Home Buying 101
Congratulations on your decision to invest in real estate! I know this is a really big decision and your head must be swimming. You’re probably asking yourself “So……… now what?”
The REALTOR’s® Job
At the heart of it, a REALTOR® is a facilitator. Our job is to walk you through the entire process of getting you into your new home, one step at a time. We help you to find exactly the right home, introduce you to lenders and other service providers that will help you throughout the process, guide you in the writing of your offer, negotiate on your behalf, make sure everything is properly disclosed to you and that you know what you’re buying, manage the mountain of documentation, and facilitate you ending up at a successful finish line. Easy, right???
#1 Home Hunting Tip
Go look at houses live and in person…with your REALTOR®. Listing photos are marketing photos. Their job is to highlight the home and pique your interest, and REALTORS® are very good at showing you only what we want you to see in listing photos. No agent is going to show you pictures of the cracked side of the fireplace, only the crackling fire. Stop looking on your phone and go tour some houses. There is nothing like when I walk into the perfect home with an excited buyer and see their eyes light up, telling me “This is the one!” We can never have that experience looking at listings on a screen.
What is the MLS?
MLS stands for Multiple Listing Service. When a REALTOR® loads up a new listing, he/she doesn’t do it directly to Zillow or Trulia, he does it directly to the MLS, and then hopefully tells the system to allow the listing details to pass through to those 3rd party apps and sites. That’s why the MLS is always the most accurate and up-to-date source of listing information. It may not be as pretty, but it is what REALTORS® use when looking for homes and looking at comps. Be very careful relying on 3rd party home price estimates like the Zestimate; they are not an accurate indicator of a home’s value and ultimate sales price. Trust your REALTOR® 😊!
Getting Ready to Put in an offer
It’s time to start doing some homework. A lot goes into getting an offer together, so it’s best to get started early. Here is some work you will want to do so you’re ready when the time comes:
· Write a nice letter introducing yourself to the seller. You may have heard that Buyer Love Letters have gotten out of style, and to some degree that is true, but I still encourage them. Sellers are advised not to look at them because of fear they might discriminate, but there is nothing that says you can’t still submit one, and they can still be effective. You will want to pull at their heartstrings a little bit. Who are you? What do you love about the house? What are your plans for the future? Include a picture if you have one. It sounds corny, but these letters can go a long way. You can even do a short video of you and your family.
· Choose a lender. If financing is needed, you will need to decide on a lender sooner than later. Your lender will provide a pre-approval letter for you, which should be submitted along with your offer and shows that you are legitimate. Your lender and your REALTOR® will work as a team throughout the entire process, from pre-offer to closing. Ideally both your lender and your REALTOR® will be local, so they have relationships within the community and know how the local real estate customs work.
· Get your finances together. Your lender is likely going to need tax returns, pay stubs, bank statements, employment history, and more. Don’t wait until the last minute to gather this info. Once you find the right house, you don’t want to miss out because your paperwork isn’t ready. You should also submit proof of funds with your offer. This is usually in the form of a bank or financial statement. Your name and account balance should be on it, but we can black out your account numbers.
· Give your REALTOR® plenty of notice (if possible). These things take time. You will be amazed at how your REALTOR® bends over backwards to make things happen for you, but you put yourself in the best position if he/she has time to speak with the listing agent and find out as much as possible about the property ahead of time. In a competitive market, you want your offer to be as well thought out as possible. Also, if all other things about the offers on the table are equal, one thing that can set your offer apart is your REALTOR’s® communication skills and thoroughness, which is much easier to show if we have the opportunity to communicate prior to submitting.
· Listen to your REALTOR®! We know the market, and we know what it’s going to take to get you into that home. Every buyer wants to pay as little as possible, and every seller wants to sell for as much as possible. The competitiveness of the listing and the seller’s motivation are key to knowing how much to offer. Your REALTOR® should research comps, look at number of days on market, speak with the listing agent about the listing’s activity, and more. Please don’t listen to Zillow, or other 3rd party real estate sites. (Sound familiar?) Zillow has never been in that house or toured the neighborhood. It doesn’t know if the neighbor next door fixes cars in his driveway or stores junk in the back. It doesn’t know how nicely the home has been updated, and it certainly doesn’t have an up-to-the-minute understanding of the pulse of the market. Let your REALTOR® be your guide.
· Be available. You are going to need to get everything together, discuss your offer with your REALTOR®, and sign documents in a timely manner. Even though these things can be done electronically nowadays, they still take time. You would be surprised how many people forget to check their email. Oftentimes timing can be a critical component of getting your offer accepted. It only takes a couple of quick clicks for a seller to accept someone else’s offer.
Your offer’s in. What’s next?
· Back and Forth. The seller may send you a counter-offer, and you may send a counter-offer back. When you receive a counter offer, that means the seller has agreed to everything about your offer except what is written on the counter offer. Each subsequent counter offer also assumes that everything else not addressed is agreed upon.
· Acceptance. Once all the parties have signed the Purchase Agreement and the last Counter Offer in the chain, you are “In Contract” or “In Escrow”. Congratulations! The day the ratified offer is delivered to the other party is considered day zero, and the next day is considered day 1 in regard to timelines.
· Timelines. All of the timelines were specified in the Purchase Agreement. Your REALTOR® and team should manage them and make sure you are aware of any important dates.
Here is a sample of a timeline from an actual escrow:
Acceptance Date: 12/5/2022
Initial Deposit: 12/10 (3 business days) $ 12,000
Seller Disclosures Due: 12/12 (7 days)
Physical Contingency: 12/14 (9 days)
Appraisal Contingency: 12/19 (14 days)
Loan Contingency: 12/24 (17 days) * due date fell on a weekend, so it is bumped to Monday
Close of Escrow: 1/9/2023 (35 days or less)
It all moves pretty fast. Take a deep breath!
What does the escrow (or title) company do?
The company that is handling the escrow would have been specified in the Purchase Agreement. The escrow company is a neutral party that ensures that all the financial elements of the contract are adhered to. When it is time for you to submit your deposit, you deposit it directly to the escrow company either with a cashier’s check or wire transfer. When the seller’s bank loan needs to get paid off at close of escrow, the escrow company handles that transfer. The seller does not receive any of your money until and unless the escrow closes.
What is title insurance?
The escrow (title) company will also provide you with title insurance. Title insurance is an insurance policy that protects you against unknown claims of ownership to the property. For example, I once had a client who was looking for a place where they could build an ADU for mom. We researched the home they were purchasing exhaustively, speaking at length with the City about any potential issues. As it turns out, a neighbor had a sewer line that was running right through the middle of the backyard, but there was no recorded documentation about that. The title insurance policy kicked in, and my client was awarded a settlement to pay for the cost of moving the sewer line off their property.
What is a contingency period?
You will hear this one a lot! On the Purchase Agreement, you agreed to certain procedural time frames. Specifically, you agreed to an amount of time for the following:
· Buyer Investigation Contingency. You have a certain number of days to investigate the physical characteristics of the property, such as a Home and Pest Inspection, Permit History, taking a walk in the neighborhood, etc. It is always highly advised that you fully investigate the property, and your REALTOR® will guide you through this and be there every step of the way. All these investigations are at your expense, and there are no refunds.
· Appraisal Contingency. If you are getting a loan, you will likely be required by your lender to have an appraisal of the property done. This is at your expense as well. The appraiser’s job is to try to validate the price on the Purchase Agreement, so the bank knows what they are lending on.
· Loan Contingency. If you are getting a loan, this is the time frame during which you need to complete your loan approval. Don’t go out and buy a new truck or quit your job! The loan underwriters will double check before issuing you your final approval.
What happens if something comes up during the contingency periods?
Good question! For the most part, if there was information you had when you submitted your offer, like perhaps they provided you with a Pest Report ahead of time, that knowledge was part of your offer when you wrote it, so it is essentially considered off the table. Any NEW information, however, is up for negotiation. Until you have removed your investigation contingency (via a Contingency Removal form), you have three options:
· Accept the condition and move forward
· Attempt to negotiate to either have the seller repair something or receive some sort of credit for the defect
· Cancel the contract with a full refund of your deposit.
More often than not, both the buyer and seller are highly motivated to make the deal happen, so there is usually some sort of compromise that involves either a reduction in sales price or a credit to the buyer toward their escrow fees.
The other thing that sometimes comes up during the contingency periods is that the appraisal comes in below the value of the agreed-upon purchase price. The key thing to note here is that the bank is only going to give you a loan on the appraised value. Therefore, if you’ve offered $600,000 and the appraisal comes in at $580,000 there is a big discrepancy between what the seller has been promised and what the bank will give you. Something has to give, and this time there are four options:
· Buyer agrees to come up with the extra cash above and beyond what the bank loan provides
· Seller agrees to reduce the sales price to match the appraisal
· Buyer and seller compromise somewhere in the middle of the two values
· There is no meeting of the minds and the escrow gets cancelled
What happens if I miss a contingency deadline?
Your REALTOR® and team will watch the deadlines carefully. At the end of the day that the contingency is supposed to be removed, all the negotiations will hopefully have been completed and you will be able to remove the specific contingency. If you’re not ready to remove the contingency, you can request an extension. If the seller doesn’t want to grant you an extension, they can issue you a Notice to Perform, which gives you 48 hours to wrap it up and remove the contingency, or they can then cancel the escrow due to failure of the buyer to perform. If you cancel your escrow for cause at any time prior to removing the related contingency, you will receive a full refund of your deposit.
What happens at close of escrow?
You will be amazed at how quickly everything happens. A few days before closing you will sign your final loan docs and escrow paperwork. You will also do a final walkthrough of the property and make sure it is in substantially the condition you are expecting (hopefully nobody broke a window while moving out). Once the escrow company has word that the loan is ready to fund and everything’s in place, we’re ready to close. They will send a representative to the County Recorder’s office, usually first thing in the morning or first thing in the afternoon, and physically record the documents with the County. The escrow company than calls or emails us to notify that we are on record. After that, your REALTOR® will bring you the keys and you get to enjoy your new home.
The most important thing to note in all of this is that you should never feel like you are an inconvenience if you call or email your REALTOR® with questions. Forget what I said in the beginning about what a REALTOR® does. The truth is that our #1 job is to make sure you can rest easy at night, knowing that you’ve made a good decision that you will be happy with for years to come.
Congratulations! You’re a homeowner!!!