A Few Things Financial

First we received a notice from the IRS last week. And the news: we had neglected to take the $800 Making Work Pay tax credit to which we were entitled. So they were notifying us that our tax refund would be substantially larger than we had expected. We accepted the money with as much grace as we could muster. (If you neglected to take this credit, don't worry. So many people didn't that they recompute your taxes for you and send a form letter notifying you of your good fortune.)

I hesitate to give financial advice. One need only look at the state of my investments (non-existent) and bank balance (small) to see that I am not one to whom one should turn for help in matters financial. But I'm going to take a stab at it here to assist some tenants who may find themselves in a situation those of us who do foreclosure counseling haven't seen much of.

In the early days of the foreclosure crisis lenders tried to bully tenants out of their homes and, in a lot of cases, still do. But it appears that, in some cases, lenders are trying to sell foreclosed properties to the tenants who live in them. I don't have a sufficient number to determine why a particular property, or a particular tenant, is selected for this.

It may be that the lender looks at the contract rent and thinks, hmmm, these people could pay a mortgage that would be less than the rent they're paying now. It may be that the lender looks at the tenant and thinks, wow, these people are really gullible. I can palm this turkey off on them. I don't know. Herewith are some guidelines for those who are in this situation.

1. Make sure that you pay for a thorough inspection of the property. You want to know how long the roof will last, whether or not there are problems with the foundation, whether there are any bug problems, the age and life expectancy of the heating/air-conditioning, the state of the wiring--all the stuff you don't have to worry about as a tenant, but will have to pay to fix or replace if you buy the house.

2. Pay for an appraisal. It's worth it. Remember that a lender trying to sell you the property is just as sleazy and disreputable as one trying to get you to vacate the property. You want to know if the lender is trying to eke more money from you than the property is worth, and the lender's appraiser is likely to come in with the price the lender wants. (Shocking, I know, but true.) The appraiser should measure the property, look at the rooms, amenities, appliances etc., and then compare the property to other recent sales in the neighborhood. The appraiser should also look at whether the housing market is rising, falling, or stable. If there are a lot of foreclosed properties or properties that are about to be foreclosed, that's probably a bad sign.

In addition, you want to look at rents in your community. Are they rising or falling? Are there a lot of rentals that have been sitting on the market for a long time? You don't want to buy if it turns out that rents are about to fall 15% and you just bought a house with a mortgage payment comparable to the rent you're paying now.

3. Do you really like the house and the neighborhood? If you have children, do you like not only the school they're attending now, but the schools they'll attend when they're older? How long are you planning to stay? If you're thinking of moving to a new city, or your children are almost grown and you want to downsize, or your job is unstable, this house is probably not for you.

4. Can you pay the mortgage easily? If the rent is the same as your mortgage, you don't want to lock yourself into payments that are at the edge of your ability to pay. In addition to the mortgage, you have to pay property taxes and insurance, as well as make necessary repairs. You can decide to move for cheaper rent much more easily than you can sell the house.

5. Run a mortgage calculator. The New York Times calculator is very good. Real estate industry calculators much less so. The calculator will tell you how long you have to stay in the house for buying to make sense. (Note that as you get close to the point where buying is sensible, the additional cost of buying is very small.)

6. And demand that any Notice to Vacate served be withdrawn in writing. Yes, get it in writing. Should your negotiations fall through, you want a full 90 days to vacate the property, not the short time that remains at the end of the negotiating process.

Update 10/30/10: With the foreclosure documents problem, it is essential that, before even considering a purchase, you THOROUGHLY check the history of the property. You must find out whether there are any loans outstanding on the property, liens of any kind, and whether you can get title insurance for the property. If any of these problems exist--if there's another loan on the property, the utility service has put a lien on the property, or the title insurer gives only limited title insurance--give the property a pass. Remember that the lender may be trying to get rid of a turkey--a house with problems--and you don't want to get stuck with it.

And another update 1/2/11: Please be specially careful if you're being offered a condominium or a house in a planned unit development (houses where there's a homeowner's association responsible for maintaining the common areas and community amenities). These are particularly dangerous, because you're buying into a whole community and not just a house. You need to know whether other units are in danger of foreclosure, as the remaining homeowners may have to pick up the cost of dues not paid on foreclosed units. Banks are loathe to finance communities with too many tenants, so a community with a lot of tenants could be a problem if you had to sell. (Banks may change their policies though, when it becomes clear that having a renter-occupied unit is better than having an empty unit.) You'll need to look at the finances of the association to insure that they have sufficient funds for ordinary maintenance and a reserve fund for major repairs (roofs and the like.)