Imagine that automobiles are sold like real
estate, with no more car lots or dealerships. Both new and used cars are just
parked on the street. So if you want a Ford, there are no more Ford
dealerships. No more Lexus dealerships or any other kind of dealerships,
either. If you want to look for a car on your own, you just drive around and
see what you can find. Even then, you can only look at the outside, because you
don't have the keys.
There are some people that have the keys. They
also have a computer that tells them where all the cars are parked, what model
and year they are, what size engine they have, and how many miles are on the
odometer. They get paid a commission for selling the cars.
Some of these commissioned agents just sit around
and look at the computer, waiting for the phone to ring. Some of them go out
and locate the new cars, physically inspect the interior and exterior, and flip
on the ignition to listen to the sound of the engine. They are interested in
finding the best cars so their customers refer future clients to them.
Who would you rather call?
to Conduct the Search for a Good Realtor
One way to find candidates to interview is to
talk to professionals from real estate related professions and ask their
opinion. If you know someone who is employed as an escrow officer, title
representative, homeowners insurance salesman, or loan officer, they will be
able to recommend Realtors from the area they work in.
If you talk to a loan officer, be sure it is
someone who deals primarily with purchase money first trust deeds and mortgages
instead of refinances, second trust deeds, or finance companies. Since the
latter do not deal with Realtors on a regular basis, they will not know who to
You could just make phone calls to real estate
offices and ask questions. Ask the manager to recommend someone or ask a
Realtor who he/she would recommend from another office. This will be a little
tricky because the Realtor you ask will be "giving away" a commission, but you
will find out who they respect as a competitor.
A new alternative to finding a Realtor is the
internet. Look for Realtors who advertise themselves, not property. That way
you have a pretty good idea you are getting a "buyer’s" agent instead of a
listing agent. Look to see if their web page offers something to you in the way
of information or other services instead of just telling you they are "number
one." You want someone of value to represent you, not someone who is full of
a Good Realtor
When you interview Realtors for the job, you want
someone who will be concerned about you and will take care of your interests.
You want someone who demonstrates ready knowledge of homes available for sale
and does not have to call you back after they "check on the computer." This
ready knowledge demonstrates they have actually been out previewing homes and
don’t just sit around waiting for the phone to ring.
You also want someone sharp enough to ask you
questions as well, including your financial and debt information. By asking
these questions, a good Realtor will be able to determine the proper price
range you should be looking in. By asking about your family, an agent will be
able to tell if what you need in a home is something available in your price
range. You want a Realtor who is bold enough to talk straight with you instead
of always telling you what you want to hear.
a Realtor Asks to Meet With You
Finally, any decent agent will always
ask for an appointment to meet with you, too. It is only natural, since they
earn their living by commissions. However, Realtors are also supposed to act as
your agent, looking out for your interests before their own. You want a Realtor
who takes that responsibility very seriously. If someone seems too much like
simply a salesman, then maybe you should look a little further.
Improve Your Chances
With inventory diminishing daily and multiple offers being extremely common, it
is of great importance that you position yourself to have the "Best Chance" to
get your offer accepted. You enhance your chance of getting the home of your
choice by doing the following:
Get pre-approved for the purchase:
This takes very little time and is of great value. At this time, identify the
price range for which you qualify and which fits your lifestyle.
Submit a strong competitive offer:
Submit the offer as if there will be multiple offers.
Include substantial earnest money deposit:
Acceptance of an offer is sometimes determined by the amount of the deposit. A
larger amount may signify a bigger commitment to the seller.
Minimize or eliminate contingencies:
The fewer contingencies, the stronger the offer.
Make a buyer profile available:
Time on the job, flexibility, reason for purchasing seller's home, etc.
Be prepared to preview a new property quickly:
Homes sell sometimes in hours. Be prepared to make decisions quickly and be
accessible to change the terms instantly.
Buyer and agent to have instant communication access:
Let us maintain instant access to each other via office phone, voice mail, fax,
pager or cellular phone.
Thinking Ahead About
If you are thinking of buying your first
home, you should take out a pen and paper right now and draw a line down the
center of the paper. Calmly and logically, think of all possible advantages to
buying a home and write them down on one side of the page. Afterwards, you
should list all the disadvantages on the other side of the line.
Then save the list in a place you will
be certain to remember.
Of course it sounds silly. Who needs to
write down their reasons for buying a home? After all, home ownership is the
central theme to living the "American Dream."
Naturally, while in hot pursuit of this
dream you are going to be excited about the future -- researching
neighborhoods, searching MLS sites on the internet, viewing homebuyer’s
magazines full of appealing homes that are just "minutes from the beach" with
"fantastic views" and "cozy family rooms."
Next comes the really good stuff –
looking at houses. Full of imagination and optimism for the future, you wander
about each home envisioning a happy and contented life for you and your family.
The first house may be "too big," and another may be "too small," but you are
certain to find one that seems "just right." So you make an offer and wait
anxiously and excitedly for the counter-offer. Finally, you and the seller
agree on terms and you have bought yourself a brand new home!
Congratulations! Break out the champagne
Later that night or perhaps the next
day, you start to worry about whether you made the right decision. Doubtful
thoughts will intrude. Can you afford it? Is it the right time? Should you have
waited? What if you lose your job? What if this happens? What if that happens?
Anxiety and stress set in. Sleep may be hours in coming.
This is a normal response to buying a
home and is called "Buyer’s Remorse." You have just made the single biggest
purchase you have ever made in your life and it can be downright scary. Logic
deserts you. Worry takes over.
Remember your list?
Back when you were thinking
semi-logically, you were fairly rational about home ownership. You catalogued
the good and the bad, weighed them against each other, and decided that buying
a home was the smart thing to do. Reviewing the list will help resolve your
You will not be totally stress-free, but
it will help.
Of course, in spite of this advice you
will probably not take the time to make that list now – before
you buy a home. Hardly anyone ever does.
So when buyer’s remorse sets in and you
remember reading this column, here is what you do...
...get a piece of paper and draw a line
down the center. Then…
You know the rest.
a Home With Resale Value
There are many things that should be
considered when buying a home. Since most homebuyers expect to buy a bigger and
better home someday in the future, resale value is an important factor in
decision-making. You use the proceeds from selling one home to buy the next
While no one can guarantee that your
home will grow in value, there are steps you can take that maximize your
"Location, location, location," is a
common and almost hackneyed phrase in real estate literature. Your agent may
even throw it at you when you ask for advice about buying a home. However, what
does "location, location, location," actually mean? Why repeat it three times?
Mostly, "location" is repeated to
emphasize that it is extremely important to the resale value of your home. The
idea is to buy a house that will appeal to the largest number of potential
future homebuyers. A careful choice of location can minimize potential negative
influences on future resale value, and maximize positive influences.
Focusing on resale value requires you to
make several different "location" choices. The first choice you have to make is
"which community?" At the very least, you should narrow your choice down to
just a few local communities.
Buying a Home With Resale Value
– Local Community, Town or City
Before you can actually pick out a
house, you need to choose what cities or communities you would like to live in.
There are many factors you should pay attention to, not only for yourself, but
because you intend to eventually sell the home to someone else. Carefully
choosing your community is the first step in "location, location, location" and
can help maximize your future potential resale value.
When choosing a community for your
purchase, it makes the most sense to buy in a city with a viable and stable
economy. Five, ten, or even fifteen years from now – when you want to sell your
home – you can have a reasonable expectation that your community will still be
a desirable place to live.
In addition to residential
neighborhoods, there should be a healthy mixture of commercial and business
districts. These not only provide jobs to the local residents, but also add an
income source that the city can use to upgrade and maintain roads and city
In fact, you should take a drive and see
how well the community is maintained. You have probably heard of "pride of
ownership" when referring to an individual home or an automobile. Look to live
in a city that demonstrates community pride, as well.
In addition to community pride, check on
the services provided by local government. One example would be the local
library system. Are there several library branches? Do they stock a good
selection of books, including recent best sellers?
You should also look into local crime
statistics and see how the city compares to the national average and other
local communities. Is the police force effective and responsive to community
needs? Are fire stations located strategically around the community so that
they also can respond quickly in an emergency?
Another area of inquiry is community
services. Does the city sponsor youth sports and have well maintained athletic
facilities and parks? Do they sponsor community events, such as an annual
parade? Are there activities available for children, teenagers and senior
Your local agent, if they are a good
one, will have amassed a wealth of information on these subjects of inquiry. It
is also another reason to always use a local agent.
Even if you do not have school-age
children and do not intend to have children, you must pay attention to the
local school system. That is because when you sell the property, many of your
potential buyers will have concerns of this nature.
You will want to know if the local
schools are overcrowded. Take a drive around and see if there are auxiliary
trailers outside the local schools. Call up the local school district and see
if elementary aged children always attend the school closest to their home. If
not, ask why. Are there enough schools to support the local population? If not,
are there plans to build new schools? How will building new schools affect
local property taxes?
You should also check to see how local
students score on the standardized tests. You can ask your agent about these
things, but you should also get the local phone numbers so you can ask
There are also school reports available
for free on the Internet.
Property taxes may be higher in one town
than another nearby city. This can sometimes affect whether potential
homebuyers view a community as a desirable place to live. Often, they will
choose not to purchase in a community with higher taxes, though this decision
is not always justified. Higher property taxes often mean newer and more modern
schools, well-maintained roads, and bountiful community services.
In addition, you will often find that
the "cost per square foot" of homes is lower in cities that have higher
property taxes. This means you can buy a bigger house for less money. Since the
mortgage payment may be lower, but the property taxes a bit higher, the monthly
housing costs may be approximately the same in each city.
However, many agents and prospective
buyers have a bias against a community with higher property taxes. If resale
value is important to you, make property taxes a consideration when choosing
the location of your new home.
Buying a Home With Resale Value
– The Local Neighborhood
The term "local neighborhood" refers to
an area wide enough to cover your residential area plus nearby stores such as
the "neighborhood grocery store."
You want to be sure all essential shops
and services are located nearby. This would include grocery stores, gas
stations, dry cleaners, and convenience stores. There should also be fairly
convenient access to local highways, major traffic routes, and mass transit.
One thing you should look out for,
though. If your local shopping center is in decline, it could be an indicator
that the local neighborhood is in decline, too. Check to see if a lot of
storefronts in your local center are vacant or available for lease. If they
are, you might want to consider moving your purchase a few blocks.
Buying a Home With Resale Value
– The Residential Neighborhood
Within your residential neighborhood,
you want the nearby properties to be fairly homogeneous – alike in style, size,
and structure. This does not mean they should all be exactly the same, either.
Owners will put their own unique stamp on their homes.
Your future home should be located as
close to the center of this neighborhood as possible. Avoid the edges. In
short, you do not want your property to back or side to a busy street. If you
are buying a single family home, you do not want your property to border a
condominium, apartment complex, business, school, or even a park.
You also want to make sure the street
you buy on is not used as a shortcut between two busier streets. Nor do you
want to buy a house on a corner lot, as those tend to attract more street
traffic and are not as safe for children. Buy in the middle of the block or on
a cul de sac.
Like we said before, you want your home
to be neatly tucked away in the center of your residential neighborhood.
Buying a Home With Resale Value -
a Home With a View
Homes with a pleasant view of the
horizon often sell at a premium above similar homes without the view. However,
if a view is important to you, buy it mostly for your own pleasure and not as
an investment. Though you may place a considerable dollar value on the view,
future buyers may not be so like-minded. It may take you longer to find a buyer
when it comes time to resell the house. Or you may end up dropping your price
to more nearly match other sales prices in the neighborhood.
In short, if you are buying a house with
a view, try to pay as little extra as possible. Otherwise, you might not get
your money back.
Even though most real estate value is
usually concentrated in the building, the lot is important, too. Obviously, it
should be as level as possible. Assuming the property is in a typical
neighborhood, the lot should be rectangular – no odd shaped lots or oddly
Yard sizes are smaller in modern homes
than in older homes, but there should still be a decently sized front and back
yard. Do not buy a house where the entire back yard is taken up by a swimming
pool, for example.
Do not purchase an over-landscaped
property, either. You would normally pay a premium for that, which you may not
be able to recover when you sell. You will get your best value if the house is
moderately landscaped or under-landscaped for the area. You can always improve
the landscaping during your ownership by improving the grass and adding bushes
and trees. Just do not spend too much.
In each residential neighborhood, houses
will vary in size and rooms, but they should not be too different. If resale
value is an important consideration, you should not buy the largest model in
the neighborhood. When determining market value, the homes nearest to yours are
most important. If most of the nearby houses are smaller than your house, they
can act as a drag on appreciation.
On the other hand, if you buy a small or
medium house for the neighborhood, the larger homes can help pull up your
value. This is one of those times where determining your "wants" versus your
"needs" can be extremely important. Buying what you need in a
more prestigious neighborhood may provide more financial reward than getting
what you want in a less desirable neighborhood.
Three and four bedroom houses are the
most popular among homebuyers, so if you can stick in that range you will have
more potential buyers when it comes time to resell. Five is okay, too, as long
as you do not have to pay too much extra for the additional bedroom.
There should always be at least two
bathrooms in a house, preferably at least two and a half. One bathroom with a
place to wash up for day-to-day visitors, one for the master bedroom, and at
least one to be shared by the other bedrooms.
Walk-in closets are extremely desirable
for the master bedroom. For the rest of the house, just be sure there is plenty
of closet space. Don’t forget space for linens and towels.
Garages add to the resale value and you
should always make sure to get at least a two-car garage. Lately, three-car
garages have become desirable in some areas of the country.
The laundry facilities should be located
somewhere convenient on the main floor of the house, but not in a place it will
create an eyesore. Think about whether you want to walk up and down stairs when
carrying loads of laundry.
Family activity centers around the
kitchen, so this is the most important room of the house. Larger kitchens are
better, and they should be provided with modern appliances. Obviously, the
dining room and breakfast nook should be located adjacent to the kitchen. In
newer houses, the family room should also be extremely close to the kitchen.
There should be easy access to the back
yard, as there will be occasions for barbecues and outdoor entertaining. In
addition, it should be a short trek between the garage to the kitchen so
hauling groceries in from the car does not become a horrendous chore.
The only room where you absolutely have
to have a fireplace is the family room. A fireplace in the living room may be
nice, but you pay extra for it and will probably rarely use it. At best, it
serves as a focal point of the living room, but does not add much in real
Swimming pools do not provide as much
added value as they once did. Safety issues about families with younger
children have become more publicized than in the past, so families with small
children tend to avoid homes with pools. As a result, having a pool may
actually reduce the number of potential homebuyers when you try to resell the
Buy a home with a pool for your own
enjoyment, not as an investment.
Since we are on the subject of swimming pools, here is a
word of advice: If you want a pool, buy a home that already has a pool. Paying
a contractor to install one for you is like throwing money away. You will never
get a dollar-for-dollar return on your investment
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
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.
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.
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
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 if 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.
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.
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.
Factors Affecting Your Offer Price
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.
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.
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.
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
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 (for more
information on agency, click here).
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.
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 huge 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.
in an Offer to Purchase Real Estate
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
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.
Money Deposit in an Offer to Purchase Real Estate
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
One recommendation is to make sure your
deposit is less than two percent 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
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
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.
Closing Date in an Offer to Purchase Real Estate
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.
of Possession in an Offer to Purchase Real Estate
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, their purchase 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.
Writing an Offer
- Concerns About the Property
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
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.
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.
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.
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.
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.
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.
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
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.
for 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 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.
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.
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
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.
FHA and VA Loans Affect Your Offer
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.
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
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
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."
Providers When Buying a Home
You and the Seller Must
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 be 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.
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.
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.
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.
Remorse - Did You Make a Huge Mistake?
When you were in hot pursuit of the
"American Dream" you were excited about the future and owning your own home --
researching neighborhoods, searching MLS sites on the internet, viewing
homebuyer’s magazines full of appealing homes that were just "minutes from the
beach" with "fantastic views" and "cozy family rooms."
Next came the really good stuff –
looking at houses. Full of imagination and optimism for the future, you
wandered about each home envisioning a happy and contented life for you and
your family. The first house might have been "too big," and another was "too
small," but finally you found one that was "just right."
So you made an offer and waited
anxiously and excitedly for the counter-offer. Finally, you and the seller
agreed on terms and you bought yourself a brand new home!
Congratulations! Break out the champagne
Later that night or perhaps the next
day, you started worrying.
Did you make the right decision? Can you
afford it? Is it the right time? Should you have waited? What if you lose your
job? What if this happens? What if that happens? Anxiety and stress set in.
Sleep may be hours in coming.
This is a normal reaction to buying a
home. It is called "buyer's remorse."
This is what you do...
Take out a pen and paper right now and
draw a line down the center of the paper. Calmly and logically, think of all
possible advantages to buying a home and write them down on one side of the
page. Afterwards, you should list all the disadvantages on the other side of
This process is supposedly how Ben
Franklin used to weigh tough decisions.
After you get done writing your lists,
you may think back on your anxiety and think you were being silly. After all,
buying a home is obviously a good decision. Your list proves
it. But your reaction was normal and shared by many. You see, buying a home is
not entirely a rational process. It is an emotional process, too.
You will not be totally stress-free, but
it will help.
Home Buying Glossary
Agent- A person acting on behalf of another, called the principal.
Appraisal- An expert judgment or estimate of the quality or value of
real estate as of a given date.
Assessed Value- The valuation placed upon property by a public tax
assessor as the basis for taxes.
Bill of Sale- An instrument which transfers title to personal property a
"Deed" transfers real property.
Certificate of Reasonable Value (CRV)- A document that establishes the
maximum value and loan amount for a VA guaranteed mortgage.
Certificate of Title- A document signed by a title examiner or attorney
stating that the seller has a good marketable and insurable title.
Commission- Payment to a real estate broker for services performed.
Condominium- A form of real estate ownership where the owner receives
title to a particular unit and has a proportionate interest in certain common
areas. The unit itself is generally a separately owned space whose interior
surfaces (walls, floors and ceilings) serve as its boundaries.
Contingency- A condition that must be satisfied before a contract is
binding. For instance, a sales agreement may be contingent upon the buyer
Deed- A formal written instrument by which title to real property is
transferred from one owner to another. Also, "conveyance".
Deed of Trust- Like a mortgage, a security instrument whereby real
property is given as security for a debt. However, in a deed of trust there are
three parties to the instrument; the borrower, the trustee, and the lender (or
Due-On-Sale Clause- An acceleration clause that requires full
payment of a mortgage or deed of trust when the secured property changes
Earnest Money- The portion of the down payment delivered to the
seller or escrow agent by the purchaser with a written offer as evidence of
Equity- The interest or value which owner has in real estate over
and above the debts against it. (Sales Price - Mortgage Balance - Equity).
Escrow- A procedure in which a third party acts as a stakeholder for
both the buyer and the seller, carrying out both parties' instructions and
assumes responsibility for handling all of the paperwork and distribution of
Fee Simple- An estate in which the owner has unrestricted power to
dispose of the property as he wishes, including leaving by will or inheritance.
It is the greatest interest a person can have in real estate.