The home buying process can be intimidating, but with the right preparation you can confidently buy a new home to live in for years to come.
What's in an Offer?
Now that you have found a home you wish to purchase, the next step is to make an offer. The real estate agent will have a printed form that will list all the legal talk, leaving blanks for the pertinent information. As with any legal document, be sure you understand this document before signing.
The primary item in an offer is the price you are proposing. This price is often a negotiating tool, setting the stage for a give-and-take that will eventually lead to final sales price. The price the buyer offers will depend on many factors: the market conditions, what comparable properties in the neighborhood have sold for, the condition of the home and your budget. Your realtor is an invaluable guide during this process.
The buyer must also list in the offer any concessions he wants the seller to include. For instance, will the seller be asked to cover any of the closing costs? Also will certain items, like appliances, be included in the price.
There are also stipulations on the sale put into an offer. The sale can be contingent on an inspection of the property, the mortgage approval of the buyer, or the sale of a buyer’s other home. Also an offer states how soon the closing will take place after an offer is accepted.
Finally an offer will limit the time a seller has to respond to the offer. The offer is no longer binding on the buyer after that period of time ends.
What exactly is earnest money?
Once the seller accepts an offer, the buyer and seller are under contract. This means that the two parties are in a legally binding agreement. The next step for the buyer is to pay earnest money.
Earnest money is a portion or percentage of the sales price that is held by a third party in escrow until closing. Earnest money is given to show the full faith of the buyer, that he is “in earnest” in his desire to purchase the property. Thus the seller is obligated to take the house off the market and not accept any other offers. The third party who holds the earnest money varies by state. In some states, it is the title company or settlement company. In other states, the real estate broker holds it.
If the offer is rejected or rescinded because of contingencies listed in the offer, the earnest money is returned. For example, if the property’s inspection shows multiple problems that would take a great deal of money to repair, and the offer was contingent on an inspection, the buyer can withdraw the offer and receive the earnest money back. However, if the buyer backs out for any reason other than those stipulated in the offer, then he forfeits the earnest money to the seller.
Once the sale of the home has concluded, the earnest money is counted towards the purchase price.
The day has finally come: the day you get the keys to your new home.
In some parts of the country, this day is called closing. In others, it is settlement. Either way it is the day ownership is transferred from the previous owner to you, the buyer. This day is normally at least 30 days to several weeks since the offer was accepted.
Several things happen during this process. If the buyer is paying a down payment, he brings a check to the title company covering that, as well as one covering closing costs. If any of the selling price is being covered by a mortgage, then mortgage paperwork will need to be signed and finalized. The seller brings the deed, keys, and any other needed items to the title company to be transferred to the buyer. The seller’s mortgage is paid off with the proceeds, and the real estate agents also receive their percentage payment at this time. If there is any money left after the mortgage pay-off and realtor fees, this money is given to the seller. The title company then registers the transfer of deed. All these parties are not required to be at the title company at the same time.
In states where ownership transfer is handled by a settlement company, the same process takes place. However all the parties – buyer, seller and agents – appear at the settlement company’s office at the same time so that all steps are done at once.
What should I expect at closing?
You’ve found a home you love and made an offer. The seller has accepted the offer and you have given the title company or broker a check for earnest money. The next step in the process is closing time – which is to say, a lot of “hurry up and wait” time.
This is the time in which a home inspection takes place. If the inspection shows significant problems, then further negotiations may take place. The buyer may either ask the seller to pay for the repairs or to lower the sales price.
During this time, the financial issues will be finalized. The mortgage company will appraise the property, if needed. If the appraisal is lower than the selling price, further negotiations will be required. The buyer will also need to finalize approval for the mortgage and be prepared to pay the closing costs and down payment.
Start packing – it’s time to move to your new home!
Should I play hopscotch with the housing market?
While it may be tempting to “play” the market in an effort to get rich, you should first be thoroughly familiar with the economic conditions of the real estate market you’re in. Your success in real estate investing depends on your ability to see things for their long-term potential. Frequent turnover only works in the context of a healthy housing economy, which may be several years away.
Low housing prices at low rates can be very lucrative for real estate investors. When mortgage rates are low, the best way to take advantage of the market is to either buy property, or try to refinance any current mortgages at a lower rate. Lower prices at lower rates could be very lucrative for the right investor. Instead of potentially losing money by selling a property in a bad market, try leasing your property instead through a licensed real estate agent. Your agent will place tenants in the home and perform managerial duties for a monthly fee. Consider this alternative until the housing market rebounds and you can cut a profit. Construction costs are currently low, therefore any remodeling needed for a sale in the future can be done at a discount. Whatever your interests in real estate, you should know the profitability implications of good–and bad–economic conditions.
How do I price my offer?
See it from the seller’s perspective
There are two things that will affect whether or not a seller will accept your offer: time and money. If they’re in a rush to sell or their house has been listed for a long period of time, then they are much more likely to accept a lower bid. In this instance, start with a low offer. If the seller is truly motivated, they are likely to negotiate with you.
On the other hand, if you’re making an offer on a home that’s located in a high-demand area, remember that there may be other people placing bids at the same time. In this situation, it’s best to begin with your best offer to ensure you have the best chance of getting the home. Keep in mind that low ball offer can send a message to the seller that you’re not serious about the purchase. In some cases, a seller will reject a low ball bid without even countering.
With a little bit of research and an understanding of the seller’s motivations, you can make an offer that the owner is unlikely to refuse.
Compare asking price to MLS and public record listings
Making an offer on a home requires researching beyond what the seller’s agent has provided you. Offers to purchase should be based on facts (and a realistic assessment of them). The seller has been equipped by their agent with all of the information required to establish a sales price, but sometimes the seller will ignore their agent’s advice. While it is generally acceptable to negotiate price, you will be more compelling and effective if you have done your homework before asking for a deal.
A fair price can be determined by the purchaser using several means available to them.
- Start with comparables – Often called comps, the comparables are the homes like the home you want to buy that have sold recently or that are on the market currently in the same neighborhood. The MLS is a great source for this information. A comp is a valuable pricing tool if it is truly comparable to the house for sale. This means: same amount of square footage, same number of bedrooms, comparable yard and basement condition, and similar overall condition of the home. A home that has sold recently in superb condition with many extras and a remodeled kitchen would set the benchmark for value.
- Public record – Sales made without a realtor involved require a little more work to get the selling price, but you will likely be successful if you visit the county real estate recorder’s office. The county recorder’s office may be able to provide you with an internet site where you can look-up all of the recent real estate transactions in the neighborhood.
Property conditions and your offer
When determining how to price your offer, it is imperative to know the condition of the property you are seeking to purchase. No one wants to buy a property, only later to discover that it requires thousands of dollars in repair costs.
To prevent this, hire a certified home inspector prior to making an offer. It will cost you a little bit of money upfront, but you could end up saving yourself much more in the long run, if the inspector finds unexpected damage you may determine not to make an offer or you know you need to adjust your offer to offset the cost of repairs. Typically, an inspection does not occur until after an offer has been accepted, but you can request the seller to allow you to have an inspection prior to making an offer. It lets the seller know you are serious and it lets you have the necessary information to structure your offer.
Work closely with a general contractor who knows the accurate costs of repair work, including both supplies and labor. You provide the contractor with a list of repairs from the inspector and then the contractor can figure the cost of all the necessary repairs. In your negotiations with the seller, you can reduce the price of your offer based on the cost of repairs. Of course, you want to lower the cost more than the repairs will actually cost you, so you come out a bit ahead in case of anything unexpected.
Also, consider the age and condition of the paint, flooring and appliances. You can lower your offering price based on those items being worn or outdated. Again, it is important for you to know the cost of replacing those items. Having new appliances for example, can really update the look in a kitchen and can increase the value of the home after you purchase it.
How does financing change things?
Your down payment
Today’s housing market has changed from recent years, and this affects home buyers in many ways. The requirement for a down payment is just one of those areas.
Historically, there have been programs to allow buyers to finance their down payment– which essentially meant you bought a house with no money down. While the programs today are different than these historical programs, there are other ways to redue the down payment on your home. If you are looking for a no-money-down option, a rural housing loan may be your best choice. With this loan, you are limited to where you buy a home, but but you can avoid a large down payment (i.e. if you are willing to commute, this may be a good option). However, you can often find a house just outside the city limits that will qualify.
Another low down payment option is an FHA loan. These requirements are typically much lower than what is needed for a loan with a bank or mortgage company. You will only need to save 3 1/2 percent of your home’s cost for a down payment. There are also qualifications for this program, like being a first-time home buyer, as well as buying a modest home.
While you will have to find out if you qualify for either option, the lower down payment can make this a much cheaper alternative to traditional loans. This way, you can buy your home much sooner than you would otherwise.
When considering the purchase of a new home, investment property or refinancing your existing home loan, it’s best to familiarize yourself with how financing changes things. Current mortgage interest rates have a major influence toward your overall purchasing power. It is important to obtain a mortgage with an interest rate that suits your circumstances. Options for financing your property depends on your personal financial situation and your unique desires.
Interest rate is the rate at which interest is paid to a lender by the borrower for use of loaned money such as a mortgage. Higher interest mortgage rates simply mean that your monthly mortgage payments will be greater than financing at a time when interest rates are lower.
An adjustable-rate mortgage differs from a fixed-rate mortgage in many ways. This interest rate changes periodically, typically in relation to other factors. Monthly payments may go up or down during the period of your ARM loan. You may consider refinancing when interest rates are low if you have a variable interest mortgage rate.
Shopping for a fixed interest rate mortgage may save you a substantial amount of money. Future interest rates will have no impact on your loan, meaning your home loan monthly payments for principal and interest will not increase. The fixed rate does not change during the period of your loan which is usually 15 to 30 years.
Many different types of mortgage interest rates are available. Choosing your mortgage and type of interest rate may be the most important financial decision you will make.
Closing costs and loose ends
Closing Costs & Loose Ends
Because financing is such a significant part of the buying process, it is best to know everything you can about it. Sometimes, however, there are unexpected costs to buying a home that you should be aware of (if these costs are intentionally hidden, however, the seller may be breaking federal laws). Some examples of “loose ends” that should be tied before closing day include:
Property taxes are pro-rated to the time of closing, and the amount of taxes due at closing will depend on how the taxing authority collects property taxes.
There may be liens against the property that have been ignored and they must be settled before closing can occur.
The current owner may want the buyer to pay the balance of a current sidewalk assessment that was being paid yearly with the taxes.
The financing source may include costs that were not mentioned such as document fees, courier fees, and the funding of an escrow account which includes taxes and property insurance that will be due before the monthly payment builds up enough money in the escrow account to pay them.
The finance company should have disclosed their “points” for originating a mortgage long before closing, but the amount of points may go up before closing.
Homeowner association dues are sometimes payable two months in advance for new homeowners.
However experienced you are in purchasing a home, be aware of potentially hidden costs, so there’s no surprises for you at closing time.