Category Archives: Homeowners

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

Three Little Pigs Get a Windfall (Or, Mortgage Discount Points FTW)

Once upon a time there were three little pigs. (I'm surprised I haven't done this in the past year.) The pigs have a grand adventure in store for them involving building supplies and poached wolf, but for today we're starting at the beginning of their story, and that means it's math time.

Yay math time!

Yay math time!

They were each sent out into the world to make their fortunes. When it came time to buy housing, their mother gave each of them a surprise gift of $5000 in addition to the money they'd already saved.

Now, let's say that they'd each saved up the same amount of cash, had similar credit scores, and all bought $300k townhouses in the same development using FHA loans with 3.5% down. (I know that isn't how the story goes, but I'm not talking about construction materials today.) However, each one chooses to do something different with their $5000 gift from their mother.

Pig #1: $5000 on new appliances.

The youngest pig spent the extra $5000 on new appliances for his kitchen. He got a new Fridge ($1300), a new stove ($1300), and a new washer and dryer ($1200 each). Ten years later when he sells the property he'll have spent $154837 in debt service on his mortgage. His appliances would be close to the end of their useful lifespans, so they won't contribute much to the value of his home. In fact, he might have to replace them all again in order to sell the property.

Maybe he got something awesome like this modular stacking refrigerator.

Maybe he got something awesome like this modular stacking refrigerator.

Pig #2: $5000 towards the down payment.

The middle pig was quite content with the appliances that the developer provided, so he chose to add $5000 to his down payment. This lowered the amount that he had to borrow from the bank. When he sells his property ten years later, he'll have paid $152163 in debt service. This means he'll have saved $2674 over his younger brother. He'll still have to replace the appliances before he moves out, but he'll at least have saved a nice bit towards the cost.

I should note here that given the same 3.44% interest rates on their loans (which happens to be the current national average), it doesn't matter what the down payment was nor what the cost of the property was. Over 10 years, the savings will always be $2674 if you add $5000 to the down payment.

Ok, so it's a pug, not a pig. Still, if you saved $2674 you'd be saying "neener neener" to your brother too.

Ok, so it's a pug, not a pig. Still, if you saved $2674 you'd be saying "neener neener" to your brother too.

Pig #3: $5000 towards 1.5 Discount points.

We've talked about mortgage discount points before. Basically, for a fee equal to 1% (one "point") of your loan paid up front, your interest rate lowers by a specific amount, usually 0.25%.

The eldest pig used the $5000 to purchase 1.5 discount points on his mortgage, lowering his rate by 0.375%. His brothers got loans at 3.44%, but he came in at a cushy 3.065%. Over the next ten years he will spend $147686 on his loan, saving $7151 compared to his youngest brother. This means he'll actually make a profit on his mother's gift! (Thanks, Mom.) He'll also have accrued $3055 more in equity on his townhome than his younger brother, meaning he can replace the appliances and still walk away with a nice $5000 in savings.

Needless to say, the eldest pig made the smart move here.

You bet it feels good, little piggy.

You bet it feels good, little piggy.

The moral of the story is that cash at closing can be spent in many different ways, and that bulking up your down payment is not always the best way to go. First time buyers rarely think about mortgage discount points. In fact, residential buyers often don't consider points at all, unless they are required to pay them in order to get a loan in the first place. However, if you have the cash to spare and today's already ridiculously low rates aren't good enough for you, spending some extra dough to push the rate down even further can have a very good effect on your bottom line. Of course, your mileage may vary and you should always run the numbers yourself after a hearty conversation with your lender.

We also learn that an extra $5000 can go a very long way. When saving cash to purchase a home, every bit helps.

See you Monday.

Anatomy of a Showing: Is Same-Day OK?

The matter of booking showings with very short notice has come up several times with my clients lately, so I thought I should address it for everyone. With the recent holidays the time required for booking a showing has been longer than normal, but even in normal circumstances there is a fine balance required to get you in to view a home or apartment.

Requesting a showing with very short notice is like springing a pop quiz on the current residents.

Requesting a showing with very short notice is like springing a pop quiz on the current residents.

The Process of Booking a Showing (more…)

Resolutions for Chicago Real Estate

So it's 2013. Funny how that happened. World didn't end, although for some of us we were wishing it might have done after the New Year's Eve parties. I'm sure some of you already have resolutions that found you duking it out over a treadmill this morning. A few more never hurt, though. Here's a few that you might want to consider if you're thinking of moving or buying property this year.

For Renters:

Try communication before confrontation. It doesn't matter if you talk with your landlord directly or with the office staff of a big property management corporation. It doesn't matter how badly things escalated last year over assorted issues with your apartment. This is a new year and time to start over. If you've had big problems, schedule a time to sit down calmly with a decision-maker for the property and review how both sides can resolve problems in an efficient and effective way. Don't go for the big guns like lawyers and unions until you've tried to talk it out first.

Seriously? Always around?

Seriously? Always around is the nicest thing on the list?

Likewise, make a point of warning your landlord if you know there are problems on the horizon. Whether it's money problems or crowds of house guests, it's better to notify ahead of time and work out a game plan than it is to sneak around and hope they don't notice.

Remember, moving is more expensive than you think. (more…)

Mistakes on a Plane (or, When Pigs Fly)

Some travel errors could have a far bigger effect on your life than this movie ever did.(image via Wikipedia!)

Some travel errors could have a far bigger effect on your home purchase than this movie ever did.
(image via Wikipedia!)

So as my regular readers know, (Hi Mom! Hi Dad!) I recently took a vacation to California. A splendid time was had by all and I'm feeling nice and refreshed. However, I did have to spend quite a bit of time in airports and on planes, and couldn't help but notice all of the potential hazards that await a prospective home buyer who's trying to save for a down payment and get a loan. Since I know a lot of you will soon be traveling through the holidays, I figured a few warnings might be of use so that you don't return from your trip to a nasty surprise.

Protect your savings (more…)

Six Homes, One Payment

It's been a while since I've gone and done some real math for you guys. Let's fix that. It's easy to look at the sale price of a home and have that be the deciding factor on what sort of house you buy. However, your monthly payment is what will dictate if you can stay in that house once its yours. Today we're going to calculate the average affordable monthly payment for a Chicago homeowner, and look at six different types of homes they could afford with wildly different purchase prices.

Step 1: Establish the monthly payment.

We've used the American Housing Survey (AHS) data from 2009 before. It's a little dated at this point but it's the only trustworthy survey that has numbers for the City of Chicago. Within that survey we discover that the median income for a Chicago Homeowner's Household was $56,200 per month. Divide that by twelve months and you get a monthly income of $4683.

Many lenders use 33% as the percentage of your income that should go towards housing costs. For today, we'll consider those housing costs to include your mortgage, your property taxes, your homeowner's insurance, assessments, and utility bills. 33 percent of $4683 is just over $1545, which is the number we'll shoot for.

Step 2: Determine some scenarios.

For this exercise I wanted six different scenarios, all for the same monthly payment. I chose three single family home options and three condo/co-op options.

  • A 5 bedroom single family home in Austin
  • A 3 bedroom single family home in Lakeview
  • A 3 bedroom LEED-certified single family home in North Center
  • A 1 bedroom condo in a high rise building with doorman & pool in the Gold Coast
  • A 2 bedroom condo in a vintage courtyard building in Lincoln Park
  • A 2 bedroom condo in a small co-op in Lakeview

Step 3: Source some utility, insurance and property tax rates.

For utility rates I went back to the same AHS data. I discovered that on the low end a homeowner would pay about $115. The median was about $350 and the high end would be way up around $700 per month for a big drafty house with a deluxe cable package and super fat internet bandwidth.

For the monthly insurance I used a ballpark figure that insurance would be the sale price divided by 3500.

Property tax numbers were sourced from actual listed 2011 taxes for properties similar to the ones I'm describing that have sold within the past four months in Chicago.

For all purchases I'm assuming an interest rate of 3.5% (the current national average on BankRate.com) except for the co-op, as those tend to be tougher to fund. For the co-op I'm using an interest rate of 3.625%. I'm also assuming a down payment of 20% of the purchase price. If you'd like to play with the interest rate, down payment and other financing aspects, you can check out the mortgage scenario calculator I wrote a few months ago.

The monthly homeownership cost consists of many smaller pieces.

Step 4: I do math for you.

The first scenario is the big single family home in Austin. This area has low property taxes but high insurance rates. Since it's a big, old house the utility usage is about as high as it can possibly get.

5 bedroom Single Family Home in Austin
Monthly Property Tax Escrow $125.00
Monthly Homeowner's Insurance Premium $80.87
Monthly Utilities (Heat, Power, Stove, Water, Cable) $700.00
Monthly Mortgage Principal & Interest $636.29
Total Monthly Payment  $1,542.16
Initial Loan Balance  $139,521.58
Maximum Home Price  $174,401.98

The next scenario is for a smaller single family home in Lakeview. Property taxes are much higher here than they are out in Austin, as are list prices. However, the insurance premiums would be a little lower here and for the smaller house it would cost much less in terms of utility bills.

3 bedroom Single Family Home in Lakeview
Monthly Property Tax Escrow $750.00
Monthly Homeowner's Insurance Premium $32.88
Monthly Utilities (Heat, Power, Stove, Water, Cable) $350.00
Monthly Mortgage Principal & Interest $405.00
Total Monthly Payment $1537.88
Initial Loan Balance $90,191.47
Maximum Home Price $112,739.34

So, moving in from Austin to Lakeview means you can afford $61,000 less house if you want to keep your monthly payment consistent. Now, what if we scaled back our neighborhood choice to something nice but not outrageous in terms of property tax, and cut back those utility bills with a LEED-certified Green home?

3 bedroom LEED Certified Single Family Home in North Center
Monthly Property Tax Escrow $350.00
Monthly Homeowner's Insurance Premium $80.57
Monthly Utilities (Heat, Power, Stove, Water, Cable) $115.00
Monthly Mortgage Principal & Interest $992.43
Total Monthly Payment $1538.00
Initial Loan Balance $220,982.46
Maximum Home Price $276,228.08

So moving just a few blocks north from Lakeview to NorthCenter and focusing your search on green homes can more than double how far your monthly budget will stretch for the same size house. Pretty cool.

Now what about condos and co-ops? Our first condo is a little one bedroom in a building full of amenities. Let's figure that the building has a full-time doorman, an exercise room, party room, roof deck, elevators, business center, receiving room and a dry-cleaners on site. These buildings tend to include most of your utilities, and the insurance premiums are really low. The assessments, however can be quite pricey. The number I've chosen for assessments in this case is far from the lowest in the Gold Coast area, but leaves at least a little room for a mortgage payment on top.

1 bedroom Condo in Amenity High Rise, Gold Coast
Monthly Property Tax Escrow $183.33
Monthly Homeowner's Insurance Premium $25.78
Monthly Utilities (Power, Cable) $115.00
Monthly Condo Assessment $900.00
Monthly Mortgage Principal & Interest $320.89
Total Monthly Payment $1,541.61
Initial Loan Balance $70,705.66
Maximum Home Price $88,382.08

Wow. What a difference those assessments made. But not all condo buildings have ridiculously expensive monthly dues. In fact, the median condo assessment in Chicago according to the AHS was $325. A big condo in a smaller development will have higher property taxes, but much lower condo fees.

2 bedroom condo in small development in Lincoln Park
Monthly Property Tax Escrow $487.38
Monthly Homeowner's Insurance Premium $41.33
Monthly Utilities (Heat, Power, Stove, Cable) $350.00
Monthly Condo Assessment $150.00
Monthly Mortgage Principal & Interest $517.03
Total Monthly Payment $1545.75
Initial Loan Balance $113,371.02
Maximum Home Price $141,713.78

So. Suddenly another $50k to spend. Kinda neat, don't you think?

Now, I've been neglecting co-ops and one of my clients yelled at me for doing so lately, so I'm going to make a point to include them more. So, our last option is a co-op. Because the co-op pays taxes as a single entity, your property taxes in this case would be rolled into your monthly payment. However, since many major lenders won't finance purchases in co-ops you'd have to settle for a higher interest rate than normal on your loan. Your insurance premiums would also be higher, as many insurers avoid writing policies on co-ops. In this case I've chosen a real co-op that includes heat, water and cable in the monthly membership fee. I should note though that the listed amount of $548.80 is on the lower end for a co-op monthly payment.

2 bedroom in Modestly Priced Lakeview Co-Op
Monthly Property Tax Escrow $0.00
Monthly Homeowner's Insurance Premium $80.57
Monthly Utilities (Power, Stove Gas) $115.00
Monthly Co-op Membership, Incl. Taxes & Remaining Utilities $548.80
Monthly Mortgage Principal & Interest $781.00
Total Monthly Payment $1527.47
Initial Loan Balance $171,252.66
Maximum Home Price $214,065.83

So Why Do We Focus on Price?

So with six wildly different prices all leading to the same monthly payment, why do we talk about price at all? Well, while there's a massive gap between the low end and the high end of buying power outlined above, we do need to consider what's realistic in the areas I specified. While the last two condo prices are within range of a short sale, the other four are pretty much non-existent in the neighborhoods I chose unless you're a cash buyer working the foreclosure market. You can muck about with the assorted components of the monthly payment all you like, but if you can't afford to purchase the property in the first place it's all academic.

The point of all of this isn't to say that the price should be totally neglected. Rather, it hopefully will serve to give you an understanding of how lifestyle choices can affect your buying power. After all, if you knew that your choice to live in a high rise was going to knock $125.6k off of your price point, would you still want all of those amenities? If going for a new, green home could more than double the amount of house you can afford, would you still want that lovely old Victorian?

On the other hand, if you're comparing the monthly cost of owning a home with the cost of renting, it is worthwhile to consider the whole scenario. The monthly rent for most of these properties would be between $1800 and $2400 per month and you'd still have to pay utilities on top.

This Friday we'll have a guest post for the landlords. I'll see you guys Monday.

Assessing the Association

I was recently talking with a first time buyer about the assorted contingencies that she'll have to fall back on if she puts in an offer on a property. For those of you not accustomed to real estate lingo, contingencies can be thought of as "escape routes" - they're reasons you can use to get out of your purchase contract. If you're working off of a standard Chicago area housing contract to purchase a condo, you'll usually be able to use the following reasons to get out of your purchase contract:

  • Inspection contingency (Major problems with the property found by a licensed home inspector)
  • Lawyer review contingency (Problems in the purchase contract language)
  • Home sale contingency (If you have to sell your current home first before you can buy a new one)
  • Loan contingency (No loan, no property.)
  • Condo association contingency (Problems with the bylaws or financial status of the condo association.)

Plane image adapted from a United Airlines safety card. Thank you for flying CondoAir.

I mentioned that buyers often do not see the bylaws, financial statements and meeting minutes of a condo association until just a few days before closing.

"Isn't that really late in the game to be finding out that kind of information?" she asked. "Shouldn't you know the financial health of the association before you make an offer?"

(more…)

Magic Words

Humans have a strange habit. They attempt to avoid the negative effects of powers that they do not understand by using words and symbols that they also do not understand.

Some are fictional.

 

Others are harmless gestures.

(more…)

Chicago Renters and Owners: A Snapshot

I'll be off on Friday for the Thanksgiving Holiday, so I thought today we'd do a chart-based photo essay. As I promised at the end of Monday's article counting Chicago apartments, I went back into the American Housing Survey from 2009 and dug up some more results. There's a little something for everyone in the following charts and graphs. Take home a few select morsels to argue with Uncle Bob about at the dinner table.

(more…)

Pig Latin: Confusing Chicago Regional Real Estate Terms

We Real Estate folk talk pretty funny sometimes. Here's some terms that are often confused, even by supposed "professionals." Today I'm going to be discussing how they should be used within the Chicago regional real estate market. I'll also give some warnings as to how the terms are misused by certain real estate practitioners who don't know their stuff.

Deposit vs Fee. A deposit is basically collateral. It's held for a specified time period and returned to you if you behave yourself. A fee, on the other hand, is never refunded. I have unfortunately seen terms such as "non-refundable deposit" get tossed around, which is just outright incorrect.

Deposit vs. Down Payment. For first time renters, it's easy to get these two terms confused. For rentals you put down a security deposit. For new home purchases you put in a down payment. I've heard many prospective renters ask me how much of a down payment is required by the landlord. While it's pretty easy for me to translate in my head, those renters immediately give away their lack of experience in the market.

Eaves, Fascia, Soffits, Gutters and Downspouts. The eaves are the part of a roof that stick out from the side of the building. The roof will have a certain amount of thickness to it, meaning that it doesn't meet up with the wall in a perfect point. The fascia spans the gap between the roof and the wall like a bandage. If your roof protrudes substantially from the side of your house, you will have a soffit underneath the overhang. This is another "bandage" to cover the gap underneath the roof. A gutter is a semicircular tube that runs along the point of an eave furthest from the building where the roof and the fascia meet. Water collects in the gutters and runs through them to a central drainage point. Connected to that drainage point is a downspout, a vertical tube that runs down the side of the building.

From renovationexperts.com. You're welcome.

Scavenger. When you're looking at a real estate listing in Chicago, "Scavenger" is the term used to refer to trash collection. As a general rule of thumb you will not have to pay for trash pickup if you're renting in Chicago. If you're a homeowner in a building with fewer than seven units the city will provide pickup, covered by taxpayer funds. If you're owning in a larger building your trash collection will be outsourced to a third-party hauler. The cost will be included in your assessments. Some new Chicagoans will interpret "scavenger" to mean pest control. Don't confuse the two terms.

School District vs. School Attendance Boundary. The entirety of the Chicago public school system is referred to in state terms as "District #299." You heard right. Every public school student in Chicago is in the same district. However, some of the schools have geographic attendance boundaries. If you live within those boundaries, your children will be expected to attend the designated neighborhood school. However, in many cases you can opt to send your child to a different nearby school, a magnet, or a charter.

Ceci n'est pas un ranch.

It's a penthouse! It's a garden unit! It's all of the above!

Penthouse. In television lingo a "penthouse" refers to a single unit protruding from the roof of a skyscraper. They're usually large and luxurious, and possibly the only unit on that particular level. Chicago uses the term more generically. A penthouse in Chicago real estate refers to any top floor property in a multi-unit building.

Rehab vs. Renovation. There was a time when "rehabbing" a property meant a whole-hog, full-on repurposing of a failing structure. Rooms were moved around, entire sections of wall were replaced. Renovation, on the other hand, took a property in decent but dated condition and freshened it up with new finishes and modern amenities. The two terms are now used interchangeably. If you see that a property was "recently rehabbed" it could mean something as basic as replacing the carpet in a couple of rooms.

We'll call it the Amy Wine House.(Too soon?)

Dining Room. I've discussed my issues with counting rooms before, so I won't dwell on this. It will suffice to say that with "combo" dining rooms a viable option in real estate listings, all a "dining room" signifies is that a real estate agent thinks you'll be able to fit a 6 person table in some corner of another room.

Deck vs. Porch. In Chicago, those wooden (sometimes metal) structures attached to the back of buildings as fire escapes are called porches. If it's attached and stacked in multiple levels up the back of a building, it's a porch. If it's freestanding and uncovered, it's a deck.

Any Questions?

Township. When you're looking at a Chicago real estate listing you'll see mention of a "township." Many home seekers get confused and think that this refers to the neighborhood of the property. Chicago only has eight townships. They're relics from the old days before Chicago was quite so large, and basically delineate the different towns that Chicago swallowed as it grew. There are eight townships: Rogers Park, Jefferson, Lake View, North, West, Lake, South and Hyde Park.
These days township boundaries are only used by Cook County for dividing up property tax appeal deadlines. So, if you're looking in Edgewater don't be surprised to see that your property is listed in Rogers Park Township.


Do you have any terms that confuse you from the Chicago housing market? Let me know and I'll try to cover them in another installment of Pig Latin.

10 Things that Renters and Home Buyers Forget to Check

"Do you have any questions?"

I always ask this at the end of a showing. It's really an unfortunate question, don't you think? Unless you've prepared well and assembled a list, it's easy to forget a few of the big questions when you're in the middle of a showing. Here's a few you can take with you next time. They may help you to avoid some major annoyances. Some you can answer on your own, while others will require feedback from the listing agent or landlord.

1. Do the doors close securely?

Look at the outside doors. Do they have deadbolts and doorknob locks? Are there privacy chains or latches on the inside? Is there a peephole or some other way to see who's outside without opening the door? Is it possible to accidentally lock yourself outside on the porch? Now look at the interior doors. Can you close the bedroom door securely? The bathroom doors? Is it possible to accidentally lock yourself into or out of a room? What about the kitchen? If you have pets, is there an area where you'll be able to securely store their extra food? (more…)