Buyer Beware – “great deals” may come with other “issues”

big new houseWhen you get the opportunity to buy a house “worth” over a million dollars, for fifty to seventy cents on the dollar, you have to ask yourself if you can “afford” it before you say WooHoo!

#1 -  Real Estate Taxes may be too high

Often people ask why so many pending sales don’t close.  There are many reasons, one of which is that lender pre-approvals show a purchase price vs. a monthly payment.  Reality is that your lender is NOT qualifying you for a purchase price, but for some reason they think it is easier for you to understand a price vs. a monthly payment. They then make assumptions as to other costs, and convert their communication to you, the agents and the seller, to a Purchase Price. (This was not so when I started in real estate, and someone should change that.)

So you have a pre-approval to buy a house for $650,000 with a 20% downpayment.  What that really means is the lender “assumed” taxes of approximately $6,500 a year and homeowner’s insurance of $650 a year. Now you go out and find an amazing, super-great deal! You have the opportunity to buy a house assessed at $1.2 million for “only” $650,000! WooHoo? Maybe not.  The annual real estate taxes are $11,000 a year vs. $6,500 a year and the homeowner’s insurance is $1,100 vs. $650. That means your monthly payment is $412.50 more each month for that particular “$650,000 house”, than your lender assumed when you were pre-approved.

Your income needs to be $15,000 to $18,000 more per year, for you to be able to afford that particular $650,000 house.

There are two possible consequences. One is that the loan will “kick out” early enough for you to get your Earnest Money returned, assuming you have a good Finance Contingency. The other is that you planned to buy with a payment of  $3,400 a month, but end up being approved for a payment of $3,800 a month, with no recourse.

It’s possible that you could appeal the assessed value with the County, but I’m not hopeful that will work this year. I clearly wouldn’t recommend anyone promising you can have the taxes reduced to a level commensurate with the lower Purchase Price,  unless you are buying in California. In King County Washington this is NOT a good year to bet that you can prove that the purchase price of $650,000 is a good reason for the County to lower your assessed value of record. Nor is it a good year to think that lower assessed value will equal lower taxes. The County has already notified owners that they are dramatically reducing assessed values (not taxes). 2010 is a particularly bad year to rely on being able to get that tax bill dramatically reduced, in my opinion.

The only sure course is if the bank-owner would have the assessment and taxes reduced prior to sale, in order to obtain a buyer for that home. But I strongly doubt that will happen. Anyone who can’t afford the $11,000 tax bill that comes with that “great deal”, should not be buying that house.

 

#2 - The “carrying costs” may be too high

When a lender pre-approves you for a Purchase Price of $650,000, they do not consider annual use and maintenance costs. Unlike real estate taxes and homeowner’s/hazard insurance, the lender makes no assumptions as to utility bills and other maintenance and repair/replacement costs. In King County a $650,000 house is generally about 2,900 square feet. A house for $1.2M is usually about 4,400 square feet, and often on a much larger lot.

Before you buy that 4,400 sf home on an acre+ lot for $650,000, instead of a 2,900 sf home on 1/4 acre, be mindful of the extra cost to heat and maintain that larger home on that larger lot, in good condition, over a period of years.

 

#3 – Cheaper, bank-owned, new construction may not be “complete”

Most recently we are seeing builders losing their construction projects to the bank. The bank then puts the house on market “as-is”.  Yes, the prices can be awesome! But will your lender finance the “new home” without it being completed? There are programs available to provide funds for purchase and rehab or completion, but are you ready to be your own “general contractor”? Even if you think you can handle it, will the new lender allow you to be your own “general contractor”?

Again, two possible consequences. One is you don’t qualify for the new financing, including cost to complete the home. Again, hopefully that consequence “kicks in” early enough for you to get your Earnest Money back under the Finance Contingency. Another possibility is that the things that need to be completed do not cause the sale to fail, but you end up with a house like the one pictured above. No landscaping, temporary construction fences or barriers, no garage doors…and no money to comply with the neighborhood rules to get your new home in good order in the timeframe required by the CC&Rs.

Once you enter into a Contract to Purchase, you may not be protected against “biting off more than you can chew”. Before you enter into a contract to purchase that “screaming deal”, make sure you can handle all the “issues” that come with.

About ARDELL

ARDELL is the Managing Broker of Sound Realty in Seattle/Kirkland. ARDELL was named one of the Most Influential Real Estate Bloggers in the U.S. by Inman News and has over 22 years experience in Real Estate up and down both Coasts, representing both buyers and sellers of homes in Seattle and on The Eastside. Follow Ardell on Google+

Comments

  1. ARDELL, This is an excellent article!

  2. King Co adjusts for foreclosure sales in developing assessments as a matter of practice, so making an appeal based on purchase price is all the more difficult with an REO.

  3. I’m continually amazed at Ardell’s ability to pick a meaningful, pertinent subject and then write so well about it- a great service to RCG readers.

  4. Ardell,

    This is a very informative article which all potential buyers (especially at times like these) should be aware of.

    Thanks again for your insights!!!

  5. Thanks all for the accolades on the post. I’m trying one where we will want to try to push back the taxes while the property is in escrow. Will report back on the process.

  6. And there are more ‘bewares’ in those REO purchases. The bank usually has no knowledge of the property’s defects, so the potential buyer has only their inspector to rely on for information about the home’s condition. I am aware of a person who bought an REO and is now finding out that the wiring in the house was done by a homeowner who had NO CLUE and it’s a potential fire hazard, there is rotten wood in the walls, oil seeping into the ground, and the water shut-off had been hidden behind a finished wall! And that’s just so far…….. yes, they may be screamin’ deals, but there’s so much more than meets the eye.

  7. Karen,

    You raise a good point. The buyer must do EXTRA due diligence in the inspection phase when buying an REO. Did the buyer not do an inspection? You can’t accept a property “as-is” unless you due extensive investigating as to what “as-is” means with regard to this particular house.

    All too often people think “no inspection addendum” means “no inspection”, when it does not. All buyers should do an inspection prior to closing whether the contract is “contingent” on that inspection, or not.

  8. I wasn’t there for the transaction, so I don’t know if she did an inspection. But if she did, there shouldve been red flags flapping everywhere…and that takes us to the unfortunate situation of limited liability for inspectors…

  9. If you can find out if inspections were done, and if not why not, I’d like to know that answer. No rush of course :)

    It’s worth making the point here that EVERY buyer should do an inspection when buying a house. All too often people think that ‘as-is” means they should not do an inspection, when it is the exact opposite. True, one might lose their Earnest Money if they cancel after doing their due diligence and inspections, with no inspection contingency. Still, as in the case you mention, losing $1,000 might be the better choice, if the alternative is $20,000 or more in future headaches.

    Any way you slice it, it would seem that buyer did not perform their due diligence adequately prior to closing. Amateur-wiring is fairly easy to spot by even the least diligent of home inspectors. Bank-owned usually means “we don’t know…you figure it out”. I don’t know of a bank who refuses to allow the buyer an inspection contingency, unless they require a “pre-inspection” prior to offer. But I don’t know of any seller that says “you can’t have an inspection” unless by doing so they are saying the place is SO bad, an inspection is a waste of time because we are selling it for the land value only, and the building needs to be torn down.

    This point does come up from time. When a listing says “the value is in the land”, they are basically saying “the house is free and deservedly so”.

  10. Great insight and details, Ardell :)

    On the consumer side, I always feel a bit sorry for most buyers as it’s incredibly difficult to understand the mortgage side of the transaction and all that goes into it. Having started my career as an LO, it’s easy for me to see what’s going on but for a regular consumer, especially first-time buyer, I just hope they have a solid agent guiding them.

    That exact scenario of being pre-approved one second and declined the next happens too often. Although, I think the changes occurring on the mortgage side will help/have helped in regards to better LO’s in the marketplace to help clients understand possible outcomes and not just “sell” mortgages.

    Josh Sanders

    Founder, Shiloh Street

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