| What Happens When You Buy A Home?On | | | | is paid by the seller and split it with the seller's |
| average, people who live in the United States | | | | listing agent. While there is still some argument |
| move to new homes about every seven years. | | | | that this method leaves the incentive for a higher |
| That means that every seven years, people just | | | | sales price, buyer's agencies counter that by |
| like you are driving around neighborhoods, | | | | pointing out that a $10,000 savings for the buyer |
| checking out schools, walking through complete | | | | only amounts to a $150 difference in commission |
| strangers' homes, talking with bankers, and | | | | for the buyer agent. They feel that the benefit of |
| spending large amounts of money (i.e., keeping | | | | your satisfaction with their service and the word |
| the economy rolling). The process is a long and | | | | of mouth promotion they will get outweigh the |
| sometimes difficult one, but also one that can | | | | loss of this small amount of money. The type of |
| bring with it a lot of excitement and joy if you | | | | agreement you sign with a buyer's agent will |
| find your dream home and can afford it. In this | | | | dictate how the arrangement works. A limited |
| article, we're going to go through the steps | | | | agency agreement may stipulate, specifically, for |
| involved in a search for the perfect home. For | | | | what the agent will be paid. For instance, the |
| instance, do you really need a real estate agent? | | | | agreement might state that if you find a home on |
| Why do you need to be pre-approved by a | | | | your own, then no commission will be paid. |
| bank? How do you negotiate the deal? And, how | | | | Basically, you can negotiate the terms of the |
| do you keep from getting a lemon?Money | | | | agreement up front so both you and the agent |
| MattersProbably the most important step, and | | | | know what to expect and are comfortable with |
| certainly the step you should take first, is to | | | | the relationship. Typically, however, if the agent |
| figure out how much you can afford to spend on | | | | has been otherwise very helpful and attentive, |
| a new home. If you haven't set up a budget that | | | | most buyers still pay some type of commission |
| shows you how much you're spending on | | | | even if the agent was not involved in finding the |
| everyday things, now is the time to do it. A good | | | | home they end up purchasing. If you do decide to |
| budget will help guide you to the right price range | | | | use a buyer's agent, be sure to read the next |
| of homes as well as prevent you from spending | | | | section.Be on the lookout for: If you decide to use |
| more than you should on your house. This can | | | | a buyer's agent be on the lookout for: Dual |
| happen when the bank says you can afford a | | | | agency: This means the agent (or agents) are |
| certain price range of homes based on your | | | | working on both sides of the fence. For example, |
| income and debt, but they haven't taken into | | | | an agent with XYZ Realty may represent the |
| consideration all of your expensive hobbies, your | | | | seller, while another agent (or the same agent) |
| monthly child care expenses, the fact that your | | | | also with XYZ Realty represents the buyer. There |
| car could die at any moment, or your love of | | | | are obviously arguments against this arrangement |
| international travel. You probably don't want to | | | | because of conflicts of interest, but nonetheless, it |
| have to change your lifestyle in order to buy a | | | | is still a common practice. In the dual agency |
| more expensive home. By having a handle on | | | | situation, both the buyer (you) and the seller must |
| your personal budget, you can compare your own | | | | be made aware of the arrangement and |
| numbers with what the bank is willing to lend you | | | | privileged information can't be shared unless you |
| to come up with a very manageable mortgage | | | | agree to it. Neglecting to specify: If you begin |
| payment that will let you continue the same | | | | working with an agent and forget to ask for or |
| lifestyle you currently have.Other Costs In addition | | | | sign a buyer's agency agreement then the agent |
| to the mortgage itself, you'll also have to add | | | | automatically represents the seller. In most cases, |
| property tax and insurance to your monthly | | | | the agent will bring this up and offer you the |
| payment. And, if you don't make at least a 20% | | | | choice. If, however, the agent is the listing agent |
| downpayment, you'll also have to add Private | | | | for a house you are interested in then the |
| Mortgage Insurance. Also, don't forget the | | | | relationship automatically becomes that of a "dual |
| expense of closing costs. It can eat into the cash | | | | agency." Buyers' Agency Clause: One potential |
| you have available for the downpayment. All of | | | | problem with signing a buyer's agency agreement |
| these additional costs add up, so make sure you | | | | may come with a blanket clause stating that the |
| are comfortable with the total amount of your | | | | agent gets a commission on any home purchase. |
| monthly payment and know how much you can | | | | If you think it is likely that you will find something |
| put into a downpayment before you begin your | | | | without the help of the agent then you may want |
| search and fall in love with a house you can't | | | | to specify in the agreement that a home you find |
| really afford.Need vs. Want Armed with a realistic | | | | on your own (a FSBO, for example) will not |
| price range, you can now start the process of | | | | require payment of the standard commission. |
| finding that perfect home. Here is also where you | | | | "In-house" Listings: If you're working with a |
| have to keep a level head and think about what | | | | traditional agent (or listing agent) rather than an |
| you "need" versus what you "want" in a home. | | | | exclusive buyer's agent, be aware that you might |
| Hopefully you can get both, but be prepared to | | | | get a little harder sales pitch for their own listings, |
| give a little on some things that you don't really | | | | or the listings held by their brokerage firm simply |
| need. Keep in mind that finding the perfect home | | | | because they make more money that way. |
| isn't always possible simply because it may not | | | | Release Clause: Make sure you have a "release |
| exist. Make a list of things you absolutely need, | | | | clause" in your buyer's agency agreement just in |
| like three bedrooms, a backyard, a good school | | | | case you find out you just don't like your agent. |
| district, etc., as well as a list of the things you | | | | This will allow you to sever ties without any |
| want, like hardwood floors, skylights, a "smart" | | | | future problems. You may need to take |
| house, or a large foyer. Then prioritize those | | | | advantage of this clause BEFORE you see any |
| things. If you find a house that comes close to | | | | houses -- or at least any houses you think you |
| having all of your NEEDS but doesn't have | | | | are interested in. The Great House Hunt Once |
| everything you WANT, give it a second look. By | | | | you've made the agent decision, you are ready to |
| keeping these distinctions in mind, you'll prevent | | | | start house hunting. The agent will search the |
| yourself from prematurely ruling out certain | | | | Multiple Listing Service (MLS) and give you a |
| houses without seeing them first.Location is Key | | | | printout of houses that meet the criteria for your |
| Location, location, location. We've all heard that the | | | | ideal home. If you are using a buyer's agent, you |
| most important thing to look for in a home is its | | | | may also get a list of For-Sale-by-Owner (FSBO) |
| location. It's true -- location is very important, | | | | homes to look at in addition to the MLS list. Don't |
| even if you don't plan to be there many years. | | | | forget to do some looking around of your own |
| What to look for in the location of your home | | | | just in case the agent misses something. This is |
| may also tie in with the list of priorities we | | | | where your communication with the agent is |
| discussed in the previous section. For instance, are | | | | critical. The agent needs to have a really good |
| you looking for someplace close enough to town | | | | idea of what you want in order to make your |
| that you could walk to shops and restaurants, or | | | | search as efficient as possible. Making an Offer |
| do you want the seclusion of a more quiet, rural | | | | When you've found the house and are ready to |
| setting? Do you want your kids to be able to | | | | make an offer there are several steps you need |
| walk to school, or is riding the bus okay? Even if | | | | to take and contracts that need to be drawn up. |
| some of these things aren't important to you, | | | | Here is where your real estate attorney or agent |
| when it comes time to sell, the location of the | | | | really come in handy. The first thing that happens |
| home will always have an impact. The other thing | | | | is your official offer, or bid. When you make the |
| to keep in mind about location is that your | | | | offer, you have to keep in mind that it could |
| preferences will change over the years. What's | | | | easily become a legally binding contract if the |
| important to you right now, may not be so | | | | seller accepts it. Because of this, you need to |
| important in 10 years and vice versa. For | | | | make sure the offer includes all of the |
| example, having no kids might make you ignore | | | | contingencies, concessions, and other details you |
| looking into the school district the home is in. Later | | | | need it to cover. In the next section we discuss |
| on, if you do have kids, that will be an important | | | | the items your offer should include. Your Offer |
| consideration and can also mean moving from a | | | | Here are some examples of things that should be |
| home you love in order for your children to | | | | included your offer: Your offered purchase price |
| attend better schools. But, is it a good location? | | | | and the amount of earnest money you are |
| There are many reasons why a home's location is | | | | putting down Home inspection contingencies: Since |
| so important. As you're shopping for your new | | | | the inspection may take place after the offer is |
| home, you may want to consider the | | | | accepted, you need to state that the entire deal |
| following:Proximity to town: How convenient will | | | | is contingent upon an acceptable inspection report. |
| quick trips to the grocery store be? Do you care? | | | | If the house is on a well and septic system rather |
| Proximity to schools: Is the school district a good | | | | than city water and sewer, these should also be |
| one? Do you like the school your kids would | | | | inspected. Financing contingencies: You can also |
| attend? This is important for resale, even if you | | | | include a contingency for getting the mortgage |
| don't have kids yourself. Proximity to work: How | | | | you want (i.e., maximum interest rates, expected |
| long will your commute to work be? Proximity to | | | | terms, etc.) Items included in the purchase: This |
| other amenities: If you have kids, will you be | | | | list can include things like major appliances (often |
| driving all over the county to take them to sports | | | | the refrigerator goes with the seller), lighting |
| events and school functions? Would that bother | | | | fixtures, shrubbery, basically anything that isn't |
| you? Crime rate: Does the area have a high rate | | | | nailed down and some things that are! Title |
| of crime compared to other areas of town? Tax | | | | contingencies: Your attorney will do a title search |
| rate: Do you have to pay both city and county | | | | to make sure the property does not have any |
| property taxes? Zoning: What's going to be built | | | | other legal claims against it and that the seller |
| next to you in the future? Or, what restrictions | | | | holds clear title to it. Timeline: A deadline for |
| might there be on what you can do in your home. | | | | responding so you know when to consider the |
| Some home businesses can be affected by | | | | offer rejected Conter Offers After your initial |
| zoning issues. Restrictive covenants: Does the | | | | offer, the seller may counter with a price just |
| neighborhood have restrictive covenants, or will | | | | slightly below their asking price. This back and |
| you have a chicken farm pop up on the property | | | | forth dickering can go on a couple of times until |
| next to yours? If you want a chicken farm | | | | you come to an agreement, or someone else |
| yourself, does the neighborhood allow it?! | | | | steps in and offers the asking price! Your |
| Homeowners association: Is there an active | | | | agreement may not be only about the money |
| neighborhood organization that will help maintain | | | | either, there may be other terms and demands |
| and improve the area? Public transportation: Do | | | | that you have to deal with. Just remember that |
| you have transportation options? Is that | | | | until you have a signed contract anyone else can |
| important to you? Noise: Go to the property at | | | | step in and make another offer. Professional |
| various times of the day. Is there a lot of noise | | | | Inspection Required Since the entire deal could be |
| from traffic? Are you in a flight pattern from the | | | | riding on the professional inspection of the home, |
| local airport? Safety issues: Are you near a | | | | don't cut corners when it comes to the house |
| nuclear or other potentially dangerous facility? Is | | | | inspection -- and never skip it altogether. Even |
| there a landfill nearby that lowers the property | | | | with new houses, there can be hidden problems |
| value? Neighbors: Do the neighbors have similar | | | | that only a professional inspector may find. These |
| values to yours? Go to the neighborhood at night | | | | inspections cost anywhere from $200-$500 and |
| and on weekends to get a taste of the types of | | | | are well worth it. The types of things the |
| activities that go on. Realtor-Ready or Not When | | | | inspector looks at are defects that affect the |
| you begin the search for your home you have | | | | value of the home, make it unsafe or less livable |
| three choices: You can go it alone and do all of | | | | for whatever reason. Leaky appliances, damp |
| the legwork of finding homes by looking in the | | | | basements, plumbing problems, and other defects |
| newspaper, searching online, or simply asking | | | | are some of the problems that can be turned up |
| around. You can call a real estate agent and ask | | | | by a good inspector.Major Points of Inspection |
| them to show you homes. Or, you can sign a | | | | Here is a list of some of the major areas |
| contract with a buyer's agent. If you're like most | | | | inspectors will cover:Foundation: With either a |
| people, you probably weren't even aware of that | | | | basement or a crawlspace, is it simply damp or |
| third option. There are some very fundamental | | | | are there outright water problems? Are there any |
| differences in these three options. In the first | | | | cracks in the walls or floor that might indicate |
| instance, going it alone, you may miss out on a lot | | | | structural problems? Construction: Does the house |
| of potentially great properties. You will also find | | | | have good quality construction? Is the flashing |
| that you're not saving any money because the | | | | properly installed to protect wood, are there any |
| seller pays the commission to the agent based on | | | | rotting problems with the wood, is the roof in |
| a percentage of the sales price. In the next | | | | good shape or will it need replacing soon, etc. |
| section we'll discuss finding a real estate agent. | | | | Plumbing: Has the plumbing been properly installed? |
| Real Estate Agent When you call an agent and | | | | Is it in good shape? Is there any evidence of |
| ask them to show you some properties, you | | | | leaks? Heating and cooling systems: Are the units |
| have to remember that they are always working | | | | in good shape? Will they need replacing soon? Are |
| for the seller -- not you -- even if they are not | | | | they rated for the amount of square footage |
| the listing agent! (The listing agent is the agent | | | | they are heating? Electrical: Do there appear to be |
| who was hired by the sellers to list their home.) | | | | any electrical problems or code violations? Interior: |
| This ties in with the fact that the agent is paid a | | | | Are the floors level? Do windows and doors |
| commission based on the selling price of the | | | | function properly? Do the appliances in the kitchen |
| house. (Usually a 5-7% split between both agents | | | | function properly? Is there any evidence of leaks |
| involved.) So, the higher the sales price, the more | | | | or mildew in the bathrooms? Closing the Deal |
| money the agent makes. It may be hard to keep | | | | Assuming the inspection turns out well, the |
| this in mind as you spend time with the agent and | | | | financing is going through to your satisfaction, and |
| feel you know and have a relationship with that | | | | all other contingencies are met, you're now in the |
| person.Even though you trust the agent, it is very | | | | home stretch. Your attorney will do due diligence, |
| important to never reveal the highest price you | | | | which includes a title search to determine if the |
| are willing to pay, or other concessions you know | | | | seller does indeed hold the title to the property |
| you would be willing to make. Because the agent | | | | and there are no other legal claims against it. This |
| represents the seller, he/she must relay this type | | | | along with the home inspection will complete the |
| of information to the seller. The flip side of this is | | | | due diligence package If everything is clear, then |
| also true. Again because the agent is representing | | | | you're ready to sign what may seem like the |
| the seller, he/she is not allowed to divulge | | | | largest stack of documents you've ever seen! It |
| anything that would tip the scales in your favor -- | | | | is at the closing that the title to the property will |
| like why the seller is selling or how low the seller | | | | be transferred to your name, your home owners' |
| will probably go regarding the selling price. | | | | insurance (which you have to have already |
| Remember, the agent is bound by contract to | | | | secured) begins coverage of the property, and |
| work to get the best possible deal for the seller. | | | | you are officially committed to your mortgage. It |
| In the next section, we'll discuss your third option, | | | | is, unfortunately, also time for you to plunk down |
| buyer's agents. Buyer's Agent Your third option, | | | | your cash for the downpayment and closing |
| using a buyer's agency, means the agent is | | | | costs. You should be able to get a copy of the |
| working with your best interests (and wallet) in | | | | settlement statement that includes the amount of |
| mind. A buyer's agent will work to negotiate the | | | | cash you'll need at closing from your lender a day |
| best price, ensure the property is inspected, and | | | | or two prior to the closing. Knowing these costs is |
| make sure you have the representation you | | | | important since you'll need to pay your down |
| need. Things you tell a buyer's agent remain | | | | payment (and usually your closing costs) with a |
| confidential. Using a buyer's agent also means that | | | | certified check. You'll be signing lots of papers, |
| you will be shown homes that are For Sale By | | | | including: The settlement statement The sales |
| Owner (FSBO). It might seem like using a buyer's | | | | contract Title insurance Homeowners' insurance |
| agency means you are going to pay more -- but | | | | The title or deed to the property The down |
| that's not always the case.Although there are | | | | payment and closing costs There may be |
| situations where agents charge an hourly fee, or | | | | additional documents to sign depending on the |
| a flat fee for the service, in most situations they | | | | complexity of the deal, so be prepared and block |
| are simply working for the same commission that | | | | out appropriate time for everything. |