Buying & Selling Homes - 4/12 - Bob Vila

Category: Buying & Selling Homes


Flipping: Remodeling for Resale

If you’re in the market to buy a house to rehabilitate for profit — also known as “flipping” — you’ll need to play it smart. Here are some common errors as well as the best approach.

Photo: unitedhomeinvestments.com

With a glut of distressed properties on the market now, people are eager to make deals. But there’s little room for error. You have to be smart about the houses you buy and the repairs you make. You also have to be prepared to hold your property for the long-term, or you could wind up with a house you can’t sell and a mortgage payment you can’t afford. But if you’re going to try to flip houses, here are some things you have to know.

Finding the Right House
Real estate investors live and die by the numbers. You have to fall in love with the deal, not the house. And great deals aren’t going to jump out at you. Experienced investors spend time every day looking for distressed property and have a network of people scouting deals for them.

Some investors make a point of taking a different route home from work to look for possible deals. Others, like Sid Davis, a real estate investor and the author of Home Makeovers that Sell: Quick and Easy Ways to Get the Highest Possible Price, recommend picking out a particular neighborhood and driving through it regularly. “Look for the best deal in the best neighborhood,” Davis says. “Even in the best areas, there are always people who need to sell quick. Pick a target area you want and make up flyers that say, ‘I can close in a week’ or ‘Cash up front.’ There are a lot of people in trouble. ”

Look for is a house that’s priced far below market value, experts say. That’s the only way to make money in today’s market.

Finding Financing
Even when mortgage underwriting was loose, bankers were tougher on investors than on owner occupants, requiring more money down and charging higher interest rates and fees. Today lenders are tighter than ever when it comes to lending money for real estate investment.

For rehabbers who own a home, it may be easier to get a home equity line of credit and use that money for the required down payment. But understand what you’re doing: You’re putting your own home at risk if you can’t sell the property and fall behind on the payments.

Thinking Long-Term
Many professional real estate investors view flipping as a shortsighted approach to the business. Virtually the only advantage, Jones-Cox says, is a quick profit, but the capital gains taxes eat a big chunk of that — and the current market conditions aren’t conducive to a speedy sale. Plus, rehab projects are notorious for taking longer and costing more money than anticipated. It’s far better to hold the house and enjoy the long-term benefits.

Davis, who has flipped seven houses in one year, agrees, saying, “I made $10,000 to $12,000 per house and thought I was pretty hot stuff. It was the dumbest thing I ever did. If I’d kept them as rentals, I’d have $1.5 million in equity by now.”

Perhaps the smartest way to approach flipping right now, especially for the new investor, is to buy a house as an owner occupant, live in it for two or three years while fixing it up, and then sell it for a profit. You’ll get a better interest rate on the financing, eliminate the larger down payments required of investors and the hefty capital gains tax that flippers pay on the houses that they buy and sell quickly, and give the house time to appreciate. “That’s a pretty spectacular strategy to make $50,000 or $100,000 and not pay taxes on it,” says Vena Jones-Cox, a Cincinnati -based real estate investor and past president of the National Real Estate Investors Association.

Making the Right Renovations
Once you find the house, you need to make a renovation and repair budget. The first step is establishing an approximate sale price. That’s accomplished by running a comparative market analysis of houses similar to the one you’re selling in location, age, square footage, bedroom and bathroom count, age, and features. Look at the prices of the houses that are selling — as well as those that have been sitting for months, recommends Dean Graziosi, a Tempe, AZ-based real estate investor and the author of The Real Estate Millionaire. That will give you a good idea of what to include in your rehab.

Then deduct how much you paid for the house, your other expenses (such as a real estate agent’s commission), and the profit you’d like to make. “That will tell you how much you can spend,” he says. The repair rules for rehabs are quite similar to those recommended to home buyers getting their own house ready to sell: First impressions are critical, so pay close attention to the front yard, the exterior of the house, and the entryway; kitchens and master baths sell the house; don’t impose your decorating style on the buyers; and keep colors in a neutral palette so buyers can make it their own.

The biggest mistake Jones-Cox sees investors make in their rehabs is spending money on upgrades that don’t add value and aren’t appropriate for the neighborhood. “They get into these properties, fall in love with them, and think it would be great to put a hot tub in the bathroom of a $125,000 house,” she says. “They’re not reasonable about what should be done, go way overboard, and never get their investment back.”

Diane Saatchi, a senior vice president of the Corcoran Group who is based in East Hampton, NY, sees the same thing in multimillion-dollar rehabs. “Sometimes people overspend in ways that are not that important,” Saatchi says. “Someone will put in an expensive generator and not have enough closet space or storage space for the size of the house. Or they’ll do something that doesn’t suit a neighborhood. If it’s a neighborhood where all the houses have garages and you turn the garage into an exercise room, that’s stupid.”

If you think like a successful real estate investor and consider flipping or rehabbing as a longer-term investment, you’re more likely to succeed.

There are dozens of ways to botch a remodeling job done for resale. At the top of the list are:

  • Not doing your homework. There are so many houses on the market for sale today, the competition for buyers is fierce. Check out the competition before you start knocking out walls. The easiest way to do that is to visit open houses in the same price range.
  • Going overboard. You want your house to stand out but not like a sore thumb. Make yours a little better than the competition but maintain consistency with the neighborhood.
  • Ignoring the yard. Some rehabbers spend all their time on the interior and forget about the exterior. The lawn needs to be in the best possible shape.
  • Cutting corners. There’s a big difference between doing things as inexpensively as possible and turning a blind eye to major problems to save a buck. Don’t just clean and paint when something should be repaired or replaced.
  • Hiring unlicensed contractors. Problems with the structural integrity of the house or its major systems — heating and cooling, plumbing, and electricity — need to be repaired by licensed, insured professionals.
  • Trying to do it all yourself. If you haven’t done some of the trickier home improvement jobs that you have lined up for your house — such as electrical or plumbing work — now is probably not the time to attempt it. You’ll get frustrated and perhaps even injured. Hire a professional and ensure that you allocate that cost in your repair budget.
  • Underestimating the time frame. You should probably pad the time allotment for completing the job — especially if you can’t pay an extra month or two on the mortgage. If you’re holding two mortgages, establishing a realistic time line is critical.

Can’t Sell It? Rent It Out

Becoming a landlord may be your best option.

Photo: Flickr

It was an unsuccessful attempt to downsize for a smaller house payment that led Joseph Cortez, a realtor in Corpus Christi, TX, to become a landlord.

“My wife and I started building a house because we were pregnant with our first child,” he explains. “In an attempt to downgrade our payment, we built a house 300-square-feet smaller than our current one. But in the process, we had several weather delays, and construction took longer than expected. My wife became more pregnant and she and the house were due around the same time.”

When the Cortezes thought of moving with a newborn, they were overwhelmed, so they put their new house on the market. But it wasn’t as easy to sell as they had hoped. After a good deal of interest but no offers, the couple was asked if they would allow someone to rent for a year, then buy the home. “We took it,” he says. “We make approximately $15 a month in profit.”

The circumstances may be different, but the story is the same for homeowners across the nation. As the market continues to sputter, some who had hoped to sell are now finding themselves turning into reluctant landlords.

Deciding to Rent Out Your Home
The decision to rent your home out can be a tough one, both emotionally and financially.

Decide if the loss you would take by selling the home for less than you owe now is more than any loss you’d sustain while renting it out, says Bret Holmes, president of Advanced Management Group , a property management company based in Las Vegas. “You have to calculate if you were going to sell today, what kind of loss you’d take,” he says. “Then consider how much you’re going to lose in the gap between how much rent you’re bringing in and how long you want to rent it out.” For example, if you have a $100 negative cash flow each month you rent out your house and you think you’ll rent it for two years, you’ll lose $2,400 on the house over that period of time. If that’s more than you’ll lose by selling it at a loss, it’s probably best to just get it over with, Holmes explains. Otherwise, he says, renting it makes sense.

Emotionally, of course, there’s an entirely other set of issues. “It creates emotional ties and makes it hard to see someone not take as great care of the property as the owner once did,” Cortez says. You have to step back and look at it objectively to be a better landlord.

Know Your Local Laws
The first thing you should do if you decide to rent is research your local laws. For some areas, you may have to have a business license if you want to rent your home.

“We had to get a business license from the Washington, D.C., government when we leased our property,” explains Bronagh Hanley, who became a landlord when she moved from D.C. to the West Coast with her husband and the couple decided they didn’t want to sell their home they’d worked on so hard for so long. But Hanley didn’t anticipate the difficulties with getting the document. “It took forever,” she said. “They had random repairs they wanted us to make, there was a substantial fee, and they had to schedule an inspector to come to the house.” The whole process took about a month, and Hanley says this is something potential homeowner/landlords need to keep in mind because not only can it disrupt your timetable, it is also emotionally exhausting.

Potential landlords also need to educate themselves about equal housing opportunity laws says Braun Mincher, president and managing broker of Aggie Real Estate LLC and Aggie Commercial LLC   in Fort Collins, CO. “If you do something like charge a larger deposit because a family has a pet, that’s fairly standard practice and wouldn’t be considered discrimination,” he explains. “But you obviously can’t change your practices based on race, sex, creed, culture, religion, or anything else like that. It has to be based on your actual risk.”

Finding the Right Rent Price
Deciding what to charge on rent can be tricky, Mincher says, because often the amount you could rent a property for isn’t really connected to what you should be able to sell the property for.

“That’s hard for a lot of people to understand because they want to make up that mortgage payment,” Holmes says.

And while how much you’re paying the bank will figure in somewhat to what you charge, it’s key to do your research on what similar houses are renting for, much like you’d look at comparative properties when figuring out an asking price for sales.

“Of course you want to take a realistic look at your PITI [principal, interest, taxes and insurance payment costs] if you have a payment on the home, which most people do,” he says. “But you also have to consider what the market will bear in terms of rent.” Mincher says that if you bought a townhouse at the height of the market, you’re probably not going to make up a $1,200 payment if all the other similar houses are renting for $900 a month.

Another factor to consider is insurance. You will pay more for insurance on a home you’re renting out, despite the fact that you’re not insuring the contents, only the structure. Call your homeowners’ insurance company and talk to them about any rate increases that will result from changing your residence status on the house so you can figure that into the price you’ll charge a renter.

And for homeowners who paid a premium for granite countertops, gorgeous hardwoods, or full-stainless-steel kitchen, there’s more bad news. These extra features don’t necessarily translate into higher rent prices. “You may have less vacancy because of these things, but you’re talking to renters, not buyers,” Mincher explains. “They don’t care as much about your beautiful landscaping. So, figuring out what to charge is a challenge.”

How should the average homeowner who’s thinking about renting confront the challenge? “You really just have to check newspapers and online ads and get a feel for what a home in your price range within about a three-mile radius is going for,” Holmes says. Other good sources of information include a trusted broker or realtor; if you have a good relationship with someone in real estate, he or she may be able to offer you useful advice.

Finding the Right Tenants
Once you’ve priced your house and you have interest from a potential renter, it’s critical to perform due diligence in checking out the person or people you’ll be entrusting your home to.

“On their own, people can verify employment by contacting a current employer,” Holmes says. “Get paycheck stubs to make sure they’re making what they say they’re making. Also do a rental history check. Call previous landlords and see what kind of information you can get.”

Also, consider outsourcing some of the rental screening process. “If a person wants to do a full screening, the process is pretty intensive because you basically become a credit reporting agency,” Holmes says. For that reason, homeowners should consider looking at companies that complete the tenant screening process for you, he says. They’ll do credit checks, eviction checks, criminal background checks, and other similar screenings.

A tenant screening company is how Hanley found her first renters. “We hired a rental management company to find the tenants since they had the skills and resources to do the credit and background checks,” she says. “We paid them a percentage of the first month’s rent for their services. It was well worth the money, since we ended up with an accountant couple from Wisconsin who were the best tenants!”

Are You Ready to Be a Landlord?
Once your tenants are in place, your main duty as landlord is to maintain the property. But if you’re living in a different city, state, or even country, how do you handle it when a pipe breaks or the air conditioning dies mid-August?

“I advise people to get a home warranty program in place,” says Holmes. “Things are going to go wrong — they always do. A home warranty program prevents a huge out-of-pocket expense when it happens.”

Most home warranty programs have a premium you pay once a year. Then, whenever something goes wrong that your homeowner’s insurance won’t cover ­— like a dishwasher that leaks or a refrigerator that won’t cool — you call the home warranty company. You’ll pay a “co-pay,” usually $50 to $60, and the home warranty company picks up the rest of the repair tab.

If you don’t want to pay the initial premium of the home warranty, however, employ a handyman. “Going outside your comfort zone can cost more money than repairmen,” Cortez says. “It’s many times worth it to hire an expert. Find a good all-around handyman that is trustworthy.”

Photo: bizmology.hoovers.com

Money Management
While the process of getting a property rented and managing it can be all-encompassing for novice landlords, dealing with the dollars and cents is a critically important factor.

Insurance: Talk to your insurance company about renting out your property, Mincher says. “You’re going to transfer your coverage from a homeowner’s policy to an investment property policy, which will cover the actual structure but not the contents,” he says, adding that it is critical that landlords make it clear to their renters that their coverage does not protect the renter’s possessions or liability. “Renters’ policies are so cheap,” he says. “We pretty much make our tenants get them. We practically walk them down to the insurance office.”

Taxes: This can be complicated for owner/landlords. If you plan on selling the property in the next few years, you probably just want to deduct your property taxes as you normally would. But if you’re transferring it to a true investment property and don’t plan to sell for a while, there can be other tax benefits. You can depreciate rental property, says Mincher, which is a real tax benefit because home prices actually should appreciate. “If a property is held for investment purposes and you generate rental income, you can depreciate the property,” he explains. While it’s best to consult an accountant, he explains that residential properties are depreciable for 27-1/2 years. “So, if I owned 50 rental properties, I can depreciate an average of $10,000 a year for each one; that’s $500,000 a year in tax deductions I get that I never had to write a check for.”

Collecting deposits and rent: Take your renter’s security deposit and open a separate bank account for it, Mincher says. “Note on the account that it is a ‘trust’ account, which signifies that it’s someone else’s money you’re holding,” he says, explaining that since it’s a deposit and the renter should get all or most of it back if they uphold their agreement, it’s really their money, not yours. Mincher says setting up another account for rent is also a good idea. “I used to have 20 tenants at my door the first of every month waiting to pay their rent,” he says. “But I came up with a system where I send them an invoice and a deposit slip now, and they can just deposit their rent at any branch of my bank each month instead of trying to come to my house to do it.” He also suggests setting up automatic draft so tenants can elect to just have their rent drafted out of their account each month. “Almost any bank can set that up,” he says.

Returning deposits: You can’t just collect a $2,000 deposit and then only decide to return $1,500 of it when the renter moves out, Mincher says. “You have to send them a detailed itemization,” he says. Once your tenant moves out, make sure to call all the utility companies your tenant had service with to see if there are any outstanding bills. If so, deduct that from the deposit, says Mincher, along with a detailed, itemized list of any repairs you’ll have to make.

Legal Matters: Protecting Your Interests
No matter how much you may trust your renter, never do business based on a handshake and a spoken agreement.

“Getting a good lease is very, very important for both novice and experienced landlords,” says Mincher, who recommends making an appointment with a real estate lawyer to go over your documents before you have anyone sign. It may cost a little more, but it’s a price worth paying when you consider the consequences of a lease gone bad. A local real estate lawyer should know the rental laws, which can vary from municipality to municipality. You can also check with property management companies, your area housing department or your local board of realtors for less formal advice.

“This way you can find out if there are any forms or attachments that need to be part of a lease, because if you don’t know about these, there can be some pretty dire consequences,” Mincher says, adding that in the college town of Fort Collins where he lives and rents property, landlords also have to have an occupancy disclosure form. “This came from people cramming multiple college kids into one house,” he says. “Now tenants have to sign a form that acknowledges the city has a rule that no more than three unrelated people can live in one house.” If this form is missing, says Mincher, the landlord can be fined $1,000 a day .

Besides hefty fines, Mincher says there are some forms that are required to actually make a lease valid. “For example, if a house has a building permit from before 1979, you have to have one of the EPA lead-based paint disclosures as part of the lease, or it’s totally void ,” he explains.

And while you hope for the best with your tenants, Holmes says it’s wise to prepare for the worst. “Make sure all state laws are addressed, so that if you do have to evict somebody, you have the law on your side,” he says, adding that a consultation with a real estate lawyer is the best way to handle this. “If you don’t and you go to an eviction proceeding and there’s a loophole you missed in the lease, someone could end up living in your house rent-free.

Property Management
Hiring a property management company can take a lot of the headaches out of renting your home if you choose the right one. Management companies will usually take a portion of each month’s rent in exchange for handling the screening, rent collection, repairs and other day-to-day landlord management aspects.

Property managers will likely either take a percentage of the monthly rent — anywhere from 10 to 15 percent is common — or they’ll take charges upfront, sometimes as much as the first month’s rent. “As your novice owners go, that 10 percent of their monthly rent is probably a big part of that nut,” Mincher says. “Say their payment [PITI] is $950.00 a month and they’re renting [the home] for $1,000.00. If they manage it themselves they can probably make those numbers work, but if they put a property manager in the mix, they are now only getting $900 in rent.”

Management companies will handle tenant screening, credit reports, and other checks before the tenant moves in. But you have to choose the right company or person. “Pick someone who is more geared toward management than sales,” Holmes says. “Especially if you’re just looking to recoup as much money as you can until the market comes back around. If you don’t have someone who has experience getting a house rented, it could sit on the rental market longer than it should.”


How To: Stage a Home

Staging your home sets the scene for potential buyers. A well-staged home can help it sell faster and for more money. Here are some basics for prepping your house.

Ho To Stage a Home

Photo: stimulrealty.com

Much like detailing a used car prior to sale, staging a home allows it to put on its best face. Not to be confused with decorating, staging is about presentation, cleanliness, and drawing positive attention to the space inside. According to StagedHomes.com, the Web site for a unique program that provides certification and training to become an Accredited Staging Professional (ASP), 93% of homes staged by an ASP sell in less than 31 days. Home sellers can choose to do the staging themselves, take guidance from a qualified realtor, or hire an accredited professional.

Letting Go
The first step when staging a home to sell is to cut emotional ties, which means temporarily living without your most precious belongings surrounding you. When the house is put on the market, it should be thought of as a product, not a home. Although you might still be living in it while it’s for sale, it should not look that way to potential buyers. “The way that you live in your home and the way that you market it and sell it are two different things,” says Barb Schwarz, author of Home Staging: The Winning Way to Sell Your House for More Money and recognized as one of the founders of the home staging industry. “Once your home becomes a house, it can become a product, and people want to buy the product that has the best wrapper.” One way for the seller to be able to look at his home objectively is to take tours of homes for sale. “A walk through the neighbor’s house can help the home seller to see things from the homebuyer’s point of view,” says Craig Schilling, founder of Real Estaging, a home staging company in Chicago.

Selling the Space
Part of letting go means packing up all unnecessary “junk.” Anything that can be lived without should be packed up and either tucked away or put into storage. Put away knickknacks, memorabilia, superfluous furniture, lamps, or anything else that adds to the home’s clutter and distracts from what is really important: the space. “You’re supposed to be selling the space, not the stuff,” says Schwarz. “The value of the house is in the space.” When potential buyers walk through an unstaged home, they tend to focus on everything but the space, particular in an overly cluttered home. A sparse, staged home is open, allowing the size of the rooms to be the main attraction.

Packing alone isn’t enough, however. The staged home must sparkle, and to do that will take some elbow grease and attention to detail. “A staged home needs to be Q-tip-clean,” adds Schwarz. For the exterior of the home, cleaning can mean power-washing the siding, scrubbing and staining the deck, and taking down unsightly cobwebs. Inside the house, any dust, stains, and scratches must go. Every corner of every room—from the windows to the baseboards—should be made to look new.

Setting the Stage
With clutter packed away and all the surfaces shining, homeowners should go through each room arranging furniture and configuration to best present the space. Also, each room should clearly look like what it’s designed to be. “Make each room what it is,” suggests Schwarz. “If it’s a dining room, make it a dining room.” Consider the focal points of each room, and arrange those focal points to accentuate space and function. In bedrooms, for example, the bed is the focal point. When a potential buyer stands in the doorway to look inside a bedroom, the bed should not block the view of the room or make the room look small. If certain rooms lack the necessary furniture to make them what they are, the homeowner might consider borrowing or renting furniture for staging purposes.

Another investment worth making is in paint. Neutral and light colors will make a room look big, while dark walls shrink the size of a room. Furthermore, off-kilter colors and color combinations can make for a bad first impression of a home. The small investment in time and money to paint the walls can make the difference when it comes to time on the market and selling price.

Hiring a Professional
The home staging business is a fast-growing industry, and there are many people who call themselves professional home stagers. Accredited staging professionals are typically members of the International Association of Home Staging Professionals and can be found by searching by ZIP code on both organizations’ Web sites. When hiring a professional home stager, homeowners should ensure that the professional is certified as well as protected and insured. “Homeowners should call and meet two or three professionals,” says Schwarz. “Home staging is about commitment, and homeowners should know that everyone involved is committed to the job.” Home stagers can be hired to perform a range of staging services, from simple consultationto a complete “enhancement,” where the stager might bring in his/her own props, furniture, and artwork as part of the staging process.

Additionally, more and more realtors are becoming staged-home-savvy. Many are choosing the ASP certification, while others are educating themselves on the ins and outs of the practice. When choosing a realtor to help sell the home, homeowners should inquire into staging experience and ask about rates. Although the cost to have a home professionally staged will vary by market, homeowners should expect to pay anywhere from $1,000 to $3,000. “Homeowners need to remember that they are not just paying for the props or the advice; they are paying for the actual time it takes to stage the home,” says Schiller.

Whether you hire a professional home stager or use the funds toward a DIY staging job, home staging is a worthwhile investment that will almost certainly sell your home more quickly and increase your return on investment.

Maximize Appeal
The exterior of the home is the first thing a potential buyer sees, so make sure to tend to landscaping needs, make small repairs, and clean dirty siding. Here are some other quick essentials for the interior:

Pack before you move. Put everything that you can do without until your move into boxes and then put the boxes in storage or somewhere completely out of sight.

Clean. Go room to room and clean every surface until it sparkles. No cutting corners! Don’t forget the windows.

Create space. Arrange the furniture in each room to accentuate the space. Remove as much furniture as possible without making the room appear vacant. Make every room seem bigger than it is.

Paint. Freshen up your walls and make colorful ones neutral. Dark rooms are smaller in appearance, and off-kilter color combinations are distracting.

Eliminate odors. It’s not just what is seen that matters. Unsavory smells will turn the buyer off. Clean carpets, get rid of pet and food odors, light some candles, and put out some potpourri.

Lighten up. Open blinds, pull up shades, and turn on lighting.


How To: Find Affordable Housing

Start by looking into government programs.

Photo: chicagoagentmagazine.com

In most areas of the U.S., housing costs are rising faster than wages. To meet the federal government’s definition of housing affordability, costs should not exceed 30 percent of household income or 60 percent of the area’s median income. Looked at it this way, the issue of affordability becomes very personal. What may be affordable for some will not necessarily be affordable for all.

Financing a Home
Virtually all people purchasing homes are doing so with money borrowed from a bank or mortgage company. A mortgage is a legal agreement between buyer and lender that uses the house being purchased as collateral or security for the loan. Before lenders loan money for a house, they make sure that the buyer has enough monthly income to cover the costs of principal, interest, property taxes, and insurance (PITI). Most mortgage programs require that those payments not exceed 30 percent of the borrower’s monthly income. To keep the monthly payment affordable, a buyer might have to raise $25,000 or $30,000 for a down payment. For many first-time buyers, this kind of cash is out of reach.

Help Is Available
If you cannot find a home in your community that you can afford using traditional mortgage formulas, look into special programs to assist first-time homebuyers. A variety of programs have been spawned to help people get into home ownership. Some of the programs are federally sponsored, some are state-sponsored, and most rely on a mix of federal, state, and private funding subsidies to make them work.

Much of this assistance is tailored to people at or below the area median income (AMI). Some of the programs offer low-interest financing, down-payment assistance, or both. There are also programs designed to keep housing affordable by offering limited or shared equity clauses that restrict the future resale price of the home. Generally speaking, the more assistance one accepts, the more restrictions there will be on the terms of ownership or resale.

Get Prepared
Buying a first home takes a lot of work. Begin by getting the lay of the land, your own and that of the community where you wish to live. Start a first-home file for basic information, your financial records, and employment information. Learn as much as you can about the housing market in your area — read real estate ads, talk with real estate agents, and study the real estate transactions section of your local newspaper. Learn the terms and numbers. Know what homes cost in your target area, what your monthly income is, what your monthly financial obligations are, and how much you think you can afford. Start to reduce your monthly debt and open a savings account that is dedicated to your first home. Even if you only save a few dollars a month, you will be moving in the right direction.

Locate Your Resources
Not everyone can buy a home, but there are programs and services like the Section 8 federal housing subsidy program that assist low- and very-low-income people with housing costs. Section 8 vouchers have traditionally been used for rental housing, but can now be used to purchase a home. This Section 8 program is usually run through local or state housing authorities. Every region of the country and most states have programs to help first-time homebuyers. State housing finance agencies or a NeighborWorks office ( see below ) are good resources. If you are a veteran of the military, contact the Veterans Administration for the latest information on homeownership assistance.

Community land trusts (CLTs) put together packages of funding to help offset the cost of housing for low- and moderate-income families and individuals. These organizations develop perpetually affordable housing by limiting the resale price of the home if and when the homeowners decide to sell. These limited- or shared-equity clauses keep the house affordable for the next eligible buyer and preserve the original homeownership subsidy for the life of the home.

Know the Limitations
Most home-buying assistance programs have income limitations and are often reserved for people earning 80 percent or less of the area median income. Most programs also require enough income to make the monthly mortgage payments. Program staff can help you verify and maintain your eligibility for homeownership subsidies until a match can be made.

It is important to understand under what circumstances you might be required to pay back the subsidy. Employer-assisted housing programs, for example, may have a residency or employment requirement — to get housing help you may need to stay in the home and work for the company. With CLTs, the selling price of the home will be limited should you decide to move. The price limitation may be a predetermined fixed price, but is usually determined by a formula. Have any restrictions and formulas explained to you and get them in writing before you commit.

Resources: NeighborWorks
Chances are NeighborWorks supports a housing agency or neighborhood program in your community. This nonprofit agency was established by Congress in 1978 to build partnerships that result in affordable housing and homeownership for low-income community members.

NeighborWorks’ goal is to revitalize communities through homeownership, housing rehabilitation, housing vouchers, equity protection, minority homeownership, ongoing education about homeownership and care, community economic development, and aging-in-place solutions. The NeighborWorks network has more than 240 community-based programs and operates in all 50 U.S. states to create stable, sustainable communities.


One Warranty for Everything

Explore insurance plans that take over when the old coverage runs out.

SHARES
Home Warranties

Photo: thesafetyreport.com

If your furnace dies on a blustery winter morning, you’ll need a few hundred dollars to get it fixed or, worse yet, a few thousand dollars to have it replaced. The same could be said for the refrigerator, oven, plumbing system, water heater, air conditioner, electrical system, washing machine, clothes dryer, or garbage disposal. Unless, of course, it’s under warranty or covered by a home service plan or home warranty.

When Things Go Wrong
The complexity of modern homes, and the cost to keep them running smoothly, is one reason more homeowners than ever before are turning to home warranties. The other reasons are the aging of the American housing stock, and the desire homeowners have for, as home warranty companies invariably put it, “peace of mind.”

Home warranties, also known as home service plans, are not new—they have been around since at least 1971. According to the Better Business Bureau, home warranties and service plans overall are increasing in popularity.

The appeal of home warranties is obvious. For an annual flat fee of about $400 or less, most warranties will pay for repair or replacement of your home’s appliances and systems that fail because of normal wear and tear. Policies are typically issued without a home inspection, take effect 30 days after payment is received, and cover appliances and systems that were in good working order when the policy was ordered.

With just one toll-free call, a good home warranty can make life simpler no matter what goes wrong. There is typically a deductible to pay when a service technician comes out. Deductibles range from $35 to $100, but the policy pays for covered repairs beyond that.

Who Needs a Home Warranty?
If you just bought a new home, your builder likely handed you a stack of warranty and maintenance documents for various elements in your home. Virtually all new appliances and systems are already covered by a manufacturer’s warranty. A home warranty will not kick in until those warranties have expired.

The National Institute for Consumer Education at Eastern Michigan University states that most defects in appliances show up while the item is still under the manufacturer’s original warranty, or after a store-bought extended warranty has expired. So, while you may be encouraged to buy third-party extended warranties for individual appliances at the time of purchase, the consumer Web site believes, “The only ones getting a good deal are the sellers, who find these programs very profitable.”

Dollar for dollar, it’s far better to purchase a home service plan or home warranty that takes all systems and appliances into account, no matter the age or place of purchase. Indeed, home warranties make great sense when the house and its appliances and systems start to wear, perhaps after 10 years.

Help Your Home Sales
Most home warranties or service plans are transferable, so a warranty brings a level of security to a home’s sale, especially as it moves through escrow. According to some real estate experts, a home with a warranty in place sells faster than one without. And new homeowners, who might have overextended themselves financially to buy the house, may not have a cushion for unexpected repairs. Just make sure that your plan can be transferred with the house before making any promises.

Granted, there will always be handy people who prefer to make their own repairs. These people may be better off banking or investing the $400 policy cost, and using it when needed. Likewise, people who want the freedom to hire the repair company of their choice might not be happy with contractors approved by the warranty company. Read the home service plan carefully and see if your needs are met by their coverage.

Choosing a Home Warranty
All policies and companies were not created equal, and the key to choosing the right home warranty is research. You need to know what’s covered and what isn’t.

Policies vary radically, making it impossible to list all the variables here, and only your study of the fine print will help you to manage your expectations. Most policies cover these home elements: air conditioning units, central heating units, ductwork, electrical systems, paddle fans, plumbing systems, water softeners, water heaters, refrigerators, built-in dishwashers, built-in microwaves, ovens/ranges, garbage disposals, built-in trash compactors, central vacuums, and washers and dryers. If it’s the security system you’re looking to cover, or a pool or spa, you may wish to look further.

A good first step would be to list the issues with your home that concern you the most, and read individual policies to determine the level of coverage. If you live in Tucson, AZ, for instance, you’re probably more concerned with the air conditioning system coverage than if you live in Bangor, ME. In the North, furnace coverage is much more of a priority.

Understanding What Is Covered
Don’t just glance over the contract or you’re likely to be disappointed later on. One policy may say it covers invasions of pests, a definite plus, but the fine print excludes termites, carpenter ants, rats, and wood-boring beetles. Again, policies might list the “plumbing system,” but exclude damage done to pipes by tree roots. This may or may not be a problem for you. Take the time to read the contract before you decide.

Once you find a policy that covers your “hot-button” issues, either with a basic plan or with added options that cost more, ask yourself who will make the repairs. Most companies have agreements with outside contractors to do the work. If you bring in your own favorite plumber who is not approved, the repair will not be covered.

Definitions of how plans can be sold vary from state to state. In some areas they are considered warranties; in others, they might be sold as insurance or as a service plan or contract. Also, many states have their own laws and restrictions for warranty programs. In Nevada, for instance, the breakdown of heating or air conditioning renders the residence uninhabitable. As a result, service must commence within 24 hours.

The peace of mind you seek in a home warranty will only come if you buy the right policy, from a reputable company. Time spent researching the policy and company now will pay off later when you’re most likely to need it.

How Long Things Last
Life estimate in years:
• Dishwashers: 5-12.
• Disposals: 5-12.
• Washers and dryings: 8-12.
• Water heaters: 8-12.
• Refrigerators: 15-20.
• Stoves: 15-20.
Gutters and downspouts (galvanized): 15-20.
• Gutters and downspouts (copper): Life of home if well maintained.
• Warm air furnace: 8-12.
• Heat pumps: 8-12.
• Air conditioning compressors: 8-15.
• Gas-powered air condition: 8-15.
• Hot water boilers: 30-15.

Source: Freddie Mac


Creating Affordable Housing

Together, developers and municipalities can overcome the challenges.

Affordable Housing

Photo: chicagoagentmagazine.com

Since World War II, the federal government has had its hand in promoting and supporting affordable housing through GI Bills and low-interest financing. These policies and subsidies were very effective in helping returning GIs and other first-time homebuyers get into their first homes. But with rapid economic growth and the Baby Boom, traditional federal subsidies alone have not been able to keep up with the growing affordability gap. Families need safe and decent places to live. Communities need an adequate supply of housing, at all price levels, and businesses need housing that is affordable for their workforce.

Affordable to Buy
The federal government defines housing affordability as housing costs that do not exceed 30 percent of household income. Housing costs are defined as rent or principle, interest, taxes and insurance combined (PITI). If we assume you’re making the 2002 median income of $43,318 (U.S. Census), you would be spending no more than $1,083 per month on housing costs. Now, if we also assume that you are purchasing a home at the 2002 median price of $158,300 (National Association of Realtors), you would need to come up with a down payment of $28,890 to purchase that home and still meet the definition of “affordable.” Of course, there are other factors that influence this deal including mortgage rate, term (length) of the loan, points, and closing costs. Change any of these factors and your down payment or monthly payments could go up or down. And when you factor in points and closing costs, your total cash outlay at closing would be over $33,000! By the government definition, this home may be affordable to own, but with this much cash required up front, would it be affordable for you to purchase?

Affordable to Build
One major factor in affordability is the cost to produce housing. Builder groups often claim — and government statistics support these claims — that home building traditionally leads the nation out of recession. It’s no wonder when you consider that home building benefits not only the trades but also manufacturing, professional services, and even transportation. But the demand for new housing can cause shortages in labor and materials. Delays due to weather or permit issues also add to costs and these costs get passed on to the buyer. Builders of new homes typically operate on fairly narrow net profit margins of 5 percent to 10 percent, so even a small spike in costs can cut drastically into a builder’s profit and increase housing costs to buyers.

An experienced builder can help the homebuyer keeps costs down through careful design and material selection. This process is called “value-engineering” and, as a buyer, it is in your best interest to find a builder who thoroughly understands it. But while the building industry certainly benefits from innovations in materials and methods, the independent builder is generally not able to have much of an impact on overall housing affordability. Think of it this way: A $750,000 mansion, at its core, is built with essentially the same materials as a $125,000, three-bedroom ranch. It’s not just the finishes that make for the inflated price tag.

Bringing Housing Costs Down
One of the key ways to achieve affordability is to increase housing density. Land use regulations at the federal, state, and local levels can have a tremendous impact on housing affordability. Wetlands regulations, for example, take large tracts of land out of the housing market, reducing supply. Local zoning rules that require five-acre plots for each single-family home also add pressure to land supply. There are certain fixed costs to developing any parcel of land, including site planning and permits, roads, power, sewer, and water. All of these costs have to be included in the selling price of the housing that is built on the parcel. If zoning or other regulations limit the parcel to the construction of one house, all of those development costs will have to be borne by that single home, making the price go higher. If zoning regulations allow a higher density of housing—more houses per parcel—the builder can spread the land development costs over all of the housing units, so the same house would actually cost less to build and buy.

Housing Policy for Affordability
Local governments usually jump in when a shortage of affordable housing starts to harm the vitality of the community. In many areas of the country, essential workers such as police, firefighters, medical workers, and teachers cannot afford to live in the communities where they work. Some municipalities are now offering subsidies and other incentives to close the affordability gap and lure workers closer to their jobs. Other measures employed by local and state governments include housing affordability mandates and inclusionary zoning ordinances.

In Massachusetts, for example, Act 40B is a state statute that requires every municipality in the state to have a housing policy with the goal of having at least 10 percent of its housing stock affordable to people earning 80 percent or less of the area median income (AMI). Such measures may require that developers increase housing density to more efficiently use available land. Some rules require developers to make a certain percentage of the homes they build affordable. Act 40B was one of the first such statutes in the country and has been partially responsible for the creation of approximately 18,000 units of housing that meet this level of affordability. Maine followed suit with a similar law. Today there is a growing list of states, in every area of the country, with existing or pending legislation that promotes and/or mandates housing affordability.

There are also a number of nonprofit organizations and programs that specifically address housing affordability. Community land trusts (CLTs), for example, are usually private, nonprofit entities that secure grants and donations to purchase land and housing for long-term affordability. Most CLTs sell the houses but hold the land “in trust” through long-term land leases to the house owner. Most CLT leases require some sort of equity limitation so that when the house is sold, it will remain affordable to the next buyer. Other organizations include Habitat for Humanity, NeighborWorks, state housing finance agencies, and local housing authorities. One relatively new federal program, administered through local housing authorities, allows eligible renters to use their Section 8 housing vouchers to purchase a home. Local banks and mortgage lenders often have the latest information on loan programs for first-time buyers.

Case Study: Community Land Trusts Save Housing
The city of Burlington, a town of about 40,000, is Vermont’s largest city. Despite its stable economy and small-town charm, Burlington has its share of big-city problems: high rents, absentee landlords, aging housing stock, and wages that lag behind rising housing costs. In 1984 city leaders and housing advocates established the Burlington Community Land Trust (BCLT), the first municipally funded CLT. Today it is the largest CLT in the U.S. with over 2,500 members.

A CLT is a democratically controlled community organization that acquires land and buildings and holds the land in trust for the good of the greater community. In terms of affordable housing, this model removes the cost of the land from the housing-cost equation, thereby making the house much more affordable. Additionally, the land trust provides a long-term (usually 99 years), renewable lease to the homeowner. In exchange, homebuyers agree to limit the price of the home if and when they decide to sell it. In many cases, the CLT gets the first option to buy back the house at a formula-determined price. The homeowners get less equity out of the sale, but this limitation ensures that the house will be affordable for the next buyer.

On average a first-time BCLT home is affordable to people at 62 percent of the area median income. On resale, the average BCLT home is affordable to people earning 57 percent of AMI, but the sale brings owners a net equity gain of over $6,000.

Limiting equity may have been a radical idea 20 years ago, but the model has gone mainstream. When the Burlington Community Land Trust was established in 1984 there were only a handful of CLTs. Today there are over 160 in 34 states and others in Canada and the U.K.


Historic Home Buying 101

The pros, cons, and everything you need to know about buying a registered, historic home.

Perhaps you have been searching for several months or even years, and now you have found the perfect home. Your dream comes with elaborately detailed scrollwork, a hand-carved newel post, or stately white columns. It is also listed as a contributing resource to a historic district on the National Register of Historic Places. What does that mean? What things should you consider before determining that this house is for you?

Part of Something Larger
Pacific Union senior sales agent Tom Zannelli of San Francisco indicates that a listing on the National Register is a particular, upscale amenity that attracts a specific group of homebuyers. Others may fall into this possibility during a house hunt. Tom and Lynn Wood, architects and principals of Timeline Architecture, consciously chose to live in their neighborhood of redeveloped military housing at Fort Ethan Allen in Essex, VT. Both the surroundings and the house encouraged residential re-use, while the space offered uncommon design, craftsmanship, and materials. “It was a chance to be part of something larger and unique,” said Lynn.

Return on the Investment
A National Register citation confirms a home’s historic significance, but the real worth may be realized in the stability and strength of the property’s value. A 2000 study of South Carolina home sales showed that homes in Columbia’s historic districts sold 26 percent faster than the overall market; while historic Beauport owners saw a whopping 21 percent greater sale price. In Rome, GA, properties in designated historic neighborhoods increased in value 10 percent more than similar properties without historic designation between 1980 and 1996. Studies in Texas, New York, and Pennsylvania corroborate the positive effect an historic district designation has on property values, with overall increases between 5 percent and 20 percent. The stability of property value appears to extend to owner tenure as well: There is a reportedly lower owner turnover within historic districts than in neighborhoods lacking that distinction.

Playing By the Code
National Register inclusion is an acknowledgment of a property’s importance to its community, state, or the nation. Some homebuyers may be anxious about this designation from the National Park Service, fearing infringement of their property rights. These concerns are unfounded, as long as the work receives no federal money, and requires no federal license or permit. Owners are under no obligation to restore their property, or to open their doors to the public.

Many municipalities, however, have designated design control districts in areas that have been identified as having particular historic, architectural, scenic, cultural, or visual significance. Buildings in these areas may be subject to review for any proposed alteration, addition, or demolition. A prospective homebuyer of a property within an established historic district would be well advised to visit the local planning and zoning office to determine what guidelines may apply to them. Preservation ordinances help homeowners protect their investment by preserving the historic character of their neighborhoods. Review of any project may run the gamut from a cursory evaluation by a zoning administrator to review by a secondary commission that advises specifically on questions of historic sensitivity and architectural compatibility.

For certain types of work, homeowners may need to secure a permit called a Certificate of Appropriateness (COA), or Permit for Minor Work from their planning office or historic review board. Communities that rely on heritage tourism frequently have more stringent review procedures: Historic Savannah requires review for alterations as minor as changing awnings. In New York City’s Row House District, a COA is necessary before changing exterior shutters. Review only applies to the exterior of any structure in a historic district, and does not affect any interior changes.

Some historic district commissions may require replacement of damaged materials in kind, that is, with material or design features original to the building. While the alteration of an historic home may require specific or expensive materials or craftsmanship, it will be balanced with the likelihood that the investment will hold. Additionally, your neighbor’s protected property is also less likely to be altered in a manner that might reduce your property value.

Preservation Resources
In some instances buildings listed as contributing resources on the National Register may be eligible for limited financial aid through grants, loans, or tax incentives. Georgia has provided an eight-year freeze on property-tax assessments on designated historic properties. The federal government currently limits tax credit opportunities to structures that are income-producing (rather than strictly residential). Preservation organizations are another resource for modest financial assistance. Preservation easements may also be arranged through local governments or private organizations like Historic New England (formerly the Society for the Preservation of New England Antiquities). These arrangements can lessen the property-tax burden while providing for the preservation, protection, and maintenance of your historic property. Programs differ from one state to another, so check with your State Historic Preservation Office (SHPO), local planning agency, or community historical society.

Thousands of historic districts have been listed by the federal government on the National Register, ranging from the landmark homes of Newport to modest mill housing of New England. Owning property within a historic district offers you the unique opportunity to interpret and share the history of your home, as steward of a recognized contributor to our nation’s past.

For further information, contact the National Register of Historic Places or your local State Historic Preservation Office.


Consider a Condo for Your Second Home

Vacation condominiums offer amenities and less maintenance, but more restrictions.

Condominiums

Photo: keyinspectionservices.com

Bob Vila’s Home Again opened its fifteenth season with a bay-front condo remodel along the Venetian Island stretch of Miami Beach. This vacation getaway was a remodeling challenge from the start. Gina Kirkpatrick, a realtor with Beach Front Realty, was given a modest purchasing budget to work with and the directive to find something dated. “You know, shag carpet, awful wallpaper, that sort of thing,” she recalls.

She found a one-bedroom, 950-square-foot unit with an open floor plan in the Island Terrace complex, with views of the bay and the luxury homes along Venetian Island. The complex is situated right on the Venetian Causeway, a stone’s throw from the beach and an easy jaunt to the Miami mainland or to trendy Lincoln Road. What’s more, the unit fell well within Bob’s purchase range — proof that you don’t need to be a millionaire to live like one.

This condo was a bargain because the owner was willing to buy into an older building, Kirkpatrick explains. Older units are often roomier with more closets, which means more space. For Bob, taking out closets meant opening up more space. Bob’s unit was in need of TLC, but so was the rest of the building. The timing was good, however, as the current owners had just been hit with a one-time assessment earmarked for a major property overhaul, making this condo an ideal second-home investment.

Condo Conscious
In Miami, second-home owners tend to purchase condominiums over single-family homes. Condominiums provide a host of amenities and low maintenance. “Owners like having a doorman downstairs — the doors are locked, there’s less vandalism,” Kirkpatrick says. And the market has responded to that demand by significantly adding to its inventory. Property values have been known to double in just five years, making a condominium purchase a wise choice for those looking to resell down the road.

In Miami, views are a priority, causing developers to build upward instead of outward. so even mainland properties tend to offer views of Biscayne Bay. The Miami mainland can be a buyers’ paradise, with one- and two-bedroom luxury condominiums with square footage ranging from 850 to 1,500 square feet. In Miami, swimming pools are standard fare, but developers tend to attract new buyers with luxury spas, community rooms, and high-end services. ’

Beware of the Bylaws
Condominium living has advantages, but they come with a price tag. Prospective buyers should inquire about the complex’s association fee, which can run anywhere from $300 a month for a one-bedroom to $600 for a two-bedroom condo in Miami. The higher the square footage, the higher the association fee. Fees cover things like routine exterior maintenance, pool upkeep, building insurance, and front-door security. Plan for the occasional assessment, particularly for older buildings where exterior updates and structural upgrades are more likely.

Condo associations also have bylaws and regulations that dictate what you can do to your unit and how it will be done. Cosmetic changes are typically okay as long as any required city permits have been acquired. Condo associations don’t concern themselves with a wall-color or carpet change. But interior reconstruction is another story, particularly if it compromises a load-bearing wall. Beware of noise restrictions and the hours during which construction can take place. Also inquire about delivery and storage of construction materials, as well as disposal of construction waste and debris. All of this will factor into the cost of your remodeling project.

Second-home owners aren’t year-round occupants, so it’s important to check association bylaws if you plan to rent out your unit. Some places require that owners establish residency for a couple of years, while others may limit the number of months or the number of times per year that the unit can be rented. And some don’t allow rentals at all. Pet ownership is yet another consideration, so do your homework before you buy.


Evaluate the Home Systems

Learn what questions to ask when you conduct an inspection of the heating and cooling systems, insulation, water and electrical service, of your home.

Bob and plumbing contractor Frank look at the 40-year old Dinosaur. Photo: From Bob Vila

So you like the way the house looks and believe the footprint will accommodate your family’s needs. But how does it function?

Let’s examine the house’s infrastructure:

Heating and Cooling Systems
Here are questions you should be asking:

  1. What kind of system is being used?
  2. How old is it?
  3. What kind of condition is it in?
  4. How much does it cost to operate?

I’m not suggesting that you pursue or walk away from a house based on the answers you receive, but it’s worth figuring in the cost of future replacements as you debate the merits of one house versus another.

Common heating and cooling systems include hydronic, warm-air, natural-gas, oil and electric. Let’s take them one-by-one.

Hydronic Systems. Hydronic heating systems transmit heat via hot water or steam. A boiler (powered by electricity, natural or propane gas, or oil) heats the water, which is then circulated by a pump via pipes to the radiators or baseboards of the house. You’re better off with forced hot water than with steam. The cons that come with steam heating are: uneven heat distribution, drying the air, slow response, noise, and inefficiency. Many newer homes will not use steam heat but older houses will.

Warm-Air Systems. Warm-air systems can use electricity, gas, or oil as their main fuel source. The most common warm-air system is forced air. How it works: fans or blowers circulate the warmed air from the furnace through the house. Another type of warm-air system is a gravity system. You know how heat rises? Well a gravity system is based on the likelihood of warm air rising. You’ll find these systems in use mainly in older houses. Their drawbacks, compared to forced-hot-air systems are that you’ll need a huge furnace in the middle of the basement and considerable duct-work. Not only are they inefficient, you can’t run central air-conditioning through them. For these reasons, if the house you’re considering has a gravity system, you should plan to replace it.

Natural-Gas Systems. Heat is transmitted from the furnace to the distribution system via a heat exchanger. To find out how energy-efficient your gas furnace is, you can check the Annual Fuel Utility Efficiency Rating. If you’re evaluating newer equipment, by law it will have a bright yellow “Energy Guide” which will show the anticipated annual cost to operate the unit.

Oil Systems. While a furnace that is powered by oil is similar to one that is powered by gas, the difference is that your fuel will be delivered by truck versus automatically being piped into your house from an outside gas line. Because oil doesn’t burn as cleanly as gas does, oil furnaces require regular cleaning for optimal operation.

Electric Systems. Here’s what’s different about electric systems versus gas and oil systems: Electric systems do not involve combustion and thus do not produce exhaust. Most of the time, electricity will be the most expensive option. There are electrically powered heat pumps, which can both heat and air condition the house. You’ll find them mostly in warmer climates because they’re not sufficient on their own in terms of heating the house’s interior when temperatures fall below 25-30 degrees Fahrenheit.

Heating and Cooling Systems: Costs
When you evaluate a potential house, pay attention to its heating and cooling costs. Energy costs fall just after housing payments and food costs in most household budgets.  You’ll need to know how much it will cost to operate.

Tip: Ask to see at least the last two years’ worth of utility bills.

Not only is it the “green” way to do things, but you’ll save yourself money if your house is more energy-efficient. For minimal or no cost, you can ask the utility company to conduct an energy audit. This audit might suggest insulating the hot water pipes or replacing the furnace, both of which could help reduce your energy costs.

Should You Replace the Temperature Control System?
Depending on what time of year you inspect a house, not to mention unusual weather patterns that could be in effect, you may or may not be able to determine if a house’s temperature control system is working properly. Part of a routine home inspection by a professional home inspector involves testing the heating system by turning it on and letting it run for a few hours (or more on a warm day). Make sure that you find a reference to this test in the inspector’s report. It’s unfortunate, but you can’t conduct a similar out-of-season test on an air-conditioning system as testing an air conditioner in the dead of winter could cause serious damage. If you find yourself in this position, you might want to set aside some of the money in an escrow account for future home repairs.

Don’t make assumptions. That is, a bigger heating and cooling system is not necessarily better—in fact, if it’s too big for the house’s needs, it will be inefficient and expensive. You might be better off with an older system that has been maintained well as opposed to a newer one that has been neglected.  This said, if the maintenance is the same, a newer system will be more efficient, less likely to be a source of trouble, and more likely to still be covered by a warranty.

Of course, if the house’s furnace doesn’t work, you’ll have to replace it. If instead it’s a matter of making your house’s systems more energy-efficient, you’ll need to crunch some numbers before you determine when your investment would pay off. You’ll want to figure in the cost of the replacement, the savings in energy costs, and how many years you anticipate living in the house. First consider more minor improvements such as adding insulation or taking conservation measures.

The House’s Insulation
If you’re considering a house that is exposed to temperature extremes, you should be sure to ask about the insulation.

Questions you should ask:

  1. Is the house insulated?
  2. What kind of insulation is being used?
  3. How much insulation exists in the house?
  4. Where is the insulation located (roof, attic, sidewalls)?

One of the best types of insulation is fiberglass though there are other effective types such as cellulose or foam (rigid foam, foam board, and poured-in foam). If you learn that the house has been insulated with urea formaldehyde (UFFI) or that asbestos insulation surrounds the hot-water pipes, you should investigate this further and make this part of your negotiations with the seller.

The Hot-Water Heater
“You used up all the hot water!” Ideally, this is a phrase that you won’t be hearing in your future home. Your hot water heater should be able to accommodate your needs, such as taking a hot shower while you’re running the dishwasher. What’s important to find out is how long it takes the unit to reheat the water from a starting position of empty.

Oil-fired and gas-fired water heaters are efficient and are quick to reheat. Thus a thirty-gallon holding tank should be adequate for your needs. Electric heaters, on the other hand,  are slower to reheat and therefore are usually accompanied by a sixty-gallon tank. Assess your family’s needs, and if there are teenagers in the house, figure that into the equation!

Water Service and Supply
Where does the water for the house come from? A municipal water system? A well? A nearby lake? (beware of this last scenario as drinking-water problems are likely to be an issue). You should be asking a different set of questions if the water for the house is connected to a municipal water and sewer system versus having its own well.

Questions to ask if it’s connected to a municipal water and sewer system:

  1. Have there been problems in recent times with either the quality or the supply of water?
  2. What does water and sewer service cost? Questions to ask if the house has its own well: a) Has the well ever run dry? b) Has the water been tested recently for potability? If you are considering making an offer on the house, send the water out to be tested by a lab in order to determine that it’s safe to drink. Not only will the lab be able to tell you about safety, it will also tell you if the water is hard or soft.
  3. Is a lot of salt used on the street or road during the winter? (If the answer is yes, you’ll want to find out where the drains are in relation to the water source in order to determine the likelihood of the well’s becoming contaminated.)
  4. Where are septic fields (yours or others’) located in relation to the well?
  5. Are there or were there gasoline-storage tanks near your house? (As old gasoline-storage tanks disintegrate, toxic amounts of petroleum products are released into the watershed and therefore into the well water.)
  6. What is the well’s capacity? (Related questions involve how much water is dispensed, how quickly, how long it takes to refill, and if there’s variability in the supply depending on the season.) Note that if a well doesn’t supply enough water for two showers to occur at the same time during a fifteen to thirty minute period, you should think about buying a larger reserve tank.

Tip: A water capacity test can be conducted by a home inspector or a water-testing lab. There are contractors who specialize in water and septic systems. You should make sure that your Purchase and Sale agreement notes the requirement of a satisfactory assessment of the water supply.

Septic Systems
If the house is served by a septic system, as opposed to being connected to the municipal sewage system, ask the following questions:

  1. How old is the septic system?
  2. Have there been any problems with the septic system?
  3. How frequently has the system been pumped out? (Maintenance that is too infrequent or too frequent can be an issue whereas every two to five years is ideal. An older house with a cesspool and no leaching field will have to pump the system more often.)

Tip: Hire an independent septic contractor, recommended by someone you know versus the broker or seller, to test the septic system. This test will involve pumping out the system to see how much waste there is and running a dye test to confirm that the system is flowing as it should.

If the house’s cesspool is older than twenty-five or thirty years, you may need to replace it with a new septic system.

Whether the house is connected to the municipal system or has its own well and septic system, you’ll also want to find out about the condition of the house’s plumbing to make sure the pipes are to-code, not lined with lead, and not so narrow that they negatively impact the water pressure in the house.

Electrical Service
You should check the number and location of electrical outlets as well as that the service in the house is adequate to meet your needs. This will depend mostly on the number and type of electrical appliances. If it seems that you’ll need to rewire the house, don’t be too concerned as the cost is important but not huge.

A home inspector will be able to tell you:

  1. If the house fails to meet code requirements
  2. If the house is unsafe
  3. How old the wiring is
  4. What condition the wiring is in

The wiring system may use fuses or circuit-breakers.  Either is fine, though it’s easier to manage the newer circuit-breaker system, involving a simple flip of a switch back to the “on” position. But if you keep extra fuses on hand in an accessible spot with a flashlight nearby, and are prepared to change things out yourself, then either system will do.


Evaluate the Home Interior

Follow our guide to inspecting the interior of your home, room by room.

Bob and Gregg walk through a shingle style home. Photo: From Bob Vila

The Floor Plan
Find out how many rooms the house has and whether or not the number will meet your family’s needs. In particular, think about how many bedrooms and bathrooms there are. Is the layout awkward? The house on more than one level? Don’t estimate the room sizes in your head, actually measure their dimensions. Note whether the rooms are bright or dark. If you’d consider expanding the current living space, make sure first that there are no restrictions.

Bathrooms and Kitchens
We can probably all agree that these are the key rooms in the house. Look closely, whether you’re examining how much counterspace there is in the kitchen or if the bathroom has a shower or bath. Check the water pressure throughout the house. Look under the sinks in the bathrooms and in the kitchen for signs of former leaks.

Walls, Ceilings, and Floors
Here’s what you’re looking for: cracks, stains (which will tip you off to past leaks), and peeling paint. This is not the time to be shy—look under rugs to assess the condition of the floors and look in back of paintings to make sure they’re not covering up issues you’re not supposed to see.

Doors
Windows and doors get a lot of use in the home.  See if they fit as they should—if they don’t, they’ll get caught and be the worse for wear. Wooden windows and doors expand in the summer and contract in the winter. While this is taken into account during construction, if the house has “gone out of square” or if the condition of the hardware is compromised, the issue will remain. Doors in older houses tend to be too tight or susceptible to drafts. Entrance doors that don’t work properly will be expensive to fix. As for patio doors, problems include streaking and frosting; while newer models use more appropriate materials and succeed better at keeping the heat out during summer and the cold out in the winter, their installation is expensive.

Windows
Windows these days are much more advanced than they were in the past. The windows in most old houses don’t work that well. The use of weighted sash cords meant that there were slots in the window frames, which let the winter air in. Not surprisingly, this didn’t help homeowners conserve energy. If you’re trying to tackle leaky windows in an old home, you can cover them with aluminum storm and screen windows. This can look out of place and is expensive but is the best functional approach.

Tip: Beware of steel casement windows. You’re unlikely to come across them but if you do, be forewarned that they’ll cause you trouble, rarely closing tightly, conducting the cold, and condensing moisture. They’re also difficult to find replacement parts for. It’s not a reason to walk away from a house that you’re considering, but know what you’ll be in for.

Details That Make a Difference
As you walk through your potential home, keep an eye out for:

  • Electrical outlets. Make a note of how many there are and where they are located. Think about your specific needs.
  • Closets and storage areas. There’s no such thing as too many closets. Keep in mind that if you bring in a free-standing one, you’ll be giving up 10 square feet of floor space.
  • Skylights. In spite of the aesthetic value that these bring, they also contribute heat from the sun during the summer, as well as leaks if they are the kind without insulating glass.
  • Fireplaces and heating stoves. Look past the charm and make sure there are no hazardous situations.
  • Bulkheads and cellar entrances. It’s convenient to be able to enter your cellar from your yard. But unfortunately, what can enter with you are cold and water, and water can lead to rotting.   If you’re inspecting an older home, the cellar doors are likely to be made of wood, which means that they’ll be heavy and susceptible to rot. You can replace them with steel but you’ll have to hope that standard sizes will fit. You may need to replace the cheek walls too. If you’re dealing with a bulkhead that’s been leaking over the years, the water will probably have reached to the stairs below, causing them to rot. Since it’s extremely difficult to get a proper seal between the cellar walls and the bulkhead opening, you should buy a doorway and door to keep out the cold.

Toxic Environments
Investigate whether any of these toxic situations are at play in the house you are considering:

  • UFFI (Urea formaldehyde) insulation. While this form of insulation is one of the most effective, it was found to be a source of respiratory disease and other health issues in homes where it was not installed properly. Even if you are not concerned, a future home buyer might be.
  • Asbestos. This previously popular form of insulation for pipes is most often found in houses that are over 40 years old. Asbestos becomes an issue if it dislodges and asbestos particles enter the air. Find out from a professional home inspector if there is asbestos in the home. Then look into removing it (not always the best way to proceed) or encasing it.
  • Radon. This gas is released naturally wherever uranium exists in the soil. The presence of radon becomes an issue if it gets trapped inside dwellings. The good news is that it is an easy and inexpensive problem to fix. By improving your ventilation, you can most likely solve the problem. Your home inspector may recommend that you seal cracks in the basement floor and walls.
  • Lead Paint. How old is the house you’re assessing? Lead paint is likely found in houses built before 1940. Between 1940 and 1955, there is still a danger, though less of one. After 1955, manufacturers of paint stopped using a lead base. But it wasn’t until 1970 that the use of lead was banned. It is expensive to remove lead paint. But it must be done if there are young children in the house. And even if there aren’t, you should do it so it doesn’t become an obstacle to your selling the home in the future.