Taxes
One of the questions I was asked that prompted creating this document, was that of a comparison of tax basis for home purchase decisions. Its very hard for me to appropriately answer, as the question of comparison is largely based on the entities in the county in question. I can tell you that differences in South Western and Central Wisconsin counties are negligible (although they can vary higher in larger municipalities and vacation destinations such as Madison and Lake Geneva.) For most rural properties, its quite comparable based on zoning and use. The question I believe was prompted in a comparison of retirement/BOL spots – but the answer is actually simple to arrive at as the numbers are public and readily available – Almost all counties publish their tax rates on their public web sites. If you are concerned, it will take about four minutes to research both the specific property, as well as side by side comparisons of the various townships in the county (and often the state as a whole.)
Finance
Mortgages are available – but you have to work a bit harder these days… The last time I bought property, I think arranging financing took 25 minutes. While I don’t particularly appreciate the paperwork, I understand why the banks are doing it. I will say this; it is well worth having multiple budget conversations with your partner/spouse before you even begin this process. Our mortgage will be at a great rate, I am happy to buy now instead of trying to “time” the market for another drop. One other note, despite having a relationship that includes personal and business accounts that are sizeable with one of the largest banks in the world, I have chosen to place this mortgage with the small community bank in the rural city we are moving to. The rates are competitive, the service is the same to me (for most people it will be better,) but the contacts and inroads into the community are strategic and could pay off down the road.
Budget
Any real estate book or web site will tell you the following – but for the sake of you other male gorillas having the budget talk with the fairer sex, and to ensure peace in your home, let me break it down for you in the elemental terms for the sake of the aforementioned budget conversation that must take place (and preferably before anything else takes place!)
- Down payment – the house you can afford is a function of 20% down of the final purchase price and the 30 years of monthly payments (that should be small enough to pay off long before 30 years by making extra principal payments.) i.e. House is $100,000, you need to have $20,000 on hand in cash for closing, and be able to afford approximately $750 a month (with money you can throw on top of the $750 when you have spare cash.) By the way – do not even consider one of the slimy deals and lenders who offer home ownership with “zero down.” The bottom line is that for any number of reasons which are a finance manual, you will wind up in trouble in one of those deals. That is fact. Harsh. True.
- Will you be able to afford the fixer-upper things you need to do to make the home “yours” after the above mentioned down payment? Are they cosmetic and cheap? Structural and pricey? Have you added some emergency padding to this number?
- Do you have your current home sold (if owned) or can you afford two payments for some period of time? As we are moving, we are purchasing, with the knowledge that we can afford both payments until I find a new gig and physically move to our new home in our new city.
- Do you have income in your new home location? i.e. this document is being written when we are moving to a new city, meaning my move will physically be when I find a job in the new city, not when we actually buy the home in a few weeks. For those wondering, we are moving for family, lifestyle, and other reasons – but not because a job has taken us there. Luckily we have the luxury of time! And we are purchasing a home we can afford while still making payments on our other home until the actual migration. As an aside, as we can afford two locations, we can then relax a bit on the fixer-upper requirements, and go to the new place on weekends to fix it up, while living in our current home (this is obviously also a function of geography – our new home is just under 4 hours away.)
- Can you afford the other things your new home will need? I for example, will need to buy a tractor, or pay a landscaping service – the little push mower just isn’t going to get the job done.
- Have you considered the moving costs? I happen to have family both in current and destination cities that will help load and unload my truck and trailer (which I don’t have to rent.)
- I discussed taxes above in terms of comparison – but make sure you can pay the tax on the property, understand how it is calculated in the locations you are looking, and what you can do to mitigate some of the burden. Definitely check out the state credits for agriculture use, nature preserve lands, and particular home assessments such as bedroom count, school district, appraised value, etc. Do not be afraid to ask for a reassessment, but do not count on a reassessment to drop the tax basis at all.
Agents Brokers Realtors Used Car Salesmen
Real estate is a sales business. People are selling their home. People are selling you on the idea of buying a home. Take it all with a grain of salt – or a shaker full.
The legal structure varies by state. In Wisconsin where we are buying and moving, there are four types of legal agent relationships. Seriously, you need a law degree to understand the nuances and fiduciary relationships. It is messed up.
Let me take a step back, for complete rookies. A home is being sold for $100,000. The two agents (for buyer and seller) agree to split a 5% (for example) (in our case $5,000) commission. Think about this logically – your agent as the buyer of the property is being compensated as a percentage of the closing price. S/he is being incentivized to get you to agree to pay more money! I kid you not, that is how it traditionally works. If your agent is scum and happens to be short on cash this month, if they are great at sales and get you to pay $110,000 instead of negotiating on your behalf to $90,000, then they earn more money! I have yet to experience another business in this world that is so completely structured to fleece the client – and where the client is normally not sophisticated enough, or activist enough, to call Bravo Sierra on it. Just stop it!
I’m sure that i will get multiple hate e-mails for the preceding paragraph, but the residential real estate industry knows it is their Achilles heel, but are afraid of that gravy train disappearing. They have all sorts of arguments of the differential profit not being enough to convince them to breach their ethics (just like our politicians.) For example: That their business relies on referrals and repeat business, so they would be shortsighted to do this. And that they have a legal or fiduciary responsibility to you. Yes, I have heard them all – but the fact is your mortgage and food and boat and vacation are all being paid by my paying more for my house and having a bigger mortgage.
THERE IS AN ALTERNATIVE
No matter how many different types of agent your state has, I have not heard of a state that bars the type of agent you must search for – the exclusive buyer’s agent. This agent does not sell homes. They do not have any agents or brokers in their office that do sell homes. They normally have a specific pride in the fact that they offer flat fees, and work exclusively on the buyer’s behalf – never entering a relationship, nor even trying to segment their office, into a way that could be remotely misconstrued as anything other than your strict advocate! If they aren’t working for you – they are working against you. Period. Don’t you owe it to yourself to work with the best tools, the best people, and to secure the future of your family and budget? Why put yourself anywhere near a position to not get the best for yourself?
Criteria for House Hunting
After your budget conversation, you and the better half will most likely want to go out and find your new castle. Before you do, have a brief conversation where you develop a list of needs and wants, and then rank them.
Things to consider include, but are not limited to:
Schools (we don’t have kids, but if we did, this would rise to #1 or at least top three on our list)
Community
Spiritual community
Water (I wanted a year round stream, the better half wanted to finish the darn conversation and have bagels)
Type of home (she was okay with siding, I wanted brick, she liked bungalow, I preferred ranch)
Size of home (are you intending to grow your family, are you an empty nester, do you plan for multiple guests to have bedrooms or the couch)
Size of property (we all want bigger unless we are retiring, but it does affect taxes, time to maintain, etc, sometimes enough is enough)
HOA (I say, “Just say no” to HOAs.)
Bedrooms
Bathrooms
How much fix up are you willing to deal with
House Hunting
You must do the work, do not expect your exclusive buyers agent (you did decide to find one right?) to do it for you. Sure they will show you a couple of great properties they know of. Sure they will sign you up for automated emails that notify you of new homes that match your search criteria. However, you need to do some of the lifting. Truth be told, if your better half is anything like mine, the house hunt will be an all-consuming lunacy fever that takes hold. In this day of Trulia and Zillow, you can do it easily from the couchm, so do so. It is particularly useful for folks like us, who were less concerned about a specific locale, and more about a region – as both web sites allow you to place filters on the search, and then call up a map that is navigable with homes pinned on it that match.
Take your time.
Do not rush.
Do not be talked into rushing.
Do not take anything for granted – even questioning your advocate.
Foreclosure and Short Sale Homes
Foreclosure – bank owned, as the prior owners failed to pay their mortgage and the bank took possession.
Short Sale – the owners can no longer afford the home, and are attempting, with bank permission, to sell it to someone who can before they are tossed out.
There are an awful lot of both the above types of home on the market. It’s a sad state of affairs for all of us, even those not directly involved, as it is dragging down our entire nation (amongst many other issues.)
Do not be afraid to view and purchase either type of property, but do understand that while you can find great value in these homes, you will have to jump through a few hoops. Go ahead and ask your agent (before choosing one) how comfortable they are with that process, should you decide to attempt to purchase one. Its quite advantageous, particularly in these cases (but should be considered in all cases) to get pre-approval for a mortgage from your lender of choice. And no, you do not have to use the lending services of the bank that owns the foreclosed or short sale home.
Making an Offer
Holy cow – this one threw me for a loop. I really never even contemplated this being an issue. Silly me. This was the first major purchase the better half and I made together – her last car that we purchased was used and cheap, no haggle. My truck I purchased on my own. Our deal making styles were polar opposites. Our home is a 50.001% dictatorship, to my favor. In this rare case I put my foot down. When the lady informed me that negotiating was distasteful, I had to slam the brakes on and explain a few things. Use whatever argument you want, or precede the process with a discussion of your tactical approach to real estate – but this is the financial future of your family. Be ethical. But get yourself the best darned deal you can. Always. If neither of you are good negotiators make sure your agent is. If the agent isn’t hire a litigator, or someone else who is. But every cent you don’t spend, is a cent in your pocket. I don’t care if you don’t like negotiating. You don’t have to like it. You just have to do it – and do it well – or find someone who can.
Our Recent Home Purchase Story
We were idly thinking about moving last fall, and on a trip to visit family arranged for a showing of a home we randomly found online, and that looked reasonable. Our agent (who assisted in 3 different home purchases for family in the past two years in the area) suggested that we find 2-4 other homes in the area to look at – and to make a day of it. We were driving four hours anyhow, and since these are rural properties, it made the best use of his time to devote half a day to a client. No problem.
The first home we saw, the wife loved (notice this, it will become a theme if your better half is like mine – in our entire purchase story, she fell in love with about 12 homes, was ambivalent about three or so, and hated only one!) but I didn’t care for as it was way to much fixer upper work. I foresaw a 3-4 year project doing it ourselves nights and weekends all while living in an ongoing project, or doubling the price to pay a contractor to do it. The third and fourth homes, were okay but not great.
But that second home the first day? We both loved. It was fantastic for both of us – and we have radically different tastes. Long story short, we were outbid by another purchaser, but stuck to our guns and didn’t overpay for our budget and value estimate. (I am glossing over the emotional roller coaster, the lack of information, and the pain in the rear factor of this process.) It was a foreclosure being sold as-is, and it was a massive blessing in disguise. Being a small town, we heard the gossip a month after we lost the deal – the new owners were in, and discovered a fault in the foundation, the need for a new septic system, and a leaky roof. Estimates were $18,000-to-$40,000 in out of pocket repairs – not wrapped into a mortgage. That’s a lot of money when you just sank a massive amount of cash into a down payment.
We kept looking. We didn’t agree on anything. She had an emotional argument that demanded a new home now – she gets these notions… I had a project at work that took me international and bought me a brief respite.
We kept looking.
We saw a home that looked good online, and called our agent. Keep in mind, your agent may have slightly more information than you can see on Zillow or Trulia. The home had an accepted offer on it already that didn’t show online.
Remember that earlier I suggested you question even your advocate?
I asked that he do us a favor and make a 30 second phone call to the selling agent to confirm status.
To our agents shock, the seller’s agent said that their deal may be falling apart, and the seller would welcome us to come take a look with the understanding that we would be a secondary offer only if the other folks found themselves in breach of contract. This is rare – and the only reason we were able to find our dream home is that we kept politely questioning even the experts, and no other purchaser got past the online listing, the advice of their agents that it was under contract, the human laziness, and the norms.
We grabbed our dogs, hit the road, and went to have a look. We loved it and made a secondary offer that day.
There were back and forth counter-offers, and we were still the secondary offer.
We were again in the limbo of not knowing. We didn’t know when the primary contract would default. We didn’t know the primary offer amount. We did know were getting nothing but paper counter offers – and were not negotiating across a table with a person. For an old poker player like me, this is frustrating as the traditional advice is “play the man, not the cards.”
Finally, after about two weeks of this super frustration, and with our original offer expired; I resorted to a negotiation strategy that is not recommended other than in dire circumstances, it is a scorched earth strategy that will kill the deal, or get you an incredible value. Also keep in mind that this resulted in a crazy fight with my better half who now owes me big time having lost the bet that this would work. Remember above how I explained that she didn’t like/believe in negotiations? Imagine that mindset wrapping around the course of action I was proposing. I “Godfather Offered” them. Remember that sub-story in Godfather Part II where the Godfather offers the record label guy $100,000 to release his godson from his contract, is told no in response, and then counters his own offer by then offering $50,000? It resulted in a severed horse head in the record producer’s bed, and the godson being released anyhow.
In our case, I was sick of getting kicked around, and was willing to walk away without the house if it didn’t work – so I sent a paper offer 10% lower than our original offer, with some strong wording that we would not be coming back to the table. That’s right, I didn’t bid it up to sweeten the deal. I guessed (as it turned out, correctly) that their deal was crumbling, and that they were panicking about being stuck with the property and having their secondary ace in the hole disappear. (I did have some other hints I am not detailing here that assisted me in taking this gamble.) They sent a single counter offer offering at 5% discount, and said we would be given a final decision in one weeks’ time taking us from secondary to primary at the agreed upon 5% discount. We accepted. We close in less than a month from writing this (if all things go well.)
In Summation
Do not be afraid to think outside the box!
Fight the good fight for yourself.
Be prepared to be gentle and kind with your better half – there is one heck of a lot of emotion that this process will bring to the surface.
Get the best tools for the job.
Be realistic (well you are preppers – so I assume you are better at this than most.)
Do your pre-work, do your homework, follow up, question everything.
Be your own darned advocate, even when you have positioned yourself to have an adviser who is working nominally well on your behalf.
JWR Adds: Land and house purchases should be made dispassionately. There is a lot of psychology to the process, some of it is overt, and some subtle. For example, note that real estate agents always refer to the structure as a “house” to the seller, and as a “home” to the buyer. Be honest about the debt level that you can afford. Always do your due diligence. If in the slightest doubt, then have things inspected by experts. The costs of inspections are minimal (certainly versus the subsequent cost of repairs), and keep in mind that the inspection reports can be used as leverage when negotiating your offer. Don’t be afraid to negotiate aggressively, especially in today’s declining market. Also, shop around for both the best house and the best lender. Note that there are some great retreat properties available at our spin-off site, SurvivalRealty.com