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The Financial Mistakes
That Homeowners Make

By SUZANNE MCGEE

With interest rates beginning to rise from their lowest levels in nearly a half-century, current and would-be homeowners are racing to capture those disappearing low financing costs.

But the buying frenzy can lead to costly mistakes that affect owners for months and years to come. "Americans are eternal optimists, and they are also short-sighted," says John Sestina, a Columbus, Ohio-based financial planner. "There are a number of mistakes that people make with respect to their homes, especially when they're in a rush."

For example, one of Mr. Sestina's clients -- a financial executive in the New York City area earning a healthy six-figure income -- forgot to factor in the cost of hiring a groundskeeper to care for extensive grounds surrounding his new home. He sold the home prematurely because he couldn't afford those expenses on top of his substantial mortgage and taxes.

Whether it's a cottage or castle, buyers are almost certain to make some kind of mistake in the home they select, the way they finance it, or how they approach the process of selling it, real-estate veterans agree. Here are some of the most common ways homeowners go wrong:

Being careless when buying newly built homes.

With prices in established neighborhoods soaring, new homes appeal to many buyers -- they're pristine, don't need renovation and may be customized right down to the bedroom paint and carpet colors.

But buyers who rush in without doing adequate research about their purchase may "encounter some hazards," warns Mary Zentz, a Realtor with Re/Max Suburban in Arlington Heights, Ill.

Making informed decisions about a specific property can be difficult, especially if the home is still in the plan stage, she says. Ms. Zentz worked with a young couple with children who selected an unbuilt property from the handful available in their price range in a development and paid a deposit.

Their home was being built at the end of a cul-de-sac, with the master bedroom at the front. After talking with Ms. Zentz about their decision and reviewing the street plans, the couple realized that it was far from ideal. At night, headlights from cars coming down the street and turning around would shine directly through their bedroom window. Appalled, the couple discovered that raising the elevation of their home to prevent this would cost $10,000. They were able to work out a deal with the developer for a home (at a higher price) located on another street in the development that wouldn't require an elevation adjustment, says Ms. Zentz.

Another error when buying unbuilt houses is not accounting for the price tags attached to all the attractive "upgrades" typically installed in show homes. "Often the best deals you can get are before construction starts or when the builder is trying to sell the last few houses in a development," says Ms. Zentz. And installing those attractive extras -- better carpet, a finished basement -- can drive up the cost. "By the time you are finished, you end up with a home that has cost you a lot more than you budgeted for," says Mr. Sestina.

Also watch out for hidden costs. In a new community, buyers may be assessed additional fees to pay for new sewer systems. A new subdivision also may rely on a volunteer fire department, which can drive up insurance costs.

Underestimating the costs of home ownership.

That new subdivision may not be served by public transportation, or you may have to make a longer commute. And while any home requires maintenance, a larger house can boost day-to-day costs in unexpected ways. The financial executive who couldn't afford to landscape the property he bought is a case in point.

Many homebuyers underestimate the cost of homeownership from the start, failing to realize how much money they need just to cover closing costs. "Sometimes a bank will put in escrow half a year's real-estate taxes and four or five months' worth of insurance prepayment -- and all of that comes out of the buyer's pocket," says Evan Bell, of Bell & Co., a New York financial adviser serving high-net-worth clients in the entertainment industry.

Over-renovating.

"The chance of finding someone who likes what you have done and shares your taste is exactly nil," says Mr. Bell. "The classic mistake everyone makes is assuming they will get the money back from their renovation."

Building a swimming pool is one of the more costly home-improvement errors. "I have arranged to fill in at least three swimming pools for people because their buyers insisted on it as a condition of the purchase," says Nick Wolff, owner and president of Century 21/Wolff Real Estate in White Plains, N.Y. A pool "automatically cuts the number of potential buyers in half," he says. Why? Many homebuyers consider a pool an expensive nuisance, not an enjoyable luxury.

A Chicago marketing executive knocked down a wall separating a small bedroom and the bathroom in his home, to build a bigger bath. But the change meant one less bedroom, which he figures cost him about $25,000 when he sold the property, Mr. Wolff says.

Similarly, avoid transforming an ordinary house into the most expensive one on the block. Mark Prather, owner of Mark 1 Mortgage Inc., a Cerritos, Calif., mortgage firm, says his mother's neighbor made this mistake. Although she lived in a neighborhood where the average house was only 1,500 square feet, she made over her modest home into a 3,500-square-foot mansion. When it came to sell, she "tried to price it as if it were in a different neighborhood," he says. The neighbor had to cut the price to sell the home, he recalls.

While it's wise to paint and make basic repairs, the worst decisions may be made on the eve of a sale, says Marianne Segura, a Washington, D.C., Realtor. A friend of hers with a $1.4 million house did just that -- installing high-end Internet connections and sound systems throughout the house, as well as new bathrooms. She put the house on the market for $1.7 million but found no buyers and had to refinance.

"People have a tendency to put too much money into the house in order to get it sold," she says.

Not securing the right loan.

Adjustable rates, fixed rates, interest-only, staggered payments -- financing options are endless. While housing prices today may leave buyers suffering from sticker shock, Mr. Prather is more worried about "payment shock" as mortgage payments on adjustable-rate loans creep higher in the months to come. "There are a lot of 'teaser rates' being offered to home buyers, and too many people are so excited by their purchase that they don't read the small print," he says.

Sometimes just reading the fine print isn't enough. When Eva Rosenberg bought a house in the early 1980s, she reviewed her loan document, but the wording was vague. The Northridge, Calif., tax accountant signed a loan agreement to buy a house in Irvine expecting to make fixed payments for five years while the interest rates declined annually. She discovered a year later that not only was her payment fixed, but so was her interest rate -- in the neighborhood of 9.5% to 10.5%.

"It was humiliating that someone like me didn't realize what was happening until it was too late. Everyone I talked to just said, 'But that's what it said in the papers you signed,' and they were right," says Ms. Rosenberg, now 51. She was forced to sell the house prematurely, sacrificing her down payment and the money she'd paid in mortgage interest and principal over the two years she owned the property.

Ms. Segura says many homebuyers aren't willing to take the time to shop around and compare the full panoply of mortgage products. "The average life of a loan is two years; the average person lives in their home for six or seven years, so why are so many people fixated on the idea of getting a 30-year fixed-term loan?" she marvels.

"A lot of people may not understand when an adjustable-rate mortgage makes sense -- such as when your income has significant growth potential," Mr. Prather says.

Paying cash when you can afford it might be a mistake as well, Mr. Bell says, because you aren't always required to take precautions required by lenders, such as a survey and title search. In this respect, lenders "help you do the right thing," says Mr. Bell.

  • Becoming overemotional.

Many buyers and sellers can't separate their emotions about their home from the realities of the real-estate market and the economy. This affects their financial decisions. Almost daily, Mr. Prather sees sellers asking too much money for their homes, or buyers bidding up prices or waiving all conditions on their bids just to secure a purchase. "If you remove the [stipulations] that the bid is conditional on an appraisal value or obtaining financing, you're making a big mistake and taking a big risk," he says.

Pricing a home accurately has always been crucial, of course, but Ms. Zentz warns that a poorly priced home can go unsold for weeks and make a bad first impression on the market.

Mr. Bell, who numbers entertainment celebrities among his clients, says that unless you are a bona fide celebrity, "just because it's your home and you love it doesn't mean it has higher value. Unless it's the only house on the beach" or there is something else that makes it truly unique, a home is simply one of a number of properties on the market at any one time. "Be realistic," he says.

-- Ms. McGee, a former reporter for The Wall Street Journal, is a free-lance writer in New York City.

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