What Happens When You Buy A Home?
On average, people who live in the United States move to new homes about every seven years. That means that every seven years, people just like you are driving around neighborhoods, checking out schools, walking through complete strangers' homes, talking with bankers, and spending large amounts of money (i.e., keeping the economy rolling). The process is a long and sometimes difficult one, but also one that can bring with it a lot of excitement and joy if you find your dream home and can afford it. In this article, we're going to go through the steps involved in a search for the perfect home. For instance, do you really need a real estate agent? Why do you need to be pre-approved by a bank? How do you negotiate the deal? And, how do you keep from getting a lemon?
Money Matters
Probably the most important step, and certainly the step you should take first, is to figure out how much you can afford to spend on a new home. If you haven't set up a budget that shows you how much you're spending on everyday things, now is the time to do it. A good budget will help guide you to the right price range of homes as well as prevent you from spending more than you should on your house. This can happen when the bank says you can afford a certain price range of homes based on your income and debt, but they haven't taken into consideration all of your expensive hobbies, your monthly child care expenses, the fact that your car could die at any moment, or your love of international travel. You probably don't want to have to change your lifestyle in order to buy a more expensive home. By having a handle on your personal budget, you can compare your own numbers with what the bank is willing to lend you to come up with a very manageable mortgage payment that will let you continue the same lifestyle you currently have.
Other Costs
In addition to the mortgage itself, you'll also have to add property tax and insurance to your monthly payment. And, if you don't make at least a 20% downpayment, you'll also have to add Private Mortgage Insurance. Also, don't forget the expense of closing costs. It can eat into the cash you have available for the downpayment. All of these additional costs add up, so make sure you are comfortable with the total amount of your monthly payment and know how much you can put into a downpayment before you begin your search and fall in love with a house you can't really afford.
Need vs. Want Armed with a realistic price range, you can now start the process of finding that perfect home. Here is also where you have to keep a level head and think about what you need versus what you want in a home. Hopefully you can get both, but be prepared to give a little on some things that you don't really need. Keep in mind that finding the perfect home isn't always possible simply because it may not exist. Make a list of things you absolutely need, like three bedrooms, a backyard, a good school district, etc., as well as a list of the things you want, like hardwood floors, skylights, a smart house, or a large foyer. Then prioritize those things. If you find a house that comes close to having all of your NEEDS but doesn't have everything you WANT, give it a second look. By keeping these distinctions in mind, you'll prevent yourself from prematurely ruling out certain houses without seeing them first.
Location is Key
Location, location, location. We've all heard that the most important thing to look for in a home is its location. It's true -- location is very important, even if you don't plan to be there many years. What to look for in the location of your home may also tie in with the list of priorities we discussed in the previous section. For instance, are you looking for someplace close enough to town that you could walk to shops and restaurants, or do you want the seclusion of a more quiet, rural setting? Do you want your kids to be able to walk to school, or is riding the bus okay? Even if some of these things aren't important to you, when it comes time to sell, the location of the home will always have an impact. The other thing to keep in mind about location is that your preferences will change over the years. What's important to you right now, may not be so important in 10 years and vice versa. For example, having no kids might make you ignore looking into the school district the home is in. Later on, if you do have kids, that will be an important consideration and can also mean moving from a home you love in order for your children to attend better schools. But, is it a good location? There are many reasons why a home's location is so important. As you're shopping for your new home, you may want to consider the following:
- Proximity to town: How convenient will quick trips to the grocery store be? Do you care?
- Proximity to schools: Is the school district a good one? Do you like the school your kids would attend? This is important for resale, even if you don't have kids yourself.
- Proximity to work: How long will your commute to work be?
- Proximity to other amenities: If you have kids, will you be driving all over the county to take them to sports events and school functions? Would that bother you?
- Crime rate: Does the area have a high rate of crime compared to other areas of town?
- Tax rate: Do you have to pay both city and county property taxes?
- Zoning: What's going to be built next to you in the future? Or, what restrictions might there be on what you can do in your home. Some home businesses can be affected by zoning issues.
- Restrictive covenants: Does the neighborhood have restrictive covenants, or will you have a chicken farm pop up on the property next to yours? If you want a chicken farm yourself, does the neighborhood allow it?!
- Homeowners association: Is there an active neighborhood organization that will help maintain and improve the area?
- Public transportation: Do you have transportation options? Is that important to you?
- Noise: Go to the property at various times of the day. Is there a lot of noise from traffic? Are you in a flight pattern from the local airport?
- Safety issues: Are you near a nuclear or other potentially dangerous facility? Is there a landfill nearby that lowers the property value?
- Neighbors: Do the neighbors have similar values to yours? Go to the neighborhood at night and on weekends to get a taste of the types of activities that go on.
Realtor-Ready or Not When you begin the search for your home you have three choices:
- You can go it alone and do all of the legwork of finding homes by looking in the newspaper, searching online, or simply asking around.
- You can call a real estate agent and ask them to show you homes.
- Or, you can sign a contract with a buyer's agent.
If you're like most people, you probably weren't even aware of that third option. There are some very fundamental differences in these three options. In the first instance, going it alone, you may miss out on a lot of potentially great properties. You will also find that you're not saving any money because the seller pays the commission to the agent based on a percentage of the sales price. In the next section we'll discuss finding a real estate agent. Real Estate Agent When you call an agent and ask them to show you some properties, you have to remember that they are always working for the seller -- not you -- even if they are not the listing agent! (The listing agent is the agent who was hired by the sellers to list their home.) This ties in with the fact that the agent is paid a commission based on the selling price of the house. (Usually a 5-7% split between both agents involved.) So, the higher the sales price, the more money the agent makes. It may be hard to keep this in mind as you spend time with the agent and feel you know and have a relationship with that person.
Even though you trust the agent, it is very important to never reveal the highest price you are willing to pay, or other concessions you know you would be willing to make. Because the agent represents the seller, he/she must relay this type of information to the seller. The flip side of this is also true. Again because the agent is representing the seller, he/she is not allowed to divulge anything that would tip the scales in your favor -- like why the seller is selling or how low the seller will probably go regarding the selling price. Remember, the agent is bound by contract to work to get the best possible deal for the seller. In the next section, we'll discuss your third option, buyer's agents. Buyer's Agent Your third option, using a buyer's agency, means the agent is working with your best interests (and wallet) in mind. A buyer's agent will work to negotiate the best price, ensure the property is inspected, and make sure you have the representation you need. Things you tell a buyer's agent remain confidential. Using a buyer's agent also means that you will be shown homes that are For Sale By Owner (FSBO). It might seem like using a buyer's agency means you are going to pay more -- but that's not always the case.
Although there are situations where agents charge an hourly fee, or a flat fee for the service, in most situations they are simply working for the same commission that is paid by the seller and split it with the seller's listing agent. While there is still some argument that this method leaves the incentive for a higher sales price, buyer's agencies counter that by pointing out that a $10,000 savings for the buyer only amounts to a $150 difference in commission for the buyer agent. They feel that the benefit of your satisfaction with their service and the word of mouth promotion they will get outweigh the loss of this small amount of money. The type of agreement you sign with a buyer's agent will dictate how the arrangement works. A limited agency agreement may stipulate, specifically, for what the agent will be paid. For instance, the agreement might state that if you find a home on your own, then no commission will be paid. Basically, you can negotiate the terms of the agreement up front so both you and the agent know what to expect and are comfortable with the relationship. Typically, however, if the agent has been otherwise very helpful and attentive, most buyers still pay some type of commission even if the agent was not involved in finding the home they end up purchasing. If you do decide to use a buyer's agent, be sure to read the next section.
Be on the lookout for: If you decide to use a buyer's agent be on the lookout for:
- Dual agency: This means the agent (or agents) are working on both sides of the fence. For example, an agent with XYZ Realty may represent the seller, while another agent (or the same agent) also with XYZ Realty represents the buyer. There are obviously arguments against this arrangement because of conflicts of interest, but nonetheless, it is still a common practice. In the dual agency situation, both the buyer (you) and the seller must be made aware of the arrangement and privileged information can't be shared unless you agree to it.
- Neglecting to specify: If you begin working with an agent and forget to ask for or sign a buyer's agency agreement then the agent automatically represents the seller. In most cases, the agent will bring this up and offer you the choice. If, however, the agent is the listing agent for a house you are interested in then the relationship automatically becomes that of a dual agency.
- Buyers' Agency Clause: One potential problem with signing a buyer's agency agreement may come with a blanket clause stating that the agent gets a commission on any home purchase. If you think it is likely that you will find something without the help of the agent then you may want to specify in the agreement that a home you find on your own (a FSBO, for example) will not require payment of the standard commission.
- In-house Listings: If you're working with a traditional agent (or listing agent) rather than an exclusive buyer's agent, be aware that you might get a little harder sales pitch for their own listings, or the listings held by their brokerage firm simply because they make more money that way.
- Release Clause: Make sure you have a release clause in your buyer's agency agreement just in case you find out you just don't like your agent. This will allow you to sever ties without any future problems. You may need to take advantage of this clause BEFORE you see any houses -- or at least any houses you think you are interested in.
- The Great House Hunt Once you've made the agent decision, you are ready to start house hunting. The agent will search the Multiple Listing Service (MLS) and give you a printout of houses that meet the criteria for your ideal home. If you are using a buyer's agent, you may also get a list of For-Sale-by-Owner (FSBO) homes to look at in addition to the MLS list. Don't forget to do some looking around of your own just in case the agent misses something. This is where your communication with the agent is critical. The agent needs to have a really good idea of what you want in order to make your search as efficient as possible.
- Making an Offer When you've found the house and are ready to make an offer there are several steps you need to take and contracts that need to be drawn up. Here is where your real estate attorney or agent really come in handy. The first thing that happens is your official offer, or bid. When you make the offer, you have to keep in mind that it could easily become a legally binding contract if the seller accepts it. Because of this, you need to make sure the offer includes all of the contingencies, concessions, and other details you need it to cover. In the next section we discuss the items your offer should include. Your Offer Here are some examples of things that should be included your offer:
- Your offered purchase price and the amount of earnest money you are putting down
- Home inspection contingencies: Since the inspection may take place after the offer is accepted, you need to state that the entire deal is contingent upon an acceptable inspection report. If the house is on a well and septic system rather than city water and sewer, these should also be inspected.
- Financing contingencies: You can also include a contingency for getting the mortgage you want (i.e., maximum interest rates, expected terms, etc.)
- Items included in the purchase: This list can include things like major appliances (often the refrigerator goes with the seller), lighting fixtures, shrubbery, basically anything that isn't nailed down and some things that are!
- Title contingencies: Your attorney will do a title search to make sure the property does not have any other legal claims against it and that the seller holds clear title to it.
- Timeline: A deadline for responding so you know when to consider the offer rejected
Conter Offers After your initial offer, the seller may counter with a price just slightly below their asking price. This back and forth dickering can go on a couple of times until you come to an agreement, or someone else steps in and offers the asking price! Your agreement may not be only about the money either, there may be other terms and demands that you have to deal with. Just remember that until you have a signed contract anyone else can step in and make another offer. Professional Inspection Required Since the entire deal could be riding on the professional inspection of the home, don't cut corners when it comes to the house inspection -- and never skip it altogether. Even with new houses, there can be hidden problems that only a professional inspector may find. These inspections cost anywhere from $200-$500 and are well worth it. The types of things the inspector looks at are defects that affect the value of the home, make it unsafe or less livable for whatever reason. Leaky appliances, damp basements, plumbing problems, and other defects are some of the problems that can be turned up by a good inspector.
Major Points of Inspection Here is a list of some of the major areas inspectors will cover:
- Foundation: With either a basement or a crawlspace, is it simply damp or are there outright water problems? Are there any cracks in the walls or floor that might indicate structural problems?
- Construction: Does the house have good quality construction? Is the flashing properly installed to protect wood, are there any rotting problems with the wood, is the roof in good shape or will it need replacing soon, etc.
- Plumbing: Has the plumbing been properly installed? Is it in good shape? Is there any evidence of leaks?
- Heating and cooling systems: Are the units in good shape? Will they need replacing soon? Are they rated for the amount of square footage they are heating?
- Electrical: Do there appear to be any electrical problems or code violations?
- Interior: Are the floors level? Do windows and doors function properly? Do the appliances in the kitchen function properly? Is there any evidence of leaks or mildew in the bathrooms?
Closing the Deal Assuming the inspection turns out well, the financing is going through to your satisfaction, and all other contingencies are met, you're now in the home stretch. Your attorney will do due diligence, which includes a title search to determine if the seller does indeed hold the title to the property and there are no other legal claims against it. This along with the home inspection will complete the due diligence package If everything is clear, then you're ready to sign what may seem like the largest stack of documents you've ever seen! It is at the closing that the title to the property will be transferred to your name, your home owners' insurance (which you have to have already secured) begins coverage of the property, and you are officially committed to your mortgage. It is, unfortunately, also time for you to plunk down your cash for the downpayment and closing costs. You should be able to get a copy of the settlement statement that includes the amount of cash you'll need at closing from your lender a day or two prior to the closing. Knowing these costs is important since you'll need to pay your down payment (and usually your closing costs) with a certified check. You'll be signing lots of papers, including:
- The settlement statement
- The sales contract
- Title insurance
- Homeowners' insurance
- The title or deed to the property
- The down payment and closing costs
There may be additional documents to sign depending on the complexity of the deal, so be prepared and block out appropriate time for everything. More information can be found at http://www.landstarnorth.com/
