The Buyer Experience
Buying a home comes with a ton of questions. Over the years, we found that the people we work with ask similar questions. So, we decided to answer all of those questions (and more!) below.
Does it cost money to use a Realtor? How does commission even work?
In most states, traditionally the seller agrees to the commission that will be paid to the agent that is working for them. From there, once the listing is posted publicly on the Multiple Listing Network, the commission that agent will pay to a cooperating broker is posted there.
Essentially, this means that both buyer and seller agents are working for free until the deal is closed! The buyer will almost never write a check to pay a broker, and the agent working for the seller is paid out of the proceeds of the sale.
For rentals, the way the market is right now, the tenant is usually charged a fee of one month’s rent that is often split between two cooperating brokers. One thing to keep in mind is that your agent may have insight into larger buildings that are offering to pay brokers fees and offer other incentives, especially when they are first opening.
What are the upfront costs of buying a home?
Inspection – Inspection costs vary based on the area, size of the home, and the services the inspector is providing. For a standard home inspection for a condo in the city or a single-family just outside of it, a buyer should budget $400-600. Of course, other inspections require additional fees, so if you’re thinking about a lead inspection you should budget $400-500 at a minimum, an additional pest inspection will be additional, and so on.
Lender Costs/Fees (Appraisal, Credit Report, etc) – These fees are often lumped into your closing costs that are paid at the end of the transaction but sometimes are charged up front. Expect to pay about $390 for an appraisal.
Attorney/Legal Fees – Real estate attorneys traditionally charge a flat fee and do not charge by the hour. A real estate attorney that is able to work on behalf of your lender will often waive the personal representation fees on your behalf, as they will be compensated by the lender and/or title company. Expect to pay about $1000-1200 for attorney fees, with some additional recording fees up to $500.
Downpayment – The largest chunk of money that you will pay, your downpayment is broken up into two deposits and a final payment. You’ll need to bind your offer with a deposit, typically $1000-5000, but sometimes higher depending on purchase price and the situation. The same is true for binding the purchase and sale agreement, where the buyer will traditionally place the remainder of half the total downpayment amount into escrow as the second deposit. The remainder of the downpayment will be brought to closing as cleared funds, either via a wire into the attorney’s account or via a bank check. Any small adjustments at closing can be made via personal check. We traditionally speak of down payments as percentages (5% down, 10% down, 20% down, 30% down, etc).
How much do I need for down payment?
This is an interesting question because there are actually some loan programs out there that require 0% down! There are a number of first-time buyer programs that require between 3-5% as well.
That being said, many homes end up with multiple offers and financing is a big consideration as to the strength of an offer, so oftentimes if a buyer has the ability to do so, a 10-30% down payment will help strengthen an offer. In addition, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance which can be quite costly.
What's the difference between assessed, appraised, and market value?
We get asked all the time about the different values assigned to a property, and why they often seem to be so substantially far apart! Here’s a quick rundown:
Market Value: Simply put, this is what a buyer is willing to pay for a property. A real estate professional will use their knowledge of the market as well as a comparable market analysis to give a range of value for a specific property; however, there is both an art and a science to this process so each real estate professional may have a different opinion of value.
Appraised Value: An appraisal takes place if there is financing being obtained on a home (or some other situation arises, such as for estate/probate purposes). Basically, a lender wants to be sure that the home is worth what the buyer is paying (and what they are lending), as they will be holding a mortgage on the home as collateral for their loan. Appraisers traditionally will create a radius around a property and select 5-6 comparable properties that have sold, and add or subtract value based on the finishes, overall condition, and basic specs of a property. If financing, it is important that the property appraises. If it does not, the lender may deny the loan.
Assessed Value: An assessment is done for tax purposes. The city/town assessors’ office places a value on each property in the municipality each year in order to ascertain what the tax on each property should be.
Where do my offer check and deposit go?
Only licensed escrow agents can hold deposits for real estate transactions. When you give your offer or purchase and sale check to the agent working for the seller it will be deposited in the company’s non-interest bearing escrow account. Some companies do not act as escrow agents, so the attorney working for the seller will occasionally hold escrow for the transaction.
Your deposits are usually protected by contingencies, such as an inspection and/or financing contingency. These contingency periods expire on specific dates, but should there be any issues with either prior to the contingency date put forth in your offer, the deposit would be released.
The deposits are applied towards the money that the buyer is paying for the purchase, specifically the downpayment. Just prior to closing (a minimum of three days), the buyer and seller will each have a chance to review a closing disclosure, which breaks down all of the finances of the transaction.
What is a bidding war?
Our current market conditions are simply a function of supply and demand, because of this, there are often multiple buyers bidding on the same one property, which creates “the auction effect” – or a bidding war.
At one of our most recent listings, the scarcity of similar properties becoming available in the neighborhood led to over a dozen offers being submitted, the majority over asking and a handful presenting as either all cash or boasting no contingencies.
It’s not always the highest price that seals the deal, sometimes, other aspects of the offer add significant value to the seller. Limiting contingencies can lessen the risk for sellers who are worried about their ability to buy their next place, and adding a use & occupancy for a seller after leaseback might help with the timeline on their purchase or significantly increase their buying power.
Oftentimes, when there are a number of offers on a property, the agent working for the seller will work with their client to narrow the field to 3-5 of the strongest offers and circle back to those buyers for a second round or “best and final”. This represents an opportunity for the seller to communicate their most desired terms and for the top offers to improve their position before the seller makes a final decision.
In our market, there is often an emotional desire to “win” that overpowers the need to make a sound investment decision. It’s very important to discuss goals with your agent after signing a Buyer Agency Agreement in order that they make be able to effectively advise you while keeping your investment goals in mind to avoid making a decision that could negatively impact your financial future.
“I’ll get a better deal working with the listing agent, directly, right?”
Usually – wrong. A listing agent is better defined as “the agent working for the seller”. When the listing contract is signed the commission being paid by the seller to the listing firm is legally bound; therefore, generally speaking, the only entity that would benefit from working with the listing agent directly would be the agent working for the seller’s pocket.
In addition, when the listing contract is signed it also creates a fiduciary responsibility between the agent working for the seller and the seller. What this means is that anything the agent working for the seller learns about you, they are required to disclose to the seller (unless you and the seller sign a dual agency agreement which basically makes the listing agent a messenger between the two parties). Simply put, if you work with the listing agent directly, you have no representation or advocate in your corner.
Why shouldn’t I wait to buy once the market cools down?
This is a common question given the market that we work in. With rising prices all over the area, it can be daunting to think about making such a large investment. There are a couple of variables to consider here:
1. Interest Rates: As interest rates continue to rise, buying power decreases. The negative correlation of rising rates outweighs the impact of a market slowdown.
When you look at the overall cost of interest rates rising, for every .5 rate increase, it represents an additional 5.5% that you'll be paying each month. To put this into perspective - for a 30-year loan on a $500,000 purchase with 20% down, you're looking at an additional $43,000 in mortgage payments over the term of the loan for each .5 rise.
2. Do you have something to sell?: If you are planning to leverage equity from a current home, or need to sell before you will buy, keep in mind that should the market cool down, so does your investment. Talk to a mortgage professional sooner rather than later to discuss various scenarios for your next purchase.
Is a condo or single family more liability?
It’s not necessarily a matter of “more” liability, it’s a matter of how it’s shared. With a single-family home, your homeowner’s insurance will be more expensive than a condo policy, and general maintenance and repairs are solely the owner's responsibility, so there could be more work/additional cost associated with a single family home. A condominium spreads the liability and burden of maintenance and repair costs across all of the owners, and your condo insurance policy is generally less expensive as the association’s master insurance covers a lot of the larger ticket items (roof, etc). It’s important to work with your agent and lender to understand the implications of each when deciding which is a better fit both financially and from a maintenance standpoint longterm.
What do I need for a pre-approval?
A solid pre-approval can certainly give you the leg up on competing offers, so it’s important to be ready when it comes to working with a lender. In short, your pre-approval is the lender saying you can afford “x” after taking a quick glance at your financial situation. The majority of lenders will have very similar rates; however, a local lender on the ground in the area you’re looking in will likely be more competitive and better-known amongst agents, which surprisingly can have an impact on the pre-approvals credibility. You’ll also want to consider access to your mortgage banker throughout the process – a big question to ask is whether they are available on weekends (and whether you will be able to access them via cell phone!).
In order to be best prepared for getting pre-approved, begin compiling the following items:
- Tax returns for the past two years
- Pay stubs for at least three months. If you are changing jobs or relocating, a copy of your offer letter. You’ll want to talk to your lender about your career change prior to a preapproval, as it may impact your ability to obtain a loan
- Bank statements for the past three months
- Other assets/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property
- If obtaining money from a third-party (friend or family member), a gift letter, which your lender can help you with
- An idea of your credit score and monthly debts – student loans, car loans, etc will be used to calculate your debt-to-income, an important factor in mortgage lending
- If you have a mortgage already, a couple of months statements may be needed by your lender
- If you are divorced, a copy of your divorce decree and documentation of any child support or alimony may be necessary
Getting all of these items together in advance will help you and your lender be prepared. Many lenders, if given all of this information up front and authorized to pull your credit, will actually be able to pre-underwrite your loan, meaning that you will be approved as a buyer and they will simply need to “approve the home” via appraisal and if needed, a condo document review and verification of facts through a condo questionnaire. This can be a huge bonus and help you shine amongst multiple offers.
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