If you've been a homeowner for several years and out of the market or are a first time homebuyer, it may help to know the steps of purchasing a home in today's market.
Determine the difference in agency representation of Realtors® available to you (Buyer's Agent, Designated Agent, Transaction Broker, etc.) and/or whether you should hire an agent or an attorney. Get to know the process and possible pitfalls of many buyer's.
What should you do first? Who should you call to get started? How does an agent help? Ready? Let's get started.
Steps to buying a home
Note: We are not real estate professionals. This is a general process of buying a home to help you determine if you are ready to buy and/or prepare you for the process. Based on certain variables relevant to your circumstances, qualifications and state laws, some of the information below may not apply, the process may differ or include more than what is listed. When ready to buy, it's best to consult local professionals for guidance and/or representation.
1. Survey the market's of interest
If you're in the process of moving you should start researching the areas of interest before you hire an agent. Determine areas that you like based on the key issues that are important based on your needs, likes and interests (e.g. high rated schools, parks and green space, shopping, restaurants, taxes, safe neighborhoods, affordable housing in high demand, resale value).
2. Contact a mortgage broker
Don't contact a single agent or homeowner until you've spoken with an experienced mortgage broker who can preapprove you for a mortgage at a specific loan amount, sales price and minimum down payment.
A pre-qualification will tell you only what you are qualified to buy based on information you provide in order to determine if the area of interest is in your price range. However, before you hire an agent or set appointments to see homes you will still want to get pre-approved. The broker will need to run your credit and verify employment along with any other required documentation deemed necessary by the broker in order to grant a pre-approval.
Once you are pre-approved, you're ready to hire an agent and set appointments as a serious (ready, willing and able buyer). You can provide your Buyer's Agent (agent who represents you as a buyer) with the document or if you are unrepresented, keep the written pre-approval from the mortgage broker with you at any time you are looking for a home.
The best homes sell the same day they go on the market. Sometimes there could be multiple offers and the home could sell for more than the asking price. To be a qualified buyer with the best offer you may need to write a contract at the time of your first showing and many sellers will not consider a contract without specific pre-approval documentation included. Forgetting to bring your pre-approval documentation would be a terrible reason to miss out on your dream home.
You should have your lender's contact information readily available should you need to contact him/her for any reason. Some listing agents and their respective sellers want the exact home and sale price listed on the pre-approval. Some Buyer's Agents may present the offer with the generic preapproval contingent upon providing the preapproval with address and sales price within a specified period of time (e.g. 24-48 hours).
3. Hiring an agent
Agents are very helpful in the home buying process. If you have not purchased a home in many years or have never purchased your own home, you should seriously consider hiring an agent. Buying a home is stressful, it helps to have a professional who can take care of the many duties associated with buying a home. The process is overwhelming (just read all that needs to be done in a typical transaction in this article).
Most agents are paid through the listing brokerage in what is known as a co-operative commission. This means the listing brokerage pays a portion of it's total commission (usually a little less than half) to a co-operating brokerage that belongs to the local Board of Realtors® and utilizes the MLS (Multiple Listing Service). The MLS is only accessible to Realtors®. Most active listings from this service are also listed on the National Association of Realtors® site, www.realtor.com which is an excellent resource to locate a local Realtor®. The MLS will have more comprehensive information about listings and comparables than what is available on the consumer site, including data about homes that have recently gone under contract or sold. This information is extremely helpful when buying or selling real estate and accessible to any Realtor® you hire that belongs to their local Association of Realtors® and MLS.
The relationship that occurs between a principal (buyer or seller) and an agent is called "agency". Note* This information is relevant to buyers and sellers in most states, however, it's best to discuss the agency opportunities in the state for which you plan to buy or sell real estate, since some states may have different guidelines and laws.
In order to have full representation, you will need to hire an agent as a Buyer's Agent. This is someone who represents you in the transaction and usually for little to no fee paid by you since their primary fee is paid out of the Listing Broker's commission. There are exceptions including but not limited to: FSBO's (For Sale By Owner's) or listings that do not offer a co-operating broker's fee.
Make sure you understand the fee schedule and/or commissions upon hiring an agent in any agency representation. Unless you or the seller fail to perform on the contract, usually there is no commission due if the deal falls through, but occasionally there may be a small fee. Accordingly, you should understand any fees or commissions for which you may be responsible if the deal falls through due to your fault or otherwise.
Agency and real estate laws can be confusing and change frequently. It's important to understand all laws associated with agency representation by speaking with a licensed agent or real estate attorney with home sale experience in the area for which you have an interest.
Upon hiring a Buyer's Agent you should disclose you are represented at any time you come into contact with another agent (such as an open house) or home seller. Let the agent/seller know that if you are interested in the home your agent will contact him/her. Do not discuss your qualifications, intentions or transaction details with another agent/seller. Do not write a contract with another agent or the home seller without your agent present. Do not disclose information relevant to your preapproval or mortgage broker's contact information. The Listing Broker does not represent you. He/she represents the seller. The agent "covering an open house" is often a Designated Agent from the same firm as the listing broker and does not represent you. Even if they are from the same firm as your Buyer's Agent, they do not represent you. Any information obtained will be used to benefit his/her seller accordingly. If you have immediate interest, contact your agent immediately to write a contract.
If you are unrepresented, the listing brokerage usually attains the entire commission but can usually conduct the transaction for both you and the seller. However, the seller's agent for the listing broker usually represents the seller unless another form of agency has been established such as Transaction Brokerage, Dual Agency or Designated Agency. There are many types of agency that could be established and laws vary state-to-state. So, make sure you understand how and by whom each party to the contract is represented and who is responsible for any fees or commissions for the transaction.
Make sure you understand that if you hire a Buyer's Agent you should know that if you write an offer on a home where the seller is not paying a Buyer's Agency commission, is paying a reduced commission and/or the property is unlisted (such as FSBO) you may be responsible for a portion or all of your agent's commission. Make sure you understand the fee schedule in this circumstance prior to entering into an agency agreement and before writing an offer.
Sometimes the seller will opt to pay your agent to avoid losing the deal. Your agent can still represent you and add his/her commission to the sale price and deduct it from the seller's proceeds. Another way is if you increase the sales price by the commission amount to finance the commission instead of paying it upfront. If doing the latter, remember the home must still appraise at the higher amount inclusive of the agent's commission. If the home was discounted to avoid paying a 7% commission and your Buyer's Agent requires a minimum of 2.7% to 3.5%, you still come out ahead.
However, in many cases, F.S.B.O.'s (For Sale By Owner Homes) are priced over market value since the owners often have insufficient comparable data provided by a professional to help them price their home competitively in their local market. Some just don't have the equity or funds to cover an agent's commission. The homes are still "on the market" and generally no different than those listed with a real estate firm. Just be cautious and check if they offer an agent's finders fee or commission before proceeding. It's best to let your Buyer's Agent contact them first to verify this information and schedule a showing of the home.
Often times, the cost for an agent is similar to hiring an attorney. The benefits of an agent in a home sale process are endless though. A good agent or broker will search for homes, explain market conditions, provide market comparisons, show you homes, provide expert opinions and keep your home purchase organized until formally complete. Most times the cost is next to nothing for the buyer. But, agents don't work for free any more than you or I. Nobody wants to put in weeks, months or even years helping someone find a home only to not get paid. The agency is meant to protect both the buyer and the agent. Make sure you understand it and usually there will be few times where you could be personally responsible to pay the buyer's agent's commission out-of-pocket. If you are, know that it's money well spent!
4. Hiring an attorney
If you have hired an agent, you usually won't need a real estate attorney unless there's an extenuating legal circumstance. If the home is listed and you're unrepresented, you may enter into the home sale directly with the listing brokerage or the listing agent. Ask a local agent/broker for details as to how this affects you based on laws in your state.
Otherwise, For Sale By Owner homes are most common transactions managed by a local attorney. If you have found a home that is unlisted (FSBO) you may elect to hire a local real estate attorney to represent you in the sale if you don't have a Buyer's Agent. Sometimes the seller will split the cost for the attorney to conduct the transaction. However, you should both understand how or who the attorney will provide representation or if he/she will act as only a facilitator of the transaction.
If you hire and pay for an attorney you should have an agreement with the attorney that specifies his/her representation. In the case the seller has already retained an attorney or representative you should understand the scope of that representation, who is paying for the representation and how it affects you. Upon doing so, you may elect to hire your own attorney (which is usually wise) to represent your interests in the home sale. You will likely be responsible for your attorney's fee's.
All attorneys and parties (buyer and seller) involved in the transaction should be listed on the contract. The contract should also note who is responsible for any attorney fees. Note: you'll usually still be responsible for any attorney fees regardless if the home sale is successful or not. Real estate laws can be complicated and can change frequently. It's always best to contact a local attorney prior to signing a contract when you have no other form of representation (usually, you can request a contingency in the sale contract for your attorney's satisfactory review). You should always consult an experienced local real estate attorney for legal advice specific to your situation.
5. Find a home
Upon finding a home that meets your criteria, you should arrange a showing immediately. If you have a buyer's agent, contact him/her so that the listing brokerage can be contacted to schedule a showing. Ask your agent to bring comparable home sales in the area and any other data needed to make an offer. Make sure you or your agent has immediate access to your pre-approval at the time of the showing.
Common things to consider
Location - Taxes, schools, shopping, restaurants, area demand/average days on market, large employers in the area, parks and green space, traffic, commute to work, busy road, undesirable location near loud-dangerous-unsightly-structures, E.P.A. danger zones or areas of high pollution, toxins or unpleasant smells (highways, factories, dumps , junkyards or landfills)
Condition - Is the home as appealing inside as outside? How does it compare to other homes in the area that have recently sold (use the comparable data supplied by your Realtor®? Are there any major problems (foundation, roof, improper grading, termite damage, etc.)?
Functional Obsolescence - Be cautious of a home that is missing key components offered in most homes today (e.g. 1 car garages in an area of 2 or 3 car garages, 2 bedrooms and 1 bath in an area where most homes have 3-4 bedrooms and 2 - 2.5 baths, slab homes where most homes have basements). In some areas, older homes are common and are likely to have some outdated features, but be cautious anyway, especially if the home can not be modified to meet the demands of future buyers when you sell.
Move-in ready - Is the home move-in ready or does it need work? If it needs work, have you had a qualified assessment of the work and costs associated? If you don't have remodeling or rehab experience, it's a good idea to factor in 15-20% over the costs expected for repair work to determine the value of the home after repairs compared to the asking price. If the home is that great, just make sure you have the extra funds to cover the repairs if the costs are higher. If you don't think the home would be as great a value with the 15-20% overage, it may not be worth the purchase and headaches of immediate rehabbing. Only you can decide what's best for you and your budget.
Listing Sheet - The listing sheet will detail the specifics of the home and it's location. You should read it carefully before you make an offer. It will include: rooms and sizes, general square footage, schools and tax record information. e.g. High rated school districts are a huge selling point and boundary lines are confusing. It isn't uncommon to think a home is in one district only to find it's in another. This can have a drastic affect on the home's value or market demand.
Seller's Disclosure - Read it. Carefully. Before writing a contract you should read and understand the seller's disclosure. Anything disclosed in that statement is no longer a latent defect and you will not be able to address it in the building inspection resolution. It will need to be addressed in the contract before it's accepted. Everything the seller knows* that is wrong with the home should be disclosed in the Seller's Disclosure. The Building Inspection will be used to find other issues unknown to the seller.
*If the seller has never lived in the home, he/she will likely note that on the Seller's Disclosure and will not complete the disclosure otherwise. Most times, this is when a seller has rehabbed a home, leased a home to a tenant or is selling a home he/she inherited. In this case, many times the home is being sold as-is.
As-is - Make sure you understand if the home is being offered as-is that you will not be able to end the transaction based on any latent defect (without liable), nor will you be able to request such defects be repaired by the seller. You may still be able to get a building inspection, but no repairs will be made based on or following the inspection. If your loan is a FHA or VA loan and the home has defects that will not pass an FHA or VA appraisal, your financing will not be approved. Therefore, as-is properties are not ideal for these types of loans, but may still be possible.
Financing accepted - Know the types of financing the seller will accept prior to arranging a showing. Most as-is properties will want cash or conventional financing and will exclude FHA or VA funding since the appraisal is more scrutinizing of the home's condition.
Your financing - It's not easy to realize that what a lender deems you are pre-approved may not actually be in your best interest based on your own financial goals. While you should reconcile with this before you actually ask your agent to take the time to show you a home, you should be absolutely certain the sale price of the home and consequential monthly payment does not exceed your financial comfort level.
Second guessing - It's not uncommon upon finding a great home that satisfies the majority of what you seek to suddenly get cold feet. Cold feet can cost you a great home. Don't overthink it. Yes. It's an important decision. Issues regarding financing and general location should not be the issue at this point. If they are, you should carefully reconsider either issue before resuming your house hunting so that it doesn't happen again.
If the issue is the house, consider this.
- Does the house satisfy the major "must haves" on your list? Know that even if you build your own home, it will never be "perfect" until you move in and make it your own. Then it will be perfect for you.
- Has any house come close to the house you just found?
- Has any other house had everything on your list? Most likely the answer will always be "no".
- How will you feel if someone else gets the house because you needed to "think about it"? If it's worth risking, then risk it. It's your risk and perhaps worth the wait...or possibly your loss. But, only time will tell.
- Is the asking price reasonable for the local market? If the home has a good price, it won't last long. While you're thinking, someone else is writing (a contract).
- Can you live with or change the issues you dislike? Right now you are looking at someone else's home. It won't be exactly right until you make it your own.
6. Make an offer
It's time to make an offer. Your agent will have the proper documentation needed to make an offer. The sale packet will likely include (but not be limited to): sales contract with counter offer form, appraisal rider, disclosures from the seller (Seller's Disclosure, Lead Based Paint, Mold or Radon, etc.), any other addendums related to the specific home purchase. You will complete and sign all documents and submit them along with your pre-approval and copy of the earnest money deposit to the seller, seller's agent or attorney.
Your offer - Your agent will not tell you what to offer. Instead he/she will provide you the information needed to make an informed decision related to the current market value of the home. Consider how long the home has been on the market, if you're aware of any other offers currently on the home or expected (though this may not be disclosed and/or the suggestion could be conjecture), comparable home sales data provided by your agent, and how much you like the home. The contract will usually include (but not limited to) appraisal, building inspection and loan approval contingencies (all have specified deadline dates). Sometimes you can ask the seller to pay a portion or all of the closing costs. Discuss any other important information related to the home sale your agent feels should be part of the offer. The offer will have a certain period of time for the seller to respond. The offer can be countered between the seller and buyer until either party accepts or one party chooses to decline the offer or let the deadline expire. Upon acceptance the home is considered under contract (in escrow) with contingencies (if applicable). Your offer should include an opportunity for a final walk-through just prior to closing.
7. Negotiate the Building Inspection Resolution
If the home was purchased as-is, sometimes the seller will allow for building inspections but will not make repairs. Otherwise, if your home sale contract is contingent upon a satisfactory building inspection (building, termite, radon, asbestos, mold or any other inspection noted in the contract) you will have a set period of time to have the inspections completed and a Building Inspection Resolution signed by you, inclusive of the report(s) delivered to the listing agent and seller. The Building Inspection Resolution will include all defects not formerly disclosed or noted on the contract as detailed in the report and that the buyer wishes to have repaired by a reputable contractor or repairman (documentation to be provided before closing) or appropriate credit for said repairs. The seller then has a set period of time to respond with acceptance of the resolution or counter offer. If both parties can not come to an agreement in the resolution, the contract will likely terminate. Note - Some issues such as termites or hazardous materials will need to be mitigated in order to obtain loan commitment. A clear termite and natural gas inspection is usually required by the lender and is often paid and arranged by the seller. The natural gas inspection is usually done just prior to closing. The reports for both must be delivered to the Buyer's Agent within the set period of time prior to closing. In some cities or municipalities the seller must have a city/municipality inspection prior to home sale. The buyer may need to obtain an occupancy permit that may or may not be contingent on the satisfactory city/municipality inspection. Consult your Realtor® or attorney for more information relevant to your specific home sale and city/municipality, state laws or any other governing board's requirements.
8. Obtain documents specific to repairs and inspections needed
Upon determining any repairs or clear inspection reports designated the seller's responsibility, that need to be completed prior to closing, the seller should provide documentation and re-inspections by the Buyer's Agent, buyer or inspector. The documentation should include reports, permits, receipts and/or invoices that detail the work by a reputable company or serviceman (usually licensed and insured) or that required inspections were completed or permit was granted and paid for in-full. Lein waivers may be necessary in certain circumstances.
9. Order the appraisal
Once the Building Inspection Resolution has been satisfactorily negotiated, the appraisal will usually be ordered. If the home sale falls through, you will be the one responsible for the appraisal, loan processing and/or inspection costs. This is why you should satisfy all other negotiations before ordering the appraisal and the contract sales price has been established with a solid comparative market analysis.
In most cases your agent will work directly with the mortgage broker or appraisal firm to schedule the appraisal. It must be satisfactorily completed within the specified period of time as noted in the appraisal contingency on the contract or in a rider/addendum to it. If the home does not appraise either you can pay the difference in addition to your cash down payment, the seller can modify the price or a combination thereof.
Many sellers are surprised when their contracted home appraises so close to the sales price. Coincidence? While it means the home was likely priced right for the local market conditions, home condition and size (among other things), in many cases, the appraisal for a typical residential home sale is used to prove value, rather than establish it. It's not uncommon for the appraisal to come back at or near the sale's price.
In some cases, a different type of appraisal is requested, required or recommended (e.g. commercial, multi-zoned, multi-family, new construction etc.). The value of the property is determined utilizing a different value system than a typical, residential home.
Speak with your Buyer's Agent and mortgage broker for more assistance regarding appraisals, if needed.
9. Schedule the closing and order title insurance
Usually your Buyer's Agent will order the title work and subsequent insurance by a local title company of your choice. A clear title and title insurance is required by most lenders. This step may be done earlier in the transaction if the agent feels confident there will be little chance of problems with the appraisal or other contingencies. He/she will also schedule the closing for the sale date specified on the contract. The seller and buyer can close at separate times and locations but on the same date unless other arrangements are noted on the contract or an addendum. The seller can not be funded until the buyer has completed his/her closing.
9. Predications to loan commitment
Satisfy all predications (appraisal, clear title, formal employment verification, final credit check and other underwriting guidelines set forth by the lender) to your loan approval in order to obtain an unencumbered loan commitment provided by the mortgage broker from the lending institution of which you have been approved. The loan commitment must be delivered to the listing brokerage within the set period of time (usually just prior to closing).
10. Final walk through
Your contract should have included an opportunity for a final walk-through prior to closing (usually after loan commitment, 1 - 2 days prior to closing). This is not the time to find things that you failed to notice at the time of your previous showings or during the inspections. This is the time to ensure the home is the same home you contracted to buy. This means no changes were made or defects hidden beyond the scope of a normal inspection. Remember, vacant homes look much different than homes with furniture and décor (hence the reason for home staging companies). So don't stress if the home looks a little bleak upon the walk-through. Once you move in, it will have the potential to be the home of your dreams once again!
11. Keys
No you can not have the keys to your soon-to-be new home until the specified time on the contract and/or the seller has been funded (refer to the contract and your agent for guidelines). It's still possible for deals to fall through the day of closing and possession to have been given prematurely to the buyer which can cause a great deal of legal run around for all parties involved.
12. Final figures
Your closing agent (usually at the title company, attorney's or broker's office will get you the final figures for closing). This is the amount you will need to close (close escrow) on the home. It will include your down payment and closing costs minus your earnest already in escrow and any prorated amounts. You will need this exact amount in the form of a cashier's check at closing and usually made payable to the closing/escrow agent (make sure to know exactly to whom it should be made payable, since every transaction is different).
13. Buy your new home
It will seem like you are signing your life away. You will sign and sign and sign, then hand over a big cashiers check. But at the end of it, you will be the proud new owner of the American Dream. It's a privilege not all are qualified and of which you should be proud. Congratulations! You did it!
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