FINDING AND NEGOTIATING YOUR DREAM HOME
This is not a shopping trip to the mall! It is complex, and requires the team of people you will rely on. The only real choice you have is the Realtor you chose and the home you make an offer on. The rest is built around large teams of interrelated parties, each looking out for you, but in business in their own right. So be aware, and be a team player to get best results.
Now that we have successfully received our loan pre-qualification, or even better, our preliminary underwriter preapproval, we have selected our Realtor to be the team manager on our behalf, we are ready to search/finding and negotating for homes and make offers.
There are numerous ways to search for homes that meet your needs. One is to drive around until you are cross-eyed. This is fun to do on a sunny day, and a great way to get to know areas and neighborhoods. It’s also probably the least effective way to really find the right home.
Online vs. Public
Consumer real estate web sites such as Zillow, Tulia, Realtor.com, and others are easy access, anonymous ways to begin your search. These public online websites get daily data feeds from realtor associations and real estate companies, as well as some input directly from sellers and independent agents. The number of active listings nationally varies, but these websites probably cover 80% of currently or recently active listings.
The problem is that not all realtor associations feed to them, and as of mid-2015, Zillow and Trulia have been cut off from the primary feed source, ListHub, and will need to work hard and fast to replace those feeds by going directly to the thousands of national real estate firms and associations to replace them. In addition, the data can be outdated, and it no longer updates once the property goes into escrow until it closes, which can be one to three months. So a rather larger percentage of listings seen are no longer available for purchase.
Private or Realtor Search Tools
Realtors nationwide have proprietary home search systems or multiple list systems (MLS) they use to get up-to-the minute complete data, status, viewing instructions, agent comments, etc.
Many agents these days provide website access to home buyers to these MLS sites through their personal or company websites. Some require registering to view them, some do not. These are direct feeds from their local MLS, and will typically be complete and up-to-date for everything available in a given market area.
MLS Public Feeds
With the proliferation of easy access Internet tools, most local realtor associations these days have public search tools that allow homebuyers to search their local MLS listings. These tend to be current and complete.
Now that we are pre-approved for a price range and loan amount, the best way to quickly narrow down your home search is by area, then price range, then home styles such as bedrooms, bathrooms, number of stories, yard size, etc. With these specific search parameters, you can narrow your search down to a manageable number of properties to view and write offers on. Typically, if your final list of homes is greater than 20 or so, you are probably not close to being ready to write offers.
With a reasonable list of homes to view, it is now time to get inside some and “preview” them, as we say. The goal is to quickly view them, and narrow the field down to five or less homes that really appeal to you, are in your price range, and that you are ready to offer on and negotiate for. So, it’s time to find an agent if you have not already done so.
Selecting the Right Realtor
Friends, Family, Part-Timers
One of the first things first-time home buyers do is turn to those they already know to help them. If that person is a part-timer, not familiar with the area, or has limited experience, you are doing yourself a disservice by using him or her, and it will cost you time and money―guaranteed! Save the friendships for less major financial decisions in life, like where to go for dinner. Leave real estate negotiation for professional, full-time agents. You win, and they deserve it.
What Makes a Professional Agent?
There are a few easy-to-know things about a real estate agent that can quickly tell you if he or she is professional and deserves your business. Referrals are good, but you still must answer these questions.
Does your agent live and work in the areas you are interested in? Let’s say they should work or live― preferably both―within 10 miles of the communities you are looking in.
Experience can be hard to gauge for a fist-time buyer, but a rule of thumb is that he or she preferably has five years’ experience, and has done at least 20 transactions. The absolute minimum should be two years of active selling, with 10 transactions closed.
Some of the qualities we look for are just good, common sense business skills. Good communication skills with you and the other parties involved are a must. If you find an agent who is unresponsive, does not fully answer questions, or is just rude or impatient, run! Likewise, he or she should indicate a willingness to be readily available during business days and weekends for viewing homes.
Every first-time home buyer believes in his heart that there is a way to get a “killer” deal out there somewhere, and that by searching far and wide enough, there is the one deal everyone else has overlooked, which is perfect for them. This always leads to For Sale by Owner properties, or FSBO, for short.
Having owned 10 homes myself, and closed 1,500 mortgage and real estate transactions for buyers and owners, I can tell you this is the biggest fallacy in the business for numerous reasons. First, recognize that there are hundreds of buyers and agents in any given area looking for good deals, so the likelihood of a fist-time buyer finding one is slim at best. Next, the reason sellers elect to go FSBO is they typically are trying to bypass agents and selling commissions, and as such, are highly unlikely to turn around and give the savings to the buyer. Their goal is to keep it all themselves, so the buyer hasn’t saved much, if anything.
Then we have to worry about two untrained parties attempting to sidestep the normal procedures, processes, and parties to these complex and costly transactions. Buying a FSBO can be a disaster waiting to happen, in my opinion. In addition, there is a fair amount of legal risk, primarily on the shoulders of the buyer, something that no first time buyer should assume. There’s a reason the term “buyer beware” exists.
Last, the homebuyer has a whole list of transactional needs that he cannot hope to know about without guidance and assistance from a professional agent. Less than 5% of homes sold are FSBO. If it worked well, everyone would to it. Bottom line, use an agent to represent you, and stay away from FSBOs.
Offers / Terms / Negotiation
Now comes the fun part! Negotiating for price and terms. This area is covered in detail in our advance seminar and coursework, but here is a brief outline of the areas the buyer will be exposed to and have negotiating power in, with the benefit, naturally, of their professional, experienced real estate agent.
First and foremost, price starts with the listing price. Based on other recent sales, and an assumption of some sort of customary discount, the buyer can negotiate this down to between 3-10% off the listing price.
Terms can mean many things. The purchase offer contract most realtors use will have a series of terms and contingencies that are standard and can be negotiated. These include:
Good faith deposits can run from $500 up to $10,000 or more. Since they are typically refundable up to just before closing due to unforeseen circumstances, most listing agents (sellers) do not ask for much. My recommendation is go for $2,500 on the average priced deal.
The escrow period is the number of days the process will take from the date of the accepted offer, or open escrow date, until the recording or close date. Typically, this is 30 days. For some loan types or special circumstances, the buyer can request longer, say 45 to 60 days. Most sellers will balk at escrow period requests for over 60 days. They do not want to take their home off the market that long in the event you can’t close, and they also have moving and other financial needs to address.
Costs / Expenses
(See addendum CC for a detailed breakdown of typical closing costs.) Closing costs are an area that is confusing and requires discussion up-front as to the types, amount, and ways to minimize or have them paid by the seller, the agents, or the lender. In our seminars and online training modules, we discuss in detail how to understand them and get them reduced, or paid for entirely. Don’t miss it!
Selection of Closing Services
The selection of closing services, like escrow, title, reports, home warranty companies, etc., can sometimes be requested by the buyer. Normally they are dictated by the seller (actually the seller’s agent), and are best left to their needs as a token gesture. There are other reasons why they select them, and we go over these in our advanced training seminars.
Home inspections are the buyer’s choice, and should be used to determine the specific condition of the home and all appliances.
Every home purchase with financing requires an appraisal, which supports the purchase price by comparing recent sales of similar homes in the immediate area known as comparables, or “comps.” The appraiser is selected by the lender through an appraisal management system. The home buyer will not typically ever meet the appraiser. Most appraisal fees cost $400-$500, or more, depending on the price and complexity.
After the initial offer is accepted, the buyer is afforded contingencies for such things as the home inspection, the appraisal, review of any homeowner association documents, review of a title company report, and finally, their lender’s loan final approval. Once those have been completed, and confirmed by the buyer, then they are essentially in a hard escrow, and fully expected to close by all parties unless something big comes up. At this point, the buyer’s deposit could be at risk under some circumstances.
Buyers can sometimes negotiate for contingency or contract extensions, if the seller is willing. This can be for loan needs, or other last minute bumps. Usually these extensions are going to be for only a few days to a week, at which point the seller has the option to decline the request and cancel the contract if he thinks it is in his interest to do so. Most sellers prefer to allow the extension request and hope to close soon rather than starting over again in a new market time and with an unknown buyer.
Costs, Fees, Allocations
Closing costs, various party fees, and the allocation of costs to seller and buyer are a huge area of discussion and some negotiation. (See addendum 12 for a detailed breakdown of typical closing costs.)
HUD 1 Closing Cost Schedule
The escrow company draws up a schedule of closing costs for each side, based on input from buyer and seller support services, lender charges, taxing authority charges, etc. These are updated throughout, and will become quite accurate in the last week of the transaction, allowing the buyer to know closely what his cash-to-close requirement will be.
Cash to Close
Escrow will provide the buyer’s cash target to complete the transaction, and will refer to this as cash to close. This is the difference between the purchase price, less the loan amount plus the deposit and the total closing costs. This net figure will be the amount the buyer will wire or bring to escrow a day or two before the final close date.
Closing Cost Credits
There are numerous sources of credits to the buyer for any home purchase. The source of these credits can come from relatives, special first-time homebuyer incentive programs offered by the state, lender, or sometimes employer programs. But most often they come from the parties to the transaction who may have a financial incentive or tactic to pay for some or all of the buyer’s closing costs.
Sellers will often agree to pay closing costs from their sale proceeds. What they are really doing is setting their sale price to cover these. What sellers care about is not the selling price itself, but the net proceeds they walk away with. Thus, a price increase can allow for additional funds to pay buyers’ costs. The industry has allowed this practice, within bounds.
The buyer’s real estate agent is allowed by law in most states, and in some cases will give a commission credit to the buyer through escrow to pay for certain closing costs or move-in costs. This can range from a few hundred dollars to thousands of dollars, which some agents offer to get buyers to work with them. Since real estate commissions on even average transactions can run over $10,000 or more, the agent is able to share some and still have a profitable and satisfied client.
Most mortgage lenders have loan and pricing options that allow for rebates to the borrower to cover closing costs. These can be thousands of dollars, depending on the loan size and need.
Home warranties are insurance policies that cover appliances, pools, air conditioners, etc. They are typically offered as first-year coverage by the seller, as a way to give the buyer peace of mind that he is not buying broken or substandard home appliances. These policies will pay out for repairs or new equipment in the first 12 months if needed, for a small cost―usually around $50 per incident. The cost to the seller is typically $400-$500 depending on coverage. The new homeowner can elect to renew after the first year, if he desires, at his own cost.
All homeowners will carry some sort of disaster insurance for their homes. Even cash buyers and those with no mortgage want to protect their investment against fire, water damage, tree damage, accidents, etc. The buyer requiring a mortgage will be required to carry insurance at a rate the lender approves, to ensure replacement cost of the home in the event of a major fire or other damage. However, most standard homeowner’s policies do not cover earthquake or flood damage from rivers and lakes. That is extra coverage, and usually optional at the buyer’s desire.
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