortgage loan balance divided by the current market value. When it drops below 80% you no longer have to pay PMI. PMI is insurance you pay to protect the lien holder from you defaulting, walking away from the house. The idea is that if you have 20% equity you are unlikely to walk away.

FSBO For Sale By Owner: Houses are routinely bought and sold FSBO. In fact we sold two homes FSBO, our 1425 sq ft ranch in Beaverton and our 2400 sq ft home in Wilsonville. We advertised them with an asking price and noted that brokers were welcome to bring their clients. They would simply add 3% to our asking price and we would then pay their 3% commission. IMPORTANT: If you buy or sell FSBO, do NOT attempt to do the deal "on the kitchen table." Hire an experienced professional real estate attorney to represent you. For a few hundred dollars you will save yourself untold grief later on. Trust me on this.

Reroofing Our House, March, 2020

Several months ago we decided to investigate having our twenty-year-old cedar shake roof replaced. This blog entry is a recollection of that process.

There are two kinds of roofing companies: those that do existing roof restoration and those that do roof removal and reroofing. They serve different markets and those companies that do roof removal and reroofing typically do not want to do roof restoration.

So our first step was to get bids from both kinds of companies. We quickly found out a roof restoration was going to be so expensive it made sense to focus on reroofing.

This led us to an investigation of shingle manufacturers and grades. We narrowed our search to CertainTeed and Owens-Corning and got bids from reroofers using several grades of products from both manufacturers.

What we discovered was that the material and labor warranties are completely separate, and the manufacturer warranties the material. The problem is if you as homeowner file a material warranty claim, the manufacturer will send an inspector. If the inspector discovers that the installation was done incorrectly they might deny the material claim and possibly void the manufacturer's warranty. CertainTeed will not do this, however some manufacturers will.

So, even more important than an extended manufacturer's warranty is the choice of an installer. Pick an installer that is highly-rated by the manufacturer. That way you can have confidence in the installation and the product. Also, every roofing manufacturer offers not only a variety of products, but a complete roofing system including underlayment. By using a single manufacturer's roofing system and an installer who is certified by the manufacturer to install it, you can be assured it will be done right and your new roof will be long-lasting.

After much deliberation we decided to go with CertainTeed, in part because we were impressed with the installer, and the references he had given us. He gave us a list of every installation he had done over the past twenty years - the address, manufacturer, roofing product and color. This made it easy to pick exactly what we wanted and we were even able to talk to thee homeowners who had had the roof installed.

CertainTeed has a very wide product line consisting of several grades: Landmark, Landmark Pro, Landmark Premium, NorthGate, Presidential and Presidential TL (triple layer) being some of the grades. While Presidential and Presidential TL are very popular (and expensive) we decided on a more standard shingle with a lower profile and a lower cost. We went with NorthGate because it is an asphalt shingle with a rubberized compound added which maintains flexibility and resists impact and cracking better than standard asphalt shingle. Each grade comes in a variety of colors and which one you choose is strictly personal preference. We chose Moire Black and are very happy with the result (pictures below). You can also select a premium grade ridge cap shingle which gives a slightly upgraded appearance at additional cost, but we decided against that.

Our installer gave us a bid of around $15,800 with the understanding that there could be additional hidden costs. Using Google Earth we estimated our roof to be around 2700 square feet in total size. In most new home installations, cedar shakes are installed over laths, so the shakes and the attic crawl space 'breathe'. In our case, however the shakes were installed over solid 1/2" plywood sheets. After twenty years there was rot and mold on the undersides of some of the plywood sheets and about 1/3 of the roof plywood had to be removed and replaced - 29 sheets of 1/2" CDX5 plywood, a total of 928 sq ft, at $75/sheet. In addition our roof had a very low pitch with vaulting in the rooms below. The space for insulation was not deep and worse, over the twenty years, the insulation had slid down and covered the soffit vents. So the installers used special pink plastic flexible corrugated batts, stapled to the soffit vents and folded down, to keep the insulation in place (pictures below). Finally, there were insufficient ridgeline exhaust vents, so more vents had to be added to bring the house up to code. In fact, over the garage there were NO ridgeline exhaust vents. Obviously the building code had improved over the past twenty years.

The installation took a total of five days - for removal of the old roof and installation of the new roof, and ended up costing around $18,300, which was what we expected.

When the installation was finished we asked the owner of the company to walk the roof and check the gutters. This is not something he normally did, but he did it at our request. He found a clogged gutter which he opened using our garden hose, and some left-over material which he collected. He also brought a rolling magnet, kind of like a hand lawnmower, which he ran over the yard, picking up old nails and staples that had come loose when the original roof had been removed. He also ran it over the driveway where the huge dumpster had been placed. 

In retrospect, my advice to pick a quality installer, rather than the least expensive one, was the best advice we could have received.

Here is a website I used to educate myself.

CertainTeed Shingles

CertainTeed.com

CertainTeed NorthGate Impact Resistant Shingles

CertainTeed Find A Pro

Yet another way to buy a new car

In two previous posts on the subject, I described several ways to buy a new car: forcing local dealers to compete for your business strictly on price, using an auto broker or using your selected dealership's fleet sales manager.

However, in the last six years I've discovered yet another way to buy a new car. This method does have some constraints on it. First, you have to be very flexible regarding color and options, and you have to be willing to own the car for a long time, to avoid taking a huge depreciation loss when you sell it.

This process involves patiently waiting until the end of the model year and the next year's models have arrived in dealer showrooms. Also, you're looking for a car that is the top-of-the-line, with options on it that typical buyers don't want, and without the options that typical buyers do want. Basically you're looking for a car the dealer does not want and is willing to take a loss on to get rid of.

Let me give you an example based on our own experience. I had been trying to interest my wife in a Hyundai Santa Fe for several years. In October, 2012 after the 2013 models became available we went to several Hyundai dealers. The 2013 models had been redesigned in the egg shape, and we wanted the older two-box shape (engine box and cabin box). (This was done because the Honda CR-V was eating Hyundai's lunch.) So we went looking for a 2012 model, a red one. We live in the Portland area and the nearest red 2012 Santa Fe was in Tacoma. It was a Limited Edition, and was loaded with options, including a dealer-installed remote start. So the price was around $34,000. However the car was missing the most desirable option, four-wheel-drive, which is almost a necessity in the Pacific Northwest. This is why it had sat on the dealer's lot for six months and he was eager to sell it. We were able to buy it for $27,800 and I'm convinced, in retrospect, that if we had negotiated harder or been more patient, we could have bought it for $25,000.

The thing to remember about doing this is that as soon as you drive the car off the lot, you will be eating the first year's depreciation. So it's important to negotiate the price down so the dealer eats that depreciation, not you. To paraphrase real estate guru Robert Kiyosaki (Rich Dad, Poor Dad), you want to make your profit when you buy the car, not when you sell.

The experience that made me realize this could be a real car buying strategy occurred in May, 2018. We discovered a new 2017 Mercedes-Benz SL450 designo Edition at a local dealer. This car had a sticker price of $103,235 and had been in the dealer's inventory for over 300 days (10 months). The 2019 models were only a few months away, and clearly the dealer was eager to sell the car. He offered it to us for $89,588 which was the base price for a new SL450, and we countered at $80,000, which he accepted. I recently went online to AutoTrader and CarGurus and have found new 2017 SL450s at dealerships for $103,000 and used, low-mileage examples, both at dealerships and privately owned, for $80,000 to $85,000. Basically, by saving $23,000 off MSRP, we have effectively avoided the first 18 months of depreciation. And since we plan to keep the car for at least ten years, we think we got a great deal.

So, to recap: (A) wait until the end of the model year and the new models are in the showrooms, (B) be flexible as far as color and options, (C) do your research so you know what equivalent year and models are worth as used cars, so you know what the car is realistically worth when you drive it off the lot, (D) be firm about what you are willing to pay, (E) avoid the trade-in trap... be prepared to pay cash or secure your financing before you negotiate, (F) plan to own the car for a number of years to minimize the depreciation hit and (G) ideally pick a brand and model that has been redesigned for the new year, making the end-of-year model you're negotiating for even less appealing for the dealer to keep in inventory.

How to buy a car (or anything else) using game theory

In this short three-minute video, Prof. Bruce Bueno De Mesquita presents a simple but foolproof method for getting the absolute lowest price on any car (or other product) you want to buy. Instead of going into a dealership, you simply telephone all the dealers in your area, describe the vehicle and request their lowest price. Here's the link to the video:

How to buy a car using game theory!

How to buy a car... using game theory (alternate source)!

Buying a new LCD/LED HDTV?

Are you in the market to buy a new LCD/LED HDTV?

If so, beware of misleading video performance terms like:

Sony Motionflow XR 240, 480 or 960
Vizio SPS (Scenes Per Second)
Samsung CMR (Clear Motion Rate) 120, 240, 480, 840 or 960
Sharp AquoMotion
LG TruMotion

These are NOT the same as real screen refresh rates. Typically these numbers are exact multiples of the standard 60 Hz refresh rate, so they are designed to deceive the customer and make you think you are getting a higher refresh rate.

Why should you care? Because refresh rate, the number of times a second the screen is refreshed, directly determines how clear and smooth your screen action appears. The more rapid the action being displayed, such as sports, auto racing, video games, etc., the more blurry the action will be at a standard 60 Hz refresh rate, and the more you will want to have a higher refresh rate, such as 120 Hz or even 240 Hz.

The problem is, the higher refresh rate is more expensive to manufacture, so the HDTV will cost more. HDTV manufacturers have come up with these phony numbers to make you think you are getting better performance at a lower price. If you cannot find out the true refresh rate, make sure you can return the HDTV if you are not satisfied with the screen image.

Some HDTV manufacturer websites will tell you the real screen refresh rate, and it may be available at BestBuy or on BestBuy.com.

By the way this is only a problem with LED/LCD HDTV, not with plasma HDTV, which typically runs at a screen refresh rate of 480 Hz.

Beware Of Phony LCD HDTV Refresh Rates; posted March 26th, 2012

Carpeting your home? Beware of carpet relabeling.

Recently we decided to re-carpet our living room and dining room. We started by visiting a large carpet retailer, one who has several stores in our local area, as well as a large advertising budget. We first looked at Karastan SmartStrand carpet, but rejected it because we did not think it would wear well.

Next we looked at Shaw nylon carpeting. Shaw is apparently the largest carpet manufacturer in the U.S., and nylon is recognized as the best synthetic material for carpet, plus it is much less expensive than wool.

Despite the best efforts of the salesman, we decided not to buy from that retailer, and the reason why can be expressed in one simple word:

RELABELING

Relabeling refers to the retailer practice of demanding that carpet manufacturers provide them with unique, custom labels. This is done primarily so the customer cannot price comparison shop for the same carpet at different retailers.

Relabeling is widely practiced across the consumer economy, for example in inexpensive consumer electronics, small appliances like coffee makers and toasters, clothing, gasoline and other auto-related products, and, of course, in food products, whether fresh, frozen or canned. In fact, large grocery chains rely on house labels, or brands, to attract value-conscious shoppers. Basically, any product that is so widely available that it has become an undifferentiated commodity, and is sold mainly on price, is likely to be relabeled. Consumers understand this, of course, and we have learned to rely on our physical senses,  comparing visual appearance, product features and specifications.

The difference with carpet is that it is an investment, an expensive purchase that we buy infrequently. When we purchase carpet, we cannot walk out of the store with our purchase. Instead, the retailer orders it from the carpet mill, and it arrives in a roll. There is no product code embedded in the backing, to confirm that what we bought is what the installers are installing. So we really have to trust both the manufacturer and the retailer.

After spending some time with the first carpet retailer and then going on-line to learn more about the different carpets I was comparing, I learned several things:

(1) Relabeled carpets cannot be found on the manufacturer's website, in this case on the Shaw Floors website.

(2) Beyond the name of the fiber, and a durability rating, it is generally impossible to find any data on relabeled carpets - such as face weight, total weight, tuft twist, gauge or stitches per inch. So you cannot compare a relabel with a standard carpet label. This is by design.

(3) The carpet salesman will deflect your inquiry, refusing to provide any data.

(4) Carpet relabels may be intentionally chosen to be widely used generic phrases in order to frustrate an on-line search, and disguise the fact that many regional carpet chains use them. For example, the following are actual names of Shaw carpet relabels: Dividing Line, Highland Cove, Invite Possibility, San Carlos and Truly Modern.

As a result of the above, I've come to these conclusions:

(1) Carpet relabeling is a deceptive practice designed to prevent a customer from price comparison shopping. It allows the retailer to maximize profits at the customer's expense. It is definitely NOT in the customer's best interest.

(2) A carpet retailer who relabels has a CAVEAT EMPTOR - LET THE BUYER BEWARE business philosophy.

(3) A carpet retailer who engages in one deceptive practice might well engage in others, such as substituting, delivering and installing a lesser grade of carpet than the one for which the customer paid.

So, we've decided to work with a carpet retailer that we trust, that uses standard Shaw labels. Standard labels have a large amount of publicly available information. Also, I feel comfortable knowing that if I contact Shaw directly, and give them the label, they will know what I am talking about.

Regardless of which carpet manufacturer you prefer, before you sign a contract simply go on-line and search for the manufacturer and the label. If you cannot find it on the manufacturer's website, you can assume that your retailer is relabeling, and their business philosophy is: LET THE BUYER BEWARE.

These retailers may continue to be successful, preying on unsuspecting customers, but you do not have to be among them.

So, which local carpet retailer did we finally decide to hire? You can find them on this national list of trusted carpet retailers. I'll give you a hint... It's Koeber's Carpet in Beaverton, OR, found on this list:

ABC Carpets Preferred Carpet Dealers

References:

When is the best time to buy carpet?

How to buy carpet wisely - the ABCs of Carpet

Yahoo! Home Buying

Renting a home or apartment, and thinking about buying? This Yahoo! piece could be useful. Be aware that some values are monthly and some are annual. Annual home maintenance costs typically run from 1% to 2% of the value of the home.

Click the following link:

Should I Rent or Buy A Home?