(This guide was originally published by the Caltech Technique in the year 2000.)

 

Buying a House or a Condo

 

Disclaimer: The information below is provided for informational purposes.

Author is not a real-estate expert. Information does not apply to all cases,

may be found to be incorrect, and is subject to change without warning. Buying a house is a big

investment and should be studied carefully using several sources of

information.

 

 

 

Mini-lexicon:

 

Condo: A unit

(usually an appartment) of a housing complex where parking space, if any, is

not attached to the individual units. There are usually regulations that limit

owners' ability to modify the exterior of their unit and that pay for common

expenses through the collection ofstyle='mso-spacerun:yes'> monthly condo fees.

 

Condo fees: Monthly fee imposed by the homeowner's association of a condo or townhouse to

pay for common expenses through the collection ofstyle='mso-spacerun:yes'> monthly condo fees.

 

Escrow: The legal

process of transfer of ownership, which legally must be done by an escrow

company. Essentially, it entails verifying that all the paperwork is in and

genuine from both seller and buyer.

 

Points:

A percentage of the total amount of a loan that buyer pays upfront to the

lender as extra payment for the loan. Each point is equivalent to one

percent of the loan amount. Loans can be chosen to have from negative (buyer

gets a discount upfront for the first payment) to positive, including zero. The

higher the points, the lower the interest rate for every subsequent period will

be.

 

Single-unit: A

stand-alone house, usually with no association involved in owning it.

 

Townhouse: A unit

(house, duplex or appartment) of a housing complex where parking space is

private and attached to the individual units. There are usually regulations

that limit owners' ability to modify the exterior of their unit and that pay

for common expenses through the collection of monthly condo fees.

 

 

 

Getting a loan

 

The first assumption of this article is that you will get a

loan to help pay for the house. First of all, buying a house in a lumpsum

payment is extremely rare, especially for Caltech students and postdocs.

Secondly, there are tax advantages if you borrow money to buy class=GramE>a house which usually make it to your advantage to do so.

Obtaining a loan in the U.S.

is easier and cheaper than in some other countries, and the rates in the last

few years have been particularly low, although there is an upward trend in the

rates, fueled by the Fed's recent increases, in turn fueled by inflation

concerns. To qualify for a loan, you need to have a satisfactory credit

history, as reported by three national credit bureaus. This involves

essentially two things: a) having had a sufficiently long history of credit in

the U.S., as evidenced by previous loans, credit cards and other creditors; b)

having had a sufficiently good history of credit in the U.S., as evidenced by

lack of negative notes (non-payments, and to a lesser

extent late payments) on your credit history. One thing that's nice to know is

that for most purposes, credit ratings are discrete, not continuous, and thus

if you have a reasonable credit history you will qualify for an A rating, and

minor blemishes on your record do not affect your interest rates at all in that

case.

 

 

 

The economics of buying vs. renting

 

The first and perhaps most important aspect of the

house-buying process for a Caltech person is deciding whether it's best to buy

or to rent given the length of time that you expect to stay at Caltech. The

length of time is a factor because of the expenses and hassle associated with

buying a house (somewhat over 7% of the value of the house). Speaking very very

generally, if you can afford a downpayment large enough (e.g. 20%) to afford

you a low interest rate, it is usually financially more attractive to buy than

to rent if you plan not to sell the house (whether because you will live in it

for that long or because you will rent it out after you move out) for at least

3-4 years. These are among the factors to consider when making your

calculation:

 

 

 

Costs of buying:

 

a) The brokers' commission for the sale is usually 3% each

(agreed beforehand), payable by the seller.

 

b) Other transaction costs include escrow costs and lender

costs. Reasonable numbers for these are about a 10% of the value of the

property (possibly more percentagewise for lower-valued properties, since there

are some fixed costs), including escrow fees, title insurance, loan

underwriting & document preparation, appraisal and loan tie-in, in

approximate decreasing order of magnitude.

 

c) Condo fees, which can vary from ~$150 to ~$500/month for

garbage collection, gardeners, exterior repairs, sometimes insurance, pool

maintenance, ...

 

d) The opportunity cost of investing your downpayment and

monthly payments in the stock market or elsewhere. This depends on how well

other investments are paying currently and how they will perform in the future.

 

e) The interest on your loan.

 

f) Property tax: ~1.25% of the value at which you bought

your house annually.

 

g) Cost, time and hassle of maintaining the house. Just

think of everything you used to call the landlord for.

 

 

 

Note that unless there's depreciation, your money is not

lost, so your downpayment and principal payments are not a cost: you are just

transferring your wealth from liquid assets into real estate.

 

 

 

Benefits of buying:

 

a) Property appreciation (historically on the order of 2-5%

annually in Pasadena, but values

can sometimes go down instead). There is a very important point to realize

here: the appreciation is on the entire

 

value of the house, despite the fact that you have only put money to pay for a

fraction of it (the downpayment). Therefore, the rate of return for your

investment (which is the relevant rate to compare with what you would get in

Wall Street, for example) is much greater than the appreciation rate; in other

words, while your debt to the bank remains constant, what you get when you sell

the house does not. You may have realized that as the years go by and your

investment in the house becomes a larger percentage of the value of the house,

this advantage gets diluted; this is the reason why it is best to refinance a

house after about 7 years, getting a new loan and investing the money you had

put into the house elsewhere.

 

b) Interest payments are tax-deductible.

 

c) You save the cost of rent or, equivalently, earn rent

income.

 

d) You don't get kicked out

 

 

 

Types of loans

 

Now the exact economics depend on the type of loan you get.

There are fixed rate loans that do just that: keep your interest rate constant

through the term of the loan, usually 30 years, but possibly 15 or 20. Variable

rate loans have a floating interest rate that varies with the prime interest

rate set by the Fed (Federal Reserve). These are not good if you suspect the

rates will go up, or if you want to avoid the risk of that happening, but in

return for you taking the risk as opposed to the lender doing it, the rate is

lower initially. An interesting

compromise is what is called 7/1 or 5/1 ARM loans, which keep the rate fixed

for 7 or 5 years, respectively, at a value lower than that for fixed rate

loans, and then jump to the floating value of variable-rate loans. I have a hearty

recommendation for John Thompson of First Advantage Mortgage (888 265 2445

x343), who has shown to have very competitive pricing, integrity and excellent

service. Most realtors will try to get you to use the lender associated with

their real estate company, but you do not need to.

 

 

 

Realtors

 

OK, so you've gone through the economics, and you've decided

you will buy. Now what? The first thing to do is to get a realtor. Lately,

there's been a surge of internet house buying and selling sites. Since this class=GramE>is very new and I

have never bought a house that way, this article will not deal with that way of

doing it. My hunch is that online selling may be an excellent idea if you are

selling a house, for three main reasons: because the seller pays most of the

transaction costs and online selling reduces seller-buyer matching costs

considerably, because the seller faces little risk once the check clears, and

because the seller is only interested in the selling price and is not looking

for a specific property, so an exhaustive search is not essential. The buyer,

in contrast, faces great risk in buying a house, so the experience and

liability of realtors is welcome; he/she wants the best match to the house of

his/her dreams he can find & afford, so the larger the search the better,

and does not pay for the cost of realtors, so there is really no reason not to

use a realtor, which does not preclude him/her from expanding the search online

as well on his own. But try to get a recommendation for a good realtor, because

a bad one can be a real pain throughout the long buying process. I have

received a recommendation for Kevin Gardner at Fred Sand's (626-431-2377).

 

 

 

What will a realtor do for you? First, he/she should make an

exhaustive search of all properties that match the criteria you specify. Some

realtors will not do a thorough checking of each property's properties before

calling you to discard those that do not comply with your desires; if they do,

that will be a big time-saver for them and you. Second, he/she will have the

keys or make arrangements to be able to get into every property. Most

properties on the market are vacant and require a realtor's keying system to

get in; those occupied usually require appointments. Thirdly, the realtor will

carry you through the whole paperwork process, from offer to the close of

escrow.

 

 

 

Choosing the house

 

In deciding what house you can afford, bear in mind that

payments will get smaller with time as more of the principal is paid, as

inflation makes the fixed value of the loan smaller in real terms, and as your

income increases (hopefully!). Decide on a (series of) neighborhood(s). Decide

on the right number of rooms. Decide whether you want a condo or a townhouse.

Private garages are more convenient and afford a lot of storage space, but cost

more. And look, look, look.

 

 

 

Your offer

 

A few recommendations on making your

offer. Look at a lot of properties, but when you see something you like,

do not take long in making an offer, properties on the hot Pasadena market do

not stay long on the market before they are sold, typically no more than a

month, which means that by the time you see them you may have a week of time

before a hot property goes into escrow. Ask for the seller to pay for a Home

Warranty. This is standard, sellers almost always pay for

them, and protects you in case something wrong is not detected during

escrow or goes wrong in the following year. Demand that the seller check the

boxes for seller warrants that all appliances are working, etc.: this means

that if you find something not working during escrow, the seller will have to

fix it. Don't be afraid to offer below the asking price, but do not expect to

get a seller to agree to something below 5% of his asking price unless the

property has been on the market for a long time. Get a professional inspector

to perform a thorough inspection of the property during escrow, but do not have

that replace your own inspection, trying every appliance, inspecting faucets

and sinks for leaks, etc.

 

 

 

Happy buying!

 

 

 

Acknowledgements: Thanks to Eric Slimko for contributing

some of the knowledge expressed herein, and to Eva Peral for constructive

comments.

 

 

 

 

 

This guide has been perused times since we started counting on November 11, 2003.