Sunday, June 6, 2010

House buying! WTF?!

So I recently bought a house and being mostly settled in I wanted to recap the crazy process that is house buying as I discovered.   While I hope this exposes some of the less discussed aspect of home buying for those considering it, it is also a bit of a rant, though hopefully a well constructed one for everyone else.  ( oh and it's a tad not edited too )

I'll also add foremost that a lot of these issues are trying to be fixed by new companies like RedFin.  Being my first home purchase and that I was completely ignorant, I just went the typical route; however, I'd seriously consider RedFin et al. when I buy again.

The Looking

MLS listings are annoying!

So when your realtor sends you listing to look at you get a fairly junky experience, in my experience at least.  MLS is a listing system everyone uses and the format is ok, though the features are 1999.  You're effectively given a single screen search-result list of places.  So for some broad searches you have to scroll through a very long page.   You also can't link to a single listing, and getting additional images beyond the first opens a whole new page.


You never meet or talk directly to the sellers

This kind of really annoyed me.  Everything you do with the seller is telephoned through your realtor, who telephones it through the sellers realtor who then conveys it to the seller.  This makes asking any question an lengthy process with responses nested three deep if not more.

Also, you have no idea what kind of people owned the house before hand.  When you buy a used car you get to see who the people are selling it and through that get some idea of how the treated the car.  But nope, not with a $100,000s purchase.

The Buying

You have no real idea what your closing costs are until you have to pay them

Closing costs are basically all the things you have to pay for on top of the house and it turns out no one really knows what that value is until pretty much when you have to pay for it, and even then it might be a little wrong.

The problem isn't that the exact value is unknown, it's that any estimate you get will be wildly off.  My actual closing costs were just under 2% however my first estimate was something like 5%, and my 'mostly correct' estimate was still several hundred dollars off.

I ended up using all the money I was comfortable spending on the house almost on the nose after closing, but the huge variance that has happening easily could have forced me into spending money I didn't want to or for some people don't even have, and at that point you only have a day or two to come up with it.

Closing Costs make NO SENSE

There are two related problems with Closing Costs which make the above variance in value more understandable.

Closing Costs (CC) are mostly just a necessary annoyance with the process.   There are roughly 8 million entities involved in you buying a house and they want money for different things from different people.  Closing Costs actually serve as a convenience to handle all of that in one place [ a convenience which you also pay money for in your CC too :) ].  This is basically what Escrow does.

The main issue though is Escrow enters the process at pretty much the end, for me it was the week of closing.  So up till then it's all wild guessing because no one else owns this process.   For me my Lender tried to fill this role, but ended up doing a poor job at it.  I assume all lenders more or less step in for this too.   Your lender really wants you to buy a house and they don't want you to realize you don't have enough for CC later so they VASTLY over estimate all the costs.  They pick the high end for every sub fee I'm guessing.  So for me my initial Good Faid Estimate ( GFE ) from my bank was 5% of my house value.  that +3% over what I actually paid, which makes it a completely useless estimate.  If I'd actually used that value I wouldn't have been able to afford closing, or I would have had to only put 10% down which would have required changing my loan terms late in the game when I realize I could actually do 20%.

So your lender is trying to be nice and help you out, but they end up kinda failing.  What facilitates this even more, is that a lot of the costs they're estimating aren't actually paid to them, so their estimating costs for other companies.   It all gets worked out when the big legal guys at Escrow set things in stone, but it really should happen sooner.

So basically it's like you half assing your taxes, thinking you owe $5000 then going to a tax preparer on April 13th to realize it was only $2k.  You're happy, but it hurt getting there.

Another wonderful thing here is that your HUD may include severl $1k fees which are then just paid to you by the seller but they still show up as money you owe.  yay!


The second issue here is then that your HUD ( the official version of your Closing Costs ) is effectively unreadable and what you're paying for makes no sense.   My Closing Agent actually told me he's never seen two HUD formats that look the same.   I'm 100% sure they're so confusing to warrant paying people having jobs who can read the forms.

The wonderful thing on mine was in each sub section on mine was summed up to the first value in the section, and it wasn't named something like "Total".  Instead is was like "blah blah blah fee" with each following item in that section being "blarg blarg blarg fee".  AND, wonder that is wonder, some of those were and some weren't in that first item sum!   Ahh it's great :)

Loan terms are poorly conveyed

You have a few ways to tweak your loan based on your personal preferences and circumstances.  This is great!   But it's kinda hard to really see the dimensions offered or eyeball a change etc.   Often times I see a static listing of rates for a single situation then a run on sentence describing how you can change that rate by putting more down, or simply paying a higher fee up front.   This is something that doing a little studying on what all terms mean will vastly help.   LTV, what a 'point' actually means to your lender, etc etc.

Whose who?

This is probably one of those areas where you should just not try and figure it out.  It turns out the Real estate market is fairly incestuous and has multiple personalities.

When you buy you'll end up having a Title Company and a Title Insurance Company.   In my case they had different names and seemed to serve different purposes, yet as it turned out they were effectively the same company.  I actually got mail from one on letterhead from the other for instance.    Oh and it turns out all the Real Estate companies in the area owned a partial interest in both also.

The missing Nexus

To round out why the Closing Costs make no sense you should understand that there's no single central information Nexus yet there are at lease 10 different entities involved in your home purchase and it's never clear or certain who is or will communicate with who.

A great example of this is my home appraisal.  The appraisal was only just ordered a month before closing and in WA state Lenders can't ask about the appraisal for at least a week.  I was told it could take up to a week to schedule the appraisal, then who knows when it'll be scheduled for, then a report has to be created and then the Lender has to review that report.  It's 4 weeks out till closing and I can see a worst case scenario of my Loan not being official for 3 more weeks.    But oh..., actually the Appraisal already happened and my realtor was just never notified about any of it, and the bank will get the report in a few days.   fun...

Ca Ca Condo!

So as it turns out my place is actually a Condo as far as people who charge you money are concerned.  From what I can tell this basically means: I don't own every single part of the property, and that an HOA controls the rest.   So I'm in what we'd call a TownHome, 3 floors with units on both sides.  So I own the walls in and the HOA owns the roof, lawn etc.

The reason this matters is that your Lender is all about risk as they technically own the property until you pay off the loan.  So they care about your financial risk in paying back the loan and the property risk in your ability to keep up the property.   Ah, but when someone else, the HOA, controls part of that, your loan is riskier.

This meant two very annoying things for me.

1. My loan terms were worse.  I had to pay, as a fee, 0.75% ( 3/4 points ).   I guess it's effectively a one time insurance fee from the Lender's perspective.  I called around too and this is fairly standard.  The really annoying this is, I've never seen this kind of restriction on any rate forms.  So if you're going to buy, let your lender know if it's a Condo early on, or ask about this if you aren't sure what you're buying.  They were nice enough to waive the fee if you put down 40% though....

2. The Lender wants to know a lot about the HOA and community.   This is quite reasonable, but from what I can tell HOA administers are on level with Payroll companies, not as sophisticated as they really should be.  In the end I had to pay some company $120 for a sheet of questions with yes/no answers, and then $30 for them to copy those answers onto a form from my Lender.  Oh and only 1 of 4 faxes they ever sent out made it.


Reserve Report

I won't say too much about this as it's more about the place you're buying, but if you're going for a condo, look into the Reserve Report and how 'healthy' the reserve is.  An unhealthy reserve seems like the best signal that the HOA dues will increase.   I say a tad more about it at the end of this too.


In Conclusion


It occurs to me that I may have been just a tad more hands on than the average home buyer.  I at least skimmed every word of every document, and ended up understanding every cost on my HUD.   I can't say actually reading any of the documents mattered.  You have no real choice if you find something you don't like;  Your options are buy or don't buy.   I guess I at least wanted to have some idea of what things might affect my loan etc, or if something does happen, some quick idea of if it's something covered in those documents.

Understanding my HUD was likely also pointless in that I didn't find any errors, but it did help me realize that a decent bit of what I paid during Closing were things I'd just have to pay soon anyway if they weren't in closing, so they felt less like arbitrary fees and more just pre paying stuff.  Some examples are:  First two months of HOA dues and property taxes and the interest-only part of my loan for the rest of the month which I closed in.

The one thing I'm really glad I did read through though were the HOA docs.  These are likely the things that will have the closest effect on you.  They let you know if your potential neighbors had complaints against them, what repairs had already been done, what construction things had to be fixed after the fact for some reason, how much your future-repairs Reserve is funded and so forth.  If you pay HOA fees you should get a good idea of where it goes, and the current health of the Reserve will give you some idea of if it'll likely go up.