Buying Process, An Overview
This is a basic overview of the steps you will go through as a buyer.
*Buyer decides they want to buy a home. If you are currently renting - then congratulations on this first step. I shake my head at renters because if you can spend a few hundred dollars more a month, you can start investing in yourself rather than paying for someone else's investment. If you currently own, then congratulations are also in order! You've probably built up enough equity to enable you to move up into a bigger home, a better location, with different amenities, etc. So whatever your current circumstance, here you are. Before you get lost scouring the internet and newspaper for houses you think you can afford, you have a couple of things to square away.
*Get finances in order.This is an understatement. I know we are living in an instant-gratification kind of world, but you owe it to yourself and to your future to really sit down and bang through this at the most meticulous level you can. Why? Just read today's papers about foreclosures, short sales, and REO properties. It is my strong belief that people facing foreclosure today were not educated in financing and were ill-advised on their financing options. So what do I mean about getting your financing in order? Check out my budgeting exercise, which involves categorizing three years worth of itemized bank statements to see where you are spending, where you can honestly shave some of that spending, and how to start saving to get you into your home.
*Get pre-approved by a lender and get a copy of a pre-approval letter. A pre-approval letter serves a few different purposes. First and foremost, it gives you a good idea of what you can afford. KEEP IN MIND! Just because you are approved to a certain limit, doesn't mean that you can truly afford that highest limit. The banks don't keep in mind your spending habits. Please go through my budgeting exercise and apply that to your mortgage/mortgage insurance/taxes/HODs, etc. before you decide what your price range is. This economy is suffering today from people who reached a little too far outside of their budget, and irresponsible lenders who enabled them to obtain financing for a home they truly could not afford. THE SAFEST way to go is with a 30 year fixed, conventional loan. Secondly, a pre-approval letter arms you with a strong offer. Sellers, especially in today's market, are reluctant to accept an offer if financing is not approved. If two offers are on the table with similar terms, and one has a pre-approval letter - that is probably the one that is going to be accepted. Thirdly, in order to get a pre-approval letter, you have to have your credit checked. Ask your lender to give you a copy of your credit report. SCOUR this report for high balances, late payments, incorrect information, anything that made its way to collections, open cards that should be closed. The sooner you start making corrections, the higher your score will be when you are ready to lock down a rate for your loan (and this means you can possibly get a better interest rate if your score is boosted). Soon I will post helpful tips on increasing your credit score.
*Find a REALTOR. If you are wondering "How hard can it be?", ask any buyer that has been through the process and they can attest that real estate transactions can be stressful and complicated. Real estate agents are here to alleviate some of that stress by guiding you through the process, analyzing contracts and negotiating terms for you, and ensuring that your best interests are served. These are not just things that we "like" to do. Real estate agents are boung by law to fiduciary representation. Beyond just a real estate agent, you should seek out a supportive REALTOR (different than just a real estate agent) to handhold you through the process. REALTORs are further bound by a code of ethics and can be fined and penalized for not upholding them. I especially urge buyers to contact an agent if they are working in a "for sale by owner" situation, as unfortunately sometimes it takes an agent to keep things moving in a timely and honest manner. In most cases, the seller pays for the agent's commission, so you are really doing yourself a disservice if you do not find an agent to represent you.
*Complete a Wants/Needs Analysis. A wants/needs analysis is a checklist of what you MUST have in your new home and what you would REALLY LIKE to have in your new home. Almost no home will have EVERYTHING you desire. Your real estate agent should offer you buyer counseling where they interview you to find out what your wants and needs are. They should keep a copy of this list and give you a copy of this list. You will be surprised how often you use it to keep yourself in check. For instance, my parents are retiring and want a rambler so they don't have to worry about stairs. I don't know how many times my mom emailed properties to me of 3-story homes that she wanted to see. As her agent, it is my responsibility to say "Remember when you said this - is this still important to you?". It is especially important in today's market when inventory is plentiful. A good real estate agent will conduct this analysis, then set a date to tour a bunch of homes and observe how you respond to these homes, THEN going forward they will preview homes on your behalf and not even bother taking you to properties they know you will not like. Taking the time to tell your agent what you must have will save you countless hours (and gas!) touring properties that look like they meet the criteria online, but don't actually meet them in person.
*Market/Neighborhood Rersearch. Get to know the area you might be living in. I personally advise my clients to stop at the neighborhood grocery store and gas station and hang out for a few minutes to make observations. Do you feel comfortable in this environment? These are your neighbors. What about the employees? Does it feel "like home"? This is what I call a "field study" :) Market and Neighborhood research that your agent can provide for you are statistics on the area, on the school district, anything that can be found in the public record. We can compile information on businesses, utility companies, history of the city, and possibly even the home that you are interested in. More importantly, we do what is commonly called a "Comparative Market Analysis" or CMA. Also known as "comps". This analysis will tell you what the asking price is for homes in the area that meet your criteria, as well as how long it usually takes for homes in the area to sell, as well as what are the homes ACTUALLY selling for in the area? What is the sales/square foot? This information is necessary negotiating tool. It will help you devise your offer in numerous ways beyond just the price you are willing to purchase the home for.
*Home Search. Start online. At John L. Scott, we can set you up on Property Tracker. This is a semi-hands off approach where emails are automatically delivered to you of new listings that match your search criteria. Your John L. Scott agent will get a copy of the emails you are receiving so you can easily reference the listing if you find it interesting. On top of Property Trackers, agents that subscribe to the NWMLS also have the opportunity to set you up to receive new listings that come onto the MLS. The only difference between these two are that the MLS can be very specific and detailed (i.e., "I only want a home with a master bedroom on the main floor and an attached 2-car garage") versus the John L. Scott tool is a little more broad (i.e., "I know I want to live in Issaquah in a 4 bedroom home with at least 2 bathrooms and at least 2000 square feet"). You can also look for FSBO (for sale by owner) properties via Craigslist, Zillow or Trulia, but just be sure you find representation if you go that route as most owners of these properties aren't there to serve your best interest, but rather to serve theirs (by saving dollars either in commission or repair, which normally equates to either inflated prices or hidden costs to the buyer at the end of the day). The paper will most likely be a small representation of everything you will find on an online search engine like John L. Scott.com. When you finally are able to go on a home tour, be sure to be very loud and candid with your remarks to your agent. A good agent will listen to- and observe- your reactions to the homes you see and use this information to further weed out undesirable properties in the future. When you go on your tour, take a pen/highlighter and take notes about each home on the back of the property flyer so you can remember everything that you liked and disliked about the home. I provide my client with a binder and copies of all the properties we will be touring, with my own notes added to each property. You will be amazed how quickly you forget what properties you have seen, haven't seen, what you liked and didn't like about them.
*Submit an Offer on Desired Home. This is the first negotiating piece of the process. Your agent will help you determine an offer that can be much more beneficial to you than a low asking price. I like to make it clear to all of my clients that negotiating the lowest possible price may not exactly be the best route. The most important thing to remember is that this property is going to hopefully become YOUR property, and your property is your "best comp". By lowering the property price, you are essentially lowering the property value for that home and your neighbors' homes! So it is in your best interest to get the home at a FAIR market price. Not only that, but a calculation to estimate the difference in mortgage payments that I like to use is: for every $1,000 you shave off the asking price, you are only saving approximatey $7.00/month on your monthly mortgage payment. So say you want $10,000 off the asking price. Is $70/month really worth the risk of a seller not accepting your offer? That $10,000 you are saving is spread over the life of your loan. More than likely, you will not be staying in your home for the life of the loan. If you keep the asking price as is, you spend $70 more than you wanted per month, but the seller now doesn't have to think of losing $10,000 all at once out of their pocket. Think of other ways you can get your money's worth (Maybe instead of $10K off the asking price, you ask the seller to pay for closing costs or part of the closing costs; or you ask for a carpet allowance or other allowance to repair the home; or you ask that the seller leave behind a personal item such as appliances or window coverings that were not offered as items that would stay with the property when it sold; etc).
*Negotiate with sellers. Unless you made a full price offer with cash financing, you may likely see a counteroffer come back from the seller. They will have looked at your terms and revised the terms, creating a new offer. Your old offer is void. Make sure there are no changes to your financing or inspection contingencies, and triple check which terms they have not signed off on or made changes to. You can relist terms from your original offer if they are important to you, or if the sellers new terms are acceptable, you can sign off them. Once all terms are signed off on by both parties, you have reached mutual acceptance. Be sure of the terms of which you are making your offer. Are there any contingencies? Financing contingencies say the contract is only valid if you are able to get the terms you listed for financing. Inspection contingencies say the contract is only valid if the home passes inspection or all repairs are made that come off the home inspection. Home sale contingencies say the contract is only valid if you can sell the home you are currently living in (assuming the profits made from that home are needed for the purchase of this one). POS review contingencies and CC&R contingencies enable you to decide whether you agree with the terms set forth in the association's Public Offering Statement or rules and restrictions of a Home Owner's Assocation (for instance, you own a Great Dane and the condominium complex only allows dogs up to 25 pounds). Neighborhood Review contingencies allow you to check out your neighborhood and ensure it is a desirable neighborhood for you. All of these contingencies allow you to make sure that you really want the property you are going to be living in and under conditions that are acceptable for you. If a contingency is not satisfied, you can get out of your agreement. Needless to say, the more contingencies you have, the less desirable your offer becomes to the seller.
*Mutual Acceptance. Mutual acceptance means you are now in a binding contract. If you wrote contingencies in your offer, and they are not satisfied, you will be able to get out of your contract without monetary loss or lawsuit. Monetary loss will usually be part or all of your earnest money or could be a lawsuit if the contract was breached at a loss to the seller, either agent, or other third party involved in the contract.
*Home Inspection. A home inspection is usually paid for by the buyer. If you do not know of a great home inspection service, your agent surely does. Your agent should be present during the home inspection taking notes diligently on what the inspector is reporting. These notes will be important negotiating tools to the seller as far as repairs that need to be made or monetary compensation if the repairs are not made. If your property has a Home Owner's Assocation, make sure you read all of their meeting minutes carefully so you can address any relevant concerns to the inspector, making sure (s)he checks it out.
*Satisfy Contingencies Once all contingencies are satisfied, it's time to relax and focus on your financing! The next big date is your closing date and you want to make sure you have your financing in order. A good real estate agent will help you coordinate with your loan officer and with escrow to ensure all monies will be available at closing.
*Financing Finalized. When you find the property you love, you should have contacted your loan officer and had them start working on your financing. Please note that a rate given to you on your pre-approval letter and even on Good Faith Estimates, have nothing to do with the rate you will end up with. Rates change daily, even during the day - they are constantly waxing and waning. When you hear "locked in" rate, that means that you are signing off on that rate to be applied to your loan, no matter if it drops 1 point tomorrow or gains 3 the day following that.
*Closing. Closing is your last step. Usually your possession date is also the same day as closing (unless otherwise agreed upon in the terms of your contract. Possession time is usually 9PM PST. If all goes well, you will meet with Escrow and sign off on paperwork. My favorite part of closing is when they show you the amortization schedule of your loan, which tells you if you stay in the home and make payments for the LIFE of the loan, here is how much you will be paying total, including all that interest. You will be shocked and amazed to see a $200K loan turn into $500K before your eyes. It might not be that ridiculous or it might be way more ridiculous, depending on what kind of loan you get. But regardless, it's going to look like WAY MORE than you bargained for!
*Pack/Move! Packing and moving is a pain for some, but I LOVE IT! Why? It's the time you can go through every little knick knack in your house and ask yourself "do I really need this?" "when's the last time I looked at/used this?". You can sell your things, donate them to charity, or take them with you in an organized fashion to your new home. A tip I have learned to know and love is to mark all sides (but the bottom) of a box with a ROOM NAME and a short description of contents in the box. When you pack a moving van or truck with boxes, having this written on ALL sides of a box will help you easily determine what goes where. If you are taking one trip in a big van, pack the small stuff first and the big stuff last. The big stuff (aka furniture) most likely HOLDs and STORES a lot of that little stuff. So get it in place in your new home before you start unpacking your little stuff and creating traffic clogging messes in your new home! See my packing/moving section for more on this.
