Smart Moves

A federal employee in his early 30s just signed a year-long lease for an upscale apartment near the National Mall in Washington, D.C. For a two-bedroom, two-bath apartment, rent on the place tops a handsome $3,000.

Instead of putting out that much rent each month, he could have bought a condo-apartment or a modest townhouse in the D.C. area. In fact, that would have been his preference. But having come of age during the housing downturn of a decade ago, he’s terrified of the commitment that comes with a mortgage. This explains why he keeps renting.

Like the federal employee in this true story, a minority of millennials are too fearful about homebuying to make a purchase. These include people with vivid recollections of family members and acquaintances who lost their properties to foreclosure during the Great Recession, which cost them both sleepless nights and ruined credit.

But is financial upheaval truly more likely for homeowners than renters? A new study from the Urban Institute (urban.org), a Washington, D.C. think tank, questions that assumption. Indeed, the study -- which compared the financial situations of tenants versus owners -- found that those who rent suffer more financial uncertainty.

“Rents can often climb each year, compared to a fixed-rate mortgage where home payments remain the same every month over a period of years or even decades,” says Corianne Payton Scally, a co-author of the study.

Scally acknowledges that across time, homeowners can confront rising property tax bills, obviously not a problem for tenants. Still, she says that compared with owners, renters at the same income levels face higher rates of “material hardship” and are less likely to have savings for emergencies.

“Renters can see a higher proportion of their income going to pay their rent year over year if their income does not keep pace with rising rents. They can start to feel the financial pinch and may have few options but to start cutting costs elsewhere,” she says.

Are you a renter who, despite your fears, is determined to pursue homeownership? If so, these few pointers could help:

-- Remind yourself of the key reasons you want to buy.

Anxiety is an influential factor that can stop people from actualizing their home-buying plans, even when logic tells them it’s the right time to go forward, says Sid Davis, a real estate broker and author of “A Survival Guide for Buying a Home.”

What’s important is to head into any purchase with as much objective information as possible, he says.

To be sure, there could be legitimate reasons to wait to buy. Perhaps you have a basis for worry that the company where you work could soon lay off employees, or that your spouse could soon be subject to a job loss.

“None of us has a crystal ball. But those who have secure jobs and truly want to own a home in order to build equity and enhance their family life might be kicking themselves later if they wait too long,” Davis says.

-- Seek mortgage pre-approval from a reputable lender.

The last recession ushered in an era of highly conservative lending practices, and most lenders still go to great lengths to ensure that the mortgages they originate are solid. This means borrowers must be unusually well prepared to respond to the lender’s requests for documents.

As proof of income, many lenders now insist on more than the customary pay stubs and W-2s. For example, they’ll likely ask you for federal tax returns. In addition, they’ll probably want assurances that the funds you’ve accumulated for your down payment have been in your savings or checking account for some time and weren’t borrowed from an uncle just last week.

The time you spend documenting your eligibility for a home loan is time well spent if the lender gives you a “pre-approval” letter before you begin shopping for a property. This letter is a vitally important bargaining tool to help you win the home of your choice.

-- Take a cautious approach to home selection.

Many popular neighborhoods are still short on available inventory in the starter-home category, although this situation is starting to ease. Davis says this pressure to compete for the best properties is causing some anxious buyers to back off.

“After losing a property to another bidder, some home shoppers get very discouraged and throw in the towel,” he says.

Rather than abandoning your pursuit of a property due to tight inventory conditions, Davis urges you to “hang in there” and keep looking.

“In the late fall and winter, home shoppers face less competition from other bidders than they do in the spring and early summer, making this an ideal time to land an exceptional deal from a highly motivated seller who must move,” Davis says.

If you’ve identified your target neighborhood but haven’t yet found a suitable home there, spend your waiting time getting to know the community, making sure it’s the right place for you and your family.

“Walk through the neighborhood, chatting with residents. That way, you could be the first to learn about up-and-coming listings. Be patient and don’t let your agent rush you into the wrong choice. Remember that the home you buy now could be in your ownership for years to come -- so it’s folly to make an impulsive decision,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

For several years, homebuyers in popular neighborhoods have been plagued with the problem of tight inventories. Especially in starter-home communities, there have been more buyers than sellers. The result: multiple bidding drama.

Finally, that situation is gradually easing, says Daryl Fairweather, the chief economist of Redfin (redfin.com), a national real estate brokerage. At long last, the inventory crunch is starting to subside. In coveted areas, prices are still ascending, but at a slower rate.

These market changes are beginning to give buyers a breather, helping offset the rise in mortgage rates and making the home search process feel less frantic.

Experienced real estate pros say sellers are slower than buyers to catch on to market changes. Given human nature, some owners are still trying to “test the market” with very high list prices, which can cause a house to get stigmatized and then to languish unsold for an extended period.

This can create buying opportunities for attentive purchasers, says Dorcas Helfant, the co-owner of several realty firms. These opportunities occur when the owners of an overpriced home are compelled to move away with the place still unsold, leaving it vacant.

Helfant, a past president of the National Association of Realtors (realtor.org), says that after a property has gone vacant, the owners typically become much more motivated to negotiate, because they face substantial carrying costs.

With current market conditions gradually easing for buyers, Helfant says it’s possible to get a good deal on a vacant property. But, as always, she urges buyers to exercise caution, especially if the property you’re considering is vacant due to foreclosure.

Here are a few pointers for buyers:

-- Attempt to find out who’s owned and occupied a vacant place.

It’s tough to gain details on a house that’s been vacant for months because its owners moved away. It’s still harder if the empty property has gone back to the bank through foreclosure.

“The bank won’t tell you anything. And, frankly, the folks at the bank -- or the real estate agent they’ve hired -- probably won’t know much about the people who lived there,” says Merrill Ottwein, a former president of the National Association of Exclusive Buyer Agents (naeba.org).

To get the scoop on a vacant property that interests you, your best sources are often neighbors.

“Those living nearby probably know something about the skeletons in the closet," Ottwein says.

-- Schedule a “pre-inspection” of a vacant place.

Perhaps the vacant property you like has gone unsold for so long that you’re nervous about hidden defects. In fact, you don’t even want to make an offer until you know more. In such cases, Ottwein advises hiring a home inspector to take a preliminary look.

What are the advantages of hiring an inspector to check a property before (rather than after) you’ve submitted your bid?

“If you decide to go through with the purchase, a pre-inspection will let you set your bid based on findings from the inspection. Then, if you decide to back out of the deal, you can walk away without complications,” Ottwein says.

-- Ensure that the utilities are on during the inspection.

Cost-conscious banks that own foreclosed property sometimes shut off utility service to the vacant homes they own. But a lack of utility service poses a challenge to home inspectors.

“In fact, it’s useless to do an inspection when the utilities are off. You can’t tell if the cooling, heating and plumbing are functioning correctly,” Helfant says.

She strongly recommends you always have a home inspection on a vacant property -- if not before a bid is submitted, then after. And even if you have to pay to get utility service restored, she says it’s worth the expense.

“It shouldn’t be too costly to get the utilities restored for just a five-day period or so,” she says.

-- Review your bid before finalizing your offer.

“Before you write your offer, you and your agent should take a careful look at the recent sales history in your neighborhood. As always, you have to be careful to avoid overpaying,” Ottwein says.

Ideally, you’ll want to examine at least three similar properties that have sold in the immediate area in the past three to six months -- adjusting for differences, such as a larger garage or a second fireplace.

Although you’ll want to take a home’s condition into account when judging its market value, Ottwein advises against seeking out-of-proportion discounts to compensate for superficial shortcomings. Also, don’t get greedy and demand too many small concessions.

“The market might be slightly better for buyers now. But that doesn’t mean you can take the owners to the cleaners. Forget about small issues like the neon yellow kitchen walls you want repainted or replacing that cheap light fixture in the dining room. Focus on the big picture,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)

A real estate agent cherishes the one-story ranch house she’s owned and babied for 14 years. To enhance her place, she recently painted the entire interior. She also sanded and polished her hardwood floors and expanded the kitchen, making it light, bright and open to the dining area.

This agent can’t bear the thought of selling her beloved sanctuary. But that sentiment is now competing with her engagement to a man from another city where she plans to move, however temporarily. So, to buy time before making a final decision, she’s placed the property on the rental market.

“She’s holding her breath that a rental will work out without any serious problems, and so am I,” says Elizabeth Weintraub, a colleague and friend of the property’s owner.

Weintraub, a real estate broker who’s sold homes since 1979, says the odds are good her friend will do well as a landlady because of her background in the housing field. But she said many homeowners who convert a residence to a rental property are more naive about what that entails.

For instance, Weintraub tells the true story of a couple of clients who had a terrible experience renting out their house to a pair of doctors. When it came time to sell the place, the doctors were so angry at being uprooted that they poured castor oil all over the white wall-to-wall carpet.

In recent years, many local governments have tightened regulations protecting tenants. As Weintraub says, longtime renters are typically much more familiar with these regulations than are first-time landlords, which puts them at a disadvantage if a dispute develops.

Here are a few pointers for homeowners considering a temporary rental:

-- Inform yourself about your local rental market.

Sid Davis, a real estate broker and author of “A Survival Guide to Selling a Home,” says that before deciding to convert your residence to a rental, you should make sure the numbers work for you.

As he notes, most large realty firms have rental departments that can help you assess the relative strength of your local market. Agents who list many rentals on the Multiple Listing Service can quickly estimate how much rental income your property could command.

Advertising (online or in print) can also help, Davis says. Survey the ads to see how numerous they are for your type of property (single family, townhouse or condo-apartment) and going rents.

“You might even wish to run a test ad to check out your rental market. This is not unethical, so long as you don’t mislead any potential tenants,” he says.

-- Consider professional management for your rental property.

Mark Nash, a longtime real estate broker and author of “1001 Tips for Buying and Selling a Home,” says it could be sensible to consider engaging a professional manager to oversee the property.

“Many people find it annoying to be a landlord. It’s like being a parent,” says Nash, who owned several rental units for a period spanning 11 years.

He says the sole downside of hiring a good rental manager -- who’s best found through personal referrals -- is that this service will cut into your rental income. That could pinch your budget if you’re operating with a narrow profit margin.

-- Investigate the financial implications of renting your home.

Most landlords want to be sure they’d have a positive cash flow from their rental, meaning they’ll bring in more than enough income to cover their mortgage payments after taking into account property taxes and insurance costs.

When assessing the financial impact of converting your place to a rental, even a temporary one, Nash says you should be sure to factor in home maintenance expenses.

“Upkeep can be a big item,” he says.

You’ll also want to consider the tax implications of renting out your home. To do so, Nash recommends you call an accountant for advice.

-- Realize you’ll likely need to empty your home of tenants before you sell.

Do you intend to rent out your place temporarily with the expectation that you’ll probably sell in the future? If so, Davis says you should be aware that it can be tricky trying to sell a home when it’s occupied by tenants.

To avoid this problem, Davis recommends you plan to have your property vacated for at least a month before it hits the market. That way you’ll have time to paint, clean and do repairs before it’s available for showings.

-- Make sure you have the temperament to handle renting.

Once a home is sold, most people close the door and move on emotionally. Not so when you’re renting out a property, Davis says.

“Psychologically as well as financially, people still have an umbilical cord attached to a property they own while tenants are living there. If you know you lack the nerves you need for renting and yet you must move, you might be better off selling without delay,” he says.

(To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.)