Transcript - Money Tree Investing Podcast with Linda P. Jones
UNIDENTIFIED MALE SPEAKER:.. make sure that your ownership interest is insured and that there are no liens, no bankruptcies, no violations, anything that would affect the integrity of the property that you're buying.
WELCOME TO THE MONEY TREE INVESTING PODCAST – STOCK MARKET, WEALTH, PERSONAL FINANCE, VALUE STOCKS -- INVEST IN YOUR LIFE
LINDA P. JONES: Welcome to the Money Tree Investing podcast. I’m Linda P. Jones from Be Wealthy and Smart and I’ll be running the show today, driving the car so to speak. We have a great guest for you, New York attorney Jules Haas, who has been in real estate more than 30 years. He is an expert on probate, estate planning and real estate, and today we’re talking about the basics of a real estate transaction. So you can learn about buying your first home, what to look at and the thinks to avoid so you have a smooth transaction. We’re going to join Jules in the conversation where he’s talking about having a plan and how important that is. I hope you enjoy the show, here we go.
JULES HAAS:.. past years you had mortgage companies that would give people loans that ordinarily they couldn’t qualify for. So they would for instance give out loans at 95% of value, 100% of value, but the carrying costs on those loans far exceeded what in reality a person could afford, and then when they got into a situation that they couldn’t either upkeep the house and pay the mortgage going forward, they couldn’t refinance it in any way to get any different rates, and they couldn’t’ sell it because the value of the house were usually inflated, at least within that market. And so you had more money that you were paying out than you could sell the house for and so people said, well, what’s the point. I’m just not going to pay my mortgage because I can’t sell the house and why should I just spend money for something that ‘s just going down the drain. And so people – and they still are doing this, living in houses that they’re just not paying on and ultimately you know some day the bank may come by and take it over. So you really just need your financial plan. It’s gotta fit in with your economics and what your social expectations are going forward.
Aside from your economic plan, you need to do a lot of due diligence and understand you know the property itself. So for instance, clients will come to me and say oh, I want to buy this house. You know, the first thing you do before you do anything is you get an engineer or an architect and go through that house and do a great inspection so you understand what parts of that house may not be functioning or may need to be replaced. And you know, when you're replacing a heating system or a roof that’s a lot of money…
LJ: … that’s a lot of money, and also not every inspector is the same, because I’ve had inspections where the inspectors missed some important things, like mold, which was huge. And so you have to be really careful who your inspectors are who you hire as well.
JH: Absolutely. So you get a certified or a qualified, licensed engineer or architect, and of course make sure that when the inspection is done, you go with them on the inspection and walk through the house, and don’t be afraid to ask questions. You know, don’t just say fine, this looks okay, even if you’re not sophisticated as far as a builder goes, you can still ask question and you know nowadays with the Internet, you know, you can learn a lot. So you go through the house, you do the best you can. Of course, life’s not perfect, but you know most of the time you can get a pretty good idea as to what the house is about. You know, you’ll get that inspection done and what you should try to do also is, again, get an idea of what the cost of keeping that house is, the taxes, etc. You gotta figure taxes are always going to go up. The cost of heating that house, how is it heated. Is it oil, is it electric, is it gas, you know, what is it and what is that going to cost you. I can tell you that my house, I live here in New York City, in one of the boroughs, you know, heating oil is crazy. It costs you a fortune every year to heat the house. You can go to gas but nothing is cheap. And so how is the house insulated. If it’s an older house it’s not going to be insulated that well. But to reinsulated the house, what would that cost and what’s feasibility of doing that. And if it’s an older house, you may want to maintain the older quality of the house and not get the best insulation because you're keeping some of the older quality that you like about the property.
Another aspect of this – and this is sort of just preliminary stuff, you're not even getting to the contract stage yet – you know chances are you have a real estate broker and the real estate broker is showing you the property. There are a lot of good real estate brokers and it’s really helpful when you have a great real estate broker who can really give you comparisons and lead you in the right way as far as what you're buying. But not every real estate, just like any professional, lawyer, doctor, whatever it is, is the same. So some may have more experience than others, and some may be more forthcoming with information than others. Just bear in mind that the real estate broker, when they sell the property, they make their commission, so of course everyone is anxious to get the deal done and real estate brokers will tend to want to incentivize you to move forward. What I always tell my clients is just take a deep breath an d you know, this is your investment, whether it’s a broker or another seller or the seller saying oh I have five other people waiting to buy this house, you better sign tomorrow. Take a deep breath and think about what you're doing. And at the beginning of the process you should try to speak with a lawyer because, particularly when you're dealing with real estate brokers they may say oh yes, you have to sign this binder, if you don’t sign this binder, you're going to lose the house or whatever. And particularly first home buyers, they’re going to say, what does this mean if I sign the binder, if I give you a thou- you want $1,000 for the binder, what does all that mean. So you want to have a lawyer or someone advise you that okay, this binder isn’t going to lock you into this deal, you don’t necessarily have to sign the binder. What’s going to happen if I DO sign the binder. So all of these preliminary things – and when you're buying a house, particularly for the first time, even the second or third time, it’s really stressful because no house, you know, it’s not a $25 purchase, and you say well, if I don’t l like it no problem. You know you're talking about hundreds of thousands and millions of dollars.
LJ: … right and when you see the interest added onto the purchase price of the house over 30 years and the amount of the mortgage that you're actually committing to, it’s quite eye-opening the first time you see that.
JH: Well it is. And when, and as you probably know, when you sit down and you're signing all your mortgage papers on the truth and lending papers, they give you a calculation of what the cost of the house is going to be over that period of time.
LJ: That’s what I’m talking about, yup. Exactly.
JH: And I always say to the client, Don’t worry about that (laughing). Don’t let that scare you. You know, this is your monthly payment and the thing is you know as you’ve probably seen, when you look at the amortization schedule of your payments, which is basically the schedule of what you're payments are going to be and how much of that monthly payment – let’s say you're paying $1,000 to your mortgage company, you know, during the first part of that loan, $5.50 is going towards equity, the rest is going towards interest, because the equity part doesn’t really start to get paid until later on in the mortgage.
LJ: That’s right, that’s right.
JH: But there are certain standard provisions that really need to be considered no matter what. Number one, if you're getting a mortgage, the mortgage contingency clause is extremely important because your contact is going to be contingent on you getting a mortgage commitment from a bank. But your mortgage contingency protects your deposit because if you don’t get the mortgage, you then have a right to cancel the contract and get back your deposit. So you want to make sure that the mortgage contingency a) is there, and b) it’s going to say: I’m going to get a mortgage of $200,000 or whatever it is and if I don’t’ get it it’s also going to have a period of time in which you can get it. So typically it’s going to be 40 days to get your mortgage commitment. And if you don’t’ get it within that period of time or you're rejected, then you have a right to cancel the contract. But if you don’t cancel the contract then you may be stuck to get to the closing without the mortgage and if you can’t close you're going to lose your deposit. So you want to make sure that if you're getting a mortgage you have a mortgage contingency clause in there.
LJ: Right. And it’s pretty standard to have the mortgage contingency clause and the inspection clause on just about every contract, right?
JH: Well, that’s true, but you know, what I do – and again this woks a little differently outside of New York, because from what I’ve seen is they have inspection provisions inside the contract, so you sign it subject to an inspection and a cancellation. That’ snot how we typically do it here, right? I will have my clients do their inspection and do all of their details about the house, like I talked about earlier, before I even see a contract. Alright? I want that engineer or architect or whatever to go in that house, do the inspection, termite inspection, whatever it’s going to be, mold inspection before I do a contract because if we don’t like the house we’re not going to sign the contract and I have to worry about anything else, you know? So sometimes it could be if you did 3, 4 inspections, say well these properties are not good, I’m not going to buy them, I don’t’ even get to contract. So unlike other places, I do it, we do it here, and I usually do it here, up front and if the house doesn’t pass inspection there’s no contract. You don’t even start.
LJ: Right. Okay.
JH: But outside of New York it’s different.
LJ: Yeah, it is different.
JH: It is different. And then what you're going to do in the contract is you're going to fit in within that context, okay, when are we going to close, you know? There’ll be a closing date. And that closing date is going to be somewhere after or around the time that that mortgage contingency clause will expire. So let’s say your mortgage contingency clause says 45 days, your closing date is going to be let’s say 45 days out, or 60 days out or whatever. And in order to put those dates in you have to know a lot of other things because number one, you gotta know that your bank is going to be able to get you a mortgage, commitment, within that period of time so you need to speak to your lender beforehand so you say listen, if I sign a contract are you going to be able to get this to me in 45 days? And then you have to sort of say well, okay, fine let’s say I get my mortgage, am I ready to close on the closing date that I put into my contract, because once you sign a contract you’re going to go to a title company and have them do a compete search of title to make sure that your ownership interest is insured and that there are no liens, no bankruptcies, no violations, anything that would affect the integrity of the value of the property that you're buying. You want to make sure it’s free and clear, that’s what a title company will do and the title company will issue title insurance which is based on you know the cost of the insurance is based on the value of the property that you are insuring. And just so you know, when you do this and you have a loan, you're buying two title policies. You're buying one for yourself and you're also buying one for your bank, because the bank is going to want their interest to be insured as well. So that’s one of the costs that you're going to have to understand going in as to what the cost of the title insurance policies are going to be. Once you ….
LJ: And then that title policy just assures that there’s clear title for the owner, the new owner, to take over from the old owner.
JH: That is correct. It’s basically a certification. So if let’s say the title company says yes, you know,m we’re insuring your title to this property – and so let’s say a year later, somebody comes by or some deed pops up or something happens where somebody says oh, you know, I really own the house or whatever – I mean, these title issues appear in one form or another all the time, I shouldn’t say all the time but quite often – then you would then have a claim vis a vis the title company, and the title company would have to review it and try to rectify whatever the issue is as far as title goes. It’s not like a premium on a life insurance policy where you pay every year. It’s a one shot payment when you close and that’s that. And then you take the title policy and put it in your drawer and probably never look at it again until you sell the house. So those are all the considerations. So once you get past all of that, and you’ve found a house and you’ve got your mortgage commitment and your title work, everything looks good, you head towards the big day, the closing day. Again, this is another day that you know creates a lot of anxiety, more on the buyer’s side than the seller’s side, because the buyer is the one who has to come up with all of the various dollars to pay for various things. Among the things that they have to do is they’re getting a mortgage but the lender is going to have all of these costs and expenses, and the title company is going to have all these costs and expenses and the buy has to come to the closing with certified (or) bank funds. You can’t just come with a checkbook and write a check for you know $50,000 or $100,000 or whatever. No one’s going to take that. So certified funds, bank funds are needed at the closing, and you’re going to have to be able to cut your checks for all the various amounts that you need for that closing. So the problem arises that the bank usually doesn’t know what its figures are until a day or two right before the closing.
So using as an example, let’s say you're getting a $500,000 loan from the bank, and your purchase price is let’s say $600,000, and putting aside you know whatever escrow money you had to pay, alright, you’ve gotta come to the – the bank’s going to give you $500,000 and you’ve gotta come with the extra $100,000 for the balance of the purchase price. But the bank’s not really going to give you $500,000. The bank’s gonna only give you four-hundred and some-odd thousand because the bank is going to take all of the money that you have to pay the bank for all of their fees out of your loan. So they’re going to take their attorney’s fees, their points, you know, whatever their origination fees are, their processing fees, the bank, you know, the per diem interest, whatever it is. It’s going to be thousands of dollars. So when you actually go to the closing, the bank is not going to have $500,000 for you, let’s going to have say $495,00 or $490,000. But you're not going to know that number exactly until a day or two before the closing. And whatever that difference is you're going to have to make that up out of your pocket. So in addition to the $100,000 that you're going to have to pay for the balance of the purchase price, you're going to have to pay an additional amount to make up for the shortfall of the money that the money is going it extract from our loan proceeds to pay for its OWN fees. And in addition to that you're going to have to pay for the title company bill which can be, again, thousands of dollars for the title search and all the rest of those things. And you know so you're going to basically have all of those items coming, being thrown at you a day or two or three right before the closing. So that’s where your lawyer is going to come in and help you coordinate what the numbers are going to be. And on the sellers side you're going to have a lot of expenses to pay, aside from getting money you're going to have to pay your real estate broker, you’re going to have to pay a mortgage pay off amount and maybe satisfy some liens or judgments or who knows what’s going to come up on the title search. And everyone is going to have to get all those numbers together, get all the checks together, actually come to the closing table and exchange all the checks, exchange all the documents, sign all the deeds and all the mortgages and everything is going to happen at that closing.
LJ: Jules, how can people reach you if they want to work with you or ask you questions? How can they get a hold of you?
JH: Sure. They can go to my website which is juleshaasattorney.com and they can certainly – there’s a lot of real estate information there too. My email is email@example.com But you can always go to my website and it has all that information there and feel free to call me or email me or otherwise contact me and if you have a question I’ll be happy to answer it.
LJ: Thank you Jules. You’ve been so helpful and gave us so many good ideas and tips. We really appreciate that. We hope to have you back again.
JH: Okay, Linda, you're very welcome. Well thank you and you have a great day.