This article is intended to be a primer on buying your new home. It does NOT include all the information you need to know. Do your homework. There is a lot of information readily available from a HUD certified housing counselor, on the internet and from real estate professionals.
DOING RESEARCH ABOUT YOUR HOME PURCHASE
- If you are thinking of buying a house in the next year or so, pull your credit report today. You want to find out what your credit score is so you have any idea of what your interest rate range will be. This can have a big impact on how much house you can buy.
- You also want to see if there are any old issues on your credit report that you may want to resolve to help up your credit score.
- Talk to a couple mortgage brokers to get an understanding of the types of documentation you’ll need to gather and amounts of down payment money you may need
- Get a mortgage pre-approval letter from your lender, NOT just a pre-qualification letter. Having a pre-approval letter can be very helpful when making an offer on a house
- Don’t go buy a new car until after you get a mortgage
- Pay down or off credit cards as much as possible
- Save up 3 pots of money for your home purchase:
- Your down payment
- Your post purchase contingency fund – this would include money for a new hot water tank because the old one died a week after closing, etc.
- Your new house move-in fund – this would include money for new curtains, new garbage cans, a new bed, a new couch, etc.
- Having the two latter pots of money to whatever extent will help you not rack up a bunch of credit card debt after buying your new home
- Make a list of your must haves, would really like and deal killer items so that you can try to stay a bit more objective. Buying a house is a very subjective process. Having a list can help keep you from making a poor decision based on appearances.
- Don’t just do internet searches for houses. Drive around a neighborhood and see if it works for you. Is it close to shopping, getting to work, is there a dry cleaner nearby, how is the congestion, how are the noise levels, is there a park nearby to take the dog to? A great house in a location that doesn’t work for your needs may not be a great house for you.
- Work with a real estate agent that is familiar with the area and types of houses you are interested in. Working with an agent that normally works in the City when you are looking for a house in the suburbs isn’t necessarily a bad idea. However, agents who work in a particular area or type of housing can be more informed about potential houses in an area ahead of time.
- Work with a real estate agent you are comfortable talking with and that understands your needs.
CHOOSING A HOME
Everyone would like to buy a bigger better house in a nicer neighborhood. What we would really like doesn’t always fit our wallets. With that in mind it is important to find a house that fits your family, fits your wallet, you feel comfortable with and that you can see as your ‘Home’; not just a house you bought because its what you could afford.
There a lot of house styles and types. It can be helpful to keep an open mind and look at house types that you don’t necessarily think you would want. You may only want a Bungalow but looking at a Ranch house may help give you a better perspective of options. I can’t count how many times a buyer has told me they thought they would never by ‘a house like this’ but when they looked at it just by chance or due to their agents recommendation they fell in love with it.
WHETHER OR NOT TO BUY A PARTICULAR HOUSE
A home inspection is not meant to tell you whether or not you should buy a particular house. The information that a home inspection provides is intended to inform you about whether or not the house is feasible for you based on house conditions and your situation.
The house may look great but it may have costly deterioration issues the next owner will have to deal with. Part of buying a house that works for you is assessing its post purchase costs.
Just because a house is in overall good condition doesn’t mean you can’t try to negotiate on the few bad issues that the house has. Remember how much you can negotiate depends on the details of the deal. Just as much as you want to buy the house the Seller wants to sell it. How feasible it is to negotiate a particular deal is something to discuss with your real estate agent.
Just because a house is in poor condition and will need a fair amount of post purchase investment for repairs doesn’t mean it’s a house that you shouldn’t necessarily buy. Let’s say a house is in poor condition and needs a lot of work and the purchase price is right based on conditions. Some buyers may walk from that house because they don’t have resources or time to deal with upgrading the house. For another buyer the house is 5 minutes from their elderly parents that they need to get to regularly and that buyer has the time and money to deal with upgrading the house. The house you think is too outdated to buy may be perfect for that buyer.
- What it comes down to is ‘does the house work for your family needs’. Does it fit your budget, does the location work for getting to work, getting the kids to school, etc.? Little issues can always be dealt with as needed over time. Bigger issues can be planned out and budgeted for.
YOU AND YOUR HOME INSPECTOR
You should always hire a good home inspector to assess conditions at a home you are looking to purchase. The point of a home inspection is to provide you with an understanding of the homes conditions and protect you from what you don’t know. A home inspection is essentially a more personal, hands-on version of going on the internet and doing research about which vacuum cleaner or fridge to buy.
A good home inspection should provide a buyer with 3 essential services:
- A thorough understanding of the homes true condition – this is about looking beyond the fancy new kitchen or shiny bathroom. Is the roof in good condition or ready for replacement; is the porch ok or ready to hit the ground; is the furnace in good condition or very old and ready for replacement?
- An understanding of post-purchase considerations and costs – this would include information about what you may need to plan and budget for. Does the house need a new furnace, a new roof or new back porch? Can some of those costs be pushed out for a bit or are they immediate issues?
- An education about the home – this would include explaining to you things such as how some components you may not be familiar with work, where the water main shut off is, how to change the furnace filter, etc.
Your home inspector is there to provide you with information about the home and educate you as much as possible. The home inspector cannot tell you whether or not to buy a particular home. That is a decision you have to make based on all the information from your inspector, your real estate agent, your attorney and our personal needs
Your home inspector is not qualified to help you negotiate your deal. That’s not his or her profession, that’s not what you hired them for and they don’t know anything about the deal to provide that kind of advice. You need to discuss negotiations with your real estate agent and attorney.
It is also important to understand what a home inspection is NOT. A home inspection is not intended to be a hammer to hold over a Seller to re-negotiate the deal. Granted based on the findings of a thorough home inspection, re-negotiating the deal may be a reasonable and realistic option but that is not the intent of an inspection. As mentioned, the home inspection is a service to educate you about the home.
HIRE AN EXPERIENCED REAL ESTATE ATTORNEY
Having a good attorney to review documents related to your purchase contract and/or related agreements is highly recommended. If you are going to try to save money on something during the home buying process this isn’t it.
The common practice is for a homebuyer to hire an attorney ‘for the closing’. In that situation the attorney typically reviews all the documents to make sure no odd stipulations or changes have been slipped in and that the agreements follow local standards and applicable laws. The attorney would also typically explain what you are signing, answer any questions or make recommendations about changes. In standard residential home purchases the documents tend to be fairly standard. In various types of commercial purchases the contracts tend to get more complicated.
- One of the shortcomings during the purchase process is that homebuyers typically don’t have an attorney review the initial purchase offer that you sign. This would be the paperwork that you sign when you meet with your real estate agent and tell them that you want to make an offer on a house. In the past this hasn’t been a major problem. The paperwork has typically been fairly standard for the local market. However, we are starting to see some language that can make it more difficult for a buyer to cancel a deal and get their earnest money back.
- If you planning on making an offer on a house, I urge you to ask your real estate agent for a copy ahead for time for your attorney to review and explain to you. This is even more important if you are looking at buying a new construction home or a Condo. There have been stories about Developers retaining ground rights within new subdivisions for potential future drilling rights. For Condo purchases there have been stories about Developers limiting a buyers rights to recourse.
- Have your attorney review any purchase offer paperwork before you sign it.
NEGOTIATING A REAL ESTATE TRANSACTION
Your real estate agent will be the most experienced person involved in the transaction to help you figure out what is feasible to negotiate. He or she presumably knows the market, knows the comps and has some understanding of the details of the deal. This, however, does not mean that you shouldn’t do some research on your own or ask advice from relatives or colleagues that you think are good at negotiating. It is important to have a good understanding of how to negotiate. Many books have been written about how to negotiate deals.
Information from your real estate agent or your own research can be very helpful in figuring out how to ‘wheel & deal’ so to speak. In the end it comes down to what you are comfortable paying for what you believe you are getting.
- As an example, if it is October and a house has been on the market for 9 months; then negotiating harder may be a viable option. The owners are probably ready to get a sale over with after 9 months of people walking through the house and winter is coming.
- On the other hand, if a house has only been on the market for a week and there are two back up offers, negotiating hard might not work out so well. The Seller may just cancel your deal and move on to the first back up offer hoping the next buyer will be easier to deal with.
WHAT YOU CAN OR CANNOT NEGOTIATE
There tends to be a wide range of opinions on what can or cannot be negotiated as part of a real estate transaction. Some of that information is factual, some of it is personal bias and some of it is based on local standards.
The basic reality is that you can essentially ask for anything you want as part of a deal (within legal and sane limits of course). You could ask for a box of donuts day of closing if you wanted. The Seller might think you are a bit crazy but if it gets their house sold they might go for it. The simple reality is that you have the power of the purse. A Seller can always say no and you can always negotiate something else.
When it comes to questions about how to negotiate a particular real estate purchase you need to talk with your real estate agent.
From a practical standpoint there are some generally accepted practices in terms of what is or isn’t negotiable. The following are based on the Chicagoland market. Other markets may have other standards.
- Normal wear and tear issues are typically not considered negotiable items.
These would include basic drywall nicks, paint scuffs, normal finish wear on hardwood floors, worn carpet, maybe loose hinges on a door, etc. These are the types of issues that are normal in pretty much any house. They are also the types of issues that a homebuyer would presumably recognize prior to making an offer.
- Broken items or misrepresentations are typically considered negotiable items.
Lets say you look at a house and the AC works. You then go back to the house for the home inspection a week later and now the AC isn’t working. Under those circumstances you could typically negotiate with the Seller to fix the AC, replace the AC or give you a credit as part of the deal to resolve the AC issue yourself after closing. It’s a broken vital component.
Sometimes misrepresentations are a relatively innocent mistake on the part of a Seller; sometimes they are overly optimistic assertions by a Seller either party may not fully understand; sometimes it can be hard to believe someone would actually make a particular assertion.
A Seller may represent that the house has a functional 2 car garage. And yes the garage is functional. You can park your cars in it and they’ll probably be fine. However, the roof rafters are rotted and starting to sink; the bottom of the wall studs are rotted from water coming into the garage; and the siding has lots of holes. While the garage is functional it may not exactly be safe or have much in the way of safe remaining life span. Under this scenario you might want to negotiate something on the garage.
One of the common issues for a house being sold by a flipper rehabber is that the listing sheet may say ‘updated plumbing or updated electrical’. When inexperienced homebuyers read ‘updated’ they tend to think ‘new’. That is often not the case though. Updated may mean they put in new plumbing for the new kitchen and bathroom but the rest of the plumbing in the house is 80 years old. When you read ‘updated’ ask for clarification of what exactly that means. How much has or hasn’t been replaced goes to what your capital investment costs may end up being over the short to mid term.
- Issues that may or may not be negotiable based on the deal
This category is all about the market. Are you buying in a hot area with limited house for sale or are you buying in a slow market where houses sit on the market for an extended period? This category is especially important to discuss with your real estate agent.
As previously mentioned, if a house has been on the market for 9 months a Seller may be more willing to negotiate. If you are the first offer on the house and there are 2 back up offers, a Seller has less incentive to negotiate.
So what would you want to try to negotiate under this category? A primary concern comes down to building components that are at or near the end of their useful life span. This tends to be one of the more subjective areas of negotiation. It isn’t generally considered reasonable to ask a Seller for a new furnace credit when the existing furnace is only 5 years old. However, if the furnace is 25 years old then negotiating some sort of credit for a new furnace may be more feasible. How feasible, depends on the deal and advice from your real estate agent. Just because the rest of the house is in really good condition with minimal issues doesn’t mean you can’t negotiate on a defective roof or a rotted back porch. Again how much you can negotiate comes down to the details of the deal.
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