The purchase and sale of real estate occurs around the United States, North America, and all over the world every single day. Constantly, willing buyers are forming agreements with willing sellers to purchase homes. Considering the sheer number of people buying and selling, it may appear that the process is not overly complicated. But, in reality, it takes a lot of dedicated people working together, to get someone from interested house hunter to homeowner.
During this process, you will be led down a road that has many possible places to take a “wrong turn.” In most cases, you will have a Realtor® to guide you and keep you on the right road.
The fact is; the better your Realtor® is at their job, the better the guidance. A big part of a realtor’s job is to minimize, if not eliminate, mistakes leading to “wrong turns.”
Mistake #1: Purchasing Without an Understanding of Budget
Home sellers do not want to tie up their property with a buyer that isn’t qualified to get a loan or complete the purchase. Until recently, anyone with something resembling a heartbeat could get a home loan. In recent years, however, the real estate market began to experience problems and mortgage lenders have tightened up the standards and qualifications for home buyers to finance their purchases.
Now, in order to get your pre‐approval letter, you have to provide bank statements, tax returns and other documents to prove you earn what you claim to earn. While these new restrictions will preclude many from qualifying for pre‐approval, the good news is that many will be spared the heartache of losing their homes to foreclosure or a forced short sale.
Most mortgage loan professionals will attempt to pre‐approve you for the maximum amount of loan you can afford. This gives you more options in your home search. If you know you can successfully get a loan to purchase a $250,000 home, you also have the option of looking at homes anywhere below $250,000. It depends on the size of monthly payments you can handle.
You should be aware that each lender has approval and underwriting guidelines that are based on several factors. They consider the amount of long‐term vs. short‐term debt you and your family is managing. They consider length of employment, credit history, credit score, and several other factors. Unfortunately, while they are making decisions on an individual, your loan qualification is based on guidelines and computer models established for the “average person,” and not a specific buyer.
Based on underwriting guidelines, you may be able to afford a $250,000 home and easily make the monthly payments. However, at that price, you may find you’re your finances stressed beyond their comfort level. What good is it to buy a wonderful new home if the monthly payment causes economic hardship?
When you get a pre‐approval letter, take a moment to review what your monthly payment will be. Do this based on your review of the maximum amount in the pre‐approved loan. In determining your monthly payments, you should be careful to consider property taxes, HOA dues (if any), and homeowner’s insurance.
Additionally, you should speak to a qualified tax professional who can factor in deductible interest and property taxes. They can also show you how to decrease your payroll tax withholdings to increase your take‐home pay. The bottom line here is you should get some assistance in calculating the approximate total monthly expense of home ownership before you write an offer.
One necessary side note to this relates to the pre‐approval letter or document provided by the lender. In many cases, your offer to a seller may be lower than the amount you are approved to purchase. If you are approved to purchase a $250,000 home, but only offer $240,000 to the seller, it’s not in your best interest to disclose that you are approved for the higher amount. If the seller knows you are already approved for $250,000, they might be more likely to make a counter‐offer for that higher amount.
Once you possess a pre‐approval letter, you will know the maximum amount for which you can get a loan. Simply make an educated decision of how much you are willing to pay. Once this is determined, you can begin your house hunting adventure.
Mistake #2: Failing to Get a Home Inspection
On television crime dramas, a violent crime will be sometimes referred to as, “one committed in the heat of passion.” In real estate purchases, you can get so caught up in the process of finding and negotiating for the right home, you get blinded by “passion.” While there is no violence involved, there is a “crime” in the sense that there could be damages to your financial future.
Whether buying a brand new or resale home, a Realtor® should be recommending a home inspection. In truth, sometimes sellers forget to disclose things that they may or may not know about the home and its condition.
In most states, home sellers are required by law to disclose known property defects, but the law cannot guarantee that sellers will know all possible defects. It is best to think of an independent home inspection as the great equalizer that helps uncover defects and ensure you are as informed as possible about the condition of your future dream home.
Typically, home inspections range in price from about $200 to $500. This expense at the beginning of the home purchase process could save you tens of thousands of dollars down the road. This is well worth the relatively modest up-front expense.
Mistake #3: Compromising on Home Features
Ideally, when shopping for a home, you should be thinking about the specific requirements you need or want to find in your dream home. Typically, you might consider size requirements, the number of bedrooms and bathrooms, proximity to work or school, quality of the local school district, and countless other features.
Some real estate markets might make it easier to check off all the “needs” or “wants” on your wish list. Other markets can be more challenging. In a seller’s market (one where there are more buyers than available desirable homes); it may be difficult locating a home that meets your requirements. This is because there is more competition for the same limited supply of homes.
Likewise, in a buyer’s market (one where there are too many available homes for a smaller number of qualified buyers) larger inventory may translate to more choices that meet your criteria.
According to the National Association of Realtors, people will, on average, spend about seven years in a home they purchase. Buyers who compromise on their desired home features could end up living through those seven years as if they were a prison sentence.
- How many bedrooms, bathrooms, and total square footage are needed? This should be well thought‐out and not a spur‐of‐the‐moment decision. Do you plan on starting a family (or adding to it)? Will you need an extra bedroom or bath? If buying with a spouse or significant other, both should make sure they agree on these needs
- Is the home in the right location with easy access to streets, freeways, schools, parks, and local businesses? Is this important to you? If so, you should visit your top areas of choice to ensure that these important needs are met
It is important for you to think about these home features in terms of whether they are “needed” or merely “wanted.” If a family of two adults and five children are shopping for a home, having four or five bedrooms may be considered a “need.” Whereas, a couple with no children might “want” an extra room to use as a home office or study – but it isn’t necessarily needed or required by them.
Breaking things down to what is “needed” vs. “wanted” can be helpful when discussing what you can afford. Some of the dozens of topics or features you may want to think about before making an offer might include:
- How far is the commute to work? Sitting in stop‐and‐go freeway traffic for an hour each way may not be a problem – but it could be something to consider.
In summary, it is critical to make every effort to find a home with as many desired features as possible. At the same time, it is necessary to recognize that there could be limitations based on financial ability, geographic location, and supply and demand.
The bottom line is you should consider all of the factors (both good and bad) and make an educated decision based on those factors before having your agent write a purchase offer.
Mistake #4: Choosing an Inexperienced Sales Agent or Broker
All professionals, whether lawyers, physicians, insurance or real estate agents are generally required to take some education or college coursework. Some require college degrees, post‐graduate and continuing education. Most are required to also pass a state‐administered examination. But, with the exception of physicians, none are required to have someone supervise them in the field to ensure they know what they are doing after passing a state examination.
In the real estate industry, a licensed salesperson will generally have to hang their license under a broker who is supposed to “supervise” their activities. In truth, though, most brokers will simply offer training classes with hardly any checks and balances to ensure that the salespersons attend those classes.
There are national real estate organizations that have made great strides to increase educational opportunities. They help reinforce best practices and higher levels of ethics amongst their members. But, just because a Realtor® gets their license today and joins an association of other Realtors® tomorrow – doesn’t mean they are more qualified or knowledgeable than another Realtor® who chose not to join. So, what does this mean to you looking for a Realtor® to help you find and purchase a new home?
It’s probably not the best idea to use cousin Vinnie who has never written a sales contract to help find the home. Not to mention negotiate the price, and close the deal. An inexperienced Realtor® may draft a purchase offer that commits you to pay for items that, by local custom, are normally paid for by the seller. Likewise, an inexperienced Realtor® may not know or understand inspection and financing contingencies – which could ultimately cost you the home and/or forfeiture of you earnest money deposit.
You are literally making one of the largest single purchases in your lifetime – why shouldn’t you find the most qualified person available to represent you? What kind of interview questions should be asked of a prospective Realtor® (buyer’s representative)? Some recommended questions are:
- How many real estate sales have you personally closed over the last 12 months? (Ask for a
printout from the Multiple Listing Service ‐ this should be easy for the agent to provide.) - Is selling real estate your only job? Part‐time real estate agents may not have the time to devote to you or your transaction. What if they work at their non‐real estate job from 9AM to 5:30PM and cannot let an appraiser into a home, meet a home inspector, or allow a buyer access for a final walk‐through?
- Are you currently involved in any litigation over a transaction you were associated with?
- Do you work alone, or are you supported by a team? Real estate agents who run their business as a team usually outperform agents who work on their own because teams can generally provide superior customer service to their clients.
- Do you offer a “performance guarantee?” In other words, is the Realtor® confident enough in their negotiation skills and abilities to backup their claims with a monetary penalty (payable to you) if they don’t perform? A typical guarantee might be, “I will save you at least $5,000 on the purchase price of your next home or I will pay you $1,000.”
The bottom line is that with a purchase as large as a home, you should be a discriminating consumer. Ask hard questions.
If the Realtor® isn’t convincing, doesn’t have the right answers, or they just don’t feel like they would be a good fit, then move on to the next “applicant.”
There are plenty of experienced, competent, and ethical realtors to choose from. Why take a chance using one with no experience? There is just too much at stake to go with an agent that is simply adequate.
Next month, we will cover finding the best deal, so stay tuned!
