March 22, 2011

Ocracoke Real Estate: The saga of a first-time homebuyer

I have been so excited for my first-born child this week. Each milestone as you watch your child grow is sure to set off fireworks inside a proud parent from the very first infant smile to school graduations.

On Friday, February 25, Soren became a first-time homebuyer! I must have texted this “Yahooo!” message 10 times over the course of his home-buying adventure, from the loan approval, to the signed contract, and finally the closing.

Spurred by the government program that gave first time homebuyers an $8,000 credit, his journey started over a year ago. With the credit as a carrot, Soren started searching the websites offering homes for sale in his market of Virginia Beach. The architectural characteristics of a property plus the number of bedrooms, the neighborhood, and the option for a garage were all important factors under consideration. And so the dreaming began. I loved getting the emails where he linked me to the MLS sites of the houses he was considering.

As a real estate agent in a resort community, I have really only worked with clients who had enough discretionary income to afford a second home. Owner-occupied home sales have been rare for me. I had a general idea of my son’s income level and advised that a wise first step was to get qualified by a bank. There is nothing like the scrutiny of a bank, to bring a prospective buyer back down out of the clouds. The good news was that within Soren’s circle of friends, he found a trusted banker and a real estate agent with whom he could work.

Through Soren’s loan qualification process, I learned a few interesting banking tidbits.

His job produced a 1099 at the end of the year instead of a W-2. The bank used a more stringent formula for qualifying the potential loan amount because of his 1099 status. This type of employment describes a category in which the individual is contracted to perform certain duties and can write off his expenses against the income. The individual assumes the responsibility for paying all of the Social Security, Medicare, and state and federal taxes. The bank looked at the income after expenses rather than the gross. Consequently, he qualified for a smaller loan amount.

This house buying process took more than a year. He missed the opportunity for the first-time homebuyer’s credit. In the meantime, two good things happened. First, his employer switched him to W-2 labor, in lieu of a raise. This type of employment is one in which the employer takes half of the Social Security, half of the Medicare, and all of the state and federal withholding taxes, out of the employee’s pay. W-2 labor requires the employer to pay the other half of the Social Security and Medicare. It is actually a great deal for the employee.

With this switch in the type of labor, the bank used the gross wages on his W-2 and he qualified for a larger loan amount. I checked in with a favorite banker for more explanation on the loan process with a 1099 versus W-2 as proof of income. The bottom line is that the bank looks at the pre-tax dollars that the applicant has to work with. A 1099 and a W-2 both indicate a gross amount of income, but the bank will look at two to three years worth of expenses to get an average for a 1099 laborer, to deduct from the gross, before it can arrive at the pre-tax dollars.

Soren is very lucky to have a Dad who was a contractor and a plumber and is currently a home inspector, energy auditor, mold tester, and septic inspector. Soren would look at the house and the neighborhood, decide if this one was the “one,” and the next day, Dad was called to do a home inspection on the house.

Soren was able to submit an offer without requiring it to be subject to a home inspection. In a regular real estate market, the waiving of the home inspection simplifies the negotiations and helps it sail through to acceptance.

Even with this inside track, Soren ran into a number of peculiar road blocks. With his initial loan qualification, he found a postage stamp of a house on a nice lot in a very decent neighborhood. His first offer was lost to a higher bid. Developers, watching this declining market, could swoop in fast and secure the good stuff in Soren’s price range. Another contract was lost when the seller went into foreclosure. He must have been teetering when Soren’s offer was submitted. Once foreclosure proceedings start with a bank, the door is closed and you might as well not wait.

My conversation with a favorite banker yielded a clearer understanding of just how complicated the banking system has become. When loans are made, they get bundled and sold to investors. Many of these loans will be re-bundled and sold again.

Consequently, when the mortgage holder runs into trouble, it is difficult to find the owner of the mortgage to re-negotiate the terms. The banks that made the loans were not prepared for the deluge of people in trouble. There is just so much work to be done to attend to every troubled mortgagee.

Along the same lines of the foreclosed seller, the third contract was lost when the bank chose to take the house to auction rather than entertain Soren’s offer. I think that the banks have created three grooves within which to work: short sale, foreclosure and auction.

The second bit of luck over this long process was that the market dropped even more. As Soren’s ability to borrow a little more principle grew, the prices went down. It was hard for him to see how these price drops were going to work for him. Even with this buyer’s market, imagine the frustration of having submitted three offers to purchase and having asked Dad to inspect three houses and losing the option to buy three times.

The frustration was mounting, and Soren periodically caved into despair. After hundreds of Internet MLS searches, drive-bys, and house viewings with his agent, he felt like it was never going to work out.

When he started looking, I had recommended that he confine his search to single family dwellings as opposed to town homes and condos. My rational is that the Tidewater area is flooded with condo and town home projects to accommodate short term military residents. Soren’s father and I had purchased a brand new condo around 1990. When we wanted to sell only three years later, there were more brand new complexes that were selling in our range or lower.

A seller can’t compete when the buyers have so much from which to choose. Soren’s greatest chance to maintain his investment was to go with something that a young family or single person might consider as a starter home. This is a guaranteed pool of buyers. There will always be a rising segment of the population that leaves the apartments to have a little patch of land to call their own.

In his state of despair, Soren would lapse into scanning the condo options one more time. And I had to butt out.

Dashed hopes were everywhere until Soren uncovered a three-bedroom, two-bath house, with a Norfolk address. This property had been purchased by a couple for their son to use while he attended Old Dominion University. The house had been on the market for too long. They had tried renting it and that did not work out to their satisfaction. They were ready to sell. It was not a bank-owned property. He had real live sellers to work with. They had just dropped the price into his range. Soren had been searching for better than a year and this one was looking promising.

To secure the contract immediately, the offer was submitted with the home inspection contingency clause included. They must have been as thankful for Soren as he was to find real sellers and this house. The absolute best part is that this 1,100 square foot house, with a small lot totaling 5,000 square feet and a garage, was move-in ready.

The carpets were new. The kitchen had all the appliances and clean surfaces. Both bathrooms were tiled. The windows had been replaced with energy efficient, vinyl, double-insulated ones. The heating and cooling system was relatively new. One of my favorite attributes of this house is its location across the street from a marsh. An adjacent building lot belongs to the house to the right; no one across the street; and a neighbor to the left. So far, it is a very quiet setting.

Good things come to those who wait and don’t freak out. There were a few hurdles to get to closing.

About a week after the signing of the contract, someone bashed a hole in the foundation of the house and stole the copper plumbing. The sellers had the unexpected expense of re-plumbing the house. There was a glitch with the title, but the title insurance squared that away.

Along with learning about home loans, Soren also had to jump into the research project called homeowner’s insurance. I had read an article about how the folks in California learned a lot about their policies after they made a claim because of brush fires. I e-mailed the article and suggested that he ask around about which companies were used by his real estate broker, his banker, and home-owning friends. He uncovered more good news. When you bundle your homeowners with your car insurance, the premiums go down.

This has been a win/win on a lot of different levels. The learning has been incredible. Gaining equity appears to be a given. Soren bought low and should be in this house for a period long enough to see some degree of increase in the market. The payoff after a lot of hard work is so reinforcing. And then, to warm a mother’s heart, the knowledge that the mortgage payment plus the escrow (monthly portion of taxes and insurance) is less than what my son was paying per month for an apartment. The icing on the cake is that he brought two roommates with him from the apartment, who will help to pay this mortgage.

I think that our children’s milestones are the parental assurance that the child has successfully launched to the next level, that they will find their own way in this world, and that they have garnered the skills to meet new challenges. They will be okay and flourish.

(B.J. Oelschlegel has lived on Ocracoke Island for more than 30 years and has worked in the real estate business for 26 years.  She is a broker with Ocracoke’s Lightship Realty and a real estate columnist for The Ocracoke Observer. You can reach her by e-mail at [email protected])

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