Category Archives: Homeowners

Buy it! Sell it! Fix it! Furnish it! But don’t get burned in the process.

Quality Control Week #2: Recognizing Low Quality

Hey all! Sorry about the silence last week. Between business and the recent floods in my neighborhood it was absolutely frantic. As always, my clients come first.

So when we left off we were talking about the factors that make for a high quality home. Today we’re going to talk about how to spot symptoms of poor construction and quality when you’re in a showing. After all, a home with even medium quality construction will suffice for many of you, especially for renters who are only going to be living there for a short while. Poor construction and materials, however, can be dangerous and costly. You would not want to purchase a cheaply-made home without budgeting time and cash for major capital improvements to occur before you move in.

Sometimes it's easy to spot a cheap knockoff. Here's how to spot them when you're looking for real estate.

Sometimes it’s easy to spot a cheap knockoff. Here’s how to spot them when you’re looking for real estate.

Preparations

You’ll want to do a little research before you get started.

Learn the names of the current specialty appliance lines.

I recently worked with a buyer who rejected all homes with American appliances. If the kitchen had Maytag, GE, Whirlpool or Frigidaire appliances it was immediately off the list. He was only interested in imported labels like Bosch, LG and Samsung. In truth, every manufacturer has different lines of appliances with varying levels of quality and warranty. For example, GE currently has it’s basic line, as well as the Cafe, Profile and Monogram lines. Whirlpool Corporation owns the Amana, Maytag and Whirlpool labels, each label having multiple lines of appliances. There’s a big difference between a regular GE fridge and a GE Monogram fridge – a difference of several thousand dollars and several years of longevity.

The seller of a kitchen full of Amana (budget line) and no-name appliances will expect you to replace them when you move in. They’re basically placeholders. However, a seller who’s sunk a lot of money into top of the line gear will expect you to recognize their taste and pay more for it.

The same goes for IKEA. Yes, they’re known for cheap furniture, but some of their lines are well-respected for durability.

Take a trip to Home Depot

Home Depot is not known for their contractor-grade supplies. If you see a home that’s been outfitted with nothing but Home Depot fixtures, you can be pretty sure that the owner has been skimping on quality. It’s worth taking a look around to see what the cheaper stuff looks like, especially the lighting fixtures, bathroom fixtures and kitchen cabinets.

Oh, and if you watch a lot of HGTV, remember that their main purpose is to drive business to their advertising sponsors. They can make crappy cabinets look nice, but a TV show won’t show their durability over time.

Your Testing Kit

Appliances and cabinets are easy to test, but testing the structural quality of a home is the toughest thing to do. Here’s some things you should bring with you that won’t draw a lot of attention.

A scarf

You’ll want to make sure that door frames and walls are straight and not sloping or bowed. A slightly heavy winter scarf will do as well as a plumb-line to accomplish this test. Hold it up to the wall or door and make sure it stays flush all the way down.

A marble

Uneven floors can indicate foundation problems. You don’t need a level to tell you if the place is sitting pretty, though – a simple marble is enough. Lay it on the floor and see if it stays put.

A ballpoint pen

Any basic ballpoint of normal barrel size will do. That’s about the minimum size hole that a mouse could fit through. You want to make sure that baseboards and floorboards meet with no gaps larger than the tip of your pen. You’ll also want to make sure that any gaps around pipes are smaller than your pen. Pay particular attention to the areas under sinks and in the mechanical room.

You can also use your pen for listening tests. Tap it against things to get an idea of their interior composition. If you’re tapping against something solid and well-insulated, you shouldn’t hear anything at all. If you’re tapping something cheap or hollow, it will sound much louder. (Don’t forget to try it on the floors, too.)

Things to Look For

As many of my physician friends like to warn me, symptoms don’t always indicate the same disease. However, if you spot a large number of these problems in the same property it’s probably best that you move along.

Air

When it comes to the components that make up your home, you want as little air as possible. Window frames and doors are the main places where a seller, landlord or developer can get cheap on the materials by installing lots of air. Hollow-core doors and hollow-frame windows are simply not as durable. You want windows and doors to serve as insulators as well as security features, and air just isn’t as good at either as something solid.

A well-built window frame will be chambered and filled, not hollow. (Image from wikipedia.)

A well-built window frame will have many chambers, like this one, and be filled with insulation. (Image from wikipedia.)

Too much air in the walls – in other words, insufficient insulation – is also a problem. On a sunny day, head to the side of the house closest to the sun and hold your hand up to the inside of the walls. (Or on a snowy day, hold your hand up against the inside of any exterior wall.) If you feel too much of the outside temperature through the wall, you could be dealing with an insulation problem.

Stopgap measures and concealers

This one only works if the home is still occupied, but it’s definitely worth considering. Don’t get me wrong – I love duct tape and WD-40 as much as any other geek, but they’re still stopgap measures. A truly “fixed” item will not use either one. Pest control items scattered throughout the house are also a temporary fix that should really be remedied through more thorough means.

A lesser known fact is that the Chicago city inspector will fine a landlord who’s got visible damage to the sills and lintels that hold windows in place on the outside of a building. However, if the damaged sills and lintels are covered so the inspector can’t see them, they will escape the fine without solving the problem. Those sills and lintels are what keep water OUT and heat IN – you really want them to be intact, not just covered up to hide a deeper problem.

Systems with single Points of failure

When it comes to major fixtures in the home, you really don’t want any system to have a single point of failure. For example, the recent flood in Albany Park demonstrated the problem with sump pumps – many of them were hooked to the electrical grid without battery backup. During the flood, power was cut to many homes, rendering their sump pumps useless.

Of course, when your street looks like this even a sump pump can't help you much.

Of course, when your street looks like this even a sump pump can’t help you much. (Albany Park 2013, photo by me, unfortunately.)

Similarly, a furnace should have a manual cut off switch attached in case the thermostat fails, and outlets close to sources of water should have breakers built in.

Lack of Detail

While a simple aesthetic is certainly valid, complexity can in some cases be equated with quality. As we discussed last week, moving parts add to the usefulness and the expense of something like a kitchen cabinet. High levels of detail in trim indicate custom builds and considerably more care invested in the installation. Basic cabinets and plain walls will look frumpy by comparison. It isn’t just the visual impact that matters, either. While you certainly want your home to make your guests say “wow,” you also want it to last for a good, long time. Lack of detail can imply lack of quality – plain cabinets can be nice and sturdy, but you’ll definitely want to take a closer look at them than ones with lots of crown molding and heavy detail.

You should also pay attention to items that seem out of place. If you spot a contractor-grade ceiling fan in a home otherwise furnished with custom-grade decor, it may be a sign that the wiring behind the fan is faulty, resulting in multiple replacements over time.

Lastly, it’s worth considering how the moving parts, well, move. Do drawers and doors slam shut or do they quietly glide closed? Do faucets and drains open and shut fully and smoothly?

We Need to Go Deeper.

These tests are all quite superficial, and failing any one of them alone is not reason to walk away from a house. If you decide to put in an offer on a home, your inspector will be able to more thoroughly test everything so that you’re aware of major problems. Unless you’re planning on gutting the place, you definitely need to probe deeper than this before you get all the way to the closing table. However, basic awareness of quality and some quick on-the-go tests can save you from getting under contract on a clunker.

I’ll be back Friday (I promise!) with a special take on quality for folks who are looking for rentals. See you then.

Quality Control Week #1: What Affects Building Quality?

You probably know that there are different grades of quality when it comes to food. The USDA has three different grades for poultry, eight for red meat, and hundreds for fruits and vegetables. Similarly, building materials come in four different official grades: building, quality, custom and ultra custom. I would add “commercial grade” to those standard four. As the quality goes up, so does the cost; in some cases it increases exponentially. Homeowners must always walk a fine line between material quality and cost, but many are unaware of the differences and how they affect the bottom line.

Condo boards also face tough decisions when it comes to major capital improvement projects. Expensive materials will last longer – in fact, they may well outlast the current residents’ tenure in the community. Convincing condo residents to take on large special assessments for maintenance that they won’t be around to use is a difficult task. (more…)

The First 10 Things You Should Do After Closing

So you’re about to close on your first house. Congratulations! You’ve come a long way and it’s probably been a big hassle to get here. Saving money, filling out paperwork, viewing house after house… now that it’s over, what’s next?

There’s bound to be a lot of silliness that comes with getting your first house. You can dance around in your new empty living room and call up all your friends for a housewarming party, but there’s a few very important things you’ll want to take care of before you pop the cork on that champagne.

Make Copies of your Closing Documents. If you’re a first time buyer, the documents handed to you at closing are probably the most expensive pieces of paper that you have ever encountered in your life. The first stop you make after closing should be your local copy shop. While all the documents are still together and in order, take at least one copy of everything.

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Safety and the Illusion Thereof

One of the most common questions among renters and buyers moving to new areas is whether or not those areas are “safe.” In fact, the majority of moves, be it between apartments, condos or houses, are within a very short distance. Safety and comfort levels are definitely a factor in this particular statistic – people stay within the area that they know. However, with rising prices in both the rental and purchase housing markets, many Chicagoans are faced with moving to new sections of the city where safety is an unknown factor. As for the folks moving from outside the city, it’s tough enough to understand the hundreds of distinct neighborhoods within the city limits, let alone to compare crime statistics to a reasonable extent.

Antique maps show monsters and dragons beyond the edges of known lands. This is coincidentally also the worldview of people who are moving to a new neighborhood.

Antique maps show monsters and dragons beyond the edges of known lands. This is coincidentally also the worldview of people who are moving to a new neighborhood.

As much as I’d like to reach every renter and buyer and explain to them how to statistically analyze crime risk in a given neighborhood, I can’t do so. Even if I did, my own rational explanations would be massively overwhelmed by the media hype surrounding Chicago’s high crime rates. Those crimes may be consolidated in areas far removed from your neighborhoods of choice. They may have little to no bearing on your daily life. However, they are prominent in the minds of any home seeker, and it’s tough to combat emotional conviction with reason. What you must fight against is not the idea that your particular area is a bad neighborhood, but that the entire city is a homogeneous, crime-ridden hole.

If you’re a landlord or home seller, it’s therefore far more critical to be aware of how safe your neighborhood feels. You can rattle off all the stats in the world, but if a potential buyer or renter feels wrong in your immediate vicinity they will not be interested in making an offer on your property. This is even more critical if you’re expecting to get an above-average price for your listing, since those tend to be taken only by folks from out of town who don’t know any better. Curb appeal in Chicago is not just about the visual appeal of your yard and building. It is also majorly affected by the aura of safety or danger projected by your block.

Familiarity Breeds Contentment

I’ve been living in Chicago for 15 years now, but I grew up in the suburbs of Connecticut and spent several summers mucking about in small New England towns. The last town where I worked before moving here was so small, the residents got offended if they saw you locking your car doors. Now, this doesn’t mean that I was a wide-eyed hick when I moved out here in the late 90′s, but it did take a bit before I found my “city legs.”

Lincoln, NH. My last "home" before moving to Chicago.

Lincoln, NH. My last temporary “home” before moving to Chicago.

Before I moved out here the worst sort of crime I encountered was a prank phone call or two. Since then I’ve had my car windows smashed in three times. Now, for Chicago these crimes are pretty benign, but the first time it happened to me it was still pretty shocking. The third time? I’d gotten used to it. I rolled my eyes, called up my mechanic (Speed Dial 6) and hauled out the vacuum.

As owners in Chicago we become inured to the level of criminal activity that surrounds us. The longer we stay here, the more difficult it becomes to see our neighborhoods through the eyes of a newcomer. Unfortunately, if you’re trying to market your home to a new resident that is exactly what you have to do.

Zeroing Out the Scales

For me, getting into a buyer or renter’s head often involves a day trip to the suburbs. I encourage prospective home sellers and landlords to do the same before they put their property on the market. There is not enough difference between Chicago neighborhoods to truly serve as a “control” in our safety experiment. You need to get out of the city completely – maybe even out of the county – and go spend a day walking in the shoes of someone from the outside. I don’t just mean a quick jaunt to Evanston, either. Get out beyond the reach of the El and walk around a residential neighborhood that has absolutely nothing in common with the city. The best time to do it is a weekday afternoon.

Observe everything while you’re out there. Notice how far the houses sit back from the street. Pay attention to the people walking around, the cars and where they park, the separation of commercial and residential areas. Observe what happens when a school lets out for the day. Spend some time walking around after the shops close.

"Honey, look! They still have front-in parking here! That's so cute!"

“Honey, look! They still have front-in parking here! That’s so cute!”

Once you’ve zeroed out your mental scales for what clean, wholesome livin’ is all about, it’s time to head back into the city and reassess your home turf.

I Spy With My Little Eye…

Upon returning from the city outskirts, it should become far more apparent what factors contribute to and detract from the feeling of safety in your own neighborhood. We’ve probably all had our moments in the city of turning down the wrong block and instantly knowing that we were unwelcome. However, if you’ve paid attention to the details in the suburbs you should be more able to pinpoint exactly what contributes to an illusion of safety.

Here are a few that I wrote down on my last trip back in from the hinterlands:

  • Claustrophobia. The distance from the sidewalk to the buildings (the “setback”) gets very shallow in some parts of Chicago. This can lead to a feeling of claustrophobia that can be off-putting for newcomers. The areas of the city that tend to feel “safer” also have deeper front lawns. Do buildings in your area crowd in close to pedestrians?
  • Gates and Grates. There are entire blocks where black iron fences line the street in front of the homes, and shops are secured with accordion grating. It’s a common enough sight in Chicago that locals tend to ignore it. To a newcomer, it can imply security problems and fear of trespassers.
This is probably not the "gated community" your prospective buyers and tenants have in mind.

This is probably not the “gated community” your prospective buyers and tenants have in mind. (Photo by therodabides on Flickr.)

  • Sounds. Listen to what’s going on, both during the day and at night. Do you hear lots of shouting? Traffic? Car alarms? How about friendly sounds, like the ice cream truck or the bus announcing streets as it drives along? Is it deathly quiet?
  • Interactions. Do the people walking past seem comfortable with your presence? Do they make eye contact or hurry past? Are there people just sitting around in their yards doing nothing? How about the local kids – what do they do after school? Are there parents and caretakers around? What about pets? Do you see a lot of people with small companion animals? Are there lots of strays? Do you see a lot of dogs that could be mistaken for guard dogs or fighting dogs?
  • Cars. What types of cars park near your house? Are they in good condition? Are there lots of cabs? How about old beater scrap metal trucks? Is there visible broken glass in the street left behind from break-ins? Any cars with the Denver boot, or piles of parking tickets?
  • Cameras. It isn’t tough to figure out that security cameras cameras in Chicago are a sure sign of a troubled neighborhood. Even without the obvious flashing blue lights, security cameras are a tipoff to newcomers that something has probably occurred to merit their installation.
  • Alleys. Newcomers won’t check, but Chicago residents know that our streets are like mullets – business up front, party in the back. Take a walk down your local alleys. Are they clean? Well-lit? Are the garages in good condition or are they covered in graffiti? How about the porches – are they well-maintained, or decrepit and covered in junk? Are the dumpsters tidy, or overflowing?
  • The Commute. The neighborhood around your house extends as far as the closest El station. Many newcomers will test the safety vibe of an area by making the walk from the train to their new prospective home. Alone. After dark. You should definitely do the same and make sure there’s nothing untoward to scare off a potential buyer or renter. Are the sidewalks in good condition? Are there panhandlers or large groups of loiterers hanging out anywhere along the way? Are there large stretches of empty stores or vacant lots?

These are only a few factors that contribute to my personal sense of safety in any given section of Chicago. I’m sure there are many others. Safety is a very relative thing, and I’ve lived here for a while now, so even with trips to the suburbs to freshen up my outsider eyes I know I’ve grown pretty blasé about the things that make Chicago feel like a city.

Assemble your own list of criteria and test it out by visiting a new section of the city. Do you feel safe there? Why? If not, why not? Which of your criteria are within your control to fix? Which ones do you just have to accept? Would you adjust your asking price accordingly because of them?

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Exploring the Taboo against Prices on “For Sale” Signs

Once Upon a Time

Buyers agents as we know them in modern Illinois did not always exist. There was a time (and in some states it still exists) when agents were expected to represent both sides in home sales. “For Sale” signs with phone numbers were meant to give you access to the sellers’ agent, who would show you the property and serve as an intermediary in negotiating the purchase contract. In the days before the internet, this was one of the few ways you could find out price information, other than stopping by a real estate office or reading the Sunday paper.

If the price did not agree with you, the agent in question could take you out and show you other properties represented by their office. Before the advent of MLS systems, this was all they would show you. Back in those days when agents controlled access to all the listing information, the signs were a very important route for generating business. So, those real estate signs would never list prices. They would only list the name of the agency and a telephone number. Buyers would call in, have a chat, and get upsold. Brilliant.

This For Sale sign tells a great story, but still omits the price. What gives?

This For Sale sign tells a great story, but still omits the price. What gives? (Sign by Elle Zober of Greatfamilyhome.com. Worth a read.)

Of course, nowadays we have the internet. If you see a sign in front of a property you can look it up on a smartphone, or maybe scan a QR code, and you’ll get all the info you need. However, the internet also brings its problems. Scammers can co-opt listing addresses with fake ads, so that the information you get could be legit or fraudulent. Since many scammers make their money by posting copycat listings at too-good-to-be-true prices, one would think that the best safeguard would be to simply print the price of the listing right on the “for sale” sign, or perhaps in a little brochure in a box attached to the sign. Unfortunately, taboos exist against both of these options.

Once Upon Another Time (more…)

What’s Your Sign? (How to Tell if YOUR Housing Market Has Recovered)

If you’ve been following the housing market at all, you’ve probably seen articles about how the housing market is recovering, mortgage rates are slated to rise, and prices are climbing again. However, as the inimitable Dennis Rodkin recently pointed out in Chicago Magazine, the Chicago housing recovery is happening in fits and starts.

Oh really? (Cover © Chicago Magazine)

Oh really? (Cover © Chicago Magazine)

As we’ve discussed before, even if you live in Chicago, when it comes to housing you don’t live in Chicago. You live in a district of Chicago with its own boundaries, attractions and demographics. Those districts in turn contain many different types of housing, not all of which are truly comparable to your current home or the one you want to buy. Statistics that may be useful on a national or citywide scale are useless when it comes to determining the right time for you to buy or sell.

Today we’ll be looking at how you can determine what section of the market you should be watching and how to figure out whether or not the market has recovered.

What’s Your Market?

Much like your personality can theoretically be affected by the motions of the stars, planets and other cosmic bodies, there are also many factors that contribute to a home’s real estate horoscope.

Local Attractions & Neighborhood

The name recognition of a neighborhood will do a lot to dictate when your market recovers. Trendy neighborhoods that everyone recognizes will come back faster than the ones nobody knows about. Areas closer to the El trains and Metra stations will come back faster than those that require a car. Give some thought to which type of neighborhood you’re in and base your comparisons on similar areas. In other words, if you live in Hermosa you should not be using Wicker Park as a barometer.

Single family/Townhome/Condo

Condos and townhomes are popular among younger families, older folks and singles. There’s different types of condos to consider, too. Skyscraper towers with their $700+ assessments attract a far different population than small, self-managed walk-up conversions.

Single family homes generally attract an older, more stable population. But some will target ranches and split levels while others will want bungalows, Georgians or Victorians.

Uniqueness

Do you own/want a Prairie Style house in a neighborhood full of Colonials? Or a vintage walk-up on Sheridan Road? A 3 story loft built into the chimney of a Chinatown noodle factory? Or this contemporary beauty that’s nestled in the middle of pre WWII brick in Lakeview? The market for non-conforming properties is always the toughest to gauge in terms of speed and price. If you’re trying to sell or buy something that’s out of whack with its surroundings you need to be aware that the market statistics in your immediate surroundings only marginally apply to you. They’ll have an effect on price, but less impact on market time.

Beautiful story, but that would have been a very hard house to sell.

Beautiful story, but that would have been a very hard house to sell.

Age of Property

New constructions and rehabs fresh out of the developer’s hands are in a totally different market from owner-occupied homes. Buyers interested in one will have a very hard time shifting gears to consider the other.

Current buyers are used to seeing nothing but rehabs on the market, since it’s been dominated for years by conversions of distressed properties while homeowners waited out the downturn before listing. Meanwhile, sellers who have occupied their homes through the downturn may have pushed too-small homes to their limits, or run short on funds to maintain them. If you’re trying to sell your home of the past ten years, you cannot consider the performance of the prefab Green Tech home they just built down the street.

Nearby Schools

As poor as Chicago’s public school reputation may be, proximity to a good school (public or private) will still buoy up the surrounding neighborhood. NorthCenter and Edgebrook have both largely survived the downturn with minimal loss in value due to their strong public schools, while their neighbors Irving Park and Jefferson Park took a tumble without similar strength to anchor them.

Lender vs Cash

Who is likely to buy your building? Someone who needs a loan or someone with cash? At low prices and very high prices, cash buyers can cause a feeding frenzy. In the middle price ranges you find mostly buyers with mortgages, especially between about $150k and $450k. Cash dominant areas are going to seem to move more quickly because it takes less time for a cash deal to close.

Price

This should be a no-brainer, but you really do need to consider your budget/target sale price as part of determining your specific market. The markets under $100k and over $1m have been on the upswing for several months already. In the middle we’ve seen slower growth.

Politics

The politics of a neighborhood will affect how quickly your market recovers. Some folks don’t want to live in TIF districts. Others may shy away from high property taxes in a particular area, or only want areas with blue recycling carts. Given the long history of some members of the City Council some folks may have sworn to never again live in Alderman So-and-So’s ward. The city, county and state also court buyers into some neighborhoods with down payment assistance and lower loan interest rates.

Figuring out what portions of the market to watch is like finding your Chinese astrology symbol on a placemat.

Figuring out what portions of the market to watch is like finding your Chinese astrology symbol on a placemat.

What to look for

So you’ve determined that you should be watching for new construction single family homes in the Bell school district, or perhaps you’re looking for a 1960′s condo along Harlem in Montclare. Now that you know what types of homes you should be watching, what signs should you look for?

  1. Shortening market times. This means how long it takes a property to sell. You can find this information on many real estate sites. Just look at the date the listing was posted and when it went under contract. An average of 3 months is good. Anything shorter is great. Anything longer and you’ve still got a long way to go.
  2. More resales. As owners surface from underwater status, more of them will list their currently-occupied homes for sale. When you start seeing homes on the market while the owners are still living in them, that’s a very good sign.
  3. Fewer renters. In a rising market, the homes temporarily occupied by renters will return to the sales market. A good chunk of those renters will convert to buyers. Many of them were waiting for their credit to recover after short sales in the late 2000′s.
  4. Homes selling at list price or higher. Realtors aren’t going to turn around and start listing homes at higher prices. They will let buyers in multiple offer situations bid the prices up over list. For a long time now we’ve seen the average sale prices of homes at anywhere from 50-95% of their list prices. When that tips over 100%, your market is on its way back.
  5. Homes sitting under contract for 60+ days. A house is “under contract” if the seller has accepted an offer but the deal has not yet closed. For years now, contingencies in sales contracts have been plentiful but one specific type of contingency has been largely absent – the home sale contingency. This means that the purchase of a new home is contingent on the buyer selling their prior home. In the slow market, most places have been under contract for 30-45 days even when lenders are involved. If you start seeing homes under contract for 2-3 months, you can bet there’s a home sale contingency involved. This is a very good sign.
You cannot simply price your house higher than the market and hope to lead the market recovery.

You cannot simply price your house higher than the market and hope to lead the market recovery.

What does this mean for you?

If the market is starting to come back, then the price for your home of choice (or your current home) will be rising. However, sellers should not assume that they will immediately surface from being underwater, nor should buyers panic and think that prices are going to skyrocket out of reach. There are still a lot of foreclosed homes that the banks need to sell off, and the underwater homes may have a lot of appreciation to do before they can resurface. Even if the sections of the market jump 10% this year, remember that an average, sustainable appreciation rate is more like 3% per year.

Realtors may call you and try to convince you that now is the time to buy or sell, using national or citywide statistics. Before you jump on board with them, make sure they’re looking at the right “horoscope” for your particular home of choice.


 

Friday I’ll be back to discuss the taboo against listing prices on “for sale” signs, and how it might be leaving the door open for scammers. See you then!

Different Types of Insurance

I had initially planned to discuss mortgage insurance today, but in the process I’ve encountered some folks who are confused about the different types of insurance involved in the real estate business. So I’m going to do a quick overview of the major types of insurance involved in owning a home.

Homeowner’s Insurance

This is your standard insurance against damage to the home and land. It also may cover damage or loss to your personal belongings kept on site, and medical bills for people injured on your property.

Catastrophes happen a lot. Be prepared.

Catastrophes happen a lot. Be prepared.

If you’re buying a house with a mortgage you have to get a Homeowner’s Insurance policy, and your lender will escrow the premiums as part of your monthly payment, then pay your insurance company out of escrow. If you’re buying a condo, it’s the association that has to provide proof of a building-wide condo insurance policy.

Your lender will probably require you to name them as an “additional insured” party on your policy. This major reason behind this is that catastrophes involving your house may also kill you. If your lender is also on the policy, they will be able to approach the insurance company to recoup their losses without going through probate.

This would be the point where I say that cash buyers don’t need homeowner’s insurance. I’m going to phrase it slightly differently. Cash buyers are not legally obligated to buy homeowner’s insurance, but they still need it.

Condo and Renter’s Policies

Condo Owner’s Insurance and Renter’s Insurance only covers your belongings and the surface of your walls and floor. The policies usually cost far less. Until very recently, condo owners were not required by their lenders to have insurance policies. This has changed in recent years – if you’re buying a condo with a loan, your monthly premiums will be escrowed by your mortgage lender just as if you were buying a house. You will need to have your policy in place at closing.

More and more landlords are requiring their tenants to provide proof of renters insurance within a month of moving in. There’s no bank to escrow the payments for renters, though. They’ll have to pay the insurance company directly, just like with car insurance.

As with homeowner’s policies, landlords and condo lenders may require you to add them as additional insured parties. In the case of condos, a condo association may also want to be named on your policy.

Landlord Insurance

If you are buying property as an investment, you will need to get landlord’s insurance instead of homeowner’s insurance. If you change from living in a home to renting it year round, you will need to switch to a landlord’s policy. They cover a broader range of incidents, with bulked up liability coverage to protect you from tenants seeking the deepest pockets in the room. Some landlord policies will also be able to reimburse you for rent income that you lose due to property damage.

Unfortunately, these aren't the deep pockets your tenants are looking to raid. (Mmmm. empanadas...)

Unfortunately, these aren’t the deep pockets your tenants are looking to raid. (Mmmm. empanadas…)

Premiums for landlord policies can be escrowed like homeowner’s policies or paid directly to the insurance company.

Umbrella Insurance

Most owners of small homes and condos will not need an umbrella policy, but large condo developments and landlords will want to look into it. In the event of a massive incident that causes huge injuries, loss of life or large-scale damage beyond the limits of the standard policy, the umbrella policy will kick in to help with the rest of the repair costs. If you have a higher risk feature on your property like a pool, or if you use the land for crops or livestock, or if you’re planning on allowing renters to stay in your home, I recommend that you consider an umbrella policy.

Title Insurance

Title Insurance policies are available for homeowners and for their mortgage companies. The way American land rights work, there is no way to be absolutely certain that you are the only one with a claim to the title of the house you’re buying. Your lawyer will do their best to make sure that all previous owners, contractors, lenders and the government have given up any claim to the property, but the records only go back so far. In the event that someone else comes forward and claims to have a right to your house, your title insurance will protect you.

She may have won the lottery, but if the prior owner forgot to take her off the title, she could also still have claim to  YOUR house.

She may have won the lottery, but if the prior owner forgot to take her off the title, she could also still have claim to YOUR house.

In Illinois, title insurance is issued by the company where you have your closing. That’s why many closings happen in such odd locations – they’re held at the offices of title insurance companies. Your closing is basically the time when the title insurance policy is issued. You pay for it in one lump sum as part of your closing costs.

Mortgage Insurance

If you take out a loan for more than 80% of the cost of a home, your lender will think that you don’t have enough skin in the game. It would be too easy for you to walk away from your loan with so little invested. The risk of default on these kinds of loans is much higher. To cover some of the cost of foreclosure, lenders will require that you have mortgage insurance on your loan.

Mortgage insurance for conventional loans is called “PMI” – private mortgage insurance. These policies are covered by third party companies that specialize in this particular type of insurance. For FHA loans, mortgage insurance is called “MIP” – mortgage insurance premiums. They’re covered by Ginnie Mae.

Much like the Judean People's Front (now known as the People's Front of Judea) from Monty Python's "Life of Brian," PMI and MIP are the same thing with slightly rearranged acronyms.

Much like the Judean People’s Front (now known as the People’s Front of Judea) from Monty Python’s “Life of Brian,” PMI and MIP are the same thing with slightly rearranged acronyms.

PMI rates vary depending on how much or little you put down. They are usually less than 1% of your total loan amount per year. Once you have paid down your loan to the point where you have at least 20% equity, you can contact your bank and have them discontinue PMI. However, if you don’t request it, they won’t stop charging you for it.

MIP rates are the same for any loan regardless of down payment. If you took out an FHA loan prior to this year, your rate was 1.25% of your total loan amount per year or less, and you will be able to terminate those premium payments when you reach 22% equity. However, rates are going up for people who take out FHA loans after the end of March 2013. If you wait until the 2nd half of 2013 to take out an FHA loan you will also be required to make MIP payments for the life of the loan regardless of your equity.

MIP and PMI premiums are added to your monthly mortgage payment that you send to the bank. They count towards the maximum amount you can pay in a month, which means they can really put a crimp in your buying power. Mortgage insurance is often the most expensive policy a buyer can have. Homeowner’s insurance in Chicago is usually less than $80 per month. Condo insurance is often less than $30. But PMI on a $300k loan could be as high as $225 per month, and MIP on that same $300k loan will be $437 starting in April.


Monday we’ll be talking about various signs you should look for to determine if the market has recovered in your neighborhood. See you then!

The Cost of Changing Your Mind

What is Earnest Money?

Earnest money is the price you pay to take a property off the market. If you’re a renter, it’s customary to offer one month’s rent as earnest money. If you’re buying a home in Chicago, the amount varies, but can be as high as 10% of the purchase price for a new construction home.

In the event that the deal goes through, it is applied to your purchase price. For home buyers, this means that the earnest money may well be more than your down payment. You’ll get it back at closing.

"Give us the earnest money or you'll never see another open house!"

“Give us the earnest money or you’ll never see another open house!”

If the deal falls through, you lose the earnest money. This means that you’d better be really sure that you want to commit to the place before you put that money down. (In fact, that’s why buyers customarily request a chance for an attorney to review their offer before they put down all of their earnest money.)

Basically, it’s a ransom that you pay while the seller or landlord holds hostage your ability to shop around for other properties. By taking a property off the market, they’re in turn forfeiting the right to potential better offers that might come along while they wait for your deal to close. (more…)

Fannie, Freddie and Ginnie

First time buyers will probably get confused when people start talking about Fannie Mae, Freddie Mac and Ginnie Mae. Who the heck are these people, and why do they they have a say in what house you can buy? Today’s article is a quick (and vastly oversimplified) overview of who they are and why they exist.

They aren't actually people. You cannot invite them to parties or weddings.

They aren’t actually people. You cannot invite them to parties or weddings.

The story begins back in 1938, at the height of the Great Depression. FDR and his team were trying to come up with ways to encourage the money to start moving around again. They wanted to get people to buy houses, but they had several problems to solve along the way.

Problem: Government-Mandated Limits on Bank Lending

When people don’t have any cash, they need to borrow a lot of money to buy a house. Money doesn’t grow on trees, though, not even trees in the backs of banks. The amount of money a bank can lend is capped at a number that’s in ratio to the amount of money people have deposited there. The exact ratio varies depending on the economy, but there is always a limit. They cannot lend out infinite amounts of money. Back in the 1930′s, with everybody short on funds, the banks were also out of money to lend. Nothing was coming in, so nothing could go out. (more…)

Buying in 2013? Here’s what to expect.

I don’t really spend much time talking about the home buying market. There’s plenty of folks who write well about that side of the business. I feel that renters and landlords are somewhat under-served, so I focus on them. However, the changes occurring in the Chicago residential market are going to affect everyone this year. It’s time that we have a little talk about what to expect if you are moving from renting to buying.

You’ve probably heard a lot over the past several years about the depressed housing market. If you’re renting, you may have thought you still had some time to take advantage of the lowest home prices and mortgage rates seen in decades. Guys, you’re running out of time. Prices are climbing, inventory is short, and rates are starting to move up again. While the prices aren’t likely to spike back up to 2006 levels any time soon, the bottom of the market has passed you by. (more…)

Dear Piggy: Does anybody shovel around here?

So did any of you have this running through your head last week? I know I did.

Yes indeed, I’m a child of the 90′s and we had snow last week here in Chicago. Quite a bit of it. And it prompted one of my regular readers to send in a question:

Dear Piggy,

How about an entry on how you can be fined if you don’t clear snow from your sidewalks, including tenants (and that you can call 311 if people AREN’T clearing)?

So that means we’re talking about shoveling today.

Who owns the sidewalk? (more…)

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