Benefits of Owning Your Own Home
The
Best Investment
As
a fairly general rule, homes appreciate about five percent
a year. Some years will be more, some less. The figure will
vary from neighborhood to neighborhood, and region to region.
Five percent
may not seem like that much at first. Stocks (at times)
appreciate much more, and you could earn over six percent
with the safest investment of all, treasury bonds.
But
take a second look…
Presumably,
if you bought a $200,000 house, you did not pay cash for
the home. You got a mortgage, too. Suppose you put as much
as twenty percent down – that would be an investment of
$40,000.
At an
appreciation rate of 5% annually, a $200,000 home would
increase in value $10,000 during the first year. That means
you earned $10,000 with an investment of $40,000. Your annual
"return on investment" would be a whopping twenty-five
percent.
Of course,
you are making mortgage payments and paying property taxes,
along with a couple of other costs. However, since the interest
on your mortgage and your property taxes are both tax deductible,
the government is essentially subsidizing your home purchase.
Your rate
of return when buying a home is higher than most any other
investment you could make.
If you
are moving to a home for the first time, you are going to
be very pleased with all the new space you have available.
You may have to even buy more "stuff."
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Income Tax Savings
Because
of income tax deductions, the government is basically subsidizing
your purchase of a home. All of the interest and property
taxes you pay in a given year can be deducted from your
gross income to reduce your taxable income.
For example,
assume your initial loan balance is $150,000 with an interest
rate of eight percent. During the first year you would pay
$9969.27 in interest. If your first payment is January 1st,
your taxable income would be almost $10,000 less – due to
the IRS interest rate deduction.
Property
taxes are deductible, too. Whatever property taxes you pay
in a given year may also be deducted from your gross income,
lowering your tax obligation.
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Stable Monthly Housing Costs
When you
rent a place to live, you can certainly expect your rent
to increase each year – or even more often. If you get a
fixed rate mortgage when you buy a home, you have the same
monthly payment amount for thirty years. Even if you get
an adjustable rate mortgage, your payment will stay within
a certain range for the entire life of the mortgage – and
interest rates aren’t as volatile now as they were in the
late seventies and early eighties.
Imagine
how much rent might be ten, fifteen, or even thirty years
from now? Which makes more sense?
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Forced Savings
Some people
are just lousy at saving money, and a house is an automatic
savings account. You accumulate savings in two ways. Every
month, a portion of your payment goes toward the principal.
Admittedly, in the early years of the mortgage, this is
not much. Over time, however, it accelerates.
Second,
your home appreciates. Average appreciation on a home is
approximately five percent, though it will vary from year
to year, and in some years may even depreciate.. Over time,
history has shown that owning a home is one of the very
best financial investments.
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Freedom & Individualism
When you
rent, you are normally limited on what you can do to improve
your home. You have to get permission to make certain types
of improvements. Nor does it make sense to spend thousand
of dollars painting, putting in carpet, tile or window coverings
when the main person who benefits is the landlord and not
you.
Since
your landlord wants to keep his expenses to a minimum, he
or she will probably not be spending much to improve the
place, either.
When you
own a home, however, you can do pretty much whatever you
want. You get the benefits of any improvements you make,
plus you get to live in an environment you have created,
not some faceless landlord.
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More Space
Both indoors
and outdoors, you will probably have more space if you own
your own home. Even moving to a condominium from an apartment,
you are likely to find you have much more room available
– your own laundry and storage area, and bigger rooms. Apartment
complexes are more interested in creating the maximum number
of income-producing units than they are in creating space
for each of the tenants.
If you
are moving to a home for the first time, you are going to
be very pleased with all the new space you have available.
You may have to even buy more "stuff."
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Other Things to Avoid Before Purchasing a Home
Don’t
Move Money Around
When a
lender reviews your loan package for approval, one of the
things they are concerned about is the source of funds for
your down payment and closing costs. Most likely, you will
be asked to provide statements for the last two or three
months on any of your liquid assets. This includes checking
accounts, savings accounts, money market funds, certificates
of deposit, stock statements, mutual funds, and even your
company 401K and retirement accounts.
If you
have been moving money between accounts during that time,
there may be large deposits and withdrawals in some of them.
The mortgage
underwriter (the person who actually approves your loan)
will probably require a complete paper trail of all the
withdrawals and deposits. You may be required to produce
cancelled checks, deposit receipts, and other seemingly
inconsequential data, which could get quite tedious.
Perhaps
you become exasperated at your lender, but they are only
doing their job correctly. To ensure quality control and
eliminate potential fraud, it is a requirement on most loans
to completely document the source of all funds. Moving your
money around, even if you are consolidating your funds to
make it "easier," could make it more difficult
for the lender to properly document.
So leave
your money where it is until you talk to a loan officer.
Oh…don’t
change banks, either.
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The
Effect of Changing Jobs
For most
people, changing employers will not really affect your ability
to qualify for a mortgage loan, especially if you are going
to be earning more money. For some homebuyers, however,
the effects of changing jobs can be disastrous to your loan
application.
How
Changing Jobs Affects Buying a Home
Salaried
Employees
If you
are a salaried employee who does not earn additional income
from commissions, bonuses, or over-time, switching employers
should not create a problem. Just make sure to remain in
the same line of work. Hopefully, you will be earning
a higher salary, which will help you better qualify for
a mortgage.
Hourly
Employees
If your
income is based on hourly wages and you work a straight
forty hours a week without over-time, changing jobs should
not create any problems.
Commissioned
Employees
If a substantial
portion of your income is derived from commissions, you
should not change jobs before buying a home. This has to
do with how mortgage lenders calculate your income. They
average your commissions over the last two years.
Changing
employers creates an uncertainty about your future earnings
from commissions. There is no track record from which to
produce an average. Even if you are selling the same type
of product with essentially the same commission structure,
the underwriter cannot be certain that past earnings will
accurately reflect future earnings.
Changing
jobs would negatively impact your ability to buy a home.
Bonuses
If a substantial
portion of your income on the new job will come from bonuses,
you may want to consider delaying an employment change.
Mortgage lenders will rarely consider future bonuses as
income unless you have been on the same job for two years
and have a track record of receiving those bonuses. Then
they will average your bonuses over the last two years in
calculating your income.
Changing
employers means that you do not have the two-year track
record necessary to count bonuses as income.
Part-Time
Employees
If you
earn an hourly income but rarely work forty hours a week,
you should not change jobs. There would be no way to tell
how many hours you will work each week on the new job, so
no way to accurately calculate your income. If you remain
on the old job, the lender can just average your earnings.
Over-Time
Since
all employers award overtime hours differently, your overtime
income cannot be determined if you change jobs. If you stay
on your present job, your lender will give you credit for
overtime income. They will determine your overtime earnings
over the last two years, then calculate a monthly average.
Self-Employment
If you
are considering a change to self-employment before buying
a new home, don’t do it. Buy the home first.
Lenders
like to see a two-year track record of self-employment income
when approving a loan. Plus, self-employed individuals tend
to include a lot of expenses on the Schedule C of their
tax returns, especially in the early years of self-employment.
While this minimizes your tax obligation to the IRS, it
also minimizes your income to qualify for a home loan.
If you
are considering changing your business from a sole proprietorship
to a partnership or corporation, you should also delay that
until you purchase your new home.
No
Major Purchase of Any Kind
Review
the article title "Don’t
Buy a Car," and apply it to any major purchase
that would create debt of any kind. This includes furniture,
appliances, electronic equipment, jewelry, vacations, expensive
weddings…
…and
automobiles, of course.
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Don't Buy a Car - or Did You Already Buy One?
When Income
Grows and You Want to Buy "Stuff"
When
an individual’s income starts growing and they manage
to set aside some savings, they commonly experience what
may be considered an innate instinct of modern civilized
mankind.
The
desire to spend money.
Since North Americans have a special love affair with
the automobile, this becomes a high priority item on the
shopping list. Later, other things will be added and one
of those will probably be a house.
However, by the time home ownership has become more than
a distant and hopeful dream, you may have already bought
the car.
It
happens all the time, sometimes just before you contact
a lender to get pre-qualified for a mortgage.
As
part of the interview, you may tell the loan officer your
price target. He will ask about your income, your savings
and your debts, then give you his opinion. "If only
you didn’t have this car payment," he might begin,
"you would certainly qualify for a home loan to buy
that house."
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Debt-to-Income Ratios and Car Payments
When determining
your ability to qualify for a mortgage, a lender looks at
what is called your "debt-to-income" ratio. A
debt-to-income ratio is the percentage of your gross monthly
income (before taxes) that you spend on debt. This will
include your monthly housing costs, including principal,
interest, taxes, insurance, and homeowner’s association
fees, if any. It will also include your monthly consumer
debt, including credit cards, student loans, installment
debt, and….
…car payments.
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How a New Car Payment Reduces Your Purchase
Price
Suppose
you earn $5000 a month and you have a car payment of $400.
At current interest rates (approximately 8% on a thirty-year
fixed rate loan), you would qualify for approximately $55,000
less than if you did not have the car payment.
Even if
you feel you can afford the car payment, mortgage companies
approve your mortgage based on their guidelines, not yours.
Do not get discouraged, however. You should still take the
time to get pre-qualified by a lender.
However,
if you have not already bought a car, remember one thing.
Whenever the thought of buying a car enters your mind, think
ahead. Think about buying a home first. Buying a home is
a much more important purchase when considering your future
financial well being.
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The Business Cycle and Buying a Home
Recession and Expansion
There are times when the economy is brisk and everyone feels
confident about his or her prospects for the future. As
a result, they spend money. People eat out more, buy new
cars, and….
…they buy new homes.
Then, for one reason or another, the economy slows down.
Companies lay off employees and consumers are more careful
about where they spend money, perhaps saving more than usual.
As a result, the economy decelerates even further. If it
slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so,
some homeowners find themselves in a situation where they
must sell. Families grow beyond the capacity of the home,
employees get relocated, and some may even find themselves
unable to make their mortgage payment - perhaps because
of a layoff in the family.
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Supply and Demand
When the
supply of available houses is greater than the supply of
buyers, appreciation may slow and prices may even fall,
as happened in the early eighties and the early to mid-nineties.
If you
are lucky enough to purchase a home during a slow period,
you can be reasonably certain the economy will begin to
show strength again. At times, real estate values may even
surge drastically. In many regions of the country, this
is precisely what occurred in the late eighties and nineties.
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Should You Try to "Time the Market"?
One problem
with attempting to time your purchase to the business cycle
is that no one can accurately predict the future. Another
challenge is that interest rates are generally higher during
a depressed market and income may not be keeping up. For
that reason, fewer people can qualify for a home purchase
than in more prosperous times.
Why
You Should Not Wait
Plus,
this strategy generally works best for first-time buyers.
People who already have a home usually need to sell it in
order to buy their next one. If a "move-up" buyer
wants to buy a home during a depressed market, that means
they usually have to sell one during the slow market, too.
If a seller wants to sell his home to take advantage of
a "hot" market when prices are fairly high, they
generally have to buy their next home during that same hot
market.
It tends
to equal out.
Finally,
the business cycle can change over time. Since 1983, we
have had two fairly long expansions with only a slight recession
in between each. You would not want to wait nine years to
buy a home, would you? You could miss out on a substantial
amount of appreciation by waiting, and end up paying much
higher prices.
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Comparable Sales and Your Offer Price
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.
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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.
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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Major Factors Influencing your Offer Price
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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Writing an Offer to Purchase Real Estate
Once you
find the home you want to buy, the next step is to write
an offer – which is not as easy as it sounds. Your offer
is the first step toward negotiating a sales contract with
the seller. Since this is just the beginning of negotiations,
you should put yourself in the seller’s shoes and imagine
his or her reaction to everything you include. Your goal
is to get what you want, and imagining the seller’s reactions
will help you attain that goal.
The offer
is much more complicated than simply coming up with a price
and saying, "This is what I’ll pay." Because of
the large dollar amounts involved, especially in today’s
litigious society, both you and the seller want to build
in protections and contingencies to protect your investment
and limit your risk.
In an
offer to purchase real estate, you include not only the
price you are willing to pay, but other details of the purchase
as well. This includes how you intend to finance the home,
your down payment, who pays what closing costs, what inspections
are performed, timetables, whether personal property is
included in the purchase, terms of cancellation, any repairs
you want performed, which professional services will be
used, when you get physical possession of the property,
and how to settle disputes should they occur.
It is
certainly more involved than buying a car. And more important.
Buying
a home is a major event for both the buyer
and seller. It will affect your finances more than any other
previous purchase or investment. The seller makes plans
based on your offer that affect his finances, too. However,
it is more important than just money. In the half-hour it
takes to write an offer you are making decisions that affect
how you live for the next several years, if not the rest
of your life. The seller is going to review your offer carefully,
because it also affects how he or she lives the rest of
their life.
That sounds
dramatic. It sounds like a cliché. Every real estate book
or article you read says the same thing.
They all
say it because it is true.
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Contingencies in a Purchase Offer
In most
purchase transactions there may be a slight challenge or
two, but most things will go quite smoothly. However, you
want to anticipate potential problems so that if something
does go wrong, you can cancel the contract without penalty.
These are called "contingencies" and you must
be sure to include them when you offer to buy a home.
For example,
some "move-up" buyers often agree to purchase
a home before selling their previous home. Even if the home
is already sold, it is probably a "pending sale"
and has not closed. Therefore, you should make closing your
own sale a condition of your offer. If you do not include
this as a contingency, you may find yourself making two
mortgage payments instead of one.
There
are other common contingencies you should include in your
offer. Since you probably need a mortgage to buy the home,
a condition of your offer should be that you successfully
obtain suitable financing. Another condition should be that
the property appraises for at least what you agreed to pay
for it. During the escrow period you are likely to require
certain inspections, and another contingency should be that
it pass those inspections.
Basically,
contingencies protect you in case you cannot perform or
choose not to perform on a promise to buy a home. If you
cancel a contract without having built-in conditions and
contingencies, you could find yourself forfeiting your earnest
money deposit.
Or worse.
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Earnest Money Deposit
After
you have come up with an offer price, the next step is to
determine how large a deposit you want to make with your
offer. You want the "earnest money deposit" to
be large enough to show the seller you are serious, but
not so large you are placing significant funds at risk.
One recommendation
is to make sure your deposit is less than two to three percent
(depending on your location) of your offered price.
The reason for this is that if your deposit is larger than
that, the lender will pay particular attention to how you
came up with the funds. You might have to provide a copy
of a canceled check along with a bank statement showing
you had the money to begin with. Normally, this is not a
problem, but if you have a short escrow period or are barely
coming up with your down payment, it could pose an inconvenience.
Another
reason to limit your deposit is "just in case."
Although significant problems are the exception and not
the rule, they do occur. "Just in case" there
is a nasty or prolonged dispute between you and the seller,
the less money you have tied up in a deposit, the fewer
funds you have placed at risk.
As with
practically everything in real estate, there are exceptions
to this rule, too. During a hot market there may be multiple
offers on the property that interests you. A large deposit
may impress a seller enough so they will accept your offer
instead of someone else’s, even when your unknown competitor
is offering the same price or slightly higher.
Since
large deposits do impress sellers, you may also find that
by making a large deposit you can convince the seller to
accept a lower offer. More money up front may save you money
later.
There
are also times when closing can be delayed by weeks, through
no fault of your own. Have back-up plans prepared for such
a contingency.
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The Closing Date
It is
absolutely essential that you include a closing date as
part of your offer. This way both you and the seller can
make plans for moving, and the seller can make plans for
buying his or her next home. Though most transactions actually
do close on the right date, do not be so inflexible that
a delay creates insurmountable problems.
For example,
if you are renting and need to give the landlord notice
that you are moving out, you may want to allow a little
flexibility. Otherwise, if your purchase closes a few days
late you could find yourself staying in a motel with your
belongings packed in a moving van somewhere while you pay
storage costs.
There
are also times when closing can be delayed by weeks, through
no fault of your own. Have back-up plans prepared for such
a contingency.
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Transfer of Possession
A transaction
is considered "closed" once the deeds have been
recorded. Then you own the home. However, it is not always
possible for you to occupy it immediately. This can happen
for several reasons, but the most common is that the seller
may be purchasing a home, too. Usually, it is scheduled
to close simultaneously with your purchase of their home.
It is
sort of like being at a red light when it turns green. Although
all the cars see the light change at the same time, the
guy at the back of the line doesn’t begin moving until all
the cars ahead of him have started.
As a result,
it has become customary to allow the seller up to a maximum
of three days to turn over actual possession and keys to
the home. When transfer of possession actually occurs should
be clearly laid out in your offer to prevent confusion later.
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Writing an Offer - Safeguards Regarding the Property
Disclosures From the Seller
Although
you have toured the property, looked at the walls and ceiling,
turned on the faucets and played with the light switches,
you have not lived in it. The seller has years of knowledge
about his or her home and there may be some things you want
to find out about as quickly as possible. For this reason,
you will require certain disclosures as part of your offer.
Basically,
you want the seller to disclose any adverse conditions that
may have a substantial impact on your decision to purchase
the home. This would include any problems with the house,
whether the property is in a flood zone, a noise zone, or
any other kind of hazardous area.
If you
have an agent representing you, this is almost automatic,
but many states do not require individuals selling their
own home to provide you with this information. Often they
do not require banks selling foreclosed property to provide
these disclosures, either. Obtaining these types of disclosures
should always be a part of your offer, and time is of the
essence.
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Condition of the Property
The last
thing you want when you assume possession of your new home
is to find it in a total mess. Therefore, you should make
it clear in your offer that certain minimum standards are
required. If you do not, you might find out the seller or
neighbors have begun using the back yard as a trash dump,
or something worse – and you would not be able to do anything
about it.
Some of
the requirements you might want to include in your offer
are that the roof does not leak, the appliances work, the
plumbing does not leak, that there are no broken or cracked
windows, the yard has been kept up, and any debris has been
cleared away.
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Inspections You Should Require
Besides
appraisal and the termite inspection, you should also have
a professional go through the house and seek out potential
problems. Of course, you will have inspected the home, but
you are not used to looking at some things that a professional
will find. Even if they are not things the seller is expected
to repair, at least you will have foreknowledge of any potential
problems.
The seller
will want this inspection performed quickly, so that you
can approve the results and move forward with the purchase.
Once you receive the inspection, you will want to allow
yourself sufficient time to review and approve the report.
If you do not approve the report, you may negotiate with
the sellers on which repairs should be performed and who
should pay for those repairs. Otherwise, you can cancel
the purchase without penalty, provided you have included
timetables in your offer.
Allow
a maximum of ten to fifteen days to receive the report and
five days to review it.
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Final Walk-Through Inspection
Before
closing, you will want to revisit the property to ensure
it is in the condition you have required in your offer,
and to inspect that any required repairs have been performed.
You should do this no sooner than five days before you intend
to close. Make sure this right to do a final inspection
is included in your offer to purchase the home.
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How Financing Details Affect Your Offer
Most buyers
do not have enough cash available to buy a home, so they
need to obtain a mortgage to finance the purchase. Since
you will probably make your purchase contingent upon obtaining
a mortgage, the seller has the right to be informed of your
financing plans in order to evaluate them. That is one of
the major reasons that financing details are included in
your offer.
Down
Payment
As part
of your offer, you will need to disclose the size of your
down payment. Once again, this allows the seller to evaluate
your likelihood of obtaining a home loan. It is easier to
get approved for a mortgage when you make a larger down
payment. The underwriting guidelines are less strict.
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Interest
Rates
Another
reason for including financing information in your offer
is to protect yourself. If interest rates suddenly become
volatile and rise quickly, as sometimes happens, you may
looking at a mortgage payment much higher than you anticipated.
By putting a maximum acceptable interest rate in the offer,
you are protecting yourself from such an occurrence.
At the
same time, the seller will probably want to see that you
have some flexibility in the financing terms you are willing
to accept. If interest rates are currently at eight percent
and you indicate this is the highest rate you will accept,
you would be able to cancel the contract without penalty
if interest rates rose past that point. The seller would
suffer because they have lost valuable marketing time and
may have made their own plans based on successfully closing
the transaction.
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Closing
Costs and Financing Incentives
There
may be times when, as part of your offer, you request the
seller to pay all or a portion of your closing costs, or
provide some other financial incentive. One common request
is asking the seller to provide funds to temporarily buy
down your interest rate for the first year or two. Such
incentives can be especially effective if a buyer is tight
on money or pushing their qualifying ratios to the limit.
Whenever
you ask for incentives such as these, you will probably
find the seller less willing to negotiate on price. After
all, what you are really asking for is to have the seller
to give you some money to help you buy their house. The
end result is that, for a little relief in the beginning,
you are willing to pay a little more in the long run.
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Seller
Financing
Another
occasional request is to have the seller "carry back"
a second mortgage to help facilitate your purchase of their
home. In cases when the seller does not need all the proceeds
from their sale in order to purchase their next home, this
is an option. The advantage to the buyer is that by combining
your down payment and the second mortgage from the seller,
you may be able to avoid paying mortgage insurance and save
yourself some money.
If such
a carry-back is part of your offer, you should include the
terms you wish to pay on such a second mortgage. Keep in
mind that your first trust deed lender needs to know this
information so they can underwrite your loan, and they have
certain minimum requirements. The minimum term of the second
mortgage can be five years. The minimum payment can be "interest
only." Longer mortgage terms and payments that also
include principle are also acceptable.
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Cash
Offers
If you
are one of those rare individuals making a cash offer to
buy a home, it makes sense to provide some documentation
with your offer that shows you have the funds available.
A bank statement would be fine. If you have to liquidate
stock or some other asset, your offer should give a timetable
on when you will provide proof you have converted the asset
to cash.
Other
Financing Details in Your Offer
Your offer
should also contain information on whether you are obtaining
a fixed rate or an adjustable rate mortgage. It should also
state whether you are obtaining conventional financing or
obtaining a VA or FHA loan.
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How FHA and VA Loans Affect Your Offer
Extra
Costs to the Seller
If you are obtaining a VA or FHA loan in order to finance
your purchase, you must include that information in your
offer. This is because government loans place additional
financial and performance obligations on the seller.
Non-Allowable Fees
First, VA and FHA loans prohibit buyers from paying certain
types of fees that are often charged by lenders, escrow
companies, settlement agents, and title companies. They
are called "non-allowable" fees. They still get
charged anyway, but as the buyer, you are "not allowed"
to pay them. The result is that the seller ends up paying
them instead of you.
Most of these "non-allowable" fees come from your
lender. By the time you are making an offer you should have
already been pre-qualified by a loan officer, so you or
your real estate agent can ask how much the lender’s non-allowable
fees will be. Experienced agents should also have an idea
of what non-allowable fees will be charged by the escrow
or settlement agent and the title insurance company.
Since these are fees the seller would not pay on an offer
with conventional financing, this information must be included
in your offer. You should also realize that since the seller
will be paying these additional fees, they may be a little
less negotiable on the price.
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VA
and FHA Appraisals
Home appraisal
inspections on FHA and VA loans are a little more detailed
than on conventional loans (and more expensive). The appraisers
are required to perform certain minimum inspections as well
as evaluate the market value of the property. Although these
inspections are not as detailed as a professional home inspection
and should not be considered a substitute, sometimes repairs
are required.
These
are additional costs the seller would not be obligated to
pay for someone obtaining conventional financing, so your
offer should include a maximum figure for these repairs.
Otherwise the seller is signing the equivalent of a blank
check, and they do not want to do that.
At the
same time, whatever figure you put in will most likely affect
the seller’s willingness to negotiate on price. If you put
$500 as an estimate, the seller may be $500 less negotiable
on their price. If no repairs are required, you may have
been able to get the house for $500 less than what you and
the seller agreed on as the price. The solution is to add
a clause to your offer that goes something like this. "If
required repairs cost less than the maximum amount allowed,
the excess will be credited toward buyer’s closing costs."
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Selecting Service Providers
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
For example,
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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