Steps Involved in Buying a Home

 

Small home in Visby, Sweden.

The primary steps in buying a home are listed below. 

  •         Getting preapproved for a mortgage;
  •          Finding an experienced Realtor;
  •          Searching for your home;
  •         Conducting due diligence;
  •         Writing an offer;
  •         Negotiating the contract;
  •         Conducting inspections and requesting repairs;
  •         Inspecting the repairs;
  •         Navigating the lender’s appraisal;
  •         Navigating the lender’s “clear to close;”
  •         Final walk-through;
  •         Closing.

 

The Timeframe

The timeframe will largely be dependent upon your level of motivation, the supply of listed homes and the type of financing you wish to obtain. Assuming you are prequalified, have a Realtor, all participants in the contract (i.e., buyer, lender, Realtor, seller, title company) are highly motivated and the transaction is neither a short sale nor a foreclosure, the approximate time to complete the process starting from the Search step, will vary as noted below.

  •        FHA/VA – insured mortgages: 90-120 days;
  •         Conventional/fully conforming (20% down) mortgages: 45-60 days;
  •         Cash deals: 20-30 days.

 

The key aspects of each of these twelve steps will now be summarized.

 

Getting Preapproved:

Before you begin to look for a home, you need to know how much you can afford to spend, which means meeting with a lender and becoming preapproved for a mortgage. A “pre-qualification” is not what you want, since only a pre-approval involves a review of your credit history, along with a thorough analysis of your monthly cash inflows and outflows. Subsequent to the financial meltdown of 2008, all lenders have significantly tightened their credit standards. Here’s a link that discusses the Mortgage Approval Process. Consequently, even if you were pre-approved a year or two ago, don’t automatically assume you can qualify for the same amount today. At a minimum, your lender will require pay stubs, bank statements, tax returns and a complete list of your financial obligations. From the standpoint of the lender, the most appealing candidate will be someone who has had steady employment with only a few employers over a period of years. If you are self employed, be prepared to provide extra documentation concerning your earnings history. In addition, you may be preapproved for a smaller mortgage and/or a higher interest rate, as compared to a peer who isn’t self employed. This is especially true for those just starting out and before a solid track record of success has been established.

 

The Home Search:

Given all of the websites focused on homes for sale, home valuations, etc; it may seem like a simple task to find your dream home. It is actually a bit more involved since much of the data available on-line is inaccurate, obsolete or incomplete. The quickest way to find your next home is to provide your Realtor with a detailed list of what you like and dislike. Be careful to differentiate between what is “required” versus what would be “nice to have” or unimportant. The more you share with your Realtor, the more homes you will see that are truly possibilities as opposed to complete duds. Unless you are designing and building a home and have unlimited funds, be prepared to make some trade-offs, since it is unlikely you will find a home that satisfies all of your needs. In addition, the available supply of listed homes will also impact the length of your search. Currently (Feb. 2017), there is a market shortage of well maintained homes. Consequently, you may have to make some significant compromises and/or get into a bidding war with another buyer, if you can’t wait for the supply to increase and/or be patient for the right one to become available.

 

Conducting Due Diligence:

As promising candidates are found, ask your Realtor for all the information available on each of them. For example, here in Louisville Kentucky, my clients initially receive the information listed below.

  •         Seller’s Disclosure (4 pages);
  •         Lead paint disclosure;
  •         PVA record;
  •         Pricing history of the listing;
  •         Flood plain info from MSD;
  •         Plat map of property.

Once you have narrowed the search down to 2-3 properties, ask the seller for the prior year’s utility costs and the subdivision’s Deed Restrictions or similar. Deed restrictions are very important, as they address matters such as the allowed types and location of fencing and the maximum height of same. It will also identify any limitations on what may and may not be parked in your driveway (e.g., boats, trailers, commercial vehicles, campers, etc.) There also may be limitations on outbuildings, above ground swimming pools, clothes lines, basketball hoops, etc. If your home is located in a new subdivision that isn’t completely “built-out,” pay careful attention to the rules regarding the allowable exterior finishes and the minimum size of any new construction. For example, every new subdivision’s deed restrictions identify the minimum acceptable size, as measured in square feet, for each different style of home (i.e., 1, 1.5 and 2-story homes). This is important, since a community of all brick homes will hold its value better than one that also allows vinyl and other less expensive exterior finishes. Believe it or not, but some subdivisions have very limited or no deed restrictions, which means anything goes and the likely outcome will be detrimental to your resale value in the future.

In addition, before writing an offer, ask your Realtor to conduct a market analysis of one or more of your likely targets. A market analysis will provide an estimate of the current value of the target, via a comparison with three or more sold comparables. A suitable comparable will have the following characteristics (listed in order of importance).

               A. Be the same style of home as the target (e.g., 1-story, 1.5 story, 2-story, bi-level, etc.).

               B. Have a contract pending date within the last 6-9 months.

               C. Have an above ground living space that is within +/- 15% of the target’s.

               D. Be located as close to the target as possible.

               E. Have a similar number of rooms, above grade. Please recognize that bathrooms and laundries should be excluded from the room count.

               F. Have an age of +/- 15 years of the target’s.

               G. Have a lot size that isn’t wildly different from the target’s.

The actual analysis will include adjustments for the differences between the subject and the comparable (“comps”) properties. For example, you will always have differences in square footage, as well as differences in the number of full/half baths, garage sizes, updates, etc. The purpose of the adjustments is to determine what each comp would have sold for if it had the same features as the subject. The end result will be comps with adjusted sale prices that reflect the subject’s above and below grade square footage, number of full and half baths, number of fireplaces, garage size, etc. Your Realtor should employ the proper metrics, when making these adjustments and not depend upon an automated program that is dependent upon a few basic inputs. The metrics that I employ are based upon the Marshall-Swift Residential Cost Handbook. Assuming no major issues are found during this initial due diligence process and you are comfortable with the approximate value suggested by the market analysis, it may be time to write an offer.

 

Writing an Offer & Negotiating a Contract:

As long as you are not in a multiple offer situation and there are other properties that you like almost as much, do not be bashful about making an offer that is below the home’s market value. However, if there is a shortage of likeable properties and/or you feel this property is clearly superior to the others on the market, do not play games by offering a low-ball offer. Low ball offers most often result in angry sellers who think you are trying to rip them off. Negotiations that begin with angry sellers may result in failure or, without question, a less than optimal conclusion. Remember that while you and the seller are in negotiations, if a clearly better offer is received you will most likely lose the property to the other buyer.

 

Here are some other factors to consider in making an offer.

1. Who is the seller (e.g., a homeowner, an investor, a realtor, trustee, executor/executrix, etc.)?

2. How long has it been on the market and have any prior offers been accepted, but fell through?

3. How much non-cosmetic work does the home require, if any?

4. Does the Seller Disclosure of Property Condition reveal the ages of the roof, HVAC system and provide other pertinent details? If not, why not?

4. Is the seller offering a 1-year home warranty? If so, you might want to review the warranty’s exclusions and other limitations.

5. What did the seller pay for the home and how long ago?

6. What significant improvements, if any, have been made by the current owner?

 

Conducting Inspections & Requesting Repairs:

The inspection period begins once both the buyer and seller have agreed to the terms of a contract and all related documents have been signed and delivered to both parties. Inspections are very important, since it is your opportunity to have an expert(s) examine the home in detail and report the findings, good or bad, back to you. Anything found to be broken or dangerous is included on a document called the “Request for Repairs” and given to the seller to address. The seller will then review the list and determine which items he will agree to repair prior to the closing. The repair list may result in additional negotiations between the buyer and seller, as the seller may choose to not make all of the requested repairs. For example, the seller may offer a cash payment to the buyer, in lieu of making one or more of the repairs. Alternatively, the seller may just flat out refuse to make one or more repairs. The negotiation of the repairs is usually not a battle, but it can become one, if the list includes some unreasonable requests (e.g., change the color of a room, make cosmetic repairs, etc.) or if the contract negotiations left the seller feeling that he gave up too much. Here is a link to a prior post that discusses why it’s important for buyers to pay for an inspection(s). It also addresses the request for repairs.

 

Inspecting the Repairs:

Once the repairs are completed by the seller, the buyer, his agent and possibly the buyer’s inspector should return to the property to ensure the repairs have been made. The seller should also be willing to provide the buyer with the receipts received from the vendors who performed the repairs. The receipts may also identify if there is a warranty or guarantee of any kind. 

 

Navigating the Lender’s Appraisal:

Prior to the financial meltdown of 2008, it was uncommon for an appraisal to not be equal to or slightly higher than the contract price. Subsequent to the meltdown, the federal government issued many new regulations and requirements under the Dodd-Frank law. Consequently it is no longer uncommon for appraisals to fall below the contract price. One reason is that appraisers may not exclude foreclosure properties when searching for “comparables.” A second reason reflects a change that was made in the appraisal process itself. Prior to the “meltdown,” lenders could choose the appraisal company; however, today, due to new regulations, the lender may neither choose the appraiser nor have any contact with same. In conclusion, lenders appraisals can no longer be assumed to be just another formality with little risk that the appraisal will not confirm the contract price.

 

Navigating the Lender’s “Clear to Close:”

The clear to close notification signifies that the loan has been approved by the underwriter and a date for the closing can be set. This final approval from the underwriting department has become another hurdle fraught with the risk of delays that were rarely encountered prior to just a few years ago. The delays are due to added levels of review to ensure every document has been perfectly executed. The reasons underlying these additional paperwork checks is explained here.

 

(Note: With mortgage interest rates so low, banks have little incentive to retain them in their own portfolios due to the inherent interest rate risk. The risk stems from holding a fixed, low rate mortgage when the expectation is for rates to rise in the not too distant future. When rates begin to rise, the value of such mortgages will fall, just like any bond. Consequently, the banks are selling their mortgages to such federal entities as Fannie Mae and Freddie Mac.)

 

The Final Walk-Through:

Just prior to the closing, the buyer and his/her agent should make a final visit to examine the interior and exterior of the home. The purpose of a final walk-through is to be sure the home wasn’t damaged during the sellers move out and to ensure that all of the fixtures, and any other items that were negotiated to remain with the house, are present. It is one final check to be sure the home is in the condition that existed when you last saw it (e.g., no water in basement, no holes in the walls, no missing fixtures, etc.) and that every repair has been completed.

 

The Closing:

The closing is when the paperwork gets signed and you become the legal owner of the home. There will be documents for both the seller and buyer to sign; however, the vast majority of the signing will be done by the buyer (e.g., mortgage note, etc.). One such document is called the Settlement Statement or the “HUD-1” form. This document shows all of the transaction’s cash flows. There will be two columns of numbers: One column for the buyer and one for the seller. The buyer’s column will begin with the contract price, identify the sources of funds being used to finance the transaction, and end with the amount, if any, the buyer needs to bring to the closing. Those funds must be certified funds and are often a cashier’s check. That check is usually made out to the firm conducting the closing. The seller’s column also begins with the contract price, identifies the seller’s settlement charges (e.g., real estate broker commissions, title costs, etc.), the amount of any mortgage(s) payoff and finally the net proceeds, if any, to be received. Obviously the deed will also need to be signed by both the buyer and seller. Assuming the contract calls for the keys to be exchanged at the closing, after all the documents are signed and the checks presented, the buyer receives the keys, garage door openers, etc. Congratulations! You are now the owner of a new home.

Please feel free to share your experiences or add other issues that you found important!

@homeslouky

Photo courtesy of Flickr.com and Edgygrrrl’s Photostream