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