FRANK LL0SA- Northern Virginia Broker .:. FranklyRealty.com

Ok, I got a tricky question about the new home buyer tax credit.

I was always told the tax credit was based on a contract price of $800,000. However some accountant seems to think the $800,000 has to be AFTER all costs. How can that be? Even including taxes? That means a home has to sell for under $765,000. How can that be right?

Where can I get clarification and proof?

Frank

Ok, this is kinda tricky to explain, so bear with me.

I feel strongly that ultimately the seller should pay for all (actually "most") closing costs. But not in the way that you might be thinking. And this type of post will lead to the 101 hyper technical "but what if" scenarios and counterarguments.

I'm not talking about "Negotiate strongly and beat down the seller by getting closing costs thrown in, heck this is a buyer's market!"

I'm talking about "The seller should care about their NET." Once the net is established, go back and ask if the price can be adjusted (INCREASED) to include closing costs.

Example: $500,000 with 0 closing costs vs $510,000 with $10,000 back.

Why? The higher the recording closing price, the better for the buyer. Ie $510,000 1) In the short term for comps: The higher it records on the county records and the MLS the better it is for "comps." In other words it helps the next similar unit close for higher, which is better for the buyer (ie more of the cheesy "instant equity"). Note that the MLS DOES show the seller subsidy (closing costs paid by seller) in Virginia, DC, MD, but a) not everyone sees it (even though FranklyMLS nets out all closing costs when showing sold prices). b) not all appraisers will adjust 100% for it (thus helping the next unit appraise for higher).

2) Better loan. For some people adding back in 2% in closing costs, can help people jump from a 15% down loan to a 20% down loan, thus dropping the rate significantly.

3) In the long term: since the county records do NOT show the closing costs, this helps the buyer when they sell the unit in a few years. Many do-it-yourselfers and data hounds will say "well you bought it for $510,000... therefore" instead of "well you bought it for $500,000... therefore." I would rather make it look like I spent more (and in essence, with all the closing costs, you really did spend $510k, so why not have people see that number?).

Common counter-arguments:

1) Some will say this artificially inflates the marketplace and might lead to a subsequent crash. Answer: I'm talking about a benefit to the individual buyer. A buyer agent's job is to do what is in the best interest of the client, while being legal.

2) Taxes will go up. Yes, perhaps. Maybe $50 a year, big deal. Buyer tip: See post on NOT using Tax Assessments to value a home) Seller tip: Since some buyers DO use this, the HIGHER the tax assessment the better, so think twice before fighting to get it lowered, see post)

3) Seller might have to pay the commission on the seller subsidy. Yes, this might be the case. The buyer can offer to pay the difference. Or skip the idea of asking for more seller subsidies after the fact, and ask for it up front in the initial offer.

Things to watch out for:

1) Don't make the seller subsidy too high. This isn't free money. Sometimes a lender will say "sure we can use up 3% or 4%", but that defeats the point. Don't start buying points if you weren't already planning to.

2) The contract reads "Up to X in seller closing costs." If you put a number that is too high, then the rest goes back to the seller. You can maybe add in your contract "unused closing costs will result in a drop in the contract price, with the same net to the seller." Or get from your lender the closing cost estimate and leave $2,000 in wiggle room. Also if you need to use up the funds, you can count your home inspection and sometimes up to a year in condo fees. Worst case scenario, you can do a 2-1 buy down (more complex, prepays part of your mortgage) to use up funds.

3) Watch out if you ask for a credit for home inspection items, you don't want your credits to go so high that the lender won't allow it.

4) This might get tricky with how the appraisal is handled (it can actually help), but I can go into that next time as that can take a long time to explain.

Sorry if this was a little complex, but it is something that I strongly believe in, and I think most of you will get it. Feel free to add more "well, what if..." I did it for my personal home, and I would do it to help my clients.

Written by Frank Borges LLosa
Broker FranklyRealty.com
Owner FranklyMLS.com

Cash photo by emdot

You've seen them, and maybe you have used them.

The "Home Inspection for Information Purposes Only." (coupled with no home inspection contingency, ie, no back and forth, no walkingg after the inspection)

What the hell is that? It is a trick, is what it is. In my first year, I let one agent do this, thinking it would build goodwill, and it backfired. They did it during the HOA review period and backed out over something stupidly small!

(Sidenote, I was able to keep $3,000 of the deposit for my client. Why? Because the idiot put on my voicemail that he was backing out because they found XYZ. Thing is, with HOA docs, you can get out for NO reason, or an HOA reason, you can't get out for an unrelated matter. The broker said "in my 30 years... I've never...")

Now my motto is "You want that information, great, do it AFTER closing."

Don't get me wrong, I'm all for home inspections. What I am against is agents sneakily (is that a word?) trying to make their contract look more attractive, either to win a bidding war or to win on price (see post on winning on terms).

There are other creative ways to help your client while making your contract stronger (without increasing the price).

Such as:

1) Put in a provision that the buyer will only request items over $2,000 to be repaired. That way the seller knows you aren't going to nickel and dime them

2) Or go higher. Put in a provision that the buyer will only request items over $15,000 to be repaired. That way the seller knows you just want it inspected to make sure it isn't falling off a cliff (which is usually most people's concern)

3) Make it an all or nothing home inspection. That is what the banks do sometimes. I'll get it inspected and I'll walk or I'll buy it. Hopefully this implies that you won't sweat the small stuff.

But don't do the "Info Only" stuff. It is dishonest if you try and do it during the HOA review period with the intent of using the HOA Docs to get out. And if the seller can prove that this was your intent, you might risk your deposit and more. (most people think only the deposit is at risk when you back out of a contract, they are wrong)

And the only thing worse that an "Info Only" inspection is a contract with no home inspection contingency yet the buyer still sneaks in their Home Inspector anyhow, and then they have the gaul to bring one anyhow? No Sir.

Frank- Broker FranklyRealty.com

Wolf pix by manitou2121

Please report typos

Are you better off buying AFTER the tax credit expires? Maybe.

Everywhere you turn you read about the $8,000 1st time homebuyer tax credit and how you need to "Buy Now" (anybody remember that NAR ad from 2006?). Gotta hurry up before the Dec 1st Expiration! 

(Sidenote: that expiration means you need to CLOSE by then. If you are looking for a short sale gamble, and you want the credit, you better get it under contract NOW. And everyone else, don't be an idiot and schedule your closing on the 1st. At least close a week early. There will be a backlog and hiccups and you might miss your tax credit.)

So Warren Buffet says whenever you see a herd running in one direction, you are supposed to walk the other way. 

Oh, and there IS a stampede in Virginia trying to buy a home in time for the tax credit. People LOVE tax credits. Kinda like people love to "SAVE" by going FSBO, when it will likely actually NET them less.

Has anybody stopped to wonder whether this mad dash might be temporarily INFLATING prices beyond the credit that it offers? And the day after the credit expires, might there be an even MORE of a dead winter following it?

Buyers:

If you are buying under the $100,000 price point, sure that $8k credit will likely be better to take now. 

If you are buying from $400k-$700k, you have to ask yourself, "Once the flood of buyers evaporates, won't that send prices down?" Maybe.

Am I saying "NOT TO BUY." No, but I am also saying, don't be silly and getting into some crazy bidding war or overpay for a place to get in under the wire.

Kinda like the Cash For Clunkers campaign. How many "Deals" do you think the Dealers were really giving in that last week when their phones were ringing off the hook? They probably jacked prices up. And sometimes that $5,000 credit was in place of a $3,000 valued car. So the net saving was only $2,000! And on a $25,000 car, I bet a month after the tax credit, (after inventory catches up) you can get that $25k car for well under $23k.

Sellers:

Don't get too greedy! You also want to sell into this flurry. Ask for too much and watch the dead Winter-time come (unless Congress extends it, which they might).

Normally I am not an advocate of Market Timing. But for those that like to try and play the game, I just wanted to give some food for thought.

Also please attach comments with links to any other blogs that might question the value of rushing in to get the tax credit (I didn't see any, they were all "buy now").

And stay tuned for a flurry of new posts. I had an 18 hour trip to Africa (see Wheel Estate Cam Below) to write a ton.

Written by Frank Borges LL0SA Broker FranklyRealty.com

Inman 2009 Innovator of the Year

Random Wheel Estate Cam video from Africa:
Please report all typos!

Photo Credits:Tax photo by Aimeesblog, Clunker by ThreadedThoughts, Warren by Tedizen 

Cartus relocation company is a CROC! (that is an opinion, for more opinions Google Cartus sucks).

Actually many "relocation" companies that are supposed to help the employee are just fronts for making profit. And they have such a compelling pitch! How could an eligible buyer actually decide to bypass them? EASILY!

I'll explain exactly why you might want to bypass your relocation company AND how you can use PART of their system to your benefit and ditch the other part.

Why am I picking on Cartus? Cuz I was robbed. I got this email the other day:

Hi, I'm moving to Virginia with my job in a month and my fiance and I are a big Frank fan! {Name Omitted} recommended you to us. We love the website and reading/listening to your blog. And, we'd like to go with your realty firm when we purchase a place in Northern Arlington this summer. Fortunately for us, my company (XYZ) is willing to pay Realtor's fees and closing costs but I need to approve you as a realtor/realty before they will allow us to get started.

I added the emphasis.

1) Fortunately for us. Wow, the company is so gracious. They really care about their employees. Consider it a benefit like healthcare. They will pay Realtor fees and closing costs! (end sarcasm here)

Ok, first of all when you are buying, there are NO "Realtor fees" (sidenote: ha, I wonder if they pay for the bogus Realtor Admin fees which the Washington Post, link, just covered and cited my blog) per se because the Realtor fees are paid by the buyer. But it surely makes for a good BS pitch in the brochure. Why not also add: free keys! As for the "closing costs" I'll get to that shortly...

2) Approve you. Approve me for what? Make sure I'm good? Knowledgeable with people that are relocating? Maybe a quiz or a check for references? No. None of this happened.

I knew the "approve" the agent sounded fishy. I warned the buyer... I said "I bet they are up to something."

Finally Cartus contacts me. I get an email that effectively said: You are approved when you agree to give us 40% of your commission. (actually it said "registration entails a verbal agreement of a 40% referral fee.")

Are you F-ing kidding me? "Referral fee?" Did they refer business to me? Hell no. These buyers found me on their own. They were a personal reference from a friend that felt like they got great service. And Cartus demands 40% to be part of their program. What is this Robin Hood? Take from one to give a another? And keep a little for profit in the process?

So here are the details for their program, I am a fine print reader, so at the end I will try to parse this out for you.

Isn't it fun making a really long list of fees that are paid? Even though many of them are next to nothing. I just pulled up a HUD1 for a buyer (note that fees can vary by closing company and frequently get renamed and shuffled around).

Here are a few of the next to nothing fees on the list that you get FREE!!: Notary Fee= $0, Messenger= $55, Tax service fee $0, Recording $65, Termite $35, Credit report $14, Title examination=$0.

The fees that have some real value: Survey= $265 Settlement fee=$195 Title Search=$175 Lender's title insurance=$1,800 (on a $650k VA home, reissue rate) NOT present in the list of closing costs: Owner's title insurance= $1350 (except for closing costs) Read more on Owner's Title

Conditional costs. Ie IF, a big IF, you use their "approved" Realtor. You get: Loan origination fee 1%. Lenders have a ton of names for these types of fees. Sometimes they are called "Rate buy down" points, or "Discount Fee." The short hand is just "points." Points aren't necessarily bad (make sure to subscribe to this blog for a full post on when to buy points). More often than not, if you put down 20% there are ZERO POINTS, ie $0 Loan Origination fees. So if you DO use the Cartus program, and an "approved" Realtor, make sure you go out of your way to max out the full 1% point. (ie if the lender was going to charge you no points, they can make up the fee and buy down your rate, as in make your 5% rate 4.75% approximately)

But here is the fine print as I understand it...

BOTTOM LINE: You only have to use their approved Realtor IF you need that Loan origination fee. In other words, you can still pick your favorite Realtor and get all the other fees covered for free by Cartus. (I could be wrong, but that is how I understand their rules above).

Why in God's world would you give up the ability to get a "free" 1% loan origination fee?

Well that is a separate and lengthy discussion on rebating and discounting. Heck, there are several companies that will give you a 1.5% cash rebate. Heck a 1.5% cash rebate is MUCH better than no cash reimbursement for a 1% fee you might not have purchased normally.

WAYS TO MILK CARTUS

1) Have them pay ALL your fees except the 1%, and find your own Realtor that will give you a rebate.

2) Or if you find a Realtor that is willing to be "approved" by Cartus, tell them "hey buddy, you are willing to give 40% to Cartus right? And Cartus will just turn around and refund 33% (1% or 1/3rd of the 3% offered to buyer's agents) of the 40% in the form of a 1% loan rebate, why not just give me the 40% directly?! Cut out Cartus and get 1.2% refunded on your HUD1 vs 1% lender fee repayment and Cartus pocketing the rest.

3) Get your own un-approved agent, skip the loan fee reimbursement, yet accept all the other fees. So why am I telling you the secret path to getting the most cash out of the relocation company and system? Well maybe, just maybe you will then believe me that #3 above might be the best solution for you in the end.

Stop and think about for a second. Cartus demands 40% from a Realtor that you pick or one that they pick. So for the ones that they pick, what kind of Realtors will accept that? Oftentimes desperate ones. Perhaps those that are kinda struggling. You know, economy is tough right now. Weekend warrior Realtors that have nothing better to do? One that will pressure you into a house and hope to get you off their slate as fast as possible so they can make the next 60% deal from Cartus. Perhaps they have to cut down half the time they spend on you, to make it worth it.

So signing with Cartus with an "Approved" Realtor, is not much different than Rebating. I have no problem with the rebating business model. (note: you won't find many other non-Rebating Realtors talk about it openly).

Why do I talk about it? Well as I like to say "I use to rebate, but then I got good." Yep Read: Realtor Rebates. Free Money or Expensive Savings? and more on rebating.

In the end, know you do have a choice. You can get the best of both worlds. You can get Cartus to pay a good amount of your closing costs, get a loan with NO loan origination fees, and get to pick an agent that is working for YOU, and not for Cartus.

Oh, and remember I'm not too busy for you, so email me. See I'm Not Too Busy For You video #1 and Video #2

Make sure to subscribe and comment and debate. Nobody likes a stale blog!

Written by Frank Borges LL0SA

Broker FranklyRealty.com

Owner FranklyMLS.com

Croc image DrBartje Fish image Phillip

ps. My experience was on the BUYING side. Can somebody comment on the SELLING side of relocating? Do they really buy the house at the appraised price and eat any subsequent loss? Now that seems to have some value in this market.