November 2012 Blogs
6 Hidden Costs of Home Ownership - and How to Handle Them:
They say humans are born with only two fears: the fear of falling and the fear of loud noises. But as we get older, we
learn to be afraid of lots of other things, from snakes to radio show hosts on the other end of the political spectrum
from ourselves. (I kid. Sort of.)
But seriously, one of the biggest, learned fears of home buyers and homeowners, old and new, is the fear of
unpredictability in our home-related expenses, whether it be an unexpected one-time repair or just a trickle of little,
monthly costs we didn’t account for.
The fortunate thing about this particular set of fears is that you can unlearn them by getting educated about the
common surprise costs that arise and managing them systematically. Here’s a how to do just that:
1. Property tax increases. So,
you got a 30-year-fixed home loan, and you set up an impound account
with your bank so as not to have to worry about paying big lump sums for
your property taxes twice a year. Fact is, the day could still come
where you get a note from the bank advising you that your payment is
going to go up - because your property taxes have increased! Property
taxes are based on your home’s value, so as the value of your home
rises, your property taxes will likely also go up over time.
Talk
with your mortgage professional about how homes are reassessed for tax
purposes in your area: how often they are reassessed, when, and whether
there are any limits on how much your taxes can go up in a given year.
Understanding how tax increases work and what their limits are allows
you to predict and project your worst case scenarios in terms of extra
costs, years in advance. It also helps to know that in a down market,
your homes value - and property taxes - can also decrease, and
to know that your property taxes are deductible on your income tax
return. So, if you do have increases, you’ll have a corresponding tax
break.
2. Utilities. Garbage, gas, water - these all cost money, something that’s easy to
forget when your landlord is covering them. But when you own a home, you
also own these bills. During the buying process, it can be very
difficult to predict exactly how much these bills will run. Your best
bet is to ask the seller if they will kindly provide you with copies or
at least the amounts of their recent utility bills, so that you can have
some sort of basis in reality for your own budget and spending plan.
Also, it’s not a terrible idea, once you own the place, to go through
and do an energy audit to find places where you can stop leaks of heat,
cool air and water, and otherwise put a cap on those utility bills.
3. Unexpected repairs. Obviously, the reason we get disclosures and inspections
and such is
to minimize the likelihood of buying a lemon of a home - and minimize
the spectre of unexpected repair costs. Your first line of defense at
managing these costs is the one-two punch you have to execute during
escrow: (1) reading your disclosures and inspection reports and getting
repair bids for any issues that arise therein, and (2) obtaining a home
warranty to cover things that arise later on.
Most
people get #2 right, but don’t pay as much attention to disclosure and
inspection report follow-up as they should. The other common fail is
that people allow their home warranty to expire after a year, rather
than paying the annual renewal fee (new home owners: expect to see this
in the mail 10 or 11 months after closing). Don’t fall into either of
these pitfalls: if you own a home long enough, chances are good that
you’ll eventually have some unexpected need for a repair come up,
whether it’s a plumbing snafu or a roof leak. Keep a handle on your home
repair bills by keeping a home warranty in place, and keeping your
home’s systems well maintained (see #6 on this list).
Beyond
that, stay smart about your financial planning by diligently saving so
you have funds to tap into in an emergency, and by making informed
decisions about your insurance policies (e.g., exploring flood or
earthquake insurance if you live in an area where these are common
hazards). Ask your home owners insurance provider to brief you on what
is and isn’t covered, to be sure you’re not unduly exposed to repair
costs if bad things happen.
4. HOA dues increases. If you choose to buy a home in a Home Owner’s
Association (HOA),
you’ll be given a number of disclosures about what the HOA dues are
during escrow, so the dues themselves should be no surprise. What can
come as a surprise, though, is the fact that dues can go up over time -
sometimes in relatively shorter order. I’d encourage you not to skim
lightly over what may seem like the least important of the HOA documents
you’ll receive: the newsletters and board meeting minutes. You might
expect them to be full of minutae like stories about Mrs. Cranston’s
rogue tabby cat - and indeed you might find that in there - but you’re
also likely to find discussions of proposed HOA dues increases far in
advance of them being enacted, as well as discussions about major
building or complex repairs and upgrades that need to happen and how
they will be paid for.
The
other thing you can and should do to avoid getting blindsided by an
increase in your HOA dues is to simply be a present and active
participant in your HOA, including attending board meetings, sitting on
the board or simply building relationships with your neighbors. The
board makes many decisions which impact the HOA dues and assessments
that will be levied on all members. So getting yourself on or in the
room with the Board puts you that much closer to the power position for
managing your dues.
I
only have anecdotal evidence on this point, but I believe strongly that
HOAs where the members have close interpersonal relationships are HOAs
where the members are much less likely to default on their dues - even
if they default on their mortgages! Associations nationwide have been
plagued by high rates of dues default since the start of the recession,
and when one or five or eight members default repeatedly, everyone
else’s dues are likely to be raised to cover the shortage. Having your
neighbor over for coffee on occasion or watering their plants while they
travel boosts your chances of keeping a handle on your HOA dues and are
just nice neighborly things to do - if they help keep a lid on your
costs of homeownership, too? All the better.
5. Special assessments. There
are two types of special assessments for homeowners. The first are
assessments imposed by the City, County or State on top of your property
taxes, to pay for things like street lighting, parks, first responder
agencies and to help the schools out - these are often imposed after a
city or district-wide vote, which helps you predict for them. If you’re
planning to buy a home, often the seller’s tax bill - which you can get
from them or even, in most areas, on the county tax assessor’s website -
will list the existing special assessments separately from the property
taxes, so you can know how to budget for them.
The
second type are assessments imposed on HOA members when the building or
complex needs a major repair that the HOA has insufficient funds saved
up for, or a large, unexpected repair needs to be made. For example, I
know of a number of California HOAs that imposed special assessments to
replace the buildings’ roofs when many insurance companies stopped
covering buildings with wood shake roofs.
Again,
staying involved with your HOA and board helps keep you apprised and
avoid being completely shocked by special assessments, but it also
behooves buyers of homes in HOAs to look carefully over the HOA
financials, including their reserve account statements and their plans
for maintaining the buildings over the years. Many HOAs do a great job
of planning to replace roofs, windows, private roads and walkways years
in advance - and saving up for these projects - to minimize the chances
of having to make surprise special assessments. And others, well, don’t.
6. Basic maintenance. When
I bought my current home I gutted it to the studs and remodeled it
completely, including all new appliances and systems,so I haven’t had to
do many fixes on broken things - knock wood. Yet and still, every year,
Spring rolls around and I end up spending a nice chunk of change just
keeping the place in tip top shape, from having the gutters and carpets
cleaned, to having the windows and exterior power washed, to having my
backyard (known affectionately by my friends as Jurassic Park) weeded
and the paint touched up inside and out. Being aggressive about
maintaining your home on an ongoing basis allows you to avoid bigger,
scary repair bills later on - but it does cost.
The
only way I know to manage these costs are to plan for them - I keep a
running spreadsheet of little fixes, touch-ups and mini-upgrades (e.g.,
putting in a dimmer, etc.) I want to do to my home. That allows me to
plan and budget for them all year round, so that it’s fun and exciting
when the time rolls around to do them. Some maintenance costs, like pest
control, may be available on a monthly contract with your vendor,
making them much more predictable. Finally, these are costs that are
well-suited to being minimized by a little DIY weekend work - if you’re
so inclined and you have the time, you might be able to do these sorts
of basic maintenance items yourself to keep the costs down considerably.