Real Estate Info

HOME BUYING 101

YOU’RE READY TO BUY YOUR FIRST HOME

You’ve saved enough for a down payment, you’ve secured the financing you need, you’ve researched the cities, areas, and neighborhoods to which you’d like to move, and you’ve got a good idea of what’s out there and what to expect. Now it’s just a matter of researching specific homes in your price range, hiring a real estate agent, attending a few open houses, and making a bunch of offers on the homes that strike your fancy or meet most of your criteria, with fingers crossed that the seller accepts your offer and you don’t end up in a bidding war. Right?

Well, not exactly. Many buyers assume they are at the mercy of sellers. After all, the seller is looking for the right buyer, the seller wants to score the best deal, and the seller ultimately determines whether to accept or reject your offer. So, the ball must be in their court, right? 

This write up  provides you with an overview of the entire home-buying process, including the home search, breaking it down into 10 basic steps that you should follow, along with your agent, to get things moving.

Below is the 12-step checklist that will help make the whole process more rewarding and less anxiety provoking. Searching for and purchasing a home is not for the faint of heart, but it is so very worth it! 

THE 12 STEPS OF HOME BUYING:

  • Find Out What You Can Afford
  • Get Pre-Approved for a Loan
  • Create a List of Needs vs. Wants
  • Look at Homes
  • Choose a Location
  • Choose Home Design
  • Hire an Agent
  • Make an Offer
  • Put Money in Escrow
  • Negotiate with the Seller
  • Begin the Closing Process
  • Close the Closing Process

Step 1: Find Out What You Can Afford

This first step is essential before you do anything else in the home-search and home-buying process. If you find out you can’t yet afford a home, or you aren’t ready to sell your home to get to your dream home, then wait until you can. There’s no point in getting your hopes up, stumbling upon the house of your dreams, and finding out you can’t afford it. You have to work within your price range, and not only use that as a general guide, but also as your starting point in going forward.

We talked about this in Chapter 1, when we outlined the financial steps you need to take before starting the journey of purchasing a home, which include improving your credit score, saving for a down payment, researching recent home sales, and determining what you might be able to afford.

So, know your budget! Don’t just think about the overall home sale price; consider the down payment, the monthly mortgage payments, property taxes, homeowners’ association fees, maintenance, and closing costs. Too many buyers — both first-time home buyers as well as second- and third-timers — make the mistake of not factoring in and accounting for all associated expenses in buying a home.

For example, a home might seem affordable to you at first glance, but there are always “hidden” expenses involved, which, if you aren’t prepared for them, could lead you into financial problems.

If you’re not sure where to start, try an online mortgage calculator, which will take various factors into consideration, including your monthly income. It also never hurts to pay a visit to your bank to see what will be affordable for you.

One tip is to make a detailed examination of the housing market to figure out your price range, as well as determine any issues you might have in meeting your basic needs. Do research on items like school districts, crime stats, impending construction, or anything that could increase or decrease the value of a home.

Step 2: Get Pre-Approved for a Loan

The first step mentions visiting your bank to see how much you can afford for a new home. You’ll also need pre-approval for a loan, whether it’s from your own bank, a different bank (perhaps one that specializes in mortgages or is offering a great interest rate), or another mortgage-lending company.

At any rate, the majority of home buyers must contact lenders for mortgage loans because the full cost of a home is generally not within the purview of the typical buyer’s assets.

Be careful here. Some banks are willing to lend larger loans than they know are reasonable, creating financial issues for buyers down the road. Even if you know your budget, and you know what’s affordable for you, you could get “tricked” by a bank or lender into thinking you can afford more than you can. Know your limits. Stay disciplined so you stay on track.

Let’s say you’re counting on selling your home for xx amount of dollars to serve as your down payment for your dream home that’s a bit out of your financial reach, and you don’t have extra in your savings account. What are you going to do if your home doesn’t sell for the amount you expected — or worse, if your home doesn’t sell at all, languishing on the market while you’re forced to pay two mortgages and can’t make ends meet?

You have to be smart about this. While the process of buying a home, whether or not it’s your first, is a major emotional financial investment, you must maintain emotional control and make practical decisions based on your budget and situation.

The best approach? Pre-approval by a proven, experienced, qualified, and reputable mortgage lender with whom you have worked closely and carefully to determine the appropriate budget for a mortgage loan.

Step 3: Create a List of Needs vs. Wants

We described the concept of determining your needs vs. your wants in great detail and at great length in Chapter 4, but nonetheless, this topic is the third step in the overall home-buying process and bears repeating here.

Essentially, you need to determine what is most important to you in a home — the non-negotiables — vs. what you’d like to have in a home — things you might need to let go of. In other words, figure out what you need in your home (think number of bedrooms or bathrooms, yard, garage, basement, etc.) vs. what you want in your home (such as a fenced-in yard, gourmet kitchen, deck, walk-in closet). Then write these items down when you’re shopping for a home. This will eliminate a lot of wasted time and energy looking at homes that don’t meet your criteria, and your budget, and will bring you that much closer to finding the right home for you.

Keep in mind that no home is perfect. Be prepared to make some concessions, and remember that your ultimate dream home might be out of reach — for now. Nobody said that your first home has to be your last home!

Step 4: Look at Homes

Now comes both the fun part as well as the tricky part — looking at homes. The fun part is searching and viewing online homes that meet both your budget and criteria, as well as visiting open houses, allowing you to figure out and see for yourself what is and isn’t the right home for you, and then finding it.

You should make sure a thorough search is completed on all the available for-sale homes that fall within your price range and meet all the needs — and at least several of the wants — on the lists you wrote out in the third step.

The tricky part? You need to examine each property’s condition so that you know exactly what it is you’re getting. Who knows what a seller or a listing agent is disclosing to you? Hire a qualified home inspector to inspect all aspects of the home, such as structural and foundational issues, the yard, driveway, and walkway, the quality of water and plumbing systems as well as electrical work, water damage or mold, infestations requiring extermination, as well as doors and windows.

Step 5: Choose a Location

Location, location, location! You probably hear that term in real estate a lot. This term can mean several different things, but here I’m referring to the fact that one of the most important choices someone can make when determining which home to purchase is location.

You’ll need to factor in the area of the city, the neighborhood, the school district, proximity to important amenities, the commute to work, crime statistics, noise, neighbors, parking, traffic, etc. There is plenty to consider when thinking about location.

Don’t forget that every property has its own specifics related to water supply, sanitation, and market access, which can either increase or decrease the value of the property.

Finally, really picture yourself and your family both inside the home and outside it, in the area. Can you see yourselves living there? Do you get a positive vibe, or a negative vibe? These are all things to consider when choosing a location.

Step 6: Choose a Home Design

When you’ve determined such items as price range, needs vs. wants, and location, don’t forget to add home design to the list. I’m not talking about interior design or décor, which are all things that can be modified, upgraded, or even completely renovated in time. Rather, I’m talking about the type of home — such as a condo, a townhouse, a bungalow, a two-story home, etc., as well as big-ticket items like a garage, yard, basement (finished or unfinished), dining room, staircases, where the bathrooms are located in relation to the bedrooms, etc. In other words, how was the home architecturally designed?

Perhaps you’re a first-time home buyer who’s single, and you’re looking for a condo in a multi-story building where you’ll meet plenty of people. Or perhaps you and your partner have outgrown your smaller starter home, and you need to upgrade to a larger home with three bedrooms in close proximity to a bathroom, and perhaps on a second story, with the kitchen and living room on the main floor.

Design matters! You need to determine the right type of home design that meets your needs and those of your family, if applicable.

Step 7: Hire an Agent

This step has been mentioned many times throughout this book so far, but it bears repeating. I’ve dedicated an entire chapter to why it’s important to have a professional buyer’s agent working alongside you throughout the entire home-search and home-buying process (Chapter 2).

Sure, there are success stories of buyers who’ve managed to find a good home at a good price without the services of a professional real estate agent — more with veteran buyers than with first-time buyers — but these cases are generally considered the exception rather than the rule. FSBO (For Sale By Owner) situations can work out to your benefit, but it’s highly recommended to avoid the potential risks and pitfalls and hire an agent. Sure, there’s a commission fee involved, but you’ll save yourself a lot of stress, time, and energy with an agent — plus, there’s a good chance your agent will be able to find you an even better home than you were hoping for, at an even better deal, essentially negating the commission fee.

Real estate agents know the ins and out of the housing market and can help you find a home that you would never have found on your own. They can also advise against certain properties that don’t meet your criteria or fail certain home inspections, negotiate on your behalf, and help with the sometimes-complicated closing process.

Note: Don’t just hire the first buyer’s agent whose advertisement you see online or on a bench, or the first one your friend recommended. Do your due diligence to make sure you hire someone experienced, qualified, professional, and knowledgeable.

Step 8: Make an Offer

Once you’ve found the home that you and your agent are sure is the one — it falls within your price range, it’s in the right area and neighborhood, it meets all your needs criteria and maybe most of your wants, it’s been thoroughly inspected and examined — it’s time to make an offer. This is the first step to actually purchasing a specific property.

“Making an offer” essentially means proposing a price to buy the property, and depending on the seller, the listing agent, your own agent, and the current housing market, that proposal could be equal to, less than, or more than the asking price. Further, a “spoken deal” means nothing; many legal requirements and written documents, such as the Residential Purchase Agreement, are involved in officially making an offer on a home, and this is another area where you truly need the expertise of a good real estate agent.

If you choose to work without an agent, especially if you’re a first-time home buyer, you put yourself at risk of making expensive mistakes, or even screwing up the entire deal. Further, keep in mind that real estate laws and requirements can vary from state to state and can change over time. Keep yourself abreast of all new home-buying and housing market information applicable to your area. For second- or third-time home buyers: Don’t assume that because you bought a home in Oregon two years ago that you know the rules or conditions in North Carolina.

The process of actually drawing up an offer on a home in which you’re interested is a bit complicated. Here are a few basic things that are important to know about making an offer. The offer:

  • must conform to local regulations and standards;
  • must mention the amount being offered as well as the actual asking price;
  • must include any terms and conditions on the purchase;
  • must be drafted and signed;
  • must be forwarded to the seller through an agent (your buyer’s agent or the seller’s agent);
  • is not a binding sales contract;
  • is the buyer’s offer on the house based on its current condition and according to the terms and conditions;
  • is subject to change if the seller doesn’t agree with your terms;
  • can be refused if the seller doesn’t accept the amount being offered;
  • becomes void if the seller makes any changes, and becomes a counteroffer, which you can accept, refuse, or change.

In this last instance, which is actually quite common during this process, an offer turns into a counteroffer, which can turn into another counteroffer, and on it goes back and forth until both parties are satisfied, or until the buyer moves on and/or the seller refuses to accept the buyer’s deal. The offer doesn’t actually become a contract until all parties agree to all terms, conditions, and changes in writing.

So, now, what should be included in the drawn-up purchase offer? Here is a list of the most common items:

  • Physical address of the property;
  • Legal description of the property;
  • Price and terms and conditions of the purchase;
  • Seller’s promise to give clear title to buyer;
  • Target closing date;
  • Earnest deposit associated with the offer, as well as method of deposit;
  • Disposition of earnest deposit if deal falls through or fails;
  • Plans for adjusting taxes, fuel, and water bills between buyer/seller;
  • Who will pay for title insurance, land survey, home inspections, etc.;
  • The deed to be granted;
  • State-mandated legal requirements;
  • Attorney review of contract;
  • Any disclosures;
  • The time after which the offer will expire.

Something else to consider is contingencies. Many offers are made contingent upon a factor or event that must be resolved before the offer moves forward. The two most common contingencies are financing and home inspections. For financing, the offer is made contingent on the first-time buyer receiving a sufficient mortgage loan from their bank, or for current homeowners, contingent upon the sale of their home. For home inspections, the offer is made contingent upon a satisfactory home inspection report.

This might seem like a lot to remember and keep in mind when making an offer on a home. That’s because it is. And that’s why you need to hire and work with an experienced real estate agent, so you can gain the upper hand and have the power in the negotiation process, which we’ll discuss in Chapter 10.

Step 9:  SUBMIT DEPOSIT CHEQUE

Part of the home-buying process involves putting money into an escrow or the trust account of the Selling brokerage. The buyer is expected to put money as deposit in order to make the contract binding, which then helps the contract move through and toward closure. 

A lot of people, both buyers and sellers, are confused about what “escrow” is. Essentially, it refers to a time period, not a place. Escrow is the period between 1) the time an offer of purchase is made on a property; and 2) the time when that property’s title is officially transferred from seller to buyer — to the new owner. The escrow process is essential in cases in which the ownership title will be changed. 

The money put into escrow, or the initial deposit amount collected as part of escrow, is considered as “good faith” money or “earnest” money. This money is the payment amount that will follow the home purchase process.

How much money are you, the buyer, supposed to put into escrow? This totally depends on the terms as stipulated in the offer of purchase. 

Still confused? The good news is that an escrow agent who specializes in this period and process should be involved. The agent serves as a third party who enjoys a neutral state between seller and buyer, and helps provide assurance to both parties. The agent is also heavily involved in the actual transaction to ensure the clauses of the offer will be met completely, accurately, and satisfactorily. Further, the escrow agent serves as the manager of the trust account that holds the funds that will cover the value of the transaction.

You might be wondering how long the money that you will deposit remains “in escrow.” The money collected from the buyer is held in escrow until the seller completes his or her obligations, and transfers the title over to the buyer. After this transfer is authorized, verified, and completed, the payment is then remitted to the seller. The “good faith” or “earnest” money is used to cover some of the down payment, the purchase price, and the closing costs.

Step 10: Negotiate with the Seller

The negotiation process in real estate transactions is one of the key steps for both the buyer and the seller. While the seller and listing agent want to sell the home for the reasonably highest amount they can, the buyer and the buyer’s agent want to get the best deal that they can. It can feel like a competition, and this is where negotiations come into play.

For many buyers, this is the toughest and most challenging aspect of purchasing a home, to the point of becoming exhausting. It’s especially difficult to navigate if you don’t have a good buyer’s agent who’s skilled in negotiation tactics. In fact, this is one of the biggest reasons that we recommend hiring a real estate agent — negotiation!

But you should also learn negotiation skills yourself. There are strategies and tactics you can learn and do when you are involved in the home-buying process, and we will discuss these in greater length in Chapter 10. However, we can offer a summary of this aspect in this step in this process for the purposes of this chapter.

You need to plan ahead with your agent on how to make a winning negotiation strategy. For example, once you find the home that meets your needs and falls within your price range, and you intend to make an offer, you should review comparable sales in the area and compare these comps with the prospective house, which will aid in validating the asking price.

Be sure to research and look at at least a handful of properties that are similar to the one on which you have your eyes set. This way, you can take the average price of all the applicable comparable homes, and mention it in your offer. I also recommend that you visit the homes you’re using as comps before deciding on a price for your offer. The conditions of these properties must be taken into consideration. For example, if your prospective home — the target home — has additional features that the comps don’t have, then you need to factor that in for the price quote.

It doesn’t need to be a “secret” that you did some research on comparable homes. In fact, you should actually mention the comps during the negotiation. Why? It will give the seller and the listing agent the impression that you know your stuff. You did your due diligence by doing your homework ahead of time — research — and this will only strengthen your bargaining position. Hiding the fact that you studied comparable sales, or, worse, failing to do this all together, is a mistake that can weaken your bargaining position, mark you as vulnerable or a “target” to be taken advantage of, and cost you in the end.

As discussed in Step 8, a purchase offer can evoke different responses from the seller. First, the seller might accept your offer as is. Second, the seller might counter the offer by demanding changes (making a counteroffer for your review). Third, the seller could reject your offer altogether, coming back with a totally different counter proposal.

How does negotiation play into this? Essentially, knowing how to negotiate, and having a skilled buyer’s agent on your side, will get you the best deal possible. It will also help you to deal with the seller’s response (acceptance, counteroffer, or rejection) strategically and effectively. 

First, know the maximum amount that you are prepared to spend on this home. If you’ve persuaded the seller to come down from the original listing price (based on the comps date you’ve acquired and shared), but now the seller comes back with a counteroffer, you, with the guidance of your agent, will need to determine how much you want the home and how badly you want to go through with the deal. For example, if you persist with your offer price when there’s a high market demand, you risk losing the property to another buyer who’s willing to pay more. This is why it’s important to know your limits and to stick to them, as well as to know how badly you want a particular home.

Another tip for negotiating is to set your emotions aside, no matter how tricky that could be. The process of buying a home, which includes negotiating, is a professional business transaction, so there is no room for personal sentiments. If the price that the seller demands is too high relative to the comparable value of the property, then you need to know when to walk out of the deal, regardless of how painful it might be. In Chapter 12, we will talk more about this scenario, which you need to be prepared to do in some cases. And this requires a detachment of emotions.

Step 11: Begin the Closing Process

After the negotiating is over, and after an offer has been made and accepted, comes the closing process. We will break this down into two steps, starting with beginning the closing process.

First, what is the closing process? Essentially, it involves everything that’s needed to make the home sale and home purchase complete, legal, and finalized. It’s also referred to as settlement or escrow, and is highly automated and computerized. Although nearly pro forma (“done as a matter of form” or “standard”), the closing process is meant to bring all the parties involved to the same platform.

Before the process of closing can begin, the buyer must inspect the property personally. Why? You have to check to make sure that absolutely nothing has changed regarding the property’s condition following the signing of the contract (purchase agreement). If something has changed, then you must notify your agent and go back to the drawing board.

What’s all involved in the closing process? The closing process can seem confusing and complicated, particularly for first-time buyers, but when compared to other aspects of searching for a home and the home-buying process, it’s actually a brief component, essentially involving the completion of the transaction to which all parties have agreed, based on the contract. The main “goal” of the closing process is to transfer the title of the property from former homeowner (seller) to new homeowner (buyer).

It includes the need for title insurance, since there could be errors, unreported claims, or other flaws in the review of the property’s ownership. All usual property transfer taxes must be paid during closing. Further, you need to settle all other claims, including closing costs, legal fees, and adjustments. The closing agent is the party who is responsible for drawing up and finalizing the documentation regarding the home loan.

In the majority of cases, both the buyer and seller, along with their agents, are present in a professional office setting. They’re committed to the completion of all relevant and required paperwork so the property can officially be transferred from seller to buyer — the buyer gets the keys to the home; the seller gets the payment. Then, it’s the closing agent’s responsibility to subtract the funds required to pay existing mortgages and other costs related to the transaction. The closing agent must also ensure the deeds, loan documents, and other papers are prepared, signed, and submitted to the offices that maintain property records.

This seems like a lot, but there really is little work to be done by you, the buyer — provided you have hired your own agent (this is another reason it’s important to have an agent working on your side) — because closing agents take care of all the necessary documentation required by title companies, lawyers, and lenders.

The final result of the closing process is that the buyer obtains the title to the property, the seller receives the payment, the agents receive their commissions, the lenders’ loans are fully documented in the public records, and the state government collects the taxes generated by the transaction. Everyone wins!

Step 12: Finish the Closing Process

After the negotiating is over, and after an offer has been made and accepted, comes the closing process.

First, what is the closing process? Essentially, it involves everything that’s needed to make the home sale and home purchase complete, legal, and finalized. It’s also referred to as settlement or escrow, and is highly automated and computerized. Although nearly pro forma (“done as a matter of form” or “standard”), the closing process is meant to bring all the parties involved to the same platform.

Before the process of closing can begin, the buyer must inspect the property personally. Why? You have to check to make sure that absolutely nothing has changed regarding the property’s condition following the signing of the contract (purchase agreement). If something has changed, then you must notify your agent and go back to the drawing board.

Low home appraisals also occur, and can be deal breakers, just like a poor home inspection report or damage noticed. If your target home’s appraisal is low, the lender will not give you a home loan to purchase it.

To avoid financing becoming an issue as a last-minute deal breaker, please ensure you have been pre-approved for a mortgage, and for the appropriate amount. You might be surprised at how many applications are rejected during the mortgage approval process. Wait to get your finances in order before you apply for a loan, and then wait again to be pre-approved before you go off searching for homes, finding the perfect one, making an offer, etc. — only to have the deal go through because you didn’t end up qualifying for the loan after you’ve gotten yourself emotionally invested in a home you can’t have. Going through the entire process and finalizing everything with the seller and listing agent, but then faltering in the financing department, will stall or probably sink the deal, almost every time.

Title insurance and even more home inspections should also be expected as part of the closing process. The lender will have to ensure the seller fully owns the house. Defaulters will not own the house fully.

It’s important that you keep these potential pitfalls in mind before you get to the closing process. If something goes wrong, but appropriate contingencies are in place, the deal could still be saved. But better to be safe than sorry — so protect yourself and take the right steps to get you where you want to go.

What’s all involved in the closing process? The closing process can seem confusing and complicated, particularly for first-time buyers, but when compared to other aspects of searching for a home and the home-buying process, it’s actually a brief component, essentially involving the completion of the transaction to which all parties have agreed, based on the contract. The main “goal” of the closing process is to transfer the title of the property from former homeowner (seller) to new homeowner (buyer).

It includes the need for title insurance, since there could be errors, unreported claims, or other flaws in the review of the property’s ownership. All usual property transfer taxes must be paid during closing. Further, you need to settle all other claims, including closing costs, legal fees, and adjustments. The closing agent is the party who is responsible for drawing up and finalizing the documentation regarding the home loan.

In the majority of cases, both the buyer and seller, along with their agents, are present in a professional office setting. They’re committed to the completion of all relevant and required paperwork so the property can officially be transferred from seller to buyer — the buyer gets the keys to the home; the seller gets the payment. Then, it’s the closing agent’s responsibility to subtract the funds required to pay existing mortgages and other costs related to the transaction. The closing agent must also ensure the deeds, loan documents, and other papers are prepared, signed, and submitted to the offices that maintain property records.

This seems like a lot, but there really is little work to be done by you, the buyer — provided you have hired your own agent (this is another reason it’s important to have an agent working on your side) — because closing agents take care of all the necessary documentation required by title companies, lawyers, and lenders.

The final result of the closing process is that the buyer obtains the title to the property, the seller receives the payment, the agents receive their commissions, the lenders’ loans are fully documented in the public records, and the state government collects the taxes generated by the transaction. Everyone wins!

But what if not everyone wins? Remember, it’s not over until it’s over — meaning the home isn’t yours until you close, and until the closing process is fully complete.

 

HOW TO GAIN AN ADVANTAGE:

The best way to gain the upper hand in the entire home-buying process is to hire and have a professional and experienced real estate agent working with you through each of the above-mentioned steps, guiding you all along the way throughout this sometimes-complicated process.

By using this guide and following the 12 steps outlined, you will know what you’re getting into ahead of time, and you can do extra research on your own in order to be fully prepared for each step of the process. Purchasing a home, whether it’s your first, second, or third, is a big deal, and you need to treat it that way. Be prepared. These 12 steps will get you started on the right path!

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