Thursday, December 3, 2009

Buying a house step by step, pt 1.

After reciting the same monologue for nearly a dozen times this year, I realized that standardizing it online would be a great teaching tool. First Time home buyers or people who haven't bought in a while are always curious as to the process of buying Real Estate. I deal in California-Los Angeles in Particular, but the process is fairly universal around the country. Here is an outline of the homebuying sequence in order from start to finish.

1. Secure Financing.

-Get preapproval from lender within 60 days. Have the down payment ready and don't leave your job or apply for credit from anywhere until your loan is closed. You'll get a good faith estimate (GFE) from the lender for closing costs so you'll know what the bottom line to bring in will be. Budget for Title and Escrow fees if it is not included in the lender's GFE. Typical buyer's closing costs are between 2-3% of the purchase price so make sure you have that amount in addition to your down payment. Don't move money around, keep it in one place until you close. If you have to move any money keep the paper trail because the lender will need to account for every dollar.

2. Find the property, write your offer, get it accepted.

-Finding the Property is the fun part. Your agent should be showing you many properties, and you should be learning from each one. If something feels right to you, it usually is. Once you begin to write offers there are many things to be aware of in the fine print. These details can mean thousands of dollars coming from your pocket at closing so understand clearly everything you are offering to the seller. Some details I see: Transfer Tax, unpaid assessments, Mello-Roos taxes, Termite repairs, smoke detectors and on and on. Once the contract is accepted then it is taken verbatim by everyone involved so make sure you are OK with what you are putting on it. Ask your agent what the protocol and customary fees are for the items that you are including, they will know and advise you. This is why they are getting paid.

It is impossible to know everything about the property when you are writing offers on it, so don't worry too much about uncertainties in the beginning. As knowledgeable as your agent is, they won't be able to tell you absolutely everything about the property's maintenance history, neighborhood information (especially ethnic or racial makeup-by law) etc. The successful buyer needs to be able to act quickly with limited information. The best properties never stay on the market long in Los Angeles, despite economic or market conditions. The early bird gets the worm with real estate so don't get "analysis paralysis" as Rich Dad calls it. If you know the property is right for you, write the offer. You have plenty of time after writing it to change your mind, so put pen to paper now. Once it is accepted you will have an inspection contingency period and a financing contingency period usually 17 days. If you find something that you do not like, or are unable to obtain the mortgage that you said you would get on the offer, you can pull out no harm no foul. The chances are, you won't get your first offer accepted anyway. I did not have one single buyer in 2009 who got the first place they wrote an offer on. One of them is on his 12th offer. Buyers cannot be afraid to write offers, but with that being said they should be careful to dot the I's and cross the T's with every offer.

After the offer goes in, the seller will most likely counter-offer and request concessions. Higher price, shorter escrow, less closing costs etc. This negotiation is natural and should be approached with patience and serenity. Don't be flustered by aggressive counter offers, deal with them knowing that you are making progress. Too many times first time buyers bury their head in the sand at the first counter offer, probably because they feel intimidated not having negotiated much in their lives. That's perfectly acceptable, but I don't think any buyer should give in too easily to the sellers' demands. Many times the seller's agent will create inuendos about other buyers circling the property ready to pounce like well-funded lions, but in most cases it is a bluffing tactic. Keep a cool head and act rationally. This is another area where your agent has to earn their keep. They will be able to guide you, and should be heeded. After the dust settles and a counter offer is signed by both buyer and seller, notify the mortgage lender immediately and send them what they need right away to start underwriting the mortgage. It is important that the buyers do not make any large life changes once an offer is submitted. Don't change jobs, don't move money around, don't buy anything aside from everyday items, don't apply for credit and don't let anyone run your credit report for any reason.

3.Open Escrow, put down deposit money.

-Escrow is a neutral third party licensed by the state to carry out the contract. They ensure first that the seller doesn't take the buyer's money and the buyer doesn't take the seller's property. They ensure that all taxes get paid, all liens and any claims against the property get paid, every expense is accounted for and prorated up to the day the buyer takes title to the home. All money gets sent into escrow and sent out by escrow. The buyer will have to send in their earnest money deposit to escrow at this point. That is usually done with wire transfer or cashiers check. Escrows rarely accept personal checks. Wire transfer is easiest but it usually costs $30 each time. Escrow will send you out a small pile of paperwork to fill out. That paperwork needs to be returned to them as soon as possible. The buyer will need to determine their vesting, need to give background information and other questions. If your agent is not available, calling the escrow company for questions is perfectly acceptable.

Once escrow is opened, the clock starts ticking with the buyer's agreed upon Inspection and Loan contingency periods. Every day counts, so buyer's need to be ready to respond quickly to the requests of the lender, agent or escrow company. Email is the best way to send paperwork back and forth because it's possible to pull up what was sent and received by everyone involved. Make sure you keep or get copies of everything that you sign and keep it for your records.

4. Get a property inspection.

Getting an inspection is currently not mandatory in CA but it should be. I require all Preferred Realty and Loan buyers to get an inspection, even on new houses because you never know what you'll find. Inspectors are licensed and bonded professionals and hold insurance policies in case they miss anything in their inspection report. They never do. The agent will be able to recommend an inspector to you. They cost from $250-$450 on most houses and condos and are usually paid by buyer. If possible, go out and meet the inspector at the property when he's inspecting and ask questions. Inspector are typically contractors and they all know what to look for. They will provide you a large report outlining everything that is notable in the house. When you get that report, don't feel too broken hearted when problems are disclosed. Most houses have problems with them, especially in LA where most houses are 50+ years old. Things to pay attention to in inspection reports are: -Foundations, especially on hillsides. Foundation ideally should be bolted to the piers (wood beams). Foundation problems are seen in cracks that go from ceiling to ceiling or floor. In hillside houses, it is natural for the soil to move 1/10" per year. Keep that in mind.
-Any leaking water in roof or pipes. Water entry is the biggest problem in houses. Even in the desert climate that Southern California water is still an issue, and anywhere that has water should be examined for dryrot. Mold is a frequent accomplice of water leaks, and should be examined (although there are hundreds of different strains of mold, only a couple of which people are allergic to.)Mold can pose a problem for potential landlords. Also look for water coming off the roof and not flowing alongside the structure.
-Old elecrical systems, if there are air conditioner units or other large power draws. An updated 220v electrical box on a 1500 sq ft 3+2 house will cost 3-4 thousand dollars. Look at the breaker panel. If you see cloth wires going to a fragmented, unlabeled center then it's probably going to need to be updated.

There are more issues to discuss when seeing home inspection reports, but this blog is only so big. When you get it back, look at the report closely and ask questions about everything that is unsatisfying. The requests for repair will be based on this inspection report, and that is a fun time for buyers.

That is the conclusion of the first chapter of "Buying a house, step by step". Stay tuned for the second installment of this series. For a personal discussion, contact Sky Minor.

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