Bare minimum

Posted: Oct 03, 2006 9:35 PM

This hopefully will be a survivor’s guide to those who have wandered into the real estate industry, or are about to take the first step to home ownership, and are fairly unsure of what to do, and worse, what they need to know. Hence a quick course to give you the bare minimum of knowledge that will keep you moving down the road to financial freedom. When I say bare, I mean really basic information that everyone should know, and conduct their business within the framework of these rules.

Get pre-qualified for your sake and no one else's. Know what you can afford before looking. Look with a professional who knows your price range (you told this person and showed them your pre-qualification letter). This will save frustration, a tremendous amount of time, and save you from your first major mistake.

When you make an offer, it must be contingent on a minimum of three things: loan approval, approval of the physical inspection and the appraisal being equal or greater than the purchase price. Do not let anyone talk you out of these three items, including your own real estate agent. You can't buy the house without a loan, you won't want the house if too much is wrong with it, and you can't afford to pay the difference between the appraised value and the purchase price if the purchase price is higher.

As an addendum to the previous paragraph, you need to have an appraisal and inspection on new houses. I once bought a new house where the glass slider was installed upside down and I had the toughest time locking the door. Needless to say my inspector missed it, but when I sold it, the inspector for my buyer didn't miss it. The builder fixed it, as they were still there building other phases.

Closing the purchase can be, but doesn't have to be, traumatic. If you are getting gift funds, get them early. If you have the funds in your account for three months you will not have to provide verification of the gift or the donor's ability to give the gift. If you are going to liquidate some assets, don't cut the time short. Have the funds ready for the down payment at least a week early. And now we will discuss insurance.

Years ago no one bothered to call for the insurance until the day before it was ready to close. Not any more. Insurance can be a problem and you will not be able to close without it unless you aren't getting a loan. Start working on the insurance when your offer is accepted and the escrow is opened. You never know what you can run into, such as a fire danger area where certain roof types (shingle or wood shake) may not be insurable. You could find yourself in a liquid-faction area in California where earthquake insurance would be prohibitive in cost, or in a hurricane area in the South.

While you are looking at insurance, please consider three other policies aside from your homeowners: disability, long term care and a large liability umbrella. Most people have some form of life insurance, so I will not cover that, but disability and long term care are both important if you do not have a year’s worth of reserves of ALL your debts in the bank. These can save you and your credit from a major disruption, should you become disabled and unable to make your payments.

A liability umbrella will keep you safe from a major lawsuit where you accidentally caused a loss to another individual, which is either over your current insurance liability limit or not covered under one of your policies (I am not saying that this will be sufficient to cover you if you aren't already covered). It isn't very expensive and should be discussed with your insurance broker as to the ramifications of the policy.

When it comes to choosing a loan, you need to have a financial plan in place. I have written about "The Plan" on 8/5/2006, and also about the types of mortgages you should consider in "How Important is the Right Mortgage" 8/29/2006 and "Invest in Your Mortgage - You Win” on 8/14/2006. I also wrote an article on the most important part of home ownership, the one that will keep you in this rare atmosphere – reserves. It is called "What Reserves" on 7/18/2006. These articles will help you understand what you need to consider to make your actions become reality in the way you wish them.

There was an old film with Robert Redford who became a candidate for either the Senate or a Governorship, I believe, and surprised everyone and won the race (I had a clue that he would win). He brought his campaign manager into a room off the main ballroom where his supporters were celebrating, shut the door and then turned to his campaign manager and said, "What do I do now? "

Once you are in your house, you might feel like Robert Redford yourself. The important point is you have accomplished what you set out to do, decided upon a plan and executed the first step. Now you need to monitor your progress at least twice a year and make sure that you are firmly on the road to financial freedom. You may think it isn't prudent to continue to check on your progress; it isn't prudent if you don't.

Hopefully you didn't reach for the stars or at least not one too hard to reach. Tomorrow is another day, and with your plan in place you will get to the star you are wishing for, in time.