The Closing Process: What Home Buyers Can Expect on the Big Day

The Closing Process: What Home Buyers Can Expect on the Big Day

The hardest parts are over: You’ve found that perfect home in a haystack of listings, negotiated a deal you’re happy with, and secured a mortgage—and you’re now in the home stretch of the home-buying process. Just one more critical hurdle lies ahead: the home closing. Also known as “settlement” or “escrow,” this is a day when all involved parties meet to make this transaction official.

To make sure you’re fully prepared, here’s what to expect from the closing process, step by step.

The Ten Commandments for Fiduciaries

First Commandment: Thou shalt be faithful to the interests of the Trust and its beneficiaries. Always!

Second Commandment: Thou shalt not use the office of Trustee to take out thy aggressions on thy siblings. Never!

Third Commandment: Thou shalt not use Trust assets for thy own benefit. Ever!

Fourth Commandment: Thou shalt not commingle Trust assets with the assets of others. Never!

Fifth Commandment: Thou shalt not hire thy kids. Never, ever, ever!

Sixth Commandment: Thou shalt keep all Trust beneficiaries informed. Always, always, always, even if there is no news!

Seventh Commandment: Thou shalt keep proper and complete records. Always, always, always!

Eighth Commandment: Thou shalt not take exorbitant Trustee fees. No, no, no, never!

Ninth Commandment: Thou shalt make Trust property productive. Always!

Tenth Commandment: Thou shalt keep thy attorney informed. Always, always, always. Otherwise how can we help you?

Image by Thomas Rowlandson (1756–1827) and Augustus Charles Pugin (1762–1832) (after) John Bluck (fl. 1791–1819), Joseph Constantine Stadler (fl. 1780–1812), Thomas Sutherland (1785–1838), J. Hill, and Harraden (aquatint engravers) - Unknown, Public Domain, https://commons.wikimedia.org/w/index.php?curid=587644

Considerations Before Investing in a Condo

By: Brandon Turner

A friend who happens to also be a business partner in one of my non-real estate ventures reached out this week with a question. He does this from time to time, seeing as I am such a big shot real estate expert and all…

This time, the text read: Hey, Ben – how about this condo…?

This was worth a telephone call. He needed to understand a few things!

Two Basic Reasons to Buy Real Estate

There are only two reasons to buy real estate – cash flow and capital gain. Cash flow accomplishes the objective of financial freedom, which is defined as capacity to generate income outside of W2/1099. Equity, on the other hand, builds the balance sheet, which makes us rich. No big, earth-shaking discoveries here…

Why Condos Are Problematic

Indeed, condos are problematic with respect to both of the stated objectives. First, by and large, condos don’t appreciate as much as free-standing single family residences. Also, the cash flow can be unpredictable…

While there are obviously exceptions to the rule, mostly this is true, and there is a good reason for this:

Condos have an extra cost of ownership, which most houses do not — the condo association fee. Let’s remember that a lot of what drives values of owner-occupied real estate is availability and affordability of credit, which is to say the more people can afford to borrow, the more they will pay. Consumerism galore.

Well, when qualifying folks for mortgage loans, banks underwrite two metrics: the Debt to Income Ratio (DTI) and the housing expense ratio. I haven’t looked at the exact percentages in a long time since they are not pertinent to my business model, but essentially you are permitted to spend only a certain percentage of your income on all of your combined expenses, not including the debt service on the mortgage loan that you are applying for. And that new mortgage payment can’t inflate your total DTI above a certain percentage more.

Therefore, since your income is what it is, the crux of the matter relative to how much you can borrow is a function of expenses. Obviously, anything that adds to the expenses has the effect of diminishing the amount of P&I that your DTI can absorb…

Guess What?

Condo association fee is an expense, is it not? If your DTI permits your total hosing expense to be $1,200/month, then without a condo association fee, you’d be able to borrow the full amount of mortgage, resulting in PITI of $1,200. However, if there is a $275/month association fee, then since your total housing expense has to remain at $1,200/month and since taxes and insurance are what they are, you now must compress the P&I to result in lower debt service by $275/month. Well, crap…

Such is the logic. There are caveats, exclusions and intricacies that apply. If interested, please do further research. But since prices are set by what ready and willing buyers can afford to pay, which in a lot of ways is a function of what they can borrow, hopefully this explains why valuations of condos are structurally compressed.

So What’s the Problem?

The problem is that we want two things in a real estate investment – cash flow and equity appreciation. The condo association fee compresses appreciation of equity, as we just discussed. And since rents on most condos are not higher than rents on SFRs, but there is this additional and often substantial expense, the cash flow objective is also problematic indeed.

We have many “wants” when it comes to our investments, but there is only one “must have” — control, and this is perhaps the biggest issue with condos. The association fee will go up in tandem with CapEx, and unless you have substantive vote on the committee, you won’t be able to avoid paying.

Importantly, as that fee goes up (while the building is aging), your rents will likely not keep up. There’ll be newer and better amenitized condos in the marketplace by then. Ouch.

So, these will get cheaper, and investors will start buying more and more of them… because investors often think that cheap is good. Guess what? When there are too many investors in a condo development, the banks lose appetite for providing mortgages to investors, which completes the spiral cycle, and when you are ready to refi and bridge the equity, you may not be able to.

Conclusion

There is but one strategy that works well with condos, but that’s beyond the scope of this article. All and all, there are some serious problems with condos. Be smart!

Best Places in Chicago & the Suburbs to buy a Home

Best Places in Chicago & the Suburbs to buy a Home

Crain's Chicago Business has looked at data from 77 city neighborhoods and 200+ suburbs and has compiled a list of 18 neighborhoods —10 in the suburbs and 8 in the city—where the schools are good, crime is low and transportation is accessible and easy. 

Home values in all of these neighborhoods has been going up which has negatively impacted affordability, in some areas faster than others. Nevertheless, in most of the chosen locations, buyers are still paying less than they would have a decade ago.

Elmhurst has taken over as the new "hub" for million-dollar homes

Elmhurst has taken over as the new "hub" for million-dollar homes

Million-dollar homes continue being built throughout Elmhurst.  Excellent schools, easy access to the major expressways and a great downtown are just some of the features that are have buyers flocking to Elmhurst. More than two-thirds of the million-dollar homes sold in 2016 were new construction, according to Crain's Chicago Business.

Building Wealth Through Homeownership

One of the most popular contentions in the buying vs. renting debate is that homeowners build wealth over time, while renters do not build equity with their monthly payments. According to the Federal Reserve, in 2016 the discrepancy between homeowners and renters was approximately $220,000 in favor of homeowners. Homes tend to appreciate in value and as the borrower repays the mortgage, they gradually build equity.

“Though there will always be discussion about whether to buy or rent, or whether the stock market offers a bigger return than real estate, the reality is that homeowners steadily build wealth. The simplest math shouldn’t be overlooked.”

—Lawrence Yun Chief Economist, National Association of Realtors

The five factors that contribute to the accrual of wealth through homeownership:

  • the forced savings imposed by a required monthly mortgage and down payment,
  • homes’ appreciation in value over time,
  • federal income tax breaks including mortgage interest and property taxes,
  • financing with a mortgage increases the returns of owning a home,
  • and homeowners are not subject to rent inflation, a fixed-rate mortgage payment stays the same.

Understanding Your Credit Score

Buying a new home is a substantial financial commitment, especially for new homebuyers. Preparing sooner rather than later improves chances of securing an affordable home loan. Financial planners recommend prospective borrowers start credit clean-up about six months to a year before a new home purchase.

The credit score is influenced by five factors: payment history (35%), debt-to-credit utilization (30%), length of credit history (15%), credit mix (10%), and new credit (10%). The most widely used credit scores are FICO® Scores ranging from 300-850, with 850 being perfect credit.

Credit score damage occurs when the borrower misses a payment, maxes out a credit card, undergoes debt settlement in the form of a collection, judgement, lien, or repossession, experiences a foreclosure, or declares bankruptcy. A poor credit score will not completely bar the borrower from securing a loan, but will make it more difficult.

Credit will not build itself. Prospective borrowers can take steps to be proactive about improving the credit score before starting to shop for a new home.