Buy a Home Like a Pro
Looking to purchase a home in the future? Read along and learn some fun stuff!
The first thing most people think when they think of buying a home is what a huge, daunting, stressful ordeal it is. Then they get a bad pain in the pit of their stomach.
Well, let me tell you it doesn't have to be any of that. All that worry is coming from not knowing enough about it. I'm sure buying a car is kind of a bad feeling also, but not as bad, right? And buying groceries is a breeze. Well, I do this all the time and it really is easy for me. It's almost like buying groceries.
So if you are in a position to buy a home in the near future, I'd like to shed some light by going over the basics and talk about some finer points, so that you have a little more understanding and a little less fear about the process.
Let's start by introducing the main characters involved:
2. Your Money
3. Your Realtor
4. The Seller's Realtor
5. The Seller
6. Their money
And that's really it. That's stage of players in this thing. So in the simplest sense you would just grab your Realtor and your bags of cash and buy a home and live happily ever after. And that's how you do it.
If you do not possess bags of cash, or you do but they are very small bags, then you would go to your friendly neighborhood Mortgage Loan Officer. Your Realtor will definitely hook you up with the names of at least three of these wonderful people who will absolutely go out and grab you a loan and get you into a house lickety split. All they need to do right away is make sure you are not a gigantic liability that is going to completely put them out of business because you are not worthy of such things as home ownership, and your whole endgame is to screw over complete strangers. But you are not! So you gladly give them the information they need and they will determine if you can get a mansion or mole hill.
WITHIN MINUTES they will give you an official piece of paper that says "Go out and buy a house up to the amount stated below!" This is often called a lender letter or a prequal letter. Once your Realtor sees that you have it, you're off to go buy a home and live the dream.
YOU are in control as you surf Zillow and Trulia and all the dot coms you want. This is a blast! Let's go see some homes!!! But wait! At this point, your Realtor might very well present you with a short little contract that says "Hey, it's me and you and nobody else." This is usually called a Buyer-Broker Agreement form and ensures that the Realtor GETS COMPENSATED for all his countless hours of hard work that are to follow. It also ensures that you receive the proper level of assistance from the Realtor. It's a legally binding four or five page form that says that he will absolutely work toward your best interest and all he wants in return is for you not to dump him at the last minute for some other Realtor so you can save a few bucks or maybe because you developed a crush on the other Realtor. It's basically a marriage contract that says you are marrying the Realtor until such time as you close a deal on a home with him and are happy ever after.
This contract has to happen because when you are BUYING a home, you do NOT pay the Realtor any money. (Unless of course he wishes to charge you a fee for his services - he will put this in the contract.) BUT... The person SELLING the house pays all Realtor commissions, for BOTH Realtors. So your Realtor is doing all KINDS of work for you without you giving him a dime. So to avoid any funny business, they created this type of contract. It's easy to understand why, and it's very simple. You both agree to work together and the Realtor will receive any commissions generated by your purchasing a property.
This type of contract is not always needed, but sometimes people are moving to another state and do not know of any Realtors there, so they just pick a random one off the internet. Or your Realtor is your old college roommate, and you're not so sure how trustworthy he is. But if your beloved uncle whom you see all the time is your Realtor, then you might NOT need to sign the Buyer Broker Agreement form.
You just really NEED to trust and know your Realtor, because this buying a home is a big, long, complicated, heated, crazy, legal process and you will develop ulcers and start drinking excessively, as I explained earlier. A good Realtor will wipe away all those problems and even take you out to lunch several times.
So now that we are all cozy with each other, let's move on.
You can start right away by looking at dozens of homes online and sending them all to your Realtor, along with little messages like "Ooh, this one looks really great!" Your Realtor will stop what he is doing and investigate, visit, call, text and email the seller's Realtor and find out all the little facts and details and will be armed to the teeth with information on whatever house you are interested in.
And then your Realtor will show you the homes in person, pretty much whenever you want. It's almost always just you and your Realtor, and whoever else you'd like to see the place, such as your spouse, uncle, best friend, neighbor, or grandson.
Sometimes when you go and see homes, there are people still living in them and they will have to tidy up and spray air freshener and leave so you can check out their house. More often than not, the house is vacant and is sometimes "staged" with prop furnishings.
So we all show up at the house and say things like "This property looks perfect!" or "Ugh, I hate that fence!" Then your Realtor will use his magic smartphone app to pop the keybox open and boom, you're in for 15 or 30 minutes or an hour or whatever.
So you go in and look around and check out the kitchen and backyard and everything else. If you don't have a good feeling about it, no biggie. You can just take some mental notes and head on out to see more. Remember, looking at homes is fun, but it can be a little tiring if you are trying to see several homes in a day.
So at some point you will find a home that looks like something you could definitely see yourself in. You can't wait to show all of your friends and plant things in the backyard and have barbeques. And the commute is way shorter and there's a Starbucks right on the corner and all the neighbors wave and smile and you make a best friend with one. So in this case you turn to your Realtor and calmly tell him you want to buy it. Your Realtor will light up and give you a high five and you will circle around staring up at the ceiling and saying all the things about it you love.
Then the Realtor will say something to the extent of "Let me find out exactly what this house is worth, how much you should offer for it, and anything else I can find out about it, such as the condition, the seller's motivation, and stuff like that." Sometimes he will bust out his computer right there and figure everything out. Sometimes he will say something like "I will speed to the office and run a series of professional reports, call a few people, and get back to you ASAP."
Then you say "OK." And you jump around excited and hurry home and make sure your ringer is up.
So this is a point where the Realtor can really be worth a lot. Maybe the sellers are asking too much. Maybe there are other offers coming in. Maybe it's priced just right. Maybe the house has sat empty for six weeks and the sellers are dying to unload it. Maybe it needs a new roof and the air conditioner is on the fritz. All sorts of things affect that offer price. Your Realtor will know exactly what to do.
HOWEVER, you, the buyer, who will own the house, are in control of how much to offer, not the Realtor.
If the Realtor says something like "I know they want 450, but I think we should offer 420..." and so then you offer 420, that's of course fine. If you offer 450 anyway, or if you offer only 395, that is entirely up to you. Hopefully everyone is on the same page and you get the house for the right price.
A good Realtor has been through this many, many times, even recently, and well, that's why you use them. It's like if you were going to climb Mount Everest, you might be able to do it alone just fine. But then there's this guide who has climbed it 23 times this year. He comes at no cost to you, and if he gets you to the top safely, he earns a nice paycheck from the mountain. So when he says "There's some very slippery rocks up ahead by a huge cliff and you could fall off," you would probably listen. Afterall, he does this for a living, all the time, and you will only do it once or twice in your whole life.
Your Realtor, if he is good, will get you to the top of Mount Everest with little to no drama. He may even buy you lunch a few times along the way.
So you say "OK, let's offer the $420,000." The realtor says "OK," and he runs off to write up the offer which includes several forms and can be 75 pages long in some cases. Never you mind, he knows what he is doing. He will email this offer to you. You will usually sign it on the computer, which takes about 2 minutes and zero skills, if you do not plan on educating yourself too much, that is. Of course if you want to read everything you sign and actually understand it, your Realtor can tell you what it all means.
So great, you sign the offer electronically in 2 minutes flat and hit send and your Realtor gets it in his email. Now he will email it to the seller's Realtor, and also give him a call letting him know that there is an offer on his client's house and that it's a strong offer and they therefore should be very excited.
The "offer" is a lot more than just an offer, and I think for first time homebuyers that this is a point worth going over. It's not like the "offer" is just a phone call where the Realtor says "We offer $420,000."
It's not just a peice of paper with the number $420,000 on it with your name and the address of the house you are trying to buy, either.
No, no...the "offer" is actually a "purchase agreement." This purchase agreement, or simply "PA," is around 20 pages of ridiculousness that has been refined over the years by legal experts and lawmakers. It may seem horribly long and complex. It may seem illegible and cause immediate headaches upon reading the first sentence. It may be all of those things, but it is also the way the people of Earth buy homes. It serves as the backbone for the whole transaction and includes things like the purchase price you are offering, what the brokers are responsible for, and all the little details about the house and how you will pay for it and WHEN all this will happen. And with the PA, there can be several other forms and documents that ride along with it.
So when the seller first puts the home on the market, he has to disclose everything he knows about the condition of his house to his Realtor, using the official form. He has to disclose how much he paid in property taxes on the house. He and his Realtor need to disclose if there are any conflicts of interest between them, such as they are twin brothers, or own a business together. There could be a floorplan, HOA documents, solar panel information, anything the owner of the home and his Realtor want to add to the listing, they can. Any forms the seller has uploaded with the listing will be downloaded by your Realtor, signed or initialed by you, the buyer, and these will accompany the PA.
So when an offer is written, it's the whole folder of the transaction starting. The buyer basically says "Here, sign this entire file cabinet of crazy forms so I can buy your house."
There is a library of hundreds of different, specialized, ready-to-go, forms that your Realtor regularly uses to buy and sell homes. He is very familiar with all of them. Usually whatever comes up in buying or selling a home, there is a form for that. Your local Realtor Association is always revising them and creating new ones as needed too.
Forms forms forms.
Forms are your friend. They are everybody's friend. They are how the buyer's and seller's Realtors communicate to each other during the complex transaction of buying a property. They are the absolute tools of negotiation. The forms are always signed by each party so that everybody knows that everybody was aware and OK with things that come up. Like when the seller said he would replace the skylights at no charge to the buyer, and it would be done THREE days before "closing" by a licensed professional and he would have the reciept emailed to you, which is important because you love the house but the inspection report that you paid $400 for, said among other things, that the skylights had dried-up seals and were probably about to start leaking and ruin the ceiling unless they are replaced at a cost of $1,430.27. There's a form for everything and they are always signed or initialed by both parties so nobody can say "What?!?!? I never said that!" Forms protect everyone. It's a sweet deal.
So back to the deal. The seller's Realtor opens the email and reads the offer with his seller. The seller grimaces when he sees that you are only offering $420,000, but then also realizes that he wants very badly to sell the home and it's been on the market for a few weeks now with no offers at all.
Is it cruel and horrible to offer a lower price than they are asking? Nope. It's normal. Unless this is the best house in the world and you absolutely must have it and you KNOW that other people are also drooling over it, and it's definitely worth it, you should typically offer less.
Why? Well, in many cases the current owners of the home owe less on the mortgage than the amount they are asking. They might owe half, and they might owe nothing. Maybe they really are hard up and still owe $440,000 because they got into trouble taking out second mortgages to pay for trips to the Bahamas, and by purchasing this home, you are somehow inheriting their spending problems. In this case, you might grimace yourself. But in most cases, they are in good shape and when they sell the home, they are in for a big payday. Plus the house has probably gone way up in value since they purchased it.
The negotiation will be shaped by all the information that your Realtor has dug up. Maybe the seller is a crotchety old stubborn one and will not budge at all no matter if he never sells the place. Maybe the home was a rental for years and the owner passed away and a sibling or child of the owner is now in charge and they live a thousand miles away and just want the deal done so they can inherit the money.
So a good Realtor definitely comes in handy at finding out all the details of the home and it's story, and he can apply his negotiating expertise to save you from getting into a bad deal.
THE OTHER part of a home's price is the appraisal amount. An appraisal is a legal document that says the house is worth X dollars and it is done by a licensed person called an appraiser who physically comes out to the home and pokes and prods and writes notes and then goes back to his office and decides how much the home is worth.
And if your bags of cash are small, you will need to borrow money in the form of a mortgage and you won't be able to borrow more than what the appraisal amount is because the banks aren't stupid. You can only borrow what the home is worth and that's what the appraisal is for.
OK, back to the deal. Your Realtor says that they have "countered." So they weren't in love with your $420,000 offer, and propose making it $440,000. At this point you have an even better feel about the negotiation because now you know that they are willing to "play ball."
So you look at the counteroffer, which is a form signed by the seller, and you mull around in your head what you should do. You want the house, but you don't like getting taken for a ride and so you tell your Realtor to counter their counter at $430,000 and proclaim that you will not go one cent higher.
Your Realtor writes it up, you sign it, and he sends it off to the seller's Realtor, along with a very friendly phone call saying that the house is in need of repairs and there's no way anyone is going to give them any more for this pile of junk, and that they should feel lucky to have such a huge amount offered.
The Realtors are usually calm throughout all of this, but both the buyers and sellers are permitted to bite their nails whenever they wish.
WAIT A MINUTE! Your counter was accepted! It worked perfectly! You have the signed acceptance of the counter at $430,000!! The house is now off the market! Oh boy the warm and fuzzies are all over the place! It is a fine feeling to know that these excellent people have agreed to give you their beautiful home. You will have butterflies in your tummy everytime you think about it.
So the house is now off the market, and there is a PENDING legal contract that describes, in very great detail, that this property is in the relatively short process of changing it's legal owners. During this time, nobody else can come and try to buy the house.
So "Under contract," "Pending," or "In Escrow" is what this part is called. It can take anywhere from a few days to a few months, usually around 30-45 days, for the house to legally be yours. Please follow along...
So there is a Title Company. This is a company with a very fancy, large, busy office that handles all the legal aspects of homebuying, and keeps all the forms and contracts of the transaction. They are a nuetral party and act as a referee in the match. They also look up everything on the house and its history to make sure it's free and clear to buy or sell, according to the laws of the Universe.
So whoever is paying for the Title Commitment shall choose a Title Officer at a Title Company and open Title on the house. This just means that you call the Title Company and say "Hey, we are buying this house and want you to do all that stuff so we can buy it!"
The next thing you do is ante up, or in other words throw down some "Earnest money," which says that you have "some skin in the game." This money is sent to Title. The amount and when you must send it by, is in the original PA. Usually around $1,000 is sufficient, though it can be lower, or much higher, depending on the price of the house and stuff. This money is eventually applied to the price of the home, unless you go crazy and leave the whole thing, in which case the seller keeps it forever. Earnest money protects the seller against random members of the general public trying to buy their home who are just lunatics.
Then once the earnest money is at Title, it's time to have the house looked at very thoroughly by a licensed, qualified, experienced, reputable, competent certified Home Inspector. He checks the roof for leaks. He checks if the light switches work. He will spend a couple hours checking things out and send you a detailed report of everything that needs to be fixed on the house.
This is a great thing for a the buyer, because the seller just wants his money and doesn't care too much about anything else. You, however, want a house that is in good working order at a fair price. Remember... Caveat Emptor...Buyer Beware.
So the house you are in love with has some issues according to the inspection report. You discuss these things with your Realtor and decide that you would like the hot water heater replaced, the roof repaired, the smoke alarms brought up to working order, but that the bent window screens are no big deal and you will do that yourself. Also the furnace is the original unit and it's probably on it's last legs.
This is where you can flex your muscles and work things in your favor.
Here come the ORW's.
Objections, Resolutions, and Waivers. This is a form that you and the seller work out agreements about having all the issues "cured," either by fixing them, changing the purchase price of the home, or both
So your Realtor helps you get estimates for everything and you find out that a new furnace is around five to seven thousand dollars and all the other repairs will cost another twenty five hundred.
And you say "Oh, wow." And your Realtor will say "Yep."
So you send over the completed ORW form that says you want a few things fixed and also to lower the price $425,000. If neither side feels they are really getting burned, then everything is accepted using the ORW form. Sometimes it can go back and forth a few times! On the ORW, there is a large blank white area that you can basically write a novel describing what your request for cures are.
Finally we have arrived at an agreement. Thank goodness! It turns out that the seller will replace the furnace himself and wants to keep the price at $430,000. His brother installs furnaces for a living and he can get it done for way cheaper and the work will be professionally done with invoices and it's all licensed and warranted. So now you're like "OK, yeah that's fine." Maybe this seller is a pretty cool dude afterall...
Be sure to tune in next week to find out what happens next in Buy a Home Like a Pro.