When thinking of buying a house for the first time it may seem like a very difficult task, but today I am going to share with you the steps to buying a house you are supposed to take. A house can be a lifetime investment which means you are not supposed to make rushed decisions
Picking A Realtor/Agent
When you are looking for a Realtor/Agent please don’t go by based on reviews or your wife’s best friend’s cousin. This is quite possibly the biggest investment of your life, don’t throwaway one of the most important aspects of it.
Online reviews are easily manipulated, so if I stole your puppy’s toy, most likely your review isn’t going to make it. Realtor and FB allow you to control your reviews, so unless it’s 5 star or a very glowing 3 star, it’s not staying up there. Especially on FB, those reviews aren’t vetted at all, so people can have their mothers basically say “So and So is excellent to work with, attention to detail, blah blah blah”.
In the same vein, don’t go with someone you happened to know by chance. Look, I understand if your best friend is a Realtor or someone that’s very close to you, but be very careful. It kinda feeds off the theory that it’s an easy job that anyone can do, and as many of you have/will find out, it’s not the case. You want someone that actually knows the job but can also communicate it to you efficiently.
One thing to understand is that, the bestseller in a market doesn’t necessarily indicate the best agent. The biggest part of the job is lead generation, which is advertising, networking, referrals, etc, all of which don’t really have a direct impact on the job once you actually sign. There are agents that spend thousands every month to show up on Zillow or Google searches because that’s the hardest part of the job. It doesn’t necessarily mean anything in terms of quality.
There are also teams that usually branch off from one famous person, so all those reviews you may see for a particular Realtor don’t mean you’ll actually work with them, unless it’s a mega deal. You’ll most likely work with a team member unless it’s a major purchase (think million plus), so know that about teams.
Pick three or four Realtor that you like, and interview them. See which one works best with you. Communication is key, especially as a buyer, because you are constantly changing things.
You have to get along with the person, but it has to match with you. For example, I babble a lot because I feel like explaining everything, which may or may not mesh with you. Some people just want someone to open doors, while some want their hands held through the process.
You interview them, discuss your wants/needs in terms of the agent/client relationship (not the house) and see which one fits best. It may or may not be the most experienced agent or the most put together person, which is why you need this talk.
Please don’t go with the first person that popped up without talking to them. Think of yourself as a business person that is looking for help to expand. You wouldn’t hire the first person that walks in the door, you want to know if the person can help or not.
Take two days, meet with 3-4 or how many more until you find someone that you communicate well with. This is absolutely vital in the process.
It’s also important to note that the agency that you sign does not lock you in to the agent, even if it states exclusive. So if the agent is bad, you can ask to terminate the contract. You would fill out a waiver that states that the houses you saw together won’t be bought by you for X amount of days.
This is to prevent people from looking at homes with one Realtor, only to use a family member at the end once they find a home. There might be a fee involved in breaking the contract, especially if you saw a bunch of homes.
This is the agent that is representing the seller. That agent is bound by their fiduciary duty to the seller, they couldn’t care less about you. If I’m the listing agent, I’m looking out to get the best deal for the seller.
In some places you can be a dual agent where you represent both sides, but it’s rare and almost always one person is getting screwed in that deal.
I’ve seen this a few times. Just because an agent lists the house, you don’t have to work with them to buy that house. It’s not like you can only buy the house through that agent. When an agent lists the house, they put it up on the MLS for everyone to see. The MLS then feeds sites like Zillow.
So if a house is listed by say Keller Williams, it doesn’t mean you can only buy that through Keller Williams, anyone can buy it through any agency, or even without an agent. I thought this was pretty self-explanatory, but I’ve gotten this a ton where people wanted it to be cleared up.
Remember the listing agent is representing the seller, so any information you share with them isn’t protected. So if you’re like “I really like this house, I need to move within 3 weeks”, you can bet the sellers will know and use that as leverage.
Selling Agent (Buyer’s Agent)
This is the one that’s representing you in the deal, has a fiduciary duty to look out for your interests. This is the person you share your concerns like “I really like this house, I need to move within 3 weeks” and then formulate a plan together. This person is your point of contact within the transaction, the one that helps you with everything.
Think of a wedding coordinator but one that’s not just centered around the bride. That is why you have to communicate well with this person, because you are going to be in consistent contact with them throughout the process.
So when the listing agent (seller’s agent) agrees to list the house, they have a commission agreement with the seller. So it’ll be like say “6% of purchase price as commission” to the listing agent. Then that agent turns around and offers (usually half but obviously could be different) half to an agent that bring them the deal from the MLS. So it’ll be like “Buyer’s agent to get 3%”. So each agent keeps 3% in this scenario (no set numbers just hypothetical).
Here’s the rub, the buyer doesn’t impact this. There is no section on the Purchase Sale Agreement contract that deals with the commission. When are my client and our contract offer is accepted, there is a separate contract that I send directly to the seller’s agent agreeing on the commission. It doesn’t have signatures or releases for the buyer.
In this scenario, the seller is paying for the buyer’s agent’s (your agent) commission because it’s coming out of that 6% they already agreed upon.
When you first sign with the buyer’s agent, you sign an agency contract where you outline what you want. Essentially, it just means that person is your agent but there is a section that mentions the commission percentage.
So you write 3% commission, but the seller is only offering 2.5%? This is where you can pay the .5% yourself or if it’s not a laborious deal, the agent might just waive it. This is again, where you work with the person that you get along with the best will help you out.
Back in the day, if you wanted to buy a home, you met up with an agent, described your needs, and they faxed you a bunch of houses that fit the criteria. You then picked what you liked, and saw the house with the agent driving you around.
That’s not the case anymore. Sites like Trulia, Zillow and others get their feed directly from the MLS. You have your own filters, and you can see the pictures and narrow down the choices. It’s not the job to sift through homes to find the perfect ones for you.
So when you see Love it/List it and the agent randomly takes them to a home, that’s not real life, that’s TV. You wouldn’t randomly go to a house without knowing much information about it, but it’s presented that way because the real target audience is you watching the show, therefore to create a similar effect you “find out” about the house together.
It’s to build a connection with the buyer so you can relate to them. This is also why people think the job is easier because “they are doing the home search part” but that’s the easiest part of the job. Heck, sometimes when I’m bored, I’ll browse homes myself to see them.
Nowadays, Agents don’t usually drive you around (especially in Covid times) because it’s easier to meet up somewhere and then drive separate ways, than meet at point A, then go to B and C together, then come back to point A again. It’s much easier to meet up at point B, then drive to C. You don’t really need to go to the office to sign an offer, almost everything is done online.
To understand your leverage, you need to understand the market. You’ll hear terms like “hot market/seller’s market, etc” but need to translate that into your situation. Things you should know.
LP/SP – List price to Sale price. Essentially, what are people asking for and what are they actually getting. In a seller’s market that is hot, you will see stats above 100% sometimes, which means that on average people are getting more than what they are asking for, or a red-hot seller’s market. When you do this, you also narrow down the field in your price range. So for a 350K offer, LS/SP for the 300-400K range. It doesn’t help you if the $5 million home only got $4 million.
DOM: Days on Market is pretty simple, how many days has it been on the market. This indicates if a home is priced right or if it’s overpriced. Or if there is something wrong with it. The longer it’s on the market, the more curious you should be as to why.
Tip: If a house goes under contract, and then appears back on the market within 10-15 days, make sure you do not waive the inspection contingency. The inspection is usually the first thing that happens after a contract is signed, and usually has X amount of days for it happen, and then Y days (depending on state) for a repair proposal to be accepted/denied. If they don’t agree, contract falls through, house comes back on the market.
Price per sq ft: This usually indicates the size of the house you can generally afford in an area. For example, I can get a bigger home in Nashville for 500K than Beverley Hills for 500K. You want to know the average of an area, multiply your desired sq ft range to get a basic idea.
Know the builders, especially in new construction sites. Sometimes you will see a home that is perfect for your needs, under your budget in a desired area. Check into the builders because many companies have a cheap version of their construction company. Think Chevy-GMC-Cadillac and know which one is the builder for the house you are looking at. Your agent could help.
Commute: You want to know how long it takes for you to commute to a potential home. I’m not sure how post-Covid it impacts real estate, but this was extremely important before. You can go to Google maps, put in the address of work and potential home and pick the option to see the average times when you leave at say 5 in the morning on a Friday. Be careful now to go back to pre-Covid dates because there’s less traffic now, and it may not be the same time in the future.
You will need these things to help you with the search, albeit there are more factors involved based on individual circumstances.
Agent Disclosure: There are certain things the agent can’t really tell you because it’s against federal laws or there is a liability issue.
Neighborhood: An Agent can not say this is a great neighborhood or this is a bad neighborhood because then it falls under steering. An agent can direct you to websites that rank the place, crime stats, census data, etc, but can’t make you go one way or another. So if you ask something like “Hey, is this a good place to raise my family?” Expect a very non-involved answer.
Financial Advice: Agents aren’t really allowed to give you financial advice, but rather direct you to a lender or financial adviser. So if you ask something like “How much down payment should I put down?” Expect an answer that leads you to a lender or basic information like XYZ loans require 3.5%
Schools: Same thing with neighborhoods, mainly because people sue based on recommendations. You can get plenty of sites that rank schools and all that information, but Agents can’t tell you if this school is great or if you’ll be lucky your kids can tie their shoes at graduation.
Home Inspection: Agents can’t act as an inspector, but rather point things out to you, that need to be asked at inspection. “Oh this could be a sign of water damage” rather than “Yup, that’s water damage”. It’s semantics but it’s the world where coffee cups need to be labeled as hot.
One of the first things you should do with an agent is go over the contract. Yes, it’s long and it’s boring as heck. You want to know what each section means in a contract, before you write it. It’s not just the price that you should care about.
Price: Obviously self-explanatory.
What’s included: This is where you have to get in writing what is included with the offer. Part of the contract outlines what is generally included, which should be anything bolted in or attached. So the stove, a built in microwave, dishwasher but not the refrigerator, or the flat screen TV. The mount to the TV might be included. So you want to know what is generally included in your market. Then you add anything else that you want included in the home, say that sofa they had or the washer/dryer.
What’s you want removed: Maybe they have some junk in the backyard, you can specify that it’d be removed, or anything else you want to make sure the seller doesn’t leave behind.
Leased Items: You want to let them know that you either want a leased item or not. You usually want to avoid this, especially in cases like say a dish antenna or solar panels, because then you are taking over the lease from the seller, and you aren’t sure of the costs associated with it.
Earnest Money: This is essentially a deposit that you give to escrow to show you are negotiating in good faith. Usually about 1-2% of offer price, but that differs from market to market. The money is held until something happens with the contract, either executed at closing or terminated beforehand (with the distribution based on termination instructions). So if the contract goes through, you retain the money because it’s just added to down payment or closing costs. If it doesn’t, then it’s based on contingencies if you get it back or not.
Contingencies: Know what are some of the contingencies that are available to you in the offer, and what can also be added. Not everything that you may want would be written in the pre-drafted contract, but you can add them via addendum before sending in the contract.
First of all, a contingency is basically “if X happens, Y can happen, if X doesn’t happen, I retain the right for Y to happen, or Z to happen”
Financial Contingency: Essentially, you are saying that I need to qualify for X amount of financing for this deal. Always check this unless you are buying full cash offer. Otherwise, you are saying that if I can’t get financing, I can still afford this home. So if you lose your job in the middle of it, and can’t get a mortgage, you will lose that earnest money for sure, and risk possible litigation to perform (basically fulfill the contract). When do have this and you can’t get financing to the percentage, you can use it to get your earnest money back.
Appraisal Contingency: This essentially means that the offer is contingent on the appraisal matching or exceeding the offer price. The bank will fund the mortgage for the lower of appraisal price or market price (the one the house will sell for).
So if you offer 500K with 10% down and appraisal comes in at 450K, the mortgage only goes to 450K. So your 50K down payment comes in at 11%, but you are on the hook to pay that extra 50K out-of-pocket and it doesn’t go anywhere. You don’t get equity out of it because the mortgage is only for 450K and that’s what they deem the house is worth.
Tip: In hot markets, sellers sometimes won’t accept appraisal contingencies because they know the house won’t appraise. Buyers will offer a higher price to start, get the appraisal and see it’s lower, and negotiate the price down based on it.
Inspection Contingency: IMO, the most important one in the contract, as this states you have the right to have an inspection on the house. I will never recommend anyone waive this unless they have money to blow. You get a certain amount of days to conduct an inspection (state specific), and your inspection must be done in that time.
When don’t conduct the inspection in that period, and send in a repair proposal, the seller isn’t obligated to fix anything because you missed your window. You conduct your inspection, get the inspection report, and then ask for repairs. You don’t send over the entire report, but rather just the aspects that you want fixed.
You then have a set amount of days (again state specific) to negotiate back and forth. When agree, you write it as an amendment to the contract and move forward. When don’t agree, you have the right to move forward regardless, or choose to walk away with the earnest money. When don’t have this contingency or if you missed your period, and you choose to walk away, then you may not get that earnest money back.
There are plenty of other ones that you can google : Home Sale Contingency, Title, Kick Out, etc.
Escalation Clause: You can put an escalation clause on your offer by saying I offer 300K but will escalate to say 340K if there are other offers.
Tip: Most likely you are pretty much going to pay the top of that escalation clause. You are basically telling the seller that you are willing to pay up to X amount if someone else makes an offer close by. Agents are supposed to provide proof of an offer, but there’s nothing preventing a cousin of the seller making an offer for 339K. It’s not ethical, but when it comes to money, people tend to bend the rules, so be careful.
You’ll need to understand all of this to make an educated offer. If it’s rejected, rinse and repeat. If accepted:
Escrow money is the first thing that needs to be sent out. I like to have the title company hold it, but you can specify who holds it in the contract. You will need to get a check from the bank and send it in, and send a copy to the listing agent to show proof that it’s been deposited.
Inspection period, know it from before. Usually the buyer’s agent will either be present or talk to the inspector to get an idea of what the issues are. They don’t follow them around like a toddler but they’ll talk to them to get a better idea of their opinions.
You want to talk to the agent and go through the report and understand what is wrong, what needs to be fixed, etc. Know that houses aren’t perfect so there will always be something wrong.
You then decide which things need to be fixed, send a repair proposal. Once you send that repair proposal, your inspection period is over. You can schedule as many inspections within the stated days at first, but it ends when you send in the proposal. So if you have 10 days for inspection, and 5 days for proposal negotiations and you send it in on the 4th day, you no longer have those 6 days. The inspection period is over and the proposal period starts. At least in TN.
Then based on contingencies, you can walk away or agree to move forward.
Once the inspection resolution period is over, you and your agent are mostly dealing with the mortgage process. The lender will require the contract, the title company will require the contracts, and you are going to hand over credit information to the lender.
It is vital that you don’t make big purchases at this time that will impact your credit score. New cars or furniture or anything that could impact it, because the lender will run your credit right before closing, and if something pops up, they may not proceed. Countless stories of closings not happening because they bought furniture or appliances for the new home right before closing. Wait until closing is funded and then go shopping.
It’s during this time that communication with your agent is vital as well because you are going to be pulled in all kinds of directions. You need to coordinate logistics, like getting your address changed, telling your rental landlord, work, mail forwarding, etc. Most likely your agent will have a checklist for you, but you are going to be busy. In the meantime, your agent needs to send contract documents, amendments, to all interested parities (you, seller, their agent, lender, closing company) and keep track of all appointments.
The bank will order an appraisal (as I mentioned before) and they will go with the lower price from the appraisal or the market price (the one you are paying). If the appraisal comes in low, you have the right to negotiate. Your agent can get on the phone with the listing agent and negotiate a middle ground, where the price comes in lower. You do have the right to walk away here (if you have the appraisal contingency) but be warned that the inspection fee and appraisal fee (roughly $1000-1200) will be lost.
You’ll need to pay that again for the next home you go under contract for. However, the seller also is losing a bit because they have to disclose what you provided them in the inspection repair proposal, so if the HVAC is broken, they now have to disclose it. They would also have to go through the process of others seeing the house again and all. Therefore, both sides have some motivation to negotiate here, although don’t expect major concessions in a seller’s market because they can get back up offers pretty quickly.
Pick your closing dates carefully, you don’t want it on a Friday because if a financial institution closes for the day, you are stuck until Monday. Same with holidays. It’s safer to pick a day in the middle of the week and in the morning if possible.
It’s a long process and something that needs very good communication, especially the first time. Make sure you find an agent that can guide you through, and you don’t feel afraid to ask questions. I have this saying, that I don’t want the Assistant Principal feeling when I’m working with someone, dating back to my high school-days. You don’t want to be intimidated by anyone working the field, you want to know that your concerns will be answered. There are no stupid questions, so it’s all about understanding.
I know this is a very long post, but just some thoughts I had. Take it sections by section. Anyway, hope this helps.