O r let’s say your car dealer is pushing «incentive financing» by offering a 4.9 percent rate, while your credit union may be charging 12 it on new car loans. I n such cases, you need to find out how much the dealer would charge for the car if you paid cash. B
y holding ant the down payment and the length of the loan from the dealer it union, you can see which arrangement would cost less in finance charges and be better for your particular situation. I n essence, sake all the terms of the two credit arrangements the same, except for finance charges and monthly payment. T hen favor the deal chat gives you the lowest monthly payment for the same length loan. THE PAPER CHASEOne way buying a car differs buying a loaf of bread is that the buyer virtually never walks in with a checkbook and drives off with the car-especially where financing is involved.
P art of the reason is that, even if the car doesn’t have to be ordered for you, the dealer usually handles the paperwork with your state’s motor vehicle administration, which makes it possible for you to hold title-legal ownership-of the car. (T his is one area of the law in which possession is much less than nine-tenths of the law, because the technical title requirements are legally critical.)Dealers are entitled to charge a fair fee for handling your paper-work, but keep an eye on these numbers-getting you a registration and plates shouldn’t be a profit center for them. U se this opportunity, though, to have them order duplicates of the registration, as needed for your family, in states that issue them. What if something happens to the car between the time you make your deposit and the time the dealer delivers it?
T he answer depends on who has the risk of loss. U sually, unless there is an agreement to the contrary, the party who possesses the vehicle bears the risk and is more likely to have insurance against the loss. U
nder the UCC, if the seller is a merchant (for example, a car dealer), the risk of loss passes to buyers only when they receive the car. I f the seller is not a merchant, as in a private sale of a used car, the risk passes to the buyer on tender of delivery-when the seller actually tries to deliver the car or makes it available for pickup arranged by a contract. REPOSSESSIONYou may lose title if you fail to make your payments as they become due. T
he creditor is then permitted to repossess your car. «W hen you buy a car on credit, you usually give the creditor rights to your property (the car) that are superior to the rights of your other creditors. This is known as a lien. W hen you buy the vehicle on credit, you sign a security agreement, which gives the creditor a security interest in your car (the collateral). T hese liens are filed with the state, usually by noting the lender’s interest on the title certificate.
I f you don’t pay, the creditor may try to get the car back and apply its value toward your debt. T hat is repossession. The only limitation on a repossession is that the vehicle must be taken without «breaching the peace,» i.e., without violence or a significant potential for violence. T he repossessor can, however, essentially break into the car or tow it away. I
n many states, the creditor does not have to sue the debtor or even notify the debtor of the default before reclaiming the vehicle. If your car is repossessed, you usually have one chance to redeem yourself-or, more specifically, to redeem the property before it is sold to someone else. T o do so, you normally must pay the entire balance due, plus any repossession costs and other reasonable charges. T his is because of the contract’s acceleration clause. T his forces you, the debtor, to pay the entire outstanding debt, not just the amount of overdue payments. S
ome states, however, have laws that allow you to «reinstate» the contract by making up missed payments. B ut in most cases, once a default and repossession have occurred, it is unlikely that you will have enough money to pay the entire balance, even if you don’t have to pay interest for the period after the car was repossessed. R edemption rarely takes place. If you do not redeem the car, the creditor may keep the car to satisfy the debt fully (unless you have paid at least 60 percent of the purchase price). T he law refers to this as strict foreclosure. T
here is no duty to return excess value over the amount owed in a strict fore-closure. Y ou must, however, be provided notice of a proposal to strictly foreclose and may object to it. C reditors seldom use the option of strict foreclosure because dealers want to sell, not keep, cars. M
ore likely, the creditor will sell the car to satisfy the debt. I f the profits from the sale are not enough to pay expenses and satisfy the debt, you would be liable for the difference. T he only limitation. placed on the creditor is that the sale be «commercially reasonable.» In some cases, that may mean first getting court permission to hold a sale.
T he sale may be public or private. T he creditor must, however, give you reasonable notice of the time and manner of the sale. I
f it is a public sale, you have the right to take part (bid on the car). I f the sale produces too much money, the creditor must pass some of it along to you. F or example, if the amount of debt and expenses totals S5.000, and the creditor gets $ 5,600 from the sale of the car, the balance of S600 is due to you, and the UCC obliges the creditor to refund the money to you. BUYING OR SELLING A USED CARIn recent years the used-car business has boomed, partly because consumers may resist the high prices of new cars and partly because the popularity of leasing has resulted in many clean, late-model cars on the used car market. T
he business is changing, too, with superstores promising low prices, no-haggle shopping, and good warranties on late-model cars. S ome auto brokerage services, including some that are on-line and available through the Internet or a commercial service such as CompuServe, advertise that they’ll get you low, no-haggle prices on used as well as new cars. Legally, buying and selling a used car has some unique features, but it is similar to buying a new car. T he advertising rules are largely the same, so you must still beware of bait-and-switch ads that look too good to be true. A nd you have to keep in mind-always-that unlike most auto dealerships, a private seller (the source of most used car sales) is not concerned about a commercial reputation.
T he private seller might leave town with your money and never be seen again-especially if you’re the one looking. Still, some experts believe you may be better off buying from a private seller, as alluded to in the discussion on trade-ins above. A private seller may give a more accurate description of the car’s faults based on personal knowledge, and you may get a lower price from a private seller. (T hey’re not in the car business, after all, and indeed are seldom looking for profit on the turnaround but rather need to raise cash for something new.) Private sellers, however, seldom givewarranties, which dealers sometimes offer.
A lso, some states have regulations governing used car sales that may apply only to dealers-You have to handle your own paperwork with a private seller. I f you are paying more than $ 500, you should have a written contract, An oral contract to sell a car for over $ 500 may not be enforceable. E ven under $ 500, it is always best to put the contract in writing if you are not going to conclude the deal immediately with a bill of sale. M any states require you to present a bijl of sale to register your car.
A bill of sale may also serve as a receipt. T he bill of sale should contain the date of the sale; year, make, and model of the car; vehicle identification number (VIN); odometer reading; a statement of the car’s condition; amount paid for the car and in what form (cash, check, and the like); and buyer’s and seller’s names, addresses, and telephone numbers. T he seller should sign and date the bill of sale, and both you and the seller should get a copy. SPECIAL RULES FOR USED CAR DEALERSA hundred years ago horse traders had a reputation for shady deal-ings. F air or not, used car dealers often have a similar reputation today.
T he inherent problem lies with human nature. T oo many of us don’t take to heart the natural risks of buying a used car-or a used horse. A ll too often, our unrealistic expectations lead to bad feelings and disappointment. A
ll this could be prevented if we took some precautions up front. Used car dealers have to make a profit, above the salesperson’s commission, on a car whose real value is probably closer to what they paid for it than what they’ll get for it. T o improve their chances, they make sure that most cars, especially late models, are in almost pristine cosmetic condition. T he car looks good, but you have to find out about structural defects, accident histories, and long-term mainterm tenance problems.
B y all means, ask the seller about each of these matters. Y ou also must take the car to a trustworthy mechanic for examination-one that you select, not one recommended by the dealer. A
nyone who does not permit this kind of inspection simply cannot be trusted-look elsewhere. The Federal Trade Commission has issued a Used Car Rule for dealers. U nder the rule, «dealers» are those who sell or offer to sell six or more used cars in a twelve-month period. T he rule prohibits them from representing that a car comes with a warranty when none exists. They must make available the terms of any written warranty they provide, and they must post a «Buyers Guide» prominently on the car. The Buyers Guide must include the following information: — whether or not the car comes with a warranty, and if so, an outline of the specific coverage; andwhether the vehicle comes with implied warranties only or is sold «as is,» that is, with no warranties at all. The Buyers Guide also statesthat you should request an inspection by an independent mechanic before you buy;
— that you should get all promises in writing; andsome of the major problems that may happen in any car. If you buy a used car from a dealer, you must be given a copy of the actual Buyers Guide posted on your car. I f you have negotiated any changes in the warranty, it should be noted on the Buyers Guide. T he Buyers Guide becomes part of your contract, and its terms over-ride any conflicting terms in that contract. There are other facts that a seller must tell the buyer. T
he seller. whether a dealer or a private individual, should be truthful about the car. I f the buyer is disappointed because it is not as described or doe; not perform as it was supposed to, a breach of warranty action may arise against the seller, who has deceived the buyer. I
f possible, you should get the seller to provide you with the car’s complete service records. Federal law requires the seller of a used car to give the buyer a mileage disclosure statement, even if the seller is not a dealer. T he statement also should certify the odometer’s accuracy to the seller’s knowledge. I
f the seller knows it is incorrect, the seller must admit it. R efusal to provide such a statement or illegally tampering with the odometer exposes the seller to stiff penalties. LEMON LAWS AND OTHER SPECIAL PROTECTIONSWhat can you do if the car you just bought is a real lemon? W hat if the car you purchased is in the repair shop almost as often as it is in your garage? T o protect consumers from such situations, most states have passed some form of lemon law, which usually applies to new cars purchased for personal, family, or household use. L
emon laws entitle you to a replacement car or a refund if your new car is so defective that it is beyond satisfactory repair by the dealer. H owever, you must give the dealer a reasonable opportunity to repair the car. N ormally a lemon is a car that continues to have a defect that substantially restricts its use, safety, or value, even after reasonable efforts to repair it. T his often means four repair attempts on the same problem or a directly related problem within six months or one year (the time period varies by state).
O r it might mean the car is out of commission for more than thirty nonconsecutive days during either the year after the dealer sold it or the duration of any express warranty, whichever is shorter. To get the benefit of your state’s lemon law, you typically must do several things. F irst, you must notify the manufacturer (and, in some states, the dealer) about the defect. S econd, you should keep a copy of every repair or service receipt you are given.
T his serves as your record that the required number of repair attempts has been made and is especially important if the defect had to be repaired at another garage or in another city because it was physically impossible to drive the car back to the seller’s repair location. Most states require that you go through an arbitration procedure before you can get a replacement or refund. S ome states sponsor arbitration programs, while other states require you to use a program run by manufacturers. A
rbitration is usually free, and results often are binding only on the manufacturer or dealer; if you don’t like the result, you can still take the manufacturer to court. S ome states require arbitration only if the manufacturer refuses to give you a satisfactory replacement or a refund. Y
ou may also have the option of bypassing arbitration and going directly to court. You should be aware that many consumer advocates have serious misgivings about lemon laws. T hey say such laws are often of little use because the requirements may be extreme (i.e., car out of commission for thirty days in a year), and the statutes may build in considerable risk to the consumer, often under the guise of avoiding, a litigation explosion. I n some states, for example, if the manufacturer makes a settlement offer to the buyer that the buyer rejects, and then at trial the buyer does not get at least 10 percent more than the offer, the buyer must pay the manufacturer’s legal fees and costs from the time of the offer. F or many consumers this would lead to (immediate bankruptcy.
A s a result, not many suits are brought under such laws. If you do successfully pursue a lemon-law claim, you may get a fund of what you paid for the car, as well as reimbursement le taxes, registration fees, finance charges, and the like. I f you choose you may get a replacement car. B
e sure that it is of comparable value to the lemon it is replacing and that it satisfies you completely. Lemon laws cover used cars in a growing number of states. I n some places the law applies both to dealer and private-seller purchases. T he laws may have a connection with the safety-inspection sticker requirement. T hese sticker laws usually protect you if two conditions occur.
F irst, the car must fail inspection within a certain period from the date of sale. S econd, the repair costs must exceed a stated percentage of the purchase price. T hen you are permitted to cancel the deal within a certain period.
Y ou will probably have to notify the seller in writing of your intention to cancel, including your reasons. Y ou must return the car to the place of sale even if it must be towed. I f the seller offers to make repairs, you can decide whether to accept the seller’s offer or get your money back. Keep in mind that the car might pass the safety inspection and still be a lemon. A nd you may drive the car (if it is drivable), but be aware that if the car does indeed turn out to be a lemon, the law usually allows the seller to deduct a certain amount from your refund based on the miles you have driven.
T his applies to both new and used car safes. In addition to lemon laws, other statutes protect car buyers: the federal Anti-Tampering Odometer Law prohibits acts that falsify odometer mileage readings;She federal Used Car Law requires that dealers post Buyers Guides on F cars;the federal Automobile Information Disclosure Act requires manufacturers and importers of new cars to affix a sticker called the «Monroney label»; on the windshield or side window of the car. T he Monroney label lists the base price of the car, the options installed by the manufacturer and their suggested retail price, how much the manufacturer has charged for transportation, and the car’s fuel economy (miles per gallon).
O nly the buyer allowed to remove the Monroney label. By far, the statutes providing the strongest protection are the consumer fraud statutes prohibiting unfair and deceptive acts and practices discussed in chapter 15. RECALLSThe recall system identifies defective automobiles that are already id by notifying car owners about how to get them fixed. Generally it includes defects that affect the car’s safety, cause it to fall below federal safety standards, or both, and that are common to a group of the same kind of cars or equipment. T he defect can be in performance, construction, components, or materials found in the car or in related equipment, such as child safety seats. Many recalls result from the manufacturer’s response to owner complaints. T he National Highway Traffic Safety Administration (NHTSA), however, influences and orders many recalls. T
he NHTSA receives safety-related complaints through letters and its toll-free telephone hotline. (T his hotline number is listed in «Where to Get More Information,» on page 245). W hen the NHTSA registers enough complaints, NHTSA engineers perform an engineering analysis and then contact the automobile manufacturer. T he manufacturer must either remedy the defect or launch its own defect investigation. U
ltimately the NHTSA decides if a final defect determination and recall is proper. The manufacturer must remedy the defect for free. T his does not apply when the first buyer bought the car more than eight years earlier. I
n comparison, the standard for tires is three years. T he manufacturer has the option of repairing the defect, replacing the car, or refunding the purchase price. I f the manufacturer refunds the money, a certain amount may be deducted for depreciation (loss in value). T he manufacturer reimburses the dealer who makes the repairs.
I f the manufacturer chooses to repair the defect, it must do so within a reasonable time. O therwise, the manufacturer must replace the vehicle or refund the purchase price. AUTOMOBILE LEASINGAn alternative to buying a car is leasing one. L eases are becoming increasingly popular, with about a quarter of consumers choosing lease a new car rather than buy one.
T his percentage rises to half the case of luxury cars. A lease is essentially a contract for the use of a vehicle for a specified time period. T here are two types of lease contracts: the end lease (sometimes called a net or walk-away lease! and rise common open-end lease (sometimes called a finance base}. Leases usually are for at least a year; twoand three-year leases are common. Leasing a vehicle is like renting an apartment-you know what your monthly costs are going to be, but at the end of the term you have no equity (ownership) in the property. W hether to lease or not depends on your situation and what’s important to you. P
urchasing a car might be more economical in the long run, but leasing may be attractive to people who want to avoid the hassles of ownership, drive a more expensive car than they could afford to buy, and drive a new car every two or three years. Whether it is better to lease or buy a car depends on many factors. M onthly payments for a leased car may be lower than if you purchased it. Whether your lease payment is lower depends on four key factors: — the capitalized cost of the vehicle (i.e., what the vehicle was worth new);
— the interest rate;
— the residual value of the vehicle (i.e., what it’s worth at the end of the lease); andthe length of the lease. Your monthly payments cover an estimated amount for the depreciation of the car over the lease period (the difference between the vehicle’s worth when new and at the end of the lease), so, unlike your monthly payments if you purchase a car, you are not paying off the vehicle’s full value when new. W hen your lease is up, you can turn it in, extend the lease payments (or renegotiate another lease), .buy for cash (typically at the residual value), or finance the purchase through an installment loan. T he lease usually doesn’t spell out these options, though it often does contain an option to purchase at the residual value. H
ow you buy the car or extend the lease is often a rate negotiation. With a lease you’ll probably have to face another set of monthly payments once the lease has expired. O n the other hand, if you buy on credit instead of leasing, you at least have the possibility of paying off the vehicle entirely over time and driving it for several years with-out having to make any monthly payments. Y
ou’ll be driving an older car, but when you’re done with it you can sell it and get some cash. At one time leasing normally avoided a down payment and various taxes, but nowadays you often have to put up a down payment, sometimes called a «capital cost reduction.» You may also face an acquisition fee if you ultimately choose to buy, or a disposition fee if you return it at the end. Y ou may have to pay a documentation fee to the dealer to set up the lease. Y
ou’ll have to put down a security deposit equivalent to one or two months' payments and in some states a monthly «use tax.» But don’t forget that there are fees associated with installment loans, as well as the possible headache of selling a car yourself (see page 108). A nd there may be some tax advantages if you lease mainly for business use.`It's hard to generalize with all these variables in the air, but some-times you can get «more car» -a higher-priced model-under a lease than if you purchased it. Usually the consumer is liable for damage to the vehicle, though a lease may include insurance. I
f not, you must provide your own. D amage done to the car while in your possession may cause the lessorthe bank or company that leases the car to you-to deduct:; an «appropriate» amount from your deposit. Will you owe anything at the end of the lease? T hat depends on what kind of lease you have.
U nder a closed-end lease contract, the car’s value when you return it may not matter unless you have put extreme wear on the car. B ut because lessors sometimes charge fee minor damage, it might be a good idea to repair things like cracked windows (usually covered by insurance) and to address other cosmetic damage before you bring the car back. I
f all is well, you return the car at the end of the term and walk away. B ut your monthly payments are higher under this kind of lease than under an open-lease, because the lessor (the leasing company) takes the risk on car’s future worth. A n open-end lease involves lower payments. Y ou gamble that the car will be worth a stated price, the estimated residual value, at the end of the lease.
I f its appraised value at the of the term equals or exceeds the specified residual value, you owe nothing and may be refunded the difference if your contract provides for a refund. I f it is worth less, you pay some or all of the difference, often called an «end of lease» payment. LEASE FINANCINGAs noted above, up front you’ll probably have to pay a security deposit (returnable at the end of the lease) and a fee similar to a down payment when you buy a car, although it will have a different name. B y paying a large amount up front, you could, in effect, reduce your monthly payments. B
ut by doing this, you lose one of the advantages of leasing: lower up-front costs. O ther expenses may include tax, title., and license fees, as well as a lease-acquisition fee. Y ou might have to pay for repairs and maintenance after any warranty period expires, unless the lessor agrees to pay in your contract. A t the end of the lease term you may have to pay an excess mileage cost if you have a closed-end lease. E
xcess mileage charges add up very quickly. F or example, if your lease specified that you would drive no more than 15,000 miles a year and you exceeded that amount, you might have to pay twelve or thirteen cents a mile for the excess. I t is essential that you get a lease that allows you to drive the number of miles that you typically drive before the excess mileage kicks in. (U nder an open-end lease the final appraised value of the car will reflect any excess mileage.) Excessive wear and tear may also cost you. You almost always may renew or extend a lease at the end of the term. S
ometimes your lease may contain this option, or you can negotiate for it. On the other hand, getting out early is something altogether different. Y ou have signed a binding contract that obligates you to make payments for a stated term. Y our contract may contain an early termination clause. T his usually requires a minimum number of monthly payments before you may cancel, and the formula for determining the amount you owe in the event of early termination typically results in a very large payment. I
n addition, this early termination charge may apply even if the reason for early termination is the theft or destruction of the vehicle or even death or disability of the lessee or someone in the family who drove the car. There are many ways of calculating the charge for early termination, and it is important that you understand the method that dealer proposes so that you have the option of trying to negotiate better terms before you sign. Y ou may also wish to have gap insurance included in the lease to take care of situations like owing more for car that has been stolen than the market value that the insurance company will cover. E
ven if you have to turn a car in early under a existing contract, it may be possible to work something out with the company if they hope to get more business from you in the future. Almost all leases include a purchase option, which allows you to buy the car when your lease term ends. U nder such a provision, which you’d probably be well advised to bargain for, the lessor mast state the purchase price or the basis for setting this price in the initial lease contract. P
urchase options are common in both openand closed-end leases. PROTECTIONS FOR CONSUMERS WHO LEASEThe federal Consumer Leasing Act (CLA) offers protection not only to consumers who lease cars but to those who lease other items as well. I t applied to leases of consumer goods of more than four months' duration. (I t does not apply to leases of real estate, vehicles used for business, or total contractual obligations over $ 25,000.) The law requires the lessor to disclose information before you sign the lease. A mong the most important items are: total amount of any initial payment you are required to pay;number and amount (s) of monthly payments;total amount for fees, such as license fees and taxes; any penalty for default or late payments;the annual mileage allowance and the extra charges involved if you exceed that allowance; whether you can end the lease early and the extra charge required;whether you can purchase the auto at the end of the lease and for what price;any liability that you may have for the difference between the estimated rate of the auto and ifs market value at the time you end the lease;any extra payment that you must make at the end of the lease. The Federal Trade Commission helps enforce the CLA and will take action if there is evidence of a pattern of federal law violations. You can contact the FTC at the Correspondence Branch, Federal Trade Commission, Washington, DC 20 580.
T he FTC has published a free booklet entitled A Consumer Guide to Vehicle Leasing, which explains your legal protections and provides checklists to help you decide whether to lease or buy and to help you compare lease offers. I t also answers commonly asked questions. I
t is available from the FTC Public Reference Department at the address above. Y our state may have laws protecting consumers who lease. C
heck with your consumer protection agency or the local office of your state’s attorney general. RENTING A CARRentals" may last as little as one day. T hey are never economical in the long run but have the advantage of, say, getting you from the end of a May lease to early autumn, when dealers are eager to make deals to move out cars of the waning model year. A nd, of course, people rent cars when traveling on business or pleasure. A car-rental contract should list the base rate for the rental car and any extra fees. T he length of the rental period should also appear.
S pecial rates are frequent, and discounts are available through so many bodies-professional organizations, unions, frequent-flier clubs, etc.-that virtually no one should ever pay the full price for a car rental, at least without an upgrade to a larger or better-equipped vehicle. W hen you pick up your car, it may also be possible to negotiate a special deal or upgrade. I
t’s always worth your while to try to get as large a car as you feel comfortable driving. But the rental agencies giveth and quickly taketh away-or will, if you let them-through extras. T he rental company might offer you the Collision Damage Waiver (CDW) option. T
he rental company covers damage to your rented car if you accept CDW. C overage, however, does not include personal injuries or personal property damage. S imilarly, they will offer you personal-effects coverage, i.e., insurance on your own property in case it is stolen from the car while you’re renting it. Before accepting these expensive options, make sure your own automobile, medical, and homeowners insurance policies do not al-ready protect you in an accident involving a rented car or your own property loss. (H int: If they don’t, talk to your broker.
T his is standard coverage, though your deductible may be higher than that offered by the CDW. A lso, coverage outside of the United States is not standard, but your credit card may offer insurance that does apply outside the country.) If traveling on business, your company’s insurance policy might cover you. S
ometimes, charging rentals on certain credit cards automatically covers you. C onfirm this in writing, however, before you use the card and decline the rental company’s coverage. C onsumer experts consistently identify the CDW as one of the most unnecessary expenses incurred by consumers, perhaps vying only with credit insurance. Other additional fees might include drop off fees if you leave the car in a city other than where you picked it up. O ther costs might be fuel charges, extra mileage fees, and fees for renting equipment like child-safety seats or ski racks, as well as fees for additional or younger drivers.
A void the unnecessary ones, and by all means (as ever) shop around! When you accept your rental car, and before you drive it off the lot, carefully check it for damage and note any damage on the rental agreement. I n some parts of the country criminals prey on tourists driving rental vehicles.
I t’s worth checking to make sure that your car cannot be identified as a rental. Are you guaranteed a car if you have confirmed reservations? N ot necessarily.
M any companies now check driving records when customers arrive to pick up cars and reject customers whose driving records don’t meet company standards. E ven if you have a con-firmed reservation, you may be disqualified from renting a car for any of the following reasons: moving violations within the last few years; seat belt law violations; accidents, regardless of fault; convictions for driving while intoxicated (DWI), driving under the influence (DUI), reckless driving, or leaving the scene of an accident; or driving with an invalid, suspended, or revoked license. REPAIRSEvery car needs repairs or at least regular maintenance. I
f you don’t regularly change the oil, plus the oil and air filters, you may as well skip this whole chapter; whatever money you save with purchasing savvy you’re throwing away with maintenance negligence. You can take it to a car dealer, which warranty terms may require. Y our other choices include taking it to an independent garage or a franchise operation specializing in specific repairs, or repairing it yourself. E ach option has its advantages and disadvantages. Dealers may charge more. O n the other hand, they are more familiar with your make of car than other repair shops and may have new and better equipment to service your car. M
anufacturers want to ensure that dealerships run quality repair operations, so they invest in training mechanics. D ealers want you to be happy with the car you bought so you’ll buy another in a few years-from them. Y ou can take advantage of these strengths and save money by looking for seasonal specials on routine maintenance by dealers of your make. A service station is a good option for no warranty work if the mechanics have adequate training and test equipment. P arts might cost more, but labor might be less expensive than dealer repairs. C
ertainly routine matters such as oil and filter changes can be done just as well at a service station as at a dealer. A nd though they don’t have the leg up on your make of car that a dealer does, if you use a service station often, the mechanics get to know your car. T
hen they might spot potential problems early. T here’s also the angle that a local mechanic would like to develop such a good relationship with you that you’ll make a point of buying your gasoline there and perhaps other products, like tires." What about highly advertised repair chains? S pecialty shops may repair one part of a car, such as brakes or mufflers. O r they may advertise complete car care services.
S heer size and volume means lower costs than dealers and independent mechanics. O n the other hand, because they specialize in repairs that are usually one-time in nature, they have an incentive to make those repairs rather than to advise skipping them. S imilarly, they are seldom in a position to develop a long-term relationship with you. I f you know what repairs your car needs, however, franchise shops can be a good deal. THE REPAIR CONTRACTThe repair contract, often called the repair order, is essential for getting a satisfactory repair job done on your car.
T he repair order describes the work to be done, and, once signed, creates a contract authorizing the mechanic to make the described repairs. The repair order should contain: — the make, model, and year of your car;
— the mileage and repair date;
— an accurate description of the problem;
— a list of parts of be used and their charges;
— the estimated amount of labor needed (time to be spent fixing your car);
— the rate to be charged, either per hour or flat rate, to do the work; andyour name, address, and telephone number. The mileage and repair date are important. T hey verify warranty terms and simplify service records. Y
our telephone number is also critical should unexpected problems arise. I f the mechanic cannot reach you, he or she must decide whether or not to proceed, and you may have to live with the results of that decision. B ut note that in many states, if you don’t sign the repair order, you don’t have to pay for any services done by the mechanic. Getting a cost estimate for the repairs before work actually begins is a good idea.
I t’s even required by law in some states. I n those states, the final cost must not exceed a certain percentage or dollar value of the original estimate without the customer’s consent. R
epair shops generally have the right to charge for making an estimate, but you must receive advance notice. The law may entitle you to some repair warranties. I f the repair shop makes an express warranty, you are protected as long as you abide by the terms of the warranty. L ikewise, if a manufacturer’s warranty covers the car or part, you should not have to pay as long as you satisfy warranty conditions.
S ome state courts have held that the implied warranty of merchantability extends to car repairs. T hat means the repairs must be suitably performed. B
eware of «unconditional» guarantees offered by many repair shops. T here are always some limitations on written guarantees. B e sure to read the fine print; there may be special procedures that you are required to follow to obtain the benefits of the warranty. FALSE AND DECEPTIVE REPAIR PRACTICESMost of us don’t understand how cars work. W e certainly don’t understand why they don’t work, and as for making them work again-forget it! T
o protect consumers against fraudulent practices, mechanic incompetence, and overcharging many states have enacted statues specifically governing car repairs or have included car repairs in their unfair and deceptive practices statutes. Most of these statutes or the regulations issued under their authority require price estimates and repair orders. M any states also give you the right to keep or examine replaced parts and require repair shops to prepare a detailed invoice, which must state the labor and parts supplied, warranty work done, guarantees, and installation of any used or rebuilt parts. I
n some states you may have the right to same-day repairs unless you agree to a longer period or the delay is beyond the shop’s control. S hoddy repair work must be corrected at no charge, especially in states where the implied warranty of merchantability has been extended to repair work. F inally, many states require repair shops to post price lists conspicuously. If you think a repair shop has cheated you or made unauthorized repairs, keep in mind that for many mechanics-and the only ones you should deal with!-their business depends on a good reputation, which they will take care to maintain. S o, you may wish to try to adjust the matter with them before you involve your lawyer and threaten legal action or complain to your state attorney general, the local branch of the Better Business Bureau, or even the Chamber of Commerce. If you do not get satisfaction, you may wish to sue if, for example, the shop made unneeded repairs or reinstalled the original part rather than a replacement, the the shop tried its best to correct the fault by fixing something that was broken, although not the problem’s ultimate cause, you should pay the shop.
A fter all, the repair shop did fix one of your car’s problems. I t is not, however, a complete guarantor of your car’s health. THE MECHANIC’S LIENIn most states the repair shop obtains a mechanic’s lien on your car, which helps the shop secure payment for the work done. F or example, if you have authorized extensive work but decide that the car isn’t worth that much after the shop completes the work and refuse to pay for completed repairs, the shop may keep your car. T he car’s actual value and the actual cost of the repairs do not matter.
I f you abandon your car in this manner, the shop may ultimately sell your car so that it can recover as much of the cost of repairs as possible. B ut note that in states that require written estimates and repair authorization, the mechanic’s lien does not attach if the repair shop has not complied with these requirements.
I n such states you are entitled to ask a court to order the car returned to you. Chapter elevenWhere the Heart IsA home is the largest purchase most Americans will ever make. I t’s surprising, then, that people sometimes plunge into buying or selling a home with less care than they give to buying or selling a car. If you are one of the millions of Americans about to buy or sell a home, it’s important to understand the ramifications of the decisions you will make. F or example, state and federal [aw, the economy, your personal preferences, your financial situation, the prevailing real estate market, current mortgage rates, and tax considerations are among the many factors that affect you as either a buyer or seller. Y ou will also need to work with a variety of people-real estate agents, attorneys, lenders, home inspectors, appraisers, and insurance agents, to name a few.
I n short, buying and selling a home is not the simple matter it might appear to be. Whether you are buying your first home or selling your tenth, you will want to make sure that you understand how the law affects your decisions. T his chapter begins with questions related to buying and selling a home. I t’s a good idea to become familiar with the legal aspects of both the buying and selling process.
T his is particularly true if it has been a while since you bought or sold a home. P ractices and laws change, so you’ll want to be aware of how these changes affect your responsibilities as a buyer or seller. Remember, someone must be willing to buy a home before you can sell it, and vice versa. T
he sale will involve negotiation and have legal consequences. L ike any other contract negotiation, it’s a good idea to understand the goals of both parties in the transaction. When you own an interest in real estate, you own the land and every-thing under it, including minerals and water; anything of value on the land, such as crops or timber; the airspace over the land; and improvements on the land such as buildings, for example, a garage, barn, or fence. E
ach of these elements may be separate or shared and may also be subject to legal claims or liens-claims against property representing an unpaid debt of the owner or an unpaid judgment entered against the owner by a court. Several different persons can have a legally recognized interest in the same real estate. F or example, a farmer leases land owned by a school district. A lthough the district owns the land, the farmer owns the crops he or she plants on the land.
T he district may also have sold mineral rights in the land to another person. REAL ESTATE TRANSACTIONSTransactions involving real estate are different from buying anything else, and that difference is reflected in complexity. P ossession of personal (movable) property is a strong indicator of ownership. W ith real estate, on the other hand, the property cannot be moved, and possession does not necessarily mean ownership. T
o illustrate, unless property is fenced in, it may be difficult to distinguish a neighbor’s property from your own. A nd while you may own real estate, you may not have possession of it, if, for example, you are renting the property to someone else. Other factors that distinguish real estate from personal property are: many different people can have an interest in the same real property; foreclosing on real property is much more difficult than repossessing a car; and real estate is taxed differently than personal property. Most people buy a home because they want to own it and reduce their living expenses as they get older. O ther benefits include favorable tax considerations and more control over one’s personal living environment than might be possible in the context of renting. Although it’s possible for a home to be bought and sold strictly between principals-the buyer and seller-this rarely happens today. O ften a home buyer will want to use the services of a real estate agent, an attorney, and a home inspector to check out the property. T
o obtain financing, home buyers will consult the staff of one or more lending institutions. T hey also may consult with a financial planner or accountant about financing and an insurance agent to obtain homeowners insurance. Sellers often use a real estate agent and an attorney. T he seller also may turn to a financial planner or accountant for assistance in sorting out the tax consequences of selling. Typically, two real estate agents are involved in the sale of the home: the listing agent, with whom the seller lists the property, and the showing agent, who shows the property to prospective buyers. B uyers should keep in mind that both the listing agent and the agent showing properties are agents for the seller. T
his means that both of these individuals work for and on behalf of the seller, not the buyer. F or a prospective buyer this is an absolutely crucial point. I t means, for example, that neither the listing agent nor the showing agent is permitted to disclose to a buyer confidential information supplied by the seller that is adverse to the seller’s interest in selling the property. (T he seller and agents are, however, obligated to disclose material defects in the property if specifically requested to do so by a potential buyer, and, under some states' laws, even if not specifically asked. S
ee page 157.)As a buyer you can avoid this information gap by hiring a buyer’s agent. Y ou will, of course, have to pay something for this person’s services, but the fee will probably be negotiable, or it may even be taken out of the commission that would have been paid in any event. B ecause this individual represents you as the buyer, he or she will be required to disclose to you all relevant information-bad as well as good-about the property you are considering.
I n addition, a buyer’s agent is there to negotiate the best possible purchase termsfor you. Under recent changes made by the National Association of Realtors, a buyer’s agent can be compensated from the total commission generated by a sale. T his change is expected to increase the number of buyer’s agents and thus expand the level of information available to buyers. I t could also lead to a slight increase in house prices. B
ecause this is an area of law that is rapidly changing, it is important for the buyer to have a knowledgeable attorney review a buyer’s agent agreement before anything is signed. The seller’s listing agent helps determine the price of the home, suggests how to market the home, schedules advertising and open houses, shows the home to prospective buyers, and otherwise facilitates the sale. T he showing agent works with buyers to show homes, contacts the listing agents, monitors the transaction, and, perhaps, helps obtain financing. I n. most cases the seller pays the sales com-mission, which is shared by the two agents. Before starting the search, the buyer’s lawyer should prepare a contract form on which to make an offer. T
he one supplied by the showing agent is likely to be seller-oriented. I f the buyer does not have such a contract, he or she will want an attorney to review an offer to buy before it is signed, or at least be sure the offer has an attorney-approval provision so that an attorney can review it before It is final. I f you are a seller, you probably will want to consult an attorney early in the process and before signing a listing agreement with a real estate agent. Buying and selling real estate almost always entails a contract.
S o keep in mind that a typed or handwritten «letter of agreement» or «letter of understanding» signed by the parties will be binding if ir meets the legal requirements of a contract. D on’t sign something assuming it’s not a contract and therefore not important. I
f something goes wrong, you don’t want to discover too late that you’ve signed away important rights, failed to include important protections, or failed to receive what you expected. A nd beware of making oral promises. F or example, if a seller orally promises to update the electrical system, the buyer might be able to insist that the system be updated even if the matter doesn’t arise in later negotiations. L egal advice will be much more helpful-and less expensive-before rather than after signing a purchase contract. SELECTING A REAL ESTATE AGENT TO SELL YOUR HOMEExperienced, reputable agents can be an invaluable asset to a seller.
R eal estate agents can offer advice on the suggested listing price, give you an educated guess as to how long it may take to sell, and offer valuable suggestions about how to best show your home. T he major advantage, however, is that by listing with an agent, information about your home is immediately available to hundreds of other agents and buyers in your area through a Multiple Listing Service (MLS), which may also be available over the Internet.
T he agent with whom you sign a listing agreement is known as the listing agent; most arc members of the local MLS. U sually, within twenty-four hours of signing an agreement with an MLS agent, all MLS offices in your area will get a notice that your home is for sale. B ecause most home buyers work with agents, this makes information about your home available immediately to a wide range of potential buyers. (Y ou should think twice before hiring a real estate agent who is not a member of the MLS.)Choosing an agent requires that you do your homework both on the qualifications of the real estate firm and the individual agent who will handle your sale.
Y ou may want to interview several agents from various local firms with the following in mind: — Is the firm a member of the National Association of Realtors? T he association is a national voluntary professional organization whose members exchange information and hold seminars in order to enhance their skills and improve the services provided to buyers and sellers of real estate.- Ask about sales for the last six months or one year. H ow do these figures compare with the sales figures of other real estate agencies?- How long do homes stay on the market?- How much and where does the agency advertise?- How close is the actual sale price to the listing price for homes sold over the past six months or year?- What does the agent think you should do to make your home more saleable? You also may want to know how familiar various firms and agents are with your area. H ow well do they know its schools, facilities, and public transportation?
T he answers to these and similar questions can help you select someone who is knowledgeable and interested in working for you. It's a good idea to avoid agents who want to list your home at a much higher price than other agents suggest. T his may be just a device to get the listing. W ithin a few weeks you may find yourself being pressured to reduce the price drastically. T
hus, make sure you are comfortable with the agent you choose. Y ou should have confidence in your agent’s ability. Y our agent should be responsive to you by telling you who has expressed interest in the home and following up on the visits of potential buyers. F
or example, if many buyers have seen your home but no offers have been made, your agent should be trying to discover why. I s the price too high? I s the decor detracting? S
hould minor repairs be made? Thе listing agreementOnce signed, the listing agreement is a binding contract between rhe seller and the listing real estate firm. I ts provisions include length of the listing period, commission rate and payment date, responsibilities of the firm and its agents, and who is responsible for the cost of advertising and other costs associated with the home sale. Read the listing agreement carefully. D
iscuss any provisions you would like to change. T o further protect your interests, resist signing an agreement until your attorney has reviewed and approved it, especially if you have requested changes that have been resisted. One final suggestion could save you a lot of money. B efore signing a listing agreement, let your friends and neighbors know you’re selling. I f any expresses an interest in buying, exclude them from the listing agreement. T
hen, if one ultimately buys the property, you won’t be required to pay any commission. Most real estate firms prefer exclusive right to sell listings, also known just as «exclusives.» An exclusive guarantees that a commission will be paid no matter who sells the property as long as it’s sold during the time period covered by the listing. E xclusive listings require that the listing agency work the property and actively promote its sale. O ther types of listings include open listings and exclusive agency listings. M ost real estate agencies avoid open listings for residential sales because these listings allow sellers to list with other agencies or sell the homes themselves. U
nder an open listing the commission is paid only to the agency who finds the buyer. I n some states an exclusive agency listing may be offered, under which the seller can avoid paying commission if he or she sells the house personally and not through an agent. MLS-member real estate firms combine their exclusive right to sell listings. T his makes the home available to a wide variety of prospective buyers. T he multiple listing agreement defines how the firms share the sales commission when the property is sold. Typically, real estate firms charge 5 to 7 percent of the sale price. O
n some higher-priced homes a firm may charge the full commission on the first $ 100,000 or $ 200,000 and a lower percentage of any amount above that price. I f the agency that lists the home is also the agency that sells it, the commission is shared by the agency and the individual agent who actually handled the sale. I f the listing firm and the selling firm are different, the commission is shared by the two firms. Other less common forms of fee payments include the flat-fee method, in which a set fee is charged regardless of the home’s price, and the net method. T he net method, which is not favored and is illegal in some states, allows the broker to retain any amount of the selling price higher than an agreed sale price. Remember: All commission agreements are negotiable, particularly in a seller’s market.
S o are the other terms in the listing agree-ment. A t the very least, the real estate agency should be willing to negotiate provisions on: oThe length of the contract.
M any of the standard forms provide that the contract renews automatically. M any firms want a six-month listing.
I f you’re in a hurry to sell your home, try to get a sixtyor ninety-day listing. oWhen the commission is earned. Y ou should insist that the listing agreement provides that this occurs only when the seller and buyer actually complete the sale, not when they sign the purchase agreement. oWho will be responsible for the advertising expenses-the seller or the agency? You should always remember that the listing agreement between a seller and a real estate firm carries a fiduciary responsibility. T his means that the firm and all of its agents act for the seller.
T hey owe the seller care, obedience, accounting, loyalty, and notice. Y our agent should promptly return your telephone calls, keep you informed about the progress of your home sale, schedule open houses, and generally appear interested in the sale. O n the other hand, do not be un-duly upset if you are presented with offers that seem unreasonably low. Y our firm and its agents have an obligation to present you with all offers, even those that may seem insulting.
O f course, you are not required to accept any offer presented, although you may required to pay a commission to an agent if you refuse to accept an offer at the precise price and terms set forth in the listing agreement. B ut if you feel that undue pressure is being applied, it may be time for a change-another reason to limit the length of a listing agreement. BUYING A HOMEIf you’re a prospective buyer, postpone offers and negotiations until you get a feel for various neighborhoods and the style of home you are seeking.
V isiting open houses is an excellent way to do this. Y ou also may want to be prequalified by a lender for a mortgage before you have a specific home in mind. T
his will require filling out financial statements, making the necessary financial disclosures, and having your credit record checked. T his will give you a rough idea of how much money the lender will lend you, making it easier for you to pinpoint your price range. MAKING AN OFFER: THE PURCHASE CONTRACTNegotiations are handled in various ways in different parts of the country. T ypically, most transactions begin with negotiation over price, although other items, such as date of possession, may also be negotiated. T
he real estate agent will provide a form, usually called a preliminary agreement (there is nothing legally preliminary about it, however), a contract to purchase or, simply, a real estate contract. I n any case, this is a formal, written offer that conveys your terms to the seller. I f you wish to have the home inspected, the contract should include an inspection rider; if you intend to apply for a mortgage, it should include a mortgage-contingency clause; if your attorney has not reviewed the contract, it should include an attorney-approval rider. (E
ach of these is discussed in more detail below.) In other words, it should cover the basics. R emember, once this document is signed by both parties, it is legally binding. The offer should specify a date after which it is no longer valid. T his period may be as little as twenty-four hours from the time the seller or the seller’s agent receives it. T he offer to purchase also is usually valid only if both the buyer and seller sign it within a certain time period. A
s a general rule, an earnest money deposit accompanies the offer to purchase. When the buyer signs the offer to purchase, he or she usually de-posits a sum of money-perhaps $ 500 or $ 1,000-with the seller, the seller’s real estate agent, or the seller’s attorney. T his is earnest money. T he offer should specify that the earnest money deposit will be placed in an interest-bearing account with the interest credited to the buyer.
E arnest money is not the same thing as the buyer’s down payment, although if the sale goes through, it will be applied to the down payment. E arnest money symbolizes the buyer’s commitment to take the necessary steps to complete the purchase, for example, obtaining a loan. T hus, if a prospective buyer does little or nothing to complete the sale, he or she risks losing the earnest money deposit. THE PURCHASE CONTRACTThe purchase contract may be called a sales contract, real estate con-tract, purchase agreement, sales agreement, purchase and sale agreement, or preliminary agreement. W
hatever it is called, it is a legal document that, when signed by both parties, is a legal contract that will govern the entire transaction. S ome states automatically allow you to void such a contract within seventy-two hours or a similar. period-a statutory «attorney review period» (see below). I deally, though, before signing such a contract, you and your attorney should review it carefully. R emember, once signed, you are obligated to fulfill your part of the contract.
A purchase contract, in most cases, is a standard form contract with any necessary riders attached. A s usual, you can change any terms on a preprinted form. T he contract can include many provisions but should include the following: the date of the contract;the purchase price of the home;the amount of the down payment;all items to be included in the sale, such as wall-to-wall carpeting, window treatments, appliances, or lighting fixtures;any items to be excluded from the sale, such as an heirloom chandelier; the date when the deed will be transferred (also called the closing date);an inspection rider, which allows the buyer to have the home inspected, usually within ten days of the date of the contract.
V arious types of inspections, such as structural, termite, roof, etc., may be specified. I f the inspection is unsatisfactory, the buyer ordinarily is released from the contract.
H owever, the buyer may not be released if the contract allows the seller to make repairs, and the repairs, when made, meet applicable standards of workmanship; an-attorney-approval rider for both the buyer and the seller if either or both parties sign the contract before it is reviewed by their respective attorneys;a legal description of the property;a provision that the seller will provide good title to the home or what is sometimes called marketable title. G enerally, the seller fulfills this obligation by providing an abstract of title, certificate of title, or a title insurance policy. T
his indicates that the seller has the authority to sell the home, in some states, for example, Connecticut, the seller is required to deliver good title, which the buyer is expected to verify at his or her own expense by securing an abstract of title, certificate of title, or a title insurance policy. I f the buyer encounters problems in establishing title, he or she can reject the title at closing;any restriction or limitations that could affect title;a provision for paying utility bills, property taxes, and similar expenses through the closing date;a provision for return of the buyer’s earnest money deposit if the sale is not completed as, for example, when the buyer has been unable to obtain financing after reasonable or good faith efforts to do so;a provision for taking possession. A long with a firm date for transferring possession from the seller to the buyer, the buyer should include a provision that requires the seller to pay a specific amount of rent per day if the seller does not leave the home by the agreed date. if the buyer and seller already know that possession will be delayed, the buyer may ask for a certain amount of money to be held in escrow at the closing to cover the rent for the expected time period;a provision for a walk-through inspection within a specified period before the date of closing to allow the buyer to make sure conditions are as they should be according to the contract;terms of any escrow agreement;a provision for who is responsible for maintaining insurance until the closing.
T he Uniform Vendor-Purchaser Risk of Loss Act applies in some states, which means that the seller assumes the risk of loss until either transfer of title or possession. I n some states the common law requires the seller to assume this risk;signatures of the parties. Many buyers like to inspect the property within twenty-four hours of the closing to be sure it is in the same condition as it was when they signed the offer to purchase and to make sure that all property to be included in the sale remains in place. T
his is called a walk-through. I f something has been removed that was included in the sale under the terms of the purchase contract (such as a chandelier or appliance), the buyer should quickly notify his or her attorney or the seller’s agent to see if the item will be returned before closing. O r, if agreeable to both parties, the buyer and seller may decide to reach a financial compromise instead. SPECIFIC CONTRACT RIDERSOne common rider, the attorney-approval rider, makes the purchase contract subject to approval by the buyer’s and seller’s respective attorneys within a short period of time, usually five to ten days after acceptance of the offer. I n such cases the standard contract form should include the phrase «Subject to the Approval of the Attorneys for the Parties Within.
D ays," with the number of days written in. Without such a condition in the contract, both the seller and the buyer are bound by the terms of the contract, which may be unclear or may differ from the parties' intent. Like the inspection rider and the mortgage-contingency rider, this language allows a buyer to get out of a purchase contract. I n fact, this is the reason some sellers will not accept such clauses, although it is mandated in some states.
A n attorney-approval rider could specify that a lawyer must state such disapproval in writing, with the seller having the option to correct the problem causing disapproval. T his type of rider ensures that the contract need not bind the parties if their lawyers find an. unsatisfactory provision in the small print. M eanwhile, the buyer and seller can sign the contract knowing that the other party may not easily back out of the contract because of a minor defect or objection. The mortgage-contingency rider, a common provision, allows the buyer a certain period of time to obtain a commitment for financing at a specified interest rate for a certain amount of money. T
his is usually thirty to sixty days, depending on the average time needed to obtain a loan commitment. T he clause might read, for example, that the contract is contingent on the buyer’s obtaining approval for a thirty-year mortgage for $ 100,000 at no more than 8 percent interest within forty-five days. F
or additional protection, the buyer might specify the type of loan he or she prefers, for example, fixed, variable, FHA, or VA. A mortgage-contingency rider provides critical protection to the buyer. F or example, it allows the buyer to void the purchase contract without penalty in those cases in which the buyer is unable to obtain financing on the terms specified in the contract after making a reasonable or good faith effort to do so within the time provided. B ecause this type of clause favors the buyer, some real estate agents suggest that the buyer obtain a prequalification from a lender, which gives the seller a degree of confidence that the buyer will not use the clause to void the contract unless some extraordinary circumstance arises. The seller may refuse to agree to a mortgage-contingency rider. T his can and does happen in a very hot seller’s market, in which case, there’s not much the buyer can do. B
ut the absence of a mortgage-contingency rider might mean that the buyer will be forced to finance his or her home purchase at an unfavorable interest rate. B ecause of this risk, buyers should be cautious about signing a purchase contract that does not contain this clause. S ellers should ensure that the proposed interest rate is reasonable and based on current rates, and allow a limited but reasonable time for the mortgage commitment.
S imilarly, most sellers accept an inspection rider but should make sure that this rider expires relatively quickly-say, ten days from signing. U nlike a mortgage commitment, there’s usually no reason that an inspection can’t be done within a week or so. UNCOMPLETED SALESWhat happens to the earnest money deposit if the sale is not complete? G
enerally, the purchase contract allows the buyer to get back the earnest money and any interest earned on it, unless he or she has in some way violated the contract. I f the seller refuses to return the deposit, the buyer may have to sue the seller for return of the deposit. If the seller violates the terms of the contract or refuses to close the sale, the buyer can sue to force the seller to complete the transaction. I t is also possible for the buyer to sue for damages.
F or example, a buyer who had incurred costs for obtaining a mortgage or costs for renting temporary housing caused because the seller broke the contract would have a case for damages. THE HOME INSPECTIONA professional home inspection varies among localities, but generally the aim is to discover any problems with the home that might not be readily apparent. M ost inspectors check to make sure that there are no material defects or problems with such items as the electrical, plumbing, heating, and air-conditioning systems. T he inspector may also check for termites, estimate the age of the roof and when it might need replacement, and look at the condition of the basic structure, including the foundation, evidence of basement seepage, and other problems. S
ome inspectors check for radon, lead paint, or other environmental hazards. A professional inspector should not be an alarmist. T he idea is to point out problems without exaggerating defects. I t’s a good idea for the buyer to accompany the inspector during the inspection. I n this way the buyer can ask questions and get an idea of the cost of any repairs that are necessary or advisable. T
he inspector may also suggest ways to better insulate the home or offer maintenance suggestions that can prolong the life of systems such as heating and air conditioning. Most buyers do not want to pay for an inspection until they have settled on other terms with the seller. T o do this, the buyer often uses an inspection rider to provide that the offer to buy is contingent on a favorable inspection of the home. I t is unethical for home inspectors who are contractors or architects (as many are) to angle for corrective work on defects they find. DISCLOSURESDisclosures about real estate are covered-or not-by state law. I
n other words, disclosure is treated differently among the states. S ome states require sellers to fill out a long form that explicitly asks about the seller’s knowledge of various material defects that might be present in the home. M ost states, however, do not require disclosure, although in many of these states the listing agent will require it anyway.
I t is certainly wise for the buyer to beware. I n some jurisdictions, unless the buyer asks specific questions about defects, the seller is not required to disclose them, even if he or she has specific knowledge that one or more substantial defects exists. A s a result, any problems discovered by the new owner after the sale is closed are his or her problems. T
here is a trend for courts to require disclosure if the buyer does not ask. B ut do not rely on this possibility. A s a buyer, when in doubt, ask. A s a seller you may want to disclose known material defects that seriously affect the home’s value even if your state does not mandate such disclosure. T
his will help you avoid any future legal problems involved with the sale of your home. M any lawsuits involving real estate transactions are due to the seller’s misrepresentation or failure to disclose. R esponding honestly to the buyer’s questions and either repairing material defects or disclosing them is an effective way to avoid future litigation. SETTING A PRICEAs a buyer or seller, how do you establish the value of a home?
F irst of all, there is no «right» price. T he value of a home is almost entirely dependent on what someone is willing to pay for it and how long the seller is willing to wait to find that person. M ost sellers are not in the position to wait for the ideal buyer who will pay their ideal price. T hey want to find the optimum price at which their home will sell in a limited amount of time.
T o do this, they typically rely on comparisons with recently sold homes in the neighborhood. A real estate agent can help you by giving you a list of homes sold through the local Multiple Listing Service during the past year or so. F
or example, if the home in question is a three-bedroom, two-bath ranch on a typical lot, your agent can point out sales prices of similar homes to determine a listing price. T ry to limit your study to homes that are similar to the one you are seeking to sell or considering bidding for. I f Victorian homes are prized in your area, even a Victorian needing work will be priced higher than other styles of homes of similar size. Amenities are a big factor in the price. A
n attached garage, wood-burning fireplace, updated kitchen and baths, large lot, and spacious rooms are among the factors that generally increase a home’s price. L ocation is also a factor. M ost buyers want good schools, good transportation, quiet neighborhoods, and little or no commercial activity. T he presence or absence of these factors all affect the selling price of your home. Perhaps equally important are personal reasons for selling and how long you can wait to buy or sell.
T ypically, the most interest is generated in the first few weeks a home is listed. I f the seller wants to sell a home fast, it should be priced so that it stands out among comparable homes on the market. I f the seller is willing to wait (and willing to keep the house in tip-top shape during the time it remains on the market), the seller will likely price it above the competition. S
ellers who try to hold out for the highest price, however, may find themselves reducing the price down the line. A house that has been on the market beyond the average marketing time generates little interest from buyers, even when the price is reduced dramatically. M ost buyers will assume that the home has problems, which they,' understandably, want to avoid. As a buyer, you have to consider the following factors to determine whether or not you can afford to purchase a home: — How much money have you saved for a down payment?- What is the status of your current income and expenses, such as car payments?- Do you have a good credit history?- What are the current interest rates on mortgages?- What are your priorities and lifestyle?- How much home can you afford? AFFORDING A HOMEThis is one of the first things to consider when buying a home. F irst of all, knowing what you can afford will narrow your range so you will not waste rime looking at homes that cost too much. F
irsttime buyers often are disappointed when they find the home of their dreams only to discover they cannot afford it. U nless you are paying cash for a home, how much home you can afford depends on your income, your assets, your expenses and debts (including automobile or education loans and outstanding credit card balances), prevailing interest rates on mortgages, the cash needed for a down payment (10 to 20 percent of the purchase price), and closing costs (4 to 6 percent of the purchase price).There is a formula for determining what you can afford. T he prevailing rule says that a home should cost no more than 2.5 times your annual income. T
hus, if your income is $ 50,000, your price limit would be $ 50,000 multiplied by 2.5, or $ 125,000. T ypically, a lender expects you to pay no more than 28 percent of your gross in-come for housing, which includes the loan payment, property tax, homeowners insurance, and estimated utility costs. A lender will look at your debts. A s a general rule, your total indebtedness, including monthly housing expenses, should not exceed 36 percent of your gross income. Along with these guidelines, consider your lifestyle and priorities. I
f costly vacations, dining out, and entertainment are important to you, you may want to buy a less expensive home than the lender says you can afford. M any people, however, find that they are willing to give up some luxuries or even stretch their budget for the home they want. I n an era of corporate downsizing and job insecurity, however, this may be unwise. L uxuries can be cut back in an emergency; a mortgage payment cannot. The total loan amount a lender will agree to provide is directly tied to your income and expenses. A
s a homeowner, you will be making a monthly loan payment, along with the cost of insurance, property taxes, utilities, and maintenance. A lender looks for a solid history of income, employment, and credit. T
he lender also will re-view your expenses, including automobile payments, credit card debt, education loans, child support, alimony, etc. I f you are borrowing money for your down payment, the lender will treat the interest payments on that loan as expenses or perhaps even decline the loan unless most of the down payment is your money. DOWN PAYMENTS AND OTHER CLOSING COSTSSome people may qualify for special government-insured loans offered through the Federal Housing Administration (FHA) or Veterans Administration (VA). T he down payment needed for these loans is minimal. B
ut, unless you can qualify, you will need a down payment equal to 20 percent of the purchase price to avoid paying the extra cost of Private Mortgage Insurance (PMI). W ith less than a 20 percent down payment, banking regulations require the buyer to carry PML This insures the lender against nonpayment of the difference between the customary down payment and the down payment actually paid. T he charge for PMI may be as much as $ 50 or $ 60 per month, although the amount declines as the loan ages and you begin to pay off more of the principal.
I t is not tax deductible. If you cannot put down 20 percent, the only way to end the PMI payments is to demonstrate in the future that your equity in the home has increased to 20 percent. T his can sometimes be done if you refinance and your home has increased in value to the point where the balance of your loan is less than 80 percent of the home’s value. O
r, if you have owned your home long enough to build up equity through principal payments, you may be able to eliminate PMI. B e aware, however, that the insurer will need written support from a certified appraiser as to the value of your home. T he value assessed by a municipality for real estate tax purposes is seldom considered in evaluating home equity. Along with the down payment, you will need between 4 and 6 percent of your loan amount to pay for closing costs, unless you are obtaining an FHA or VA loan. T hese costs include fees for your attorney, the lender’s appraisal, lender’s title insurance, title search, escrow deposits for property taxes and/or homeowners insurance, as well as other expenses, such as recording fees. I
f you are obtaining a loan from a federally insured financial institution, the law the lender to provide an estimate of these costs at the time you apply. The seller has to cover some closing costs. H e or she is responsible for paying the commission on the sale and must pay any taxes owed on the property, any money due his or her lender, and any liens that may be outstanding on the property. U sually the seller is required to pay the cost of a title insurance policy for the buyer that insures the buyer against any defects in the title to the property. MORTGAGESThe interest you pay on your loan is part of the cost of owning a home. F
or example, a 1 percent increase in the interest rate on a $ 100,000 loan adds approximately $ 75 to your monthly loan payment over the life of a thirty-year loan. O bviously, the lower the interest rate, the more you can afford to borrow. B e aware that home interest rates can change quickly. T
hey usually are the last rates to decline when other interest rates are falling and are among the first to rise when other rates are climbing. If you are unsure about your price range, and especially if you are a first-time buyer, prequalifying for a loan can help smooth the purchase process. Y ou will know exactly what you can afford and avoid the disappointment of being unable to buy the home you thought you could afford. T o prequalify for a loan, you will need to go through most of the steps entailed in applying for the actual loan. I
f you decide to prequalify, be sure to do so through a loan originator, that is, an actual lender. A mortgage broker, who brings together borrowers and lenders, cannot prequalify you for a loan. BALLOON LOANSWith a balloon loan, the buyer is expected to pay off the loan completely within a short period of time, usually in three, five, or seven years, but the loan is amortized over a longer period, so the payoff amount is large. I n other words, this is a short-term loan with a large (balloon) final payment.
T he interest rate can be fixed or variable, but in all cases the unpaid balance on the principal is due at the time specified. T he borrower must either refinance or sell the home to pay off the loan. To attract buyers, builders often offer balloon loans during periods of high-interest rates when home sales are sluggish. I n most cases the interest rate will be lower than prevailing home loan rates.
B ut if interest rates are high when full payment is due, refinancing may not be possible. The balloon will «burst,» resulting in foreclosure and loss of the home.
