Chapter 8 - PowerPoint PPT Presentation

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Chapter 8

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  1. Chapter 8

  2. Learning Objectives (part 1 of 3) • Decide whether to buy or rent. • Obtain information on houses for sale • Understand the benefits and costs of using a realtor to buy or sell a house • Explain the common features of a bid to buy a home • Discuss the strategies of setting an asking price for a home

  3. Learning Objectives (part 2 of 3) • Discuss the strategies of developing a bid price for a home • Discuss the problems associated with the concept of square footage of living area • Discuss how to select a home inspector • Discuss the tax treatment of moving expenses

  4. Learning Objectives (part 3 of 3) • Decide what type of car you should buy • Explain the relevance of MSRP and dealer's cost in buying a new car • Discuss how to make an initial bid for a new car

  5. Buy vs. Rent Decision (1 of 2) • Sometimes no choice • Lack down payment • May not qualify for a mortgage • Family needs • Expected term of occupancy • Expected change in housing prices


  6. Buy vs. Rent Decision (2 of 2) • Impact on income taxes • Property taxes • Interest on mortgage • Opportunity cost of money • Mortgage interest rate • Closing costs

  7. Steps to buying a home • Decide type of housing desired • Identify desirable communities • Find out what is on the market • www.realtor.com • Multiple listing service (MLS) • Decide on whether or not to use a realtor

  8. Benefits & Costs of Using a realtor • Selling realtor vs. buying realtor • Agency problem • A listed seller has already agreed to pay for the buying realtor • Realtor gives access to all properties in the MLS • Realtor does not show FSBOs

  9. Making a bid for a home (1 of 2) • All properties have asking prices • Projected closing and possession dates • Details of what is being purchased • E.g., grandfather’s clock • Contingencies • Mortgage approval • Building inspection

  10. Making a bid for a home (2 of 2) • Earnest money • Counteroffer • Counter-counteroffer • Risk of third party entering

  11. Setting the first bid price • Desirability of property to buyer • Current level of activity in the market • If market hot, a good property can go in first day for a price greater than the bid • In a slow market, a 5 or 10% cut from the asking may work • Don’t won’t to turn off seller so he won’t negotiate

  12. Using a Realtor to Sell • Can try FSBO • Incur own marketing expenses • Miss substantial traffic • Exclusivity • Commissions for buying & selling realtor • Expiration Date of contract • Asking Price

  13. Setting the initial asking price • Realtor recommendation • Highballing & Lowballing • Too high • Lose potential buyers • Remains on market • The longer on the market, the less desirable • Too low => forgo profit

  14. Square feet of living area • No universal definitions for measurements • Some people count finished basements • Measurement can be based on exterior of house, interior, or from the middle of the wall’s width

  15. Choosing a home inspector • Most states have no licensing requirements • Realtors can recommend • National Association for Home Inspectors • American Society of Home Inspectors • No guarantees

  16. Tax Treatment of Moving Expenses • Mileage test • Time test • Three categories of expenses • Packing, shipping & insurance • Travel to new residence • Utility disconnections and hook-ups

  17. Selecting a car to buy • New vs. Used • New has high depreciation rates • Used has higher cost of maintenance & repairs • To minimize average annual cost of car ownership • Buy a slightly used car and drive it until it dies

  18. MSRP & Dealer’s Cost • Manufacturer’s Suggested Retail Price (Sticker price) is what the dealer is asking for a car • Dealer’s cost should be the starting point of negotiation in buying a car • Many recommend an initial bid of dealer’s cost + $100