Assuming you are following along with this series, you’ve read or listened through the buy or rent discussion, as well as that on leverage, and you’ve decided buying a home is a good decision for your financial future. Now what? You have followed all the steps in the planning process to buy a home and you have now found the home you want to buy. The next step is for your agent to make an offer. Most real estate transactions are heavily regulated by state governments and often have state contracts that they require be used. This is because there have been so many fraudulent transactions in the past that state governments have created rules to try to prevent abuse.
One more note before we go through the transaction process. Don’t get attached to a property before you close. If you have convinced yourself that you have found the “perfect” house, then you have lost your negotiating power. In this case, you are more likely to make emotional choices and not practical financial choices and that is not a good situation to find a good deal. Remember, if you need to sell this home you are starting about 6% behind as that is the cost to sell, so you don’t want to overpay for what you think might be perfect as once you get into the home, it’s unlikely to be perfect.
Sometimes it’s best that an offer is not accepted because you then go back to looking and you might find a better opportunity. This happened to me and I was later grateful that the owner of the other property had rejected my offer, otherwise I would not have gotten the house I wanted. Sometimes what we think we want is not what we need or what will make us happy and it is almost impossible to know beforehand, so be open to the idea that the universe is looking out for you and don’t view being turned down on your first choice as a negative. As previously discussed, there are many upsides to renting, so not buying immediately is not a bad thing either.
The Offer:
Using the state required forms, your agent (Buyer’s Agent) will make an offer to home owner, usually through their agent (Seller’s Agent). Your agent will typically help you with the offer based on current market trends. For example, in a hot market you may have to bid over asking price to get the offer accepted. Your agent will often talk to the seller’s agent about how many showing and what the buyers are looking for in terms of timing and any offers that have already been made. The longer the property is on the market, typically the more negotiating power you have as a buyer. If the house in a very desirable area and has just been put on the market the situation could be completely the opposite and you may not have a good chance to buy if there are other “cash” offers.
Cash offers are exactly as they sound, someone has cash and can close immediately. If you are borrowing to finance your purchase, its is possible you lose out to this offer, even at a lower price, because of the speed the transaction can close and cash offers don’t have to follow the additional steps in the process.
As a buyer, this is where your agent should bring their greatest value to you. Helping you navigate the offer process to try to get your offer accepted, but at the lowest price you can pay. It is a tricky situation, but remember, if your agent does not get your offer accepted, they don’t get paid, so incentives are in the right place.
Offer Accepted, with Requirements:
Once your offer has been accepted, and because you are getting financed, there are a minimum of two things that have to happen before the bank will lend you the money and you can buy the house: appraisal and inspection. Typically, if either of the appraisal or inspections reveal the property may not be worth as much as you offered then you will have the option, or possibly the requirement, to terminate the offer.
The appraisal will be done by a certified appraiser and that person is usually hired by the bank, as an independent authority, that tells the bank whether or not the property is worth what you offered. How do they really know what the property is worth? Experience and similar sales. Appraisers will look at the interior and exterior finish and they will look at sales of similar size homes in the area and put together a rough estimate of the property value based upon those things. They stick to major items that increase or decrease value such as finished square footage, number of bedrooms and bathrooms and typically rate finish as high, med, low or custom. Most important is what other properties are selling for in the neighborhood, typically as a cost per square foot, with one cost for finished and a second for unfinished (such as an unfinished basement). They will also asses any separate structures on the property such as a garage or lock off apartment if those exist.
The appraisal is returned directly to the bank and to you. If the appraisal says the home is what you offered, or worth more, great onto the next phase of inspection. But if the appraisal comes in lower than what you offered then there is another negotiation. Your agent will discuss this with you and there are typically two options: one, you can choose to reduce your offer to the appraised value and the seller has the option to accept this or counter offer.
As an example, supposed you offered $250,000 for the home but the appraisal came back at $240,000. You might ask the seller to reduce the price to $240,000, and the seller could accept, or they could counter offer at $244,000. You then have a choice. The bank will only loan you the value of the home less your down payment, meaning you would need to come up with $4,000 difference as an additional down payment. Or, if that is the sellers final offer, then you can choose to walk away and find another property.
One note, you pay for the appraisal regardless of the outcome.
Let’s assume you offered $250k and the appraisal came back at $250k. No problems there and the process moves along to inspection. The inspection on the home is a more thorough look at the condition of the home. Typically, inspectors have worked in the construction industry for a long time and understand all the components of your home. The inspection will look at the entire home, from foundation to roof.
I highly recommend that you be there and go through the home with the inspector. Worst case you learn nothing, but I learned a lot about my home and what maintenance and repairs would be needed both short term and long term. I got a lot of information about the construction materials and design that would have been difficult to assemble on my own. A good inspector typically starts with the foundation, looking for any cracks from movement, termite or other problems with the wood. They will look at the HVAC system and make sure it is working properly, testing the heat and A/C. They check the water pipes faucets, toilets and sinks to ensure they are all in good working order and not leaking. They will inspect the outside of the home including siding and the roof. They will check for mold, radon and smoke and carbon monoxide detectors where required.
Anything that does not work or is not up to the building codes will be noted. This might include fence or railing requirements where there is a drop off or anything considered unsafe. This will include inspection of all electrical boxes to ensure wiring was done properly. Anything safety and structural related. All of this is put into a report and sent to you and your bank.
But if you are there with them during inspection you might learn a lot more. You might learn how old the roof is and get an estimate of when it might need to be replaced. You might learn that the quality of the pipes is of high quality or low, indicating long term problems to come. There may be windows that need to be replaced because moisture has gotten between the panes, but you won’t notice that until winter. You might learn that the heater is 15 years old and will need to be replaced soon. But if you don’t show up to the inspection to learn, you’ll get none of the extra information.
After the inspection there is another round of negotiations. Sometimes things must be fixed before the bank will lend the money. For example, if the electrical boxes are not up to code then that will have to be fixed before the sale. Typically, your agent will help you go through the report and discuss what the seller should fix and what you will be responsible for after you buy. This is the most critical step in the process and usually everyone wants it to get finished quickly so the sale can be completed, but don’t get steamrolled into anything you are not comfortable with handling on your own.
If you showed up for the inspection and you know the roof needs to be replaced in the next 5 years and the water heater and A/C both need to be replaced soon, that could be thousands of dollars and could be things you don’t have money to fix. If that is the case then you need to renegotiate the selling price and your agent can help you. Typically, anything you find in your inspection the next buyer would find in their inspection, so the owners will usually fix anything major (smart sellers have their own inspection and fix problems before putting their home on the market to avoid problems during this phase) to get the sale completed. Make sure you don’t feel that you are left with problems you are not prepared to handle after the inspection.
The inspection is why I started this section with a note about getting attached. If the inspection comes back and the house has termites, you want to be able to walk away. The appraisal says the house is worth $250,000, but that assumes that everything is in good working order, so make the seller get the house into good working order, or reduce the price or leave money in escrow to fix what is found in the inspection report.
Show up for the inspection so you have a comprehensive understanding of what needs to be done short term and long term.
Once the inspection is complete, all major items are addressed, then a closing date is set. Included with the closing is the Title company. This is the entity that makes sure that no one else has any rights to the property you are buying. It ensures the seller owns the home, has the right to sell it and there are no other claims on the property. These might include property taxes owed and will include all outstanding monies owed to all banks of the seller. This process ensures that you and your bank are the only one’s with rights to the property after closing.
Closing is the final step in the process. At this point, you give the bank your down payment money and the bank pays out everyone who is owed, any liens on the home, the real estate agents, and finally the seller get everything left over. All the disbursements are shown on the closing sheet, along with hundreds of pages of disclosures that are required for the loan. Stretch your wrist a bit before closing, you’ll have a lot of signature pages to sign! 😊
Once closing is completed, you get your keys.
And then the first thing you should do is change the locks, so schedule a locksmith for after closing so you know that you are the only one with a key to your home.
Congratulations, you’ve purchased a home. Before you get overly excited remember, its your home only so long as you make the payments to the bank every month and if you go bankrupt you are likely to lose the home and your down payment money too, so be sure to have some money set aside just in case.
Watch my Youtube video on this!
I’m also open to answering your questions via email! Hit me up at dave@keepyours.org.
Resources:
Sample Colorado Real Estate Contract
Loan Amortization Schedule