The Buying Process, part 3

In the first installment you read about how much money to save and choosing a lender and the best kind of loan for your financial goals. In the second installment, last week, you read about choosing a Realtor and your home search. This week, in the third installment, you'll read about writing, negotiating, and due diligence for your offer.

8. Decide which home you want and what's a fair value for it. In your home buying process you'll have the opportunity to consider many homes as you find the best fit for you. When you know the market and yourself well, finding a home can take only a couple of weeks! Once you've identified "your home", you and your Realtor will write an offer for that home. Consider carefully how you want to negotiate for the home. Investors calculate the ROI (return on investment) over the period they intend to hold the property with little concern for the emotional value of the property, since they seldom live in the property and don't emotionally bond to the property and area. A rule of thumb is that they need to purchase the home at a price below market value to make the profit they expect. Is your home purchase simply a real estate investment or more? Your realtor can show you the data your lender's appraiser will use when determining a fair market value for the property. You don't want to overpay nor will the seller be wanting to undersell the property. Every contract includes: people, property, price, terms (inclusions, dates, contingencies, who pays for closing costs, etc.), and consideration (earnest money). When purchasing a home FSBO, for sale by owner, the offer will also include who pays your realtor and how much that will be. (As you know, realtors using the mls advertise coops for agents bringing them a buyer. This means when purchasing a home in mls you, the buyer, don't have to pay your realtor's commission at closing-the seller does!) Your offer will include a check for earnest money. This check will be cashed and put into a trust account until the contract closes or is terminated.

9. Know your timeline and due diligence rights and responsibilities.
In a normal sale you'll have several dates tied to investigations you may perform to make sure the property fits what you want and can live with after closing. This is called your due diligence. It includes:
Title investigations-Research on the title to the property and any related liens, judgements, or deficiencies is done by the title company and delivered to you, the buyer. Read your title commitment and ask questions if something is not clear to you. It is a summary of the recorded legal documents linked to the property. On some occasions a real estate lawyer is needed to clarify title questions. A seller must clear the title of all encumbrances (liens or judgements) before s/he can transfer title to a buyer at closing. You may have something show up on you, too, during the title search. If so, you will need to "cure" the title by proving the person is not you or by paying the judgement and documenting the payment before closing.
Inspections-Every buyer should perform a property inspection to verify s/he knows the state of the property and its improvements. Consider paying a licensed inspector (about $250-$400) for a home inspection. If your property has severe or specific problems/concerns, then consider having these evaluated as well (some common areas investigated further are the roof, sewer line, animals or insects, environmental issues like radon, mold or methamphetamine lab organic levels, structure, electrical, furnace, plumbing, septic, well, plants, zoning, building permits and codes, etc.). This is the most common area when "round 2" of negotiations takes place over what to repair and how.
Survey-Have a surveyor determine the boundaries and easements on your property, so you don't have problems later with building or neighbors (about $250-$350).
HOA investigation-Read any covenants, HOA meeting minutes and financials, so you know you'll be ok living with this very local governance that can put liens on your property if you don't pay the HOA dues or fines.
Appraisal-Your lender will set up an appraisal for the bank lending you money to verify the home is worth at least the purchase price. You don't have any work to do here. You'll make a check to your lender for the appraisal at the time you complete your loan application. You should get a copy of the appraisal at or just after closing, since you've paid for it.
Loan Conditions-Most loans today require full documentation of your finances. Provide the documentation your lender requests as quickly as possible. Since the underwriting guidelines on loans are changing, don't be surprised if there are some last minute requests from your lender. Remember to refrain from any credit purchases or changes until after you've closed on your home purchase. Sadly, some people who have bought things before closing changed their FICO score or debt/income ratios and lost the loan for the home they intended to buy. They sometimes lost their earnest money, too!

10. Some special sellers have additional requirements.
If you're buying property at an auction, know the specific rules of the auction before you go! Know ahead of time what you expect to pay in fix up costs and set the top price you'll pay. Most purchase contracts at auctions do not include an inspection clause or any due diligence, so you'll have to have already inspected the property as much possible earlier. The title is supposed to be preevaluated for any liens and deficiencies. Do your homework, too! Ask your realtor to recommend a title company to work with you on this title investigation before the auction! There will be a cost associated with that title report (each title company sets their own prices for that). Also, ask your realtor what other due diligence may be advisable to consider when purchasing a property. For most auctions, remember the price you bid is not the full price you pay. The auction rules will specify what percentage on top of the price you bid, you, the buyer, will pay for commissions to the auction house and to your agent. Some auction rules also require certified funds for the full amount to purchase if you have the highest/best bid, so plan ahead accordingly. More about auctions later...

In a sale where a bank is involved as the seller (short sale, preforeclosure, foreclosure, lender owned, HUD) expect the timeline until acceptance to be long. When you write the offer on a bank property no one knows exactly when the bank will agree to/counter your offer, so dates can be written using "x days + mec" (mec is mutual execution of contract by all parties). These bank offers can take from 30-180 days for mec! Colorado has a short sale addendum you should include if the home you want to buy is a short sale. (A short sale is one where the bank(s) the sellers used will be shorted funds at closing. Since the banks have to determine how much of a loss they can absorb, it takes time for them to respond. A short sale often happens because home prices fell below the amount of the loans on the home.) Few buyers have the patience to wait for bank short sale processes, so listing agents will gather many offers on a short sale, hoping one will still be in place to close when the bank's processes are complete! Sometimes a buyer's offer is too low for the bank to accept, so a backup offer gets a chance to buy! Sometimes the bank's counterproposal is unacceptable to the sellers on a short sale and the home then is foreclosed on. Banks also have their own addenda that are attached to any contract they accept. Often these addenda include an "as-is, where-is" clause. This spells out what inspections are or are not allowed; how the home can or cannot be dewinterized and who pays for this; what the bank will or will not do if the buyer is not satisfied with the inspection results; how funds will be delivered at closing; whether or not the bank will pay for buyer loan closing costs; etc.

Getting from the offer you've written to the closing table is quite a process. Even in smooth transactions, there are a couple of things that must be completed on time and to everyone's satisfaction. Work closely with your realtor and you'll be able to be confident that you're buying a home that will work well for you from day 1.

Next week, the closing process...