Buy a Home Like a Pro Continued
Now that you've had a sufficient break from reading the short novel, Buy a Home Like a Pro, and have digested all that information and are becoming super experienced, it's time to continue with the beatings... er uh, reading.
So last time we were making some real headway on the Objections, Resolutions, and Waivers (ORW's.) It seemed like everything was falling into place. At one point we were starting to get worried, but then the seller had the clever idea of having his brother install the new furnace and that would be perfect. He was really turning out to be a squared away individual...or so we thought.
The issues concerning the roof, water heater, and some other little things that appeared on the inspection report were all somehow overshadowed by our seller's wonderful act of genius and generosity. He made it sound like everything was fine and dandy and we should all move forward with the sale of the house.
Au contraire mon frere!
In fact at this point we have a LIST of complaints and aggravations that we are compiling, and we will send this list right to them so they can agree and sign and THEN we will see about buying this house. The seller's Realtor knows this is coming anyways, because he has sold 23 homes this year alone and he's pretty cool with all of it, really. Realtors usually are pretty cool with all of it.
PRO TIP : Realtors generally LOVE to grease the wheels and get deals closed. Of course they do, you say. Yes, but what you might not realize is that the Realtors sort of only deal with each other. So if I am your Realtor, I will NEVER talk directly with the actual seller. I will only talk to his Realtor. And then he will relay what is said back to the seller. And us Realtors like to work together so we can both make lots and lots of money. So if I say "Hey, the furnace in this house is trashed, man!" The other Realtor will say "Oh crap! I'll let the seller know ASAP and we'll get this taken care of!!!" And then he will say something to the seller like "The furnace really is crap. We should offer something to make them happy, or they might back out of the deal." And a good listing agent (the seller's Realtor) will be able to convince the seller to do whatever it takes to make this deal work, so long as it's legal and the seller isn't getting too screwed over, so that he can get the commission check for twelve thousand dollars. And I also want him to make it work so I can get MY check for twelve thousand dollars. This is how we work together. And after we make everyone happy and the deal closes, we make some serious bank and go out for beers and do a lot of high fiving. That's the life of a Realtor and the end of this PRO TIP.
OK back at the deal, you discuss these issues with your Realtor and begin compiling the official complaints. The two of you decide that if the seller's brother is going to replace the furnace himself, he can probably fix anything.
It's important to note that up to this point in the ORW stage, everything has been verbal. What's ALSO important is that the deadline for delivering the ORW's to the seller is not for another week. This deadline was inputted into the purchase agreement by you, with the help of your Realtor. The purchase agreement, or PA for short, is LOADED with deadlines. It's not like you write up some contract to purchase a property and don't mention WHEN you'll pay for it. And it's not like you just shake the seller's hand, sign a pink slip and grab the keys. A real estate transaction takes time. As I mentioned before, usually about 30-45 days. So deadlines are a big part of it. In this case, we must deliver our list of complaints, the ORW's, no later than 18 days after the offer was initially accepted.
And while we are here, you might be thinking "Why does it take so long to close on a house?" And my answer to that is "It doesn't." Because once you realize that you need the home inspected (and this is just the General Home Inspection, not the sewer scope or the radon gas or termites, which in addition to many others, are sometimes also recommended), you start calling Home Inspectors and getting prices and finding out just how soon they can get out to the house and also how long it will take them to send you the finalized report once they are done, you will realize that this may take a week or more. AND THEN you probably will need some repairs done and this takes time to find a worker and get quotes and get them out to the house to perform the work. And it's the same thing with the Title Company. They have lots of work to do tracking down everything to make sure the house is on the up and up and nobody owes anything on it. They may tell you that there needs to be a survey done too. All of this definitely takes time. Of course don't forget that you are not the only customer the Title Company is working with. There's probably dozens more and you will spend some time feeling like you are on the back burner.
Cash deals are generally quicker because you don't need someone to loan you hundreds of thousands of dollars, which is something that takes time. Also you will NOT need an appraisal of the home if you already have the cash to buy it.
But if you need to borrow money, the mortgage company will ask you for many pieces of information such as your work history, credit score, pay stubs, social security card, letters of recommendation from your old teachers, etc. And then when you give them this information they will go on vacation. When they finally get back to town they will have lost everything and ask for it all again. You will use swear words. Then, when you are only a FEW DAYS away from closing the deal, they will ask for everything again and say things like "Well, as long as everything clears underwriting, all we need to do is get final approval from the board of directors and then we just need a criminal background check and fourteen more pay stubs.
And like the Title Company, they also have dozens if not hundreds of other deals going on and they generally don't care about you in the least, at least that’s exactly how it feels anyway.
And there might even be things I am forgetting. So when you consider all that has to be done, it does not take long, especially when you consider that you may DIE in this house (of old age, that is) and that 6 weeks to close on your house is a blip compared to eternity.
But here on Earth, you want to close this deal ASAP anyways - screw eternity. And that's OK - everyone wants to close as early as they can. The seller usually is in a big hurry to get their money and move on with their life, the Realtors want to close and get that commission, the loan people want to get it done and get paid, and the title company wants to get paid too. But if all the things don't get done by the closing date, then we have to go back in and change the dates and it can be a hassle. So it's better to stretch that closing date out a bit just so we are sure we have enough time. By the way, if the inspections and title commitment and loan documents are all done, it's NO PROBLEM to go ahead and close early if everyone is ready.
So back to the deal. The seller has agreed to replace the furnace but there's the matter of the hot water heater and some other things. We can sort of sit back for a few days and make the seller sweat a little, wondering what we are doing. But not too long! You still very much want this house and doing all these repairs takes time and you want everything done by the time you get the keys.
So in addition to the furnace, you would also like the seller's brother to replace the hot water heater and fix the roof and smoke alarms. He can even have someone else do it. Just that all these things need to be done for the purchase price to remain at $430,000.
Let's talk about that price for a bit. Where did we come up with that? Well, back when you first fell in love with the house and your Realtor said he would go "run some comps," he came up with the price then. So how do we know that we are getting a good deal on this house? Do we need an appraisal? Well, an appraisal is more for the banks. It might take several days to get one and plus they cost money. So what we do is "run comps."
"Comps" means comparable homes that have sold in the same neighborhood as your home. Sometimes there are many, very similar homes that have very recently sold, and sometimes there's not much to go by. But either way, running comps gives you a good idea of what the house is worth. It could be that your $430,000 dream home is surrounded by $350,000 or less homes and they are nearly identical in features and condition. This would not be good. Maybe there are comparable homes nearby that have sold and are very similar to yours, but they sold a year ago or more and the market has changed significantly since then.
Your Realtor will use some sophisticated software and his own experience to decide if the home is worth the asking (and your offer) price.
It's important to note that if you are getting a loan to buy the house, the comps will be of little interest to the bank. The bank will always do an appraisal by a company of their choice to determine if the house is worth the amount you are asking to borrow.
So part of the purpose of running comps is to make sure you are getting the home for a fair price, and part is to make sure you can get a loan on it.
Whaaaa? I know, I just said the banks don't care about the comps. But let's say your comp analysis comes back at $415,000 - $470,000. Comps usually come in a range because nobody, not even the bank's appraiser, can put a price on a home to the exact dollar amount. So there's always a range with the comps. CHANCES ARE the appraisal will also come in around there too, enabling you to get a loan. The loan people will usually get you the money if everything is close enough. In other words if the house's value comes back at $250,000 by the appraiser and you want to borrow $400,000, you will encounter extreme obstacles in your path. But if for that house you want to borrow $225,000 because you are putting $25,000 down and have great credit, work history, and everything else, your wheels will be greased. Sometimes, I have heard of appraisals coming in at the exact price of the house. Mysterious...
OK back to the deal once again. You send the ORW's to the seller and hold your breath. It comes back like this:
The seller will have the roof leaks repaired and the smoke alarms brought up to working order, but he will not do the water heater. He thinks that it works just fine and that the inspector probably made a mistake and flunked out of high school. He says the price does remain at $430,000 however.
There is a lot to negotiating...too much to really write about, especially in a weekly blog. I suppose you could read books about it, but it's really simple. You get what you want and the other side gets what they want. If one side doesn't get what they want, the deal will fall apart. Period. So you ask for more or you give more, as needed. Many times, you have no idea what they actually want. And believe me, it's not always what you think. This is where COMMUNICATION comes in. So let's say there's something you don't care about in the deal. It could be that the other side really cares about that part. So you give it away. Because it's of more value to the other side. Then the other side gets what they want and it costs you basically nothing.
Good Realtors are a very powerful tool because they are emotionally detached from the property. They do this for a living, and are not afraid to reach out and ham it up with the other side, finding out what the sellers are looking for, feeling them out and finding the weak spots, and doing it all with a few casual phone calls.
So back at the deal, the seller might be sitting there, waiting to see if you accept. He might be worried that you are not getting what you want since he nixed your request to have the water heater replaced, and that you will walk away. But in reality, you are totally jazzed that you are getting the home of your dreams for TWENTY THOUSAND DOLLARS LESS than the original price! Now the only thing standing in your way of living happily ever after is a new water heater, which can be done for under $1,000, if you know the right people.
Hey, here's an idea! You can request to go see the water heater yourself right away and maybe take your friend, Carl, who got good grades in shop class. Just tell your Realtor. He will let you and Carl in the house and you can go run the hot water and visually inspect the unit for any signs of corrosion, old age, leaks, noises, smells, violent shaking, or evil spirits.
Now you will have firsthand knowledge of the situation and feel much better about making any decisions about the issue. Oh, and you can also usually call the inspector and he will probably remember that water heater. You can say, "Jeez, the owner of the house said it was fine, and I went and saw it and the water was plenty hot, but I did hear a spooky noise so I wanted your opinion on just how long this thing will last until it explodes."
The inspector says "You'll probably be good, you know for a while, but the condenser relay was a little swollen and the pH on the tank sensor showed negative. But I've seen a lot worse. The serviceable life on these is usually around 12-15 years but these things can last you know, for years after that too. It just depends."
And you'll say "Huh..."
And he will say, "But you know it's just my sworn duty as a licensed professional to red flag anything I see as a potential problem in my report."
And you'll say "Huh..."
So there you go. Now you're really aware of everything that's going on and it only took a few minutes. Plus you got your first taste of home ownership with the inspection! Now you are really excited to move in! Plus you noticed a few really cool little features in the home that you didn't see before.
This really is exciting, and all the legal mumbo jumbo and forms and negotiation is really nothing compared to the excitement and joy of owning your own home. You get to sleep there. You get to rearrange the furniture and paint the walls. You get a big tax writeoff. You can even have friends over for barbecues and give them "the tour!" You can even tell the story of the water heater! They will tell you the story of when they bought their house and they will pat you on the back and say "Welcome to the club, old Chap!"
Until next time...