Homebuying Basics

The dynamic of the Washington area's real estate market continues to change with every passing day. Is now a good time to sell? To buy? To curl up in your rental pad? For insight on this and more, check out The Post's Finding Your Way feature.

Ready to get into the home buying business but not sure where to start? Eric Tyson and Ray Brown, authors of "Home Buying for Dummies" (Wiley, 2006), provided advice that can help you get going in this live discussion.

Visit The Post's online Real Estate section for more.

The transcript follows.

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Ray Brown: Hi Everyone,

Many thanks for joining us today. We'll answer as many of your questions as possible. If we seem to favor questions from first time buyers and sellers, it's because they usually need the most help.

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Washington, D.C.: Why should I buy a house today? A forecast by Moody's Economy.com, published in several papers today, projects that Washington-area -- including Arlington and Alexandria -- housing prices will drop by 12 percent over the next year. With a 10 percent down payment and closing costs, I'd be upside down by next year.

Ray Brown: Buying a home is an excellent long-term investment. The emphasis is on long-term. This is not a good time to buy hoping to flip property for a quick profit.

I think home prices will probably decline somewhat over the next three to four years as markets consolidate their gains. People won't lose money during that period as long as they don't sell. They will, however, have both physical shelter and tax shelter during that time.

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Washington, D.C.: This is not a first-time homebuyer question, but I'm hoping you'll take it anyway... I own a home and my soon-to-be husband owns a home, but neither is big enough to accommodate the both of us for very long. We anticipate selling both and using the proceeds to buy a house together, but we can't figure out the timeline for doing this. Do we sell both houses at the same time and rent 'til we find a place or do we go ahead and sign contracts hoping our houses will sell before we go to close? We figure to get a house in this area big enough for both of us and any family we create, we will need the equity from both houses.

Ray Brown: Great question! If you two want to sleep at night, my advice is to sell first, then buy.

Most folks overestimate what their house is worth & underestimate how much it will cost to buy their next home. That's a scenario for fiscal disaster.

By selling first, you'll know exactly how much you have to spend on your next home.

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Bowie, Md.: What are some of the most important qualities one should look for in a buyer's and a seller's agent?

Ray Brown: Real estate is a team sport. You don't have to know everything about the process to be extremely effective. The key is putting the right people on your team.

In both Home Buying for Dummies  and House Selling for Dummies, we devote a chapter to putting together your real estate team. Selecting an agent is a three part process. Start by interviewing several agents:

1) Ask each agent to see an activity list showing all the properties they've represented buyers and sellers on during the past 12 months. That shows you what type of property they work on, what price range they work in & whether or not they have a geographical focus. Avoid agents who try to be all things to all people. The best agents are very focused.

2) Interview each agent. Sample questions:

- How long have you been an agent? Generally, go for experience. After five years in real estate, a good agent has five years experience whereas a mediocre agent will have one year's experience five times. Time in the saddle is, by itself, no guarantee of competence.

- Do you have a salesperson's licence or a broker's licence? A broker' must satisfy more rigorous educational & field-sales requirements.

- What is your understanding of my home-buying needs? You've probably already told the agent what type of property you you to buy, how much you want to spend & where you want to live. If the agent doesn't remember, watch out. You need an agent who listens to what you say.

- Are you a full-time agent? Would you want a part-time heart surgeon operating on you? Don't work with part-time agents.

- How many other buyers/sellers do you currently represent? No matter how good the agent is, if the agent doesn't have enough time to accommodate your schedule, find another agent.

3) Check the agent's references. Any agent who won't give you references has something to hide. When you speak to their clients, ask:

- Is the agent trustworthy and honest?

- Did the agent follow through on promises?

- Did the agent have time to serve you properly?

- Did the agent get a good price for your home?

- Would you use the agent again?

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Downtown: There still appears to be hundreds of condos being built Downtown. In a declining market is it better to buy a condo or a single family home? If a condo, in a new building or an established one?

Eric Tyson: Condo prices generally soften more in a down market because more people prefer single family homes and the market for condos can be more easily overbuilt (although this is a bit less true in a built out urban area).

What type of housing do you prefer? Condos tend not to appreciate as well over time.

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Confused: Inventory seems to be increasing and prices are stalling and falling in my neighborhood. Is now a good time to sell before a bigger depreciation on home values?

Ray Brown: The real estate gods are very fair. Whatever they take away from you as a seller, they immediately return when you buy.

When the market was booming, stories focused on sellers who just got an all-time high price when they sold their house. What the story didn't do was say that those sellers ended up paying an all-time high for their next home.

Don't base your selling decision solely on what you'll get when you sell. Where will you live after you sell?

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Washington, D.C.: First time homebuyer here, so I'd like to get your opinion on buying a place in the next 10 to 12 months, considering the market? Smart decision or not? General thoughts: in the District, two bedroom or larger, depending on price. I make a good living, but am also not sure how much of my savings to spend on a house/condo, and how it compares to the risk of buying.

Eric Tyson: Our homebuying book has lots of worksheets that help you get your personal finances in order and help you determine how much you can really afford to spend on housing given your other financial commitments and priorities.

I don't have a crystal ball on the market. For the type of property you're considering, compare the monthly after-tax cost of owning versus the cost of renting that same property. Those two numbers should be fairly close.

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Washington, D.C.: Okay, I keep hearing that prices are starting to go down, and my fiance and I own a condo here in Washington, but are looking to move next year as he starts graduate school. We are seriously considering selling this summer, because we'll eventually have to sell, and prices could go down even further in two years, right? This one-bedroom is not a long-term home for us, but we can still get more than we paid for it, we think.

Eric Tyson: The summer is generally a poor time to sell.

Put the condo on the market when you're ready. Don't try and time the market.

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Washington, D.C.: I'm looking at buying a vacation property in Ocean City with the intention of using rental income to help pay the mortgage. When sellers make claims about the amount of rental income the property incurred in the past, is there any way to verify the claim?

Eric Tyson: Great question.

Ask for a copy of their Schedule E from their tax return which should show all of the income and expenses. Also, ask for copies of leases.

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Potomac, Md.: First off, thanks for a very helpful book. We used your book to guide us through our first house buying in 2000 -- when we had very little cash, just a sense that buying a house was the right thing to do. That worked out well. I'd like to thank you as well for the section about whether buying was right for us -- it was the best feature of the book and a great reminder that your goal is not to buy a house, but to find the place to live that fit your overall financial picture. It was refreshing not to read a "Buy! Buy! Buy now!" real estate book.

Eric Tyson: Thank you very much.

We take great pride in our book being holistic and truly seeking to help people solve their problems and questions!

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Ashburn, Va.: I've been looking at immediate or early deliveries from builders in the Loudoun County area. What I want to know, is how much can you negotiate with the builders. We have a real estate agent, but no buyer's contract. We're trying to get as nice of a home as we can for $400,000, preferably a detached home.

Eric Tyson: In a softening market, you can absolutely negotiate.

Offer less and ask for improvements you like. Examine comparable sales as well to bolster your case.

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Washington, D.C.: I am looking to purchase my first condo soon, I see a lot of people suggest putting 20 percent down. Why is that? Seems like a lot of money to pay up front.

Ray Brown: Excellent question.

Eric & I recommend that you get yourself preapproved for a loan before going out to look at homes. Find out exactly what you can afford to spend. Make sure that you own the home.

Putting 20% down may seem like a lot of money, but that might be the correct down payment to keep your monthly principal, interest, taxes & insurance (PITI)payments low enough to easily afford them. If you PITI payments are too high, you won't own the home - it'll own you. You won't have enough descretionary income left to enjoy life.

Ray

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Los Angeles, Calif.: I live in a land of many zero-interest mortgages, and keep hearing rumors of impending waves of foreclosures. I know that you cover foreclosure purchases in your book (which I have), but is there a source you'd recommend that focuses on purchasing foreclosures and bank-owned properties? And what is the difference? I see both terms, but they don't seem synonymous.

Eric Tyson: This is a more sophisticated and risky approach which is covered, among many other topics, in Real Estate Investing for Dummies.

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Washington, D.C.: Thanks for taking my question. Making a play on your book's title -- in our regional market it would appear that "dummies buying homes" would be more apt. Absent compelling need, why should someone buy an asset with a declining value? Unless there is a compelling personal reason to buy now it makes sense to stay out of the market for a year or more. Prices are declining and are likely to do so for some time due to existing surplus inventory and a potential wave additional inventory brought on ARM resets. It may be that one can't time the market perfectly but it is pretty clear we are in decline now ... and it won't take rocket science to discern a the beginning of a change in the trend line indicating price stabilization.

Eric Tyson: No one rings a bell at the bottom.

If market timing were that easy, real estate investors would all be rich!

If you don't have a strong desire to buy, sit on the sidelines.

To determine whether values may fall much more or not, compare the rental cost to the cost of owning (monthly, after-tax) for the exact type of property that you have in mind.

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Maryland: Hi -- I'm a young professional and last fall I bought my first condo in a building that is a conversion (apartment to condo). The location is great because of it's close proximity to 495 in Maryland. However, looking back on it I am starting to repent. The developer has not even sold half of the units in the building, and while the builder hasn't reduced prices I've seen prices of similar condos in other buildings in the area reduced by $15,000 to $20,000. I feel bad because I believe I purchased a property which was overpriced and hence I am greatly overpaying for a condo that is now probably worth atleast $15,000 to $20,000 less than when I bought it. Anyways given the fact that I have overpaid, what would be your suggestion for someone in my shoes? Am I better off to try and sell my condo after another six to 12 months, and cut my losses to avoid losing more money as the value of my condo decreases?

Eric Tyson: Don't cry over spilled milk. What's done is done.

And, don't add insult to injury by rushing to sell. Real estate transaction costs are quite large. Prices would have to fall another 15 percent just to make up for the round-trip transaction costs to sell and then re-buy.

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Arlington, Va.: I feel like I'll never recover from knowing that when I first got my job here five years ago I could have had my dream house, but it is now unattainable. With the market approaching normalcy instead of a feeding frenzy, I am considering dipping a toe in. With interest rates holding steady and prices still stabilizing, it doesn't seem like the time just yet. Are there signs to look for that it is the right time?

Ray Brown: The best time to buy a home is always five years ago. Five years from today, people will be telling you how smart you were to buy today.

What scares a lot of buyers right now is - ironically - that the feeding frenzy has abated. They wonder why they should buy now if prices are falling.

The answer is that a home is an excellent long-term investment. It gives you physical shelter, tax shelter & a hedge against inflation. If you get a mortgage that has both interest & principal in the monthly payment, the home becomes a forced savings account. Slowly but surely you'll pay down the loan & build equity. When the market takes off again, as it surely will after it consolidates its current gains, you'll build more equity through property appreciation.

Ray

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D.C.: Good afternoon,

I'm in the process of purchasing a three unit apartment (row house converted in to apartments) in Baltimore. This is my first investment property. I was wondering what you thought of the housing market there, what perils that may be involved from the landlord side in the city, and if you think something like an purchasing an apartment now is a good investment over the next five years or so.

Eric Tyson: You've got to run the numbers to examine what your cash flow is going to realistically look like. This will require lots of investigation and digging on your part.

Baltimore is a vibrant and improving city. Make sure you buy in a good neighborhood. Check out the crime rate/situation as well as the schools. Real Estate Investing for Dummies can help with your decision.

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Washington, D.C.: I'm looking to buy my first home. I hear stories of lenders charging unreasonable closing costs and fees. How do I know what is reasonable? How do I know which loan is better, more points or higher interest?

Ray Brown: Lenders offer a bewildering array of loan choices. If you want to get a loan with no closing costs & fees, you can. But - you'll pay a higher mortgage interest rate. You can, conversely, pay a loan origination fee (points) to lower the mortgage interest rate.

The key to what is reasonable depends upon how long you intend to keep your loan. If this is your first home & you plan to sell it within the next two-three years, you're probably better off getting a low with low closing costs. If you're planning to keep the loan a long time, go for the lowest possible mortgage interest rate.

Suppose, for example, that by paying a $1,000 loan origination fee you can lower your monthly payment $25. Divide $1,000 by $25 = 40 months. If you keep the loan more than 40 months, it's wise to pay the points.

Ray

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Springfield, Va.: As a potential first-time homebuyer, planning to buy a house in the next year, is it better to pay off consumer debt (i.e., credit cards) with a saved lump sum of cash meant for a down payment, then spend the next year saving up again. Or, would I be better served using the lump sump as a down payment now, and then paying off the consumer debt as a homeowner. By the way, my husband and I both have excellent credit, in the 800 range.

Eric Tyson: Get rid of the consumer debt ASAP.

Doing so will help with mortgage application and options and rid you of high cost debt!

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Silver Spring, Md.: Eric and Ray: I bought my house in 1998 and referred to your book often in the process. It was a great help to me in determining how much to spend, etc. I am extremely(!) careful in committing to long term spending and yet I still ended up buying about $50,000 more house than I planned. It has turned out well -- my salary and the house value have grown and now my mortgage amount seems like a gift when compared to rents and current mortgage payments. I wish I had a better understanding of that phenomena when I lost so many nights of sleep in 1998 and 1999. Can you comment on that?

Eric Tyson: Our book actually covers that too!

It shows exactly what you discuss - with rent, all of your costs are exposed to inflation. As a home owner, your mortgage can be fixed.

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Silver Spring, Md.: The old basic formula for determining the price of the home you could afford was two and a half times your annual income. Does that still hold, or have things changed with skyrocketing prices?

Eric Tyson: That formula never worked.

You've got to examine overall spending and goals. And, it of course depends on level of interest rates.

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Silver Spring, Md.: My wife and I are looking to relocate towards Columbia and are debating whether it is worth considering renting out our house instead of selling. We see great long term investment value in our current single family home, but also a lot of hassle.

Eric Tyson: You've hit the nail on the head.

Do you want the responsibility of being a landlord?

Also, how about dealing with the inevitable damage and wear and tear to a home you've enjoyed living in which may have nice things in it?

Keeping as a rental could be a fine long-term investment but you've got to run the numbers and understand the consequences including tax issues of converting to a rental property.

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Washington, D.C.: My fiance and I have recently been crowded out of two bidding wars (we thought those were things of the past!) in the neighborhood we're interested in. Another property in the area has sat on the market for 100+ days because it's priced high and needs work, while these two flew once they were priced right because they were in top condition. Should we make a low-ball offer based on our estimate of the cost of necessary repairs?

Ray Brown: Don't kid yourselves. Well priced property still attracts multiple offers. Overpriced property, on the other hand, just sits on the market.

Well price property factors in the current condition of the home. You wouldn't expect to pay the same price for a fixer-upper that you would for a home in move-in condition.

Buyers usually have a better sense of fair market value than sellers. What you consider to be a low-ball offer may actually represent the home's fair market value.

The best way to know whether or not it's a low-ball offer is to see what ultimately happens. If the house sells for its asking price, you were low-balling. That means you have to adjust your concept of fair market value.

If the house just sits on the market gathering dust, you weren't low-balling. In time, the seller will reduce the price to reflect market reality.

Ray

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Adams Morgan: My wife and I bought four years ago and have seen almost a 100 percent increase in our property value. We are looking at buying a new home and noticed a disturbing trend. We use a couple of realtor Web sites to track and watch various houses we like and monitor the time on market, price drops, things like that. We've noticed many houses that are on the market for say 150 days, with four price reductions that suddenly disappear off the market. A further search reveals they have been re-listed, at the lower price, under a new MLS number. This appears to be a way of wiping out the time on market reading and starting over.

Is this legal? It seems at best to be a very shady practice.

Eric Tyson: I don't think there's shady intent.

Many people choose to go with a different agent and even if they don't, the MLS system likely requires a new listing.

As you've demonstrated, you can research this so it's not like it's hidden.

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Glover Park, D.C.: Any guidelines on how long I should expect to live in my first home? I'm trying to save money for a down payment and it will take me several more years to get enough saved to buy something I'd like to live in for maybe 10 years. I could go ahead and purchase now, but what I could afford I probably wouldn't want to stay in but for three to five years. I'm itching to own, but maybe just waiting is better.

Eric Tyson: At least five years -- ten is great! Transaction costs can be about 15 percent to buy and then sell so you want to stay put long enough to recoup that and hopefully make a profit.

I'd wait to get into something you could see staying in more than a few years.

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Washington, D.C.: What are the benefits to using an agent to buy a home? Why shouldn't I just do it myself? I can do research and read books -- it doesn't seem like it would be that hard.

Ray Brown: Good agents bring a lot to the table. Objectivity is one thing most buyers overlook. Good agents aren't emotionally involved. They don't care which home you buy as long as you're happy. They'll negotiate hard for you, tell you which houses are well priced and which are overpriced, help you wind your way through the home buying process.

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Eric Tyson: Thanks everyone for coming and all of your great questions!

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Ray Brown: Hi Everyone -- Lots of great questions. Sorry we couldn't answer all of them. Many thanks for joining us today.

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