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The complete guide to trading up your home.

WHEN MICHAEL CUYJET accepted a new position as an associate professor at the University of Louisville, he and his wife, Carol, faced the prospect of moving their three daughters from Maryland to Kentucky. But they're old hands at the home buying and selling game. Career advances had taken them from the Midwest to the East Coast, where they had bought and sold four homes in their 16-year marriage.

But home values had dipped in the Washington, D.C., suburbs where they lived, and the Cuyjets knew it would take every bit of their home buying and selling acumen to achieve their goal: They wanted to leave Maryland with their equity intact and find a home in Louisville that was affordable and comfortable, and that would let them take advantage of any market rise in their new city.

Ten weeks from the day the Cuyjets started, they met their goal and closed on a new five-bedroom home in Louisville. "It worked out as well as we had hoped," says Michael Cuyjet, 46, who approached the entire process in a carefully thoughtout, methodical way.

It could certainly be worth your while to buy a home. Even as interest rates creep up, you can still gain from increased purchasing power, according to the National Association of Realtors. The NAR's affordability index, which measures the average wage earner's buying power, shows that home buyers are finding it easier to purchase homes than when the market was in the doldrums.

Consider this: In 1991, the median price of a home was $100,300, and 30-year, fixed-rate mortgages stood at 9.3%. Back then, a family needed an annual income of $31,825 to qualify for a loan and, on average, spent $663 a month on a mortgage. By 1993, the inflation-adjusted median price of a home had risen to $106,800, but houses were more affordable because of the substantial drop in interest rates.

As a result, during 1993, interest rates on fixed-rate loans were averaging 7.16%, and it took only $27,727 in annual income to qualify for a conventional mortgage. The NAR's index showed that buyers were paying $578 a month on mortgages for that $106,800 home.

Nonetheless, the housing market's roller-coaster ride in recent years has made buying and selling a slippery slope for even the most sophisticated owners. To help you navigate your way along the ridge, here are tips from real estate professionals and consumers on how to get the most for your home buying dollar in today's uncertain climate.


While houses may be more affordable now, mortgage options are a lot more complex, which means it may be smart to find a banker before you find a real estate broker. The recent jump in interest rates has caused lenders to offer a plethora of mortgage options in order to keep customers coming in the door. As a result, mortgage packages advertised in your daily paper one week may be obsolete by the next. You'll want to spend time comparing the real cost of those come-ons early in the process.

Careful shopping is more important than ever, even if you excelled at the game the last time around. You'll be choosing from among a dizzying array of mortgage options, each with its own advantages and disadvantages, depending on your financial and personal circumstances.

Sherrian E. Johnson, a loan officer with CFC Mortgage Corp. in Colton, Calif., advises buyers to focus on two factors when choosing a home loan: how long you expect to own your new home and whether your income is likely to increase, decrease or remain the same during the time you own the house.

A variable-rate loan makes more sense for some people. "Buyers who don't expect to be in their homes for more than three or four years would probably sell before having to risk [a] substantial rise in rates," says Johnson. On the other hand, if you expect to have an added expense, like college tuition or an anticipated drop in income from a pending retirement, you'll need the security of a fixed-rate loan.

Be aware that some lenders are currently offering very low teaser rates on variable-rate loans. These discounts--often as low as 2% below the real market rate for the length of the loan--can be a valuable way for someone with high upfront costs to get into a home. But as enticing as these teasers may be, any buyer who takes on these introductory rates must be prepared for the impact when the real rate kicks in one to five years later.

If you go with an adjustable, of course, remember to pay attention to the mortgage cap. Currently, the standard ceiling is no more than 2% on any rate adjustment and no more than 6% for the life of the loan. Be sure you can handle it if the loan does, in fact, move up to those caps.

Another advantage to looking for the right loan before shopping for your home is that it can give you an idea of how much house you can afford to buy. Lenders offer to pre-qualify buyers, which has some distinct advantages. Many lenders will analyze your income and fixed expenses, such as car loans or credit card payments, in order to determine early on the maximum sum they'd be willing to lend you under various mortgage terms. They'll also let you know what percentage of the selling price you'll need to fund, assuming the assessed value of the house matches the contract price.

"Pre-qualifying for a loan can also help a buyer with bargaining position," says Mike Teer, a realtor who owns his own brokering business, Teer One Properties, in Riverside, Calif. "The buyer who has qualified for a mortgage has the upper hand if there are competitive bids [on a house] and the seller wants a fast, smooth transaction."

The pre-qualification option is becoming more common among lenders, but their policies vary. Some will make loan commitments to qualified buyers before you have a sales contract; others require that you have a signed contract in hand before the formal application process starts. In either case, pre-qualification is a good idea, so long as you don't risk losing much money if market conditions change and you need to switch lenders. Pre-qualifying is not only a guide to your optimal price range, but it's also a red flag to possible problems, like a poor credit rating, that could spoil a deal down the road.

Increasingly, home buyers are turning to mortgage brokers to do their loan shopping for them. Working with this type often know about loans that aren't advertised, and they're often in a position to hurry along a loan application if you're close to a deadline.

As with all professional financial help, be sure to check the credentials of a broker you haven't used before. Some states have a certification process for these real estate professionals, so check your state's policies. Obviously, you need to be wary of a broker who asks for upfront money beyond a token application fee. Most fees are generally paid at or just before the closing. Another thing you'll want to know is the number of lenders your mortgage broker deals with, and who they are.

Be aware that there will be an extra fee involved in a mortgage arranged through a broker, usually 1% of the loan value. In many cases, the fee will be paid by the lender, but that is definitely something you'll want to clarify.


To help get the best value for your money you need to arrange for an engineer's inspection of any house you're actively considering. This past year has been tough on property throughout the United States. Between the tornados that struck the East and Southeast, the floods that ravaged the Midwest and the fires, mud slides and earthquakes in California, few regions escaped the wrath of Mother Nature. So a careful check for structural problems--deteriorating roofs, rotted floors, cracks in foundations--is important especially right now. A licensed inspector will check the house's structure and determine if plumbing, heating and electrical systems are in good shape.

Finding a competent inspector who can do a thorough job for you is so essential that you'll probably want to line one up before you go house hunting. Of course, you can always take the recommendation of your real estate broker, but be aware that brokers often represent the home seller's interests first and may not be the most reliable source for referrals in this rather sensitive area.

If possible, an inspection should be done before you sign a sales contract. In fact, experienced home buyers will tell you that having an inspection before making a bid is a wise idea. This way, if you find problems that represent big dollars in repairs, you can use the engineer's report to negotiate the sales price and any work the seller must do prior to closing. If you can't wait for an engineer's report to bid on a house, be sure your bid is contingent on the house passing inspection.


It's natural for buyers to assume that brokers are their advocates. A closeness and trust often develops between brokers and buyers as you tour neighborhoods and trade comments about a seller's housekeeping habits or decorating taste. But while a more consumer-oriented approach is developing in the industry, as a buyer you need to remember that in most transactions the broker works for the seller--not you.

In the 1980s, many states, including California and New York, responded to consumer complaints by adopting rules clarifying the relationship between brokers and buyers and sellers. In some states a broker has to let you know which party, the buyer or the seller, is his or her client. Also, real estate offices that specialize in serving as the buyer's broker are increasing in number. If you decide to use a buyer's broker, you--not the seller--will pay a commission or a flat fee for the service. Whoever is showing you homes, be sure to understand who pays for what services.

Even with these safeguards, buyers and sellers must both do their homework. Think of the broker as a guide in the home buying process. Don't let the broker take the lead and make decisions for you. For example, if you like a particular house, try to learn as much about the seller's situation as you can. Why is the house for sale? Is the family being transferred; is there a divorce or any other circumstance that could make the seller flexible on price for a fast sale? If the sellers are empty nesters, they may hold firm to their price because they might not be in a hurry to sell. How long has the house been on the market; has the asking price dropped and, if so, how many times?

Obviously, when making a bid, you shouldn't pay the asking price. "The asking price is a starting point," says broker Mike Teer. Don't be afraid to go well below the asking price; in the current market, 10% to 20% is a good starting point. And never open with what you're really willing to pay.

Even if you can afford a certain price, be careful not to overpay. It could make it difficult to sell when the time comes. The key to good bargaining is to get to really know the local real estate market by shopping around as much as possible.

The Cuyjets' strategy is a good illustration of the best way to use a broker, particularly when you're buying a home long-distance. When the university offered the couple a trip to Louisville to look at homes, the Cuyjets took the time to look over school districts instead. Once they had selected the schools that they wanted their daughters to attend, they began looking for homes in the area.

"On that first trip we found three brokers, but we didn't look at homes," says Cuyjet. Instead, after the couple returned home to Maryland, they had these brokers send them information, including the weekly multiple listings, with homes that fit their profile: five bedrooms, two bathrooms and a two-car garage. Working with these brokers long-distance, the Cuyjets selected one whose taste and instinct they trusted--the broker who was able to give them the most selections that fit their specifications and price range. By the time the Cuyjets were ready to make another trip to shop for homes, they had a good feel for the Louisville market.

To make sure that their daughters were involved in the selection process--they did not make the trips to Louisville--the Cuyjets took video tapes of their top choices. The tapes helped them refresh their memories and, more important, gave their daughters a say in the decision. "Our daughters helped us choose the house, and they picked their bedrooms in the one we bought," explains Carol Cuyjet. "It made the relocation much easier for them."

For those who are buying and selling, it may be difficult to time your transactions so that you're not stuck with two homes. But with careful planning, it is not impossible.

When Julie and Anthony Tenette decided to sell their home last winter, with plans of trading up to a larger place, they found that the house they had bought six years earlier had not increased in value. An appraisal showed that their Riverside, Calif., home would probably bring only about $125,000--vs. $139,000 that they had originally paid.

"When we talked to a broker about putting it on the market, she said we needed to do things like repair the cracked asphalt in the driveway," recalls Julie Tenette, a 33-year-old travel associate. "If we had taken all of her suggestions, we would have spent a couple of thousand dollars just to get the house ready to sell."

Worse yet, there were other homes a lot like the Tenettes' that were on sale, including a house on the same block that was being sold through foreclosure. The couple--he's a 35-year-old pharmacy supervisor for Keiser--decided on a rather nontraditional option. For $5,000, they turned their home over to a professional investor who took over the burden of reselling the property at a market price.

This left the Tenettes free to take advantage of a fairly large price cut on a new home in a subdivision where the builder had only "a few homes left and wanted to close out the project," explains Julie Tenette. "If we had waited for our house to sell, I'm sure we would have lost out on the new house." This way, even though the Tenettes made no money on the sale of their former home, they were able to put "our equity into a much larger, and more valuable, home."

Clearly, after the go-go market of the past decade, the 1990s require a different sort of nerve. If you want a fast sale and can afford it, you can follow the Tenettes' example and look at the value of what you're getting, rather than the value of what you're selling. There's nothing wrong with trying to recover your investment or make a profit. But if the market has dropped since you bought, overpricing or holding out for a better deal could be a mistake.

One danger is that knowledgeable buyers will avoid your listing. Also, brokers may take your listing but give your house short shrift if they think your price makes showing your home a waste of time.

Another problem with pricing too high is that your buyer may not be able to get a mortgage. Even when the buyer and seller agree on a price, the lender often won't make a loan if the appraisal comes in lower than the asking price.

Jackie Cooper, a Houston real estate broker, says the biggest stumbling block to most sellers who want to trade up, but who have found that their homes are worth less than what they paid, is being realistic about the market.

"Sellers often have a blind spot when it comes to their homes," says Cooper. "But there are other things to consider besides the price when you are selling to buy again." Even selling at a loss might not be the disaster it first appears to be. "Interest rates have gone down," she points out, "and for some sellers, the home they may want to buy probably has lost value, too." The result: You could end up with more house for your money.
COPYRIGHT 1994 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:tips on bidding, structure evaluation and using mortgage brokers; includes information on using real estate brokers
Author:Kennedy, Shawn
Publication:Black Enterprise
Date:Jul 1, 1994
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