THE BEST LAS VEGAS PROPERTIES
|
Benefits Of Owning
Your Own Home |
The
Best Investment
As a fairly general rule, homes appreciate
about five percent a year. Some years will be more, some less. The figure will
vary from neighborhood to neighborhood, and region to region. Five percent may
not seem like that much at first. Stocks (at times) appreciate much more, and
you could earn over six percent with the safest investment of all, treasury
bonds.
But take a second look…
Presumably,
if you bought a $200,000 house, you did not pay cash for the home. You got a
mortgage, too. Suppose you put as much as twenty percent down – that would be
an investment of $40,000. At an appreciation rate of 5% annually, a $200,000
home would increase in value $10,000 during the first year. That means you
earned $10,000 with an investment of $40,000. Your annual "return on
investment" would be a whopping twenty-five percent.
Of
course, you are making mortgage payments and paying property taxes, along with
a couple of other costs. However, since the interest on your mortgage and your
property taxes are both tax deductibles, the government is essentially
subsidizing your home purchase.
Your
rate of return when buying a home is higher than most any other investment you
could make. If you are moving to a home for the first time, you are going to be
very pleased with all the new space you have available. You may have to even
buy more "stuff."
Income
Tax Savings
Because
of income tax deductions, the government is basically subsidizing your purchase
of a home. All of the interest and property taxes you pay in a given year can
be deducted from your gross income to reduce your taxable income. For example,
assume your initial loan balance is $150,000 with an interest rate of eight
percent. During the first year you would pay $9969.27 in interest. If your
first payment were January 1st, your taxable income would be almost
$10,000 less – due to the IRS interest rate deduction.
Property
taxes are deductible, too. Whatever property taxes you pay in a given year may
also be deducted from your gross income, lowering your tax obligation.
Stable
Monthly Housing Costs
When
you rent a place to live, you can certainly expect your rent to increase each
year – or even more often. If you get a fixed rate mortgage when you buy a
home, you have the same monthly payment amount for thirty years. Even if you
get an adjustable rate mortgage, your payment will stay within a certain range
for the entire life of the mortgage – and interest rates aren’t as volatile now
as they were in the late seventies and early eighties.
Imagine
how much rent might be ten, fifteen, or even thirty years from now? Which makes
more sense?
Forced
Savings
Some
people are just lousy at saving money, and a house is an automatic savings
account. You accumulate savings in two ways. Every month, a portion of your
payment goes toward the principal. Admittedly, in the early years of the
mortgage, this is not much. Over time, however, it accelerates. Second, your
home appreciates. Average appreciation on a home is approximately five percent,
though it will vary from year to year, and in some years may even depreciate.
Over time, history has shown that owning a home is one of the very best
financial investments.
Freedom
& Individualism
When
you rent, you are normally limited on what you can do to improve your home. You
have to get permission to make certain types of improvements. Nor does it make
sense to spend thousand of dollars painting, putting in carpet, tile or window
coverings when the main person who benefits is the landlord and not you. Since
your landlord wants to keep his expenses to a minimum, he or she will probably
not be spending much to improve the place, either.
When
you own a home, however, you can do pretty much whatever you want. You get the
benefits of any improvements you make, plus you get to live in an environment
you have created, not some faceless landlord.
More
Space
Both
indoors and outdoors, you will probably have more space if you own your own
home. Even moving to a condominium from an apartment, you are likely to find
you have much more room available – your own laundry and storage area, and
bigger rooms. Apartment complexes are more interested in creating the maximum
number of income-producing units than they are in creating space for each of
the tenants. If you are moving to a home for the first time, you are going to
be very pleased with all the new space you have available. You may have to even
buy more "stuff."
Other
Things to Avoid Before Purchasing a Home
Don’t
move your money around. When a lender reviews your loan package for approval,
one of the things they are concerned about is the source of funds for your down
payment and closing costs. Most likely, you will be asked to provide statements
for the last two or three months on any of your liquid assets. This includes
checking accounts, savings accounts, money market funds, certificates of
deposit, stock statements, mutual funds, and even your company 401K and
retirement accounts. If you have been moving money between accounts during that
time, there may be large deposits and withdrawals in some of them.
The mortgage
underwriter (the person who actually approves your loan) will probably require
a complete paper trail of all the withdrawals and deposits. You may be required
to produce cancelled checks, deposit receipts, and other seemingly
inconsequential data, which could get quite tedious. Perhaps you become
exasperated at your lender, but they are only doing their job correctly. To
ensure quality control and eliminate potential fraud, it is a requirement on
most loans to completely document the source of all funds. Moving your money
around, even if you are consolidating your funds to make it "easier,"
could make it more difficult for the lender to properly document.
So
leave your money where it is until you talk to a loan officer. Oh…don’t change
banks, either.
The
Effect of Changing Jobs
For
most people, changing employers will not really affect your ability to qualify
for a mortgage loan, especially if you are going to be earning more
money. For some homebuyers, however, the effects of changing jobs can be
disastrous to your loan application.
How
Changing Jobs Affects Buying a Home
Salaried Employees - If you are a salaried employee who
does not earn additional income from commissions, bonuses, or over-time,
switching employers should not create a problem. Just make sure to remain in
the same line of work. Hopefully, you will be earning a higher salary,
which will help you better qualify for a mortgage.
Hourly Employees - If your income is based on hourly
wages and you work a straight forty hours a week without over-time, changing
jobs should not create any problems.
Commissioned Employees - If a substantial
portion of your income is derived from commissions, you should not change jobs
before buying a home. This has to do with how mortgage lenders calculate your
income. They average your commissions over the last two years. Changing employers
creates an uncertainty about your future earnings from commissions. There is no
track record from which to produce an average. Even if you are selling the same
type of product with essentially the same commission structure, the underwriter
cannot be certain that past earnings will accurately reflect future earnings.
Changing jobs would negatively impact your ability to buy a home.
Bonuses - If a substantial portion of your income on
the new job will come from bonuses, you may want to consider delaying an
employment change. Mortgage lenders will rarely consider future bonuses as
income unless you have been on the same job for two years and have a track
record of receiving those bonuses. Then they will average your bonuses over the
last two years in calculating your income. Changing employer’s means that you
do not have the two-year track record necessary to count bonuses as income.
Part-Time Employees - If you earn an hourly income but
rarely work forty hours a week, you should not change jobs. There would be no
way to tell how many hours you will work each week on the new job, so no way to
accurately calculate your income. If you remain on the old job, the lender can
just average your earnings.
Over-Time - Since all employers award overtime hours
differently, your overtime income cannot be determined if you change jobs. If
you stay on your present job, your lender will give you credit for overtime
income. They will determine your overtime earnings over the last two years,
then calculate a monthly average.
Self-Employment - If you are considering a change to
self-employment before buying a new home, don’t do it. Buy the
home first. Lenders like to see a two-year track record of self-employment
income when approving a loan. Plus, self-employed individuals tend to include a
lot of expenses on the Schedule C of their tax returns, especially in the early
years of self-employment. While this minimizes your tax obligation to the IRS,
it also minimizes your income to qualify for a home loan. If you are
considering changing your business from a sole proprietorship to a partnership
or corporation, you should also delay that until you purchase your new home.
Don't
Buy a Car
When
an individual’s income starts growing and they manage to set aside some
savings, they commonly experience what may be considered an innate instinct of
modern civilized mankind. The desire to spend money.
Since
North Americans have a special love affair with the automobile, this becomes a
high priority item on the shopping list. Later, other things will be added and
one of those will probably be a house. However, by the time home ownership has
become more than a distant and hopeful dream, you may have already bought the
car. It happens all the time, sometimes just before you contact a lender to get
pre-qualified for a mortgage.
As
part of the interview, you may tell the loan officer your price target. He will
ask about your income, your savings and your debts, then give you his opinion.
"If only you didn’t have this car payment," he might begin, "you
would certainly qualify for a home loan to buy that house."
Debt-to-Income
Ratios and Car Payments
When
determining your ability to qualify for a mortgage, a lender looks at what is
called your "debt-to-income" ratio. A debt-to-income ratio is the
percentage of your gross monthly income (before taxes) that you spend on debt.
This will include your monthly housing costs, including principal, interest,
taxes, insurance, and homeowner’s association fees, if any. It will also
include your monthly consumer debt, including credit cards, student loans,
installment debt, and….
…Car
payments.
How
a New Car Payment Reduces Your Purchase Price
Suppose
you earn $5000 a month and you have a car payment of $400. At current interest rates
(approximately 8% on a thirty-year fixed rate loan), you would qualify for
approximately $55,000 less than if you did not have the car payment. Even if
you feel you can afford the car payment, mortgage companies approve your
mortgage based on their guidelines, not yours. Do not get discouraged, however.
You should still take the time to get pre-qualified by a lender.
However,
if you have not already bought a car, remember one thing. Whenever the thought
of buying a car enters your mind, think ahead. Think about buying a home first.
Buying a home is a much more important purchase when considering your future
financial well-being.
The
Business Cycle and Buying a Home
Recession
and Expansion
There
are times when the economy is brisk and everyone feels confident about his or
her prospects for the future. As a result, they spend money. People eat out
more, buy new cars, and….
…they
buy new homes.
Then,
for one reason or another, the economy slows down. Companies lay off employees
and consumers are more careful about where they spend money, perhaps saving
more than usual. As a result, the economy decelerates even further. If it slows
enough, we have a recession. During such a time, fewer people are buying homes.
Even so, some homeowners find themselves in a situation where they must sell.
Families grow beyond the capacity of the home, employees get relocated, and
some may even find themselves unable to make their mortgage payment - perhaps
because of a layoff in the family.
Supply
and Demand
When
the supply of available houses is greater than the supply of buyers,
appreciation may slow and prices may even fall, as happened in the early
eighties and the early to mid-nineties. If you are lucky enough to purchase a
home during a slow period, you can be reasonably certain the economy will begin
to show strength again. At times, real estate values may even surge
drastically. In many regions of the country, this is precisely what occurred in
the late eighties and nineties.
Should
You Try to "Time the Market"?
One
problem with attempting to time your purchase to the business cycle is that no
one can accurately predict the future. Another challenge is that interest rates
are generally higher during a depressed market and income may not be keeping
up. For that reason, fewer people can qualify for a home purchase than in more
prosperous times.
Why
You Should Not Wait
Plus,
this strategy generally works best for first-time buyers. People who already
have a home usually need to sell it in order to buy their next one. If a
"move-up" buyer wants to buy a home during a depressed market that
means they usually have to sell one during the slow market, too. If a seller
wants to sell his home to take advantage of a "hot" market when
prices are fairly high, they generally have to buy their next home during that
same hot market.
It
tends to equal out.
Finally,
the business cycle can change over time. Since 1983, we have had two fairly
long expansions with only a slight recession in between each. You would not
want to wait nine years to buy a home, would you? You could miss out on a
substantial amount of appreciation by waiting, and end up paying much higher
prices.
Determining
Your Offer Price
When
you prepare an offer to purchase a home, you already know the seller’s asking
price. But what price are you going to offer and how do you come up with that
figure?
Determining
your offer price is a three-step process. First, you look at recent sales of
similar properties to come up with a price range. Then, you analyze additional
data, such as the condition of the home, improvements made to the property,
current market conditions, and the circumstances of the seller. This will help
you settle on a price you think would be fair to pay for the home. Finally,
depending on your negotiating style, you adjust your "fair" price and
come up with what you want to put in your offer.
Comparable
Sales
The
first step in determining the price you are willing to offer is to look at the
recent sales of similar homes. These are called "comparable sales."
Comparable sales are recent sales of homes that compare closely to the one you
are looking to purchase. Specifically, you want to compare prices of homes that
are similar in square footage, number of bedrooms and bathrooms, garage space,
lot size, and type of construction.
If
the home you are interested in is part of a tract of homes, then you will most
likely find some exact model matches to compare against one another.
There
are three main sources of information on comparable sales, all of which are
easily accessed by a real estate agent. It is somewhat more difficult for the
general public to access this data, and in some cases impossible. Two of the
most obvious information sources are the public record and the Multiple Listing
Service.
Comparable
Sales in the Public Record
The
most accessible source of information on comparable sales is the public record.
When someone buys a home the property is deeded from the seller to the buyer.
In most circumstances, this deed is recorded at the local county recorder’s
office. They combine sales data with information already known about the
property so they can assess property taxes correctly.
Provided
there have been no additions to the property, the information available from
the public record is usually correct regarding sales price, square footage, and
numbers of rooms. This makes it easy to use the public record as a source of
data for comparable sale information.
Accessing
the data is another matter, at least for the general public. Realtors can
generally look up this information through title insurance companies. The title
companies either compile the data directly from the county recorder’s office or
purchase it from other companies. One problem with the public record is that it
tends to run at least six to eight weeks behind. Add another four
to six weeks for the typical escrow period and you can see the data is not
current. The most current information is the most valuable.
Comparable
Sales in the Multiple Listing Service
Most
of the public is aware that the Multiple Listing Service is a private resource
where Realtors list properties available for sale. Recently, the public has
been able to access some of that information on such sites as Realtor. COM, MSN
HomeAdvisor, and others.
Once
a property is sold and the transaction has closed, the selling price is posted
to the listing in the Multiple Listing Service. Over time, it has become a huge
database on past sales, containing much more information on individual homes
than can be gleaned from the public record. This information is only available
to real estate agents who are members of the local Multiple Listing Service.
Your
agent will provide you with this data to help determine your offer price.
Comparable
Sales – Pending Transactions
The
most valuable information would be the most current, of course. A sale last
week has more validity in helping you determine a purchase price than a sale
from six months ago. The problem is that there is no actual record of the sales
price until the transaction is completed. The information is not available in
the public record because no deed has yet been recorded.
Neither
is the information available in the Multiple Listing Service. Once a property
is sold, it becomes a "pending sale" and all pricing information is
removed from the listing. Prices are not posted until it becomes a "closed
sale." This protects the seller in case the transaction falls apart and
the property is placed back on the market. It would give an unfair advantage to
future potential buyers if they already knew what price the seller had been
willing to accept in the past. However, if a Realtor has a reason to know the
sales price, they can usually find out through professional courtesy. Also, some
real estate brokerages post sales information on a transaction board in their
office.
Other
Factors Influencing Your Offer Price
Gathering
and analyzing information from comparable sales helps to establish the range of
prices you should consider when making an offer to buy a home. More weight
should be given to the most recent sales, but even so, you need to do a bit
more analysis before setting upon the price you will offer. That is because you
also need to consider the condition of the property, improvements, the current
market, and the circumstances behind the seller’s decision to sell.
How
Property Condition Affects Your Offer
Since
you have toured the property you are interested in, you should know how it
compares to the general neighborhood. All you have to do is put the home in one
of three categories - average, above average, or below average.
When
evaluating a home’s condition, there are a number of things you should
consider. Structural condition is most important - items such as walls,
ceilings, floors, doors and windows. Then paint, carpets, and floor coverings.
Pay special attention to bathrooms and bedrooms and whether the plumbing and
electricity work efficiently. Look at the fixtures, such as light switches,
doorknobs, and drawer handles. The front and back yards should be in reasonably
good shape. The missing ingredient will be information on the condition of the
homes from your comparable sales list. Provided you chose the right agent to
represent you, they will have actually visited most of those homes and be able
to provide key insights.
How
Home Improvements Affect Your Offer Price
Even
when comparing exact model matches within a tract of homes, you should note
whether the previous owners have made any substantial improvements. Cosmetic changes
should be largely ignored, but major improvements should be taken into account.
Most important would be room additions, especially bedrooms and bathrooms.
Other items, like expensive floor tile or swimming pools should be taken into
account, too, but should be discounted. A pool that costs $20,000 to install
does not normally add $20,000 in value to the home. Rely on your agent to give
you guidance in this area.
How
Market Conditions Affect Your Offer Price
A
hot market is a "seller’s market." During a seller’s market,
properties can sell within a few days of being listed and there are often
multiple offers. Sometimes homes even sell above the asking
price. Though most buyer’s want to get a "deal" on a home, reducing
your offer by even a few thousand dollars could mean that someone else will get
the home you desire.
A
slow market is a "buyer’s market. During a buyer’s market properties may
languish on the market for some time and offers may be few and far between.
Prices may even decline temporarily. Such a market would allow you to be more
flexible in offering a lower price for the home. Even if your offered price is
too low, the seller is likely to make some sort of counter-offer and you can
begin negotiations in earnest. More often than not, the market is simply
"steady," or in transition. When a market is steady, no real rules
apply on whether you should make an offer on the high end of your range or the
low end. You could find yourself in a situation with multiple offers on your
desired house, or where no one has made an offer in weeks.
Transition
markets are more difficult to define. If the economy slows unexpectedly, as it
did in the early nineties, people who buy on the high end of a seller’s market
(like the late eighties) could find their home loses value for several years.
So far, no one has proven reliable in predicting when markets change or how
good or bad the real estate market will become.
How
Seller Motivation Affects Your Offer Price
Truthfully,
it is rather rare that a seller’s motivation will dramatically affect the price
of a home, but it is often possible to save a few thousand dollars. The most
common "motivated seller" is someone who has already bought his or
her next home or is relocating to a new area. They will be under the gun to
sell the home quickly or face the prospect of making two mortgage payments at
the same time. Since that can drain a bank account quickly, most sellers want
to avoid such a situation and may be willing to give up a few thousand dollars
to avoid the possibility.
There
are also family crises that can motivate a seller to make a quick deal.
However, when you see a real estate ad that mentions "divorce,"
"motivated seller," "relocation," or something to that
affect, beware. Although the facts may be true, that does not necessarily mean
the seller is motivated to make a quick and costly sale. Most likely, the ad is
more designed to generate phone calls and leads rather than sell the home.
However, there are times when a seller is truly distressed, willing to make a
quick sale and sacrifice thousands of dollars. With the seller’s permission,
the listing agent will post this information along with the listing in the
Multiple Listing Service. They may also inform other agents during office and
association marketing sessions or by flyers sent to other real estate offices.
Provided this information has been made generally available to Realtors, your
agent should know when a seller is truly motivated and when it is just
"puff" designed to elicit interest in a property.
The
exception is when an agent is selling a home they have listed themselves or
selling a home that was listed by another agent from their own company. In such
a situation, the agent may be acting as an agent for the seller, or as a
"dual agent," representing both you and the seller. In such a
situation, they cannot legally provide you with information that would give you
an advantage over the seller.
The
Final Decision on Your Offer Price
Comparable
sales information helps you to determine a base price range for a particular
home. Adding in the various factors like property condition, improvements,
market conditions, and seller motivation help determine whether a
"fair" price would be at the upper limit of that range or the lower
limit. Perhaps you will feel a fair price is outside of that price range.
The
"fair" price should be approximately what you are willing to agree on
at the end of negotiations with the seller. The price you put in
your offer to begin negotiations is totally up to you and depends
on your negotiating style. Most buyers start off somewhat lower than the price
they eventually want to pay. Although your agent may provide advice and
guidance, you are the one who makes the decision. The price you put in the
offer is totally up to you.
Writing
an Offer to Purchase Real Estate
Once
you find the home you want to buy, the next step is to write an offer – which
is not as easy as it sounds. Your offer is the first step toward negotiating a
sales contract with the seller. Since this is just the beginning of
negotiations, you should put yourself in the seller’s shoes and imagine his or
her reaction to everything you include. Your goal is to get what you want, and
imagining the seller’s reactions will help you attain that goal.
The
offer is much more complicated than simply coming up with a price and saying,
"This is what I’ll pay." Because of the large dollar amounts
involved, especially in today’s litigious society, both you and the seller want
to build in protections and contingencies to protect your investment and limit
your risk. In an offer to purchase real estate, you include not only the price
you are willing to pay, but other details of the purchase as well. This
includes how you intend to finance the home, your down payment, who pays what
closing costs, what inspections are performed, timetables, whether personal
property is included in the purchase, terms of cancellation, any repairs you
want performed, which professional services will be used, when you get physical
possession of the property, and how to settle disputes should they occur.
It
is certainly more involved than buying a car. And more important.
Buying
a home is a major event for both the buyer and seller. It will affect
your finances more than any other previous purchase or investment. The seller
makes plans based on your offer that affect his finances, too. However, it is
more important than just money. In the half-hour it takes to write an offer you
are making decisions that affect how you live for the next several years, if
not the rest of your life. The seller is going to review your offer carefully,
because it also affects how he or she lives the rest of their life. That sounds
dramatic. It sounds like a cliché. Every real estate book or article you read
says the same thing.
They
all say it because it is true.
Contingencies
in a Purchase Offer
In
most purchase transactions there may be a slight challenge or two, but most
things will go quite smoothly. However, you want to anticipate potential
problems so that if something does go wrong, you can cancel the contract
without penalty. These are called "contingencies" and you must be
sure to include them when you offer to buy a home. For example, some "move-up"
buyers often agree to purchase a home before selling their previous home. Even
if the home is already sold, it is probably a "pending sale" and has
not closed. Therefore, you should make closing your own sale a condition of
your offer. If you do not include this as a contingency, you may find yourself
making two mortgage payments instead of one.
There
are other common contingencies you should include in your offer. Since you
probably need a mortgage to buy the home, a condition of your offer should be
that you successfully obtain suitable financing. Another condition should be
that the property appraises for at least what you agreed to pay for it. During
the escrow period you are likely to require certain inspections, and another
contingency should be that it pass those inspections. Basically, contingencies
protect you in case you cannot perform or choose not to perform on a promise to
buy a home. If you cancel a contract without having built-in conditions and
contingencies, you could find yourself forfeiting your earnest money deposit.
Or worse.
Earnest
Money Deposit
After
you have come up with an offer price, the next step is to determine how large a
deposit you want to make with your offer. You want the "earnest money
deposit" to be large enough to show the seller you are serious, but not so
large you are placing significant funds at risk. One recommendation is to make
sure your deposit is less than two to three percent (depending on your
location) of your offered price. The reason for this is that if your deposit
is larger than that, the lender will pay particular attention to how you came
up with the funds. You might have to provide a copy of a canceled check along
with a bank statement showing you had the money to begin with. Normally, this
is not a problem, but if you have a short escrow period or are barely coming up
with your down payment, it could pose an inconvenience.
Another
reason to limit your deposit is "just in case." Although significant
problems are the exception and not the rule, they do occur. "Just in
case" there is a nasty or prolonged dispute between you and the seller,
the less money you have tied up in a deposit, the fewer funds you have placed
at risk. As with practically everything in real estate, there are exceptions to
this rule, too. During a hot market there may be multiple offers on the
property that interests you. A large deposit may impress a seller enough so
they will accept your offer instead of someone else’s, even when your unknown
competitor is offering the same price or slightly higher.
Since
large deposits do impress sellers, you may also find that by making a large
deposit you can convince the seller to accept a lower offer. More money up
front may save you money later. There are also times when closing can be
delayed by weeks, through no fault of your own. Have back-up plans prepared for
such a contingency.
The
Closing Date
It
is absolutely essential that you include a closing date as part of your offer.
This way both you and the seller can make plans for moving, and the seller can
make plans for buying his or her next home. Though most transactions actually
do close on the right date, do not be so inflexible that a delay creates
insurmountable problems.
For
example, if you are renting and need to give the landlord notice that you are
moving out, you may want to allow a little flexibility. Otherwise, if your
purchase closes a few days late you could find yourself staying in a motel with
your belongings packed in a moving van somewhere while you pay storage costs.
There are also times when closing can be delayed by weeks, through no fault of
your own. Have back-up plans prepared for such a contingency.
Transfer
of Possession
A
transaction is considered "closed" once the deeds have been recorded.
Then you own the home. However, it is not always possible for you to occupy it
immediately. This can happen for several reasons, but the most common is that
the seller may be purchasing a home, too. Usually, it is scheduled to close
simultaneously with your purchase of their home.
It
is sort of like being at a red light when it turns green. Although all the cars
see the light change at the same time, the guy at the back of the line doesn’t
begin moving until all the cars ahead of him have started. As a result, it has
become customary to allow the seller up to a maximum of three days to turn over
actual possession and keys to the home. When transfer of possession actually
occurs should be clearly laid out in your offer to prevent confusion later.
Writing
an Offer - Safeguards Regarding the Property
Disclosures
From the Seller
Although
you have toured the property, looked at the walls and ceiling, turned on the
faucets and played with the light switches, you have not lived in it. The
seller has years of knowledge about his or her home and there may be some
things you want to find out about as quickly as possible. For this reason, you
will require certain disclosures as part of your offer.
Basically,
you want the seller to disclose any adverse conditions that may have a
substantial impact on your decision to purchase the home. This would include
any problems with the house, whether the property is in a flood zone, a noise
zone, or any other kind of hazardous area. If you have an agent representing
you, this is almost automatic, but many states do not require individuals
selling their own home to provide you with this information. Often they do not
require banks selling foreclosed property to provide these disclosures, either.
Obtaining these types of disclosures should always be a part of your offer, and
time is of the essence.
Condition
of the Property
The
last thing you want when you assume possession of your new home is to find it
in a total mess. Therefore, you should make it clear in your offer that certain
minimum standards are required. If you do not, you might find out the seller or
neighbors have begun using the back yard as a trash dump, or something worse –
and you would not be able to do anything about it.
Some
of the requirements you might want to include in your offer are that the roof
does not leak, the appliances work, the plumbing does not leak, that there are
no broken or cracked windows, the yard has been kept up, and any debris has
been cleared away.
Inspections
You Should Require
Besides
appraisal and the termite inspection, you should also have a professional go
through the house and seek out potential problems. Of course, you will have
inspected the home, but you are not used to looking at some things that a
professional will find. Even if they are not things the seller is expected to
repair, at least you will have foreknowledge of any potential problems.
The
seller will want this inspection performed quickly, so that you can approve the
results and move forward with the purchase. Once you receive the inspection,
you will want to allow yourself sufficient time to review and approve the
report. If you do not approve the report, you may negotiate with the sellers on
which repairs should be performed and who should pay for those repairs.
Otherwise, you can cancel the purchase without penalty, provided you have
included timetables in your offer. Allow a maximum of ten to fifteen days to
receive the report and five days to review it.
Final
Walk-Through Inspection
Before
closing, you will want to revisit the property to ensure it is in the condition
you have required in your offer, and to inspect that any required repairs have
been performed. You should do this no sooner than five days before you intend
to close. Make sure this right to do a final inspection is included in your
offer to purchase the home.
How
Financing Details Affect Your Offer
Most
buyers do not have enough cash available to buy a home, so they need to obtain a
mortgage to finance the purchase. Since you will probably make your purchase
contingent upon obtaining a mortgage, the seller has the right to be informed
of your financing plans in order to evaluate them. That is one of the major
reasons that financing details are included in your offer.
Down
Payment
As
part of your offer, you will need to disclose the size of your down payment.
Once again, this allows the seller to evaluate your likelihood of obtaining a
home loan. It is easier to get approved for a mortgage when you make a larger
down payment. The underwriting guidelines are less strict.
Interest
Rates
Another
reason for including financing information in your offer is to protect
yourself. If interest rates suddenly become volatile and rise quickly, as sometimes
happens, you may looking at a mortgage payment much higher than you
anticipated. By putting a maximum acceptable interest rate in the offer, you
are protecting yourself from such an occurrence.
At
the same time, the seller will probably want to see that you have some
flexibility in the financing terms you are willing to accept. If interest rates
are currently at eight percent and you indicate this is the highest rate you
will accept, you would be able to cancel the contract without penalty if interest
rates rose past that point. The seller would suffer because they have lost
valuable marketing time and may have made their own plans based on successfully
closing the transaction.
Closing
Costs and Financing Incentives
There
may be times when, as part of your offer, you request the seller to pay all or
a portion of your closing costs, or provide some other financial incentive. One
common request is asking the seller to provide funds to temporarily buy down
your interest rate for the first year or two. Such incentives can be especially
effective if a buyer is tight on money or pushing their qualifying ratios to
the limit.
Whenever
you ask for incentives such as these, you will probably find the seller less
willing to negotiate on price. After all, what you are really asking for is to
have the seller to give you some money to help you buy their house. The end
result is that, for a little relief in the beginning, you are willing to pay a
little more in the long run.
Seller
Financing
Another
occasional request is to have the seller "carry back" a second
mortgage to help facilitate your purchase of their home. In cases when the
seller does not need all the proceeds from their sale in order to purchase
their next home, this is an option. The advantage to the buyer is that by
combining your down payment and the second mortgage from the seller, you may be
able to avoid paying mortgage insurance and save yourself some money.
If
such a carry-back is part of your offer, you should include the terms you wish
to pay on such a second mortgage. Keep in mind that your first trust deed
lender needs to know this information so they can underwrite your loan, and
they have certain minimum requirements. The minimum term of the second mortgage
can be five years. The minimum payment can be "interest only." Longer
mortgage terms and payments that also include principle are also acceptable.
Cash
Offers
If
you are one of those rare individuals making a cash offer to buy a home, it
makes sense to provide some documentation with your offer that shows you have
the funds available. A bank statement would be fine. If you have to liquidate
stock or some other asset, your offer should give a timetable on when you will
provide proof you have converted the asset to cash.
Other
Financing Details in Your Offer
Your
offer should also contain information on whether you are obtaining a fixed rate
or an adjustable rate mortgage. It should also state whether you are obtaining
conventional financing or obtaining a VA or FHA loan.
How
FHA and VA Loans Affect Your Offer
Extra
Costs to the Seller
If you are
obtaining a VA or FHA loan in order to finance your purchase, you must include
that information in your offer. This is because government loans place
additional financial and performance obligations on the seller.
Non-Allowable
Fees
First, VA
and FHA loans prohibit buyers from paying certain types of fees that are often
charged by lenders, escrow companies, settlement agents, and title companies.
They are called "non-allowable" fees. They still get charged anyway,
but as the buyer, you are "not allowed" to pay them. The result is
that the seller ends up paying them instead of you.
Most of
these "non-allowable" fees come from your lender. By the time you are
making an offer you should have already been pre-qualified by a loan officer,
so you or your real estate agent can ask how much the lender’s non-allowable
fees will be. Experienced agents should also have an idea of what non-allowable
fees will be charged by the escrow or settlement agent and the title insurance
company. Since these are fees the seller would not pay on an offer with
conventional financing, this information must be included in your offer. You
should also realize that since the seller will be paying these additional fees,
they might be a little less negotiable on the price.
VA
and FHA Appraisals
Home
appraisal inspections on FHA and VA loans are a little more detailed than on
conventional loans (and more expensive). The appraisers are required to perform
certain minimum inspections as well as evaluate the market value of the
property. Although these inspections are not as detailed as a professional home
inspection and should not be considered a substitute, sometimes repairs are
required. These are additional costs the seller would not be obligated to pay
for someone obtaining conventional financing, so your offer should include a
maximum figure for these repairs. Otherwise the seller is signing the
equivalent of a blank check, and they do not want to do that.
At
the same time, whatever figure you put in will most likely affect the seller’s
willingness to negotiate on price. If you put $500 as an estimate, the seller
may be $500 less negotiable on their price. If no repairs are required, you may
have been able to get the house for $500 less than what you and the seller
agreed on as the price. The solution is to add a clause to your offer that goes
something like this. "If required repairs cost less than the maximum
amount allowed, the excess will be credited toward buyer’s closing costs."
Selecting
Service Providers
You
and the Seller Must Agree
Buying
a home does not occur in a vacuum, involving only you and the seller. There are
all kinds of people and services involved behind the scenes to make it happen. Since
some of these services affect both you and the seller, there will have to be an
agreement on which companies you will use for them. When you make your
offer, you should request your favorites for these services. If you are
unfamiliar with these service providers, you can get recommendations from your
agent.
Escrow
and Settlement
For
example, you are going to need an escrow or settlement company to act as an
"independent third party" between you and the seller. Without having
a third party involved, how do you know that when you fork over the money, you
are going to get the deed? This is the type of service provided by escrow and
settlement. They will hold your deposit and coordinate much of the activity
that goes on during the escrow period.
Since
this third party is very important to both you and the seller and both of you
will pay fees to this company, it is important to agree on which service to
use. Therefore, your choice should be part of the offer. Since you do not buy a
home every other week or so, you are probably unfamiliar with companies that
provide this service. Your agent will make a recommendation. You have the
authority to accept this recommendation and include it in your offer, or make
your own choice.
Keep
in mind that the seller will also have a preference and this may be a point of
negotiation in a counter-offer. It has become customary that one side will
choose the escrow/settlement agent and one side chooses the title insurance
company. Even so, everything in real estate is negotiable.
Title
Insurance
Title
insurance is important because, by providing you with an Owners Policy, they
insure that you have clear title to the property. If there are any problems
later, you can always go back to the title insurance company and have them clear
it up. Since it is customary for the seller to pay for the owner’s policy, they
have an interest in which company is used.
However,
you are going to pay a fee to the title insurance company, too. This is for the
Lender’s Policy. The lender’s policy insures your mortgage lender that there
are no liens or judgments against the property and that the mortgage will be in
first position. In other words, should you sell the property or refinance it,
their mortgage gets paid first, before any other claims against the property.
The lender’s policy is less expensive than the owner’s policy.
Termite
and Pest Inspection
As part of
your offer, you may require a termite and pest inspection. This company not
only inspects for termite damage and pest infestations, but also inspects for
dry rot and water damage, among other things. The company that performs the
inspection is important to you as a buyer, because you want to be sure they do
a good job. It is important to the seller because it is customary that they pay
for the inspection and some types of repairs that may be required. You should
determine which company you want to perform this inspection and make it a part
of your offer. Otherwise the seller will choose. If you do not know which
company to hire, your agent will make a recommendation.
I would like
to be the agent for you, your family, your friends and associates and empower
you to understand the types of strategies you and they can use in your next
real estate transaction. If you know of someone who is either thinking about
selling or buying a home, please let me know and I'll respectfully EARN their
business, not give them a song and dance about how fast I will sell their home
or what a great deal I will get them on a new home. I am a professional that
deals with facts, honesty and integrity and I would be honored at the
opportunity to represent your best interests.
|
|
Marc Gohres Phone
(702) 768-8598 Fax
(800) 948-0601 |
Click here to return to The 
Best Las Vegas Real Estate!
Comments? Email
Marc Gohres
© 2020 Marc Gohres
Revised April 12, 2020 9:12 AM