Buyers Due Diligence

Buyers Due Diligence in Real Estate

Be A Detective

Be A Detective

What exactly is due diligence? In simple terms it is the investigation of a property that is performed by a buyer in order to determine whether or not they want complete the contract.

In North Carolina, the Offer to Purchase a property has changed dramatically in the last year, and more emphasis is now being placed on the buyer to perform Due Diligence on the property prior to finalizing the offer. They are given a specific time period in order to investigate the home, with the use of Home Inspectors or Engineers, perform radon testing, and basically leave no stone unturned. By the end of this investigatory period, the buyer should be aware of any issues and let the sellers know if the sale will continue.

This is a great change in my opinion. It places more emphasis on the buyer to become more active and involved in the purchasing process, and to learn more about the home they are wanting to buy. How well you investigate prior to purchasing, will determine how many surprises you will later run into in regard to repairs.

If you hire an inspector and then attend the inspection (which I highly recommend to every buyer when at all possible), the more you learn first hand what is going on with the home. Seeing and getting first hand explanations is much more effective than getting an email with pictures.

There are other things that are not covered by an inspector. If a well or septic is involved, there must be an inspection of these as well. Due diligence requires a trip to the Henderson County Health Department to see if there is a copy of the permit for a septic. And a trip to the city for a copy of the well permit will be needed as well. Both of these permits come with a overhead map of the property (hand drawn by the inspector) with measurements specifying where these wells or septics are located in relation to the border of the properties and the house. These can be very helpful to have when the well or septic person comes.

Good Well or Bad?

Good Well or Bad?

For a well, you will want to get a sample of the water and have it tested. For a septic you will want to have it emptied and cleaned to check for cracks or other issues. You will want to have the septic inspector verify that the tank is the correct size for the house. Ask your Realtor about other septic issues. There are many.

Due diligence requires a lot of leg work, but if executed properly, issues can be avoided down the road. Major issues can get you out of the contract with minimal damages to your wallet. And finding issues before signing on the dotted line can get you some assistance in repairs from the seller prior to closing.

Talk to your Buyers Agent if you have more questions about what is involved in the Due Diligence process, or you would like a copy of the new North Carolina Offer To Purchase forms.

 

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Equity in your home

Equity

Equity

This is the beginning of a series on Real Estate Terminology. I think it is important that every buyer and seller have a good understanding of Real Estate Terminology on their journey though the process of buying or selling a home.

Today I wanted to start with Equity, a term everyone needs to understand.

Equity: The value of your home after the outstanding balance of any loans are subtracted. If you make a 5 percent down payment, you have 5 percent of the price of your home in equity. As you make payments toward principal over time, the equity in your home grows.

Simply stated, the way you determine the value of the equity in your home is to subtract what you still owe from what you originally borrowed. Although, over time, your equity can grow faster than what you are paying down. How can that be? Let’s crunch some numbers:

Let’s say you buy a home for $200,000. You put down $40,000. Your equity is currently $40,000. You make payments for about two years on the $160,000, and then you owe around $155,000. Your new equity is now $45,000. But let’s say that you bought this home right before the big real estate boom. After a few years, you get a new appraisal. Low and behold, the new value of your home is now $225,000 instead of the price you paid of $200,000. Now you have equity of $65,000 instead of $45,000.

This Equity thing is very important, in good times and bad. Let us say that you bought this home in the middle of the real estate crisis. Under the same scenario, when you go to appraise the value of the home, it may now be worth only $180,000 instead of $200,000. What is your equity now? It would only be $25,000. There are many variables to equity. You need to understand, not only what it is, but how it can change over time. Right now we are experiencing a lot of Lost Equity in homes all over the country.

How can equity be used?

Equity

Equity

Years ago, the way our parents and grandparents used equity was to save and pay off the home quickly to be out of debt. This gave them more wealth, as their income was staying in their pockets for other purchases, keeping them out of more debt. They were able to pay more for items with cash, rather than continuing to borrow.

Another way that people used equity was to buy a home with a modest down payment, and live in the home for about 5-7 years. They would hope that the value in the home would grow, and in most cases it did. Then they were able to sell the home for slightly more than what they bought it for. With what they had used for a down payment on the previous home, as well the the growth in value, they would then take this money and reinvest it in a slightly better home. They might do this three or four times in order to get into a home to retire into. The larger the down payment, the quicker you can pay off a home and live without a mortgage.

In more recent times, people have been using their homes as a bank. They put as little as they could down on their homes, or they borrowed against their homes equity, tapping out any equity if they needed to sell at any point. Here is another definition you should know.

Would you like to know another way to build Equity? If you are handy and can do a lot of work on a home, you may be better off getting a home that has some work to be competed. You save on the price of the home and then do the work yourself, saving hundreds to thousands. Maybe a home just needs a little cleaning and painting. Or simple cosmetic work. If you are feeling confident in your abilities, this may be a good route. This kind of work is called Sweat Equity, and is used in Habitat Homes, to keep the cost of the homes down. If this is a route that interests you, be sure that you can really do the work that needs to be done. Living under construction can be disruptive for couples if the other person isn’t handy and the work doesn’t get done. Know your limitations and be realistic.

Equity

Equity

Cash-Out Refinance:

A refinance transaction in which the new loan amount exceeds the total of the principal balance, or money still owed. It may include the original borrowing price, minus payments of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan.

The excess money is usually given to the borrower in cash and can often be used for debt consolidation, home improvement, or any other purpose. The borrower effectively borrows against the home equity. 

In good times, and with a very stable job, this ‘cash out’ can become a life saver. It can also be used to upgrade the home in order to bring more value, thus growing the equity back into the home.

But this option must be used very carefully. Always talk to an appraiser prior to any work being done, to see if it will really bring any value.

Unfortunately, too many people did this and gave up all equity. This behaviour, in part, has helped push the economy further into trouble, because now, people are loosing their homes to over extending, borrowing more on their homes than the values can keep up with.

To sum up Equity, I would say that having it is a good thing, in any economy. It should be a part of anyones long term financial goals, and it should be used carefully over time.

I do hope that this post assists you in a better understanding of Equity. Contact your Realtor or Banker for more information on Equity.

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