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Real Estate and Home


It’s the height of home repair season, a time when established contractors are often in demand and unavailable. That’s a big opportunity for the fly-by-night operators to step in.

Hiring a contractor to do work on your home, whether it’s a relatively small job or a major renovation, is a big deal. For most consumers, your home is your biggest investment. It should be treated with the level of respect that comes along with that.

Just like you wouldn’t want some quack of a doctor to perform surgery on you, you don’t want someone with questionable skills to be operating on your home. On top of that, if you do end up with a shady “contractor” you not only run the risk of poor work you also are taking a chance on getting ripped off.

Scams in the home improvement business have been around for a long time. They’re finely tuned and very focused on getting consumers at their points of maximum vulnerability.

Recognizing how their game is played, however, can help you avoid getting ripped off. And, if you play the role of consumer by the book, you’ll have the best chance at getting the job done properly for a fair price.

What to watch out for

Ideally, you should be seeking a contractor rather than the contractor seeking you. So, when someone comes to your door after spotting some loose shingles, cracks in your driveway, or just about any other problem that could benefit from repair, watch out.

One of the oldest scams in involves the door-to-door approach. They’re looking to do two things: tempt you with their immediate availability and get a commitment from you without giving you the benefit of thinking things through or reviewing your options. More than likely they’ll also dangle a price that’s too low to believe. Unfortunately, for many victims, that combination can be irresistible.

You should try to resist, however, because the very next thing after you say you want the work done is you’ll be asked for money. More than likely they’ll ask for cash or, if they take a check, it will be cashed before the job even gets going.

Regardless of whether the contractor looks the part, sounds impressive, or otherwise spins a believable tale, avoid these sorts of spur of the moment decisions. Driveway repair schemes, in particular, are widespread during the spring and summer months. A crew of workers will troll neighborhoods looking for driveways in rough shape and pitch the homeowner that they can do the work then and there on the cheap. Why? Because they claim they have a bunch of asphalt left from a previous job that must be used up. In reality, they drive around with this asphalt and what they want is someone who will lured by the chance of a cheap repaving. The result for the unfortunate people who agree is a scam that involves a demand for more money with the threat of leaving a partly finished job.

How it should work

The simplest way to avoid these contractor scams is to understand the proper way to hire someone to do work on your home. That involves doing a bit of homework and taking the time to screen contractors you are considering hiring.

Recommendations are not the final word, but a place to start. Many jurisdictions license or register contractors. It is vital that consumers make sure a contractor they are considering is properly licensed or registered with the state, county, or municipality where the work is to be done. That’s a way to avoid fly-by-night outfits and typically means the contractor has at least a minimum of amount of insurance so you don’t get left holding the bag if something goes awry. (Here’s a list of state and local consumer agencies by state that can help you track down the rules where you live.)

Check with the agency that licenses or registers contractors- or your state attorney general – to see if many complaints have been filed against any company you are considering. Look on the Better Business Bureau website, as well.

Invite at least three contractors to provide detailed estimates of what they think the work should cost. Getting estimates should be free. At their visit, ask to see their liability and worker’s compensation insurance (if they have anyone working for them). Be sure to ask them to be specific on their estimates, including any particular materials they might use (the brand of window, for instance, if they’re replacing windows). Ask what the estimate includes and does not include. Check if permits will be needed for the job and if they will be getting them. A reputable contractor will play by the rules and take care of those sorts of details. Failure to get a required permit could result have serious consequences for the homeowner.

Always ask when payments are due. Payments should be incremental, starting with a small deposit, followed by percentages of payment made after certain milestones are reached, with the last payment of, say, 25 percent, being withheld until the work is completed to your satisfaction.

The lowest price is not always the best deal. Pay attention to how the various contractors communicate with you, how thorough their estimates are and how inclusive. A shady contractor will offer a low-ball estimate to entice a customer and later jack up the prices. You want to hire someone with an established track record, references you can check, who understands what they’re doing.

It takes more time and more thought, but playing it safe will help you dodge the worst of the worst and avoid home improvement ripoff.

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Once again, I’m finding myself nearing the end of my one-year lease with the need to make a decision about my living situation. I moved to my current apartment in the summer of 2007, at a time when I had been more comfortable living off some of the income from my business. Until that point, I remained fiscally conservative with my extra income, putting as much into savings as possible, not believing earning an income from primarily blogging would be sustainable in the long run.

Accepting the fact that I had a growing income, I allowed myself to move into a bigger apartment in a nicer neighborhood. That was seven years ago. And around this time these past few years, I’ve repeatedly considered whether it’s time for me to buy a house, leaving the world of renting behind.

The popular belief seems to be renting is throwing money away, but I couldn’t disagree more. Renters’ expenses for living are much lower than those of homeowners. The expenses of living in a house, and maintaining the structure and the land, add up and make this proposition very expensive. A house may increase in value over time, but rarely enough over the long-term to beat inflation, and in order to realize any of those gains, owners must sell and downsize.

I can’t even decide where I want to live, so buying a house that I might end up leaving soon isn’t a good decision. I could find myself in another predicament relatively soon — whether to try to sell a recently-purchased home or try my hand as a landlord, potentially from a distance. This doesn’t seem to be the type of lifestyle I would want, not to mention I haven’t yet had the need to develop some of the skills that would enable me to take care of problems around a house.

There is an urge for me to leave. I would like to have more space, not less. I like my neighbors but I’d probably like them more if we weren’t living so close. The reasons to opt for a house rather than an apartment seem to be related to lifestyle, not to the potential of a financial advantage (which is dubious, anyway). So my next course of option may be renting a single-family house.

But there are ways to make owning a house pay. Forgetting for a moment that I don’t know where in the country — or the world — I want to settle down for an extended period of time, owning a house that provides an income might be a good solution for me. The reality is that I could purchase a two-family house or a house with an apartment with cash, though I may still borrow money if the situation is right. I could rent out the apartment, and the rent would cover the taxes (and potentially part of the mortgage payment if I borrow).

I live in New Jersey, and property taxes are high throughout most of the more desirable portions of the state, and those costs reduce the appeal of owning a single-family house that doesn’t generate an income.

A recent article in the New York Times warns against buying the most expensive house you can afford. Doing so involves taking on much more risk. The loss of an income you rely on can drive someone down the path towards foreclosure. An unexpected job loss can occur at any time, regardless of the national level of unemployment.

Yet, there seems to be some situations that warrant buying if not the biggest house you could absolutely afford, something at the top end of your budget. If you meet these conditions, you may be able to make stretching your budget work from a financial perspective. This is the only way it could be smart to extend your reach rather than buying the least amount of house in which you could see yourself comfortable.

  • Even after buying the house, you’ll have assets. You’re not putting all of your wealth into the house.
  • You have a clear plan for using your own home to generate income that, if combined with a conservative percentage of other income, covers mortgages, taxes, insurance, and other expenses.
  • You get a great deal.

That last point is important. And real estate agents are tricky — they want to close as many deals as possible, so they will often convince a buyer a deal is great when it’s not. I like the way Warren Buffett invests in companies. He has a brand, so an investment from Warren Buffett may be worth more than the same investment from, for example, a hedge fund. So companies will cut Warren Buffett a deal. He doesn’t just go out and buy stock in a company like we smaller investors do.

When Bank of America was on the ropes, the company gave Buffett’s Berkshire Hathaway a $1.5 billion discount on preferred shares. In addition, when Buffett decides to divest, he’ll receive a 5% premium on the value of his investment. These sweetheart deals are key to building wealth through investing at a quicker rate than buying and holding broad market index funds for more than three or more decades.

Getting a great deal doesn’t have to mean buying a fixer-upper. There are a lot of motivated sellers who are willing to negotiate, particularly if you have clout, like Warren Buffett. You won’t have that kind of clout, but having cash seems to go a long way in gaining negotiation strength for the buyer.

This is all good in theory, but in order to apply it to my specific situation, I still have questions I need to answer. I could give myself more time by renewing my lease and paying an extra free for the freedom to “break” it with notice, but that is the same thing I’ve done for the past several years. I’d like to see a change this year. Here are my questions:

  • Do I want to stay in New Jersey? New Jersey has a bad reputation, but the area where I live is nice, and there are other fantastic places in New Jersey to live. But it is expensive. House prices are high and taxes are high. I have friends and some family nearby. People who live elsewhere can get much more property for the same amount of money, and my income is the same regardless where I live. My money could go farther where the cost of living is lower.
  • If I don’t stay in New Jersey, where would I live? I have family in California — Los Angeles and San Diego — making those locations a choice that makes sense. But California is also expensive. My girlfriend lives in Phoenix and will need to stay there for at least another year, but I haven’t been convinced yet that Phoenix is the best location for me.
  • Am I willing to do what it takes to be at least some kind of landlord? My friends who are or have been landlords mostly dislike that particular choice, but I do have other friends who are able to manage properties part-time. I think a house in which I’d live that has an associated apartment might not be too difficult, and I’m in the position to be able to afford help when it comes to maintenance, but what if I decide to move fairly soon?
  • Would I be better suited to renting a single-family home? That would give me more flexibility and less responsibility, while possibly expanding my lifestyle a little bit.

There’s a lot for me to consider before I need to give my currently landlord my notice at the end of April. I don’t like the fact that indecision and inertia has kept me in the same place for several years more than I would have originally expected. What do you think you would do in my situation?

Photo: Flickr

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It’s no surprise that Bank of America is caught up in yet another scandal. This bank is no stranger to lawsuits for various practices, and the bank is now the subject of a class action lawsuit involving the Home Affordable Modification Program (HAMP).

HAMP was a government program supported by the U.S. Department of the Treasury during the recession, after an overall crash in the real estate market. The intent was to help homeowners who were unable to make their mortgage payments during the recession, whether because of the loss of a job or because the banks had encouraged homeowners to take out mortgages that were too expensive in the first place.

Rather than abandoning houses on which borrowers owed more than the decreased value of the asset, and rather than needing to face a foreclosure, homeowners could apply for a mortgage modification, where the bank would reduce the amount of principal owed and write off the loss with help from the government.

There are several requirements that must be met for a homeowner to qualify for a mortgage modification.

  • The loan must be owned by Fannie Mae or Freddie Mac.
  • The remaining loan balance must be at least 80 percent of the home’s value.
  • The borrower must have not been late with a payment more than once over the past year.
  • The loan must have been originated on or before May 31, 2009.
  • It has been more profitable for Bank of America to deny applications for mortgage modifications, even those who qualify, and in some cases, redirect struggling homeowners to the bank’s own refinancing options.

    Six former Bank of America employees and one employee of a contractor for Bank of America involved with the HAMP process have given statements to a federal court in Boston detailing exactly how Bank of America lied to its customers.

    These are among the former employees’ allegations:

  • Bank of America lied to homeowners, stating they did not receive HAMP application documentation that was clearly present. The program was understaffed, and it was easier to lie to the customers than process the applications. “We were told to lie to customers and claim that Bank of America had not received documents it had requested,” said one former employee, indicating this behavior was an accepted cultural practice for the bank.
  • Bank of America categorically denied applications after thirty days. The bank was required by the government to process HAMP applications within thirty days, but when the bank couldn’t handle the volume, they automatically declined applications that had been sitting around. Despite the customers applying for HAMP assistance and expecting a response within a reasonable time-frame, because the bank couldn’t handle the load, the applications were rejected.
  • The bank lied to homeowners who called to ask for updates. Employees were told to employees that their HAMP applications were “under review,” when they weren’t, and in some cases, the applications “under review” had already been denied for sitting around on someone’s desk too long.
  • Employees were rewarded for avoiding HAMP. Employees of Bank of America who were able to initiate a foreclosure on a house for which the homeowner had applied for a HAMP modification were rewarded with financial bonuses. Those who placed ten or more customers into foreclosure in one month received a $500 bonus; other employees received rewards like restaurant gift cards. Some homeowners allegedly lost their house, despite being eligible for HAMP assistance, so a Bank of America employee could dine at a local restaurant for free.

Because this is a class action lawsuit, those who were harmed by the bank’s practices, whether by losing a house or paying more money than necessary, will never achieve anything approaching full restitution. The most likely outcome is that Bank of America will settle the lawsuit for an amount much smaller than the financial damage caused by what seems to be a strategy of lies emanating from high-level management, not rogue front-line employees. Homeowners who fell into the HAMP trap, if part of the lawsuit’s class, will receive nothing more than a token payment.

Parallel foreclosure trapped HAMP applicants. Although customers must have been current with their loan payments to qualify for HAMP, banks offer other mortgage assistance programs, and they become available when homeowners have been late with their payments. Thus, some customers have said that banks encouraged them to delay mortgage payments so they could show they were struggling financially, particularly after a HAMP denial. This counter-intuitive advice turned out to be a trap, resulting in “parallel foreclosure.”

While customers delayed mortgage payments to qualify, their credit scores sank because payment timeliness in a significant factor in the credit score calculation. As the credit scores sank, the bank would begin a process — parallel to the mortgage modification practice — to foreclose.

The financial industry wants to win over the hearts and minds of the unbanked and underbanked in an effort to broaden the customer base and generate more profit for shareholders. That’s not necessarily a bad approach, but large banks, especially Bank of America which has been involved in many class-action lawsuits over the past several years, are doing the industry no favors in terms of marketing. I try to tell people that in general they can trust the financial industry, but time and time again, when it’s uncovered that banks lie to customers to increase profits, I feel like a fool.

ProPublica

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American culture has long promoted the idea that home ownership is key to the fulfilling middle-class lifestyle. You can be sure the National Association of Realtors will continue to do its darnedest to keep this interpretation of the American Dream alive; whether you’re buying or selling, it’s always a good time for Realtors to earn their livings.

The government wants its citizens to own houses. All recent presidents have promoted the idea of homeownership, through speeches and policies. To my memory, only Obama has said that not everybody should own a home. Nevertheless, the policies that encourage home ownership remain in place, like federal support for banks that lend money to prospective home buyers and like the mortgage interest tax deduction for owners.

Only half of all home owners claim the tax deduction either because they don’t know about it or they don’t have enough itemized deductions to be able to take the deduction. This may be because deductions reduce taxable income, and that’s more of a benefit for households with high income. A tax credit, on the other hand, would reach more homeowners, benefiting low-income home owners the same as those with higher incomes.

I can’t believe how many times I hear people suggesting that the tax deduction could be a major factor in the decision to buy a house. Even those who claim the deduction only get back a portion of their interest spent — interest they would not be paying if they were to rent instead. Say your friend wants you to let him hold $200,000 of yours, but this holding comes with a fee of $500 a month. He claims it’s worthwhile because once a year, he’ll pay you $2,100. That’s not exactly a good deal.

Renters don’t exactly have an advantage. Rents pay the owners’ interest — owners do get the deduction and renters receive nothing.

This country’s efforts to promote home ownership may drive resources towards a goal that could be harming, not helping, the economy. Several studies show that homeownership is correlated to — and may be the cause of — higher unemployment. A study in 1999 that outlined this relationship was largely ignored by economists. After all, the study was funded by the National Multi Housing Council, a trade group and lobbying organization that represents the interests of corporate landlords.

Since then, more studies, like this new study by David G. Blanchflower of Dartmouth College and Andrew J. Oswald of the University of Warwick confirms that home ownership levels determine unemployment levels. And the effect is particularly strong: an increase in home owners causes double an increase in unemployment. Because the effect is delayed by up to five years, however, it’s been easy for observers to ignore the evidence.

This doesn’t show that home owners are more likely to be unemployed themselves, but increased home ownership causes externalities that affect unemployment rates. The new study’s authors explain these externalities:

There are four main conclusions. First, we document a strong statistical link between high levels of home-ownership in a geographical area and high later levels of joblessness in that area… Second, we show that, both within states and across states, high home-ownership areas have lower labor mobility…

Third, we show that states with higher rates of home-ownership have longer commute times… Fourth, we demonstrate that states with higher rates of home-ownership have lower rates of business formation…

While this study focuses on the United States, other recent studies come to similar conclusions in Europe.

It’s easy to be skeptical of studies that show these results. We assume that home ownership encourages stable living, and stability contributes to lower crime in a region. Homeowners tend to be more involved in their communities than renters, and community involvement increases local job opportunities. The data show that these benefits aren’t enough to overcome the tendency for home ownership to cause unemployment.

A question with any study is whether the data show that there is a causation or just a correlation. For example, even though there are more large-company CEOs per capita living in Connecticut than in other states, you won’t be more likely to become a large-company CEO by moving to Connecticut. A good researcher has to wonder whether there could be some independent variables affecting both the tendency towards home ownership and the increase in unemployment.

The authors of this latest study are confident that they’ve ruled out independent variables. They show that home ownership directly causes the following:

  • Lower labor mobility. People can’t quickly move somewhere else to find a new job, and so a household that rents can follow a new job quickly while a household that is rooted to a community through home ownership is more likely to pass on the new job or not be willing to look elsewhere for new employment.
  • Longer commutes. People buy homes where they can better afford the housing for their particular job. Jobs are centered around cities, home ownership exists in higher numbers in suburbs. Commuting is expensive for both employers and employees.
  • Fewer new firms and establishments. Higher home ownership results in more space being zoned for residential living, making it difficult for potential business owners to open new business near these communities. The “not in my backyard” attitude of home owners prevents economic development, resulting in fewer available jobs and higher unemployment.

The authors of the study are confident that they’ve controlled for variables, and therefore the data show an explicit causation between home ownership and unemployment, before the housing bust, after the recession, and through the recession. They admit, however, that researchers must undertake more experiments to build off these findings. The results as they are should be troubling for policymakers that promote home ownership.

The challenge in getting this message across is that home ownership is such a core component of the middle-class American life. When studies seem to attack someone’s way of living, people take the findings very personally. The choices families have made, in this case the choice to own a house rather than rent, contribute to a weakening of the labor economy, and no one likes to be told that their choices are “bad.”

Findings that are incongruous with established culture are more often than not rejected by the public. Because there still are positive externalities associated with home ownership that one might say outweighs the effects on unemployment, and because the results are an affront to society’s drive to make as many people home owners as possible, I expect it will be a long time before we see changes to society and policies that encourage household mobility over home ownership.

Do you think home ownership causes unemployment down the road?

Photo: Flickr
New York Times, Slate

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Better Bargains With Foreclosures and Pre-Foreclosures

by Luke Landes
Zillow Pre-Foreclosure

I’ve taken a cursory look at the possibility of investing in real estate near where I live, with the intent of buying a property for rental. The numbers don’t work well in my favor. I’ve confirmed this with friends experienced with renting their properties in the area; most would not do it again if given ... Continue reading this article…

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Mortgage Fraud: U.S. Government Suing Bank of America for $1 Billion

by Luke Landes
Bank of America

I never liked the term “hustle” when used to discuss making money on the side. The word has the slight connotation of fraud or taking advantage of someone, and moving quickly to do so. Now, the word “hustle” is going to be linked to something more specific and decidedly negative. This was the name of ... Continue reading this article…

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Ignore Your Mail and Lose Thousands of Dollars

by Luke Landes

The prevalence of junk mail and spam has certainly made weeding out noise more difficult over the last decade. With email, software does a great job of hiding the junk and making the legitimate messages obvious, but there are occasional mistakes. Spam might show up in my inbox a few times each week, while I ... Continue reading this article…

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Banks Won’t Let Everyone Refinance Mortgages

by Luke Landes
Big house

Mortgage interest rates are still low, a great relief to first-time home buyers, real estate investors, and households considering refinancing their higher-rate loans initiated over the past few years. Banks aren’t too eager to hand those low-rate mortgages out to everyone who wants them, however. If you read financial media, you’ve probably heard that this ... Continue reading this article…

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How to Qualify for a 1% APR Mortgage

by Luke Landes
Mark Zuckerberg

While there are great advantages to buying a house with cash, sometimes the benefits of using other people’s money outweigh those advantages. While debt is often rightly characterized as bad for one’s personal finances, there are situations in which it can be less bad. If you can qualify for a mortgage that starts out at ... Continue reading this article…

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Earning a Living With Rental Properties: Should You Be a Landlord?

by Luke Landes
For Rent

If you have the option, owning assets that produce income is a better financial strategy than owning assets that generate expenses. If you own a house or apartment for your own residence, for example, you need to pay for maintenance, repairs, taxes, mortgage interest, landscaping, utilities, or a homeowner association fee that covers some of ... Continue reading this article…

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Buffett: Buying Houses Better Than Buying Stocks

by Luke Landes

On CNBC a few weeks ago, Warren Buffett told the television-viewing audience, among other things, that he would purchase a couple hundred thousand single-family homes right now, if it were practical to do so. That seems like a ringing endorsement of buying residential real estate for its value as an investment. If the buyer also ... Continue reading this article…

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Buy Michael Jordan’s House for $29 Million

by Luke Landes
Basketball

If you’ve ever browsed through the television guide, you might have seen that there are a good number of television shows dedicated to the real estate industry. House Hunters International, Million Dollar Listing, Extreme Makeover: Home Edition, and Real Estate Intervention are just a few of the cable or network television shows designed to allow ... Continue reading this article…

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Why The Time May Be Right for Buying a House

by Luke Landes
House for sale

I’ll be thirty-six years old this month, officially closer to forty than thirty. I’ve never owned real estate. Once in a while, someone judges this as a failure on my part, or a reluctance to “grow up” or enter a more sophisticated stage of development, as if maturity was somehow related to the ownership of ... Continue reading this article…

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Buying a House With Cold, Hard Cash

by Luke Landes
Cash

When I write about the unbanked, the vast majority of this category of consumer avoids the financial industry due to lack of trust in the industry or a belief that living paycheck to paycheck doesn’t necessitate the fees and hassles of including a third party in financial transactions. Cash, in some respects, keeps you off ... Continue reading this article…

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Home Mortgage Interest Deduction

by Luke Landes
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Although the home mortgage interest deduction is one of the most oft-cited benefits of owning a home, most taxpayers don’t take advantage of it because it requires itemizing taxes. If itemized deductions including mortgage interest paid throughout the year exceed the standard deduction, a taxpayer can take advantage of the benefit. The benefit isn’t as ... Continue reading this article…

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More Homeowners Can Refinance

by Luke Landes

Thanks to some changes to the federal Home Affordable Refinance Program (HARP), more homeowners can qualify for government-endorsed refinancing. Previously, the program only offered refinancing options for households where the mortgage value was up to 97 percent through 125 percent of the home’s market value. This did help families who have become underwater, having more left to ... Continue reading this article…

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U.S. Will Sue Major Banks Over Mortgages

by Luke Landes
Foreclosure

Imagine you’re shopping for a new high-definition television. You’re looking around the store for the television with the best picture from a brand you trust. You pick the one you like, not the least expensive model but not the most expensive, either. You take it home, plug it in, and all the television can display ... Continue reading this article…

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How to Qualify for a Mortgage Without a Steady Paycheck

by Luke Landes
Dollar

It’s been almost nine months since I had a regular paycheck. Last year around this time, I was starting to make my plans for leaving my day job. One of my concerns was the possibility of qualifying for a mortgage with only self-employment income. Banks are still tight with their lending. Although mortgage rates are ... Continue reading this article…

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The 2011 Economic Stimulus: Mortgage Refinancing

by Luke Landes
Mortgage Refinance

The American Reinvestment and Recovery Act of 2009, the 2009 economic stimulus bill, provided an opportunity for homeowners in trouble to qualify for mortgage modifications. The Home Affordable Modification Program (HAMP) and the “Making Home Affordable” provided support for lenders who worked with homeowners. Part of the requirement for qualifying for the modification program is ... Continue reading this article…

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Appeal Your House’s Assessment to Lower Your Property Tax Bill

by Luke Landes

The comparison of owning a home in New Jersey or Long Island with owning a home in New York City shows that the city has one financial advantage: property taxes. In New Jersey, it’s hard to discuss the cost of owning a home without talking about property taxes. With high property tax rates, it’s worthwhile ... Continue reading this article…

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