Buying A Home
Purchasing a home involves numerous complicated choices, so choose a Guide who can assist you in making intelligent and informed decisions.
The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of these pages is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I’m only a phone call or email/text away!
The decision to purchase a home is probably the largest and most important decision a person will make in her/his life; it’s a major investment for the future. Because there is only so much if it to go around, real estate is the top choice for many investors and a huge benefit for most people and families.
One of the greatest benefits of home ownership is putting money into something that you can call your own and knowing that the monthly payments are going toward the future value—the equity of the home—instead into the pockets of a Landlord or company. When you purchase a new car, it loses value/depreciates the moment you drive it off the lot. When you buy a home, however, it has the potential to appreciate year after year, in a few ways:
1. Many properties experience an increase in value as the areas around them become more desirable. If this happens—the demand increases–home values can increase and homeowners often benefit from the sometimes limited supply of housing. If you purchase a home in an area a lot of people would like to live in—like many walkable areas close to shops and public transport, neighborhoods located near major employers, in rapidly gentrifying areas, or in areas that are considered safe with lower crime rates—your home values may increase more than in other areas. So one way a home can provide a good return on your investment (ROI) is that it increases in value.
2. The second way is that each month, as you make the mortgage payments, the principle goes down, giving you more equity in the home. You may even be able to use your home’s equity to finance some needed improvements and/or repairs. In some cases—not all–these changes may even increase the value of your home. An upgraded kitchen or bathroom, for example, or hardwood flooring, or a well-done additional room are some changes that could result in added value.
The Best Investment
As a fairly general rule, homes appreciate about four to six percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region. Increasing in value five percent per year may not seem like that much at first. Stocks (at times) may appreciate more, and during robust times, you could even earn over six percent with treasury bonds.
Presumably, if you bought a $200,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down – that would be an investment of $40,000. At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual “return on investment” would be a whopping 25%—that’s traditionally much more than stock or bond purchases. Of course, from that 25%, you are making mortgage payments and paying property taxes, along with other costs like maintenance. Since the interest on your mortgage and your property taxes are both tax deductible, though, the government is essentially subsidizing your home purchase.
If you make intelligent decisions during the home-buying process, your rate of return can be higher than most any other investment you could make.
Don’t Move Money Around
When a lender reviews your loan package for approval, one of the things he or she are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
You may become frustrated with your lender, but he or she are only doing what they have been told to do. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it “easier,” could make it more difficult for the lender to properly approve your loan.
So leave your money where it is until you talk to a loan officer.
…And don’t change banks, either.
When determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, installment debt, and car payments.
Do you have additional questions? Feel free to call or text/email me with anything you would like to know.
Determining Your Offer Price
When we prepare an offer to purchase a home, we already know the seller’s asking price. But what price are you going to offer and how do you come up with that figure?
Determining your offer price is a three-step process. First, we look at recent sales of similar properties to come up with a price range. Then, we analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your “fair” price and come up with what you want to put in your offer.
The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. These are called “comparable sales.” Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Specifically, we will want to compare prices of homes that are similar in squarefootage, number of bedrooms and bathrooms, garage space, lot size, and type of construction.
If the home you are interested in is part of a subdivision of homes, then you will most likely find some exact model matches to compare against one another.
There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases and states, impossible. New Mexico is a ‘Non-Disclosure’ state, which means our property sales data is not public information. The most accurate info for home sales in NM comes from the Southwest Multiple Listing Service.
Most of the public is aware that the Multiple Listing Service (MLS) is a private database resource where Real Estate Professionals list properties available for sale. Recently, the public has been able to access some of that information on such sites as Realtor.com, Zillow.com and others.
Once a property is sold and the transaction has closed, the selling price is posted to the listing in the Multiple Listing Service. Over time, it has become a huge database on past sales, containing much more information on individual homes than can be gleaned from the public record. As New Mexico is a Non-Disclosure State this information is only available to real estate agents who are members of the local Multiple Listing Service.
If you would like to know the final price of a home, give me a call, and I will look it up in the MLS. I will provide you with this data to help us determine your offer price.
Comparable Sales – Pending Transactions
The most valuable information would be the most current, of course. A sale last week has more validity in helping us determine a purchase price than a sale from six months ago. The problem is that there is no actual record of the sales price until the transaction is completed. The information is not available in the public record because no deed has yet been recorded, and as New Mexico is a Non-Disclosure state, it’s even more difficult to obtain that sales information.
Once an offer is accepted by the seller, it becomes a “pending sale” and all pricing information is removed from the listing. Prices are not posted until it becomes a “closed sale.” This protects the seller in case the transaction falls apart and the property is placed back on the market. It would give an unfair advantage to future potential buyers if they already knew what price the seller had been willing to accept in the past.
Writing an Offer to Purchase Real Estate
Once you find the home you want to buy, the next step is to write an offer – which is not as easy as it sounds. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your and my goal is to get you what you want, and imagining the seller’s reactions will help us attain that goal.
The offer is much more complicated than simply coming up with a price and saying, “This is what I’ll pay.” Because of the large dollar amounts involved, both you and the seller will want to build in protections and contingencies to protect your investment and limit your risk.
In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, who pays what closing costs, what inspections are performed, timetables/deadlines, whether personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you get physical possession of the property, and how to settle disputes should they occur.
It is certainly more involved than buying a car. And much more important.
Buying a home is a major event for both the buyer and seller. It will affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his or her finances, too. In the hour time it takes to write an offer, you are making decisions that affect how you live for the next several years, if not the rest of your life. The seller is going to review your offer carefully, because it also affects how he or she lives the rest of their life.
That sounds dramatic. It sounds like a cliché. Every real estate book or article you read says the same thing. They all say it because it is true.
In most purchase transactions there may be a challenge or two, but we will see that most things will go quite smoothly. However, we want to anticipate potential problems so that if something does go wrong, you can cancel the contract without penalty. These are called “contingencies” and we must be sure to include them when we write up the offer to buy a home.
Since you probably need a mortgage to buy the home, a condition of your offer should be that you successfully obtain suitable financing. And if, after we make an offer, you are somehow unable to get a loan, we include a contingency that you get your “earnest money” back without penalty. Another condition should be that the property appraises for at least what you agreed to pay for it. During the escrow period you are likely to require certain inspections, and another contingency should be that it passes those inspections.
Basically, contingencies protect you in case you cannot perform or choose not to perform on a promise to buy a home. If you cancel a contract without having built-in conditions and contingencies, you could find yourself forfeiting your earnest money deposit. A good Realtor will keep you up-to-date on contingency deadlines, making sure you are aware of any issues before these deadlines come and go.
After we have come up with an offer price, the next step is to determine how large a deposit you want to make with your offer. You want the “earnest money deposit” to be large enough to show the seller you are serious, but not so large you are placing significant funds at risk.
One common trend is to make the deposit 1% of your offered price. The reason for this is that if your deposit is larger than that, the lender will pay particular attention to how you came up with the funds. You might have to provide a copy of a canceled check along with a bank statement showing you had the money to begin with. Normally, this is not a problem, but if you have a short escrow period or are barely coming up with your down payment, it could pose an inconvenience.
Another reason to limit your deposit is “just in case.” Although significant problems are the exception and not the rule, they do occur. “Just in case” there is a nasty or prolonged dispute between you and the seller, the less money you have tied up in a deposit, the fewer funds you have placed at risk.
There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
The Closing Date
It is absolutely essential that you include a closing date as part of your offer. This way both you and the seller can make plans for moving, and the seller can make plans for buying his or her next home. Though most transactions actually do close on the right date, I encourage you to be somewhat flexible, so that a delay does not create insurmountable problems.
For example, if you are renting and need to give the landlord notice that you are moving out, you may want to allow a little flexibility. Otherwise, if your purchase closes a few days late you could find yourself staying in a motel with your belongings packed in a moving van somewhere while you pay storage costs. We will plan accordingly so those issues will be minimized, if they have to occur.
There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
Seller’s Disclosures and Inspections
Although you have toured the property, looked at the walls and ceiling, turned on the faucets and played with the light switches, you have not lived in it. The seller has years of knowledge about his or her home and there may be some things you want to find out about as quickly as possible. For this reason, we will require certain disclosures from the seller as part of your offer.
Basically, you want the seller to disclose any adverse conditions that may have a substantial impact on your decision to purchase the home. This would include any problems with the house, any past problems that were dealt with and how, and any other details the seller can tell you.
If I am the agent representing you, this is automatic to ask for the disclosures, but many states do not require individuals selling their own home to provide you with this information. Often they do not require banks selling foreclosed property to provide these disclosures, either. Obtaining these types of disclosures should always be a part of your offer, and time is of the essence.
Inspections will give us the most information about the home. Besides the appraisal and the termite inspections, you should also have a professional go through the house and seek out potential problems. Of course, you will have inspected the home, but you are not used to looking at some things that a professional will find. Even if they are not things the seller is expected to repair, at least you will have foreknowledge of any potential problems.
The seller will want this inspection performed quickly, so that you can approve the results and move forward with the purchase. Once you receive the inspection, we will want to allow yourself sufficient time to review and approve the report. If you do not approve the report, we will negotiate with the sellers on which repairs should be performed and who should pay for those repairs. Otherwise, you can cancel the purchase without penalty, provided wwe have not passed any deadlines included in your offer.
I utilize different tried-and-true professionals for different inspections. We should not be afraid to use a “deal-killer” inspector to inspect the home. If there is something that is beyond your comfort level, I know you would rather move on to another property than discover the defect—and be stuck with it—after you already own the home. I have encouraged clients to walk away from “bad” homes and have never regretted doing so.
Before closing, we will want to revisit the property in a Final Walk-Through, to ensure it is in the condition you have required in your offer, and to inspect that any required repairs have been performed. We will do this within five days before you intend to close.
This is a lot of information to absorb. If you have questions about any of the topics presented here, let’s sit down and talk about what you are looking for, and how we will go about making it happen. Remember: I am only a phone call or an email/text away.