The Prospective Homebuyer's Guide - The Buying Process
In this section we will lay out some strategies for negotiation when you buy your home, and then some idea of what to expect as you make it to and through closing (with due attention paid to potential snags along the way).
Once you get through this section in real life, you'll be ready to take the keys and cross the threshold into your new life. But first, you need to determine if you need the help of a broker?
Do You Need Broker
Let's look at what the broker does, and how he or she is compensated. The broker is essentially a middleman who gets paid for a service. It's commission-based. You will do well to wonder why real estate brokers aren't paid a fixed amount rather than a commission, which would very likely result in substantially lower fees. (And -- surprise! -- this idea would not be very popular with the real estate brokerage community.)
How valuable is the service that brokers provide?
The broker's argument goes like this: "It's the seller that pays that money, not the buyer -- so you're getting the broker's services ABSOLUTELY FREE! Without a broker, you won't find all of the homes available to you, and you may not be informed about all of your rights and responsibilities. Buying a home is a serious endeavor. There are a lot of legal and financial hoops to jump through, and you need to know that you have someone on your side. What's more, the real estate agent can help you find and evaluate financing, and steer you toward a good home inspector and settlement attorney."
Now let's look at the counter-argument: If there were no agent in the picture, would the price be $15,000 less for the house? You and the seller could save that money and split it.
No one can predict precisely what that market will do, though it certainly makes sense that the price would be less. Any time you can leave out a middleman, you're going to save money.
However, this is not always practical. It's for that reason that most of us go to retail stores and not wholesalers -- we'd rather buy that pen at Wal-Mart than go to Bic's manufacturing plant and ask if we can buy them direct. The retailer is providing a service (convenience, chiefly) and, for that, we are prepared to pay the markup.
FSBO: For Sale by Owner
If you want to forgo using a broker and have found a house you like that is for sale by owner -- by all means, go for it. It may be that someone you know has decided to sell, or that you've found the place simply by driving through the neighborhood and noticed the sign out front. You may have found the place through the classifieds in your local paper. You'll need an attorney to step you through the legalities and the paperwork, but you could end up saving a pile of money.
Similarly, if you can find a seller-financed home, where the seller may even be amenable to a rent-to-own situation (wherein the rent you pay goes toward buying the house, if you should decide to buy at a later time), then, again, go for it. The opportunities do exist.
If the prospect of looking for a home on your own is too overwhelming, then it may be time to employ a broker. But make sure your broker is doing all they can to find you a great home.
What Your Broker May Not Want You to Know
- "I could be working a lot harder for you."
If you have children, or think you'll have children while living in your new home, you'll want to know about things like school districts and crime rates in your neighborhood. Sure, you can find that out for yourself, but a good agent knows the area and is familiar with these kinds of things. If the agent isn't offering all kinds of salient nuggets about this neighborhood and why it is or isn't a good place for you, find another agent.
- "This house is stale."
Again, this is a problem for a seller broker. "Stale" means that the house has been sitting on the market for a long time.
- "My fee is negotiable."
As we've already seen, you may be able to change the structure of the way your agent is compensated (by making it a flat fee, with added incentives for helping you to lower the price). If that doesn't happen, though, you may also be able to knock off a percentage point from the agent's commission. They will tell you what's "normally" the commission, but that doesn't mean it is written in stone.
- "Both I and the seller's agent might kick in some money to make the deal happen."
Imagine that you're an agent. You stand to make a few thousand bucks if this $250,000 house gets sold. However, during the negotiating process, things have gotten a bit acrimonious for one reason or another. Your client (the buyer) will not fork over the $450 for a new washing machine, or the $129 for a new garage door opener. Wouldn't you be willing to pay $225 (half of $450, with the seller's agent kicking in the other half) in order to make those few thousand bucks? Of course you would.
Legally, agents can't hand off checks to buyers or sellers. It happens, but it shouldn't. However, an agent can take a cut in his/her commission. So, at closing, the commission may be modified; the broker gets the modified commission amount and then hands off the correct portion to the agent.
- "You can use more than one agent."
Certainly before you sign an exclusive agreement with your agent, you can ? as you're shopping for agents just as much as you're shopping for houses ? have several people showing you around. You don't want to do anything sneaky, though: You need to make it clear to the agents involved that you're not interested (at present, anyhow) in having an exclusive broker.
- "This house hasn't sold for a good reason."
This is another reason to have a strong buyer's agent on your side. Brokers are required by law to tell you about any structural problems in the house, but they won't always tell you about anything else that might have happened there. Say that it's been renovated since that drug-running family of 20 trashed the place, and that there was a shootout featuring AK-47-wielding thugs of the Transylvanian Liberation Army. A strong broker will find that kind of thing out for you. A seller's broker will do all he can to prevent the subject from coming up.
Certain states require disclosure of "stigmatized properties." In other states, it's not clearly defined, or not defined at all. For instance, some states may require disclosure if such information would make a material difference to the value of the home. This would presumably include the fact that there's a hole in the roof, but not necessarily the fact that a crime was recently committed in the house.
The Asking Price
So you love the house. Well, that's all well and good, but as your father may have said of your prospective spouse, "How much should you really be paying?"
Here's where your buyer broker is really going to come in handy. He or she should be able to guide you through the process of making an offer that both is within your range and not likely to offend the sellers. (Yes, they're thin-skinned, sensitive types just like you and me.)
These tips will help you make a smart offer:
- Your offer price should be based on local market conditions as well as on how well the house is priced. Find out how fast homes are selling, and whether they are selling for close to the asking prices. In hot markets, well-priced homes sell for very close to the list price?usually within five% . In fact, they may sell at a premium to the asking price. People do this if they believe they'll be competing with other buyers. In slower-paced markets, where prices are soft, the gap between the list and sale price may be considerably more than 5 percent.
- Your agent should provide you with comparable sales information and should show you comparable listings. If you skip this crucial step, and blindly make an uneducated offer, you could overpay for a property that is priced too high for the market.
- Be careful about making a ridiculously low offer. It's true that you may get the house at a great price, but you also might offend the sellers, who then become tough negotiators. A bigger risk in making an inappropriately low offer is that you could lose the house to another buyer who is better informed, and who makes a more reasonable offer.
- Know how much you can pay. By the time you make an offer to buy a house, you should be lender-prequalified. If you are not, talk to a loan agent or mortgage broker before you make an offer to make sure that you can qualify for the financing you need to complete the purchase.
- Find out as much as you can about the condition of the house before you make an offer. Ask if there are any existing reports available, such as termite, house, or roof inspections. Check on radon levels in the basement. Find out if the sellers plan to complete any work as a part of a sale agreement. Make sure to budget for major repairs that the sellers are unwilling to complete.
- Find out as much as you can about the sellers. Why is the house being sold? Are the sellers transferring, divorcing, or selling to settle an estate? Have they bought another house, or do they need to sell before they can buy? If the sellers have already bought another home, they may be willing to accept a lower price if the buyer can close quickly.
- Regarding the market history of the house, find out how long it has been on the market. Is the current list price the original list price? Have there been price reductions? How long ago was the last price reduction made? If the price was reduced some time ago, and the house still is not selling, the sellers may be considering another price reduction. If so, they may be receptive to a lower offer.
- Have there been any offers on the house? If so, why were they rejected? Are the buyers who made the offer still interested in the house, or did they purchase another house?
Once you make your offer, one of three things will happen: 1) It will be accepted, 2) it will be rejected, or 3) you will receive a counteroffer. If it's rejected, you can still come back with a higher offer if you're really interested in the house. And if there's a counteroffer, you're now in a negotiation.
Offer and Counteroffer
You offer $198,000 for a house that has an asking price of $210,000. The seller comes back and says you can have the house for $205,000. What do you do? Much of what you need to know you should already have found out, before your initial offer, as we've seen. There are, though, a few things to keep in mind at this new stage.
The Offer Is Contingent
Make sure that your offer is contingent on two items: 1) You're able to obtain adequate financing (if you haven't done so already), and 2) you can pull out if the property doesn't pass muster with your inspector and you and the owner can't come to terms about how to fix the problem.
Make a Serious Earnest Money Deposit
The earnest money deposit is a check that you'll give your agent to indicate that you're serious about buying the house. The check will apply toward the sales price if the deal goes through; if not, you get it back and you can tear it up. Ask your agent what's normally given -- it may be something like $3,000 -- and then raise that amount as much as you feel comfortable. It can be as much as 10 percent of the asking price of the house, or even more. It's up to you.
If you're serious about wanting the house, the seller and the seller's agent may be impressed with a substantial sum. It says that you're interested in the house and that you very likely won't run into problems in obtaining the financing. It's kind of like pulling a fat wad of bills from your pocket and laying them out on the table. You want to see those cash registers go "Ka-ching! Ka-ching!" in the seller's eyes. Motivate him. Make him unwilling to see that money go away.
Set a Time Limit
You can specify to your agent that the offer you've made is good for 24 hours. This lets the seller know that it's serious, and that you don't want this to drag on indefinitely. (Assuming that you're using an agent, your agent will communicate with the seller's agent.) It also motivates the seller's agent to get in touch with the owner right away. This doesn't mean that they must accept the offer within 24 hours; it means that the ball will be back in your court within 24 hours (assuming that they don't reject the offer outright). It's smart from a psychological standpoint: There's nothing as wearying as not knowing when you'll get an answer, if ever.
Use Time to Your Advantage
If you can possibly find out anything about the owner's time schedule, do so. This was something you should already have tried to do, of course, but it may come up again. Perhaps the sellers are in a hurry because they're moving across country and have already set a move date. If they come forward and say that they'll accept your offer, but only if closing happens in 30 days, you can work with that. ("We'll pay $204,000 but we need to close in 90 days; if you want us to close in 30, we'll give you $201,500.")
Remember Not to Fall in Love With the House
If you find yourself in a state of high anxiety, step back. This may seem like your dream house, but there are going to be others. Really. Your agent should help you with this ? if she feels that they're just asking too much, and that they ought to be coming down, she's probably right. There are many houses in which you can be happy, so stand firm when you've decided that you've reached your upper limit.
Assuming that your offer is accepted, you now have to get that home inspected.
The Home Inspection
No matter how many times you've toured your new house, there will always be something that you're going to miss. Why kick yourself later when you can hire someone to make sure that everything's up to snuff?
You need to find a good home inspector. He's going to give you information that will either set your mind at ease, send you back to the negotiating table, or send you back to the hunt. In any event, it's critical information.
Here are some helpful tips on finding the best inspector:
- If you're using a buyer broker, ask her to recommend someone. Don't take the advice of a traditional broker. While their counsel would probably be OK, don't forget that she's representing the other guy, not you, in the transaction.
- Check out any prospective inspectors with the American Society of Home Inspectors (ASHI). Members must abide by a certain code of conduct and have attained a certain level of training and experience. Make sure your guy is one of them.
- Ask if he carries errors and omissions insurance. If he were to miss something big, this "oops" policy will help make amends when you find it later on.
- Find out exactly what is covered in the inspection. You want to know the skinny on all of the property's major structural and mechanical systems, from top to bottom.
- Ask if you can come along on the inspection. If he says no, go with someone else. When you find someone who says yes, go with him and watch what he does.
- Ask for references. This is a must. Anyone who refuses to give references should be crossed off your list. You might hear, "But I respect the privacy of my clients. Surely you can understand that." Don't fall for it. Any professional will be happy to supply the names of happy customers.
If the place passes muster, and you obtain your financing, you're ready to close on the house. That means you're actually going to buy this thing. And that means you've got to be ready for closing costs.
Next: Closing the Deal >>