Northern Virginia Real Estate Blog

When selling a home, understanding a little bit about home buyer psychology can help you move your home more quickly.

After all, what people perceive helps define how they act.

A recent article from RealEstateJournal.com listed several techniques that home seller can use to attract more offers from buyers.

The tips included:

1. Number Play: $299,999 seems far less expensive than $300,000
2. Connotation: Precise numbers indicate value; Round numbers indicate prestige
3. Simpicity: If you drop the price, make the math easy for the buyer so the savings are obvious

Curiously absent from the piece, however, is the #1 home selling tip that every good real estate agent knows:

To sell your home quickly, price it right.

A “good buy” speaks for itself — no psychology required.

When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.

This up-front deposit is more commonly known as “earnest money”.

A sales contract’s earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.

Some factors that can influence earnest money amounts include:

• Market conditions: Stronger markets often call for more earnest money
• Buyer economics: First-time buyers often give less earnest money
• Seller psychology: Skeptical sellers often ask for more earnest money

No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home.

To this end, earnest money can be forfeited if the buyer later “backs out” of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent.

This is because most purchase contracts are written with buyer-focused “outs” called “contingencies”.

A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.

If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.

When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer’s bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.

Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts.

The earnest money you save may be your own.

When buying a home, there are two stages in the home loan approval process.

Stage 1 starts when a homebuyer submits a mortgage application to his loan officer for a pre-approval.

A pre-approval is a “walk-through” mortgage approval that says — at a given purchase price and downpayment amount — the home loan application will very likely be approved.

Stage 1 ends when the buyer signs a purchase contract on a home. At this point, the “walk-through” approval is useless because the buyer now needs a real home loan approval from an underwriter and not a loan officer.

Thus begins Stage 2.

During the second phase of the approval process, a mortgage underwriter is reviewing income, assets, credit, job history, and other items, too; the underwriters job is to make sure that the buyer meets the bank’s criteria for lending.

If the loan officer did his job in Stage 1, Stage 2 is just a formality. And most times, it all goes according to plan.

Occasionally, though, a homebuyer sabotages his own mortgage approval by inadvertently changing his “risk profile”. It doesn’t happen on purpose, of course — it just happens.

So, consider this a quick primer of what not to do while you’re between Stage 1 and the completion of Stage 2 of the home loan approval process. Following these pointers will help keep the risk profile consistent.

1. Don’t buy a new car (or take on a larger lease payment)
2. Don’t quit your job or change industries (and certainly don’t switch to a heavily commissioned role)
3. Don’t transfer large sums of money into or out from your bank accounts (and remember that “large” is relative)
4. Don’t miss a payment to a creditor (even if you don’t think you owe it)
5. Don’t open a new credit card (even if you’re getting 10% off your new bedding)
6. Don’t accept a cash gift without talking to your loan officer first (because there’s rules on how to accept them)

There’s other items, too, but this a good start.

Now, avoiding these mistakes may not be practical for everyone. Therefore, if you know you’re going to violate a “rule”, check with your loan officer first.

There are a lot of “gotchas” in mortgage lending and it helps to have professional guidance for your individual questions.

For a lot of homebuyers, calculating a prospective mortgage payment is an online experience. For example, a search on Google for “mortgage calculator” returns 39 million options.

Some people, however, prefer to plan on their local hard drive using spreadsheets. For these people, the hardest part is often figuring out what formulas to use.

Interest Only Payments

Home loans with interest only payments are much more simple to calculate than amortizing loans.

Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.

Then, create a third cell and input the following formula that calculates the “Monthly Payment”. The formula is:

= (Loan Size) * (Interest Rate) / 12

Principal + Interest Payments

For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.

Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.

Then, create a fourth cell and input the following formula that calculates the “Monthly Payment”. The formula is:

= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)

For additional spreadsheet formulas and more in-depth reporting, explore your software’s “Help” feature to see what you can find.

Many homeowners are entitled to two major tax deductions — one for annual interest paid on a home loan, and another for real estate tax bills paid to government.

Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiple your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS.

This credit is one reason why some people sometimes refer to “after-tax mortgage rates”. An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules.

Federal income taxes are highly personal and require the attention of an experienced professional.

The end of the Super Bowl kicks off the Real Estate Spring Buying Season.

As home sellers should prepare for the season’s upcoming homebuyers, they could do worse than to watch this four-minute home staging video from Barbara Corcoran.

Barbara offer simple steps that “won’t cost you a lot of money but could make a 10-20 percent difference in the selling price of your home”.

Then, to watch home staging in action, tune in to well-known Home Staging professional Barb Schwarz as she takes the 20/20 news crew into Bothell, WA for a before-and-after.

With so much housing supply relative to recent years, home staging could be the difference-maker to home sellers. And it’s usually less expensive than a price reduction.

According to ENERGY STAR, properly sealing and insulation a home can save up to 10% on heating and cooling costs.

The government-group Web site focuses on major sources of home air leaks such as basements, attics and near chimneys. These three categories represent close to 80% of a home’s energy loss.

It pays little attention to more obvious air leaks near doors and windows because — while easy to identify — these energy loss sources are not nearly as costly to homeowners.

Using the Do-It-Yourself Repair Book, a handy homeowner can self-install ENERGY STAR’s efficiency recommendations, step-by-step. Or, he can opt to call a contractor instead.

The average American family spends $1,900 annually on energy bills.

(Image courtesy: ENERGY STAR)