2 Seven Steps To Home Ownership

Transcription

!
Seven Steps to
Home Ownership
Home Buying Made Easy
John Cleek, Ph.D.
ii
No part of this book may be reproduced, stored, distributed, transmitted
or utilized in whole or in part in any form by any means, electronic or
mechanical, including photocopying and recording, or stored in a database or retrieval system without the prior written permission by the
copyright holder except in the case of brief quotations embodied in critical articles and reviews unless such copying is expressly permitted by
federal copyright law.
Home Buying Made Easy
Seven Steps to Home Ownership
All Rights Reserved
Copyright © 2010 John E. Cleek and Associates, Inc.
February 2010 edition
Published by John E. Cleek and Associates, Inc.
www.home-buying-made-easy.com
ISBN
Library of Congress Control Number:
John Cleek is a licensed real estate salesperson in Kansas!and in Missouri.!A real
estate broker or agent is qualified to advise on real estate. We do!not!offer legal
advice. If you have any questions concerning the legal sufficiency, legal effect,
insurance, or tax consequences regarding any real estate or other matter, consult
with your attorney, accountant, insurance agent, tax or other appropriate professional.
It should also be noted that laws, regulations, and standard practices are subject
to change. All information contained in these pages was deemed to be accurate at
the time of publication but is not guaranteed. Readers should always seek guidance from qualified professionals regarding the specific details of any real estate
transaction.
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DEDICATION
When I moved to Oklahoma in 1965, I met a young entrepreneur who almost immediately became a trusted friend
whose advice I sought out any time I faced an important
decision. He had the knack of asking questions in such a
way that the answer to your question was obvious. Over
the past 45 years Ralph Mason and I have remained friends
and, from time to time, business associates, even though I
moved to Kansas 35 years ago.
This book would not have been possible were it not for the
enduring friendship, generous spirit, and inspiration of
Ralph Mason. I am pleased to dedicate this book to him as
a symbol of the high esteem I have for him.
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… the definitive guide for all who purchase a home today.
Whether it’s your first or fiftieth you won’t go wrong…. A
“Must Read” for Real Estate agents and brokers! Next step, buy
it for all your prospective customers! It’s a TOTAL WIN!
--Jerry Rossi, Author of the top selling marketing book, “Dog Eat Dog & Vice Versa”
The!most valuable aspect of our house-hunting experience with
John was his ! gentle reminders that we needed to continuously!pare down our!"short" list of potential houses even as we
continued to visit more homes.!John’s willingness to prescreen
houses with!the choosier of the two of us before viewing them
jointly with both husband and wife helped us achieve our goal.
This kept our options to a reasonable number which we could
then evaluate in terms of how they fit our daily lifestyle.
Terry and Marlene Calaway
[When we] decided to buy our first home, we were nervous
and extremely cautious. John was patient and answered all of
our MANY questions. He never pushed and let us ease ourselves into this life changing purchase. … he made buying our
first house an EASY experience. I highly recommend John; he is
a kind person who looks out for your best interests."
Belinda Beals
John was a pleasure to work with and I would give him my
highest recommendation. He is an extremely knowledgeable
person and he provided great recommendations and assistance
in our real estate decision. John stayed in constant communication with us during the whole process of finding a home and it
couldn’t have been a smoother experience. I have purchased
and sold 4 homes to date and John was the best Realtor I have
ever worked with."
Dustin Gentry
Preface
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PREFACE
I have bought and sold my share of homes. I paid too
much for most of them because I did not have an experienced agent helping me. I bought my first home in Kentucky in 1964. I moved to Oklahoma City the following
year and it took 9 months to sell my old Kentucky home. I
simply called the agent whose name was on the sign in the
yard and they told me the price and wrote up my offer.
I didn’t know it at the time but the agent who wrote the
offer was the Seller’s Agent and I was an unrepresented
Buyer. No wonder I paid too much for the houses I
bought. I must be a slow learner. I kept making the same
mistake. Too bad I didn’t read this book before buying
the house in Kentucky. Had I done so, I would have
known it was not the right time for me to buy a home.
“Insanity: Doing the same
thing and expecting a different outcome.”
--Einstein
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Seven Steps To Home Ownership
I began a career in real estate after almost half a century of
experience working with people in roles ranging from the
pastor of a village church in Kentucky to community college president, political campaign manager, management
consultant, university professor and dean, and international business entrepreneur. In some of my previous careers I was taking on challenges for which I had not formally prepared. To me that simply meant that I would not
be limited by doing things the “way we’ve always done
them” since I didn’t know how they had always been
done.
I’m sure my penchant for asking why things were being
done the way they were in real estate had to be a bit of an
irritant to colleagues and associates. They had been successful practitioners of the art of buying and selling real estate while I was off in China attending trade fairs or leading MBA students on an international residency in Singapore or teaching MBA classes to Malaysian students in
Kuala Lumpur. Whether they realized it or not, my questions were not intended to challenge the validity of the
way they were doing things. Rather my questions were
helping me understand the business so I could develop my
own path to success in a new field.
As I have done in other careers I have pursued, I committed myself to learning everything I could about real estate
and how successful agents and brokers did what they did.
I wanted to know what as well as why. I earned designa-
Preface
vii
tions from the Graduate Real Estate Institute (GRI), the
Real Estate Buyers Agent Council, Accredited Buyers Representative (ABR), the Internet Specialist certification (ePRO), and the Short Sales and Foreclosure Resource certification (SFR).
Along the way I became aware of an evolving transformation that will radically change the way real estate
business is conducted in the future. It would be premature to say that the majority of agents or brokers either
agree that radical change is coming or are eager to be a
part of the changing face of real estate. The twin forces
driving the change are the overwhelming impact of technology on everything we do in any aspect of life in the
twenty-first century. Ultimately agents and brokers who
fail to recognize and embrace the emerging technology
will be left behind. The other factor that has accelerated
the pace of change is the global economic free fall that
began to emerge in 2006 and reached a tipping point in
late 2008.
“Change is the
law of life.
Those who
look only to
the past or to
the present are
certain to miss
the future.”
John F. Kennedy
I like the insight that is conveyed by the Chinese phrase
wei ji. This is the Mandarin Chinese pronunciation of the
two characters that together are usually translated as
CRISIS. With only a slight stretch it is possible to say that
the two characters wei and ji can individually be trans- Wei-ji Crisis
lated as danger and opportunity. There is a real sense in Wei danger
which a crisis is a time of both danger and opportunity. I Ji opportunity
have been an optimist all of my life. The glass is always
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half full as far as I am concerned. Regardless of the depth
of the economic crisis which began to be evident in 2006
and has only recently begun to shown signs of bottoming
out, dangerous times produce great opportunities for success if we but find the right strategy for confronting the
dangers.
I was still searching for a clear strategy for identifying prospective buyers, when I began to receive calls from buyers
who had been referred to me and the more I worked with
buyers the more impressed I became with how personally
rewarding it is to hand a family the keys to their new home
and know that you have played a role in helping them find
the right home at a price they could afford. I know that
most veteran agents give priority to obtaining listings and
rely on their listings to produce buyers.
By 2009 the percentage of buyers who use the Internet frequently to search for homes increased to 76% with another
13% using the Internet at least occasionally. It was clear
that if I wanted to find buyer-clients the place to go was
where 90% of them start their search for a home -- the
Internet.
I began giving even higher priority to expanding my web
presence and today the Internet is the leading source of
prospective clients. My timing wasn’t bad either. As I was
sharpening my focus on representing buyers, the market
was rapidly becoming one that favored buyers. Any time
the inventory of available homes exceeds the number of
Preface
homes purchased in a six-month period, the market is considered to be a buyer’s market.
The average inventory for 2006 amounted to a 6.5 month
inventory. For 2007, the average inventory of homes on the
market constituted an 8.9 month supply. By 2008, the average inventory was up to a 10.5 month supply. The peak
came in November of 2008 when the inventory of available
homes reached an 11 month supply. In some markets the
inventory was well above a 12 month supply of homes.
Inventory levels began to fall in December 2008 and remained under 10 months through August 2009 except for
April 2009. and reached a low of only a 7 month inventory
in October 2009. What this means for home buyers is that
with the inventory dropping, prices will become less
negotiable. Thus buyers who have been waiting for the
market to hit bottom may find that they have already
missed the bottom.
The more buyers I represented, the more I was struck by
how little home buyers know about the home buying process. Even repeat buyers often made it clear that they would
like to know more about how to buy a home. Before making a commitment to write this book, I searched the Internet to see what I could find to recommend to buyers to
prepare them for the most important financial decision of
their lives. I found a variety of resources but none that
were sufficient to answer the questions I was hearing from
buyers.
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It was clear that a need existed for a comprehensive home
buyers guide written for consumers. I was fortunate to be
working with a diverse group of buyers who raised good
questions and presented a range of concerns giving me an
opportunity to search for answers for them and add to the
materials I was compiling for the time when this book
would become a reality.
What I was discovering was that by the time buyers came
to me as clients, especially the demographic under 40, they
had already been searching the Internet to see if they could
find an available home that fit their needs. Of greatest concern were those who didn’t know what they didn’t know!
I considered writing a book for Buyer’s Agents. Instead, I
decided to concentrate on the needs of Buyers. One that
would help them in their selection of a buyer’s agent and
help them make the most effective use of their agent in the
process. Therefore, this book is written first for prospective
homebuyers; but also for buyer’s agents who want to do a
better job representing their clients, and finally for real estate educators who may want to recommend it to their clients.
I make no claim that everything in the book is a completely
original idea. I learn from every client and every colleague
with whom I work. I have sought to give credit where
credit is due throughout the book. References are included
at the end of each section of the book. I have not knowingly or intentionally used the work of anyone without at-
Preface
tribution. If any reader recognizes any occasion where it
appears I may have violated my own rules, please let me
know. You, the readers will be the judge of how well I have
succeeded in this effort. I welcome your suggestions for
improving future editions of the book. I always welcome
your questions, and your success stories about ways in
which the book has been useful to you.
My desire is that this book will help you realize the American Dream of home ownership and help you avoid the disaster of seeing your dream become the nightmare of foreclosure!
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Table Of Contents
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TABLE OF CONTENTS
Introduction
1
Step 1: D-I-Y is Not Good Enough!
33
Step 2: How Much House Do You Need?
55
Step 3: It Takes Money to Buy a House?
67
Step 4: Location, Location, Location
91
Step 5: Deal, or No Deal?
115
Step 6: Proceed with Caution
137
Step 7: You Made It!
157
Postscript
169
Acknowledgements
179
Introduction
1
INTRODUCTION
I received a telephone call from Maurice inquiring about
a house I had listed over a year earlier. I was doubtful
this would be the right house for him but I met him and
we made a quick tour so he could make it to work on
time.
Maurice was a young man, close to the same age as my
youngest son. I was very impressed by his sincerity, his
openness and his vulnerability. He was not particularly
impressed with the house which didn’t surprise me. I
assured him that my objective was to help him find the
right house rather than to sell him one that didn’t match
his expectations. As he began to tell me his story I recognized how easily an agent who wanted to make a
quick sale could take advantage of him.
We finished our tour and sat down on the large front
deck to get better acquainted. I asked Maurice to tell me
2
about himself, why he was looking at homes, and how I
might be helpful to him. He was only 22 and I was concerned that his youthful naivete not be exploited. I told
him I would treat him the way I would expect an agent
to treat my own son.
First-time buyers, especially young first-time buyers deserve a buyer’s agent to help them determine if the time
is right for them to buy; how much they can afford to
spend; and if a house is a good buy. What they don’t
need is an agent who is going to encourage them to do
anything that will not be right for them.
Every Buyer
has a story that
is different and
the first thing a
Buyer’s Agent
should do is
listen to their
prospective client’s story.
Maurice’s Story: He and his girl friend since high
school wanted to marry but her father had never
accepted him and opposed the marriage. He had
a good job, had saved his money for a down
payment, was out of debt, and was willing to do
whatever it took to impress his girl friend’s father.
It was late October and he wanted to buy a house
as a surprise Christmas present for his future
wife. A tight fit under ideal conditions.
With my encouragement Maurice included his fiancé in the process even though he had wanted to
surprise her. She was a delightful girl and clearly
as much in love with him as he was with her. We
found a house and closed on Christmas Eve.
Every Buyer has a story that is different and the first
thing a Buyer’s Agent should do is listen to their pro-
Introduction
spective client’s story. I want my clients to know they
can trust me to never do anything that will be contrary
to what is in their best interest. To make good on this
commitment, l must get to know my clients and demonstrate to them that they can trust me.
Most of us are reluctant to share our story, our inner
thoughts, our hopes and dreams, with a stranger. I understand this and I respect my clients right to privacy. I
know that when they understand why it is important
for me to know their story, their reasons for buying a
home, and are ready to trust me to help them make one
of the most important decisions they will ever make
they will share with me what they are comfortable sharing.
This book is written for all the Maurice’s in the world
who are ready to buy a home but need to know how
the system works; where they can find help; how to
spend $100,000 or $250,000 safely and prudently; and
how to protect their investment in the future. This
book is not a substitute for a Buyer’s Agent. It is not a
DIY set of instructions to be followed by the novice
Buyer. The book can help you anticipate what an agent
can do for you. It can alert you to the kinds of questions
you can ask to get better and more practical answers. It
can help you when you visit a home to know what to
look for. My hope is that you will find it useful before,
during, and after you buy a house.
3
4
HOME BUYERS IN THE 21ST CENTURY
If you are a
first-time
Buyer, let prospective
buyer’s agents
know when
you interview
them that you
want to know
what extra
service they offer to first-time
buyers. This
book will provide a rubric by
which you can
judge their responses.
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The National Association of Realtors publishes an annual Profile of Home Buyers and Sellers. The first thing
that caught my eye in the 2009 edition was the increase
in the number of first-time home buyers from 41% in
2008 to 47% in 20092. No doubt the tax credit for firsttime buyers was a factor. If half of all buyers of residential real estate are experiencing the process for the firsttime the role of the Buyer’s Agent must either adapt to
this reality or half of the buyers will receive less service
than they deserve or need. As the first-time homebuyer
share of the market increases, the demand for REALTORS® with the specialized skills needed to represent
the increasingly diverse demographics of the home
buyers of the 21st Century also increases.
The other two primary categories of buyers are the
MoveUps, these are the repeat buyers. This may include
buyers who are entering the market for only the second
time as well as those who may have bought and sold
several homes in the past. The needs of the MoveUps
will vary depending on whether they are current homeowners, are moving to another house in the same
neighborhood or to one in a community or neighborhood that is new to them.
A subset within this category are the downsizers. These
may be the empty-nesters whose children are now gone
and they want the freedom to try or do other things
Introduction
without the constraint of as much house or yard to
maintain. The downsizers may also be approaching retirement and desire to reduce their housing costs or
convert some of their equity to funds they can devote to
other things.
Finally there are the Relocators. This category may involve some who are first time buyers and others who
have owned several homes before. The expectations of
buyers who are motivated by different circumstances or
who have different goals in mind require different types
of service. The Buyer’s Agent who fails to recognize this
and adapt the service they offer to match the needs of
their buyers should not expect their clients to recommend them to their friends and family.
ARE YOU READY TO BUY A HOME?
What does it mean to “own a home”? Typically anyone
who holds title to a home is considered to be a homeowner even if they have zero or negative equity in the
home. By this imprecise definition of home ownership,
the percentage of Americans who own their own home
has been above 60% for the past half century. Before the
flood of foreclosures took its toll the percentage was
generally estimated in the range of 66-68% in 2008. The
implied policy of the nation has been clearly tilted toward buying versus renting for decades. The only significant remaining form of consumer credit interest de-
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ductible for income tax purposes is interest paid on a
home loan.
An additional incentive for home ownership is inclusion of interest on home equity lines of credit (HELOC)
whether the money borrowed is used for the purchase
or improvement of a personal residence. Ironically this
generous interpretation which encouraged homeowners
to use Home Equity Lines of Credit (HELOC) to buy all
sorts of things they otherwise could not afford and/or
indulge themselves beyond their means is among the
contributors to the present mortgage crisis. According to
First American CoreLogic, a real-estate information
company based in Santa Ana, California, “nearly 10.7
million households had negative equity in their homes
in the third quarter [of 2009].”3 The result is that the
percentage of “U.S. Homeowners who owe more on
their mortgages than the properties are worth has
swelled to about 23%, threatening prospects for a sustained housing recovery.”4
If one in four borrowers is underwater on their mortgage, it is probably a stretch to include them as homeowners. Not only do they not have any equity in their
home, they owe more than it is worth. It is estimated
that 5.3 million U.S. households have negative equity
exceeding 20% of their home’s present value. 5 It would
be inaccurate and misleading to imply that the majority
of these homeowners are in a negative equity position
Introduction
due to the combined debt from the first mortgage and
subsequent HELOC. Many of them made down payments as high as 20% and do not have a HELOC yet
they have lost their cash equity and more due to the
bursting of the housing bubble. It is not uncommon in
some markets to find current values less than 50% of the
value at the peak of the housing market only 3 or 4
years ago.
Owning your own home is widely considered the fulfillment of the American Dream. Yet, according to The
Joint Center for Housing Studies of Harvard University,
“In any given year, some 34 million US households
make their homes in rental housing. Like the general
population, renters are highly diverse in demographic
and income terms, as well as in their reasons for residing where they do.”6
The flood of foreclosures and short sales is adequate
evidence that millions of Americans who bought homes
over the past 5 to 10 years might well have investigated
their options a little more carefully before taking on
more than prudence would have dictated. There are
really three questions here instead of one. Buying may
have many advantages over renting and still not be the
right decision for you at this time. Moreover, this may
be a great time for you to buy a home, yet if you make
the wrong decision about how much to spend on a
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home or where you buy, you may still find that you
made a mistake.
I am not implying that all homeowners who are facing a
loss they will regret for years should have known better.
They got caught in the perfect storm when the virtual
collapse of the global financial system and the collapse
of the over-heated housing market occurred at the worst
possible time for them. With the benefit of hindsight
many of those who have lost everything are blaming
themselves for making bad decisions either about
whether to buy, how much they could afford to pay, and
the type of loan they signed. In some cases these homeowners listened to the wrong advisors or perhaps they
refused to take the advice they were given. Even cautious buyers with fixed rate loans have been affected as
well.
TIMING IS EVERYTHING!
Home ownership can be the pinnacle of stability and
self-reliance but the thrill of home ownership can become the agony of foreclosure if the decision is made
lightly or ill-advisedly. Personal circumstances can
change quickly due to loss of job, medical bills, divorce,
or other circumstances. Often I have heard the sad refrain, we should have waited to buy a home; or we
should have bought a less expensive home.
Introduction
My motivation for writing this book is rooted in my desire to do what I can to educate prospective homebuyers
to the reality that home ownership may not be the best
choice for everyone. And some who bought homes during the past dozen years discovered too late that home
ownership was not the right option for them and have
now gone through the painful process of losing their
home to foreclosure or are struggling to make mortgages payments far larger than they anticipated.
Renting is not always chosen because it is the only option available. As the Harvard study notes,
“Many higher-income renters could buy homes but
prefer to rent because they want to maintain a flexible lifestyle, with easy access to work and the amenities of the city. Others rent because they want to take
advantage of the low transactions costs, at least relative to those involved in homeownership. Still others
rent to avoid the risk of a potentially volatile home
purchase market.
For working families with more modest incomes,
rental housing provides a place to live during such
life transitions as a job change or divorce. Renting
also enables households to save to purchase a
home.”7
“For many households, rental housing offers a number of advantages over homeownership. In particu-
9
10
lar, renting can provide more flexibility, greater convenience, and lower costs than buying a home.”8
A quick Internet search will produce dozens of websites
offering you an interactive calculator to weigh the relative advantages and disadvantages of renting or owning. Some will be skewed more toward buying and
some more toward renting by the formulas they use. It’s
best to select a calculator on a site that does not have a
direct in which decision you make.
A March 2009 Kiplinger.com article, Are You Really
Ready to Buy?, addresses some of the short and longer
term pluses and minuses of renting vs buying.9 According to the writer, “In the short run, renting can make
more financial sense than buying, in terms of how much
shelter you can afford for a given price. But the longrange view is different. Over time, rents tend to rise. On
the other hand, if you have a fixed-rate mortgage the
monthly payment of principal and interest stays the
same. This relatively stable cost, combined with price
appreciation, is what makes homeownership financially
attractive in the long run.”10
Among the rewards of homeownership, the Kiplinger
article cited
! The opportunity to leverage the purchasing
power of your money,
! Appreciation in value over time, and
Introduction
! Tax breaks such as interest deductibility.
On the downside, the article cited
! The risks of homeownership including the possible decline in value,
! The possible loss of opportunity to make other
short term investments that might produce a
greater reward,
! The cost of maintaining a home, and
! A reduced level of flexibility in case of a need or
desire to move on short notice.
The decision to buy or rent should reflect a careful
analysis of your personal and family circumstances,
your lifestyle expectations, your financial circumstances
and your emotional health. Peer pressure is never a
valid reason to buy a home. This will most likely be the
largest single financial decision you will ever make. Do
your homework, examine your motives, consider
whether you are ready for the responsibilities and constraints that go with owning a home.
If you decide after careful consideration that this is not
the right time for you to buy a home, you should not
give up permanently on owning a home. Continue to
save your money and work on your credit score and
your time will come. If you decide that this is the right
time to look for a home of your own, you will be able to
proceed with greater confidence if you have worked
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through the steps involved rather than jumping into the
biggest financial decision of your life and hoping nothing happens to cause you to regret your decision.
The good news, especially for first time home buyers, is
that the conditions that favor the buyer are all in place
now and will likely continue to favor buyers for at least
into 2011. Interest rates are low, an abundance of homes
are on the market at record low prices, and sellers are
more willing to negotiate now than at any time in the
recent past.
FOUR DIMENSIONS OF READINESS
The graphic on the left identifies four important dimensions to be considered before you make a
decision to buy a home. The issues are complex and the distinction between being
ready and not being ready may be a close
call. Regardless of the decision you make, it
is important that you be aware of the issues
involved as you move forward.
! Personal Readiness
Renting an apartment may have been the right option when you were single, or married with no children. Rather than spending evenings and weekends
maintaining a home or yard, you had time for social
events and activities and life was relatively simple.
However over time you have come to realize that
Introduction
your priorities are changing and you are ready for a
different life style with room to grow, to play in the
yard, and to be your own landlord. When you make
that decision it is time to talk with a professional who
specializes in helping people find a home suited to
their needs and budget.
One of the things that may have triggered your interest in owning a home is that your friends with whom
you used to spend time are buying homes. Nothing
surprising about this. It’s been happening for a long
time. The only caution is that you make sure you are
ready for the changes home ownership will bring
with it.
How committed are you to the idea of owning your
own home? Take at least a mental inventory of how
you spend your time and your money at present.
What changes would home ownership require? What
about your job? How long have you been on the
same job? Is it a career that you intend to pursue
long-term or is it a job that you will work at until
something better comes along? Is it likely that you
might need to relocate to pursue a more satisfying
job? If so, would owning a home become a burden?
Ask yourself, Why am I buying a home? Because my
friends are doing it? Because I think it will be an investment that will grow over time? Because I want
more room and flexibility than is possible in a rental
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14
home? Have I saved enough for the down payment?
This is not a scorecard where you must achieve a certain score. Rather it is a personal inventory that
should force you to think long and hard rather than
making an impromptu decision.
! Life Style Readiness
Are you prepared to curtail travel or weekend recreation to keep up with the maintenance that goes with
home ownership? If you have been living in a full
maintenance apartment or condo, have you thought
about who is going to mow the grass every week
during the spring, summer, and fall? Or do you have
sufficient discretionary income to hire someone to
handle the maintenance, landscaping, and repairs
that go with owning your own home?
Are you single or have a roommate, partner, or
spouse? Do you like to host loud parties that might
cause problems with neighbors in a subdivision? Do
you have children who are constrained by the absence of a yard or playground? Do you have pets that
need to be outdoors and the only way you can find a
suitable home is to buy? Do you want to have your
own garden, maybe some chickens, and this is out of
the question in a rental home?
Do you travel extensively for business or other purposes? Will your home be unattended for extended
Introduction
periods? If you own a home you are usually responsible for lawn maintenance and security unless you
buy where these amenities are a part of the homeowners association dues. I want to be clear that home
ownership may be the perfect choice for you regardless of life style, family composition, age, gender, etc.
The point here is that it is important to have a good
match between your lifestyle and the type of housing
you buy. Do you like the freedom and relative anonymity that is possible through apartment living?
Are you anxious to put down roots and have neighbors who will share your desire for stability? Life
style may be more of an indicator of the type and location of the home you buy than a reason to buy or
not. Did you grow up in a small town where ‘everybody knew your name’? Or have you always lived in
an urban or suburban location close to shopping, recreation, and entertainment?
Life styles are as varied as anyone can imagine and
everyone has a right to make their own choices as to
lifestyle so long as the choice you make doesn’t interfere with the rights and freedoms of others. Don’t
slide past this threshold question. It could be the key
to future happiness or it could lead to buyer’s remorse. Be honest with yourself about what type of
housing is a good match for you and share this with
your Buyer’s Agent. You should know that your
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Buyer’s Agent is committed to full compliance with
the Fair Housing Act. The key provision of the Fair
Housing Act is as follows:
It shall be unlawful for any person or other entity
whose business includes engaging in residential
real estate-related transactions to discriminate
against any person in making available such a
transaction, or in the terms or conditions of such a
transaction, because of race, color, religion, sex,
handicap, familial status, or national origin. 11
You are always free to tell your agent you want to
look at homes in a specific neighborhood or subdivision, but don’t expect your agent to select homes on
the basis of the concentration of owners who may fall
in one of the above protected classes. Your Agent will
not select homes in a subdivision because of the race
or color of a majority of the home owners. That
would be “steering” and that is both unlawful and
unethical. Keep in mind that it is the diversity of our
communities that enriches the lives of all of us.
! Emotional Readiness
Most people experience stress when they decide to
buy a home.. Experts on stress tell us that buying a
home ranks along side marriage, birth of a child, losing your job, and divorce at the top of the list of the
most stressful experiences in life. When we experience excessive stress—whether from internal worry
Introduction
or external circumstance—a bodily reaction is triggered, called the "fight or flight" response. which is
hard-wired into our brains and represents a genetic
wisdom designed to protect us from bodily harm.
When our fight or flight response is activated, sequences of nerve cell firing occur and chemicals like
adrenaline, noradrenaline and cortisol are released
into our bloodstream causing our body to undergo a
series of very dramatic changes. Our respiratory rate
increases. Blood is shunted away from our digestive
tract and directed into our muscles and limbs, which
require extra energy and fuel for running and fighting. Our pupils dilate. Our awareness intensifies.
Our sight sharpens. Our impulses quicken. Our perception of pain diminishes. We become prepared—physically and psychologically—for fight or
flight.12
By its very design, the fight or flight response leads
us to fight or to flee—both creating immense
amounts of muscle movement and physical exertion.
This physical activity effectively metabolizes the
stress hormones released as a result of the activation
of our fight or flight response. Once the fighting is
over, and the threat—which triggered the response—has been eliminated, our body and mind return
to a state of calm.
17
18
In most cases today, once our fight or flight response
is activated, we cannot flee. We cannot fight. We cannot physically run from our perceived threats. When
we are faced with modern day, saber tooth tigers, we
have to sit in our office and control ourselves. 13 The
impact of stress is even greater when we attempt to
deal with multiple stressors simultaneously.
The point to keep in mind is that it is best to spread
out big decisions. Most healthy adults can handle
most any challenge without an unbearable level of
stress. The decision to buy a home is one about
which you have a high degree of control regarding
timing, cost, location, etc. compared with other
changes over which you may have much less control.
Therefore do
not worry about
tomorrow, for
tomorrow will
worry about itself. Each day
has enough
trouble of its
own. (Matt 6:34)
If there are a number of changes going on in your
life, e.g., you have just begun a new and challenging
job, you recently married, or your favorite uncle recently died of cancer, you might consider working
through the other stressors in your life before you
take on the search for a home. This may mean that it
would be wise to delay buying a home until after
your daughter’s wedding or until you’ve gotten settled into your new job.
You can still work on developing your plans but do it
at a less hectic pace. Concentrate on what you are doing at present until you are emotionally ready for the
next big challenge. No need to worry about what
Introduction
comes next. Do a good job with the present task and
the future tasks can be accomplished in due time.
If you focus on Step One and resist the temptation to
take on subsequent steps before you have finished
the first step, you will find that your stress level is
more manageable. Individuals who borrow trouble
from the future often have trouble coping with the
challenges of today.
Accept that a little buyer’s remorse is inevitable and
will probably pass. If you have fears or concerns, let
your REALTOR® know. She/he can help you
through them. It might surprise you that most people
experience increased stress when facing decisions
that can literally be life-changing. If you plan well
and follow your plan, look forward to the joy of
moving into your new home!
! Are You Financially Ready?
The issue here is not selecting a lender, obtaining a
pre-approval letter, or securing a mortgage to finance
your home. We’ll cover that in Step 3. The issue here
is taking stock of your financial preparedness as a
part of your decision whether buying a home is the
right decision for you at this time.
19
20
! Real Estate Settlement Procedures Act (RESPA)
The Department of Housing and Urban Development has developed programs and consumer protection guidelines that every prospective homeowner should know about. 14 The Real Estate Settlement Procedures Act (RESPA) requires lenders
and mortgage brokers to give you HUD’s Settlement Cost Booklet, Shopping for Your Home
Loan, within three days of applying for a mortgage loan. RESPA is a federal law that helps protect consumers from unfair practices by settlement
service providers during the home-buying and
loan process. You may download a copy of the
booklet at the HUD website at any time. I encourage you to do this sooner rather than later. It will
provide you an excellent reference to assist you as
you consider your readiness to buy a home.
You should assume that you will need cash for a
down payment in an amount ranging from 3% to
20% of the purchase price of a home.15 The remainder
will be the amount you will need to borrow using the
house as collateral. The true cost of the house will
depend in part on the interest rate and terms of the
loan for which you qualify. The best interest rates are
available to buyers prepared to make a down payment of 20% of the value of the home they are buying. Lenders want the Buyer to have some ‘skin’ in
the game. With little or no equity to lose, buyers are
Introduction
more likely to walk and leave the lender with a
house they don’t want.
You will also need cash to cover closing costs16 which
will amount to 3%-5% of the amount of your purchase. It is sometimes possible to roll the closing
costs into the loan depending on the type of loan and
whether the appraisal will cover the increase. How
much you can borrow and the interest rate you will
be charged will depend on something called a Credit
Score.
We’ll talk about this in more detail later but before
you make a decision to continue you do need to
know your current credit score.17 Remember there is
a difference between the Credit Report which you
can obtain free at least once a year and the Credit
Score which you will probably have to pay to receive
in spite of the misleading television ads to the contrary. The most high profile ads I have seen are those
for freecreditreport.com. If you enroll in the 7-day
free trial offered on this site you should be aware of
the terms and conditions of the free trial. Read the
fine print of the Terms and Conditions before going
further. 18
The most highly rated source for credit information
is http://www.myfico.com/. This site has been rated
by Kiplinger’s as the best place to obtain consumer
credit products for the second year In a row. They of-
21
22
fer a 30-day free trial but don’t count on them to
warn you when you 30 days are up.
The higher your credit score the better, but “there is
no single ‘cutoff score’ used by all lenders. However,
you should expect that if your credit score is under
700 you may be approved for a loan but you will not
receive the best interest rate and your loan may be
considerably more expensive.19
Are you prepared to make changes in how you currently spend your money to meet the payments on
your mortgage? Are you ‘maxed out’ on several of
your credit cards already? Are you having trouble
stretching your paycheck to cover all of your current
monthly bills? How much margin do you have for
error? Are you relying on two incomes or one? If one
of the paychecks goes away due to loss of job, illness,
or the need for one of you to stay home with children, could you cover the increased cost of home
ownership?
! How Much Can You Afford to Spend on a House?
Everyone asks for a simple formula to determine
how much they can afford to pay for a home. Some
financial advisors suggest using 21% to 24% of your
monthly income as the maximum amount you can
pay for principal, interest, insurance and taxes. Others will tell you to multiply your gross income by 3
to determine what you can afford to pay for a home.
Introduction
Still others attempt to factor into the formula the
amount of debt your already have. They will suggest
your total monthly debt load including all of your
consumer credit payments including a home mortgage should not exceed 40% to 41%.
There is no shortcut that will fit all situations. There
are only two reliable ways to determine what you
can comfortably afford. One is to prepare a budget
comparing your net after tax income to your
monthly expenses. The difference between your total
expenses and your net income is the maximum you
can consider paying each month for a mortgage
payment.
! Use the HUD “WHAT YOU CAN AFFORD
WORKSHEET”
The worksheet from HUD’s Settlement Cost Booklet
will assist you in calculating your monthly income
and expenses to determine the amount you have left
over every month to pay for housing-related expenses such as your monthly loan payment, property taxes and homeowner’s insurance.
! How much are you paying at present?
Another option is to consider the amount you are
currently paying each month for rent plus renters insurance, HOA dues and other housing related assessments? Is this amount the most you can comfortably pay each month for housing? Don’t play any
23
24
games with yourself because in this game you are
the one who will be the loser if you try to fake it.
Don’t tell yourself that if you buy a house you can
pay more because you will drop your health club
membership, stop going out to dinner, take a less
expensive vacation, spend less on clothing, or drive
the same car longer. You will get some help from the
mortgage interest deduction that isn’t available to
Introduction
renters, but don’t count on that being a huge windfall. And don’t forget about the hidden costs of home
ownership including maintenance, repairs, and lawn
care.
As your Buyer’s Agent I have the obligation to be honest with you about the cost of home ownership. If I encourage you to buy before you are financially ready, or
to buy more than is prudent for you, I know there is a
strong likelihood that in the future you may come to regret your decision. Worst case, you might even lose
your home and any equity you have in it. Buying more
house than you can afford is a serious mistake and I do
not want to be an enabler. Your first home is not likely
to be your last home. Be realistic about what you can afford today, and if you are as financially successful as
you hope to be, I’ll be there to help you buy the bigger,
more expensive home when you are ready.
Don’t try assessing your readiness alone. If you haven’t
already selected a buyer’s agent, now is the time. Don’t
even think of trying to go through the process without
the assistance of a professional. Using a professional
REALTOR® is the smart way to buy a home and if you
have picked the right REALTOR® the odds of it turning
sour in the future are significantly reduced. There will
always be a risk – a risk that your financial circumstances deteriorate, a medical emergency occurs, you
lose your job, but trying to do it by yourself without the
25
26
help of a professional guide escalates the risk beyond
the limits of prudent decision making. Of course it is
important that the REALTOR® you select be the right
one for you and the lender you select be a person of integrity who helps you to select the right type of mortgage.
Hiring a Buyers Agent early in the process is really a nobrainer. First, you select your agent but the Seller will
pay him/her. Second, whether you select an agent to
help you early or late, the cost is the same. The sooner
an agent is involved the more value they will bring to
the process.
BUYING A HOME IN AN UNCERTAIN ECONOMY
By the end of 2006, the real estate market in the U.S. was
heading downward but the angle of incline and rate of
decline were not yet readily apparent in real time. With
nearly 6.5 million homes sold, 2006 could easily have
been considered a banner year except for the fact that
fourth quarter sales were at an annualized rate of only
4.7 million. Moreover, both the mean and median sales
prices in December were 20% below the figures for the
full year.
Little did we know then that these negative trends in
the real estate market were but a small part of the massive economic meltdown that was on the horizon. By
the fall of 2008, a full-blown crisis dominated all news
Introduction
media both in the U.S. and around the world. There is
never a good time for an economic crisis of this magnitude but if one time could be described as worth than
another, this would be it. The presidential election was
in its final weeks and indications were growing stronger
that on election day the United States would have a
president-elect from a different party than the president.
The incumbent lame duck president had limited political capital left with which to broker any kind of response that would have a chance of slowing the rate of
decline in the economy.
It seemed that each day’s bad news dwarfed
the news of the previous day. In the midst of
the economic free-fall the real estate market
was among the hardest hit sectors. By January existing home sales had dipped below an
annual rate of 4.5 million and it seemed that
home prices were falling faster than the MLS
listings could be revised. Suddenly it became
apparent to everyone that thousands of
homeowners were discovering that they
owed more on their mortgage than their
home would bring on the market.
Even more troubling for the residential market was that
millions of homeowners were discovering that the Adjustable Rate Mortgage that brought them such attractive interest rates and monthly payments 3 - 5 years ago,
27
28
were beginning to roll into sharply higher interest rates
and monthly payments they could not afford. The refinancing option they were counting on had also become
an impossible dream. As more home mortgages were
adjusted upward the number of foreclosures began to
flood the market and the overheated market went into
free-fall in some parts of the country. The magnitude of
the mortgage crisis was widely assumed to be much
greater than anything that had hit the real estate market
in recent memory.
By the end of 2009, home sales had begun to recover exceeding an annual rate of over 6 million in October of
2009. While mean and median prices were no longer in
free-fall they did not appear to be showing any sign of a
return to previous levels. The low point was in January
2009 when the median price was only $164,800. Gradual
improvement began in February 2009 and continued
through the spring hitting a high of $182,000 in May.
At the beginning of 2009 the market seems to be drifting
without a clear indication of where it is headed. The
dark cloud over the market continues to be the flood of
foreclosures and short sales that are forcing millions of
families from their homes and depressing the real estate
market for all homeowners who decide to sell their
home. It is hard to envision a robust real estate market
until the flood of foreclosures is abated either through
Introduction
loan modification, voluntary short sales, or direct mortgage aid from the government. 20
Since the mortgage crisis became such a visible symbol
of the condition of the economy, the debate has raged as
to where the blame should be placed. This book is not
the proper venue for resolving this issue. My view is
that regardless of the underlying causes the crisis could
not have reached the magnitude that it has without a
host of co-conspirators or enablers who may not have
even been aware of what was happening. However
anyone who helped a buyer acquire a home and debt
beyond a prudent level for them became a part of the
problem. I include in this category real estate agents,
mortgage loan officers, buyers who took on debt using
exotic mortgage arrangements such as interest only
loans or ARMs with a balloon at the end, and policy
makers who were overzealous in their efforts to assist
high risk borrowers through sub-prime and no-doc
loans.
The lesson to be learned from the collapse of the housing market that began in late 2006 and is only beginning
to move in a positive direction in late 2009, is not that
buying a home is too risky and the prudent course of
action is to remain a renter indefinitely. The lesson to be
learned is that buying a home is not for amateurs. It is
the largest financial decision most families will ever
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30
make and carries with it the opportunity for improving
the quality of life for every member of the family group.
In the pages that follow I have broken the home buying
process into seven steps. In a practical sense some of the
steps and are not linear in nature. They are interactive
and overlapping but they are best understood from a
conceptual viewpoint if we discuss them in a linear
manner.
1 2009 Profile of Home Buyers and Sellers, National Association of Realtors. Specific references re
also cited but it is safe to conclude that all data regarding the characteristics of home buyers
and sellers as well as how today’s buyers and sellers go about finding a home to buy are
drawn from the NAR Profile.
2 2009 Profile of Home Buyers and Sellers, p 16
3 Ruth Simon and James R. Hagerty, One in Four Borrowers Is Underwater, The Wall Street Journal, November 24, 2009.
4 Ibid.
5 Ibid.
6 America’s Rental Housing – Homes for a Diverse Nation. The Joint Center for Housing Studies
of Harvard University, Graduate School of Design, John F. Kennedy School of Government.
2006. p. 1
7 Ibid.
8 Ibid., p 4
9 “Are You Really Ready to Buy?”
http://www.kiplinger.com/basics/archives/2003/03/buying1a.html
10 Ibid.
11 http://www.justice.gov/crt/housing/title8.php
12 Neil F. Neimark, M.D. at www.TheBodySoulConnection.com!
13 Ibid.
14 The HUD website can be accessed at http://www.hud.gov
Introduction
15 There are still some programs available that require only a very small down payment but they
are only available under certain limited conditions. E.G., VA loans may be made at zero down
but only qualified military veterans are eligible. Rural Development loans through the Department of Agriculture are zero down but they are restricted on the basis of income and also
to areas that meet the definition of rural.
16 Closing Costs include items such as the Appraisal, Inspection, home owners insurance, mortgage tax, underwriter fee, points to buy down the interest rate, and private mortgage insurance that is usually required if the down payment is less than 20% of the purchase price.
17 The national distribution of FICO scores is taken from
http://www.myfico.com/crediteducation/creditscores.aspx
18 The terms and conditions read in part: “You will be asked for valid credit card information
when you sign up for the free credit monitoring trial. CIC will verify your credit card information before processing your order. An authorization in the amount of one dollar will be
performed on your credit card, to make sure it is valid and in good standing, but CIC will not
actually bill your card until the free trial period has passed. … Because monitoring with Experian may take 48 hours to begin, we will start your 7-day free trial 48 hours after you enroll. Therefore, you may cancel your trial membership without charge at any time within 9
days of placing your order.”
19 Ibid.
20 On October 15, 2009 RealtyTrac, (www.realtytrac.com), the leading online marketplace for foreclosure properties, … released its U.S. Foreclosure Market Report™ for Q3 2009, which
show[ed] foreclosure filings on 937,840 properties in the third quarter, a 5% increase from the
previous quarter and nearly 23% from Q3 2008.
31
D-I-Y Is Not Good Enough
1
STEP 1: D-I-Y IS
NOT GOOD ENOUGH!
Would you consider filing a lawsuit against anyone without hiring an attorney? You would most likely consult an
attorney to help you decide whether to file a lawsuit. If
you thought you needed surgery you would immediately
seek out the best qualified surgeon you could find and ask
them to handle it.
Why then would you even consider making the biggest financial decision of your life by yourself? Don’t even go
there!
If you delay retaining an agent for fear it will cost you for
an agent’s services, you will not only not save any money,
33
34
you may end up paying more for the house you buy because you won’t know whether the price you are paying is
a good price for the house. Fortunately for you buyer’s
agents don’t work by the hour. Sometimes I wish we did
considering how long it takes when the buyers are unable
to decide what it is they want in a home.
In my own experience I have had 3 or 4 buyers who
wanted to see every home listed in a three county area in
their price range. I know some agents would have dropped
them as a client long before I found them a home. I will
admit that the thought occurred to me a few times.
WHAT BUYERS MOST WANT FROM REAL ESTATE
AGENTS
NAR’s 2009 Profile of Home Buyers and Sellers1 provides
insight into what home buyers want agents to do for them.
Nearly half of the homebuyers said their first priority from
an agent was to help them find the right home. Twenty
nine percent ranked help with negotiation highest. Together these categories accounted for 75% of the homebuyers with the remainder spread among help with paperwork, determining how much comparable homes were
selling for and how much they could afford to spend.
A BUYER’S AGENT JOB DESCRIPTION
I’m not sure which is worse, not hiring a buyer’s agent or
hiring the wrong agent. To improve your chances of se-
lecting the RIGHT Agent, you need a Job Description setting forth skills and personal characteristics you are seeking. I suggest you start with a job description for a buyer’s
agent My suggested job description would look something
like the following:
! Position: Exclusive Buyer’s Agent
! Location: My Town
! Start Date: Immediately
! Compensation: Paid by Seller
! Reports to: Buyer
! Primary duties:
1. Promote the best interests of Buyer with the utmost good faith, loyalty and fidelity;
2. Seek a price and and terms acceptable to Buyer;
3. Accept delivery of and present to Buyer offers and
counteroffers to purchase the property the Buyer
seeks to purchase;
4. Assist Buyer in developing, communicating, negotiating, and presenting offers, counteroffers, and
notices that relate to the offers and the counteroffers until purchase agreement is signed and all
contingencies are satisfied or waived;
5. Disclose to Buyer all adverse material facts
actually known by broker/agent and advise
Buyer to obtain expert advice as to material matters known by broker/agent but the specifics of
which re beyond the broker/agent’s expertise.
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! Qualifications:
1.
2.
3.
4.
5.
6.
7.
Good Personality Fit
A Good Listener
Experienced in representing buyers
Member of National Association of REALTORS®
Hold ABR or GRI certification
Skilled in the use of Appropriate Technology
Available when needed to perform the duties set
forth above
8. Former Clients would use again (At least 4)
9. A good teacher
10.Knows the Territory
• Good Personality Fit – Someone You Like
Personality alone is obviously not adequate. What I am
suggesting is that the chemistry between you and your
agent is very important. Someone you respect and like
working with should be a must have quality.
• A Good Listener
It doesn’t matter whether I like the house you select. My
job is to help you pick a house that suits your needs. No
way I can do that unless I keep quiet and listen to you.
To match your needs with an inventory of homes on the
market, I need to be listening not just to what you are
saying but engage in active listening which requires me
to probe what I hear you saying until I am confident
that I know what you want. Although never described
as a good listener former president Lyndon Johnson
could not have been the master of the Senate unless he
knew what the members wanted. He is quoted as saying, “You can observe a lot by just watchin’.”
When your mother said, Look at me when I’m talking to
you, she was not just asking for respect. She was asking
you to watch her and observe the non verbal signs that
she was very serious about what she was telling you.
When we are touring a home my job is to listen for clues
to how you feel about the house we are touring. And by
watching your body language I can gain greater insight
into the nuances of how you feel about a house. I had a
client who seemed to find something positive about
every house we visited. Yet I learned to distinguish between her desire not to be perceived as negative and
how she really was feeling about a house. I prefer to
look and listen rather than talk while I am watching a
client tour a home.
I am always watching and listening for the Wows that
tell me you may have found a keeper.
• Experienced
I’m not talking about longevity. Experience is what prevents us from making the same mistakes over and over.
Every situation is different in some respects. An agent
who treats every transaction as if it were a clone of the
last one is not learning anything. Your agent may not
have the answer to every situation but you have a right
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38
to expect an agent to know what they don’t know and
to know where to go to obtain an answer.
More important than how long an agent has held a license is how much has an agent learned from experience. What courses have they taken recently?
• Member of the National Association of REALTORS®
It is important that your agent be connected to the network2 of professional colleagues around the country
and learn from the collective experiences of the profession. To be a member of the NAR, an agent must be
committed to the Code of Ethics and Standards of Practice by which the profession is governed. This your
guarantee that your agent is committed to the highest
standards of ethical behavior and practice whether it is
in the REALTOR’S® best interest or not.
• An Accredited Buyer Representative (ABR)
The ABR certification is awarded by the Real Estate
Buyer’s Agent Council which is an affiliate of the National Association of REALTORS®. It is the only Certification of agents who have engaged in specialized training and have experience representing clients as Buyer’s
Agents.
As an alternative to ABR, the GRI designation, granted
by the Graduate REALTOR® Institute recognizes real
estate professionals who have completed a required
curriculum including specialized courses designed to
equip them to provide services to both buyers and sellers.
• Uses Appropriate Technology to support buyers and sellers
Real Estate practice in the twenty-first century is in the
process of a radical transformation utilizing the tools of
the Information Age. Computer literacy is no longer optional for any real estate professional who is committed
to provided the highest level of service to buyers and
sellers.
Appropriate Technology is not a matter of replacing the
human touch. Rather it is using technology to enhance
and expand the range of services that an agent can offer.
• Technology enhances the search for property and
enables an agent to not only find available property but to tour available properties virtually before arranging a physical tour.
• Technology makes information and people accessible 24-7 and assures that no Buyer ever need be
uninformed about the status of their search for a
home.
• Technology makes it possible for an agent to create a dedicated website for each Buyer permitting them “look” at all homes under consideration at any time convenient to them.
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40
• Technology makes it possible to prepare all contract documents online and immediately accessible to all parties, and
• Technology makes it possible (though not all
states make it legal) for documents to be signed
electronically and thus make the entire process
more efficient.
• Available when needed
The right agent is likely going to be a busy agent, an
agent in demand due to the quality of service they provide. One of the services is availability/accessibility.
This is a matter of organization and personal style. It is
also knowing how to use technology to achieve asynchronous communication rather than engage in telephone tag. For example, text messaging is a form of
asynchronous communication but it can almost seem
like real time communication if both parties use it
wisely and effectively.
Availability also involves the skill of multi-tasking
while maintaining quality in all of the tasks addressed.
My philosophy is that it is better to spend 20 or 30
minutes of uninterrupted time with a client than to
juggle 2 or 3 clients at the same time for two hours. If
you know that when I am meeting with you I will not
take a call from another client you will be more likely to
understand if I do take your call when I am meeting
with another client.
I have found that most people would rather be told, I
cannot speak with you at this time but I will return
your call in 30 minutes. I can only give my undivided
attention to one client at a time. However if I promise to
call you back in 30 minutes I am obligated to keep that
promise.
• Former Clients Would Use Again
The highest compliment my clients pay me is to refer
their friends and family to me. Ask a prospective
buyer’s agent for the names and contact information for
at least 3 Buyer-clients with whom they have worked
during the past 12 months. If they cannot do that, it is
either a sign that they are not actively working with
buyers or that they are not sure what their former clients might say about their service.
• A Good Teacher
A significant portion of your Agent’s time will be spent
educating you about the home buying process. If they
frequently use jargon without explaining what they are
talking about, make you feel stupid when you ask a
question which is important to you even though it may
be routine to them, or simply expect you to take their
word for things rather than explaining why it is important to be pre-approved for a loan before you start visiting homes or what to look for when you receive the
Seller’s Disclosure, this may not be the agent for you.
• Knows The Territory
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42
No matter how resourceful an agent may be or how
motivated they are, the more familiar an agent is with
the neighborhood/community, the greater your chances
are of finding the perfect home. An agent who works in
a particular neighborhood frequently will already know
which homes are on the market, will probably have
previewed many of them, and will know the status of
homes that may not yet be on the market but will be
soon.
Ask prospective agents which neighborhoods they
cover the most. Also ask them what tools they use to
search for a home. This will give you some insight into
how familiar they are with the area.
MOST IMPORTANT FACTORS WHEN CHOOSING AN
AGENT
8%
10%
31%
11%
16%
23%
Honest and Trustworthy
Reputation
Friend/Family
Knowledge of Neighborhood
Caring Personality/ Good listener
Other
The National Association of REALTORS® asked buyers to
identify the most important factors that influenced their
decision to choose the agent they used in their home
search.3 Over half of the buyers chose their agent based on
their Reputation, 16% relied on Friendship or Family Ties,
11% chose an agent who they perceived to be a Neighborhood Specialist, and 10% were impressed by the Personality and Listening Skills of the agent. No doubt regardless
of which of these factors a Buyer selected as number one,
several of the other factors played a prominent role in their
selection.
! Choosing the Right Agent
As a Buyer’s Agent, my responsibility is to help you, a prospective Buyer, even before you make the decision to buy a
home. Some of my most important work is done with a
prospective buyer who is trying to determine whether this
is the right time to buy a home. I could pass the buck to the
bank to decide whether they will finance your loan and
concentrate on helping you find a suitable home. I also
know that if I decline to work with you because of my concern for your long-term financial health, there are other
agents who will fill the void. Of course no one can predict
the future and I don’t presume to know what’s best for
every prospective home Buyer. I do believe however that I
owe it to my clients to help them put the decision to buy a
house in proper perspective and proceed with a reasonable
amount of prudence.
In order for a buyer’s agent to fill the role I believe to be
appropriate, it is best if you contact a buyer’s agent when
you first begin considering the purchase of a home. If you
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wait until you find a home you want to inquire about, you
have already missed out on some of the most valuable
services a buyer’s agent has to offer – service that comes at
no additional cost.
I enjoy working with people and representing Sellers as
well as Buyers but my observation is that Buyers are sometimes ill served by agents whose primary role is as a
Seller’s Agent. An excellent book, published in 2007 by the
NATIONAL ASSOCIATION of REALTORS®, includes a list of
reasons to hire a real estate licensee to help you find a
home and negotiate your transaction to a successful
closing. 4.
• Real estate professionals are market specialists.
• Real estate professionals are neighborhood experts.
• Real estate professionals have more information
about homes than you do.
• Real estate professionals save you time.
• Real estate professionals can work with you the
way you want to work.
• Real estate professionals share your risk.
• Real estate professionals know how to close a
deal.
I would add:
• Help buyer determine whether they are ready to
buy a home,
• Help buyer determine how much they should
plan to spend, and
• Help buyer clarify what they are looking for in a
home.
Helping a wannabe Buyer answer these threshold questions is a function that sets Buyer Agents apart from other
real estate agents who are qualified by their license to represent buyers but who have not developed a specialty in
Buyer Agency.
The agent whose name and contact information you find
on the sign in the yard already has a client – the Seller. Legally and ethically the Seller’s Agent has a loyalty to the
Seller. They are bound by contract to be an advocate for the
Seller; to get the best possible price and terms for the Seller
and to do so in the shortest possible time. They are also
bound by contract and professional ethics to treat all information about the Seller as privileged information and
cannot disclose anything to a prospective Buyer unless legally required to do so.
As a Buyer you need an advocate who represents no one in
this transaction but you, will be loyal to you and is committed to make the best possible deal for you, i.e., to obtain
the lowest price and best terms possible. A Buyer’s Agent
is usually paid by the Seller from the proceeds of the sale
but is contractually obligated to be your exclusive advocate.
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46
Too many buyers are unaware of the specialized role of a
Buyer’s Agent and wait to contact an agent until they find
a house they want to see. If you simply call the real estate
office and ask to speak with an agent, you will usually be
referred to the agent on call for the day. Like all other
agents I receive those calls and I work with you at the stage
where you are in the process. Most agents will also ask if
you are interested in knowing about other homes and offer
to provide you with a list of possible homes to consider.
My experience is that many of the prospective buyers with
whom I speak called about a particular house but they had
no way of knowing about the types of services a fullservice buyer’s agent provides. Among the purposes of
this book is to change the expectations of Buyers, especially the first-time Buyers regarding what to expect from a
Buyer’s Agent.
Knowing where to look for agents is half the battle.
• You can do it the old fashioned way and take names
and phone numbers from yard signs but you have
no way of knowing when you do that whether the
agents have experience representing buyers.
• You can call a local real estate office and ask to speak
to an agent but you are at the mercy of the calendar
when you do that. Most offices have some type of
rotating schedule and thus you might get an excellent buyer’s agent one day but had you called the
previous day you may have spoken with someone
who rarely represents buyers.
• You can ask your friends or family members who
have recently bought a home who they used and
would they use the same agent again.
Technology has made possible a much more focused
search for agents. The pool of possible agents is much
greater as a result. Your first stop should be:
http://www.rebac.net/MembershipDirectorySearch.aspx.
This will bring you to a search screen where you can enter
geographical indicators such as state, county, or zip code to
obtain a list of agents who have earned designation by the
Real Estate Buyers Agent Council. Keep in mind that
agents cover more than a single zip code or even a single
community. If your search area is too small you will not
obtain a representative pool of qualified buyer’s agents.
You can also Google the name of the geographic area combined with terms such as “buying a home,” or “buyers
agents.” You will get a variety of responses including some
sites that are simply aggregators and offer nothing of value
for you. If you click on one of these it will take you to a
search which is a thinly disguised effort to capture your
name and contact information which will then be sold to
agents as prospects. Don’t go there if you want to find a
high quality buyers agent familiar with the area where you
are looking.
There is no guarantee that simply because an agent’s website shows up in a search engine’s top 10 list, the agent is
one of the top 10 agents in the area. But I would advise you
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to go to these sites and explore how they propose to work
with you. If they are serious about being a buyer’s agent
they will have information on their site about how they do
business, the services they offer, etc.
If you get mainly a gallery of homes for sale you can be
reasonably certain that their priority is selling their listings
rather than finding the perfect home for you. I know of no
survey that suggests a correlation between whether an
agent has a blog and their ability to perform well as a
buyer’s agent. However I do know that a blog is a good
way to gain insight into an agent’s mindset. In some areas
an excellent search would be: “the area” plus “real estate
blog.” Check each of the blogsites and read the blogs by
agents or at least have a look at the topics they address in
their blogs.
Another way to search is to enter “the location” plus
“ABR” or “GRI” and either “buyer’s agent” or “real estate”
or “home search.” Keep changing your search words or
phrases to various combinations until you find links that
interest you. The ActiveRain network is another good place
to search. Simply google Active Rain plus “Colorado” or
“Denver” or “Colorado Springs” plus “buyer’s agent”.
Combining that with ABR or GRI may give you a different
set of sites to consider. If you don’t feel you are getting
quality results, send me an email5 and tell me where you
are searching and something about the home you would
like to find. I will be glad to access my contact networks to
help you get the right buyer’s agent.
! Don’t Use the Seller’s Agent
If an agent attempts to convince you that they can represent both parties in a real estate transaction, look for another agent. The only agent who will try to convince you of
this is one who is trying to sell you one of their own listings and want to keep both sides of the commission. They
are not thinking of your welfare, they are thinking of
theirs. Ask a prospective Buyer’s Agent, If I should become
interested in a property where you represent the Seller,
how would you propose to handle the conflict of interest?
The Seller’s agent may be a person of high ethical standards and integrity, but the appearance of bias should be
avoided. Consider this situation:
The Seller’s Agent knows that the Seller is running
out of time to find a Buyer or they will lose the contingent contract they have to buy another home and
thus would be willing to discount the price far below the listing price. They know this but cannot disclose it to you because the REALTOR® Code of Ethics makes that knowledge confidential and you cannot disclose it without violating the Code of Ethics.
If the same agent is representing you as the Buyer
and you ask, How much should I offer for this
house?, the agent cannot advise you even though as
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your agent he/she is obligated to give you the benefit of their best judgment. All the protestations in the
world cannot change the reality that either the agent
represents only one party or neither party.
The Real Estate Buyer’s Agent Council of the National Association of REALTORS® distinguishes between a Buyercustomer and a Buyer-client. Until you sign a Buyer’s
Agent Agreement with me, you are not my client, at most
you are my customer. This distinction is not simply a play
on words. It is a substantive difference that defines the difference in the type of service I can provide to you. The following table makes the distinction clear. 6
Depending on the laws in your state, you may find yourself working with someone who is negotiating for the
Seller, not you, the Buyer. The best way to be certain your
interests are being considered and protected is to sign a
Buyer agency agreement with a trained buyer’s representative which clearly establishes client-level services and
spells out what services you can depend on. 7
My advice is to insist on signing an Agency Agreement as
soon as you feel comfortable that an agent is a good fit for
you. If you are not sure that this is the agent you want to
work with, you can ask to sign a one-day agreement which
will mean that any information you share with this agent
will be covered by the rules of confidentiality whether you
extend the agreement for the duration of your home search
or not.
! Disadvantages Of A Short Term Agency
Agreement
A one day or short term option is usually used when a
Buyer asks an agent to assist them in arranging to view
homes in a specific location early in their search for a
home. There is nothing to prevent using it as an opportunity to get acquainted but given the broad range of benefits
that a Buyer should expect from a full-service buyer’s
agent, don’t expect the agent to invest a lot of time with no
assurance that you are a serious Buyer. It is unrealistic to
expect an agent to invest any significant amount of time
with with you in the planning stages if you are unwilling
to continue beyond the initial phase. Under normal commission arrangements, the only agent who is paid is the
one who prepares and submits the contract.
! Can I sign an agency agreement with two or
more agents?
No, or maybe yes under some conditions. If you are talking
about two agreements signed for the same area covering
the same period of time, the answer would be no. If you
are talking about two agreements covering discreet geographical areas, you can probably do it but I would not
recommend it. Not only is it unfair to both of the agents, it
is not likely to produce positive outcomes for you the
Buyer.
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Remember that REALTORS® are independent contractors
who pay their own expenses and receive no compensation
other than commissions for completed transactions. Don’t
consider using them to develop a list of homes to visit and
then ask a different agent to show you the homes or handle
the presentation of an offer. Any agent who is truly professional will not be willing to interfere with your relationship with another agent. As a result you will likely miss
seeing some properties that fall in the gray area between
the territory called out in the agreements.
If you want to get the benefit of an agent’s best efforts to
assist you in planning your home search and implementing it to a successful conclusion, show them the respect
and confidence of asking them to be your exclusive agent
for as long as it takes to find the ideal home.
! Your Agent’s Job
By way of summary, consider these suggestions regarding
your agent’s job. It is to:
• Help you determine if you are ready to buy a
home and how much you can comfortably
spend;
• Understand what your needs and wants are in a
home by listening to you.
• Keep you informed. Let your agent know how
you would like to be informed and how frequently.
• Negotiate effectively with the seller’s agent to
get the home you want at the best price and on
the most favorable terms possible.
• Guide you through the process of home inspections, mortgage applications, appraisals, and final walk-through within the limits of a REALTORS® professional expertise and to recommend that you seek the advice of other professionals for any issues that are outside the scope
of an agent’s expertise.
• Go with you to closing to make sure everything
goes smoothly and answer any questions you
may have about the process.
1 2009 Profile of Home Buyers and Sellers, NAR, Exhibit 4-8, p. 60.
2 Currently there are approximately 900,000 agents and brokers who are members of the NAR.
3 Ibid., p. 64
4 NAR. The National Association of Realtors® Guide to Home Buying, John Wiley & Sons, Inc., Hoboken, New Jersey, 2007, p 7.
5
JohnCleek@mac.com
6 REBAC, National Association of Realtors, Homebuyer Resources, Description of Agency: The Buyer
Agency Agreement.
7 Ibid.
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How Much House Do You Need?
STEP 2: HOW
MUCH HOUSE DO
YOU NEED?
2
My experience is that most prospective buyers start looking for a home before they have determined how much
money they can prudently spend on a home and before
developing a plan regarding what features the home they
are looking for must have in order to satisfy the needs of
their household. There are no hard and fast rules regarding
what to do to achieve a successful outcome.
DISTINGUISHING BETWEEN WANTS AND NEEDS
Most of us are not very good at distinguishing between
wants and needs. We speak of our wants as if they were
needs. We say I need a new car. When what we should say
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In the early 1990s, developers converted a
large tract of rolling, wooded land near
our home from a dairy farm to an upscale
residential development. It was a beautiful setting for some exceptional homes.
We were taken aback the first time we visited one of the new residents.
As we entered the home I noticed what
appeared to be a formal dining room that
was completely unfurnished. It had no
furniture or furnishings of any kind. Next
I noticed another large room with no furniture. It had a fireplace and appeared to
be the living room. The Master Bedroom
was also on the main floor and, yes, it was
also unfurnished.
It turned out that the owners had moved
from a much smaller home into this one
and had moved the furniture they had but
had no available funds to invest in any
additional furniture because they had
paid more for the house than they could
reasonably afford. I later learned that this
was not the only home in this neighborhood that was only partially furnished.
is, I need reliable transportation.
I want a new car. It is sometimes
difficult to describe our wants in
clear terms. We tend to think in
pictures rather than words. I can
visualize what I would like but I
may not be able to verbalize it
for you very clearly. It is said
that if you don’t know where
you’re going, any map will get
you there. Likewise, if you can’t
describe your expectations for
the house you want to buy, the
odds are that you will waste
time looking at homes hoping to
stumble onto something that
appeals to you.
Experience and a knowledge of
human nature suggest that it is
hard to separate the browsing,
planning, and budgeting functions when looking to buy a
home. It may be difficult to
separate them but it is important that we recognize them
as discreet functions even if we fail to separate them operationally.
Looking at homes before you know what you can afford
exposes you to the risk of getting your heart set on features
that will not be found in homes in your price range. If you
have a template of the ideal home etched in your mind and
you compare every home you see to that imaginary dream
home nothing you see will seem satisfactory to you.
There is also the danger that you will become so attached
to this “perfect home” you have found that you do whatever it takes to buy it only to discover after it is too late
that the financial burden you have taken on is more than
you can comfortably handle. If the burden is too great you
begin to resent the home and it can become a source of
conflict as each party to the decision attempts to blame the
other for taking on the excessive burden.
There’s nothing wrong in browsing the Internet to get an
idea of the types of homes on the market in your price
range early in the process. There is also nothing inherently
wrong in doing some unplanned and unscripted touring of
neighborhoods and open houses. It will require some selfdiscipline however to avoid falling in love with features
that will add cost but not necessarily value to a home.
My recommendation is that you do enough browsing or
driving to have some fairly specific ideas about the types
of homes on the market and the price range that will
probably work for you but that you make a sincere effort to
resist the temptation to start touring homes prematurely
and visualizing what it would be like to live in the homes
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you see. Before you get to that point you need to know
what a comfortable fit would be for you considering how
much you have saved for a down payment, your current
income and expenditures, and your overall financial circumstances.
A couple of useful websites you will want to explore early
in your search for a home are the Kiplinger and GinnieMae
sites designed to make it easy to estimate how much you
can afford to spend for a home. If you are reading this on
your computer you can click on the link to either of these
sites. If you are working with a hard copy of the book, the
URLs are included in the EndNotes.
The Kiplinger interactive calculator1 makes it easy to enter
your income and expenses and quickly derive an estimate
of your home buying capability. GinnieMae has an excellent website as well, Your Path to Homeownership, where
you can use an interactive calculator to determine how
much home you can afford. 2
An easy way to start is with what you are currently spending for housing, i.e., your rent and all other housingrelated expenses you incur at present. If your total
housing-related expenses currently cost $900 a month and
it is sometimes a strain to make your rent payment each
month, you should lower your target payment range. Keep
in mind also that your monthly housing payment including an escrow for insurance and taxes is only a part of
what it will cost you to own a home.
You may not be paying all of your utilities at present and if
you are, you can expect your utilities in a detached single
family residence to be higher than in an apartment or
condo. Don’t forget about television whether cable or satellite and Internet access. You should also be aware that the
amount of funds you have for a down payment will have
an impact on the interest rate you will receive. The best interest rates are available with a 20% down payment.
Your Buyer’s Agent can help you convert your monthly
payment range to a price range. Your agent doesn’t want
you to tell everyone you know that she/he kept showing
you homes you couldn’t afford. Before you go much further in the process, you need to find a lender and see how
much you can borrow based on your income, credit score,
and credit history. The table below can give you a rough
estimate of the price range that will most likely fit with
your budget.
If you commit all of your discretionary income to a
monthly house payment and find you have to forego eating out, entertainment, and vacations, you will likely come
to rue the day you picked this house. Likewise, if you wipe
out all of your rainy day funds to make a larger down
payment and the unexpected happens, e.g., one wage
earner in a two income household loses their job or a
medical emergency arises that makes it impossible for one
to work, the consequences could be dire. Especially when
you are living in uncertain economic times, it is essential
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APPROXIMATE SELLING PRICE BASED ON INTEREST RATE AND
MONTHLY P&I
Principal/Interest
Per Month
Interest Rate - 30 Yr Mortgage
5.0%
5.5%
6.0%
6.5%
$500
$95,000
$90,000
$85,000
$80,000
600
110,000
105,000
100,000
95,000
700
130,000
125,000
117,000
110,000
800
150,000
140,000
134,000
127,000
900
170,000
160,000
150,000
142,000
1,000
190,000
180,000
170,000
160,000
1,200
220,000
210,000
200,000
190,000
1,400
262,000
250,000
234,000
220,000
1,600
300,000
280,000
262,500
254,000
1,800
340,000
320,000
300,000
285,000
that you keep your home buying in proper perspective. A
comfortable home is important but it won’t be very comfortable if the monthly mortgage payment is not comfortable. Spending more for a home than is prudent may bring
short-term happiness and long-term distress.
It used to be quite common for agents working with home
buyers to nudge them into a higher price range with assurances that their income was bound to go up and it was better to buy a little more than seemed comfortable now
rather than buy another home in only a few years. Hopefully that sales approach is no longer being used. The last
thing I want is for you to experience financial hardship because I encouraged you to over-buy.
YOUR PROPERTY WISH LIST
3
If you are struggling with this conflict between pictures
and words, spend some time on the Internet looking at
homes. At this point you are not looking for homes you
want to tour. They may not even be in the right location for
you. That is not important at this stage. You’re simply
looking for visual images that match your expectations. If
you can do this, your agent can help you translate the visual images into a guide to use in searching for homes to
visit later.
Keep in mind that you should not just look at the exterior
pictures. More important as a guide for your agent are the
interior pictures that show images of the layout of the
rooms. Of course if we combine all the features you like
into the same home, the price will likely be out of reach. A
typical comment made by home buyers after looking at a
dozen homes is they would to take the kitchen from one
home, add the deck from another, the master bedroom
from a third and so on. The problem is that we can rarely
have it all. We have to establish priorities. Your agent
needs to know which features are deal breakers for you
and which ones you can live without if necessary.
While your opinions on the type of home you want to own
may change during the home buying process, using the
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MY HOME BUYING PRIORITIES
Type or Style:
Maximum Price: $
Fenced Yard Size:_________________________________
Land for garden/horse/
other__________________________
Trees
Garage (Size __________________)
Patio/deck
Bedrooms (number you need; number you want)
Bathrooms (number you need; number you want)
Family Room
Formal Living Room
Formal Dining Room
Eat-in Kitchen
Laundry Room (location ____________________)
Basement (Finished •Unfinished•Walkout)
Floor Plan/Number of Floors
Other Wants or Needs:
Cities or Neighborhoods preferred:
School Systems:
Age of home you will consider:
Interested in foreclosures?
Willing to consider Rehab?
NEED
WANT
easy checklist that follows on the preceding page can help
you organize your expectations and priorities so can spend
time looking at properties that have a higher probability of
matching your expectations.
This process works better when all member of the family
are involved. If each person in the household (including
the children) completes their own Wish List without consulting the others, the discussion when you bring them all
together can be very enlightening. We will have the basis
for a productive conversation as we compare the similarities and differences between and among the ranking of
needs and wants for all members of the household. Ideally
this process will contribute to a synergistic outcome and
selection of a home that is a better fit for everyone. In the
process we will emphasize the difference between Wants
and Needs.
Unless you have been searching for homes recently you
may not have a good handle on what it will take to buy the
dream house you have described during our conference.
Quite frankly, even experienced REALTORS® have a hard
time estimating market prices in these uncertain economic
conditions. One of the variables that is always hard to predict has become even more unpredictable in the current
market. That is the motivation of the Seller.
The current conditions make it even more imperative that
prospective buyers select a Buyer’s Agent in whom they
have a high degree of trust and confidence and work
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closely with the agent at all stages of the process. Another
variable that makes pricing to the market more volatile
than most professional real estate agents have experienced
in a long, long time, is the saturation of the market with
foreclosures and short sales.
Hard numbers are not readily available but the best estimates are that nearly 600,000 homeowners defaulted on
their mortgages in 2008. Another indicator of the scope of
the problem is the number of homeowners with negative
equity in their homes. The best estimates are in the range
of between 10 and 15 million households were in this category at the end of 2009. When the number of foreclosed
properties4 in a community or neighborhood increases all
property values tend to be depressed.
The point here is that once you have identified your Wish
List of features you would like in a home, you and your
agent will need to spend time searching the listings of
homes for sale in the selected areas to determine what is
realistic. If you describe a home that is too far above your
price range the process is going to take longer. Your agent
will either provide you with homes that fit your profile but
are beyond your reach or homes that are within your reach
but don’t match your profile. Neither choice is desirable.
Consider the experience of two couples who allowed me to
help them find a home. Both were motivated and serious
about the process. Both were looking for essentially the
same home in the same price range. But one moved into
their home less than 6 weeks from our first contact and the
other moved into their home after a 10 month search. Two
families seeking a home in the same area. One with a clear
picture of their wants and needs, and the other with a
vague idea of what they would like which changed several
times over the course of the home search.
Both had the same agent and involved the agent early in
the process. The prices they ended up paying were only
$1,000 apart. But one consumed less than 6 weeks from
start to closing. The other consumed nearly 9 months from
start to closing. My evaluation of my work with these two
families played a role in my decision to write this book. I
was not assertive enough with the second family.
My goal is to prepare home buyers to work effectively in
partnership with their Buyer’s Agent in finding the right
home at the right price in the least amount of time. For this
to work well, it takes both the buyers and their agent doing
their part. Different agents will have different methods for
achieving the desired outcomes.
As you develop your list of needs and wants I will press
you to rank them in priority order. This will make it easier
to search the inventory of properties on the market.
1 http://www.kiplinger.com/tools/housing.html
2 http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH
3 NAR Guide to Home Buying, Reprinted by permission from REALTOR® Magazine Online.
4 Commonly referred to as REOs or Real Estate Owned
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It Takes Money To Buy A House?
Nothing Down!
12 months same
as cash!
Zero Down!
3
STEP 3: IT
TAKES MONEY
TO BUY A HOUSE?
The young lady on the phone told me that she and her fiance wanted to buy a home. She seemed a little surprised
when I asked if they were pre-qualified for a loan (they
were not) and how much money they had for a down
payment (none). She explained that she was sure they were
qualified to buy the home they wanted since they both had
jobs. Of course she had no idea how much the monthly
payments would be.
Don’t waste your time looking at houses when you have
no idea what you can afford to spend each month for hous-
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ing including principal and interest, taxes and insurance,
utilities and maintenance?
HOW SECURE ARE YOU FINANCIALLY?
Do you have a savings and/or a retirement plan? Is your
job going well? How long have you worked at your present job? Any prospect of being transferred away from the
area to a location beyond reasonable commuting distance?
Do you have health insurance in case you or a member of
your family has an accident or an unexpected medical
emergency? Do you know your FICO score?1
How long have you worked at your present job? No matter
how much you are paid, if you have only recently begun
work on your present job you may find that lenders are reluctant to make a commitment until you have demonstrated stability. However, if you remained in your previous job for a year or more and your present job is clearly
an advancement they may be more flexible.
PRE-QUALIFICATION LETTER
Some lenders will provide you with a Pre-Qualification
Letter without a full blown mortgage application. It is important to understand however that a Pre-Qualification
Letter is not the same as a Pre-Approval Letter. To provide
you with a Pre-Qualification Letter, the lender may only
require information regarding your employment, your social security number, and other information that can be
gathered from you over the phone or taken from your
credit report. Your credit score will be a part of your credit
report and will play a key role in the lender’s decision regarding your qualification for a loan.
In some markets, a Pre-Qualification Letter will be sufficient as an indication of the size of loan you can expect and
will be sufficient to submit a Real Estate Contract (an offer). You will then need to complete a loan application
upon acceptance of the contract by the Seller. In other markets you may be expected to obtain a Pre-Approval Letter
before submitting an offer. Before a lender will provide you
with a Pre-Approval Letter they will need a full mortgage
loan application with documentation of income, current
financial obligations, assets, etc. Your agent will advise you
as to which type letter you will need in your market.
Well, believe it or not, there are still some programs that
are zero down payment loans. But they are not without a
cost. It’s really a matter of pay me now, or pay me later.
You get the best terms on a home loan when you pay a full
20% down (assuming you have a good credit score). If you
pay zero down your costs will go up because you will pay
a higher interest rate plus you will most likely be paying a
point or two for PMI (private mortgage insurance) or in the
case of FHA/VA loans you will be paying a similar amount
in exchange for the guarantee of your loan.
A good way to quickly estimate the amount of your
monthly mortgage payments is by using the rule of thumb
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that a 30 year mortgage at 6% interest will cost $6.00 per
thousand for principal and interest. Depending on the
price range of the home you buy you will need to add $200
- $300 per month to cover homeowners insurance and
property taxes. This calculation does not include an allowance for PMI which you must pay if you don’t have 20%
for a down payment and/or your credit score is considered
marginal.
YOUR PERSONAL LOAN OFFICER
There are two key issues to consider when selecting a
lender to handle your mortgage. One is the financial institution and the other is the loan officer. The loan officer is
your connection with the bank, credit union, or other lending institution, and is, therefore an important member of
your home buying team. This is the person who will guide
you through the process of obtaining a loan on the most
favorable terms and in an amount that is the best match
with your financial circumstances. The loan officer is limited, however to the types of loan instruments that are
available either directly or indirectly from the lending institution that employs them.
TYPES OF MORTGAGE LENDERS
If you already have a banker that may be the best place to
start. Notice the wording here. You may have a checking
account and/or a savings account in a bank but not have a
banker with whom you consult on financial matters. Not
all financial institutions making home loans are the same.
Their structure, ownership, regulation, and policies vary
and so do the types of loans they make. For example, some
banks may make conventional loans but not FHA/VA
loans. Or they may make residential loans but will not
cover modular homes.
My advice will be that unless you already have a banking
relationship established with a banker who knows you and
in whom you have confidence and trust, you should interview at least two and preferably three prospective loan officers. It may not seem like it at times but you are the customer and you have a choice where you acquire your loan.
You want the lender to earn your business by convincing
you that they will help you select the right loan for your
personal financial circumstances.
! Commercial Banks
These may be large or small, local or national, but they
are financial institutions where most people have a
checking or savings account. In the past, you would go
into the bank lobby and a teller would handle your deposits and an officer of the bank would be available if
you wanted to discuss an auto loan or a home loan.
With the advent of drive-up banking and online banking, it is possible to conduct virtually all financial transactions and never enter the lobby of the bank or meet a
bank officer.
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! Credit Unions
For the average consumer, a credit union may serve the
same functions as a commercial bank. If you are a
member of a credit union, you should explore the possibility of a mortgage loan from your credit union.
! Mortgage Bankers
A Mortgage Banker is a lender that is large enough to
originate loans and create pools of loans which they sell
directly to FannieMae, Freddie Mac, GinnieMae, jumbo
loan investors, and others. Any company that does this
is considered to be a mortgage banker. They can vary
greatly in size. Some may service the loans they originate, but not all of them will. Many mortgage bankers
also have wholesale lending divisions.
! Mortgage Brokers
Mortgage Brokers are individuals or companies that
originate loans with the intention of brokering them to
wholesale lending institutions. A broker has established
relationships with these companies. Underwriting and
funding takes place at the wholesale lender. Many
Mortgage brokers deal with lending institutions that
have a wholesale loan department.
The mortgage broker is paid a fee for bringing lenders
and borrowers together. You may receive more personalized service and attention from a mortgage broker
provided you are careful in selecting the loan officer
with whom you work. The recommendation of others,
your REALTOR®, other family members or friends
should carry a lot of weight when considering a mortgage broker.
One advantage a mortgage broker may have arises
from their access to multiple lenders thus being able to
offer a broader array of mortgage types than a single
mortgage banker might be able to offer.
! Virtual/Online Lenders
Most of the online lenders are mortgage brokers who
serve as a link between the borrower and the mortgage
bank. One problem with the online or virtual lenders is
they may find you a lender in another part of the country. A local loan officer with whom you can explore all
of your options can be a distinct advantage. Before you
decide to apply for a loan through an online broker, you
should compare the Good Faith Estimate you received
from them with a Good Faith Estimate from a local
lender to confirm that you are comparing like type data.
The Annual Percentage Rate (APR) is a better comparative measure than the stated interest rate.
You may encounter other problems arising from the online lender’s lack of familiarity with local building
codes, terminology and standard practices. The bottom
line is, don’t be overwhelmed by flashy marketing.
Make certain you will be well-served before you turn to
an online lender.
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TYPES OF LOANS AND PROGRAMS
There are many different types of loan products. Not all of
these are offered by every lender and they are not all available to all lenders. It is important to select the loan program that is the best fit based on your needs and financial
circumstances.
Among the programs you will want to explore are loans
insured by the Federal Housing Administration (FHA),
guaranteed by the Department of Veterans Affairs (VA) or
offered by the Rural Housing Service (RHS). These programs usually require a smaller down payment. What determines how much the lender will approve?
Various states and cities have established programs to assist first-time buyers. Your agent or lender can help you
identify programs that are a good fit for you.
! Types of Mortgages
! Fixed Rate Mortgages
This is the most common type of mortgage and for
most borrowers the safest. With this mortgage your
payments will only change if the taxes and/or insurance increases. The interest rate is fixed for the
duration of the loan.
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! Adjustable Rate Mortgages (ARM)
Before you consider the lower initial rate of an ARM
keep in mind that they are one of the drivers of the
millions of foreclosures plaguing the country. Not
only do the low initial rates adjust to much higher
rates after three to five years. They also make it possible to spend more on a home than is prudent.
WHAT DETERMINES HOW MUCH A LENDER WILL
APPROVE?
! Your FICO Score
When you apply for credit – whether for a FICO® Score Components
credit card, a car loan, or a mortgage – lenders want to know what risk they'd take by
15%
30%
lending money to you. FICO® scores are the
10%
credit scores most lenders use to determine
10%
your credit risk. You have three FICO scores,
35%
one for each of the three credit bureaus: ExPayment History
perian, TransUnion, and Equifax. 2 Each score
Amounts Owed
is based on information the credit bureau
Length of Credit History
New Credit
keeps on file about you. As this information
Types of Credit Used
changes, your credit scores tend to change as
well. Your 3 FICO scores affect both how much and what
terms (interest rate, etc.) lenders will offer you at any given
time. 3
Even if your low credit score does not disqualify you from
obtaining a loan, it can cost you in increased interest for
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the life of your loan. If you go to myfico.com you will find
illustrations of the advantages which accrue from a higher
credit score. For example, assuming a 30-year $150,000
fixed-rate, owner occupied loan with a 20% down payment: If your FICO score is between 640 and 659 you might
pay $18,776 less interest than if your credit score were between 620 and 639.
Most of the data compiled by each of the three credit bureaus is identical, however it is common for some data to
be compiled by one but not others. The data in each Report
will most likely be different. Your Credit Score is a capsule
summary of your Credit Worthiness based only on the data
reported to that Credit Bureau. Thus it follows that your
Credit Scores based on data from each of the Credit Bureaus is going to be different as well.
Five types of data are collected by the credit bureaus and
used to calculate your Credit or FICO Score. These factors
and the relative weight given to each is illustrated by the
chart on the right.
! Your payment history – Do you always
pay on time?
Your payment history for credit cards, retail accounts, installment loans, finance
company accounts, mortgages, etc.
Adverse public records, e.g., bankruptcy,
judgements, liens, etc.
Amount and severity of delinquent accounts, recency of delinquency or adverse public records, influence the score.
This category accounts for 35% of your credit score
and is not something you can change overnight.
Your credit history is what it is, a record of how your
past performance. By being careful to meet all payment deadlines in the future you can increase your
future score dramatically if this is an area.
! How much you owe – your credit utilization ratio.
The total amount of outstanding balances and the ratio of the balances to the credit limits of the various
accounts. This category carries 30% of the weight in
determining your credit score.
You may be current on all of your credit balances
and have no delinquent payments yet still be scored
lower due to what the credit bureaus consider excessive outstanding debt. The reverse is also true. You
may have paid down your balances and have a very
favorable ratio of debt to credit limits and still have a
lower score than you would like if your payment
history includes recent delinquencies or adverse
public records such as bankruptcy.
! The length of your credit history – longer is better.
(15%)
How long have the accounts in your credit file been
open? If you close an account that you have had for a
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long time it reduces the average the length of your
credit history. Recent activity in the accounts.
If you have too many revolving and installment
credit lines, be sure that the ones you close out are
more recent accounts. If you have a 20 year history
with American Express or J. C. Penney, don’t close
those accounts. Paying them current each month is
good, but asking the company to close the accounts
will simply shorten your credit history and do more
harm than good.
If you have closed one account and opened another
to replace it because the terms are more favorable,
this can work against you because it shortens your
active credit history. Even if you pay down an account to zero, it is better to keep the account open
and use it frequently but pay the balance in full each
month than to simply pay cash and allow the credit
account to lie dormant.
! How much new credit you have – generally this is not
good (10%)
Recently opened accounts including the number of
recent credit inquiries create the appearance of excessive dependence on credit.
! The types of credit you use – several types of credit
are better. (10%)
There is not much you can do to improve your score
here because if you open new credit to produce a
better balance, you lose points for new credit. Fortunately this one only counts for 10%.
If your credit file consists of only one or two types of
credit, you might be tempted to take out a new credit
card and use it for purchases that you would normally pay cash for, but make sure that you pay the
balance in full each month. This will not only
broaden your credit profile, it will also reinforce
your payment record. Be careful. You might find that
the positive is offset by negative factors.
Knowledge of how the credit bureaus treat various
types of data in your credit file can give you a significant clue about how you can improve your credit
score. The first step is to request a copy of your
credit report from all three of the bureaus including
your FICO Score as calculated by each.
It is quite likely that some information will be contained in one file but not the other. It is also possible
that some data will find its way into your report that
does not belong there. It may simply be a data recording error or it may be more perverse. Someone
with whom you had an unpleasant business dealing
may deliberately seek to create a negative picture by
the way they report information.
Don’t wait until you apply for a loan to discover
what is in your credit history. Before you contact a
lender, collect the reports and scores. In the report
you will find suggestions of what you need to do to
improve your score. Federal law makes it easy to ob-
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tain one free copy of your credit report 4 every 12
months. If you are denied credit, the company declining to approve credit is required to inform you as
to which credit agency provided the information on
which they made their decision to decline credit. You
have the right to receive a free copy of a current
credit report from that agency upon request.
Your Credit Reports without the corresponding Credit
Scores are not sufficient to prepare you to meet with a loan
officer to discuss whether you will qualify for a loan and, if
so, in what amount. You can either add a request for a
credit score to your request for the free annual credit report
(the credit score is not free however) or you can contact the
individual credit bureaus and purchase your score from
them.
IMPROVING YOUR CREDIT SCORE
If you find incorrect or misleading information you should
contact the credit bureau and provide them a detailed
explanation and ask that they correct the record. 5 They
will contact the source of the information you believe to
Make sure
be incorrect or misleading. If the source refuses to acthe reknowledge that the data they reported is wrong, the buported inreau may leave their information in your file but they are
formation
required to also publish your explanation of the negative
is accurate.
data. In other words you can make sure that the incorrect
information is not allowed to go unchallenged.
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If your payment history reflects numerous instances of 30,
60, or 90 day past due payments, you can’t wave a magic
Stop
wand and change the record, but you can make certain
abusing
that all of your payments are made on time in the future.
your
If you find it impossible to at least make the minimum
credit.
monthly payments on time, that is a very good clue that
you are overextended and probably not ready to take on
a major new commitment such as a home mortgage.
If the credit bureau notes that based on your income, you
are carrying a credit load that is too high, there is not
much you can do other than to begin paying down your
balances. This may not be an easy thing to do but as
noted before, if you are finding it hard to bring your
credit balances down, how do you expect to handle the
heavier burden of a home mortgage payment?
Stop using
your credit
cards while
you stretch
to make at
least double
the miniYou cannot speed up the clock or add months or years to mum payyour present credit history. You can, however, develop a ment on each
plan to spend the next six months, year or more improv- account.
ing your financial health including your credit score and
then reapply for a home loan with the confidence of knowing you will be approved.
Be sure to heed this warning from the Federal Trade Commission,
“Everyday, companies target consumers who have
poor credit histories with promises to clean up their
credit report so they can get a car loan, a home
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mortgage, insurance, or even a job once they pay
them a fee for the service. The truth is, these companies can’t deliver an improved credit report for
you using the tactics they promote. It’s illegal: No
one can remove accurate negative information from
your credit report. So after you pay them hundreds
or thousands of dollars in fees, you’re left with the
same credit report and someone else has your
money.”6
If you have one or more credit lines that you have failed to
pay on time that have been referred to a collection agency,
contact the company, not the collection agency, and tell
them you want to get your account current. No matter how
persistent the collection agency may be, don’t send your
payments to them. Make your payments directly to the
company. The more you can arrange to pay immediately
the better, but at least set up a payout with the company
and stick with the schedule.
The worst thing you can do when you are facing payments
beyond what you can handle at the time is to ignore the
letters and phone calls from the creditor. Talk to them. Tell
them about the problems that prevent your making a
payment or making a payment in the full amount due. Better yet, initiate a call to the creditor and alert them that you
will be late with your next payment or you will not be able
to make the full payment. They may still report that you
were late with a payment or failed to pay the full amount
but that will have less of a negative impact on your credit
than if you ignore the obligation.
It is possible to have a decent FICO Score and still not be
approved for a loan on the home you want to buy. The
FICO score only looks at information in the credit bureau
files whereas your lender will look at other things including your present income and recent employment history.
The concern of the lender will be to determine that you
have a stable source of income, i.e., you have held the same
job for a year or more 7, and that the amount of your income is adequate to cover your other expenses plus the
mortgage payment. Depending on other factors most lenders will be reluctant to approve a loan that results in
monthly payments (PITI) greater than 25% to 28% of your
gross monthly income. FHA uses 28 percent as the maximum ratio to qualify.
The other ratio a lender will look at very carefully is the ratio of your total debt to your income. Add up all of your
monthly expenses including your mortgage payment and
divide it by your gross monthly income. Most lenders are
looking for a ratio that is no more than 40%.
If you have a high FICO score and your credit report warrants approval of your loan application, it is still possible
to blow it. By all means don’t go on a spending binge;
don’t purchase a new car, a large screen TV, a boat, or expensive jewelry, and don’t co-sign any obligation for a
friend regardless of how much you want to help them.
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Not only should you refrain from purchasing such items in
the months preceding the application for a home loan, you
absolutely should not make such purchases between the
time of your application for credit and the closing on your
home loan! Your loan will be predicated not only on your
credit data at the time of your loan application, it will also
depend on your credit file at the time you are scheduled to
close.
No greater disappointment than to qualify for a loan, give
notice on your apartment lease, schedule the moving van,
contact the utility companies to switch the utilities on the
closing date, pre-enroll your kids in their new school, only
to be notified at the last minute that underwriting has declined to approve your loan due to adverse activity in your
credit file resulting in a credit score below the threshold.
And the culprit is YOU. It was that flat panel TV you
bought for the family room. When the electronics store
sold it to you with no payments or interest for 6 months it
seemed like too good a deal to pass up. It was!
PREPARING TO APPLY FOR A MORTGAGE LOAN
You are not alone if you feel a little intimidated when you
go in to ask for a loan. Remember you are their customer. If
they don’t make loans they don’t make any money. They
have a responsibility to their shareholders and to their investors to assess the risk when they make loans but they
also know that if they are too risk averse they will not be
able to invest their reserves in a manner that creates a
profit. If you are the customer, it is the banker’s job to convince you they can offer you the best financing.
Decide what you need and want. Do you need someone to
be there for you at each phase of the process or are you the
type to fill out a form on the Internet and hope all goes
well with the financing?
It doesn’t matter whether you are applying for a loan with
your local bank or credit union, a large mortgage banker, a
mortgage broker, or an online lender there are certain constants that will apply. The application is a bit daunting but
your loan officer will usually assist you in completing it. Be
sure you answer all questions accurately or you could find
your closing delayed. For example, if you inadvertently
answer yes to the citizenship question when you are a
resident alien with a green card and this surfaces during
closing, expect a delay until you deliver the original green
card to the lender.
During the application process, there are certain documents that you will need. They will include documentation
of your income which may consist of pay stubs and/or
1099’s if you are self employed; bank statements and tax
returns are required. The more original documents you can
provide the better. You have probably heard that a change
of employment within the past few months can make it
hard for you to obtain a loan. It’s true that lenders like stability and are not fond of job changes, however if the
change is a promotion that increases income, it is likely a
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job change will not create problems. If you have a contract,
letter of appointment, or some type of documentation regarding the new job and the compensation you will receive
this helps.
You should not only go prepared to answer the lender’s
questions and provide the information they need to evaluate your credit worthiness, you should go prepared with
your own set of questions. Make notes during the interview (this will show how you plan to compare what they
tell you with what you hear from other lenders). Do they
seem truly attentive to your needs or do they seem determined to get you into a program that you aren't really
comfortable with?
QUESTIONS TO ASK PROSPECTIVE LENDERS
! Questions about the Lender:
! How long have you been in business. Are you new
to the mortgage industry?
! What is your background? What kind of experience
do you have in the business? What kind and how
much training have you had?
! What are your hours? Are you available in the
evening or on the weekend?
! If I want to refinance a few years down the road,
will you be here for me?
! Questions about the types of loans available
! Which types of loans do you make?
! Which type of loan do you recommend for me to
consider and why?
! Would you mind explaining any forms or terms
they are using? (Can they explain them well? Are
they knowledgeable about their work?)
! Questions About What they offer You.
! Based on my credit and financial information how
much will you approve for me? How does this
compare with your most favorable type loans and
terms?
! What can I do to improve my credit and thus
qualify for a higher amount? Or better loan terms?
! Request/insist on receiving a Good Faith Estimate
for each type of loan they recommend. Make sure
you get a written estimate of your monthly
payment including a breakdown of the amount
included for taxes and insurance. (This should all be
free of charge.)
Ask your friends and family about their experience with
lenders. Word of mouth is a great way to find a good (or
avoid a bad) lender. Steer away from lenders who are new
to the business and/or who work for a company that is
new to the area. If a lender feels compelled to make ex-
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cuses for his company and their practices, he doesn't have
confidence in them; why should you? If the costs seem too
high, maybe they are; get a second opinion ASAP!
It really boils down to trust and confidence. Are you comfortable with this person who is going to assist you in making one of the biggest investments of your life? Do you
trust that they will give you the best program for your
needs? Will they be there when you need answers? Do you
feel you can count on them to be there for you?
MORTGAGE INSURANCE
Private mortgage insurance and government mortgage insurance protect the lender against default and enable the
lender to make a loan, which the lender considers a higher
risk. Lenders often require mortgage insurance for loans
where the down payment is less than 20% of the sales
price. You may be billed monthly, annually, by an initial
lump sum, or some combination of these practices for your
mortgage insurance premium.
You may also be offered “lender paid” mortgage insurance
(“LPMI”). Under LPMI plans, the lender purchases the
mortgage insurance and pays the premiums to the insurer.
The lender will increase your interest rate to pay for the
premiums but LPMI may reduce your settlement costs.
You cannot cancel LPMI or government mortgage insurance during the life of your loan. However, it may be possible to cancel private mortgage insurance at some point,
such as when your loan balance is reduced to a certain
amount. Before you commit to paying for mortgage insurance, find out the specific requirements for cancellation.
1 Credit scores are generally referred to as FICO scores because the software used by most credit bureaus to produce credit scores was developed by Fair Isaac and Company.
http://www.myfico.com/CreditEducation/CreditScore.aspx
2 Equifax (www.equifax.com); Experian (www.experian.com); and TransUnion (www.transunion.com)
3 For
more background on the way that credit scores are developed and the impact they have on
the availability and cost of credit, go to www.myfico.com.
4 https://www.annualcreditreport.com/cra/index.jsp
5 The following website maintained by the Federal Trade Commission is an excellent source to use if
you have problems with errors or inaccurate information in your credit file.
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre21.shtm
6 http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm
7 A recent job change is not an automatic deal breaker. If the job is a promotion it can help your chances.
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Location, Location, Location
My role is not to sell you a home. My
role is to help you find a home you like
and then help you BUY IT RIGHT!
4
STEP 4:
LOCATION,
LOCATION,
LOCATION
Growing up in Oklahoma I became aware at an early age
of a man by the name of Carl Albert. Elected to Congress in
1947, he represented the 3rd Congressional District for the
next 30 years, the last six in the third highest office in the
land, Speaker of the House of Representatives. Only 5‘4”
tall he was widely referred to as the Little Giant from Little
Dixie. Carl Albert was born in a little town north of McAlester with the rather inauspicious name of Bug Tussle. Today Bug Tussle is simply an historical marker on the banks
of Lake Eufaula. How would you like to tell people your
home town was Bug Tussle or Looneyville (MN or NY) or
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Hobo Station (MS)? It’s one thing to be born in Bug Tussle
but it would be quite another to decide you want to move
to a community with a less than desirable name.
FIND THE RIGHT NEIGHBORHOOD FIRST
Before you start looking at homes, it’s a good idea to decide on the neighborhood or community where you want
to live. The answer will be different for different buyers.
You may have friends or family you want to be close to
and that dictates the neighborhood. You may want to live
closer to work or a park. You may just like a neighborhood
or community. In 2009 the median distance between the
home purchased and the previous residence of the buyers
was 12 miles.
There are towns in every part of the country that for whatever reason acquire a reputation as an undesirable place to
live. It may be as trivial as the name doesn’t have a good
sound to it or it may be that the previous history of the
community has not produced a positive image. As a result,
property values are lower and thus some people choose to
live there and take advantage of more economical housing.
Even if you think you already know enough to make a decision about a neighborhood or community, you might find
that you are operating from an out of date stereotype. At
least give yourself a chance for a second opinion. You may
be pleasantly surprised to find that some communities you
thought would not make your list have some very positive
features that merit a closer look. You may also find that
some communities you were considering, don’t look so
well when you do your research.
One approach would be to search for the major city in the
region whether you have a desire to live in the urban core
or not. For example, you might search for <St. Louis+Neighborhoods> or <Denver+Neighborhoods> which
will bring up numerous websites where you will find a
wealth of information about neighborhood in the core city
as well as about the communities around the core city. One
of the more useful sites will be about.com which has target
sites for most major cities in the country.
You may have had a dream for a long time
that living in the country would be ideal. No
next door neighbors, no traffic, and no one to
interrupt your enjoyment of nature. If you’ve
never lived in the country but you have this
romantic image of what it would be like,
spend some time in the country becoming familiar with
what life in the country is really like. While homes in the
country can be as comfortable and spacious as a home
anywhere else, if you have always had neighbors 90 feet
away, you might not be comfortable living where your
neighbors are a mile or more away.
If you are used to being able to make a quick trip to the
grocery store or hardware store when you find you are
missing something you need for the meal you are prepar-
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ing or to repair a faucet, think about how different it will
be if you live 30 minutes away from the nearest convenience store. Of course the reverse may also be
true. If you have always lived in the country,
even living in a small town may seem too confining to you.
I’m a huge proponent of small town life. I grew
up in one and more than a dozen years ago moved my
family back to a small town. But some people prefer the
anonymity of the suburbs or the diversity of a traditional
urban location. Schools, shopping, recreation, traffic, zoning, taxes, demographics, commuting times are all relevant
considerations. Which is dominant will depend on your
priorities. Selecting the right neighborhood may be both
more difficult and more important than selecting the right
home. A home that might be perfect in one location may be
unacceptable if located in another.
Unless you are relocating across country you should set
aside enough time to drive around the area visiting several
suburban neighborhoods or small towns to orient yourself.
How do you feel as you approach the community? Is it appealing to you? Do you like the way the name sounds? Are
the streets clean or cluttered? Does it feel like home or do
you feel like an outsider? Where would you shop for groceries? Location of banks, schools, daycare, medical and
dental offices, churches, parks, library, health club, phar-
macy, hardware store, post office, restaurants, and gas stations?
Do you need to be within a reasonable distance of work,
schools, transportation hubs, medical facilities? Draw a circle around the facilities you want to be near and visit all
communities that fall within your circle or close enough to
be worthy of a look. Go to MapQuest and enter the address
of your work location and the address you are considering.
Click on Get Directions. You will get a commuting time
and distance.
! What about the school system?
Even if you have no school age children, you can tell a
lot about the quality of a community by how they
maintain and support their schools. You can also ask
the District Office to tell you about the schools. If they
are proud of their performance you can expect they will
have materials readily available that provide facts and
figures about how students are performing and what
programs they consider to be exemplary.
! What about public safety?
Police and fire protection? The best place to turn for
crime statistics is the local police department. How does
the community stack up on crime statistics, fire insurance rates, medical emergency response times? Are the
streets in good repair? If you are considering a suburban or urban neighborhood, you may find a published
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report. However you will most likely need to make a
personal contact with the police chief in a smaller
community or a public information officer in a larger
department in an urban or suburban location.
Drive through the neighborhoods. Be sure to time your
tours in the evening as well as the daytime. Some
communities are completely different after dark. Are
homes well-kept? Do you see homes that are attractive
to you? What about the churches, synagogues or
mosques? Have lunch or dinner a local restaurant?
Stop in at the chamber of commerce office to learn
about the business community.
! What about infrastructure for media and the
Internet?
With satellite TV access to media is virtually universal.
High speed broadband Internet service is also almost a
non-issue. Cell phone carriers are not yet able to provide universal service but it is just a matter of time.
Technology convergence has reached a point that everything will soon be connected to everything else.
Once you think you know where you want to look for a
home, it’s still important to do some research before you
go further. Spend enough time in the small town you think
you have selected to make sure it is the place your really
want to live. How precisely you define your goals before
you start looking at homes will depend to some extent on
your personality. Some people want a detailed itinerary
with every hour accounted for before leaving for a vacation. Others would feel that takes all the fun out of a vacation.
If you start looking at individual homes before you have
selected a community or neighborhood, you may end up
going in circles. You find a home that you really like but
then you begin to do what you should have done earlier
and as you learn more about the community you realize
that no matter how perfect the house may seem, there are
no children in the neighborhood and you have small children.
You are big into dogs and you discover that the leash laws
of the community or regulations of the subdivision make
this a poor match for you. You operate a small home-based
business that you want to continue after you move, but local zoning restrictions on home-based businesses present a
problem.
The process can start with a fairly specific target, e.g., you
have taken a job in a community and the nature of your
position makes it important that you live in the community. In other instances, you may have a much broader field
to pick from. You know you want to be within a 30-minute
commuting distance of your place of employment but that
might still leave you a choice among several communities
and several school districts. Each of those communities
will have its own distinctive character and demographics.
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Shop in the local stores, visit a church, drive around, walk
around, how do you feel? It is unlikely, and probably not
even desirable, that you will find a community where all of
the people think exactly as you think. But it is important to
at least know what to expect before you take a step that
will be difficult and expensive to reverse.
How do property taxes compare to other similar areas?
Your agent should provide you with recent financial data
about the communities you are considering. For example,
the average price of all homes sold in the community over
the past 3 months, 6 months, 12 months and the average
price of all homes on the market. Depending on the size of
the community your agent should be able to give you a
breakdown of the number of homes currently on the market by price ranges, e.g., $100,000 to $150,000, $151,000 to
$200,000, …
By this time you should have a good fix on the price range
that will fit your budget. Without attempting to narrow
your search to one or a few homes, it is helpful to know the
number of homes in a given community that fall within
your price range. If the number is too small the odds are
lower that you will find a home that fits your needs. However if a community seems to be a perfect fit and there are
only a few in your price range you may want to keep that
community on your radar screen.
Buying a home is only partly a matter of numbers and objective investigation. it can also be a very subjective process.
The most important question is: How do you FEEL about
this community? Is it YOU?
Several years ago, I volunteered to take an elderly
relative shopping near Christmas. We had been going from store to store for at least a couple of hours
and she asked me to take her back to the first store. I
had noted when we were in the store the first time
that she really liked the things she had looked at in
that store but she insisted we visit 8 or 10 other
stores.
When we got back to the first store she gathered up
the items she had looked at before and took them to
the register to pay. I asked her why she didn’t buy
these things the first time we were in that store. She
said, “It wouldn’t be shopping if you bought something the first time you looked at it.” For her the fun
part was visiting a dozen stores. For me, I walk into
a store and if I find something I like I buy it and my
shopping is finished.
It seems homebuyers fall into the same categories. Some
want to see everything in their price range before they decide to make an offer. The problem with that approach
when it comes to home buying is that each home is unique.
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If you wait too long after you see a home there is a chance
someone else will also like it and make an offer before you
make it back around.
My advice is to take your time defining your priorities,
your wish list for the perfect home. However, once you
find it, you should be prepared to act quickly before another buyer comes along. This is another reason why you
will want to have your financing prearranged as well so
you can make a timely offer when you find the right home.
Your objective is to identify the areas that you consider
highly desirable and those you simply won’t consider. This
will give your Buyer’s Agent the guidance needed to begin
identifying homes within these communities that might be
a good fit for you.
FINDING THE PERFECT HOME
In the mid-1990’s we were living in a very comfortable
home in a community where our children had good
friends, and attended outstanding schools. But the area
was beginning to change due to the conversion of large
farms and wooded areas and we were no longer “in the
country.” We had a high school student and two
elementary-age children. We decided not to move until our
older child graduated from high school but before the two
younger ones entered middle school. This gave us a window of a couple of years.
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We spent nearly a year visiting small towns within a
maximum of one hour commuting time. At this time we
were not touring individual homes and had no interest in
doing so. We wanted to find the right community first. We
were looking for a community that gave us a feeling that
we would be at home there. We knew we wanted a small
town, we knew we wanted a place with excellent schools.
There was also a strong intangible that we couldn’t define
but felt we would know when we found it.
When we had narrowed the scope of our search sufficiently, we asked an experienced agent in the area to assist
us. We looked at homes in small towns in three counties.
Then one day we visited a home that we had passed over
because we thought it was beyond our price range. It was
in the community we had ranked the highest on its THIS IS IT!
schools and general quality of life. Our agent suggested THIS IS
that we should at least have a look. When we walked in OUR
the door, my wife and I instantly knew this was going to HOME!
be our future home.
Every buyer’s agent dreams of this kind of moment. I call
it the Wow! Moment. I tell my buyers that when I hear a
Wow as they walk through a home I know we are on the
right trail.
What if this home had been in another community where
the schools were not rated as highly or the community
didn’t feel right to us? What if we had not toured every
community in a 75 mile radius and had not checked on the
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schools, public safety, and other quality of life issues before
we walked into this home? We might still have been so enamored with the house that we would have decided to buy
it, but we would have been taking a risk that we might
later regret our decision. Buying a home is important
enough to invest enough time to find the place that is right
for you and others with whom you will share it.
SELECTING HOMES TO TOUR
If you have done a good job of defining the type of home
you would consider ideal, established the price you would
like to pay and the maximum you are approved to pay,
and the neighborhoods or communities that appeal to you,
it is now time to start looking at individual homes. Sounds
good, but you now need a list of homes to tour in the
neighborhoods you have selected. This is a task for your
buyer’s agent. He/She may already be familiar with every
home in the community that meets your requirements. If
not, they should be very adept in using the available tools
to quickly develop a list.
! Use the Internet to Search
Technology has revolutionized the process of looking for a
home. Anyone with a computer connected to the Internet
can search homes on the market in any zip code, any
community, in any price range. This is both a blessing and
a curse. There are so many homes on the market that the
average homebuyer cannot possibly sift through the mil-
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lions of listings and find the homes that are the best match
for them. This may sound self-serving but the purpose of
your searching the Internet is not to compile a definitive
list of homes. Instead it is to provide your agent with
homes that help to elaborate on the types of homes you
like.
No matter how vigorously you as the Buyer utilize all of
the search tools available to you, there is simply no way
that you can expect to identify all the properties that match
your wish list and do it in a timely manner. Your agent will
search the Internet for available properties and, in addition, will set up alerts that identify new listings as they are
entered into the system and in some cases, days before
they show up in the public databases available to the public.
A buyer’s agent in the Maryland/Virginia area, Lenn
Harley1 , has developed an excellent system that could be
used by any buyer’s agent. In Lynn’s words, “When I’m
on the prowl for a home for a buyer in a particular community, I send letters [to homeowners] selling a wellqualified, pre-approved, ready willing and able home
buyer.” It works for Lenn. It could work for you as well.
Regardless of how expert your agent may be in an area, the
process works best if it is interactive. You can be enormously helpful to your agent if you search for homes and
pass the ones you find on to your agent. Whenever possible provide your agent with the MLS number of a listing as
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well as the physical address. Include any information you
have about the property.
I consider it a mistake to insist that every home you find be
added to the tour list. Which houses you tour will depend
on the screening of all properties you or your agent find.
There is normally no reason to tour every home on the
market. The average number looked at is in the range of 12
to 15. Your agent is an expert at screening homes and you
will be well advised to let the agent prepare the tour list.
That makes it possible to visit homes that are located in
proximity to one another, are in the same school attendance area, etc.
When a client sends me a list of homes they think might
interest them, I will put them through an intensive screening. I begin by locating all of them on a Google Map which
allows me to look at a satellite map covering several homes
at a time. This identifies environmental issues such as
proximity to highways or high traffic streets, cemeteries,
apartment complexes or other features you have identified
as desirable or undesirable for you.
Whatever the number on the list at the outset, I exclude
those that appear to be below the average on the list which
may cut the number in half.
If the listing agent has done a good job for the Seller, the
listing will include both a visual tour and at least a dozen
or more pictures of key features of the home. I don’t waste
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much time on homes that either have no pictures or only
have 2 or 3. I am also turned off by poor quality pictures,
pictures that are crooked on the page, or poorly focused. In
a buyer’s market, sellers deserve an agent who markets
their listings professionally.
I want to observe the condition of the home and verify
how closely it matches the profile of your ideal home. I
also check the county appraiser’s file to determine not only
the appraised value but other relevant issues such as zoning. If the property is being sold as a short sale2 or is a foreclosure, I will not keep the property on the list unless the
Buyer has indicated a willingness to consider properties
that may take up to 6 months to close. If a short sale property is under consideration I will investigate the experience
of the listing agent in handling short sales.
If a property makes it through to this point, my preferred
next step is to do a drive-by screening. This is
another reason for screening properties in geographical clusters. You can only tell so much by
looking at pictures. Some look better when you
see them but many are eliminated quickly when
you see them up close without any photographic
magic. This usually cuts the list in half again and
sometimes less than a quarter of the homes on
the list make it past the drive by screening.
If time permits I may schedule a visit to selected homes on
the list to preview them before taking you to see them. I
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can quickly walk through a house and look for key indicators of suitability or spot problems that will make a
home unsuitable for a full tour. One thing I cannot do is select the home that you will like the best. In some cases I
may be able to make a good guess but buyers often surprise me with things they did not put on their wish list but
when they see them in a home it makes a huge difference.
My role is to prepare a short list of properties for you to
visit. Your role is to decide which ones are the most appealing to you.
When we schedule a tour we don’t want the distraction of
homes that don’t have a chance of being your final choice.
Before I prepare a tour itinerary I will review the short list
with you. My preference is to schedule no more than 6
properties for tour on the same day. 3 Trying to see too
many at once, results in rushing from one property to another with little time to discuss what we have seen. For
most people, even those who take good notes, it is difficult
to recall the distinctive features of each home. I recently
bought a FlipVideo camera with the intent of making a
visual record of the homes we visit to assist us when we
review what we have seen.
WHAT ARE YOU LOOKING FOR WHEN YOU VISIT A
HOME?
I am amazed by the contrasting styles of buyers when we
are touring homes. If time permits I prepare a folder of material about each home we are scheduled to visit:
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• MLS Listing,
• Seller’s Disclosure,
• Satellite picture of the house and surrounding area,
• Pricing History,
• Description Of The Home From The Tax Appraiser’s
Office,
• 12 Month Utility Costs
• Receipts For Repairs Over Past 12 Months
• List Of Service Persons Used To Maintain Home And
Equipment
• Any Other Material That May Be Available.
• Flyers Or Other information the seller’s agent may
have left for us.
If it is a second visit I will prepare a CMA (comparative
market analysis) including at least 3 nearby listings and 3
recent sales for comparison purposes. By looking at homes
in geographical clusters it is possible to prepare a CMA
that has relevance for several of the homes on the list.
Some buyers will study the material before we reach the
home and bring the folder with them while we are touring
the home. They will ask about features based on the notes
they reviewed while driving to the house; they look for
features on their priority list; they take notes on what they
are seeing and what they like and dislike about the house;
and they take pictures to make sure they can recall features
of. In addition they maintain a kind of rolling rating of the
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homes they have toured that score high on their rating
scale.
Other buyers pay little attention to the background file and
when they enter the home don’t appear to know what they
are looking for or how to evaluate what they are seeing.
They take no notes, ask few questions and give the impression that they are relying entirely on their gut feelings
about a home. If asked which of the homes they have seen
are their favorites, they are sometimes at a loss. One of my
responsibilities as a buyer’s agent is to help you to know
what to look for when you tour a home. I can only help
you to a certain point and then it is up to you to tell me
what you like and/or dislike about a particular house.
AN ART AND A SCIENCE
Whether you like a home is an art and there is no way that
your agent can tell you which home you like the best. I certainly will not attempt to do this. In reality most buyers fall
somewhere between these extremes.
! Your Likability Index
Elements that factor into whether you like a home or not
will be whether it has features you like in your present
home or in your parents home or a friends home. Whether
you like it or not is in no way a value judgment. It may be
a thoroughly beautiful home but if it does not “flow” the
way you feel a home should flow, or if it is too contemporary and you like traditional styling, or even if the decor
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can be changed with a little paint and wallpaper the way it
is decorated and furnished when you see it may make it
unacceptable to you.
One of the best buyers I have worked with, looked at every
home through a filter of the life style of her family. A house
could be top quality in every respect but it might not work
well for her. Of course you want to check out all features of
the home –condition, need for repairs, quality of construction, etc. However there is no need to invest time on the
Quality Assessment if a house fails the Likability test. Your
first consideration should always be how well it will support your life style.
Do you gather as a family around the dinner table frequently? Do you like to eat breakfast at the bar in the
kitchen? Do you like to spend time on the deck, the patio,
or in the yard when the weather is nice? Where do you
watch television? Do you need two living areas sufficiently
separated that you can have quiet conversation in one
while other family members are enjoying a noisy basketball game on the television? How far will you need to carry
groceries to put them away in the pantry? Are you a family
that spends time on the deck, patio, or around the pool?
I can usually tell when we are in a home you like. The
comments you make, the expression on your face and your
general demeanor are often a dead giveaway. I have been
fooled a few times but not often.
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Looking at a home to determine it’s suitability as a home
you may want to buy should be done in a systematic fashion, beginning with the curb appeal as you approach the
home. It is advisable to have a checklist and follow the
same pattern for each house you visit. A good place to start
in preparing your checklist is the composite Wish List you
developed earlier. Don’t be a slave to your checklist, however. Remember, in this stage you are dealing with intangibles that cannot be fully reflected on a checklist.
QUALITY ASSESSMENT
The second objective is to assess the quality of the construction and whether you will need to make any major
investments in the near future if you purchase this home.
You cannot expect to make a complete quality inspection
during a preliminary tour of a home. However, you should
be able to identify areas of concern. The Quality Assessment checklist that follows will help you to make sure you
look at all key areas and make notes so you can recall what
you saw.
You want to take note of the structural, mechanical and
electrical systems, the foundation/basement/crawl space,
the appliances that are staying with the house; the age of
the hot water heater and HVAC systems; the condition of
the floor joists which you can usually observe from the
basement or crawl space; whether the floors squeak or
bounce when you walk across the room; and whether the
basement shows signs of a water problem.
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Some of these issues can be observed during your tour if
you know what to look for while others can only be determined or confirmed by the whole house inspection.
How much time and attention you give to the quality and
safety issue will be determined in part by how you feel
about the home from a functionality point of view. If you
don’t like the home then it doesn’t really matter whether
the basement has had water in it. If your first impression of
the home is a positive one, then you should take enough
time to do at least a preliminary evaluation of the quality
and current condition issues.
RESALE VALUE
The third objective which need not be addressed during
the tour is the future marketability of the home. How well
will it retain its value? Can you expect to get your money
back when you sell? How long will you need to stay in this
home to recover your investment? We’ll give attention to
these questions when we talk about making an offer and
how much you may want to pay for the house if you decide it is your top choice.
Don’t elevate the importance of the resale value above the
other objectives. I know! We are a very mobile society but
the first purpose of a house is a place where a family can
eat and sleep and play and relax and be a family. It is certainly more than an investment which doubles as a place to
live. If you live in a home for 10 years and you recover
your investment, you have made a to of money. Right? Of
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course you have. What would it have cost you to rent this
home for 10 years? If you add that to what you get from
the sale you will be way ahead even if you are slightly in
the hole otherwise.
That does not mean that the resale value is irrelevant. It
does mean however that we need to keep it in perspective.
But no one can predict what a home will be worth on the
market 5 to 7 years in the future.
PUTTING IT ALL TOGETHER
There is no right and wrong way to keep track of the
homes you visit and how you feel about them. Even if your
system seems disorganized or maybe chaotic to me, you
are the Buyer and I will do what I can to support you by
maintaining my own records of the homes you have visited. I will defer to you regarding which homes “feel” right
to you. At most I may make a note by the listing that you
seemed to really like the kitchen or you weren’t fond of the
small deck. If I noted a Wow! During a visit I will mention
it to you as we are leaving the home and ask you if you
consider the house a Wow!
The Quality Assessment is different. I suggest you complete a Quality Checklist for each home that makes it past
the likability test. If you don’t like a home, there really isn’t
much point in wasting time doing a quality check. I don’t
think finding out that a home has a super-dry basement, 30
year roof or a new hot water heater is going to offset the
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fact that you don’t like the floor plan or the master bath is
a turn-off.
1 Lenn Harley, http://www.homefinders.com
2 A short sale is a sale where the listing price is less than the balance due on the mortgage. If the listing
agent is not experienced in working with short sales, the chances of closing in a reasonable time
are not good.
3 My experience is that the better we do the pre-screening, the fewer homes we will need to visit to find
one that is suitable. The majority of buyers are usually able to select a home after visiting 12 to 15
homes. The exceptions are almost always those who were unable to describe in clear terms what
their ideal home would be like.
Deal, Or No Deal?
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STEP 5: DEAL,
OR NO
DEAL?
5
A good deal must be a good deal
for both parties or it won’t be a
good deal for either party.
Now that you have made your choice, there may be a
temptation to let the Seller dictate the price and terms of
the sale. Conversations with many buyers have convinced
me that some buyers suddenly become very paranoid
when the idea of offering less than the asking price is suggested. They are fearful that any attempt to negotiate with
the Seller may risk losing the house they have come to
love.
Never fall in love with a house
unless you own it. It is impossiMy advice to buyers
ble to negotiate a fair contract
is very simple:
for a home that you have determined you can’t live without.
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WIN-WIN NEGOTIATIONS
Another motivating emotion that contributes to buyers letting sellers dictate the price and terms of the sale is the fear
that the Seller will think the Buyer either cannot afford to
pay full price or is seeking to take advantage of the Seller if
they drive a hard bargain. This mindset reflects a faulty
understanding of the process of negotiation. Sure, there is
the outdated style of negotiation based on a win-lose mentality. Negotiation need not, indeed should not, be based
on power and intimidation with each party showing disdain for the needs and interests of the other party.
To achieve an outcome that both parties can view as a good
deal is the ideal. The Seller has made an opening public
offer included in the MLS listing of their home. Even in
the rare instance when the Seller indicates the price is
firm or non-negotiable, I refuse to view the published
price as a final offer. It takes two people to make a deal or
enter a contract, thus negotiation is inherent in the process.
Everything is negotiable, even things that we tend to assume are not. The key to success is good faith negotiating.
This means that just as it is incumbent on a Seller who
wants to attract offers from interested buyers to list property at a reasonable price attuned to the market, it is
equally incumbent on a Buyer to make a good faith offer. If
you believe a fair market price for a property is $200,000
your opening offer should not be $100,000 or even
Deal, Or No Deal?
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$125,000. If the gap between the asking price and your offer is too great to be covered by negotiations there may be
no point in making an offer.
A few years ago my wife was helping me shop for clothes.
I found a pair of trousers that fit well that I liked. They
were priced at $69 per pair. I am not fond of shopping for
clothes so the idea occurred to me if I bought two pair I
wouldn’t have to continue shopping. I embarrassed my
wife when I offered the salesperson a deal. I said, These
trousers are priced at $69 per pair. What would my price
be if I bought two pair? $138 was the immediate response.
What is the incentive for me to buy two pair? Surely you
would rather sell two pair than one pair. Surprisingly, I
managed to obtain a 10% discount. I would not have received a discount had I not asked for it.
The same is true in buying a home. The Seller has announced the price they would like to receive and the terms
of the transfer they prefer. The next move is up to the
Buyer. Your offer will be submitted as a proposed contract
for the purchase of the property you have selected. Unless
it appears you are competing against another buyer and
may have only one chance to submit an offer, your opening
offer should not be based on what you think the Seller will
accept but on what you would like to pay.
Most buyers and their agents use the Seller’s asking price
as the starting point in deciding how much to offer. I believe that is a mistake. If the asking price for one property
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is a very competitive price and the asking price for the
other property is not, you will compound the problem if
your offer for either is calculated as a percentage of the
asking price.
COVER ALL RELEVANT ISSUES
! Price
! Comparative Market Analysis (CMA)
The first issue to decide is how much this home is
worth to you? You and your agent should spend
enough time preparing your offer that you have confidence it is a serious offer and one that you will feel
good about if it is accepted by the Seller. The key lies
in the Comparative Market Analysis. Most references
in the literature will treat the CMA as a tool to be
used by a Seller in determining an asking price. It
can be an equally useful tool for a Buyer in determining how much to offer for a particular home.
A CMA involves scanning recent sales of similar
homes as close to the present home as possible.
Three is generally considered the minimum and 6 is
better. Active listings in the immediate area should
be included as well. The value of the CMA is directly
related to how well the comparison properties have
been selected. To be useful for comparison a home
should be comparable in as many of the following
Deal, Or No Deal?
areas as possible: # of bedrooms, # of baths, square
footage, age, type of lot, basement, and condition.
Other information you will consider as you interpret
the CMA and use it to determine an offering price
will be Days on Market for active listings and the
pricing history of each property. You will want to be
cautious about using outliers in your CMA. They at
least bear more intensive scrutiny to determine why
the asking price is significantly higher or lower than
the price of other properties that appear to be comparable.
! Motivation of the Seller
Another consideration when determining your offering price will be your perception of the motivation of
the Seller. Are there indications that the Seller is
ready to deal? Sometimes the listing will include
phrases such as “bring all offers,” or “owner says
sell.” Another indicator of the seller’s motivation
may come from the length of time1 the property has
been on the market and from the pricing history. This
information is readily available to your Agent.
! Purchase Price Compared With Asking Price, By
Region 2
Data from the NAR Profile show that the median
purchase price in 2009 was 96% of the seller’s asking
price. In context that is useful information to have
but it would be a mistake to conclude that you have
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BUYERS WHO PURCHASED A HOME IN THE
Percent of Asking Price
All Buyers
Northeast
Midwest
South
West
Less than 90%
18%
20%
20%
17%
18%
90% to 94%
20
21
23
19
17
95% to 99%
35
36
35
35
34
100%
18
17
15
20
20
101% to 110%
6
5
4
7
9
More than 110%
2
1
2
2
2
Median
96%
96%
96%
97%
97%
made a good deal if you are able to purchase the
home you have chosen for 95% of the asking price.
! Closing and Possession Date
This can cut both ways. If the Seller is anxious to close the
sale it increases the likelihood that a lower offer will be accepted if it is coupled with an offer to close quickly. Of
course if the Seller has not yet purchased a place to move
or cannot move into their new home by the closing date
you propose they may insist on a higher price as a condition of accepting your closing date proposal. However if
you are willing to give the Seller the time they need your
lower offer may be acceptable.
! Early or Late Occupancy
In some instances it may fit the circumstances of the
Seller or the Buyer to separate the Closing Date and the
Possession Date. If both parties agree a written agreement
should be included which sets forth clearly the details of
the arrangement including the amount to be paid by the
occupants of the property prior to or after the closing;
Deal, Or No Deal?
121
how insurance and liability are to be handled; who pays
the utilities; and when inspections are to take place.
The impact on price will depend on which party is
accommodating the other.
! Contingencies
! Sale of Present Home
If you have not sold your present home and will
need to do so before closing on the one you are buying you will need to include with your offer a provision that makes your offer contingent upon the sale
of the property you now own. The effect of this contingency on the Seller is that it effectively takes their
home off the market with no guarantee that you will
finalize the purchase of their home.
If you have a pending contract on your present home
this will greatly reduce Seller’s anxiety (provided
however that the sale of your home is not also contingent on the sale of your buyer’s home). If this becomes a barrier you may want to discuss with your
agent and your lender the possibility of a bridge
loan.
The details will vary from lender to lender but a
bridge loan is an arrangement that allows you to
purchase the new home but not be facing two
monthly payments. This is not an advisable option
for many buyers. Ask your agent to help you assess
whether it is appropriate for you to consider. You
will also want to seek the advice of your lender.
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The point to keep in mind here is that the less certain your offer is to close, the less likely the Seller
is to accept an offer substantially below the asking
price.
! Financing
Anything short of a full commitment evidenced by a
Pre-Approval Letter with no exceptions, can give the
Seller reason to question whether your proposed
purchase will become a reality. In some areas of the
country it may be customary for lenders to issue PreQualification Letters and for those to be considered
as sufficient to secure the contract.
The point to keep in mind is that the less conditional
your financing is, the more willing the Seller will be
to consider your offer.
! Earnest Money Deposit
The purpose of an Earnest Money Deposit is to provide
assurance to the Seller that the Buyer is serious enough
about the proposed purchase to make what might be
viewed as a down payment at the time the offer is submitted. The only way the Seller will ever have access to
the EMD is to accept the Buyer’s offer and eventually
sell the property to the Buyer. Your EMD will be deposited in an Escrow account and held until closing at
which time it becomes a part of the purchase price. The
amount of the EMD is sometimes specified by the Seller
in the listing. The form of the deposit (personal check or
certified check) may also be specified.
Deal, Or No Deal?
The larger the deposit you make the more likely it is
that the Seller will accept your offer. The simple reason
being that the more you have at risk, the less chance
there is that you will walk away from your offer.
! Home Warranty
Although the cost to the Seller will be less than $500, it
can be a very cost-effective additional benefit for the
Buyer. Depending on the specific coverage offered by
the Warranty Company chosen, most mechanical, electrical problems (including appliances) will be repaired
by a service company selected by the Company with
the Buyer paying a fixed per incident deductible of between $75 and $125. I routinely recommend that Buyers of an existing home include a request that the Seller
pay for the Warranty with the Buyer selecting the carrier.
! Inclusions or Exclusions
The listing will usually clearly describe which appliances are included, whether the children’s swing set
will remain, for example. Often the Seller will be willing to include items if necessary to make the deal
work. There is no reason to ask for things you don’t
need or have a use for, but if you will otherwise be
buying a refrigerator, washer and dryer, or patio furniture, there is no reason not to request that the items be
included as a part of the sale. Even if the Seller declines the request it will have an impact on whether
your offering price is accepted or the counter offer the
Seller makes.
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There may also be items you don’t want the Seller to
leave. Rather than have to haul away the Seller’s old or
abandoned tree house or freezer that is hard to get out
of the basement you can simply make it a condition of
the sale that these items be removed before closing.
! Help with Closing Costs
Closing Costs3 can amount to as much as 3-5% of the purchase price and in the case of lower priced homes closing
costs may be as much as 8-10% of the selling price. Depending on the type of loan you are using to purchase the
home, some and perhaps most of these costs can be paid
by the Seller. Obviously if the Seller pays a portion of
your Closing Costs, this will reduce the net price the
Seller is receiving. Thus it is customary for the Seller to
expect you to add a similar amount to your offer. There is
no mystery about this so there is no reason to pretend
that your offer is higher than it is.
The benefit to you as the Buyer is that subject to approval
by your lender, any closing costs paid by the Seller may
allow you to spread these costs over the life of the loan
and thus reduce the amount of cash you must bring to the
sale.
As you can see, the amount you offer to pay for the home
is only one of the negotiable items. You and your agent will
have to decide which of these items are important to you
and which are likely to assist in achieving a win-win outcome to your negotiations with the Seller.
Deal, Or No Deal?
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GO FOR IT!
So, how much should you offer? In summary, you and
your agent will arrive at an offer based on:
! The market value of this home based on the CMA
referenced above;
! The maximum price you are willing to pay (or are
approved by your lender to pay) factoring in the
other issues you plan to include in your offer;
! The condition of the home including how much you
anticipate you will need to spend on improvements,
and
! Write an offer that leaves a small margin for
negotiation in case the Seller counters.
! Best Alternative to a Negotiated Agreement
In any negotiation, whether you are the Buyer or the Seller,
it is important to know (but not disclose) your Best Alternative To a Negotiated Agreement. Professional negotiators sometimes refer to this as your BATNA. Were there
other homes that were almost as appealing to you as this
one. If you can’t buy this one at a price and terms that are
acceptable would you be satisfied to switch over and consider one of the others? If so, your BATNA is House B or C.
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PRESENTING YOUR OFFER
Once you have agreed on the price and terms you will offer, you should not be defensive or hesitant in presenting
your offer. The way you or your agent present your offer
will go a long way toward securing its acceptance or rejection by the Seller.
! Importance of the Cover Letter
! How much you like the house
A strong cover letter should emphasize how much
you like this home and why you have chosen it.
Don’t be hesitant above giving positive feedback to
the Seller for fear they will expect a higher price.
Most Sellers have very positive feelings about the
home they are selling and will likely experience
some reluctance to let it go to an owner who they
imagine may “trash it.” You want them to feel good
about you and how you will t reat the home they
are leaving. The more specific you can be about features of the home and how it is obvious they have
cared for the home will pay dividends in terms of
their wanting to see you as the new owners. Don’t
be phony or lavish praise on a home that is going to
need TLC to make it livable.
! Explain how your offer has been calculated
The other important function of the cover letter is to
explain how you have arrived at your offering
price. This may include specific references to the
Deal, Or No Deal?
selling prices of other homes in the area as well as
to the asking price for other nearby homes. If relevant you should point out how long it took the
owners to sell as a reminder to them that offers are
hard to come by in today’s market.
If you have included a number of other negotiable
issues, you may want to indicate which of these are
most important to you and conclude with an indication of your willingness to discuss the details of
your offer in hopes that you and the Sellers can
reach a mutually acceptable outcome.
GETTING YOUR OFFER ACCEPTED
! Put a Human Face on It
Make the Seller feel a connection to you. There are
many ways to do this. You assume that the Seller has
an emotional tie to the property they are selling and
will feel good knowing that a Buyer feels the same
way and will care for it the way they have. It should
not sound phony or it will backfire but a letter signed
by the prospective buyers calling attention to special
feature of the home can be extremely effective.
For example, We love the way you have landscaped
the backyard. We can’t wait for spring to come when
we can spend time there. Our baby is due in February
and we are excited about bringing him home to the
beautiful nursery. It might surprise you to discover
how effective an honest appeal to the sellers can have
in persuading them to accept your offer even if it is
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lower than they wanted to go. If it is true, you might
say, I know you were hoping to get a higher price for
your home but we really love your house and this is
the highest our lender has told us we can go.4
! Write a Clean and Positive Offer
The initial offer, known as a Residential Real Estate
Sale Contract is an extremely important document that
should be prepared very carefully and completely. An
offer to buy a home for several hundred thousand dollars is not a casual document and should be appear as
an official and formal contract. To be complete there
are several addenda that should be submitted at the
same time as the base contract.
A handwritten contract with some addenda missing
conveys a casual attitude toward the process that
could reduce the likelihood of the offer being taken seriously. There is a natural human tendency to consider
a printed document as more official than a handwritten document. As a Buyer you have a right to expect
your agent to prepare the offer in a form that will increase your chances of gaining acceptance by the
Seller.
! Highlight Your Agent’s Credentials
The higher the level of credibility your agent commands the greater the likelihood is that your offer will
be accepted. If an agent gains a reputation for submitting low-ball or frivolous offers, it is likely that your
offer may be taken less seriously than it deserves.
Deal, Or No Deal?
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HOW LONG BEFORE OFFER EXPIRES?
The last issue to decide before submitting your offer to the
Seller is how long you are willEarly in my career representing
ing to wait for a response from
buyers I learned a painful lesson.
the Seller. If the offer is being I gave the Seller a week before the
submitted at night or on a week- offer expired. I thought it would
end or holiday I will give the be a nice gesture to give the Seller
Seller until the end of the next plenty of time to consider our ofbusiness day but 24-36 hours is fer. Well, the seller’s agent chose
not to present the offer to the
usually plenty of time for the
Seller until he alerted a friend and
Seller’s Agent to present the offer gave his friend an opportunity to
and obtain a response. If the enter a slightly higher offer. He
Agent calls and asks for an ex- then presented both offers at the
tension due to the Seller being same time and, Surprise!, Surunavailable for what seem to be prise!, the Seller selected the
higher offer.
plausible reasons, I will agree but
Yes, the behavior of the other
I also make the point that the
agent was unethical and I comBuyer has other options they are
plained to the broker, but I was
considering and don’t want to also painfully aware that my 7 day
delay pursuing those options un- window had given the agent time
less the Seller is favorable toward to out maneuver me. My friends
the offer on the table. This is by in rural Oklahoma used to say, “If
no means a trivial consideration. the same snake bites you twice, it
ain’t the snake’s fault!” I have not
It may be the key to gaining acgiven any seller a window like
ceptance of your offer or it could that since.
result in your losing a deal.
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ADDENDA THAT COMMONLY GO WITH THE BASE
CONTRACT
! Agency Disclosure Addendum
This document indicates the precise function of the
agents representing the Buyer and the Seller and establishes the source of the compensation to be paid. In
most parts of the country the compensation is normally paid from the Seller’s funds at closing.
! Financing Addendum
This document describes the Buyer’s arrangements to
finance the purchase. While it does not restrict you
from changing lenders or obtaining better financing
arrangements, it is the evidence you present to assure
the Seller that financing is available. If you indicate
that financing is available, either a pre-qualification
letter or a pre-approval letter will be attached to the
Financing Addendum.
If the Buyer is requesting the Seller to pay any costs at
closing these will be requested in this document.
! Pre-Approval Letter
A pre-approval letter is stronger in its impact than a
pre-qualification letter. Typically a pre-approval letter
will only be issued if the Buyer has submitted a written application with the lender and has been approved
on the basis of this application whereas prequalification is based on a preliminary screening including obtaining a credit report and a verbal state-
Deal, Or No Deal?
ment from the applicant as to income. Assuming the
information provided the lender is accurate and complete, a pre-qualification letter is usually acceptable.
Whether pre-qualification or pre-approval, if significant changes occur in the buyer’s financial circumstances before closing, the lender may refuse to make
the loan.
! Earnest Money Deposit
The Residential Real Estate Sale Contract should be accompanied by an Earnest Money Deposit in an amount
large enough to convince the Seller that the Buyer is
serious. The amount may vary depending on the purchase price. For a contract under $100,000 an EMD of
$500 may suffice. For contracts over $100,000, a minimum of 1% of the contract price is customary unless
the listing specifies the amount required.
The listing will indicate to whom the EMD should be
payable. The check will not be deposited until the contract is accepted by the Seller. If the contract is rejected
the check will be returned. The reason the check will
be deposited is that until it is cashed there is no security for the Seller.
! Seller’s Disclosure and Condition of Property
Addendum
In nearly all states the law requires that sellers disclose
material facts. The specifics may vary somewhat but
the intent is that the Seller disclose “all material defects, conditions and facts KNOWN TO SELLER which
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may materially affect the value of the Property.”5 Typically the disclosure form will include information regarding the condition of the roof, foundation, drainage, mechanical systems, appliances, and the structure
itself. Environmental and zoning issues are also covered.
Other material facts may have to do with intangibles
such as the location of the property relative to property
producing unpleasant odors under certain wind conditions or the location near a railroad or major highway
or in an airport flight pattern that can be a nuisance to
area residents. The possibility of future development
in the area of the home is a material fact that should be
disclosed. In some areas the absence of or lax enforcement of zoning may be a concern because of the adverse impact it may have on the property either during
the time you own it or at the time you attempt to sell
it.
The Seller should post the Disclosure along with the
listing and the you should examine it carefully before
making a decision to submit an offer. When you sign
the Disclosure you are acknowledging having received
it before making your offer.
THIS IS ONE OF THE MANY TIMES WHEN YOUR AGENT
EARNS THEIR FEE
By now it should be completely clear to you why I put so
much emphasis on selecting the right Buyer’s Agent to
represent you. The right Buyer’s Agent will save you far
more than the commission they may receive from the sale.
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The benefits you will derive if you have a highly qualified
and committed Agent go much further than helping you to
select the right home and negotiate a good deal on this
home.
Research shows that two-thirds of the home buyers will select the first agent they talk with about buying a home. After reading this book and seeing how you can benefit from
having the right Agent representing you, I hope you will
interview as many agents as necessary to find the one you
feel is best qualified to deliver these benefits. The first one
you interview may well be the right one. I am not suggesting otherwise.
What I am saying is that you are the one with the most to
gain by selecting the right agent and entering an Agency
Agreement with them so you can expect the full range of
services that an Accredited Buyers Representative will
bring to the table. A friend or relative may or may not be
the best agent for you. Only you can decide. If you are considering a friend or relative, be sure to interview them as
seriously as you interview other prospective agents. It may
be even more important that you be clear with a friend or
relative regarding what you are expecting from your
Buyer’s Agent.
DEALING WITH COUNTER OFFERS
The Seller has three options upon receipt of your Residential Real Estate Sale Contract -- Accept it; Reject it; or
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Counter it. Any change which the Seller proposes, regardless of how minor, should be presented as a Counter Offer
Addendum. If the Seller submits a Counter Offer, you as
the Buyer have the same options as the Seller had before.
You can Accept the Counter Offer, you can Reject the
Counter Offer, or You can prepare a Counter Offer of your
own.
The one thing you should absolutely not do is feel threatened when you receive a counter offer. Win-Win Negotiations are predicated on recognizing the difference between
the issues and people. Each party involved has interests
and needs that must be satisfied if they are to make a deal.
But even if a deal cannot be made for lack of common
ground between the interests of the two parties, this need
not be cause for ill-feelings between them. Amazingly I
have had agents call me up and read me the riot act because my client did not accept their offer. Any agent who
does that is not an agent you should trust to assist you in
acquiring a home. In my opinion, one of the most fool
proof tests of the professionalism of an agent is how they
handle negotiations.
In many parts of the country, the negotiation of the terms
of the Counter Offer will be conducted verbally between
the agents for Buyer and Seller. If an agreement is reached,
one of the Agents will prepare a Counter Offer Addendum
incorporating the terms agreed to verbally. Of course, the
Buyer or the Seller may request that only written offers be
Deal, Or No Deal?
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considered. If an agreement is reached, the final Counter
Offer Addendum signed by both parties will become a part
of the Residential Real Estate Sale Contract together with
all of the other Addenda referenced in the base contract or
the Counter Offer.
1 Professional negotiators recognize that in every transaction time is a factor that is on one side of the
table or the other but it may shift during the course of the negotiation. Thus a good negotiator will
frame the offer to make time work for their client whenever possible.
2 NAR, p 32
3 Closing costs include underwriting and appraisal fees, surveys, inspections, document fees, mortgage
tax, property taxes paid by Seller, and other similar items connected with the closing of the loan or
transfer of the property.
4 Obviously there is no way you can come back and agree to a higher price if you send a letter like this.
5 Seller’s Disclosure and Condition of Property Addendum 2009, Kansas City Regional Association of
Realtors.
Proceed With Caution
STEP 6: PROCEED
WITH CAUTION
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6
THERE IS MORE WORK TO BE DONE!
You have a signed contract which includes a “no later
than” closing date. Your agent will have advised you regarding the time that will normally be needed for you and
your lender to be ready for closing. Setting a schedule that
is too tight will simply require an amendment to the contract later. In most cases closing will not be possible in less
than 30 days if there is a loan involved. Cash sales take less
time since the Truth in Lending regulations do not apply.
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More often than not, the closing date will be the day that
you and the Seller sign the paperwork and you receive the
keys to your new home. In case either party cannot close
by that date an amendment will be prepared by the agent
representing the party requiring an extension. Assuming
the extension does not result in undue hardship for the
other party the amendment will be approved. If you or the
Seller desires an earlier closing date and the other party is
agreeable, the closing can take place earlier with no
amendment required.
You have work to do however, before you will be ready for
closing. Your contract will include a timetable for inspection to be completed. Local customs vary, but the most
common timeline provides you the Buyer 10 days (or more
if specified in the contract) to retain a licensed inspector to
perform what is generally referred to as a whole house inspection. Your agent will assist you in scheduling the inspection promptly. More on the inspection process in the
next section.
You will also need to meet with your lender and complete
the application for a mortgage. As a matter of record, the
contract you signed normally will include a clause that
commits you to completing an application for a loan
within a stated number of days (often 10 days) following
the effective date of the contract. If you are pre-approved
and the amount of the pre-approval letter is adequate to
cover your purchase this will be a fairly simple process.
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Whether you have been pre-approved or pre-qualified,
your agent will send the lender a full set of the signed contract documents and provide any other information your
lender may require. Hopefully you provided most of the
information the lender needs when you applied for the
pre-approval letter (the pre-approval letter will have been
incorporated into the contract by reference).
If you included a Pre-Qualification letter with the contract
instead of a Pre-Approval Letter, there is a possibility that
once you complete the application and the lender submits
your loan application to their underwriting department,
the loan will be declined. There are various reasons why
this could occur. Different lenders have different procedures and have different limits established for the types of
loans they will make. Don’t panic, it may be that other
lenders will have no problem approving your loan. Follow
the guidance of your agent. Hopefully you will find an alternate lender who will make the loan and you will be able
to close on schedule.
If you make a good faith effort to obtain a loan commitment and you fail to do so, most contracts will have included language that provides for the refund of your earnest money deposit if you are unable to complete arrangements for financing. To avoid the risk of losing the
house due to a lender declining to approve a loan, it is best
to at least stay in close touch with your prospective lender
throughout the search process.
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Your agent will likely establish contact with your prospective lender early in the search process to determine if there
are restrictions regarding the types of houses they will finance. For example, in some parts of the country modular
and mobile homes are common. Many lenders will not
make loans for homes that are not site-built. My suggestion
is that you discuss with your lender during your initial
meeting any restrictions that you need to be aware of as
you search for a home.
THE HOME INSPECTION
In most states, sellers are required to disclose to buyers any
adverse conditions they know about or should know
about. This disclosure will take different forms. In the area
where I work we have an Addendum to the Contract
known as Sellers Disclosure which is completed by the
Seller and made available to prospective buyers. It is important that you receive a copy of this document while you
are still in the evaluation stage as the information it contains may be very relevant to your decision about making
an offer and how much you are willing to offer. Always ask
your agent to provide you with a copy of this Disclosure
either at the time of your first visit to a home or at least before you make your decision as to which home you would
like to buy.
If your visual inspection of a home suggests the possibility
of problems that are not referenced in the Disclosure, e.g.,
structural issues, signs of water stains on the ceiling indi-
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cating the possibility of roof leaks, or evidence of water
having been in the basement, etc., you will want to include
special conditions in the contract at the time of your offer
that requires these problems to be explained or resolved.
There are some conditions that you will not be able to observe and these may be identified by a licensed inspector.
! Whole House Inspection
The basic inspection is usually referred to as a Whole
House inspection. The inspection serves two equally important functions.
! Identify Unacceptable Conditions
The first is to identify for you as the prospective Buyer
any conditions in the home that might be sufficiently
serious to cause you to reconsider your decision to
make an offer to buy the house. In that event there are
procedures (described below) that you and your agent
will follow to renegotiate the contract. In extreme cases,
you may even decide to notify the Seller that you are
withdrawing your offer. This should be a last resort
made only when extremely adverse conditions are discovered cannot reasonably be corrected to make the
home acceptable.
! Home Maintenance Orientation
The second purpose of the inspection, which is sometimes overlooked is to provide you with a guided tour
of your new home with explanations and directions regarding what you will need to do to properly maintain
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your home. This may range from how to change the filters in your HVAC system to how to set your thermometer to making sure that the downspouts are properly directing run-off water away from the foundation.
Some inspectors do a better job of this than others. Obviously this requires that you be present for the inspection. My advice is that you should always be there. You
are making a large investment and it is possible that a
few simple maintenance tips from the inspector could
save you thousands of dollars in the future. A normal
charge for a medium sized house will cost you in the
range of $250 to $500.
! Typical Coverage:
• Structure: including foundation and framing,
dampness in the basement1, and foundation
cracks2;
• Exterior: sidewalks, driveways, steps, windows, doors, siding, trim, and surface drainage;
• Roofing 3: age, flashing, roof drainage, gutters
and downspouts, skylights, chimneys;
• Plumbing: water supply and drainage, water
heaters, drainage and sump pumps, water
pressure, banging pipes, rust or corrosion;
• Electrical: 4 service entrance wires, service
panels, breakers and fuses, disconnects, and
outlets;
• HVAC: 5 including vent system, flues and
chimneys, water heaters, energy ratings, including energy source, central and through-
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wall cooling equipment, age and energy rating;
• Interiors: Walls, ceilings and floors, Steps,
stairways, and railings, countertops and cabinets, garage doors and garage door systems;
• Ventilation/insulation: Adequate insulation
and ventilation in the attic and unfinished areas such as crawl spaces and in the walls.6
! Other Types of Inspection
Depending on how risk averse you are, questions raised by
the Sellers’ Disclosure, or conditions noted during the
Whole House Inspection, you may want to conduct one or
more of the following special purpose inspections.
! Termites and Other Insects
It is not always possible to know about termite damage
by a visual inspection alone. They may have attacked
the floor joists only visible from the crawl space. Usually your whole house inspector will note signs of the
possible presence of termites. Most whole house inspectors also possess a termite inspection license. Frequently
my clients will retain the whole house inspector to also
conduct a termite inspection at the same time.
If you are using FHA, VA, or certain other types of government backed financing you will be required to have
a separate termite inspection. In the event this inspection reveals the need for treatment it is generally the re-
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sponsibility of the Seller to pay for such treatment. The
cost of a termite inspection will range from $65 and up.
! Mold
Mold 7 is a sign of excess moisture. This may be the result of a roof leak, sump pump overflow, sewer line
backup, or water getting into the basement. Any time
water has been in places it should not be it may leave
water-logged insulation, drywall or wooden studs. If
cleanup is not done correctly it can leave behind mold
that must have a water source to continue growing.
If the Sellers‘ Disclosure indicates a water leak of any
kind but says the problem was fixed and there has been
no water present since, you will want to have your inspector investigate to make sure the water has not left
behind enough trapped moisture as to create a mold
problem in difficult to reach places. You may not be able
to detect a source but if the air in the house, most likely
in the basement has a musty smell to it, ask the inspector to check it out for you.
Cursory checking for mold can be done by the general
inspector. However if you feel it is a serious problem, it
may be advisable to ask for a mold test which will collect data on the types of spores that may be present in
the air. If the verdict is that mold is present in the house
it is essential that you cut off any water source -- or at
least buy a small dehumidifier to dry out the area where
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the mold is concentrated. You will still need to clean all
areas where mold has been. If there are indications of
water in the walls, don’t make an uninformed decision
that there won’t be any significant amount of mold in
the walls. A small investment now may be worth a lot in
the future.
Clean or scrub the affected areas with a mild solution of
water and bleach. Don’t make it so rich it takes all the
color out of the wall. You want it to be strong enough to
clean the mold from the surfaces where it has been
found. Make sure you have corrected any problem that
was allowing water into the house.
A mold test kit can be purchased at a home center for
around $30 but the reliability of the test will be much
greater if you have a professional test performed by a
testing lab. The cost for the professional test could range
from $200 to $400 depending on the size of the area to
be tested and the precision you require.
! Radon
The other silent and invisible hazard is Radon 8. The scientific data on the danger levels of radon is not strong
enough to convince everyone that Radon is a problem.
Other than the possibility of spending money unnecessarily, it is usually better to be safe than sorry. Radon
gas is ubiquitous. No matter where you build or buy a
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home there will at least be a low level concentration of
radon gas.
The concentration at any given time may be high or low
depending on several factors including when it last
rained and how much rain fell. That’s because when the
ground water is greater, more radon gas will be released. If you are undecided about the need for a radon
test, ask your agent your agent about the results of other
tests in the neighborhood. You can also go on the Internet and search for information about radon.
The EPA site is a good one to check. A radon test will
cost in the range of $300 to $400. If high concentrations
of radon are present, mitigation involves installation of
a blower system that removes air from the lowest level
of the home and ducts it to the roof level. Depending on
the style of the home and how difficult it is to get the
small duct (usually about 6” diameter) to the roof line,
mitigation can run anywhere from $600 to $2,000.
! Lead-based Paint
If the house was built prior to 1976, the Seller is required to disclose any knowledge of the use of leadbased paint. Houses built since that time will not have
any lead-based paint to check. If the paint is cracking or
chipping off it can be a hazard to small children. Since
most owners have not lived in the house they are selling
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continuously since 1976 they will have no record of the
presence of lead-based paint.
If you have small children and there is any doubt about
the presence of lead-based paint, you can have a specialized inspection to identify any and all locations where
the hazard may exists. On the other hand you can simply assume there may be a residue of such paint on the
woodwork, doors, etc. and prior to moving into the
house, hire someone to scrape away all loose paint in
rooms where the children would have contact with the
walls or doors and then put two coats of high quality
paint to seal the finish.
! Septic Systems
Homes not served by municipal sewer systems will either be served by a septic or lagoon system 9. These require varying amounts of land to be effective depending
on the nature of the soil and the design of the system. If
you are buying a home that has a septic type system,
you will want to know that the system is a good repair
and adequate for the load that your household will
produce. Inspection involves removing the access cover,
pumping the tank, and either a visual inspection of the
tank and/or the use of a camera that is lowered into the
tank and fed into the laterals to verify the condition.
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! Water Supply
Unless the location of the home is extremely remote it is
likely it will be served by a public water system. Rural
water districts exist in most parts of the country. However even where a public water system is available
some homeowners prefer to install their own water
treatment system 10 and use available ground water
sources. It is important to conduct regular tests to make
sure the quality of the water meets acceptable standards.
RESOLUTION OF UNACCEPTABLE CONDITIONS
One of the primary reasons to conduct an inspection is to
determine whether there any unacceptable conditions exist. An unacceptable condition is usually defined as any
condition that were it know by the Buyer it would either
influence their decision to buy or the price they would be
willing to pay. Some unacceptable conditions are based on
the physical condition of the home. These will be detected
by the Inspection and properly should have been disclosed
by the Seller.
The contract will include a timeframe for conducting an inspection, often it is 10 days running from the date the contract was signed. The beginning of the inspection period
and the length of the inspection period can be anything the
parties agree is acceptable. For example, when the sale involves contingencies such as the sale of an existing home
149
or approval by the lender in the purchase of a short sale, it
may not make sense to inspect the property until the contingency has been cleared. In the event you are comfortable
with the condition of the house based on your own observation and inspection, you may waive the inspection and
notify the Seller that you are accepting the property “as is.”
In cases where the property is listed for sale on an “as is”
basis, inspection will be for the information and benefit of
the Buyer and will not serve as the basis for further negotiation. The inspection could, however serve as justification
for withdrawing your offer without forfeiting your earnest
money deposit. Special note should be taken of any items
listed in the Seller’s Disclosure as being excluded from inspection. If the exclusion has the potential for adding a
substantial cost to the Buyer, e.g., if the HVAC system is
excluded from the inspection, you consider this when you
make your offer on the property. At a minimum exclusions
from the inspection should be referenced in the cover letter
your agent submits with your offer.
THE INSPECTION REPORT
Once an inspection has been completed, you will receive a
detailed written report of the findings of the inspector.
Your agent will review the report with you and help you
determine your response to the Inspection. It is important
to understand that the purpose of an inspection is not to
recover what you lost in negotiations. In other words, it
150
should not be viewed as a way to demand additional concessions from the Seller.
Minor maintenance items are an ongoing part of home
ownership, and the inspection is not the creation of a final
punch list for the home builder before you accept the
property. Inexperienced buyer’s agents may mistakenly assume that it is their job to be tough on the seller and insist
that even minor repairs are the seller’s responsibility. Some
inspectors may reinforce this attitude by failing to distinguish between serious problems that should be handled by
the seller and maintenance issues that should not be a
cause for concern. Overstating the severity of a problem
may do more harm than good by creating anxiety for the
buyers.
If the Seller has disclosed that the roof will likely need to
be replaced within the next 2-3 years, you will have already considered this in the price you offered thus to ask
the seller to pay for a new roof would amount doubledipping. On the other hand, if the Seller indicated in the
disclosure that the roof is in good shape with several years
of expected useful life and your inspection reveals the
likely need to replace the roof within the next year, you
should address this in your response to the inspection.
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INSPECTION NOTICE OPTIONS
! Inspection Waiver
As already noted, you may agree to accept the property
“as is,” with no inspection conducted. I do not generally recommend this option but there are conditions that
make it appropriate. E.g., there is probably no need to
incur the expense of an inspection if you are buying a
foreclosed property with obvious need for significant
repair.
! Inspection Results Acceptable
If the inspection reveals no major or costly to repair
problems you are generally well advised to accept the
property “as is. Some agents may advise you to cite
every item noted by the inspector and request the Seller
to either fix these items or make a cash offer to the
Buyer in lieu of repair. I disagree with that approach for
several reasons which I will explain below.
! Cancellation of Contract by Buyer
If the inspection has identified major problems with the
property that you feel will sufficiently impair its functionality or suitability for your family you may simply
cancel the contract and request the refund of your earnest money deposit. You must notify the Seller in writing prior to expiration of inspection period that based
on results of the inspection you desire to cancel.
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A copy of the full Inspection Report conducted by a licensed inspector must accompany this notice. It is not
necessary to explain your rationale other than to note
that it is due to the Inspection. Of course if the inspector
has given you a glowing report with no notations of
problems requiring correction you can expect the Seller
to demand to know the basis for your request. I don’t
advise my clients to walk away from a contract without
a strong rationale.
! Offer to Renegotiate
If you have conducted an inspection and found unacceptable conditions, you may notify the Seller that you
desire to renegotiate the terms of the contract. You
would attach to the notification a Resolution of Unacceptable Conditions Amendment describing the alternatives you propose which may be a combination of a
cash allowance and/or repairs conducted by the Seller
before closing. In response the Seller may accept,
counter, or cancel the contract.
This is clearly a rather strong response and one which
should only be made after considering the possible consequences. Remember what a BATNA is? In Step 5, we
defined a BATNA as the Best Alternative To a Negotiated Agreement. Before you submit a Resolution of Unacceptable Conditions Amendment to the Seller, you
should be clear about the options available to the Seller.
One of the Seller’s options will be to decline to accept
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your proposed amendment and refuse to make a
counter offer.
I recommend to my clients that this option be chosen
only after careful consideration of the seller’s options.
First, I consider it an adversarial approach that may alienate the sellers and make them less willing to cooperate during the transition. Second, it may cause the Seller
to be reluctant to repair major items if they are combined with a list of minor maintenance issues. Finally, if
you refuse to accept the property and request renegotiation you are opening a door for the Seller to walk
through and cancel the contract. Consider the following
scenario.
Suppose that after signing a contract with you the
seller’s neighbor came over to ask about the new owners that would be moving into the neighborhood. In the
course of the conversation, the neighbor asked about
the selling price and was shocked that the house was
being sold at whatever price you were paying. The
neighbor subsequently called a friend who had not
bothered to make an offer on the home because he considered the listing price to be out of reach. You guessed
it! The neighbor’s friend called and said, “If the sale
doesn’t go through for any reason, let me know, I’d be
willing to give you $5,000 more than the current Buyer
is paying.”
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The sellers are honorable people and are not going to
try to break the contract with you. However, when you
demand another $7,000 to cover a long list of minor
maintenance items plus one or two more significant
items, they have the option of simply notifying you that
they are canceling the contract and returning your earnest money and you have no recourse. The point is that
you only want to resort to this option if you are prepared to accept any option the sellers may select.
If you have been having a bad case of buyer’s remorse
and wishing you had made an offer on a different home,
you may use this opportunity to encourage the Seller to
walk away. However if that is your intent, the simpler
way to do it is to notify the sellers that based on the inspection report you are canceling the contract.
THE FINAL WALK-THROUGH
A few years ago we purchased a home on a unique site.
The house sat high above the street which curved
downhill around the house and the set back on the side
of the house was quite steep down to the street. The
owners had installed a railroad tie retaining wall to
prevent the immediate area around the house from
eroding down the hillside to the street below. The day
before closing we made a final walk-through of the
house and noticed that the railroad ties had fallen down
the hill. I called the agent and reported that we would
not be ready to close on the sale until the retaining wall
155
was restored. The Seller was not happy but had no
choice but to comply. Had we not made a final walkthrough it would have been too late once we had
closed.
In my experience less than 50% of the buyers I work with
choose to do a walk-through. Of course it is the buyer’s option but I believe it is a wise thing to do. Keep in mind
however that this is not a re-opening of the previous inspection nor is it a time to renegotiate for additional repairs. It is a time:
! To verify that all conditions of the contract have
been met;
! To verify that all included items are still there;
! To verify that all negotiated repairs have been
made;
! To determine that the house is ready for you to
move in;
! To verify no major changes to the property since
you last viewed it;
! To verify that no plants or shrubs have been removed from the yard;
! To verify that the heating and air conditioning
system is working;
! To verify that garage door opener are available;
! To verify that instruction books and warranties
are available; and
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! To verify that all personal items and debris have
been removed; (Check the basement, attic, and
every room, closet, and crawl space.)
1 For more information about damp basements, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-damp-basement.aspx
2 For more information about foundation cracks, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-foundation-cracks.aspx
3 For more information about roofing problems, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-leaky-roof.aspx
4 For more information about possible electrical problems, go to
http://livingwithmyhome.com/know-your-home-articles.aspx?catid=CC_201_ELECTRICAL
5 For more information about possible hvac problems, go to
http://livingwithmyhome.com/know-your-home-articles.aspx?catid=CC_201_HEATING_COOL
ING
6 For more information about insulation and ventilation in the attic go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-attic-insulation.aspx
7 To learn more about Mold in Your Home, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-info-mold.aspx
8 For more information about Radon in your home, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-radon-gas.aspx
9 For more information about septic systems, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-septic-system.aspx
10 For more information about water supply systems, go to
http://livingwithmyhome.com/201-home-tips/pillar-to-post-well-water.aspx
You Made It!
STEP 7: YOU MADE IT!
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7
IT’S CLOSING TIME
You and the Seller have agreed on the price you will pay
for the house, the terms such as what will be left in the
house or on the property and what must be removed, work
to be done, if any, to resolve any unacceptable conditions
identified during the inspection, you have made arrangements for homeowners insurance, notified the utility companies to convert the billing to your name on the possession date.
You have confirmed the schedule with a moving company
for the moving date. If you are moving from a rental prop-
158
erty you have settled all accounts with the property management company. If you are selling one home and moving
into another, things are a little more complicated as you
may have two closings on the same day. That can be tricky
but this is one more time you will be glad you have an
agent who is on top of everything. If you have a different
agent for the sale of one home and the purchase of the
other, the two agents will need to have good communications established before closing.
SO, WHAT IS THE CLOSING?
The Closing (or Settlement or Closing of
Escrow or whatever
similar terminology is
used in different parts
of the country) is a
process whereby the
two parties to a real estate transaction meet
their respective obligations as set forth in
the Residential Real
Estate Sale Contract
(including all Addenda and Amendments).
The process is coordinated by a third party -an attorney, title company, escrow company, a
closing agent associated with a mortgage
lender, or other person legally qualified to
perform this function. All funds from the
Buyer are held in escrow until the Seller transfers ownership from the Seller to the Buyer
under the terms of their written contract.
The Closing Agent gathers all funds, documents required for the transfer of clear title to
the property, invoices for services due from
either the Buyer or the Seller, and all documents that must be signed by the Buyer to
close on any loan providing funds necessary
to comply with the contract. These documents
are usually collected by the Buyer’s Agent,
You Made It!
the Seller’s Agent, and the lender. It is the responsibility of
the Seller’s Agent to order the title search and provide the
Buyer’s Agent a title insurance policy verifying the Seller
has the legal right to sell the property. This title search will
identify any liens that must be satisfied prior to closing.
THE SETTLEMENT STATEMENT (HUD-1)
It is not always necessary for both Buyer and Seller to be
present at the final settlement time. The Seller may sign the
closing statement as soon as it is finalized and ready.
Likewise, you, the Buyer may sign the Loan Closing paperwork at your Lender’s office. Regardless of any early
signing of documents, the one document that ties everything together is the Settlement Statement commonly referred to as HUD-1. This document is a reconciliation of
the obligations of the Buyer and Seller which must be met
in order for the transfer of funds and the transfer of property to take place.
At closing, the Seller must provide clear title to the property and the Buyer must deliver the funds needed to close
the sale. The closing agent receives the funds due from the
Buyer and disburses funds to the Seller in the amounts
showing on the Settlement Statement. The closing agent
also disburses funds to all third parties with approved
claims including agent commissions, taxes, service providers, etc.
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160
THE GOOD FAITH ESTIMATE (GFE)
When you completed your loan application you should
have received a Good Faith Estimate (GFE). The estimated
costs associated with processing and disbursing your loan
as set forth in the GFE should correspond with the
amounts shown on the HUD-1. Most lenders do their best
to insure that this estimate is close to what the actual cost
of the loan will be but the spread of online mortgage loan
processing contributed to an increase in what appeared to
be “bait-and-switch” tactics.
To address the perceived abuses and increase buyers confidence in the system, new rules adopted by the Department of Housing and Urban Development went into effect
on January 1, 2010, mandating the use of a standardized
GFE form. This makes possible direct comparisons of the
estimated costs by various lenders.
In addition, the format of the HUD-1 has been revised requiring the lender to display in side-by-side columns the
estimated costs from the GFE and the actual costs included
in the HUD-1. Some fees are not subject to control by the
lender, e.g., charges from service providers chosen by the
borrower, but not recommended by the lender. Homeowner’s insurance would be in this category.
Other fees are established by the lender and cannot change
between issuance of the GFE and the closing. These in-
You Made It!
clude loan origination and underwriting charges. (Changes
included here are subject to reimbursement by the lender.)
There is a third category of fees that cannot increase by
more than 10% at settlement. This category includes services provided by a third party but required and recommended by the lender. Title services and title insurance ordered by the lender from a provider of the lender’s choice
is an example of items included here.
One business day before the actual closing, you and your
agent should receive a copy of the HUD-1 Settlement
Statement from the person handling the closing. It is important that you review this Settlement Statement with
your Agent to make sure that all agreements are in accord
with the contract as approved by you and the Seller. You
will want to pay special attention to Section J where the
transactions between Buyer and Seller are listed and Section L where all Settlement Charges will be listed.
It is possible that the closing agent was not clear regarding
terms of the contract and this will make it possible for the
corrections to be made without delaying the closing. In
some cases the closing agent may be working from the
base contract and fail to note an amendment.
WHO PAYS THE PROPERTY TAXES?
Various states handle property taxes differently but the
general rule is that property taxes are prorated between
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162
Buyer and Seller as of the date of closing. If property taxes
are paid in arrears as they are in many states, it is likely
that the Seller will have taxes accrued but not paid. If so,
an amount sufficient to cover the seller’s liability will be
deducted from the proceeds and
Abby was a single mother buying
placed in the an Escrow Account to
her first home. She had been a
cover the taxes on behalf of the
high maintenance client from day
one. She took copious notes on Seller when they come due. On the
every room in every house we other hand, if the Seller has previsited. She agonized over her se- paid taxes extending beyond the
lection and asked several friends closing date, you will owe the
and family members if they
Seller to cover the number of days
thought she had made a good
they have prepaid. This will be redeal.
flected in the Settlement Statement.
She read every line on every form
at closing to make sure that she
was not signing something that
would come back to be a problem. We were nearly finished
with only a couple of forms remaining. She found the language
giving the lender the right to call
her loan at the bank’s discretion
on sale. She refused to sign for
fear the bank would call her note
with no cause.
Fortunately she had come to trust
me and I was able to explain the
intent of the form to her satisfaction. She signed and I handed her
the keys to her first home.
YOUR BUYER’S AGENT AND
CLOSING
Most Buyer’s Agents make it a
practice to attend the closing with
their Buyers. They do this to give
moral support to you when you
are consummating a major financial transaction, to be available to
answer any questions you may
have regarding why you are being
asked to sign a particular document, and to make sure that any
last minute changes that were not
You Made It!
reflected in the preliminary HUD-1 are in conformity with
the agreement between Buyer and Seller.
I like to be there to congratulate the Buyers, make sure they
have called the utility companies, remind them to change
the locks on their new home, answer any questions they
may have regarding the home warranty and how or when
to call them if a problem arises.
I also want to remind my clients that my service doesn’t
end when the closing is over. I want them to think of me as
their REALTOR® for life any time they need assistance
with any real estate matter. Finally I want to encourage
them to recommend me to their friends and family members whenever they need real estate service. First and last,
a REALTOR® is in the people business.
WELCOME TO HOME OWNERSHIP
With the signing of the Settlement Statement you are now
officially a homeowner. Congratulations! In case you have
not done so already, there are a few things you will need to
buy either because you need them now, or simply to be
prepared for when you will need them.
! Things You Need Immediately
! Mail box
Mail delivery service varies in different parts of the
country and even in different parts of the same commu-
163
164
nity. If your neighborhood is served by a carrier who
brings the mail to your house you will need a mail box
either by the front door or on a post by the driveway.
Ask the post office for the specific guidelines you must
follow to comply with their regulations.
If your neighborhood is served by a cluster of mail
boxes at a central location you will need to contact the
post office for an assignment of a box number, make a
deposit and get a key to your box.
! Garbage Cans and Water Hose
Size, type, location and pick up times are all issues to
discuss with the company (or city department) that
picks up your garbage. The water hose will have plenty
of uses. You may need more than one.
! Change the Locks
If you haven’t already done so, arrange to have your
locks changed. This is a small expense that will give you
peace of mind knowing that no one has a key to your
house unless you gave it to them.
! Fire Extinguishers, smoke alarms, and flashlights
Fire safety is too important to delay. If the house is already well-equipped with strategically located fire extinguishers you’re ahead of the game.
You Made It!
! Things You Will Need Soon
! Lawn Equipment
A lawn mower suitable for the size lawn you have. Depending on the time of the year when you move in, you
may need a mower sooner rather than later.
! Weedeater/Trimmer and/or Leaf Blower
Depending on the size of your yard and how many
trees you have you may need other items as well.
! Snow Removal Equipment
Could be a small snow shovel or it could be a large
snow blower depending on what part of the country
you are in and the amount of sidewalk and driveway
you have to clear. If your homeowners association provides for this, you won’t need to worry about these
items.
! Basic Household Tools
If you are not familiar with home maintenance, you
should go to one of the large home centers, e.g., Home
Depot or Lowes, and ask someone to assist you in selecting what you need. Be careful they don’t overload
you with things you don’t need and won’t know how to
use.
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166
At a minimum you will need a starter set of tools, a
small step ladder, spare light bulbs, picture hangers for
the type walls you have and the types of items you like
to hang, and maybe a small drill.
! Emergency Service Providers
Before incurring the expense of calling someone to repair a
leaky faucet, clean a spot on the carpet, or fix a commode
overflow, do some searching on he Internet. You will be
amazed by what you will find and what you will learn
about your home. Even if you decide not to handle the repair yourself, you will be able to discuss the problem with
the service person you call and have a better idea what it
should cost if you do call someone.
Another thing you might consider by way of containing
future costs. If you are lucky enough to have a neighborhood hardware store, introduce yourself to the owner and
become familiar with the kinds of merchandise they stock.
(The large box stores like Lowes and Home Depot can also
assist you.)
They probably maintain a list of local service providers,
maybe even including some retired craftsmen who like to
be called to perform what used to be referred to as “handyman” repairs. The terms craftsmen and handy-man are
used without the intent of gender stereotyping. My experience is that the skills involved are by no means “genderspecific.” In my experience some of the best work is done
You Made It!
by women. If you have the idea that certain tasks can only
be handled by a man, it’s time to get over that stereotype.
If you are considering some painting, wallpapering, remodeling, or landscaping, the people at the hardware store
or home center probably have some great ideas about how
you can get the work accomplished at a reasonable price.
If you’re up to it, they can even arrange to teach you how
do handle the work yourself.
One last word of advice. Don’t wait until the middle of
the night when your furnace stops to make a list of service providers with both a regular number and a 24-hr
emergency number. If a home warranty was included in
your purchase, include that number by each type of service
that is covered. Some of the numbers to list are:
• HVAC
• Electrician
• Plumber
• Home Warranty Call Number and Contract
Number
• Emergency Auto Service
• Doctor
Don’t let your new home become a burden. Why buy a
home and then not enjoy it? Maintain it well, protect your
investment, but don’t be afraid to live in it. There should
be a balance between enjoying your home and protecting your investment for the future.
167
Postscript
169
POSTSCRIPT
HOW DID IT WORK OUT FOR YOU?
Now that you are moved into your new home, the locks
have been changed, the boxes are all unpacked and the
furniture arranged the way you think you want it, change
of address notices sent to friends, family and business contacts, you’ve met your neighbors, found a grocery store,
pharmacy, and hardware store, and had time to catch your
breath, take a few minutes and reflect on the entire process.
From the time you said, I think it’s time to buy a house, or
decided to move across country to accept a job, or whatever life experience triggered your decision to move, how
did it go?
Overall was it an experience you’d like to repeat often; a
difficult but necessary process for arriving at a place that
was worth the effort; a nightmare from start to finish; or
somewhat a mixture of all three? The primary purpose for
170
reflection is to learn as much as possible about yourself
and your experience in case you are bold enough to decide
to do it again in the future. Make some notes to yourself,
write down the things you would do differently, the steps
you skipped but would not skip next time, the contact information for people or services you would use again, and
anything else that you feel is worth preserving about the
experience. What advice do you have for others who are
just beginning the process?
How did your agent work out for you? Do you have more
confidence in your agent now than you did at the outset?
Would you involve your agent earlier in the future? Would
you use the same agent in the future? Would you recommend your agent to your friends and family when they decide to make a move? Share your thoughts with your
agent. Don’t just say thanks. Your agent will be happy to
receive your thanks but even more important to your agent
are specific suggestions you have about the experience.
My goal in writing this book is to provide buyers with the
best, most practical and useful information and guidance
possible. Some things may sound better in theory than
they do in action. What suggestions do you have for improving this book for others who will be using it as a guide
in the future? The good news about an e-book format is
that it can be continuously edited. No need to wait until
thousands of books remaining from the first printing have
been sold to make changes. It can be edited today and the
Postscript
171
next person to download it will have the most current edition. With your help this book will be an even better guide
for future buyers. Perhaps you ignored the advice of this
book or your agent at certain points along the way and as
you look back you realize you would have been well advised to have followed our advice. It may be that your mistake will make the list below and thus aid others by your
experience.1
IN HINDSIGHT, I WISH …
Blunders are mistakes that can wreak havoc with the process and cause the outcome to either be less satisfactory,
more expensive, or take more time than necessary. The list
below are mistakes that are frequently made and are
shared here in the hope that you will be less likely to make
the same mistakes. My hope is that if you are forewarned
you will be forearmed and avoid making these mistakes. If
you think there are other mistakes that should be included,
let me know.
1. Selecting The Wrong Agent
Hiring the wrong agent is most often the result of
spending too little time in the selection process. Experience tells us that most buyers agree to work with the
first agent they talk to about buying a home. This may
be the agent whose name was on the sign in front of a
house you inquired about. Typically the agent quoted
you a price and provided information about the house
and then offered to help you look for other houses. The
172
result may be excellent and you feel fortunate to have
made contact through this random process, but there is
no guarantee that this agent will be right for you. It is
usually a wise practice to at least interview two agents
before making a decision.
There is nothing wrong with hiring a friend or family
member as your agent, IF they are qualified to provide
the full range of services that you should expect from a
buyer’s agent. It is possible however that your relative
or friend will be reluctant to ask the personal questions
that need to be asked or you will be reluctant to share
your personal financial information with them. Sometimes a prospective client will mention that they have a
relative who is a real estate agent but they do not want
to use them as an agent. Every situation is different and
being a friend or relative should by no means disqualify an agent if they possess the skills appropriate to a
successful home buying experience.
If your experience was less than stellar, you might want
to review the section on selection of a buyer’s agent
should you be in the market again in the future.
2. Hiring A Discount Agent
There are self styled experts who will encourage
you to screen potential agents based on whether
they advertise or offer their services on a ‘discounted basis.’ Not only does this advice fail to recognize that your buyer’s agent’s fee is most likely
going to be paid by the seller and even if your agent
were to offer a discount on their fee, it would
Postscript
173
probably not reduce your purchase price. It puts a
priority on the wrong issue.
If your objective is to find the ideal house for you
and be able to purchase it at a reasonable price and
on favorable terms, you don’t want your agent cutting corners on the time they spend with you. If you
are lucky, the ideal house may be found early in
your search and the negotiations may go smoothly
but your agent is committed to see you through this
process to a successful conclusion regardless of the
time it takes.
Keep in mind that a discount agent who watches the
clock and rations their service is not going to be a bargain. Whatever you pay them may be too much if you
don’t get the outcome you were expecting. On the
other hand, the dedicated agent who continues to
work with for as long as it takes, is underpaid regardless of the fee.
3. Not Trusting Advisors -- Realtor, Attorney, Banker
Whether it is a banker, an attorney, or a REALTOR®
they can only help you to the extent you allow them to
do so. If you do not have confidence in the advisors
you have chosen, don’t just ignore their advice. You
lose when that happens. Instead, even if it is a bit
awkward, you owe it to yourself to make a change.
174
4. Changing Your Financial/Credit Profile After You Obtain Pre-approval
Credit scores are a snapshot in time. New data is constantly being reported and the score is revised each
time the data changes. Walt and Mary brought a preapproval letter with them when they came to see me
and discuss their desire to find a home. Every preapproval or pre-qualification letter contains a disclaimer which makes it clear that if the credit information changes, the commitment may be withdrawn. 2
There is a very simple but essential rule to follow when
you are in the process of buying a home. Don’t make
any major purchases for which you do not pay cash
and do not co-sign anything for anybody. Don’t apply
for any credit cards of any kind. Although changing
jobs will not necessarily disqualify you, even if the new
job pays more money, it is better to delay any job
change until after closing. Otherwise your loan may go
back to underwriting and anything can happen.
5. Biting Off More Than You Can Chew
I have stressed throughout the importance of caution
and prudence in the size of the loan you take on. Just
because you can find a lender who can find a way to
get a loan approved does not mean it is wise to accept
the loan. By all means, do not even think about any
type of adjustable rate loan or any loan that allows you
to defer payment of a portion of the principal.3 Eventually you will have to pay or lose the home.
Postscript
175
If you have ignored this advice and you have now
closed on a loan that is more than you can handle comfortably, I strongly encourage you to create a contingency fund and add to it every month regardless of
how difficult it is until it equals at least 3 months
mortgage payments. A 6 month cushion is even better.
6. Impulse Buying
This is one of the causes of biting off more than you
can chew. Fortunately banking regulations make it
impossible to close on a loan without a waiting period.
The earliest closing date for any loan is seven business
days after the initial disclosures are issued. And if the
Annual Percentage Rate (APR) changes by more than
1/8 of a percent (.125%) before closing, a new disclosure must be made to the borrower and closing cannot
take sooner that three business days after the redisclosure.
Although these regulations may delay closing, the
damage may already have been done if an offer is
made without due diligence and an earnest money
deposit has already been made. Changing one’s mind
about whether to buy a house is not sufficient cause
for failing to follow-through with your contractual obligations.
Of course cash purchases can effectively by-pass the
waiting periods established in the banking regulations.
The risk is that certain important safeguards for the
protection of buyers may also be by-passed. For example, flood insurance is not effective for 30 days after
176
purchase in the event of a cash sale whereas if there is
even a small mortgage or HELOC loan involved, flood
insurance becomes effective on the day of closing.
The best time to engage in due diligence is before
you sign a contract.
7. Falling In Love With A Home You Don’t Yet Own
Invariably the Buyer who becomes so enamored with a
home before contract negotiations is easy prey for hard
negotiations by the Seller. No matter how much you feel
you must have a particular house, there will always be
another home if your effort to buy this one fails.
8. Losing Out Trying To Make Too Good A Deal
We arrived for our scheduled tour and noticed several
cars parked in the driveway, in front and around the
corner and realized that someone else was viewing the
home. While we waited in the yard. It was apparent
that my clients were very impressed with this home.
The expressions of approval from the parents and the
children made it clear they liked what they were seeing. Of course we still needed to see the inside.
Eventually the other buyers began to leave … older and
younger couples, children, – I counted 15 people and
then the young buyers and their agent exited the home.
It was clear that the young couple was seeking the
stamp of approval of their parents, grandparents, and
other family members before making an offer on the
house.
Postscript
177
When we entered and before we had seen either the
basement or the upstairs, my clients were certain this
was the house they wanted to buy. We had looked at
many houses together and I had not seen this kind of
reaction before. I told them if wanted to buy this house
they would have to act quickly because the other buyers were writing an offer while we toured the house. I
also told them that if they really wanted to buy this
house they should at least submit an offer at the asking
price if not higher.
My buyers asked me to prepare an offer but to write it
for a few thousand dollars less than the asking price. I
felt sure we would be outbid but I did as they asked. It
was late evening and we agreed that we would meeting
early the next morning so they could sign the offer. By
the time I got to my home office the seller’s agent had
called to tell me she had the first offer in hand. I told
her I would have an offer for her by 10:00 AM the next
day and she agreed to wait for it and present both offers to the sellers at the same time. As I expected, we
were outbid on the house even though my buyers
would have been willing to pay considerably more
than the asking price.
The point to remember is that you can try too hard to
make too good a deal and lose out entirely. Of course
that doesn’t mean you should bid high in case. But
when you know the house you really want to buy is
likely going to have another Buyer bidding against you,
don’t quibble over a few thousand dollars.
178
Under these conditions you have to assume that your
first offer may be your only chance to bid with no opportunity for further negotiations. Don’t offer to pay
more than you can afford or more than you think the
house is worth. But don’t leave the other Buyer a
chance to buy the house for a price you would have
been willing to pay. It’s a bit like pre-emotive bidding
in bridge.
1 Send me an email at JohnCleek@mac.com
2 As an example, Any adverse change in the information that we receive could nullify loan qualification.
3 There are very limited conditions where an Adjustable Rate Mortgage is appropriate. For example, if
there is no chance you will remain in your home past the trigger date when your interest rate is
scheduled to adjust for the first time, there is no reason not to benefit from the lower short term
rate.
Acknowledgements
179
ACKNOWLEDGEMENTS
To write any book involves a commitment of time and energy that is often underestimated by the writer. I confess
that even though I am not a novice writer, this book required more intensive effort and time than I expected. That
is partly due to the way in which it evolved from a fairly
narrowly focused book to a much more comprehensive
work. The inspiration for the book has come, in part, from
the wonderful clients who have entrusted me with their
real estate business over the past five years. I will not name
them in the interest of protecting their privacy but some of
them will no doubt recognize themselves in these pages. In
all cases I have carefully disguised the circumstances so
that no one else could possibly identify them. My clients
have been far more than clients. They have become my
friends whose families I care about and whose welfare I
have diligently sought to protect.
180
Professional colleagues from whom I have learned such as
Gary Hosack, owner of Crown Realty of Kansas, who first
suggested that I become a REALTOR® spent many hours
as I was getting started advising and coaching me; and
Doug Bowes, branch broker for the Louisburg Crown office who has patiently listened to my excuses for marching
to a different drummer and not following a traditional approach in cultivating client business have contributed to
the book as well.
Other REALTORS® with whom I have worked and from
whom I have learned include not only my Crown colleagues but agents, brokers, and trainers from the Kansas
City Regional Association of Realtors (KCRAR) and across
the state of Kansas. Jan Pringle at KCRAR, and Rod McIntyre and Jackie Hovey at the Kansas Association of Realtors (KAR) have encouraged me along the way. Consultants who have been my teachers as I pursued the Accredited Buyers Representative (ABR), Graduate Real Estate Institute (GRI), Internet Specialist (e-PRO) and Short Sales
and Foreclosures (SFR) designations have all helped to
shape my understanding of the role of a real estate professional.
Saul Klein, John Really, and Mike Barnett at the RealTown® InternetCrusade® and the RealTown® Real Estate
Network have contributed more than they are aware to introduce me to professional colleagues around the country.
Their vision for the future of real estate benefits those who
Acknowledgements
181
are not even aware of the contribution they make. The
virtual communities they have fostered are far larger than
anyone outside the communities can possibly imagine and
serve to engender valuable sharing of ideas and the stimulation of creative thinking.
One colleague who has inspired me since our first meeting
a couple of years ago when he was teaching a GRI class in
Topeka is deserving of special note. It was obvious to me
in that first class that we shared similar views on many
things. Jerry Rossi, Author of the top selling marketing
book "Dog Eat Dog & Vice Versa: 9 Secrets To Put The Bite
Into Your Marketing" took the time to read several drafts of
the manuscript and give permission to use his quote regarding the book.
Finally this book would never have been completed were it
not for the patience and support of my family and friends.
In particular, my wife, Connie, who has been there for me
for the past 25 years and has spent the past six months or
more, encouraging me, believing in me, and patiently waiting for the completion date that kept getting revised. She
has also read numerous drafts of the manuscript and given
me the benefit of her keen eye for detail to make the final
product much better than it would otherwise have been.

2 Seven Steps To Home Ownership

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