November 29, 2016

First Time Homebuyers Need Expert Help!

Expert knowledge about purchasing a home is especially important to first time home buyers. People who have purchased a home previously have the advantage of having gone through the process at least once before. They have the opportunity to learn from their mistakes. New buyers haven’t had that opportunity.

The goal of this post is to help anyone considering the purchase of a home, especially the first-timer, to avoid the nine (9) most common mistakes that I have found homebuyers and in particular, first-time homebuyers, make.

1. Not Working With the Right Agent

Too many home buyers make this mistake.  They blindly go with an agent that is referred by a friend or relative or that they meet at an open house without understanding who that agent really represents or will represent.  This is listed as Mistake #1 as it can cause the most harm to a buyer during a home purchase.

I have another blog post about understanding how real estate relationships work and how you go about finding the “right” agent.  I’ll summarize part of that here as it needs to be repeated.

As a home buyer you should seek out the services of a true buyer agent. True agents, such as attorneys or CPAs, owe fiduciary duties, client level services to their clients. Agent PointingThat is what makes them “an agent”. You should seek out and use the services of a real estate licensee who understands these principles and is willing an able to provide them to you.  The legal principals involved in real estate agency come from “Trust Law”, that is the duties of a trustee or custodian to their principal.  The one providing these duties is the agent and the one receiving these duties is the client or principal.  Unfortunately, the term agent in real estate no longer takes on the legal definition of agent.  Rather, it takes on the definition of “real estate licensee” and not really someone who represents and protects you.

Buyers and sellers have opposing interests. You, as the home buyer, want the lowest price and best terms for you. The seller, on the other hand, wants the highest price and best terms for them. As a buyer you should seek out the services of a true agent who will guarantee to give you, the buyer, these full legal fiduciary duties no matter which property you are interested in buying. In other words, seek out a true home buying agent and ideally an exclusive buyer agent or exclusive buyer broker as described below.

How does one find the right agent?

The general answer is to find a real estate licensee…

  • …who is familiar with the local area;
  • …who has several years of experience;
  • …who perhaps has some industry specific designations such as GRI, CRS, ABR, CBR or SRS; or
  • …who is referred by friends, relatives or work associates.

However, the problem with these approaches is that everyone knows someone who is “in the real estate business”. I bet you know at least one person who is licensed and in real estate. So do your friends, relatives or work associates. How do you know that the real estate licensee they recommend or the one that you know is the “right” agent for you or is in fact a true agent at all?

Sure, they may be licensed.  Sure, they call themselves a real estate “agent”.  Sure, you or your relatives, friends and work associates refer to them as agents.  But that doesn’t mean that they actually can or will legally represent you as a true fiduciary agent. You have to dig deeper and find out if they really will represent your best interests at all times and in every situation.

Yes, I agree that experience, familiarity with the area and industry specific training and certifications are important. But in my opinion, these aren’t the most important criteria to use to find someone to actually represent, protect and advocate for you throughout the entire homebuying process.  It takes someone who is willing to and able to take on the legal role as your true agent.

Exclusive buyer agents, as mentioned above, are true agents who represent home buyers only and are with companies which represent home buyers only and never represent sellers or write listings or market homes for sale. By representing home buyers only they have eliminated the conflict of interest which arises when a real estate company attempts to represent both a buyer and a seller in the same transaction.  They are true fiduciaries and guarantee to protect and look out for your best interests at all times.

Just as most “buyer agents” really aren’t fakeagents at all, there are real estate licensees who call themselves and advertise themselves as “exclusive buyer agents” but who also take listings or are with a company that takes listings and thus they also represent sellers and don’t represent buyers exclusively.

The easy way to determine whether or not you are talking to a true exclusive buyer agent is to ask one simple question, “Do you or anyone else with your company take listings or represent sellers?“.  If the answer is, “Yes”, you are dealing with a fake exclusive buyer agent.

 

2.  Not Reviewing Your Credit History

Many times home buyers wait until they have a property under contract or until they apply for a mortgage to have their credit reports pulled. If any errors or problems arise, sometimes great delays and heartaches result.

It sometimes can take 4 to 6 months to get inaccurate information removed from your credit reports and even longer to get your credit scores to readjust and increase to where you can qualify for a mortgage. In the meantime the seller probably isn’t going to wait and you may have already spent money on inspections.  You may have to start the process of searching for the perfect home again.

Getting a copy of your credit reports and credit scores early in the process is an credit-scoreabsolute must. The credit score used by most lenders is your FICO score, a number based on a formula developed by the Fair Isaac Corporation, which looks at a summary of all your credit accounts and payment history.  Other credit scores are called “consumer scores” and generally are not accurate.  You should focus on your official FICO Score.  The higher your score, the better.  FICO scores range from approximately 300 to 850 and Fair Isaac calculates them for each of the three big credit-reporting agencies: TransUnion, Equifax and Experian.

 

Here’s how your score is determined:

Approximately 35% is determined by your payment history. Do you regularly pay your bills on time? Overdue medical bills, utility bills and other bills may appear here and lower your credit score.

Approximately 30% is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you. If you’re maxing out your credit cards, your score may suffer. It appears that the ideal is keep your balances below 20% of your maximum credit line.

Approximately 15% is based on the length of your credit history, both how long you’ve had each account and how long it’s been since you had any activity on those accounts. The older the accounts, the better, assuming you’ve made timely payments.  Keeping older accounts active may be advantageous.

Approximately 10% is based on two factors; the number of accounts you’ve recently opened compared with the total number of your accounts and the number of recent inquiries on your report made by lenders to whom you’ve applied for credit. Your score can drop if it looks as if you’re seeking several new sources of credit, a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.)  Shopping around for an auto loan or mortgage shouldn’t hurt, if you keep your search to six weeks or less. Remember, If you are applying for multiple credit cards each inquiry you trigger can, however, negatively affect your score. So be selective.

Approximately 10% is based on the types of credit used.  Having installment debt like a mortgage or a car loan, where you pay a fixed amount each month, demonstrates that you can manage a large loan. How you handle revolving debt, like credit cards, tends to carry more weight since it’s seen as more predictive of future behavior.

What’s not in your FICO credit score: Contrary to popular belief, your age, and myfico_icon_new_100x100employment history and where you live are not used in determining your credit score. Lenders may use this information when evaluating you for a loan, however, it will not factor into your FICO score calculation.

Why do mortgage lenders pay so much attention to these scores? Statistics indicate that there is a 1 in 8 chance that a borrower with a FICO score below 600 will be either severely delinquent or in default of their loan. While there is a 1 in 1,300 chance that a borrower with a score above 800 will have similar problems. It is therefore easy to see that lenders will put a lot of reliance on such credit evaluation systems.

3. Not Understanding Financing Options

…and Not Getting “Pre-Approved” For a Mortgage

Home buyers need to search out and choose the best mortgage program given their resources. This isn’t an easy task and is best left to a mortgage professional.

They will be able to review your resources: the three “C’s’’ of homebuying: Cash, Cash Flow (Income less expenses), and Credit. Based on these they will be able to determine the right mortgage program for you as well as the amount of a mortgage that you can be approved for.

It is important for you to know how much you can qualify for and/or be comfortablexmoneyhouse-jpg-pagespeed-ic-dkj2kitfoi borrowing to determine the price range that you should be looking in. This also will help you determine if your goals are in fact in line with reality.

You need to know how much of a mortgage you plan on getting given your desired monthly mortgage payment. You then compare that to homes available in that price range to see if you are comfortable with what you get for your money.

Most people are qualified for a much larger monthly mortgage payment than they want to spend. It is especially important for first time home buyers to be conservative and obtain a mortgage they can comfortably afford.

Many different mortgage programs are available. There are government-backed programs such as FHA, VA (Veterans Administration), and RHCDS (Rural Housing and fhaCommunity Development Service, formerly known as Farmers Home Administration), and perhaps specialty state government backed programs.  In all these programs, the government provides a guarantee to the bank as an inducement for banks to lend money with lower down payments.  The government is not lending the money directly to you.  The lender is.  The government entity is merely guaranteeing the loan.

Other mortgage programs fall under the category of conventional loans. There are many variations of these loans, each with its own unique qualifying requirements.  Included are special CRA mortgages. CRA stands for Community Reinvestment Act. Federally chartered banks and lending institutions must “reinvest” a certain portion of their funds into low to moderate-income mortgages in their area of operation. These loans often have lower interest rates, lower down payments, down payment and closing cost grants, and more liberal qualifying requirements than other loans.

Meeting with a mortgage broker should give you the most options. A mortgage broker corresponds with dozens of banks, knows the local and state special mortgage programs and therefore not only has more options but also the ability to shop the mortgage to get the best rate and closing costs.

Determining the amount of a mortgage you can qualify for is generally figured by applying debt to income ratios. As a rule of thumb, conventional financing requires debt to income ratios of 28/36. FHA and other forms of financing have their own requirements.

The first ratio, 28% in our example, is the maximum percentage of your gross monthly income that the bank will allow you for your total monthly mortgage payment, including: Principal (the amount you pay back to the bank every month), Interest (the profit to the bank each month), Real Estate Taxes (the real estate property taxes due for your home in your local area), Homeowners Insurance (your fire and liability insurance on your home), and PMI (Private Mortgage Insurance – a monthly insurance fee required if the down payment is less than 20%).

The second ratio, 36%, is the maximum percentage of your gross monthly income that the bank will allow you for your total monthly mortgage payment PLUS your other monthly debt payments such as credit card payments, car payment, other installment loans, etc.

Why get pre-approved?

You get pre-approved to make you a better buyer in the eyes of the seller, thus giving you greater leverage in negotiating for the best price and terms as well as knowing that you can afford and obtain mortgage financing.  More than 50% of all home sales in some areas are cash, with no mortgage contingency.  Seller’s expect a cash offer or one where the buyer is “well-qualified” and that means an actual mortgage pre-approval or commitment.

A true mortgage pre-approval is an actual mortgage commitment subject to the buyer getting a home under contract and it appraising for at least the purchase price.

A seller is taking their home off the market for typically 45 to 60 days, during which time the buyer applies for their mortgage financing commitment. They don’t want to hear 45 days into the deal that you can’t get a mortgage.

A mortgage pre-qualification, on the other hand, is merely a personal opinionby a mortgage professional as to ability of a buyer to get a mortgage.

A true pre-approval, however, is based on a more extensive credit report pulled from all three credit repositories with information verified, and a review of bank statements and other sources of funds, W2’s, pay stubs, etc. as well as verification of all information including employment.

TIP: Ask the mortgage professional to provide a pre-qualification initially but then file an application for a true pre-approval, or true mortgage commitment, with a lender at some point fairly soon after.

Make sure that you get a GFE, Good Faith Estimate, of closing costs when you apply for a mortgage. As of the end of 2009, there are strict regulations with regard to the preparation of a GFE and the difference, if any, between the estimate and actual costs at closing. They don’t include all costs. You may also incur closing costs such as home inspections, personal attorney, title insurance, etc. in addition to the costs noted on a GFE.  Lenders only give out a GFE if you actually apply for a mortgage.  However, they should be able to give you an itemized closing cost list and summary for your review.

4. Not Having a Clear Idea  of One’s Needs and Wants.

Once a buyer has a clear understanding of financing options and the price range they can afford given their resources, the next item of business is to have a clear idea of their needs and wants. Too many buyers just go out looking at homes without a clear understanding of what they really are looking for.

We recommend that you sit down and list the specifics of what you need and what you think you want as well as features that would be considered pluses and those that would be considered minuses.

If more than one person is involved in the purchase we suggest that each of you do your own list and then come together to compare and combine them into one list.  Everyone involved needs to agree on the basics in order to reduce the stress when looking.

Start with the basics:

How many bedrooms? How many bathrooms? How many car garage? What style of home? What general location? What age of home?

Then go into more specific options that you would like, such as:

Swimming pool? Fenced yard? Fireplace? Finished Basement? Air Conditioning? Hardwood Floors? Porch and/or Deck? Waterfront Location?

Another idea is to list “why” a particular feature is important to you. For example, you may desire three bedrooms. Yet, one so-called bedroom is intended to be used as a den or office. So perhaps a two bedroom home with a separate den-office would meet your needs.

It is also important that you separate “needs” from “wants”. For example, you may want a two and a half car garage but really only need a one and a half car garage. The two and a half car garage would be a real plus, but if the home with a one and a half car garage meets your other needs it may end up being the home you most desire. After all, you might be able to expand the garage into a two and a half car garage within your budget.

A caution is in order. You need to keep your options as open as possible. If you restrict your search to the absolute ideal home you may not have many to choose from and you may become very frustrated and stressed out with the process.

Buyers need to stay flexible in order to have a sufficient number of homes to look at. Search only on the very minimum of features that you consider absolute musts. Stay flexible on the rest. The ideal home probably doesn’t exist out there.  Yet, there are many homes that will come close if you remain flexible.

5. Not Becoming Familiar with the Market

It is vital that you know the market. You must develop a gut-feel for value.

How do you do that?

See lots of homes for sale. Don’t buy the first home you see, although sometimes it ends up being the best of the bunch. The only way to be sure about the home you decide to purchase is to get out and see other homes similar to it. Also, only by seeing lots of homes will you know what to offer for the home you decide to buy.

Open houses are a great way to get a feel for what is available. If your price range is up to $250,000, still go through homes up to $275,000. Sometimes you might come across a home that compares to some you saw priced at $275,000 but they are asking only $250,000. It could very well mean that there is a very motivated seller who has priced their home to sell.

A word of caution: The agent (or seller) who is holding the open house has a goal in mind. They want to find a buyer who falls in love with the home. They may ask you personal questions designed to help them “sell” you this particular home.

DON’T give them personal information that could be used against you.

Don’t let them know how interested you are in the home.

How much of a mortgage you qualify for.

The price range of homes you are considering Where you work, or how much you make.

To do so is like playing poker with a mirror behind you such that others can clearly see your cards. Keep your cards close to your vest.

6.  Not Having a Negotiating Strategy in Mind Before Making an Offer

Price isn’t everything.  Buyers need to look at the larger picture and also prepare for writing an offer.

  • What price should you offer?
  • What other terms should you consider?
  • What closing date? What contingencies?
  • Should you ask the seller to make certain repairs, ask for a repair credit, or offer a lower price and handle repairs yourself?
  • What did the seller pay for the property?
  • What improvements has the seller done since they have owned the property and what is the value of these?
  • What are other homes similar to this one selling for in the area?
  • What is this home really worth?
  • What defects or potential defects are there in the home?
  • What deferred maintenance is there?
  • How is the neighborhood? Crime? Noise? Smells?  Ease of access?

What about low-balling?

If the seller senses that you are in fact low-balling, they won’t take your offer serious and in fact may not counter it at all. They also may be so put off by your actions that they won’t even consider a reasonable offer from you later.

So how does one arrive at a starting point?

Rules of thumb such as starting at 10% off list price don’t work really. Some homes are overpriced by 15 to 20%, while others are priced on the money or maybe below market value.

TIP: Set the maximum price that you would consider paying for the property. Than start at a price below that maximum price that is still supported by facts, such as property condition and selling prices of other homes, but that still allows for some negotiation room with the seller. However, be aware that sometimes when a home is priced right and there are other competing buyers, a full price or over full price offer may be necessary.

Also take into consideration the strength of yourself and your offer.

For example, being pre-approved for a mortgage rather than merely pre-qualified, able to close quickly or able to delay closing or allow the seller to rent-back for a period of time.

Consider the seller’s motivation to sell.

  • Is the home vacant or soon to be?
  • Have the sellers purchased another home or do they have another home under contract subject to selling the home you are interested in?
  • Has the property been on the market for an extended period of time including expired listings with the current agent or other previous agents?
  • Are the owners divorcing?
  • Has there been a death in the family that is forcing the sale?
  • Is the property in foreclosure?

Other negotiating considerations include:

  • What is the likely counter offer from the seller?
  • What will your next counter offer be?
  • What can you give up in the negotiating that isn’t as important to you as it is to the seller?

Successful negotiating is a complex process.

You need to be very aware of the nuances of negotiating in order to get the best price and terms. That is one of the strengths of a true professional real buyer agent. They negotiate on behalf of their buyer clients every day. They have developed the experience and special techniques to consistently help their buyer clients achieve success in the home buying process.

TIP: Before you sign a purchase and sale offer or contract, do your homework. Develop a strategy. Seek assistance. Don’t be afraid to walk away if the seller refuses to meet your price and terms. A deal sometimes can still be consummated several months down the line at your price and terms, once the seller softens up a bit and no other offers come in. Be patient and you will be rewarded with a great deal on a home.

7.  Failure to Include Contingencies for Property and Mechanical Systems Inspections

or Skipping Your Home Inspection to Save Money

Before making an offer have someone who is knowledgeable with regard to building structural components and mechanical systems, go through the home with you prior to writing a purchase offer. Then you have additional information available to help in determining your negotiating strategy. Your Offer to Purchase should include a contingency for a professional inspection but it helps to have someone knowledgeable render their opinion a head of time.

Such a person could be a relative, a contractor, or your real estate agent. The point is to get additional information in the form of personal opinions without it costing you money at that stage. Make sure that the person you are relying on is in fact knowledgeable with regard to property evaluation.

A word of caution: In regard to using the real estate agent’s opinion, if the agent is a seller’s agent, designated/dual agent or a transaction broker, then keep in mind that their job is to either look out for the seller (seller’s agent) or remain neutral (designated/dual agent or transaction broker).

Only rely on the opinion of an agent if that agent is your true buyer’s agent and only if that agent has the experience, knowledge, and background such that the agent’s opinion will be of value to you.

Agents, by law, are only required to disclose “known” defects. Many listing agents don’t investigate the condition of property they list because if they found problems they would have to tell prospective buyers.

Once your Offer to Purchase is signed, it is prudent to pay for a professional property inspection. Property inspectors are available in most areas. The best ones to use are those who issue reports, which meet or exceed the internationally accepted standards of a professional organization such as the American Society of Home Inspectors (ASHI).

Such an inspection is general in nature and depending on the home you are buying, you also may want to consider additional inspections and tests such as:  (click on the links for more information)

TIP: It is important that any offer to purchase contract contain a contingency clause that states that the offer is subject to whatever testing you desire to do and that the results of said testing and inspections must be satisfactory to you or you may cancel the contract and receive your deposit back.

Know the property you are purchasing. Have the appropriate inspections and testing done as part of the deal. Further negotiating may be in order in the event that such testing and inspections indicate the need for a repair or replacement.

Making the offer contingent upon testing and inspections gives you the leverage to be able to re-negotiate with the seller, as you would then have the option to cancel the contract and receive your deposit back if they won’t make a repair or give you a repair credit for legitimate problems. After this negotiation is completed, the Purchase and Sales Agreement can begin.

Many states have a property disclosure law that requires a seller to complete and sign a property condition disclosure that asks pertinent questions pertaining to the condition of the property. A copy of this form generally needs to be given to buyers “before” they write an offer.  If your state requires this disclosure make sure you have a copy before you write an offer.  Play it safe, do home inspections.

8.  Failure to Include Other Contingencies in the Offer to Purchase

An Offer to Purchase contract written from the buyer’s perspective should have numerous contingencies in it to protect the buyer. The Purchase and Sales Agreement will have some contingencies carried over, as well as additional legal conditions. Depending on the buyer’s circumstances…

The Offer to Purchase should be subject to:

  • Engineer/property inspection
  • Other structural and mechanical system inspections
  • Obtaining financing and mortgage commitment
  • Bank appraisal equal to or greater than purchase price
  • Receipt and approval of a property condition disclosure completed and signed by seller, if applicable
  • Sale of a property owned by the buyer or pre-closing possession by the buyer, if applicable

Part of the negotiating process should include the buyer asking for certain contingencies and changes or additions to the so-called standard language. Contracts are between buyers and sellers. Each has the right to add or change language, as they deem appropriate. Many buyers (and agents as well) don’t know what language to change or add or what contingencies to ask for. And relying on attorneys to include proper contingencies may not result in the best solution either. Attorneys know legal matters; they generally aren’t real estate experts. They may not know what a property is worth, what the condition of the property is, or what contingencies are appropriate in a particular situation.

In my opinion, having a professional, knowledgeable true buyer’s agent helping you may be the only way to make sure you are protected.

9.  Failure to Continue to Monitor and Follow-up

The closing date indicated in a purchase and sale contract is a target date. Too many buyers, and sellers for that matter, assume that the closing will in fact take place on that date.

However, very rarely does that happen, unless someone continues to monitor and follow-up with the transaction.

  • This means that someone needs to make sure:
  • That the appraisal gets done on time.
  • That the home appraises for at least the purchase price.
  • That the appraiser and lender are requiring no repairs.
  • If there are repairs required to be made before closing, that an agreement is made between yourself and the seller as to who will do the repairs and who will pay for the repairs.
  • That the repairs actually get done and are re-inspected in a timely manner.
  • That a written mortgage commitment gets issued on time. Also, that any contingencies of the mortgage commitment are taken care of. A “clean” commitment has no contingencies that are not 100% sure can be cleared before or at closing.
  • That the seller’s attorney has located the abstract of title, sent it out for re-dating, if that is applicable for your area, and ordered the survey, if that is applicable for your area. Check this with your buyer agent or your attorney.
  • That calls are made to setup the closing time and date.
  • That the closing attorney has checked with the lender to make sure the closing documents are expected on time.

Your attorney or the title company, depending on the area’s normal practice, then reviews the title documents and sends a letter to the seller’s attorney with regard to any title defects they have found, so that title defects can be corrected.

Title insurance is then ordered and the title package is delivered to your lender’s attorney.

Then the attorneys, or the title company handling the closing, and the bank determine an actual closing time.

Sound confusing and time consuming?

You bet. And nearly every step of the way has to be monitored in order to have a closing on or near the anticipated closing date in the contract. Lots of disappointments result because no one was monitoring the entire process.

Most buyers don’t have a clue as to what is involved and therefore buyers should not be expected to bug everyone. Of course if no one else is, the buyer may have to or face not closing on time.

It isn’t good enough to call an attorney or the lender and have them say it is under control and don’t worry. Be sure you have one professional who is keeping track of the process. Your real estate agent should do this. Ask him or her what services are provided after your Purchase and Sales Agreement is signed.

The better real estate agents understand the process and monitor it closely. Make sure that your agent agrees to do this in advance. Otherwise you could be greatly disappointed.


The author, Tom Wemett, is a nationally known homebuyer advocate, educator and exclusive buyer agent.  He is a founding member of NAEBA, the National Association of Exclusive Buyer Agents, the national President of NAEBA in 2003 and currently serves on the NAEBA Board of Directors.  He also is the Founder/Manager/Lic. R.E. Broker of Record for Homebuyer Advisors LLC, a real estate brokerage that represents homebuyers only in Florida, Massachusetts and New York State.  Tom can be reached at 800-383-8322 or tom@tomwemett.com. 

 

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