Buying a piece of real estate, whether it will be your home, an investment property or a vacation home is one of the biggest purchases most people will ever make. It is probably the most expensive item you will ever buy and the process of buying a house can be simple or it can be very complex. And often you won’t know which until you get to the end of the lengthy process.
FAQ’s
Getting information about available properties
What’s it worth (valuing property)?
Inspecting property
Who pays for what?
How buyers are protected
Closing the deal
What happens when – the timeline of buying a home
What happens if I find a problem during inspections?
Tips for buyers in a sellers’ market
Is now a good time to buy?
What to look for in a new home
New homes vs. existing homes
Special issues with fixer upper’s
How to choose the right agent
Getting information about available properties
This sounds like it should be easier than it is. The difficulty of getting information about available homes is a common complaint of home buyers.
There are several problems:
1. Most printed material is dated by the time it hits the streets
2. Typical real estate ads only provide information about the listings of a single agent or firm.
3. Traditionally real estate ads have omitted the address of the property – the key item of interest to potential buyers.
The purpose of most real estate ads is not to sell the property, but to attract buyers to the agent doing the advertising. That is why the addresses are omitted. It forces buyers to call the agent, which is the way agents seek to snag buyer clients.
The single best source of information on available homes is the multiple listing service. Historically this has only been available to member agents. With the changes brought on by the internet, much of this information is available directly to consumers. Unfortunately the practice of withholding addresses still continues with some agents, which makes it harder to get the information buyers want without the additional hassle of phoning lots of listing agents. When working as buyers agents, we routinely provide information about all MLS listings to our clients. Working with an agent you select to represent you is still the best way to get timely and complete information about available properties.
What’s it worth (valuing property)?
When it comes to valuing real estate, the concept of “fair market value” is an important one to understand. Fair market value is defined as that price a willing buyer and a willing seller can agree on, provided the property is given reasonable exposure. When estimating the FMV of a property an appraiser will compare the property to be valued to comparable properties that have actually sold recently. In so valuing property, appraisers apply the concept of substitution. This is the concept that a buyer has choices and if the buyer does not buy one home he can buy another of equivalent value and characteristics. It is important to note that the seller’s asking price is not a factor in determining FMV. Nor is the FMV a function of how much the seller may have spent making improvements.
Inspecting property
Most purchase agreements provide the buyer an opportunity to inspect the property, have experts inspect the property and approve any inspection reports, before the buyer is firmly committed to completing the purchase. The purpose of inspecting the property is to determine if there are hidden defects or major problems that would cause the buyer to reconsider the purchase. As a practical matter it is impossible to be assured there are no hidden problems, but a good visual inspection should be able to uncover evidence of any major problems.
In most cases a structural pest inspection and an inspection by a home inspection service should be performed. While there is some overlap, this combination is likely to cover the key issues in home purchases. Problems discovered in either of the inspections might trigger further inspection from others, including specialists in roofing or hazardous materials, for example.
For properties in the country, inspection of wells and septic systems would be appropriate, since a reliable source of water and a waste disposal system are both essential and expensive.
Who pays for what?
While many of the costs associated with home purchase are negotiable, local practice often prevails. The following table illustrates typical local practices.
Buyer |
Seller |
|
| Escrow Fee | X | |
| Title Insurance | X | |
| Transfer Tax | X | |
| Pest Inspection | X | |
| Correction of Section 1 Findings | X | X |
| Home Inspection | X | |
| Home Warranty | X | |
| Home Owners Transfer Fee | X | |
| Loan Related Fees | X |
How buyers are protected
Buyers are protected in three key ways. Typical purchase agreements will contain provisions typically referred to as contingencies that allow the buyer to cancel the agreement under certain circumstances. A common contingency is the loan approval contingency. Basically, it will specify that the buyer may cancel the contract in the event that the buyer’s loan application is not approved within the time period specified. Even if the buyer is pre-approved, there may be aspects about the property that do not meet the lender’s requirements, and if this is the case, the buyer is protected in that the buyer may cancel the contract and have the buyer’s earnest money deposit returned.
Another key contingency is the inspection contingency. It will typically allow the buyer a period of time to inspect the property and to hire experts to assist in this process. If the buyer is not satisfied with the condition of the property, the contract can be canceled. Buyer will also receive a myriad of disclosures about the property and issues related to purchasing a home. The concept of buyer beware is long gone. Today, sellers are required by law to disclose any material information they know or should know to potential buyers. Buyer should review these disclosures and ask questions when additional information seems appropriate. Finally, engaging an agent that will represent the buyer’s interest alone may result in the buyer seeing things in a more objective light, than would be the case if the buyer is “represented” by the seller’s agent.
Closing the deal
In California, the actual closing occurs when the deed transferring ownership is recorded with the county recorder. Most of the activities related to the closing are completed or set in motion days in advance. In most transactions there will be an escrow agent who acts as a neutral stakeholder to facilitate closing. The escrow agent obtains instructions from all parties, including the buyer, the seller and the lender, collects the funds from buyer and the lender, and when the escrow agent holds all these items, will record a grant deed and appropriate deeds of trust to secure the loan. That is when the transaction is closed. Unlike some eastern states, the closing itself is not an event attended by all parties. In fact, buyer and seller typically do not meet with one another, but each meets with the escrow agent.
What happens when – the timeline of buying a home
Note: The number of days indicated represent the typical time frames for a 30 day escrow period:
Day 1 contract is ratified
Day 3 earnest money is sent to escrow, down payment and closing cost funds are verified, pre-approval letter provided
Day 7 disclosures, HOA docs, reports made available to buyer
Day 17 inspection contingency is removed, deal cancelled or repairs negotiated, increased deposit made, appraisal contingency cleared
Day 21 loan contingency removed or deal cancelled
Day 28 docs signed
Day 30 deed recorded and sale is complete
What happens if I find a problem during inspections?
The purpose of the inspection period in a real estate purchase agreement is to protect the buyer from buying a home that has hidden defects or problems. In the event problems are discovered as a result of an inspection that has been performed, most contracts will allow the buyer to cancel the contract and have any earnest money deposited returned. More often, the buyer may still want to buy the home provided the seller will correct the problem or make some price adjustment to compensate for the problem. If the buyer proposes some adjustment to compensate for a problem discovered during inspections, it is not required in most contracts that the seller agree. It is a matter of negotiation. If the seller declines to agree to some allowance, the buyer must decide whether to go ahead knowing of the problem, or cancel the contract and look for another home.
Tips for buyers in a sellers’ market
In a sellers market, buyers are faced with conditions that offer some advantages to sellers. It’s important to remember that all markets go through phases. This phase will pass, and future markets will be more balanced, and, at times, there will be times in which buyers will hold the upper hand. In the meantime, here are some steps to take to be better equipped to deal with the present market conditions.
1. Be Prepared – When the competition among buyers becomes more intense for fewer homes, you must be better prepared to be competitive. Being prepared takes several forms: get your financing together, get a feel for the market, be ready to be decisive and move quickly when opportunities arise.
2. Make an Attractive Offer – Given the possibility of competition among buyers for appealing properties, do everything you can to make an attractive offer that a seller will want to accept. Get your loan pre-approved, avoid asking for minor concessions unless they are essential to you, propose timely completion of inspections, and be as flexible as possible on the time for closing and other issues that allow you to accommodate the seller. Avoid making an offer contingent on the sale of your present home if at all possible.
3. Do Not Panic – While it may be frustrating if you make offers that are not accepted, or if another buyer beats you to a property, try to keep your head and not get carried away with the fear that you will never find a home you like or that you can buy. There are new opportunities everyday, and market conditions are always in flux. Be prepared for some frustrations and try not to let them dissuade you from a steady, diligent pursuit of your objective.
4. Don’t Compromise on Property Inspections – You may need to compromise on asking sellers to correct problems, but make sure you know the condition of the property you are buying. Skipping prudent inspection of a property is inviting expensive surprises. It’s one thing to decide to accept a roof with a limited remaining life, but it’s another not to look into the condition of the roof at all.
5. Know the Comps – Don’t believe the argument some may make that comps don’t mean anything in a seller’s market. Sale prices for comparable property may lag the present market because they represent the past and not the future direction of prices, but the concept of “substitution” still applies. This concept says that if you don’t buy one property you could have bought other properties with similar characteristics. There are always alternatives, and the price of one must have a logical relationship to the price of another. Bonus Suggestion – Get an exclusive buyer’s agent. Only an exclusive buyer’s agent, like Landmark Properties, can promise you 100% loyalty 100% of the time. Especially in a sellers market you need someone who is on your side to give you honest advice, without the hype, and who will put your interests first.
Is now a good time to buy?
Most traditional agents will always tell you now is a good time to buy. This is natural for an agent who represents a seller who wants to sell now. We take a slightly different approach. We take the view that the right time may vary from buyer to buyer, so there cannot be one right answer to the question. Real estate markets, like all markets, are cyclical. While values have always risen in the long run, there have been occasions when values have declined. If your expect to sell your home in the short run, it may be wise to consider the direction that market prices are moving to try to avoid selling into a declining market.
What to look for in a new home
A home is both a place to live and the largest investment many people ever make. For those reasons, buyers should consider factors that relate to their life-style as well as factors relating to the home as a major investment.
Location, often emphasized as the most important factor in real estate, affects both life-style and investment value. One way to think about home characteristics is to put the greatest weight on those factors that cannot be changed. In this respect, the location cannot be changed, but the carpet color can be changed, and quite easily and inexpensively.
Another helpful approach is to think about how future buyers will see a property when it comes time for you to sell it. For example, a home with an unusual design may appeal to you, but it may have limited appeal to a wider range of buyers. When the appeal of a property is more limited, it can be harder to sell, and may bring a lower price. As a store of value, such a home may be less desirable than a more conventional home.
New homes vs. existing homes
This is a question that has no right or wrong answer. It is simply a matter of personal preference. There are, however, differences that are characteristic of many newer homes vs. older homes.
On the plus side, most new homes, having been to meet more stringent building codes, have features older homes may not have. Among these features may be updated wiring, including GFI’s for electrical outlets near water sources, dual panes windows and more insulation, better engineering to withstand seismic forces and newer components in general.
Older homes, on the other hand, often are located on larger lots with more mature landscaping, and contain design features, which are appealing as having more character. The location of older homes is often closer to the center of town than newer homes.
When negotiating the purchase of a brand new home, there is often very little room to negotiate the price. A builder who starts negotiating prices will quickly run into difficulty with both past and future buyers if they don’t maintain some price integrity. In addition, most new homes are sold with landscaping in the front yard only. While it’s not required, experience shows that many buyers of new homes choose to upgrade certain features of the home from the base model, so the actual prices are often higher than the base prices advertised.
Special issues with fixer-upper’s
A home that needs some remodeling or improvement to achieve its highest value can be appealing to many buyers. Often the appeal is to the desire for a good value i.e. the desire to get a lot of house for the money.
Making a realistic estimate of all the costs in fixing up a home is the key to making this purchase strategy work. Contractors often have an advantage given their knowledge of the costs of materials and labor to fix up. Still, even contractors need to assess the value of their own time committed to a fixer-upper project. In addition, the “carry costs” need to be added in. Carry costs are amounts for taxes, insurance and mortgage payments during the fix-up period. Real estate commissions and other transaction costs must be accounted for if you plan on selling the property after improving it. Still, a fixer-upper can be a good choice for a handy buyer who is willing to build equity through his or her own labor.
Conventional wisdom holds that cosmetic improvements like paint, carpeting and landscaping may yield the biggest return for dollars spent. Structural improvements, on the other hand, can be expensive, but they often don’t translate into a higher sales price.
Obtaining a mortgage for a fixer-upper can be trickier. If the amount of work is substantial, lenders may require borrowers to have a larger down-payment, and a demonstrated source of funds to make the improvements.
How to choose the right agent
It’s rare for a home buyer to buy a home directly from a seller with no agents involved. Select the agent you want, rather than allowing an agent to select you. There are lots of agents who would like your business. Given this range of choices, select a small handful to interview personally before making a choice.
When selecting an agent, the single most important factor is to choose someone you can trust. The agent will be advising you on a purchase that is the largest financial transaction most people ever make. This is not the time to put your financial affairs in the hands of someone with whom you do not have 100% confidence.
Given the importance of the transaction, you should seek an agent who will represent your interests without compromise. Work with an agent who guarantees single agency to get this kind of commitment. With all other agents you run the risk of starting out with an agent acting as your representative, and ending up in a situation in which the agent or agency has a conflict between your interests and those of another client of theirs, the seller.