The Final Walk-Through Before Closing

It is a day or so prior to the closing and you’re on the way to your final walk-through. What is the purpose of this visit? What should you look for? What can you do?

I have not used a “checklist” for the final walk-through with my buyer clients and I’m not particularly fond of the ones that I’ve seen online. (There are numerous ones available from many popular resources.) Most of these checklists are laid out like a re-inspection plan, but that has already been done – the buyer has already had their inspection/due diligence period and many/most of the “final walk-through checklist” items are things that already should have been addressed if there was a problem at the time.

So, based on the language of the agreements we typically use, the final walk-through is not a new opportunity to re-open negotiations, but it is an important step to verify that:

1. Terms: The terms of the agreement(s) have been met. Any included items, such as appliances, are left in the house. Any agreed-to repairs have been completed or provided for in some other acceptable way.
2. Condition: The house is in virtually the same condition as it was when the inspection contingency was satisfied. There is no undue damage by movers or by other causes, such as a break-in and theft, vandalism, basement flood, or some other unknown or unpredictable event.
3. Readiness: The house/property has been cleared of all personal items and is left in customary “broom clean” condition.

If, in fact, the terms of the agreement have not been met, or if there is unreasonable new damage since the inspection, or if there is a bunch of junk left behind, then by all means this is a problem for both buyer and seller and the problem(s) will need to be addressed in some way prior to (or at) the closing. But if a buyer gets cold feet and wants to use the final walk-through as a means to not close on the house, or to otherwise make demands on the seller that are not provided for in the agreement, it could be considered a breach of the contract and the seller will have cause to make claim to the buyer’s deposit.

Bottom Line: Contrary to the many online “Final Walk-Through Checklist” docs available from popular websites, the final walk-through is not a re-inspection or re-negotiation; it’s an opportunity for the buyer to verify that the terms of the agreement have been met and that there is no undue damage since the inspection.

Property Taxes 101

If you are buying a home, one important calculation you (and your lender) should make is to estimate what your new property tax bill will be, then divide that by 12 to figure out how much per month to add to your mortgage payment to account for your taxes.

The Michigan Department of Treasury has a useful tool on their website:

https://treas-secure.state.mi.us/ptestimator/PTEstimator.asp

However, this tool can be misleading. Keep reading…

Property taxes in Michigan are based on two data points: State Equalized Value (SEV) and Taxable Value. The SEV is a 50% estimate of what the state thinks your property is worth (based on nearby sales over the past year) and Taxable Value is the figure used to calculate what you actually pay. The SEV will move up or down based on market conditions, but the Taxable Value is “capped” and can only move up at a maximum of 5% per year, or the current rate of inflation, whichever is smaller. This means that if market values are on the rise swiftly, homeowners’ property taxes will rise only nominally – no more than inflation. It’s a built-in stabilizing factor for taxpayers (and municipalities).

However, when property ownership is transferred, the municipality will “uncap” the Taxable Value in the following calendar year and reset it up to the SEV. Therefore, when estimating what you can anticipate to pay for taxes on your new house, the Michigan Treasury tool above directs you (new owner) to use the SEV, not the Taxable Value. (See your Realtor to get these values for the specific property you are considering.)

But there is another wrinkle: the SEV will now change too, because the purchase price of your home is a new data-point for the state to use to calculate the SEV. So your Taxable Value will go up to SEV and your SEV may go up based on the price of the house.

So now what? It’s difficult to say exactly what your future (next year) tax bill will be until it is actually calculated and sent to you, but here’s how you figure out the range:

• For minimum, best-case scenario: calculate your future tax based on the current SEV; in all likelihood, it will be fairly accurate this year.
• For maximum, worst-case scenario: calculate your future tax on a new SEV of 50% of the purchase price of your home; it might not end up being quite this high, but it will show you the maximum that it could be next year.

Do it this way:

1. Go to the web site above.
2. Select your county.
3. Select your municipality.
4. Select your school district.
5. Enter the current SEV and write down the tax estimate given (or take a screenshot).
6. Enter 50% of your purchase price for the house and write (or screenshot) this, too.

Again, the tax estimate based on SEV will give you a minimum to anticipate for this year and the tax estimate based on 50% of your purchase price will give you a maximum to anticipate for next year.

DOs and DON’Ts of buying a (new) home

 

DOING these things will help position you for success:

DO get your finances in order: clean (or clean-enough) credit (640 or higher is recommended), downpayment ready, monthly and annual budget projected, etc.

DO get pre-approved for a mortgage, not just pre-qualified. Generally speaking, “pre-qualification” means that you fit the profile of somebody who is mortgageable by answering correctly to the various mortgage screening questions (job, credit, income, debts, etc.), but that the lender may not have checked your docs to verify the info you have provided. A “pre-approval” usually means that the lender has actually checked your credit, verified your employment, calculated your income and debts, and you have submitted various documents to support your financial position; it’s a more robust investigation and therefore a stronger indication of your purchasing power.

DO meet with a Realtor to start the search. You can learn a lot by browsing/searching on the internet (Realtor.com, Trulia, Zillow, etc.) or visiting weekend open houses, and it’s advisable to do this on your own a little early, but a local agent will have professional-level resources and can keep you clear of a lot of early frustrations and missteps.

DO be realistic about what your budget will actually get; If you can’t quite afford what you want where you want it, you’ll have to compromise a bit, so keep an open mind and be a little flexible.

DO get to know the areas and neighborhoods you are looking in: drive through in the evening, stop and walk your dog, observe the houses and yards, or talk to some neighbors. Google can be useful for general research, but there is no substitute for visiting in-person.

DO be ready to move fast when you find “the one” you’ve been looking for – have your chequebook ready for a deposit (Earnest Money Deposit, sometimes called a “good-faith deposit”) and some other monies set aside for inspections, etc.

NOT DOING these things will also help position you for success:

DON’T expect to find the perfect house, it usually doesn’t exist (sorry). You will usually have to do at least a little bit of work to any house that meets your needs (even if it’s just paint and carpet), so an added project here or there may be OK in the long run if everything else checks out.

DON’T make your search criteria too narrow: if a house has only one bathroom, perhaps another can be added; if there is no garage, perhaps one can be built; if it has no basement, well, that’s a tough one – not easy to dig a basement under an existing house.

DON’T cut corners; it’s better to pay for an extra inspection on something in question (and find out it’s fine) than to take the risk of an unexpected problem down the road.

DON’T make significant changes to your financial position: DON’T buy a car, DON’T change jobs, DON’T open up new credit cards (or any new credit), and DON’T be late with (or miss) any payments. Any of these items will affect your credit and your pre-approval (and subsequently your final approval) can be in jeopardy if your credit and financial situation changes.

Good Luck!!

So now I’m a homeowner! What’s next?

Congratulations! You are now a homeowner! You’ve got the keys, have big plans, but what are the must-do items first?

Transfer Utilities: Transfer gas and electric to your name/account. Actually, you probably should have done this before the closing, but if you haven’t yet, do it now to avoid possible interruption in service and/or a potential activation or re-activation fee. If the home has an alarm system, you may be able to transfer the monitoring service for a discount. (Ask the seller about this as you may both save some money.) If you have a municipal water connection, you usually don’t have to transfer this – the seller/agent will have requested a final water bill the day before the closing and the title company will be holding funds from the seller in escrow to clear the balance.

Change the Locks: And if you have programmable garage door openers, change the codes. (I live in a 1929 house with the original front door, so this required calling a locksmith to come out and change the lock core, but had the advantage that he could key it like the other locks, so we had him do all of them.)

Fire Safety: Verify and/or replace all smoke detectors, carbon monoxide detectors, and get at least 4 small, household fire extinguishers: kitchen, basement, garage, and near bedrooms. (You’ll want to replace those every 7-10 years or so.)

CLEAN: If you’re planning to move in right away, this is a no brainer. If you’re doing repairs or renovations first, you may want to budget for a professional crew to come in after you’ve finished and are ready to move in. You love yourself, don’t you? It’s worth the price.

Important Papers: File your “Property Transfer Affidavit” and “Homestead Tax Exemption” forms with the municipality. (This is often a good thing to do as you leave the closing and are on the way to your new house.) In most cases, you have a time period (45 days here in Michigan) in which to not incur a penalty. And your homestead tax exemption will save you around 33% or more on your property taxes, depending on your municipality rate structure, so the benefit of that is self-evident.

Home Inspection Report: Your home inspection report will have revealed numerous small items that will need attention. Use the report to prioritize your “to-do list” for the immediate future; start with the safety/soundness items first, then on to repair/maintenance items. (This section is bold for a reason!)

Toilet seats? During our final walk-through before closing, a recent buyer-client made it a point to measure all of the toilet seats; she said that her #1 priority was to replace those immediately. I scratched my chin about that for just a moment, and then wholeheartedly agreed.

Enjoy! Once you get all the above stuff done, you can relax and enjoy your new home! (For about 5 minutes, until you decide to repaint, change the carpet, update the landscaping…haha.)

What if the appraisal is low?

Here is the scenario: A seller and a buyer have agreed on a price for a house and a contract to purchase is in place. The buyer is using mortgage financing, so the buyer’s lender requires an independent appraisal of the property to help ensure that the collateral (house) is actually worth the money being loaned. However, the appraisal is returned to the lender and the value is lower than the agreed purchase price.

In a strong/rising market, current values are generally driven by the present/future and appraisals look to the past; if the prices are on the rise, the past will look lower than the present. So, when this “appraisal gap” happens, there are generally these options:

• The seller can agree to accept the appraised value, especially if the buyer cannot, or will not, make up the difference on his own. This is important if the house is priced at the top of (or above) the market range and therefore it seems likely that another appraisal with another buyer might be similarly low. It’s probably in the seller’s best interest to go forward with the lower price in order to sell the house to this buyer. (And if the buyer has an FHA loan, the buyer has the automatic right to walk away without penalty if the appraised value is lower than the agreed offer.)

• The parties can reach some compromise where the seller agrees to accept a lower price but the buyer agrees to make up some of the difference. For instance, if the agreed price is $180k, but the appraisal is $170k, the seller might agree to accept $175k and the buyer would agree to pay $5k out-of-pocket over the appraisal.

• The buyer may adjust his downpayment to make the difference. For instance, if he’s making a 20% downpayment, he may be able to make it a 10% downpayment with the difference in downpayment going toward the appraisal gap. This is a conversation for a lending expert, but it’s a possible solution in some instances.

• An appraisal rebuttal may be possible. For instance, if the appraiser did not use the best/most comparable properties and better ones can be provided, or if the appraiser went well outside a neighborhood that is known to be a niche-market, or if the appraiser made adjustments using values that are inconsistent with the area/neighborhood, (etc. etc.), a lender can ask the appraiser to reconsider his opinion of value based on this other information. (I’m told by a reputable local lender that about 90% of the time this is an “effort in futility.”) If the appraiser does not change his opinion, the lender may allow another appraisal to be performed, but only if there is compelling evidence that the first appraisal and/or its subsequent revision (or non-revision) are simply not accurate. However, it is important to note that this rarely happens, it is time-consuming (and can be frustrating) when it does happen, and may not change the outcome anyway. (And mortgage industry regulations prevent a lender from simply “shopping” for the best opinion by ordering multiple appraisals; that’s not allowed.)

• The buyer can choose (with the seller’s consent) to go to another lender who will then have to re-approve the buyer, re-evaluate the purchase, and order a new appraisal. There is some obvious risk in this scenario, but it may actually work if there is sufficient data to support the agreed price as fair market value and that a different appraiser may likely come to a more favorable conclusion.

• The seller can decide he isn’t going to accept anything less than the agreed price, which then puts the buyer on the hook to make up the entire difference by paying it out-of-pocket or restructuring his loan (as discussed above), or to declare the agreement null and void (if there is a provision in the Purchase Agreement to do so) or for his lender to deny his financing due to the low appraisal. The buyer moves on and the seller re-lists the house, taking his chances that another buyer will make a similar offer and that a subsequent appraisal will be more favorable. (Unless the appraisal in question seems compellingly inaccurate, this is generally risky for the seller.)

When a market is very hot (not enough inventory = lots of competition among buyers), one strategy sometimes used by buyers to “win” a house is to make an offer that is unreasonably high and then expect to re-negotiate if/when the appraisal comes back too low. A seller is less likely to accept an offer of this nature unless the buyer is willing to guarantee the difference if indeed the appraisal is lower. For instance, if a house is listed at $275k but there are 4 offers from buyers, one buyer may offer $300k and declare that they are willing to guarantee up to, say, $285k using their own cash if the appraisal comes in below $300k.

The bottom-line is that most sellers actually have to sell their house twice – once to the best interested buyer, and once again to that buyer’s lender. Therefore it behooves a seller to price the house at fair market value to ensure the fastest and, perhaps more importantly, smoothest sale.

“Seasoned Cash” and Your Mortgage Application

When you are buying a house, your mortgage lender will require about a million documents from you to verify your complete financial situation. This is to be compliant with the many consumer-protection regulations which protect you but also to protect their investment in you (and your property). The process helps make sure lenders aren’t giving mortgages to risky borrowers, thus minimizing both parties from a potential problem. (Think 2009…)

One important (and easily overlooked) factor for mortgage approval is a transparent “paper trail” for all cash that you have deposited in to your bank account. If you make any significant cash deposits, you have to show where the money actually came from. So if you have money squirreled away in a shoebox or mattress, you will need to have it deposited in to your bank account for at least two months (60 days is the FHA minimum) before you try to use it to buy a house. Why? A reputable local lender has told me that they (the lender) will ask for your current and previous two months of bank statements to verify your present finances and that the money there is yours and not borrowed or otherwise owed to somebody else. If there are significant cash deposits on any of those statements, you have to prove the source(s). Unfortunately “I had the cash on hand at home” is not acceptable; neither is “I sold my motorcycle (or whatever) to a friend (or on Craigslist) to raise the cash.” However, if the money has been deposited for at least 60 days and shows up on both previous bank statements, it is considered to be “seasoned money” and its source probably won’t need to be verified.

The bottom line is that if “mystery money” materializes right before you try to buy your house, you and your lender will have a problem to solve. It’s better to put your cash stash in the bank very early so it can “season” before you start house shopping!

Why do I need a Home Warranty?

Well, you don’t actually need one, of course, but it is highly recommend. And let me be clear that I receive no financial/other gain if you buy one. A home warranty generally covers the mechanical systems in a home, such as the furnace and air-conditioner, water heater, kitchen and laundry appliances, garage door openers, attic and ceiling fans, and some aspects of the electrical and plumbing systems. (Each plan is a little different, so be sure to read the details.) A home warranty generally will not cover structural elements, such as the roof, walls, foundation, windows, etc., nor will it cover general interior/exterior surfaces or cosmetics.

For buyers: The home warranty serves as a financial protection for you in case something major fails after you purchase your house; you might not be responsible for the cost of the repair or to replace it. You pay a modest service fee and an approved local contractor will generally take care of the rest. When I am representing buyers, I usually suggest asking the seller to provide (pay for) the home protection plan as part of the offer/negotiation (if the seller is not already doing so). If the seller is not amenable to this, I might suggest the buyer purchase it themselves. In my mind, and based on my experience, it can be well worth the fee regardless who pays it.

For sellers: I usually recommend providing a home warranty for the buyer for three good reasons: 1. It can serve as a marketing advantage over competitive properties; 2. It can increase buyer confidence in your property; and 3. The warranty may also cover the property during the term of the listing (while it is for sale) before the property actually sells. So, while you and the buyer (based on their inspection) will know in good faith that things are functioning properly, if something were to go wrong, there is a system for addressing it before the closing. And if something should fail after the closing, the buyer won’t have ill feelings toward the seller as this protection will be in place.

A quick story: I recently listed and sold a condo for a wonderful couple. I suggested that they include a home warranty for the reasons mentioned above. Because we sold it so quickly, the sellers continued to live in the condo as tenant-occupants for a few weeks after the closing while their new house was being finished, so they got to know the buyer/new owner. After they finally moved, the buyer stopped by their new house to drop off some mail that had been delivered to him and said, “By the way, thanks for the home warranty!” As it turned out, just after he moved in, the water heater (which was not very old) failed. He called the service hotline and they took care of everything. (In this instance, he got a new water heater installed.) He was happy that he didn’t have to pay for it, the sellers were happy that the buyer was happy (and not mad/blaming them for a failure), and I was happy that everybody else was happy. The sellers actually called me up and thanked me for suggesting the home warranty as it clearly was a benefit to the buyer and kept their relationship harmonious.

Another quick story: When I bought my house (way back in 2002), the seller was not offering/providing a home warranty. My Realtor suggested that I purchase one at the time, basically for the reasons discussed above. I am not usually one to go for add-ons and extras, so I was reluctant to get it. However, the wisdom of paying $400 to help protect a $200K investment for a year eventually became apparent. As it turned out, there were no major failures, but I did take advantage of a complimentary service check-up near the end of the warranty period and learned a lot about the boiler system from the technician who came out.

How much does a home warranty cost? They vary by company and program, but most are under $500 for a good basic plan with various upgrades available at additional cost. For example, the two warranty programs we usually use in our office start at $365 and $445 and both offer broad general coverage.

Bottom Line: As you can see, I think it is a good idea and I do suggest that sellers offer this benefit for buyers and buyers should consider it themselves if the seller is not doing so.