This blog post is an introduction to getting ready for one of the biggest moments in life – buying your first home.
I like to call it a “journey,” as it will take you on a special path to homeownership – a path that is often different for each buyer. In most cases, there are about a dozen key stepping stones along that journey. Here is what you may experience and how you should prepare:
Today’s Market Strategies – John L. Scott brokers have a finger on the pulse of the market. It’s their job to know whether a home is priced right or the market is shifting. It’s never too early to add a real estate professional to your support network. Buyers rely on their brokers to be knowledgeable and prepared for changing conditions, leveraging that wisdom and skill to guide each buyer along his/her own unique journey toward that special home.
Even before searching for homes, we suggest that people have their financial house in order to achieve success. Also, it’s wise to meet with at least two mortgage consultants to understand how much of a home one can afford, compare loan options as well as determine which lender makes the buyer most comfortable to work with. Once selected, the lender should provide applicants with a pre-approval letter (or fully underwritten letter – even better), formal proof the loan applicant is a viable buyer in a competitive market.
Home Search – Here’s a good exercise for buyers: Perform a Wants vs. Needs comparison – or a ranking of home features – and share that with the real estate broker. Needs are must-haves and should take priority. Don’t compromise on those items. The more information you can supply a real estate pro the better. Then select a favorite real-estate search app, such as PropertyTracker® from John L. Scott, to track favorite listings and tour different neighborhoods to get a feel for each area.
Negotiate Price & Terms – Now that we know a buyer’s priorities in a home (yard, schools, home office) and possibly insights about the sellers’ wants/needs, it’s time to sketch out a solid offer with the most favorable terms for the buyer and one that will elicit a positive response from the seller.
Mutual Acceptance – Congratulations, we have an accepted offer! Don’t pop that champagne bottle just yet. There is more timely work ahead.
Earnest Money Deposit – A typical deposit on the home is about 2% of the purchase price – just enough for the seller to know a buyer is, well, earnest about the offer but not too much to be worried about losing it if failing to follow the contract terms. The real estate pro will guide a buyer on steps to deliver the deposit to escrow, which will hold the money and help explain the escrow process.
Home Financing Options – Amid historically low interest rates (as of this writing), buyers are leaping at the chance to grab a home. Millennial buyers comprise 47% of all mortgage applicants. In addition to financing the home purchase with a mortgage, more buyers are seeking help on their down payment through state programs that offer 0% interest loans and from the bank of “mom & pop.”
Contingencies – Welcome to the world of conditional clauses – better known as contingencies – which are legally binding when certain conditions are met. Buyers should think about how they want to be protected from unexpected developments and still be released from the contract; those expectations can be built into the offer.
Home Inspection – One of the most important steps in the buying process is the independent inspection a buyer purchases just after reaching mutual acceptance. An inspection helps buyers develop a better understanding of the property – water heater, furnace, plumbing, roof, foundation – and provide greater insight into the overall condition of the property. A home inspection contingency can allow buyers to withdraw from a deal. Without the contingency and inspection, a new home may come with unwanted surprises and costly repairs after move-in.
Appraisal Process – An appraisal estimates the market value of the home to protect the lender. Should the valuation come in lower than the offer price, buyers have the option to seek a second appraisal, ask the seller to lower the agreed price or work on a compromise with seller to complete the sale.
Loan Approval and/or Funds Transfer – The buyer’s lender has signed off on the loan and is shipping documentation to escrow to help complete the sale. Buyers making all-cash deals should transfer funds by cashier’s check or, more common, through wired funds from a bank – with a major caution flag against fraud.
Title Review & Escrow – While mostly a step for the listing agent and seller to follow, it’s important for the buyer and his/her broker to ensure the title is free and clear of any “clouds” – or liens – that may hinder closing the deal. Title review should be addressed early in the purchase-and-sale process to avoid any last-minute surprises.
Sign & Close – The buyer has the opportunity to visit the home one last time before signing papers – called the final walk-through – and is handed the keys within hours after closing, once all purchase and sale documents are recorded with the county. Congrats….you have your own home!!
One other word of advice: It’s important to have a team of experts available to discuss additional aspects of the buying process. For example, we suggest buyers speak with an accountant, financial planner or tax expert to help understand the full financial picture of your household in preparation to buying a home. Buyers should seek the professional advice of someone in a fiduciary role – and not just a good friend who enjoys solving math problems or someone with financial incentives of his/her own.
For homework, please have a look at the first few chapters of my Buyers Guide and contact me with your questions. I’m here to help.
Class dismissed!