Tag Archives: budgets

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…)

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…)

The Average Chicago Condominium

We’ve done average apartments. How about average condos?

Second verse, same as the first.

A few weeks ago I did a little overview of what the average Chicago apartment looked like. It was pretty popular. But my office is on me for material that they can promote from their new social media campaign, and they’re not so pleased with all the rentals that I do. (They are a residential sales brokerage, after all. They want me selling stuff, not renting it. Hint hint.) So, we’re going to do the same thing with condos today as I did with rentals before – find the profile of the average condo and then pick out a few from the recent sales bin to show you what they look like.

What’s the point? Well, if these are all hovering around the median price point for recent sales, then you can reasonably expect to find something comparable at or around this price in the immediate future somewhere in Chicago. Prices have started to tick upward, especially at the lower end of the spectrum, so we may not see this as the average for much longer. More importantly, this serves as a historical snapshot of what the average Chicago home buyer could afford to purchase in 2012. (more…)

The problems with Rent to Own

Please, pick one or the other.

Oh, rent-to-own. You sound so attractive, but you’re so misconstrued. I get many calls from renters, often those with weak credit or low-paying jobs, who have seen the term “rent-to-own” tossed around. Seeing that I’m a Realtor who works in rentals, they figure I must do a ton of these. They are usually surprised when I immediately launch into a full-on campaign to talk them out of the idea. It’s just a terrible arrangement for both the landlord and the tenant unless you are so bad at saving money that you simply cannot put together a down payment in any other way.

Fluctuations Hurt Everyone.

First of all, prices change over time. This means that an agreement like this where the purchase price is set at the beginning of a 3-5 year lease is going to wind up screwing somebody over. If sale prices go up, the landlord gets hurt by being locked into the old low price. If prices go down, the tenant gets cheated out of some cash and may not be able to close the deal if the property doesn’t meet or exceed the value of their new mortgage once the time comes to hand over the title.

Give a Yard, Get an Inch

Secondly there’s the typical structure of a rent to own agreement. The chart below, while simplified, illustrates the difference between the common perception of “rent to own” on a $1000 apartment, and the reality of the situation.

Based on $1000 rent rate.

Not quite what you had in mind, was it?

There’s a lot of restrictions on a rent-to-own. You have to take into consideration the landlord, the mortgage lender, and your own needs. If someone has a property on the market it means they want to get rid of it. They don’t want to hang around for 3 to 5 years waiting for you to buy it. They want it gone now. By pulling it off the market for you for 3-5 years even in an appreciating market they may lose out on a buyer who does want to buy it from them now. They will want to charge you for keeping the property out of the sales market. This is called the “option amount” and it gets tacked on to the regular fair market rent. So you’re now paying $1200 for that apartment. $1000 in rent and $200 for the option.

Meanwhile, once your rent-to-own time period comes to an end and you’re looking for a loan to complete the purchase, a lender will look at the market rents for that building. Only the amount in excess of the fair market rent will be considered as eligible to go towards the down payment. If you’re lucky, they might assess the fair market rent at $800, meaning that you’ve got $400 left that the bank will let you allocate.

Of course, your landlord may also have a say in the down payment allocation matter, too. After all, they’ll have to hold on to the amount earmarked for down payment until the actual sale occurs several years down the road. They can’t use it for today’s expenses. Many will let you contribute only 20-25% of your monthly rent payment towards a down payment. The rest needs to go towards operating costs.

Get A Yard, Feel the Pinch

There’s also the issue of maintenance. Many landlords get sold on the idea of a rent-to-own deal because they think a prospective buyer will take better care of their property than your run of the mill tenant. Some landlords take this even further and fob a lot more of the maintenance over to their renters. Suddenly items like landscaping, snow shoveling and basic repairs are dropped in your lap. I’ve seen some landlords work out something very similar to a deductible, which their tenant must contribute towards repairs before the landlord kicks in to assist with the cost.

Rent-to-own agreements are generally outside of the province of the Chicago Landlord Tenant Ordinance. You’re pretty much on your own, relying on whatever is included in your lease & rent-to-own contract. Needless to say, you want to get attorneys involved very early on in this process.

Collateral Damage

A security deposit equivalent to about one month’s rent is expected in apartment rentals. While some larger landlords are moving away from the deposit, you’ll still have to put up some sort of collateral against damage to the unit before you move in. In most cases of normal rentals, the deposit is the maximum you would forfeit upon moving out, unless you leave behind an enormous rent balance or massive damage better served by an insurance claim.

In the case of a rent-to-own, the option amount is generally not refundable. It is definitely held in escrow so that the landlord doesn’t spend it before the title transfer occurs, but if you don’t exercise your option to purchase at the end of the lease period the landlord will keep it. This means that if you choose to walk away from a rent-to-own without buying, your forfeited collateral could be far worse. Check out the difference in the chart below.

Based on $1000 deposit, $200 option add on, 3 year lease prior to purchase.

There are different tiers of rent-to-own agreements that may have far more stringent penalties. In a Lease Option agreement, the option is at risk as shown in the chart above. In a Lease Purchase agreement, the landlord might also be able to force you by lawsuit to buy the property when the rental period is over. So, unless you’re absolutely serious that you want to live in this home for at least 8 years (3-5 as a renter plus 3-5 as an owner) you should only enter this kind of agreement with extreme caution and the advice of an attorney and agent who have done it successfully before.

Cultural Predation

The rental-purchase market for goods other than housing is pretty darned pervasive among certain subsets of the population. The FTC did a survey in the late 1990s and reported that the majority of customers using rent-to-own as a purchasing option were young, poor, and black. Most do not have more than a high school education.[1]

Those who are culturally accepting of rental-purchase as a viable route to ownership of furniture, electronics, etc. will be far more likely to enter into these financially unsound agreements when it comes to housing as well. I don’t know about you guys, but anytime I see a purchasing structure targeting the poor and inexperienced members of the population I get really suspicious. A dishonest property owner stands to gain a lot more in retained collateral from a buyer who is very eager to purchase but unlikely to be able to close the deal.

The FTC had to nose in on the affairs of rent-to-own businesses even when it was on the smaller scale of renting furniture. That’s with large, obvious companies that rely on large numbers of consumers paying small amounts. A home seller, on the other hand, can fly under the FTC’s radar and needs the approval of only one person – you – in order to make quite a bit more than you’d spend on a couch. Caution is needed.

Something Closer

When most people picture a rent-to-own scenario, if it’s anything like the “Imaginary” section of the bar chart I drew above, they’re may be thinking of seller financing. In the case of seller financing, the title changes hands up front, but instead of going to an outside bank to obtain a loan, the seller allows the buyer to pay off the purchase in installments with interest. Here’s a table that explains the differences.

Rent to OwnSeller Financing
Title transfer occurs at end of lease period.Title transfer occurs up front, at least in part.
Buyer must obtain an outside loan.Seller is the originator of the loan.
Property must appraise at or above the amount of the loan.No appraisal required.
Purchase or loss of option money required at end of rental period.After 3-7 years, balloon payment of loan balance required.
Only the amount in excess of fair market rent goes towards the purchase price.Entire payment, less interest, goes towards purchase price.
Standard down payment allowances apply, as you're applying for a regular loan.Seller will very likely require 20% down payment up front.
You can build up your credit to become loan-worthy while living in the unit, if the landlord is amenable.You'll probably need excellent credit right off the bat to convince the seller that you'll honor the debt.

Obviously neither is a magic bullet for a buyer with weak credit and no savings. One commits you to a very long term arrangement at a pricey premium. The other requires you to be ready to buy up front, but allows you to wiggle around low appraisal amounts and conforming loan maximums.

Preferred Method: Self Control

There will always be homes on the market. In fact, if you’re planning on renting-to-own, chances are good that the same property you want to rent-to-own now may well come back on the market in 5-7 years anyhow. Who’s to say that it will still suit your needs? Come to think of it, considering that only a small subset of owners are willing to do lease-purchase or lease-option agreements anyhow, who’s to say that any of their properties will suit your needs in the first place?

If you aren’t ready to buy now, paying a costly premium to rent-to-own will not help matters. You need to be both financially and mentally ready to take on the responsibilities of homeownership. Better to set up a mandatory monthly transfer to an outside savings account to build up your down payment, find a cheaper apartment and focus on rebuilding your credit score on your own. You’ll be far more confident in yourself and in a stronger negotiating position after 3-5 years if you are able to demonstrate the necessary self-control to do it this way. You’ll have learned the money-saving skills necessary to keep your home for a good, long time.

  1. [1]James M. Lacko, Signe-Mary McKernan, and Manoj Hastak, Survey of Rent-to-Own Customers, January 2000, FTC.gov

The Average Chicago Apartment

Remember these two-flats from last week? Time to pay them another visit. We’re hunting for the average Chicago apartment.

When new tenants are moving to Chicago they’re often shocked to discover that most of the city does not consist of skyscrapers and that most of the apartment buildings are actually approaching a century old. Yes, we have apartments that you can afford, but they may not mesh with what you have in mind when you think of a Chicago apartment. Looking at the housing stats from City-data.com one can paint a picture of the most common apartment in the city. It has two bedrooms, in a building between two and six units, and was constructed prior to 1939.

The HUD guideline for an affordable apartment is one that costs no more than 30% of your income. (According to a 2009 report from the Metropolitan Tenants Organization, 53% of Chicago residents spend more than that, but oh well. We try our best.)

According to City-Data.com, the median income for a Chicago renter in 2009 was $46,773. 30% of that works out to about $1170 per month to spend on rent.

Today I’ve put all of this together and went in search of vintage 2 bedroom apartments currently on the market for $1150 to $1200 per month in smaller buildings. I didn’t find many – only 12 came up and only 6 of those had photos worth sharing with you. All but one of the listings are at least five miles out of downtown, and you’ll notice a distinct absence of name brand neighborhoods in the lot. But I’ve assembled photo galleries of those six apartments after the jump to give you an idea of what the average Chicago apartment looks like, and where it can be found.

(Oh, and by the way, if you want to rent any of these I can show them to you, provided they’re still on the market by the time you find this article. Shoot me an email and we’ll figure something out.)

(more…)

The StrawStickStone Mortgage Scenario Analysis Calculator

This is my new favorite entry EVER.

Let's Play!

I've spent the past week explaining why it's so important to do serious comparison shopping and saving up before you apply for a loan. On Monday we investigated how you could save up to 35% over the life of your loan by working with discount points and down payments. On Wednesday I used a salad dressing analogy to explain APR and how it affects your bottom line. For today I've gone back to my nerdy coding roots and have made a pretty hefty calculator so you can play with the numbers yourself.

(more…)

Balsamic Vinaigrette, Buttermilk Ranch & Your Mortgage.

So I was at McDonald’s today. (Bring it on, indignant foodie brigade! You’ll pry my french fries out of my cold, greasy, dead hands.) I was confronted at the palais de graisses saturées with the “Under 400 calorie” menu that they’ve rolled out to go with the 2012 London Olympics. A copy is below in case you’ve not sullied yourself with such things lately.

The McDonald’s “Under 400 Calorie” menu. This will make sense in a moment. Click to super-size me.

It was the salads that caught my eye. Maybe not for dinner, but for the purposes of explaining this article. Because salads – or rather, salad dressings – make a wonderful analogy for explaining APR and interest rates.

Salads are Kind of Complicated.

So, you get your basic side salad and it’s 20 calories. You nibble, you gain very little weight, you feel full, end of story. But a salad of just iceberg lettuce, cucumber slices and a couple of cherry tomatoes won’t get you featured in Time Out Magazine. People start getting creative. The good folks over at “Cooking Light” explain in a nifty slideshow how a restaurant salad can quickly rack up over 1500 calories, not to mention the fat & sodium involved. The more stuff you put on your salad, the more time you’ll have to spend at the gym later to work it off. But it’s so easy when you’re ordering the salad to say, “OK, I can have these croutons now, it’s no big deal.”

We’ve been doing this for so long that it’s become a cliché – “a minute on the lips, a lifetime on the hips.”

If you’re working with a weight loss deadline – say, swimsuit season or trying to squeeze into a fancy halloween costume – suddenly the amount of exercise you’ll have to do to neutralize the ranch dressing gets compressed into a far shorter time period. 500 extra calories is a lot harder to work off in a week than slowly over a few months. You start giving some thought to your order. Hold off on the croutons, swap out the buttermilk ranch dressing for a low-cal balsamic vinaigrette.

From Our Lettuce to Your Cabbage.

So when you go to buy money from a bank or a mortgage broker, you’re faced with a situation very similar to ordering a salad. Every lender will offer you a different base interest rate – that’s like every restaurant offering you a different combination of vegetables on a bare, undressed salad. Some banks will be small local ones, others big national ones, just like some salads are organic & locally grown while others are covered in pesticide & imported from Mexico. It’s your choice as to which way you want to go.

Beyond the basic lettuce, though, there’s all of the extras consider. When dealing with salad, you’re talking about dressings, croutons, and maybe those tasty little sesame sticks. In the case of the other green stuff – borrowed money – it’s all of the lender’s assorted fees & commissions. And in the lending world, all of that stuff found in the difference between the interest rate and the APR.

Lenders charge to give you a loan. They are selling money. They have to turn a profit. They may say it’s a “no-fee” loan up front to get you talking to them, but the fees may actually be wrapped up in your monthly payments instead. The government has recently started requiring restaurants to disclose the calorie content of their dishes. Similarly, the Truth in Lending act requires lenders to disclose any hidden fees that you will be required to pay, either at closing or folded in.

I’ll give you an example.

This image brought to you by lots of pounding on Excel very late at night.

That chart above explains it nicely. But there’s a problem. See, the APR they disclose to you is based on the thought that you’ll be in the place for the entire life of the loan. Most people are not planning on staying in their home for 30 years even though they get a 30 year mortgage. So while it’s all well and good that the banks are disclosing their APRs to us, it doesn’t really matter if you’re planning on taking off much earlier.

Shorter-Term Loans are Kinda Complicated, Too.

Remember when I started talking about dieting on a deadline up above? That’s coming back now. Just like that 1500 calorie salad is a lot more of a challenge if you’re trying to drop 20 pounds in a short time, the actual APR that you would be taking on will be much higher than the quoted amount of you’re planning on paying off the loan in, say, 7 years.

You’re still borrowing $50k plus $2k in finance charges. You’re still going to have to work off those extra calories – the finance fee salad dressing, if you will – but you’ll have less time to do it. Remember, you still have a loan for $50,000 at 3% interest. But with the finance fees included you’re suddenly paying off the balance plus the fees in a shorter amount of time. $2000 spread out over 84 months is a lot tougher than $2000 over 360 months.

Let’s take a look at what the real APR would be for someone who leaves after 7 years. I’ve done another handy chart below.

If you’re planning on staying for a short time, the quoted APR that the bank has to give you will not mean a whole lot. This chart explains why.

In Monday’s article, the savings from paying discount points and a higher down payment at closing increased with a longer stay in the property, from 9% after 5 years to 35% over the life of the loan. This is also true for APR. The longer you stay, more fully distributed those fees will become, and the closer your real-life APR will get to the numbers quoted by your lender. It will take you less time to get to your break-even point.

Wrapping it Up to Go.

It’s best if you can find a mortgage broker with no difference between the actual interest rate and the APR. However, if the best interest rates you get are quoted by lenders that are going to charge you fees, make sure you calculate your own actual APR or talk with your Realtor, accountant or a neutral and mathematically gifted individual to figure out if the cost in fees will be more than the difference in quoted rates.

Let’s look at another handy chart to help explain what I mean.

Don’t get all excited about a low interest rate if you’re going to be paying through the nose in financing fees. Give some thought to how long you’re planning on keeping the property before you start shopping for a loan.

So next time you see APR don’t be confused and don’t mentally check out of the conversation. Lenders are going to rely on you being both a) confused by the term and b) too ashamed to ask what it means. For a high-cost lender to voluntarily explain APR to you in a clear manner would be shooting themselves in the foot. Just remember when the term comes up that it’s like figuring out what to get on your salad. High APR is like high-fat dressing. The best thing for your financial health is to stay away from the extras and find the most basic, low-fat loan you possibly can.

(Aren’t you proud of me? I made it all the way through that without a single “bacon bits” pun!)

10 Things You Can Do Regularly to Save Money

Many of you reading this blog are saving up for a down payment, security deposit, cash purchase of investment property, or a similar major expense in the near future. With slim paychecks and rising expenses it can be difficult to squirrel away the recommended 20% of every paycheck.

When I transferred from property management to brokerage I knew I was going to take a pay cut for a while as I rebuilt my business. Here are some of the things I’ve done to cut my expenses. Maybe they’ll work for you, too.

  1. Don’t pull your scores – real FICO scores are expensive. But definitely check your credit report.

    Check credit reports regularly. You get one copy of your report from each of the three credit bureaus every year. I usually pull one at the start of the year, once over Memorial Day weekend and once over Labor Day weekend. The dates go in my calendar. The FICO credit scores are not free. And the Scores offered by many of the “free” credit score websites that have popped up lately are not FICO scores. They use a different scale. The free reports you can obtain through annualcreditreport.com are just a list of your open accounts, but for checking accuracy that’s all you really need.
    My Cost: $0 and 15 minutes. My Savings this year: $0, but I learned that one old collection account had dropped off of my report this year.

  2. Call insurance companies annually. Did you know that health insurance plans since the beginning of the year have had to cover preventive care 100% before your deductible? Do you even remember what your car insurance deductible is? It’s always good to check with each of your insurance providers annually to find out if you can get a better rate. That goes for homeowner’s/renter’s insurance, business liability insurance, landlord umbrella policies, car insurance, and health insurance for the self-employed. You won’t always get cheaper insurance if you call, but it’s always worth the effort.
    My Cost: $0 and 25 hours. My Savings this year: $75 in car insurance plus $5580 in health insurance plus $120 for annual checkup now covered by insurance.
  3. There are other sites out there that allow comparison shopping but they’re owned by corporate entities. Plug In Illinois is the state-sponsored site and likely to be more neutral.

    Switch electricity suppliers. Hey Chicago! You don’t have to get your power from ComEd. You don’t. It’s worth looking into other options, especially if you have central AC. New carriers in the area offer lower prices. Investigate your options at the Illinois Commerce Commission’s “Plug in Illinois” site.
    My Cost: $0 and 45 minutes. My Savings this year: About 5% off my bill plus the good feeling of knowing that my electricity is now coming from renewable sources.

  4. Track cell phone usage. Do you know how many minutes are on your cell phone plan? How about the date when your contract expires, if you’re on a contract? When was the last time you used all of your minutes or text messages? Have you been with your cell phone provider long enough to earn a new phone? Do you not know? Maybe you should check. It’s especially useful to track your voice minute usage and make sure your plan suits your current lifestyle.
    My Cost: $30 for a new smartphone last year. My Savings last year: No savings but I got a phone and a mobile broadband router for the same price I’d been paying for just voice service on my old carrier. (I’m on a 2 year contract so I’m holding tight on this until next year. The expiration date is definitely in my calendar!)
  5. Appeal property taxes regularly. I’ve discussed this at length in a prior article about property taxes. You get a window for appealing your taxes every 3 years, and under certain circumstances you can appeal outside of that window. If any home similar to yours has sold nearby you in the past year, it’s worth trying to appeal your taxes based on their sale price.
    My Cost: County filing fee. My Savings this year: About $200/mo.
  6. Always get multiple estimates. Calling around for estimates can be annoying and you always feel like you’re being a pill. However, you learn in the process about the task at hand, and businesses that won’t provide an estimate are not going to remain in business very long. Treat your bank account like it’s a business operating account. Allow yourself a certain amount of petty cash for expenses, but if a purchase will require more than your petty cash allowance then go do the proper research.
    My Cost: $0 and a few hours of time. My Savings this year: $500 on a dental treatment and $700 on an exterminator.
  7. Chicago’s got some of the best water in the world. (Lake Michigan photo by John Chimon)

    Learn to love ice water. Beverages cost more than food. This is true for most restaurants, and especially for alcoholic drinks. Pop & sugary juices are not healthy either. With the exception of my morning coffee (homemade, french press, black) I stick to ice water from the tap for most of the day.
    My Cost: My portion of the water bill in my monthly assessments. My Savings this year: At 20 cents per can of soda, at least $113.75 so far this year, plus the wear and tear on my pancreas.

  8. Shop slowly. This started with my mother’s habit of carrying items around with her in the store as a “test drive” before purchasing. She generally does not make a purchase unless it’s on her shopping list or she’s toted it around with her in the store for a while. In my case I use my 2 week “Do I need an Ipad” test on pretty much all of my major purchases before I even walk into the store. Mom has picked up on this test and was recently using it herself. She’s quite the frugalista, so I’m very pleased.
    My Cost: Quite a bit of time doing research. My Savings this Year: At least $700 on an iPad, $200 in unnecessary clothing & shoes, and $80 in makeup.
  9. Be nice. Win stuff.

    Buy low, tip high, stay consistent. I don’t want my thriftiness to hurt the individual workers. I want them to be able to afford to go shopping too. Tips are 100% take home for the laborers, while unit cost is retained by the corporation. Whenever possible, especially in the service industry, I make sure to tip high and I frequently reap the benefits if I’m a returning customer.
    My Cost: Minimal. My Savings this Year: At least $80 in free beers from grateful bartenders, plus $30 from being able to go longer between manicures.

  10. Refinance the mortgage. Much like insurance, you won’t always win on this one. However, as long as mortgage rates stay below what you currently have and you stay on top of your credit score, you have at least a shot at a successful refinance of your loan. This is the one scenario where the cost may outweigh the savings. Make sure you run the numbers before you go ahead with the refi. Check with a different lender at least once a year, or once every 3-5 years if you recently refinanced.
    My Cost: About $700 in 2010 for a HARP refi. My Savings: About $28k in interest.

Do you have a money-saving tip to share with us? Let me know in the comments!

 

“Affordable.”

I guess we all get a little nervous when new people move to town.

So this is a practical shelter blog, which means that I’ll be talking about affordable housing quite a bit going forward. People tend to get all up in arms about affordable housing and write me off as some kind of left wing crystal-gripping-mantra-chanting hippie when I use that term so I wanted to take a moment to talk about what it actually means.

“Affordable” does not mean low-income housing. “Affordable” does not mean Section 8 housing. It doesn’t even mean “crappy low-rent vintage housing with leaking windows and creaky porches.” When I talk about affordable housing – in particular, affordable rents – I am talking about housing that costs less than 30% of the average person’s gross income.

So let’s say that you’re earning under $35k per year. That’s a little above the median income for Chicago rental households. According to a 2011 survey by the Depaul Institute of Housing Studies and a recent study from early 2012 from the National Housing Conference, 75-80% of you guys are paying more than is considered affordable. 24% of you are paying more than half of your income in rent.  This does not make it cool or okay to do so. In fact, I’d go so far as to say that you guys are holding us back economically.  (more…)

What the !%@#$ are closing costs?

Confused stick figure and humorous breakdown of closing costs

It's only scary because it's vague.

Closing costs. The term can strike terror into the hearts of most first time buyers. Leave it to the real estate industry to come up with a special snowflake term for something the rest of the world understands as “sales tax.” Admittedly there’s more components involved than your standard skimmed bit off the top taken by the government every time you make a purchase. (Unless you live in New Hampshire, Delaware, Montana, Oregon or Alaska.) Legally we can’t call it “sales tax.” But for homeowners who are already making a big plunge here, it’s probably easier to think of closing costs in the same manner as sales tax and plan accordingly.

In Chicago these days, provided you’re taking out a loan of less than $417,000, for closing costs you’ll want to plan on needing about 3-4% of purchase price, in addition to your down payment and your loan, in order to buy a piece of property. If your lender chooses, they may require you to pay “points” to decrease your mortgage interest rate – in this case, add one percentage point for each “point.” Some lenders will charge less, some more, but on the average it will be between 3-4%. If you have reasonable credit and it looks like your lender is charging more than 4% on the good faith estimate, go find a new lender!

Despite the government requirement of reasonably accurate Good Faith Estimates from lenders, the actual cost to close will not be revealed to you until the day before you actually close, on a form called the HUD-1. Therefore, for the majority of the purchase process you will need to be carrying that number in your head.  Don’t forget about it and add the amount to your down payment. Don’t leave it tied up in non-liquid accounts until the last minute, either. Bits of it will be dribbling out from the day you get a signed contract to the day you receive the keys. (more…)