Purchasing a Home
The information that follows is designed to provide you with some general ideas on what to consider when buying a home. Some information you may already know and my intent is remind you of those areas you may not have thought about since your last home purchase. Please also note, that working with an experienced Realtor and Lender can help you make better informed decisions throughout the purchasing process.
Things to Consider When You Purchase a Home
There are basically four main things to consider when purchasing a home: 1) selecting the home that is right for you, 2) financing the home purchase, 3) choosing a Realtor and 4) making the offer.
1. Selecting the Right Home
Of all the issues involved in purchasing a home, this is probably the most subjective. Ask yourself, what type of home satisfies your needs? Is it a single family, detached home with a backyard, or a condominium? Do you want your home on one story or multiple stories? Is it close to schools, shopping and work?
2. Financing the Home Purchase
Perhaps the most important consideration when buying a home is how to finance the purchase. Buying a home can involve the commitment of a significant amount of your savings. Questions such as how much can I borrow and how much can I afford to pay on a monthly basis are very important as the decisions that are made here can significantly impact your financial situation for years to come.
Let's start by addressing the issue of the down payment. Lenders have many loans available for home purchases, There is no hard and fast rule on how much to commit to a down payment, but try and anticipate your cash needs as best as you can before determining how much to commit to a down payment. Generally, the less of a down payment you have, the greater the loan you are going to need to close the purchase. The greater the loan you need means your monthly payment will be greater, which means the income you need to qualify for the loan will need to be greater, too.
The next important issue is the loan itself. What follows is a very brief discussion of a highly complex subject. The number and types of loans available for home purchase are about as numerous as the number of lenders making loans, so this discussion is designed to give you only a broad brushstroke view of the lending market. Lenders generally make two types of loans available for home purchases, a Variable Interest Rate Loan (sometimes known as an Adjustable Rate Mortgage) and a fixed rate loan. Within those two types of loans, the loans can either be "Conforming", which means the loan amount is within the Fannie Mae/Freddie Mac loan limits (check with a lender in your State for the current loan limits), or it is "Non-conforming", which means the loan amount is in excess of Fannie Mae/Freddie Mac loan limits.
Variable Interest Rate Loans generally have a lower interest rate at loan origination, but have the provision for the lender to increase or decrease the interest rate on the loan based upon the movement of whatever index the loan is tied to. Because the interest rate can be adjusted, the lender has the right to increase or decrease your monthly payment accordingly. When and by how much the payment can be changed depends upon the loan terms you agreed to. The one thing you need to be watchful for is that many times a lender will qualify you for your loan at what is called a "teaser rate". While teaser rates are designed to help you obtain a loan, this is generally accomplished by starting your loan at an artificially low rate. After a specified period of time has elapsed, perhaps three to six months, the interest rate on the loan is then increased to bring it in line with where the true interest rate should be. This can result in a significant increase in the amount of the monthly payment. While Variable Interest Rate Loans have become popular over the past fifteen to twenty years, if you are not comfortable with the idea that your payment can be increased or decreased by your lender, then the more traditional fixed rate loan is probably for you.
Fixed Rate Loans are still the most popular form of financing. With this type of loan, your payment will remain constant for the entire term of the loan. These loans generally have a slightly higher interest rate than the Variable Interest Rate Loans at origination, but unlike the Variable Interest Rate Loans, the interest rate will remain fixed throughout the term of the loan. The traditional fixed rate loan generally fully amortizes over a thirty-year period, with the payment in the first month the same as it is in the 360th month. For those buyers who want to know that their monthly commitment to a home payment will always be the same, this is the loan for you.
Also remember that whatever loan you obtain, the lender may require an impound for real property taxes and insurance, which will further increase the monthly payment. These impounds are designed to make sure that the borrower has enough funds available to pay for property taxes and insurance when they become due and payable.
How much home can you afford to purchase? This is a difficult question to answer, as each potential buyer's situation is different. The very best way to answer this question is to go and talk to lenders and ask them to calculate how much they can qualify you for based upon your income, length of time on your job, and amount of your down payment. Lenders will need to know how much debt you have, such as car loans, credit cards, student loans, etc. Remember, once you actually apply for a loan, all the information you use to qualify for the loan will be verified through the loan qualification process. Another suggestion would be to talk to more than one lender. Each lender may have a slightly different loan to offer. Find out which lenders are most active in the real estate market in your area.
3. Selecting a Realtor and 4. Making the Offer
Your Realtor is trained in the process of making the home buying process easier for you. They can offer help in locating properties that are available for sale, give recommendations on financing, help you to understand the local real estate market, and help advise you in preparing an offer and negotiate the sale. Negotiating a purchase can be very complex, as often it takes multiple offers and counteroffers before a contract is finalized. Realtors can make sure that the offer you make is in line with the value of homes in the area you are trying to buy into. They are also experts on what disclosures are required in a sale, and what inspections need to be done. A good Realtor will be with you every step of the way, from escrow opening until you finally close your home purchase. You should view your Realtor as an expert who is there to help you in each step of the transaction.
Related Q & A
Click on any of the links to get more information.
Comparable Sales and Your Offer Price
Major Factors Influencing your Offer Price
Selecting Service Providers
Determining Your Offer Price
When you prepare an offer to purchase a home, you already know the seller’s asking price. But what price are you going to offer and how do you come up with that figure?
Determining your offer price is a three-step process. First, you look at recent sales of similar properties to come up with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your "fair" price and come up with what you want to put in your offer.
Comparable Sales
The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. These are called "comparable sales." Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Specifically, you want to compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction.
If the home you are interested in is part of a tract of homes, then you will most likely find some exact model matches to compare against one another.
There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.
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Comparable Sales in the Public Record
The most accessible source of information on comparable sales is the public record. When someone buys a home the property is deeded from the seller to the buyer. In most circumstances, this deed is recorded at the local county recorder’s office. They combine sales data with information already known about the property so they can assess property taxes correctly.
Provided there have been no additions to the property, the information available from the public record is usually correct regarding sales price, square footage, and numbers of rooms. This makes it easy to use the public record as a source of data for comparable sale information.
Accessing the data is another matter, at least for the general public. Realtors can generally look up this information through title insurance companies. The title companies either compile the data directly from the county recorder’s office or purchase it from other companies.
One problem with the public record is that it tends to run at least six to eight weeks behind. Add another four to six weeks for the typical escrow period and you can see the data is not current. The most current information is the most valuable.
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Comparable Sales in the Multiple Listing Service
Most of the public is aware that the Multiple Listing Service is a private resource where Realtors list properties available for sale. Recently, the public has been able to access some of that information on such sites as Realtor.com, MSN HomeAdvisor, and others.
Once a property is sold and the transaction has closed, the selling price is posted to the listing in the Multiple Listing Service. Over time, it has become a huge database on past sales, containing much more information on individual homes than can be gleaned from the public record. This information is only available to real estate agents who are members of the local Multiple Listing Service.
Your agent will provide you with this data to help determine your offer price.
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Comparable Sales – Pending Transactions
The most valuable information would be the most current, of course. A sale last week has more validity in helping you determine a purchase price than a sale from six months ago. The problem is that there is no actual record of the sales price until the transaction is completed. The information is not available in the public record because no deed has yet been recorded.
Neither is the information available in the Multiple Listing Service. Once a property is sold, it becomes a "pending sale" and all pricing information is removed from the listing. Prices are not posted until it becomes a "closed sale." This protects the seller in case the transaction falls apart and the property is placed back on the market. It would give an unfair advantage to future potential buyers if they already knew what price the seller had been willing to accept in the past.
However, if a Realtor has a reason to know the sales price, they can usually find out through professional courtesy. Also, some real estate brokerages post sales information on a transaction board in their office.
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Other Factors Influencing Your Offer Price
Gathering and analyzing information from comparable sales helps to establish the range of prices you should consider when making an offer to buy a home. More weight should be given to the most recent sales, but even so, you need to do a bit more analysis before setting upon the price you will offer. That is because you also need to consider the condition of the property, improvements, the current market, and the circumstances behind the seller’s decision to sell.
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How Property Condition Affects Your Offer
Since you have toured the property you are interested in, you should know how it compares to the general neighborhood. All you have to do is put the home in one of three categories - average, above average, or below average.
When evaluating a home’s condition, there are a number of things you should consider. Structural condition is most important - items such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. Pay special attention to bathrooms and bedrooms and whether the plumbing and electricity work efficiently. Look at the fixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape.
The missing ingredient will be information on the condition of the homes from your comparable sales list. Provided you chose the right agent to represent you, they will have actually visited most of those homes and be able to provide key insights.
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How Home Improvements Affect Your Offer Price
Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like expensive floor tile or swimming pools should be taken into account, too, but should be discounted. A pool that costs $20,000 to install does not normally add $20,000 in value to the home. Rely on your agent to give you guidance in this area.
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How Market Conditions Affect Your Offer Price
A hot market is a "seller’s market." During a seller’s market, properties can sell within a few days of being listed and there are often multiple offers. Sometimes homes even sell above the asking price. Though most buyer’s want to get a "deal" on a home, reducing your offer by even a few thousand dollars could mean that someone else will get the home you desire.
A slow market is a "buyer’s market. During a buyer’s market properties may languish on the market for some time and offers may be few and far between. Prices may even decline temporarily. Such a market would allow you to be more flexible in offering a lower price for the home. Even if your offered price is too low, the seller is likely to make some sort of counter-offer and you can begin negotiations in earnest.
More often than not, the market is simply "steady," or in transition. When a market is steady, no real rules apply on whether you should make an offer on the high end of your range or the low end. You could find yourself in a situation with multiple offers on your desired house, or where no one has made an offer in weeks.
Transition markets are more difficult to define. If the economy slows unexpectedly, as it did in the early nineties, people who buy on the high end of a seller’s market (like the late eighties) could find their home loses value for several years. So far, no one has proven reliable in predicting when markets change or how good or bad the real estate market will become.
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How Seller Motivation Affects Your Offer Price
Truthfully, it is rather rare that a seller’s motivation will dramatically affect the price of a home, but it is often possible to save a few thousand dollars. The most common "motivated seller" is someone who has already bought his or her next home or is relocating to a new area. They will be under the gun to sell the home quickly or face the prospect of making two mortgage payments at the same time. Since that can drain a bank account quickly, most sellers want to avoid such a situation and may be willing to give up a few thousand dollars to avoid the possibility.
There are also family crises that can motivate a seller to make a quick deal. However, when you see a real estate ad that mentions "divorce," "motivated seller," "relocation," or something to that affect, beware. Although the facts may be true, that does not necessarily mean the seller is motivated to make a quick and costly sale. Most likely, the ad is more designed to generate phone calls and leads rather than sell the home.
However, there are times when a seller is truly distressed, willing to make a quick sale and sacrifice thousands of dollars. With the seller’s permission, the listing agent will post this information along with the listing in the Multiple Listing Service. They may also inform other agents during office and association marketing sessions or by flyers sent to other real estate offices. Provided this information has been made generally available to Realtors, your agent should know when a seller is truly motivated and when it is just "puff" designed to elicit interest in a property.
The exception is when an agent is selling a home they have listed themselves or selling a home that was listed by another agent from their own company. In such a situation, the agent may be acting as an agent for the seller, or as a "dual agent," representing both you and the seller. In such a situation, they cannot legally provide you with information that would give you an advantage over the seller.
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The Final Decision on Your Offer Price
Comparable sales information helps you to determine a base price range for a particular home. Adding in the various factors like property condition, improvements, market conditions, and seller motivation help determine whether a "fair" price would be at the upper limit of that range or the lower limit. Perhaps you will feel a fair price is outside of that price range.
The "fair" price should be approximately what you are willing to agree on at the end of negotiations with the seller. The price you put in your offer to begin negotiations is totally up to you and depends on your negotiating style. Most buyers start off somewhat lower than the price they eventually want to pay.
Although your agent may provide advice and guidance, you are the one who makes the decision. The price you put in the offer is totally up to you.
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You and the Seller Must Agree
Buying a home does not occur in a vacuum, involving only you and the seller. There are all kinds of people and services involved behind the scenes to make it happen. Since some of these services affect both you and the seller, there will have to be an agreement on which companies you will use for them. When you make your offer, you should request your favorites for these services. If you are unfamiliar with these service providers, you can get recommendations from your agent.
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Escrow and Settlement
You are going to need an escrow or settlement company to act as an "independent third party" between you and the seller. Without having a third party involved, how do you know that when you fork over the money, you are going to get the deed? This is the type of service provided by escrow and settlement. They will hold your deposit and coordinate much of the activity that goes on during the escrow period.
Since this third party is very important to both you and the seller and both of you will pay fees to this company, it is important to agree on which service to use. Therefore, your choice should be part of the offer. Since you do not buy a home every other week or so, you are probably unfamiliar with companies that provide this service. Your agent will make a recommendation. You have the authority to accept this recommendation and include it in your offer, or make your own choice.
Keep in mind that the seller will also have a preference and this may be a point of negotiation in a counter-offer. It has become customary that one side will choose the escrow/settlement agent and one side chooses the title insurance company. Even so, everything in real estate is negotiable.
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Title Insurance
Title insurance is important because, by providing you with an Owners Policy, they insure that you have clear title to the property. If there are any problems later, you can always go back to the title insurance company and have them clear it up. Since it is customary for the seller to pay for the owner’s policy, they have an interest in which company is used.
However, you are going to pay a fee to the title insurance company, too. This is for the Lender’s Policy. The lender’s policy insures your mortgage lender that there are no liens or judgments against the property and that the mortgage will be in first position. In other words, should you sell the property or refinance it, their mortgage gets paid first, before any other claims against the property.
The lender’s policy is less expensive than the owner’s policy.
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Termite and Pest Inspection
As part of your offer, you may require a termite and pest inspection. This company not only inspects for termite damage and pest infestations, but also inspects for dry rot and water damage, among other things. The company that performs the inspection is important to you as a buyer, because you want to be sure they do a good job. It is important to the seller because it is customary that they pay for the inspection and some types of repairs that may be required.
You should determine which company you want to perform this inspection and make it a part of your offer. Otherwise the seller will choose. If you do not know which company to hire, your agent will make a recommendation.
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