Wednesday, December 9, 2009

Buying a house step by step, pt 2.

This is the second part of the blog series about the steps of buying a house by Sky Minor, Broker at Preferred Realty and Loan in Los Angeles.

We left off at
4(a). Get a property inspection

The home inspection report was received by the buyers. We noted items to look for that will cause concern to future owners-Foundation, Plumbing, Power, Any water leaking, etc. Once the buyer receives a copy of the inspection report they really get a good opportunity to "look under the hood" of the house. With the inspection report in hand, the buyer is given the power to do one of three things;

1. Request that the seller repair any items that are of concern.
2. Request that the seller credit the buyer the cost of repairs either from a reduction in the price of the property or by paying the buyer's closing costs.
3. Cancel the deal.

Most buyers I work with are too emotionally tied to the property at this point and do not want to cancel. So then the question becomes should they request repairs or money? This is a significant question and needs to be carefully examined. Many new buyers who I see opt for the credit never get around to getting the work done. For items that are in serious need of repair, this is obviously not a good thing. If there is water leaking in a roof and it gets into the flooring, it needs to be repaired right away. The long term cost of neglecting maintenance issues needs to be weighed by the buyer. If it doesn't get fixed now, it will usually cost a lot more to do later when it goes up for sale. Conservative bargaining and due diligence are very important. The agent should be able to offer referrals to contractors who can give estimates. I find that Yelp is also a pretty good source for finding contractors, although many good ones are not of the internet generation and must be sought out other ways. The smart buyer will have made their own connections with contractors before entering escrow, so that they can give second opinions of the issues that come up. No buyer is an island.

When buying bank owned foreclosure REO properties, the seller will rarely make repairs unless there is a health and safety issue. The banks are reticent to negotiate much on repairs either, usually requiring buyers to accept the property as-is. This refusal to fix or credit is why REO foreclosures are sold at a discount. The bank is going to pass the problems to the new buyer.

So let's take a hypothetical example and assume that the buyer asked the seller for $10,000 in credit for closing costs for various maintenance items. The buyer will put that on their Request for Repair form (ROR), and the seller can accept, negotiate or cancel. I have never seen a seller cancel at this point, even if ROR was overkill. The seller in this example will counter back at $4,000 in repair credit and the two will eventually agree on $6,500. An addendum is drawn up and sent to escrow whereby the seller will pay $6,500 of the buyer's closing costs. The price will remain the same but the seller is going to be contributing the $6,500 to the buyer's expenses. The buyer is not receiving cash from the seller, they are only getting credited money to close. If they don't use all of that credited money at the closing, they lose any unused portion. It is very rare that lenders will let a buyer walk out of escrow with money in hand that they didn't bring in themselves. It is important buyers remember this and make sure they can spend all the money they are asking for as a seller credit! After the dust has settled and an agreed upon amount is credited or repaired, we move on.

5. Get an Appraisal. This step is only for buyers getting a mortgage. The lender will always need to appraise the property. Appraisals are usually $350-$500 and usually paid by the borrower in the form of an Application fee. Since the advent of the HVCC appraisal code, appraisers are not chosen by anyone who has an interest in the transaction. The intention to avoid potential conflicts of interest is good with this law, but the actual effect is that appraisal orders get farmed out to the lowest bidder and the resulting quality of the reports is equally low. Appraisers used to be local and knowledgeable about market factors in the neighborhood (Schools, Crime, Views, Amenities, etc). For the most part, they are not at all like that any more, and are only valuating the house based on price per square foot of nearby comps. This is an overly objective approach to valuating homes and can result in wild swings of variation, often lower than the asking price. If the property that the buyer has under contract does not appraise at the price that the buyer has on their contract, they can cancel (provided they did not waive that right on their offer). Alternatively, they can take the appraisal to the seller and request that the price be lowered to the appraised value. Since the seller will presumably have this same issue with any buyer, they have a reason to consider lowering their price. Buyers should ensure their agent evaluates the comps before writing an offer far over the asking price. A lot of time and heartache can be saved by doing some diligence. After the appraisal comes back to the lender they will issue a loan approval and will require conditions from the borrower, escrow and title companies. Time is of the essence, so when the agent or lender requests something it is important to get it to them right away. I always tell my buyers that when the loan officer says "Jump", they say "How High?".

6. Get Natural Hazard Disclosure report and Title Prelim, The Natural Hazard Disclosure (NHD) report is not mandatory but is recommended. It contains 30+ pages of potential hazards in, under and around the property. The scope of the report is vast, covering everything from Radon gas to Seismic activity to landslide and liquefaction potential to airport noise. The reports are prepared by private companies who are responsible for the validity of their data so they always tend toward over disclosing. As before with the inspection report, some bad news is inevitable. Life kills and after seeing some NHD reports, it's a wonder how anyone could live in the houses. But they have, and in many cases the house has been there for 70-80-100 years and people have been living there. Don't get too flustered when the NHD comes back with some problems. At the same time, there are some important issues that should not be taken lightly. Some of those issues are;

1. Fire hazard area. In Southern California, If the property is in the hills or not surrounded by other structures in an urban setting, it is probably in a high fire area. The ramifications of this are higher homeowner's insurance premiums for life.
2. Radon Gas. Radon seeps in through the soil and collects, usually in ground level or basement areas. There are three levels of Radon gas disclosed. If it is beyond level 1, I recommend another Radon specific test. Radon is bad news, especially for young children developing.
3. Mello-Roos tax districts. Mello-Roos taxes and other supplemental tax assessments run with the land and can really break the bank. The NHD will have information on every expense that has to be paid with the property. Usually the Title report will have this data too, but the NHD is the most accurate source of information for this.
4. Proximity to old Oil Wells/Mining sites- This is most frequently associated with gas coming up from the earth. There are plenty of oil well sites around Southern California and some still leak off methane and other gases that can be dangerous, if not foul smelling.
5. Flood zone. If the property is in a flat area it may be in a flood plain and that requires higher homeowners insurance coverage.

There are many other issues that the NHD will touch on, and the agent will be the first point of contact for questions.

The preliminary title report is issued from the title company. This report shows the history of the property, sometimes going all the way back to the Spanish occupation of California. The title prelim shows any and all liens on title of the property. If the seller didn't pay taxes, had a contractor slap a lien on the property or borrowed money against it then all of this will come up on the title prelim. The title companies' job is to insure the homeowner against any defects in title, so if they miss anything at all they pay for it. They never miss anything. The lender will require a title insurance policy to protect their interest in the property. The buyer does not usually concern themselves with what is contained in the title prelim, if there are hidden costs then the agent or escrow will alert the buyer right away and the buyer can act accordingly.

After the buyer has these reports in and signed off and their appraisal is completed, they are almost done. Buyers will sign off on all of their contingencies, which means that they have to close or the seller can claim their earnest money deposit. There is usually a time in every transaction when all the contingencies are signed off, but the loan is not ready to fund. A skilled agent will negotiate with the seller to give them what they want, but buy more time for the buyer's loan contingency. The reality is that lenders are never 100% reliable and can back out at literally any moment without warning. Ideally, buyers want to keep their loan contingencies until they close but it is not always possible. If the time comes to take a leap of faith, rest assured that many before have done so successfully.

7. Sign Loan Docs By the third week into the transaction, the loan docs are usually ready to be signed. The buyers getting the mortgage will sign the docs in the presence of a Notary Public, or at the escrow company. Buyers should request an estimated HUD from the escrow company before signing their loan docs and compare it to the lender's initial Good Faith Estimate. Any increase in charges should be addressed to the lender as soon as they are discovered. Some charges are unavoidable but there should be no more than a couple hundred dollars difference. If the lender hikes up the fees then call them out on it and don't accept the loan. It is an age old trick of money lenders to wait until the borrower has no other options and then increase the fees and rate. Although this practice has lessened since the mortgage industry underwent a major overhaul in 2010, it is still prevalent at closing tables across the country. Because of this, I recommend applying for mortgages with two or more lenders if possible. Playing them one against another can lead to the best deal, but it is a lot to keep up with. If the buyer has any questions at all, ask! Don't be afraid to get answers from your lender. Remember they need to lend money to stay in business.

8. Closing Time After the loan docs are signed they go back to the lender and the buyer wires their money into escrow to close. There will be several lender conditions prior to funding-usually updating paystubs and bank account information. At this point many buyers are at the end of their rope but stay with it, the very end of the transaction is just as important as any other point. When the loan underwriter is satisfied, they fund the loan by wiring the money into escrow. Once the loan is funded, escrow disburses funds to the seller and deed to the buyer, gets the deed and mortgage information recorded at the county recorder and gives the buyers the keys to their new home. This is a happy time for everyone.

I hope I was able to shed light on the process of buying a property for first timers or anyone who might benefit from it. Buying your home is never a walk in the park and indeed it can be a stressful journey but in the end, all of my buyers unilaterally say that it was worth it. Home ownership is the biggest preserver of wealth for most American families. Right now is an ideal time to buy property. We have a perfect storm of real estate is in a downturn and interest rates are extremely low, the time is right for more people to take a step into home ownership.
For any questions, feel free to contact Sky Minor.


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