How would you feel if you bought a home that seemed perfect, only to find out you couldn't use the property like you thought you could?
One buyer bought a home with a good-sized yard that he thought would be perfect for his large dogs to roam free. Soon after the sale closed, he hired a contractor to construct a fence around the property. The day the work started, a neighbor showed up to inform the new homeowner that he couldn't completely fence the property because of an easement that ran across his property.
An easement grants property rights to someone other than the property owner. Common easements are for ingress and egress, utilities and sewers. Easements must be kept unencumbered.
In the case above, the easement provided the neighbors access to their property. A fence could not be built over the easement because it would deny the neighbor their rights to access.
The property owner had to revise his fence design, which was disappointing. But, easements can be even more problematic, particularly if you assume there is an easement in favor of your property but there isn't.
A homeowner in the Oakland Hills (Calif.) subdivided his property and sold off the lower half to a builder who constructed a new home on it. The homeowner then put his home on the market and entered into contract to sell it.
The buyer's real estate agent reviewed the preliminary title report and found that there were no easements either benefiting or restricting use of the property. In particular, there was no sewer easement.
The agent asked the seller how the sewer line from the house connected to the main city sewer line. It turned out that the sewer line ran downhill across the portion of the property that had been subdivided and sold.
In this case, an error of omission occurred during the subdivision process. A sewer easement should have been granted in favor of the owner of the upper portion of the property. Consequently, the owner of the upper property no longer had a legal right to run his sewer line across the adjacent property.
HOUSE HUNTING TIP: Make sure you have a clear understanding of the title issues affecting a property before you buy it. In some states such as California, title companies check the record and issue a title report that includes such things as the recorded owner and liens, easements and encumbrances affecting the property. In other states, buyers hire attorneys to search the title record and produce a report.
In the aftermath of the subprime lending crisis, it's especially important to investigate the status of any liens secured against the property. A preliminary title report will give you the original amount of such items as mortgages and taxes owed. But, the preliminary report won't necessarily tell you the amount the sellers currently owe.
All liens secured against the property must be paid in full in order for the seller to pass clear title to a buyer. If the seller has an interest-only mortgage and has not made any payments toward retiring the principal amount borrowed, he could still owe the original amount he borrowed. If the mortgage was a teaser-rate adjustable with an option to pay the minimal amount due, the seller could owe more than what is indicated on the title report.
THE CLOSING: Problems that could delay or derail closing can develop when the owner of record is not the same person who listed the property for sale. Before concluding a home purchase, make certain that the seller has the power of sale and that the property you're buying is what you bargained for.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2007 Dian Hymer

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Should you invest a good sum of money in your home if housing prices in your area are flat or declining? When home prices are escalating, adding more money to an asset that's increasing rapidly in value is a no-brainer. But given current market conditions, it's more important to consider the financial ramification of a renovation before giving your contractor the green light.
First, find out how much the anticipated project will cost. Then add 10 to 20 percent for cost overruns. The next step is to figure out how much your home would be worth after you complete the improvements.
The market value of renovations varies from one area to the next. According to Remodeling magazine's Cost Versus Value Index for 2006, a mid-range basement renovation -- in terms of cost and finishes -- returned on average approximately 80 percent of the cost when the home was sold.
For comparative purposes, the basement renovation used in the Remodeling report consisted of a 20-by-30-foot entertainment room with a wet bar and bathroom. To determine the return on investment, Remodeling, in conjunction with the National Association of Realtors, relied on data compiled from a survey of Realtors.
Even though the national average return on the basement renovations was only 80 percent, a comparable job in San Francisco returned 112.7 percent of the cost. So consult with a knowledgeable local Realtor to determine how much the improvement you are contemplating will increase the market value of your home.
Investment potential is just one variable to consider when weighing whether to improve your home and how much to spend. Quality of life is a major consideration. Generally, the longer you plan to stay in your home, the more it makes sense to make improvements that will make your home more user-friendly. However, keep in mind that a basic rule of investing in real estate is to avoid overimproving for the neighborhood.
HOMEOWNER TIP: To get the most out of a major renovation, make sure that the work is done with building permits. Sellers and contractors often proceed with major renovations without taking out the appropriate permits, either to save time or money. This might not matter to you if the work is done well and in accordance with building-code requirements, but it could come back to bite you when you sell.
Appraisal standards have tightened recently along with credit standards. Today, an appraiser might not count a basement conversion as livable square feet unless the homeowner could show that the work had been done with permit. This in turn could result in an appraisal for lower than the buyer agreed to pay if you represented that the den added value as livable square feet.
When the market is racing upwards, a low appraisal won't necessarily cause a deal to fall apart. But, in today's environment, an appraisal for less than the purchase price could cause a buyer to renegotiate the price, or back out, if the seller isn't willing to take less and the purchase contract includes an appraisal contingency.
It's quite common to find basements that were finished without permits. Sellers should take care how they market such improvements to a prospective buyer. In California, state law requires buyers to disclose if work was done without permit. Misrepresenting livable square feet can have serious legal consequences. Rather than take that risk, make sure the buyers know exactly what they are buying.
THE CLOSING: It's prudent to be conservative when representing the livable square feet of your home. Sellers have ended up in court over disputes about square footage.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2007 Dian Hymer

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November 05, 2007
Up until the recent slowdown, homeowners in many parts of the country saw the value of their homes rise rapidly. Home prices, in many areas, seemed to move in just one direction: up.
A combination of record-low interest rates and rapid price appreciation turned many homeowners into serial refinancers. When interest rates dropped, one mortgage was exchanged for another, sometimes several times within one year.
As home values rose, cash-out refinances allowed homeowners to pull equity out of their homes to remodel, send children to college, take vacations and buy new cars. It was good for the economy while wiping out billions of dollars of homeowner equity.
Tapping into home equity seemed like a great idea until the housing market softened. Now there are millions of homeowners around the country who can't sell their home for enough to pay off the loans secured against the property.
HOUSE HUNTING TIP: Buying a home is still a good investment if you can afford it, if you are ready to put down roots in a community, and if you want to invest in your personal happiness. Profit potential shouldn't be your only reason for buying a home, even though in most cases your home will appreciate in value if you maintain it and if you own it long enough.
The housing market, like any economic market, is cyclical. There are periods of robust activity followed by periods of sluggishness. Prices can go down as well as up. Now that the market has softened in most areas, it's time to look at owning your home as a way to gain control over your personal domain -- not as a source of quick cash.
In the areas that were previously hot, we are unlikely to see such significant home-price appreciation in the near future. So, if you're considering buying in one of these areas, think in terms of buying for the long term. If your future is uncertain, it might make more sense to rent.
Some niche markets in South Carolina, Idaho, Washington, Texas and Utah are experiencing double-digit home-price appreciation while the country on a whole is suffering a slowdown. If you are buying in such a market, take a lesson from the numerous homeowners who bought using risky mortgages and extinguished their equity through successive refinances.
Pay careful attention to how you finance your home purchase. The cheapest loan possible may be not be the best loan if it requires you to refinance or sell within the next few years. If the market slows and you are no longer earning appreciation on your home, refinancing could be a problem. If the market is soft then, you could have difficulty selling.
One of the best investment strategies is to buy when the market is soft, not when it's racing forward perhaps toward a peak. It's also a time when you'll find the least competition from other buyers, most of whom will wait to buy until the market has already turned.
Don't forget to consider the tax advantages of home ownership when considering whether home ownership makes sense for you. Generally, property taxes and interest paid on mortgages up to $1 million on your primary residence can be deducted for income-tax purposes. Restrictions apply, so consult your tax adviser before making a move.
The tax advantage of home ownership should not be your sole reason for buying. Owning your own home is a big commitment financially as well as in terms of the time and energy you will spend maintaining and improving your property.
THE CLOSING: In some countries, such as Australia, there is no tax break for owning a home. Nevertheless, people still buy houses there.
Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Copyright 2007 Dian Hymer

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November 05, 2007
(This is Part 1 of a two-part series.)
Wholesale mortgage prices are those quoted by wholesale lenders to their clients -- mortgage brokers and smaller ("correspondent") lenders. (I will use the word "client" to cover both.) Clients mark up these prices to offer retail prices to borrowers.
Wholesale price data have never been available to the general public. Each wholesale lender views its prices as proprietary information available only to those clients who have been approved by them to receive it.
The Internet is now the principal method used to distribute wholesale prices, but usually a password is needed to gain access. The few lenders who don't require passwords probably assume that any borrowers who stumbled on their site would find the data so overwhelming that they'd quickly leave.
Wholesale price data is extremely complicated. It takes time for clients to master all the pricing adjustments contained on any lender's price sheet. To make it worse, no two lenders format their prices in the same way. This is why pricing mistakes are extremely common.
It is too time-consuming for a client receiving prices from multiple wholesale lenders to compare prices for more than a few unless they have a technology that converts all the disparate formats into one uniform format. With a single format, it is possible to find the best wholesale price in any market niche among any number of lenders. Not many clients have this capacity.
One that does is Amerisave, which gave me access to their database of wholesale prices. At any one time the database covers 12 lenders, though over time the composition changes as some lenders are replaced by others with better pricing.
[Note: I have a business relationship with Amerisave that is explained on my Web site by clicking on Fixed
Markup Lender . It does not apply to the wholesale price data discussed in this article.] I used this data to compile daily series on wholesale interest rates covering 14 types of mortgages. It now appears on my Web site. A snapshot covering five products is at the top of my home page, with greater coverage and detail in linked pages. The data are updated automatically every 30 minutes -- not that they change that frequently, but they are reset every morning and sometimes during the day. I am indebted to Daryl Tubbs, who figured out how to do this. The interest rate shown is for zero points. Lenders don't actually offer loans at the rates shown; they offer them in even increments of 0.125 percent, e.g., 6 percent, 6.125 percent, 6.25 percent, etc. As the rates go up, the points charge goes down. Points are an upfront charge expressed as a percent of the loan balance. I interpolate between the rate with the smallest positive points and the rate with the smallest negative points to obtain the rate at zero points. The error from interpolation is very small, and having one price makes it easy to compare price differences among programs and at different dates. So what are these data good for? One purpose in developing these data was to provide an accurate measure of day-to-day changes in the market as a whole. For this purpose, data are required daily for a wide variety of loan types. Wholesale price data are a much better gauge of market conditions than retail price data because they contain much less statistical "noise." Wholesale data do not include retail markups, which vary widely. Furthermore, the wholesale data pertain to transactions where the borrower's credit score, loan size, down payment and other factors that affect price are specified. In the retail series, these factors are not reported, and any changes in them will affect the price. Borrowers can use the wholesale data to protect themselves against one of the most pervasive frauds in this market: price escalation between the day they are quoted a price and the day the price is locked. If the market price goes down, the borrower's price will stay the same, and if the market price goes up, the borrower's price will go up even more. Loan providers explain a price increase as stemming from "changes in the market," but the market price on the lock day is what they say it is, and borrowers have had no good way to check it. Now they do. While the wholesale data are an excellent measure of what has happened, they have no predictive power, so don't waste your time trying to spot "trends." Even if the price rises 10 days in a row, view the probability that it will rise in day 11 as 50 percent. Next week I will discuss some other uses of the new data. The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com . Copyright 2007 Jack Guttentag

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