The Pre-Approval Odyssey

In keeping with my 12-month plan for condo capture, I recently went through the mortgage pre-approval process.  I wanted to share the account here while memories are still fresh.

In the Bay Area, most people recommend that buyers get pre-approved before they even start hunting for a house.  I think a big part of the reason why is because housing is (still) incredibly expensive here.  Going through this process serves as a reality check early on.  It would really suck to spend months finding the right property, go through the hassle of negotiating a great price, only to find out that nobody will lend you money to close the deal.

A pre-approval means that you go through all the steps you would take when actually applying for a loan.  The lender will pull your credit, verify your assets and income, and see whether you can afford the loan.  If you pass all these tests, they give you the thumbs-up in the form of a pre-approval letter.  You can show this to potential agents (it shows you're a serious buyer) and sellers (it shows that you can close the deal).

There are some disadvantages to pre-approval:

• Because the lender is checking your credit, it counts as a loan application to your credit score.  As a result, your credit will drop.  I'm not sure yet how by much.
• There can be some fees involved (more on this later).
• It's relatively time-consuming.
• A pre-approval is only "good" for a certain period of time, typically 3 months or so.  You'll need to re-pre-apply to extend it.

If you aren't planning on buying in the near future (for example, you might be thinking of buying between 1 and 2 years from now), it may make more sense to get pre-qualified.  Pre-qualification involves you telling a lender how much you have, how much you make, etc., and then having them tell you how much they would be willing to lend you.  Importantly, the lender in this case does not verify what you've told them.  As a result, it's considered weaker than a pre-approval.  It won't carry the same weight with a buyer, but it could be a useful tool for estimating how much you can afford.

An important note: as people keep on saying, only YOU can REALLY know how much you can afford.  The lender may estimate that you can pay, say, up to $2000 a month on your mortgage, but they don't know what your lifestyle is or what other non-loan obligations you have.  I'm trying to play it conservatively, resisting the temptation to lend as much as I can possibly get, and instead making sure that I can comfortably maintain my lifestyle even in a new place.

Anyways.  You can get pre-approved from any place where you would get an actual loan.  I decided that I would scope out a few representative samples from different classes of lenders (local banks, national banks, credit unions), except for mortgage brokers.  I'll admit that I've been a little worried by the stories I've heard of hard-riding mortgage brokers... even if they didn't act unethically like many did during the boom years, their incentive structure pushes them to lead people into the loans that give them the best profits, which aren't necessarily the best loans for me.  My plan has been to get pre-approved by a more conventional lender, and then when the time comes to actually apply for a loan on a specific property, I'll use that lender's rates to shop around the mortgage brokers to see if any of them actually can get me an absolutely better deal.

Now, theoretically, I could just pick any old bank or whatever to get pre-approved.  I decided, though, that I wanted to get pre-approved with the lender that I'd be most likely to actually use... it seemed like a good idea to get comfortable with them, experience the process the way they did it, and hopefully cut down on the volume of work that I'd need to do when the real deal came along.  So, in essence, I started doing the process of applying for a loan, just half a year before I find a condo.

To make a real apples-to-apples comparison, you need to contact all prospective lenders on the same day - rates fluctuate on a daily basis, or even more often.  So I spent some time collecting prospective lenders.  This mainly involved Google searches and Google maps, along with a few things that just occurred to me.  My final set of candidates was:

Credit Unions
Provident Credit Union
San Mateo Credit Union
Technology Credit Union (disqualified since they currently don't make condo loans)

Regional Banks
First Republic
California Bank & Trust
Union Bank of California
Borel Private Bank & Trust

National Banks
Wells Fargo
Chase

Fortunately, most banks have online forms that you can fill out to get customized rate quotes.  This is much better than a static web page, which probably just lists the most common rates (likely the 15 and 30 year fixed for SFDs).  The web sites should also show what your closing costs can be, which vary drastically - even at 0 points, they varied from about $2000 to more than $7000.  So don't just look at the rate - the closing costs can drastically raise the total price.  This is to some extent reflected in the APR, as opposed to the rate, but the translation is complicated... if you divide the closing costs over 30 years of the loan, it may look reasonable, but if you sell in 5 years, it will look much worse.

I compared all the rates I could get within 1 day.  I found that the credit unions were the cheapest.  Some regional banks were nearly as good, while others had the highest rates of all.  The national banks tended to be high.  I checked again about 10 days later, this time just focusing on the top contenders from the first round.  In both cases, San Mateo Credit Union had the best rate AND the best closing costs.  I decided to make my move.

I'm not a member of SMCU, but I am a big fan of credit unions - I've belonged to one particular credit union for over a decade, and have been extremely pleased at their service.  SMCU has a web portal that you can use to apply for pre-approval.  This appears to be a service that they've acquired, rather than something built in-house, because Provident Credit Union seems to have the same system.

The online application was pretty good to use.  There are really helpful FAQs that display while you're filling it out.  It lets you save your progress and return later, which is great - it takes time to fill out, and I needed to occasionally wait so I could look up an old pay stub or something.  One thing that confused me a little bit was a by-product of the fact that the exact same form is used for pre-approval as for regular approval.  Based on what I had read, I had imagined that I would just supply my financial data, and it would spit out a number for me.  Instead, they wanted to know how much the property would be worth and what size of a down payment I would make on it.  I put in a number that I considered to be at the high end of what I would spend.  Then I filled out the remainder of the form, including all my assets.  Then I went back and adjusted downward my down payment and purchase price.  I'd realized that my documented assets would just barely cover the down payment and closing costs, not leaving any cushion for reserves.  In practice, I would be OK with this - I have funds in retirement accounts and personal stocks and such that I could tap for reserves in an emergency - but I knew that I didn't want to stretch that far, and in any case, I was started to get worried and confused about the whole pre-approval process.  Would they give me the "magic number", in which case it didn't matter what I put down here?  Or would they only give me a thumbs-up or thumbs-down, in which case I'd want to be careful to ensure that I selected a reasonable value?

After a couple of days, it was all filled out and ready to go.  I was surprised to note that Firefox, which had been great up until now, wasn't working on the page where I was supposed to read and acknowledge all their disclosures.  Or, to be more accurate, their site wasn't working right.  I viewed the page source and checked out the javascript, for old time's sake.  My hunch is that they hadn't re-worked it yet for Firefox 3, which probably has a different ECMAScript engine.  Anyways, I had to wait a while longer, then I did it again in Safari, and this time it went through.

At the start of the process, the page had said that they use an automated underwriting system that is capable of making many decisions automatically online, in which case they would just produce a pre-approval letter that I could print.  They also warned that in some cases, their system can't handle it, and a person needs to finalize it.  I fell into the second category.  They gave a nice, descriptive message, and told me to expect a call soon.

I was contacted the next Tuesday by SMCU.  She noticed that I wasn't an SMCU member and said that I'd need to join.  I'd been surprised before that they didn't ask about this in the online form.  The entrance requirements for SMCU are stricter than for Provident, and while I knew what I'd need to do to join, I hadn't wanted to set up an account until I was sure I'd be going with them.  In the back of my mind, I thought that since I was applying for a property in San Mateo County, that would make me eligible right away.  That isn't the case.  We chatted about that a little, and I filled out an application and sent it in.

She also asked me to send in some documentation.  I'm still not totally clear on the automated underwriting system, but I suspect that for borrowers getting very conventional loans with very high credit scores, those borrowers are statistically far more likely to be financially sound, and so those people wouldn't need to furnish actual proof of their finances.  For whatever reason, I didn't fall into that category - I suspect that it has become much harder since the credit bubble burst.  She asked me to send in my previous 2 years W2s, my 2 most recent pay stubs, and the most recent bank statements from the accounts I'd be tapping for my down payment.  I also needed to sign several forms - one acknowledging my right to a copy of any appraisal report, another authorizing anyone to release my financial info to SMCU, and a copy of the Fair Lending Notice. 

I'm Generation Y (or whatever they're calling us now), and do everything online.  I've long stopped receiving paper copies of bank statements, bills, and so on.  I hoped that printouts for everything (including my pay stubs) would be acceptable.  They were.

She also asked me to send in a $275 good faith deposit.  That threw me for a loop.  In all the dozens of books and articles I'd read advising my to get pre-approved, none of them had mentioned that you'd need to pay hundreds of dollars for it.  In fact, many touted the fact that it was free.  We went back and forth on this a little bit until I understood it.  It wasn't an application fee - they wouldn't cash it, and would just hold it until an eventual application.  If I ended up deciding not to buy a property or went with another lender, I'd get it back, minus a $10 charge for a credit check.  That seemed way more reasonable.  Also, she clarified that I would still be free to apply for a slightly different form of mortgage - even though I applied for a 0-point version, I'll probably try and buy a discount point if I can on the actual property.

Everything was kind of staggered - I gathered the documentation, signed the forms, and faxed everything in the next week.  I also mailed in the check around the same time.  Then I played the waiting game.  Then I played Hungry Hungry Hippos.

Finally, a call at work: my mortgage was approved!  I felt very happy.  She asked if I would like her to mail me the pre-approval letter; I said yes.  She reminded me that I still needed to become a SMCU member and send in the good faith deposit; I told her that both were already on their way.

I got the actual pre-approval letter in the mail the next day.  It looks like they didn't need to wait for my check or membership to issue it, although both would be required to actually apply for the loan.  It's a simple, one-page document that lists the type of loan and the amount.  Interestingly, it just listed the loan amount, not the purchase amount, which means that buyers would need to trust that I do actually have the down payment for cash that I said I did.  Also, I was disappointed to see that the letter was for the exact amount that I had put down in my application.  I had really hoped that they would calculate an upper maximum for me, but it looks like they just run the numbers for what you submit.  If I had realized that, I would probably have tried for the original, higher amount that I was considering, just since it feels like that's probably closer to my maximum.

This letter is good for 60 days, so it will certainly expire before I buy a property.  Depending on the status of my search, I might renew when it expires, or may wait a bit longer until I'm closer to searching in earnest.  The next time, I'll almost certainly put in the higher amount... not that I'm planning on borrowing more, but that should let me know just how much flexibility I have, and may reassure sellers about my resources.

All in all, it's been a good experience.  I've definitely learned a lot - going through this process is quite a bit different from the breezy paragraph-long exhortations that everyone writes about.  Most importantly, I feel like I now have an actual, official green light to move forward with condo capture.

Tips and Traps when Buying a Condo, Co-op, or Townhouse

Despite my earlier mixed feelings, I have returned to Robert Irwin for another read-through.  He's the author of one of the only books I can find that specifically address buying a condo.  Condos are certainly dwarfed in the national real estate market by traditional single-family detached homes (SFDs), but in certain markets, particularly older urban ones like mine, they're a significant force, and often the best or only choice for first-time home-buyers.  I was tired of being an afterthought in real estate books, and wanted something with more focus.

On the whole, I enjoyed reading this book more than Irwin's earlier book on negotiation.  That probably says more about me than it does about the relative quality of the books - I don't particularly enjoy negotiation, and I DO enjoy condos.  The earlier book occasionally irritated me when Irwin described high-pressure tactics and said things like, "I consider this approach to be unethical and would never suggest using it, but you should be aware of it."  There's almost none of that in this book - it's more more descriptive than prescriptive, focusing on informing you rather than advising how to act.

It fulfilled its main purpose of providing a high level of detail on purchasing properties like condos.  I have to say that I didn't glean too much additional knowledge from the book, but that's because I've spent more than six months patiently grabbing bits and pieces of info from a wide variety of sources.  I really wish I had read this up front, it would have saved me a lot of time.  I had a lot of basic questions early on that were surprisingly hard to answer: "When I buy a condo, what, exactly, do I own?"  Irwin gives an extremely clear answer: you own an "airspace", defined as the region between the walls of your unit.  You own this space "fee simple title," which is the same kind of ownership that an SFD buyer gets, and means that you have nearly unlimited freedom within that airspace.  Additionally, you own a proportional share of the land, common property, and everything else run by the association.  That last point is what used to confuse me - I knew that land was valuable, and was curious how exactly owning land works when multiple units are stacked on top of it.

He also digs deeper into the implications of this ownership structure.  Because all condo owners own their airspace "fee simple title," it can be very hard to enforce a noise ordinance against someone who plays their stereo loudly.  Unlike a co-op, where the association owns the property and can kick out someone who violates the rules, a condo association is more circumscribed - they can talk to the owner, fine them, place a lien on their condo, but can't just kick them out.

Irwin also writes a fair amount about condo conversions.  I read about these all the time - they're hugely popular in San Francisco with a very long waiting list - but he addresses all the implications.  Conversions generally offer a trade-off between a better location in exchange for an older building that may not last as long.

The book also forced me to confront an idea that I was familiar with but hadn't let myself think about very much: things wear out.  I was comfortable with the idea of a condo association repairing a roof, or repainting, but what if the building itself became decrepit?  This is especially worrisome if I think about buying, say, a 40-year-old condo unit.  If the average lifespan of a building is 50 years, then what happens to me when the time comes for massive changes?  According to Irwin, the condo association should take ALL maintenance and replacement costs into account, including the buildings themselves.  That doesn't necessarily mean that every board will do this responsibly, but at least in theory, the buildings should continue replenishing themselves over generations.

There are quite a few areas where I was learning actual new stuff for me.  A lot of these concern what happens AFTER I would buy a unit.  I've had a vague idea that there's a "board" that does important stuff, but Irwin goes into the details about the Architectural Committee, the enforcement committee, the board itself, and so on.  He confidently declares that YOU will want to run for the Board, even if right now you think you never would.  (I don't, so that makes me nervous.)  He talks about people burning out on the Board.  He describes the frequent lawsuits that Boards are involved in: against the developer, against residents, against guests.  All of which makes me a little concerned.  On the whole, though, the book maintains my goal of moving into one of these.  Now that I understand how they work a bit better, I feel more confident about what I'd be getting into.

At the same time, it impresses on me again the importance of buying into the RIGHT condo.  The difference between a well-run condo association and a poorly-run one is enormous.  Irwin gives some good advice on how to determine which is which: ask to read the minutes of recent board meetings, details on any current lawsuits, and phone numbers for board members.  If the board refuses, they're likely hiding something, and you should continue to look.

The other big concern is the unknown of a new development.  A few of the places I'm considering are new construction.  These hopefully have really high quality materials and the whole "new home smell" thing, but as Irwin points out, there's a huge unknown factor involved.  If the developer runs into financial troubles, they may never finish, and the value of existing units will tank.  Even if everything is satisfactorily completed, you're getting into an unknown situation: you don't know what the Board will be like, how responsible they will be with money, and so on.  With an existing development there is a track record that you can examine.  It takes guts to spend a lot of money to live under uncertain leadership.

Oh, and I was glad to see that Irwin tackled a question I had wondered about recently: whether the HOA fees include insurance.  While there may be exceptions, in general the HOA will purchase property (and often liability) insurance, so the owner just needs to buy a cheaper policy that covers only the replacement value of their goods.

One thing that is kind of funny about this book is that it was published in 2007, at the very height of the speculative real estate bubble.  Irwin allows that moment in history to infect some of his outlook - he writes about how "Condos usually appreciate more slowly than SFDs, but in the last few years, they've been appreciating much more quickly!"  Well, duh... that was part of the problem.  In the financing chapter he writes about negative-amortization and option-ARM loans.  Those things are long gone now.

While this book isn't perfect, it's certainly the best book that I've read yet on the specific issues facing a potential condo buyer.  I'd highly recommend checking out this book early on to orient yourself and make sure whether you want to go down this road or not.

Dang It Feels Good To Be A Renter

There can be very, very good reasons to remain a renter.  One of them occurred to me just this last week.

My apartment has vertical blinds.  Several months ago, I twisted something wrong, and ended up breaking the tilter.  As a result they became permanently stuck in a 3/4 open position.  I kept meaning to do something about it, and spent a few weekends tinkering with various replacement parts, but never succeeded in making it work.

Finally, I called the management office, and put in a maintenance request.  Less than 48 hours later, the problem was taken care of.  I didn't need to take time off of work, didn't need to find a competent contractor, didn't even need to pay anything.  That's part of the beauty of tenancy.  Your rent doesn't just pay for your lodging: it also includes the standard upkeep and maintenance.  For as long as I rent I'll never be responsible for painting or plumbing or anything of the sort.

Now, because I'm looking at buying a condo instead of a stand-alone house, I'll still get some of that benefit in exchange for my monthly HOA dues.  It won't be as comprehensive as what every renter has, though.  I'll be totally responsible for everything within the walls of my unit, for better and for worse.  That means more effort and time given to keeping my place looking nice, and also more unplanned expenses.

Expenses in general are kind of hard to judge.  There are plenty of calculators out there where you can plug in your purchase price, down payment, and interest rate, and find out how much you'll owe each month.  I'll look at that figure and think, "Oh, okay."  It's higher than my rent, but still reasonable with my paycheck.  I need to remind myself that it's just a piece of my obligations.  I'll also be paying property taxes, as well as homeowner's insurance, and HOA fees, all in addition to the unexpected costs that would come up.

HOA fees seem to be all over the map.  At the properties I'm considering, they seem to start around $250 a month and work up to just over $500.  It isn't always very clear why some are higher than others.  It makes sense that some of the difference can cover the various amenities.  It costs more to keep up, say, a pool, sauna, and exercise room than to not have those things.  Unfortunately, another thing that I'll need to consider is that low HOA fees may actually represent bad management... if they aren't responsibly collecting enough fees to cover everything, then residents can get walloped with an emergency assessment.

I would actually kind of prefer to find a townhome - these generally have much lower HOA fees, which works well for me, since I don't expect to take much advantage of the typical amenities one receives in a condo (pool, doorman, whatever).  Unfortunately, there are basically no townhomes in San Mateo County (at least not that I can find in the areas I'm considering).  Within the condo realm, you can save a lot on HOA fees, but it tends to go hand-in-hand with cheaper properties that are way out in eastern Contra Costa County or whatever.  And, conversely, the toniest high-rise condos in San Francisco charge more for just their HOA fees than I currently pay in rent.

One thing I'll need to investigate is whether HOA fees include any form of insurance.  I'm not at all clear on whether they generally do, occasionally do, or never do.  It would make buying look a lot more attractive, though, even if they just cover the physical structure and I still needed to purchase insurance for my possessions.

Because I plan to put down 20% for a down payment, it looks like I'll have the option to not use an escrow account for my insurance and property taxes.  I'm a fan of this option, for much the same reason that I like to owe income taxes on April 15th.  If I can hold on to the money for six months or a year, then I can bank it and collect interest before passing it along.  It makes things just a little bit more scary - missing either payment would be a Very Bad Thing - but I now have years of practice at Outlook reminders, email, and online payments, and am certain that this could continue to work out well.

Wow, that was a lot of rambling.  Bottom line: It's good to periodically take stock and see whether buying really is something that I want to do.  There are many good reasons to own - if you're planning to stick around for a long time like I am, then your home is insurance against constantly rising rent; it also gives you freedom to adjust your living space around you (though less so in a condo than in a traditional house).  That said, it isn't at all a clear-cut advantage over renting, and I intend to remain mindful about the reasons why I'm doing this.  Once I take the step, I'll be committed for a LONG time, so I want to ensure it makes sense before I commit.

FICO Psycho

While I won't promise to do TOTAL disclosure, I do want to document all stages and aspects of the condo hunt.  I'm now approaching my originally scheduled time for mortgage pre-approval, and before I started shopping around I wanted to find out my FICO score.  I know that, in general, my credit is good, but I wanted to be armed with my specific figures so I could make educated estimates about my likely treatment, and push back if I happened to run into a lender who tries to railroad me.

There are multiple types of credit scores out there, but FICO remains the gold standard - it is used by most lenders, and is the only score that is consistent across all three bureaus.  (At least in theory - more on this later.)  What sucks is that you have to pay to see them.  You're entitled to a free annual credit report from each bureau - and should take advantage of it - but there's no law which says that they have to share your actual score.

Currently, the place to go to buy scores is myfico.com.  You used to be able to buy all three here; Experian pulled out, and there currently is no way for a consumer to directly find their Experian score.  Boo!  The scores are also kind of expensive, over $15 each.  Double boo!

On the plus side, there is a coupon code you can enter for a discount.  Do a google search and one will pop up.  I saved 20%.

You enter your SSN, address, and answer some very basic credit questions.  In my case, they weren't able to verify me on the website, so I had to call their number to complete it.  This was a pretty fast process - I wasn't on hold for more than a few seconds.  There was some back-and-forth due to minor errors on my file - TransUnion apparently doesn't know the difference between Kansas City Missouri and Kansas City Kansas, and is incapable of looking up ZIP codes to determine what state an address is located in.  But the operator was reasonable and figured out that I was who I said, so she freed me up.  After that I could just log in to the web site and view everything - perfect.  The whole call from start to finish was less than 5 minutes.

The presentation on the web is good, well organized and colorful, with an easy printable version.  Once you purchase it, your report stays available online for about a month.  I believe that it's still frozen to the date you ordered, though - I don't think it's updated during that time.

Now, for the actual content....

I've been warned before that scores almost always vary between bureaus.  People explain this by saying that, while the FICO formula is constant, each bureau has access to slightly different information about you, so the inputs to that formula are different.  For example, if an account doesn't appear on one report, that will affect your corresponding score.  In general, scores are usually in the same ballpark as one another, unless there are any significant problems.

In my case, I was surprised by, first of all, how big the difference was between the two.  24 points isn't huge, but it isn't a rounding error either.  Even more perplexing, though, why the two would be different.  I've spent more time than I should looking over the two, and every time I find a discrepancy, it seems like the lower (TransUnion) score has the more favorable information.  The specific differences that I noticed are:

• TransUnion thinks that I'm using 15% of my available credit, while Equifax thinks I'm using 16%.  Equifax lists that 16% as the single biggest factor hurting my score.  My utilization is lower on TransUnion, but somehow my score is lower?
• TransUnion lists my oldest account, from a credit union, which is over 10 years old, in addition to a long-closed credit card from around the same time.  Equifax just lists the credit card.  Both reports say that having had credit longer helps my score; TransUnion has a longer history, but a lower score?

Other than that, the two reports are virtually identical, listing the exact same dollar amounts for my revolving accounts and installment accounts.  So where's that 24 points coming from?  Again, I shouldn't be obsessing about it, but I am.

Now, on to detailed results.

Full disclosure: my current TransUnion score is 764, Equifax is 788.  The maximum possible score is 850.  According to them, anything over a 760 is eligible for the best rates; further improvements won't affect lenders' decisions.

So I'm above the cut-off, which is awesome.  The TransUnion number is closer than I would usually feel comfortable with.  I'm guessing that most lenders simply pull all three reports and average the results.  I don't know what my Experian number is, but I imagine it's in that zone - I do the free credit report every year (at staggered 4-month intervals), and on the last few cycles there haven't been any major discrepancies between them.

That said, because this is a Big Deal, I probably will go ahead with my plan for Extreme Credit Awesomeness.  The basic idea is this - I already pay off my credit card in full each month, but lenders don't really know that, since they just see the balance in each monthly statement.  Since paying online is so easy, when I know that lenders will be pulling my score I plan to start paying my bill BEFORE the statement is generated - basically, stop taking advantage of the free float that the card gives me, and instead make earlier payments so that the actual statement balance is close to 0.  This will probably have a decent impact on the credit utilization area of the report.  A little over a year ago, my apartment complex started letting us pay our rent online via credit card WITHOUT adding an extra charge, which is AWESOME with my 1% cash rewards.  But that definitely inflates the amount I owe each month.  Anyways, depending on how aggressive I get with this, I can probably get revolving credit utilization down close to 0%.  Best of all, it doesn't require paying any more than I already do, just doing it a little earlier.

On a side note - one thing I am a little concerned about is what will happen if a lender closes one of my other cards.  Right now I exclusively use a particular card, but the other cards still count towards my total available credit limit.  Any of those cards could close at any time, instantly bumping up my utilization.  Some advisors recommend that people place a small charge on each card every month to keep them active.  I suppose I could do that, but... I dunno.  I'd rather drive down balances than spread them around.

The second major thing I could do to improve my score is to accelerate payment of my student loans.  I long ago paid off my standard education loans, so the ones that are left are the federally subsidized ones.  I made the decision a while ago to keep them and pay the minimum over 10 years.  At the time, I was earning several percentage points more in my online savings account than I was on the loans.  Now that rates have crashed, that's no longer true, so it may make sense to pay them off more quickly.  I'm a bit reluctant to do so - this would help my score, but would be directly debiting the amount I'm saving for a down payment on my condo.  If I thought that taking this step would put me into a better mortgage rate bracket, I might go ahead and do so, but as it is I think I'll stick with the current plan and just keep an eye on it.

Speaking of rates... there is a lot of cool info that comes with your report, and one of the most helpful is a chart showing the average interest rates for various types of loans broken down by FICO score range.  For a 30 year mortgage, on this day I could theoretically have gotten the best rate of 5.274%.  (In reality, rates in California are always a bit more expensive, and as I've griped about before, rates on condos are more expensive still.)  The next best set of rates (700-759) is 5.496%.  The lowest (620-639) are 6.863%.  They point out that, on a $250k mortgage, the difference between the highest and lowest score results in about $256 every month.  Not a small amount of money!  You could buy seven credit reports for that!  A nifty online tool lets you put in your state and mortgage amount to get personalized payment estimates.  (These exclude taxes and insurance, so they're beguilingly low.)

So, now that I have this wonderful raw data, how will it affect me?  Not a whit!  But it does give me more confidence as I go into the next stage.  I feel like I have a game plan for how I can juice my stats a bit, and even better, a little serenity that I don't need to panic too much.  Pre-approval, here I come!

So, rates jumped up last week. What does that mean?

It's potentially devastating to people who are in the middle of buying or selling a particular property. The impact of higher rates is that a monthly mortgage payment automatically gets higher, so people cannot afford as much as they used to. For buyers, that means that the house at the extreme of what they could afford is now beyond their means. For sellers, it means that a contract might fall through because the seller cannot find a mortgage they can afford; if they haven't signed a contract yet, fewer buyers will be available to buy at their desired price.

Over the long term, it tends to even out. Eventually, sellers need to drop their prices to attract buyers. Buyers end up with the same properties, paying the same monthly amounts, just with more going to interest and less to principal.

In my personal situation, one thing I've noted and complained about is that condo interest rates are always higher than traditional single family home rates. This past week seems to confirm that the rates move at the same time and in in about the same amount for both types of mortgage (both 30 year fixed, 20% down). Provident Credit Union, a local outfit in the Bay Area, features a really nifty online mortgage tool; one of the things they offer, that I've signed up for, is email notifications of the current rate for a type of mortgage you're interested in. For more than a month now my desired one has been a steady 5.25%; last Friday, it was 5.75%. (Update: As of June 9th, it's jumped to 6.125%! Ouch!)

Off mortgage, on to property:

I'm increasingly interested in the Millbrae area. If prices continue to fall, I think that's probably where I'll wind up. I've visited a few times on weeknights and weekends, and it feels right to me... there's a good scale to their downtown, large enough for variety and an interesting walk, but not too dense or overwhelming. Being close to the Millbrae BART/Caltrain station would help with the commute. The weather seems to be quite nice - I have the advantage of nearly a year's worth of observation on my daily Caltrain ride, and I can see that it tends to be quite sunny, especially compared to the section of the peninsula immediately north.

Current downsides that I see: Again, expense is huge; there have been some significant reductions in condo prices lately, but I think there's probably more movement to go. Demographically, it's a bit older than I would prefer. And, possibly on a related note, I don't see a lot of people walking around the residential part of town - there's lots of good foot traffic on Broadway, and the parks look fairly busy, but almost nothing once you get up into the hills. (Which, to be fair, may itself be the reason why - it may feel less like a neighborhood stroll than scaling a mountain. I love slopes, but many people don't.) Oh, and every time I've been there it's been quite windy, which doesn't exactly bother me but is interesting.

So, we'll see how that goes. Right now I have alerts set up at Zillow to email me when new condos are put on the market or sold. I'm currently looking at the area west of El Camino and within about a mile or so of the station; this includes both Millbrae and the northern part of Burlingame, though Burlingame can make Millbrae almost look cheap. I also have RSS feeds into Craigslist's real estate section, which also provides some insight into what's in the market.

So far, the thing that I've noticed the most is how few properties are moving. There are several units at 555 Palm that have been on sale for months, one of them for at least six months, and have been through a $100k price drop but still haven't sold. The cheapest option seems to be 300 Murchison (Windwater Mills, formerly an apartment complex known as Avalon), but I'm not crazy about the location - it's close to the high school, and even when I visit on weekends the traffic feels really heavy there; plus there's some pretty disturbing reviews online about living there. There are two new condo developments, 88 South Broadway and Park Broadway; as far as I can tell, they've hardly sold anything for months. Park Broadway has slashed prices; 88 South may have cut them, but it's hard to tell, since their web site is extremely out of date.

There's another property, originally called Belamor and now Millbrae Paradise (a name I like far less), which is scheduled to go on the market in August. We'll see how that affects things - I imagine that, unless the housing market has decisively turned around, it will probably drive down the other prices.

So, that's that. Fun times!

Location Cubed

Now: Before I so rudely interrupted myself, I believe I was going to write about the areas I'm considering?

First, some general background, which I alluded to in my inaugural post.

I suppose I can roughly divide my location desires into two categories, business and pleasure.  Business-wise, I mainly hope to live somewhere that minimizes my commute time, both now and in the future.  Since I already spend about 3.5 hours every day commuting, it would be hard to pick a location that would be much worse in that regard.  I do want to find a place close enough to work proper or to public transit so that I don't need to rely on an automobile.

Planning for future commutes requires a bit more crystal ball gazing.  I currently work in San Francisco's SOMA neighborhood.  My previous job was in Los Gatos, at the very southern tip of Silicon Valley.  Odds are very likely that any future job would be located somewhere between those two extremes.  My particular focus - mobile software engineering - seems to be most active in San Francisco, the Peninsula, and Silicon Valley.  Less likely but still possible would be a location in the East Bay - Oakland/Emeryville being the biggest contenders, followed by Walnut Creek, followed by the Fremont area.

Again, it's impossible to know what the future holds, but fortunately I can rely on transit to get me at least to the general area of most places.  It's more a question of time and minimizing transfers to determine what would be a pleasant commute and what would be merely possible.

Finally, on the personal front.  Part of this comes down to location: again, I want to minimize the time required to reach places I want to visit.  Here, I put a premium on being able to walk places.  The big things for me here are grocery stores, farmers' markets, libraries, and trails.  I would also dig being able to visit a commercial area, maybe with things like bookstores, restaurants, and a gaming store.  And since I go hiking almost every weekend, the shorter of a drive to the mountains, the happier I'll be.

In terms of just living in the place itself, I'm hoping for something relatively quiet - I don't expect silence, but neither do I want to front on Highway 101.  Sunshine is great.  This is a region of microclimates, and a few blocks can easily separate regular fog from frequent sun.

Okay.  With all that background in place, here's the big-picture breakdown of places I'm considering.

General region: San Francisco
Particular areas/neighborhoods: SOMA, the Mission, the Richmond, Hayes Valley, Noe Valley, Potrero Hill
Summary: Living in an urban center, of what may be my favorite city in the world.
Advantages: Perks of urban living.  I could easily live without owning a car.  My commute to my current work would be incredibly easy.  There are some surprisingly good deals on new condos.  Weather in the eastern neighborhoods is usually pretty good.  All major Bay Area transit systems run here, often including the fastest options.
Disadvantages: The affordable neighborhoods also feel pretty marginal, with very visible indigency.  This is the extreme northwest of my employment region, so future jobs would likely require an extended commute.  While I love the city, I wouldn't take as much advantage of it as others - I'm more likely to hang out in my living room than hop between coffee shops.
Conclusion: Still the dream, but may not be worth the premium in price.  I'm increasingly drawn to the idea of living somewhere where I can easily access The City without actually living there.

General region: The Peninsula (San Mateo County)
Particular cities: Daly City, San Bruno, Millbrae, Burlingame, San Mateo
Summary: Smack dab between SF and SV.  This area feels conventionally suburban, but has the goodness of California and great access.
Advantages: Very quick travel to SF.  Southern section is generally sunny.  Low crime and high quality of life.  Good Caltrain throughout, and BART in the northern section.  Fairly decent range of prices, generally cheaper further north.  Santa Cruz Mountains (really hills this far north) and the Pacific Ocean.  Good commuting times to most areas I would work.
Disadvantages: Northern section is among the foggiest/cloudiest in the Bay Area.  E-X-P-E-N-S-I-V-E - especially so for housing, where it has been least affected by the downturn, but also in regular costs.  Commute times would be the worst for the East Bay.
Conclusion: If I can swing the price, I'd love to live here.  That's a really big "if", though.

General region: South Bay / Silicon Valley
Particular cities: Mountain View, San Jose, Campbell
Summary: My stomping grounds of nearly four years.  If it wasn't for my present job, I probably wouldn't hesitate to remain here.
Advantages: More affordable than SF or SM.  Excellent weather.  High density of major tech employers.  Good transit options - Caltrain now, and BART coming soon (access to East Bay) and high speed rail in a decade or so (quick access to SF and points south).  Access to great hiking in Santa Cruz and Diablo ranges.  Familiarity with the area.  Friends in the area.
Disadvantages: Long commute to SF.  Far enough away from SF that it's impractical to visit for fun - other than work, I only make it there on special occasions, and it takes a lot of commitment in time to do so.  The most suburban-feeling area.
Conclusion: A tempting option, and will get more tempting once BART is running.  Because of my immediate employment situation, this is probably a non-starter, with the possible exception of a place within walking distance of the Diridon station.

General region: East Bay
Particular cities: Oakland (Piedmont Avenue, Montclair, Rockridge, Temescal), Berkeley, Fremont
Summary: Relaxed and easy living on the other side of the bridge.
Advantages: By far the cheapest of the four regions; steals available in marginal regions, and the best areas are still reasonable.  Friends in the area.  Great hiking in the Diablo range.  Generally good weather.  Good transit to SF and other areas in the East Bay.  Great cultural activities around UC Berkeley.  Culture seems pretty friendly and upbeat.
Disadvantages: Inconvenient access to the Peninsula and Silicon Valley - commute would be easy at first, but painful if I shifted later.  Oakland has a lot of problems, and the political situation there is pretty depressing right now.
Conclusion: When I first started looking at getting a condo a few years ago, this was the only region that looked at all affordable.  It's good to have more options.  If I was confident in remaining in SF or the East Bay for work, I'd take advantage of the great deals out there.  As it is, I'll probably focus my search westward, as long as it's reasonable to do so.

I've been doing occasional "walking tours" through various neighborhoods for the past half-year or so, specifically thinking about how it would feel to live in each area, and also been mulling in general about the various tradeoffs.  My current inclination is to focus on the Peninsula.  It feels like it has the best chances of offering a great work/play combination.  I really love the idea of being able to scoot up to the city on nights and weekends to attend concerts, plays, book readings, etc.; and doing this would physically position me well for likely future employment.  Depending on where I end up, my current commute could be as short as 20 minutes each way - not bad at all!  Price will be the limiting factor here, but if current personal and broader trends continue, I may be able to squeeze into something.  Stay tuned for more!

Tips & Traps when Negotiating Real Estate

Oh, look at what we have here: Another book summary!  Please don't expect this pace to continue - there really are just a handful of real estate books that I plan on reading, I just happened to grab a bunch of them on a recent trip to the library. 

I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce.  I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything.  However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods.  For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it.  In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars.  This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.

I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon.  "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.

The book itself is extremely well written, though.  Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority.  The structure is very sound as well.  On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across.  On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation.  As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.

If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable."  Nothing is off-limits, even though it is in other people's interests to make it seem so.  Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.

At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage.  Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask.  Leverage is crucial to get the best terms possible.  Whichever party has the most leverage can drive the other party.  In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from.  However, Irwin also describes ways that you can increase leverage in any market.  These all make sense, although I wouldn't necessarily have thought of them on my own.  For example, simply investing time can increase your leverage.  If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met.  Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.

The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection.  Make sure that your agent represents you and not the seller.  Give yourself enough time so you don't rush into a bad situation.

While everything is negotiable, you need to recognize that not everyone has the power to negotiate.  It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions.  New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder.  Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.

I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations.  While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal.  A late chapter describes why in some cases you might want to negotiate without using a real estate agent.  As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry.  They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers.  You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get.  When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.

A lot of the negotiation-specific things he describes are worth keeping in mind.  For example, "Never negotiate at offer that cannot be closed."  He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?"  You reply, "We're asking $450,000, but I could go as low as $425,000".  You've just given away $25,000 - and, worst of all, you haven't gotten anything for it.  The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position.  The correct response is, "Are you offering $390,000?"  Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.

I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars.  By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal.  Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape.  I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property.  As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away.  (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)

All in all, this was a great book, Irwin's praise of Nixon notwithstanding.  I'll probably revisit it once more before I head out into the field for real.  After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.