What Should Home Seller Expect to Pay at Closing?

The Wall Street Journal

Don't hire any real estate agent that doesn't give you a clear idea of what you should expect to pay at closing, and what you should net from the sale.

Since these costs vary depending on both the location and what other sellers are offering to buyers in your neighborhood, I can't tell you exactly what that number will be. But here's a general rundown on costs:

As a seller, you're responsible for paying certain set costs, such as a grantor's tax (which in Virginia is $1 for every $1,000 of fair market value, based on the higher of assessed or sales value). You will also have to pay any homeowners' association fees and real estate taxes due, prorated to the closing date, as well as any outstanding utility, water and sewer bills.

You'll also have costs that can be negotiated, at least somewhat. These include settlement company charges, any fees your lender may charge for paying off the loan, and of course, the broker's commission.

For all of the above, as a rule of thumb, you can expect closing costs will be about 1.5% of the purchase price, and broker fees to run between 3% (if you use a flat-fee broker) and 6% (if you use a full-service broker). All of these costs are spelled out in the HUD-1 form

But since it's still a buyer's market, it's not unusual for purchasers to ask for help with their own closing costs, or to buy down the interest rate on their loans (their lender must approve this). If the buyers are unhappy with some aspect of the house, such as stained carpeting or old appliances, they may also ask for a decorator's allowance. For this reason, I don't think it's shocking to be asked for $7,500 in concessions.

The buyers' requests will be spelled out in the offer, and you don't have to accept them. However, if other buyers are doing so, you should consider doing it too. Your agent can find out the dollar amount of seller concessions for recently sold homes comparable to yours.

Regardless of what sort of deal you and the buyer work out when you accept their offer, you should also put a few thousand dollars aside for problems that may be revealed after the buyer has the home inspected—even if you have had your own home inspection done before you put your home on the market. You don't want your sale scuttled because of some loose flashing or a sagging porch. It's also wise to offer a one-year home warranty, which costs around $300. That way, the buyer will be calling the warranty company, and not you, should the washer break a month after closing.

And remember that many concessions may be worth making if the buyer offers you a good enough price. It's the bottom line that counts.

U.S. Homebuyers still in the Driver's Seat

CNBC

Prices were cut on nearly one quarter of U.S. homes on the market in May, the same as April, with a growing supply of unsold homes keeping buyers in the driver's seat, real estate web site Trulia.com said Wednesday.

Sellers lowered asking prices at least once on 22 percent of homes listed as of June 1, unchanged in the month and up from 20 percent two months ago, San Francisco-based Trulia said in a report provided to Reuters before official release.

A year ago, prices had been cut on 23.6 percent of listed properties. Sellers may face a setback after a brief spring sales spree driven by a rush for federal tax credits of up to $8,000.

To qualify, borrowers who may have purchased in the summer and fall raced to meet the April 30 deadline to sign contracts.

Spring sales could be "providing sellers with a false state of optimism," said Trulia Chief Executive Pete Flint.

"For the unforeseen future, buyers will continue to have the negotiating power and I expect we will see sellers get aggressive via price cuts throughout the summer," he said in a statement.

In the weeks since the tax incentive expired, applications to buy homes toppled to a 13-year low and home builder sentiment worsened.

Inventory levels are growing as sellers gain comfort that the spring season will pave the way for healthier summer sales, Trulia said.

Banks coping with record numbers of repossessed properties will add to the supply as they place the homes on the market, though most economists expect that pace will be measured.

Sellers slashed a total of $26.7 billion in May from asking prices, more than the $25 billion in April and $22.8 billion in March, according to Trulia.

The average discount on the reduced homes held at 10 percent from the original listing. More than a year of tax incentives put the U.S. housing market on a more solid footing.

However, a significant recovery is unattainable without a meaningful improvement in employment, economists agree.

Government data earlier this month showed private-sector hiring rose by 41,000 in May, far overshadowed by the 411,000 temporary census jobs.

Price cutting over the past year was the greatest in cities based in the Midwest and South.

Kansas City, Missouri led by list, with 31 percent of homes for sale cutting prices at least once, up from 20 percent a year earlier.

Other cities with the largest increase in share of homes that lowered prices were Arlington, Texas; Cleveland, Ohio; Louisville, Kentucky, Houston, Texas and Minneapolis, Minnesota.

Western cities had the most improvement in the share of sellers slicing prices over the year.

These were among the cities that had gained the most during the housing boom and have already suffered the most in the crash.

Sellers dropped prices on just 10 percent of properties listed in Las Vegas in May, for example, compared with 30 percent a year earlier.

Six California cities were among the 10 cities showing the most improvement.

Price-cutting on luxury homes listed at $2 million or more was unchanged in May, with an average discount of 14 percent, Trulia said.

Homes in this category account for less than 2 percent of total inventory, but almost one-quarter of total dollars slashed from all homes for sale.

Mortgage Rates Drop Again

Market Watch

15-year fixed-rate mortgage sets record low for fourth week in a row

Bond yields fell and mortgage rates followed after a relatively weak employment report, allowing the 30-year fixed-rate mortgage to hover near its record low set late last year, Freddie Mac's chief economist said on Thursday.

The 30-year fixed-rate mortgage averaged 4.72% for the week ending June 10, down from 4.79% last week and 5.59% a year ago, according to Freddie Mac's weekly survey of conforming mortgage rates.

The 15-year fixed-rate mortgage set a record low for the fourth week in a row, averaging 4.17% this week, down from 4.20% last week and 5.06% a year ago. Freddie Mac started tracking the mortgage in August 1991.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 3.92%, down from 3.94% last week and 5.17% a year ago. And 1-year Treasury-indexed ARMs averaged 3.91%, down from 3.95% last week and 5.04% a year ago; the ARM hasn't been lower since the week ending May 27, 2004, when it averaged 3.87%.

To obtain the rates, the fixed-rate mortgages and the 5-year ARM required payment of an average 0.7 point, and the 1-year ARM required an average 0.6 point. A point is 1% of the mortgage amount, charged as prepaid interest.

"Following a relatively weak employment report, bond yields fell this week and mortgage rates followed," said Frank Nothaft, Freddie Mac vice president and chief economist, in a news release. "Private payrolls rose by 41,000 jobs in May, less than a quarter of the market forecast consensus of an 180,000 gain."

The economy is showing signs of improvement, Nothaft added.

"The Federal Reserve reported in its June 9 regional economic review that the economy strengthened in all 12 of its Districts over April and May. It also noted that loan quality was stable or improving in most Districts, but remained an issue for banks with large exposure to real estate," he said.

Microsoft eyes 60M Homes for Energy Hogs

USA Today

More than 60 million U.S. homeowners, by simply typing in their address, can now see how their energy efficiency compares with others in their neighborhood or state.

Microsoft Hohm, a free online service that gives tips on how to boost home efficiency, announced Wednesday a new feature that scores homes nationwide. Its estimates are based on public information about a home's size, age and location and other data on an area's typical weather and utility bills.

"The big deal here is that we built the Hohm Score to answer a simple question: Am I an energy hog or an energy miser?" Troy Batterberry, Hohm Score's general manager, says in the announcement.

This new tool comes as companies increasingly compete in the home energy market, either by offering smart meters that connect a home's appliances or -- like Hohm and Google's PowerMeter -- online services.

Which states have the most and least efficient homes?

The average Hohm Score is 61, based on a 1-100 scale. Homes in Hawaii top the list, with an 81, followed by those in Delaware and Maryland (each 70), District of Columbia (68) and New Jersey (67.)

The lowest score went to homes in Texas, Tennessee and Nevada, each with a score of 51, followed by those in Oklahoma (52) and Arkansas (53.)

The scores are estimates unless a homeowner inputs more detailed information, which allows Hohm to provide customized tips for conserving energy such as caulking windows or adding insulation.

Consumers can automatically link their energy bills to a private Hohm page if they're served by these utilities: Seattle City Light, Sacramento (Calif.) Municipal Utility District, and Xcel Energy (eight states in the Midwest and West.)

"Someone could easily save $200, $300, $400 a year just by taking advantage of some of the more basic recommendations we offer you with Hohm," Batterberry says in the announcement.

Hohm charges nothing for its reports, but it may at some point start charging contractors for consumer referrals and utilities for its software, Marja Koopmans told Green House in a March interview. Koopmans is general manager of marketing for Microsoft's start-up business group, which includes Hohm.

Cashing in on a Real Estate Boom

The Wall Street Journal

Most Commercial Properties Are Slumping, But 'Triple Net Lease' Deals Are Hot

Are you overlooking a commercial real-estate boom?

If your definition of the category is limited to splashy office parks and shopping malls, both of which took a pounding during the financial crisis and haven't fully recovered, then you probably are.

But think a little smaller—like fast food-restaurants, convenience stores and gas stations—and the returns get bigger. Such ventures, known as triple-net-lease properties, are "the best-performing sector of the commercial real estate marketplace," says David Bailin, head of global managed investments for Citi Private Bank, which serves ultra-high-net-worth clients. "It is the sector that lost the least value [during the recession] and rallied the quickest."

Triple-net-lease properties are usually freestanding buildings in which a tenant agrees to take responsibility for maintenance, taxes and insurance during a long lease—leaving the investor with little to do but collect checks. Investors typically buy individual properties through commercial real-estate brokers like Marcus & Millichap, CB Richard Ellis Group or others, either alone or in limited partnerships with a few other investors, and then lease them out to occupants such as drug store chains, quick-serve restaurants, convenience and dollar stores, medical outfits, and in some cases big-box retailers like Costco.

Triple-net-lease properties are generating annual returns of as much as 12% these days, estimates Bernard J. Haddigan, managing director of Marcus & Millichap Real Estate Investment Services' National Retail Group. Individual investors and small groups of partners generally invest $300,000 to $5 million per building.

Some publicly traded real-estate investment trusts concentrate on triple-net-lease properties, too. They returned 16.9% during the first quarter—compared with 11.1% for Dow Jones Equity All REIT Index, which includes all types of commercial and residential property.

Triple-net properties suffered during the recession, but less than other types of real estate. Whereas overall commercial prices fell by about 40% during 2007-09, prices for triple-net properties fell by about 15%, according to Mr. Haddigan.

Like all kinds of investing, triple-net-lease plays are based on risk: the more you're willing to take, the greater the potential returns. There are several important factors that determine a triple net deal's riskiness: the creditworthiness of the tenant, the location, physical condition and functionality of the property, and the remaining term on a lease (shorter is riskier). Also important: the "occupancy cost" or "health ratio," defined as the percentage that the tenant pays in rent relative to store sales. (The lower the ratio, the better.)

Besides overall economic risk, there's the risk of picking a tenant whose product or service might fall out of favor. Changing consumer trends can wipe out cash cows, as happened with some video-rental stores during the last decade.

"You need a good tenant," says Jeffrey Rogers, president and chief operating officer of Integra Realty Resources, a commercial real-estate appraisal and consulting firm that doesn't own or broker real estate. "Then you need an optimal location and to know what the market rent is. That is absolutely key."

Investors who lack the time or inclination to invest in triple-net-lease properties directly can get into the category via REITs such as the publicly traded Realty Income Corp. and Lexington Realty Trust in New York, as well as American Realty Capital Trust in Jenkintown, Pa., which is not traded on a stock exchange. These REITs invest mainly in triple-net properties, and they're generally sold through broker-dealers. They sometimes have minimum-net-worth and other requirements.

As with most income properties, investors can come out ahead—or behind—on triple-net properties in two ways: through price appreciation and income. The best measure of income potential is the so-called capitalization rate, or the net operating income divided by the purchase price of a property.

In recent months, cap rates have been falling because property prices nationally are rebounding. More investors are going after fewer high-quality properties, driving prices up. This is considered a positive sign for the broader commercial real estate market—but it means the easy money in triple-net-lease properties might be coming to an end.

But there is still opportunity for savvy investors. Michael K. Federman, 38 years old, is an attorney in New York who began investing in triple-net properties in 2004, during the previous recession. His first acquisitions were fried-chicken restaurants in upstate New York, followed by a Circle K convenience store in Arizona. He later sold the Circle K and purchased more buildings, and currently owns a portfolio of 15 properties.

A self-professed "conservative" investor, Mr. Federman now concentrates primarily on single-tenant properties, he says. Most recently, he and a business partner in March purchased a long-term lease property for about $4 million housing a Chipotle Mexican Grill in Lower Manhattan with a cap rate of 8.5%. That return was in line with the national average for casual dining restaurants in 2009, according to Marcus & Millichap.

"For me it was a perfect deal," he says, "because it combined prime real estate, stellar credit and minimal management responsibilities."

Median Home Prices Up in 60% of U.S. Cities

USA Today

Home prices rose in nearly 60% of U.S. cities in the first quarter of this year, the National Association of Realtors says.

The median sales price for previously occupied homes rose in 91 out of 152 metropolitan areas tracked in the January-March quarter versus a year ago. There were double-digit price increases in 29 cities.

That's a sharp improvement from the fourth quarter of last year, when prices rose in about 40% of cities. The national median price was $166,100, or 0.7% below the first quarter of last year.

Sales of foreclosures and other distressed properties made up 36% of all sales in the first quarter.

The largest percentage price increase was in Saginaw, Mich., where the median price doubled to nearly $61,000. Prices in Akron, Ohio were up 95% to about $95,000. Prices in Cleveland were up 54% to $106,400.

The largest price decline was in Orlando, where they dropped 15% to nearly $132,000. Prices in Ocala, Fla., fell 14.5% to a median of nearly $93,000. Prices in Cumberland, Md., fell 14.4% to $98,300.

Fed Planning to Sell MBS

The Wall Street Journal

Fed Officials Develop Plan to Shrink Central Bank's Mortgage Portfolio

Federal Reserve officials have agreed to sell some of the central bank's $1.1 trillion of mortgage-backed securities at some point, but have been unable to reach a firm consensus on how soon or how aggressively to do that, according to several people familiar with the matter.

Many Fed officials want to wait until after the central bank has started to raise short-term interest rates and tighten financial conditions, which could be many months away, but a minority is eager to move sooner.

The internal debate about the Fed's mortgage portfolio is important to households and investors because sales of mortgage securities could push down prices of the securities and push up mortgage borrowing costs.

Fed officials have been debating asset sales for months. Minutes of the Fed's late April meeting, due out in two weeks, are likely to show the debate has intensified but hasn't been completely resolved. The Fed started buying the securities in early 2009 as part of an effort to drive down long-term interest rates to speed an economic recovery. But now, most officials are uncomfortable holding them.

One issue underlying the debate is inflation expectations. Some Fed officials worry that holding such a large portfolio—which entails pumping money into the financial system to fund the purchases—fuels fears that the Fed will allow inflation to take hold in the future.

Sale proponents also are averse to holding instruments that seem to favor housing over other parts of the economy. But many officials worry that markets would interpret even a program of modest sales as a sign that the Fed wants to tighten credit, before it is actually prepared to do so or before the economy could bear it.

The Fed's conventional way of tightening credit is to raise a short-term interest rate called the federal-funds rate, which is what banks charge each other on overnight loans. Many officials are inclined to maintain that as their main mechanism for tightening policy when the time comes, and to put mortgage sales on a slow track at first.

One approach attracting a following within the Fed: After the economy improves enough, the Fed would change the way it communicates to the market, no longer saying rates would stay low for an "extended period." Then, it would pull some cash out of the financial system with operations called reverse repos and term deposits. Next, it would raise short-term rates by increasing the rate the Fed pays banks to keep money on reserve at the central bank. Then it would announce a modest asset-sales program that it might ratchet up after six to nine months as recovery gains steam.

"The best argument for this sequence is that the Fed and markets have lots of experience analyzing the effects of rate hikes and should be able to gauge their effects with reasonable accuracy," economists at Goldman Sachs said in a commentary on the Fed's debate earlier this week.

The goal would be to substantially reduce the Fed's mortgage holdings within four or five years after tightening starts. Fed officials believe they will need to sell substantially less than their overall holdings of $1.1 trillion because many of the securities will retire on their own as borrowers refinance mortgages and the securities mature.

The idea of ratcheting up sales later is one that is gaining support at the Fed and could be a compromise to allay the worries of the officials most eager to dispose of the securities. The Fed would also have the option of tapering down the sales if the economy responded poorly.

"I would start slow and then move based on the economy," James Bullard, President of the St. Louis Fed, said in an interview with the Wall Street Journal last week. "I would want to ensure markets that you would do it slowly over a longer period of time."

The process of just getting started could take as much as a year or more to unfold, depending on how the economy performs. Though the Fed's anti-inflation hawks want to get going soon, many officials are still comfortable with their assurance to the public that rates will stay low for an extended period because inflation might still be slowing and unemployment is high.

"With inflation expectations stable, core inflation rates declining, and significant excess capacity in the economy, accommodative monetary policy remains appropriate," Federal Reserve Bank of Boston President Eric Rosengren told a gathering in New York Wednesday night.

An added reason for caution: Rising concern about financial risks in Europe related to Greece's debt woes. Though Greece is small relative to the U.S., Fed officials are concerned that turmoil in European markets could spill into U.S. markets and hurt the recovery here.