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The Buying Process

Making an Offer

 

 

 

Once you've found a house you like, you must decide how much to offer. In putting together your actual offer, consider the following seven factors:

The advertised price of the house - Treat this as only a rough estimate of what the seller would like to receive, and recognize that different sellers price houses very differently. Some sellers deliberately overprice, others ask for pretty close to what they hope to get and a few (often the cleverest) underprice their houses in the hope that potential buyers will compete and overbid.

What you can afford - What you can pay for a house will probably depend on how much you already have in cash and how much you can reasonably borrow in a mortgage. When figuring out the cost of the house, be sure to factor in your share of the closing costs, which will be about 2%-5% of the purchase price.

Prices for comparable houses - Before making an offer to purchase, you should know the selling prices of nearby houses similar to the one you're interested in buying. For reliable comparable prices keep the following guidelines in mind:

  • A comparable sale should have occurred within six months (the more recent, however, the better). In a market where prices fluctuate fairly fast, comps should be on sale within the last month or so.
  • A comparable sale should be for a house quite similar to the one you're interested in -- in terms of age, size, and type and number of rooms.
  • A comparable sale should be within six to ten blocks of the house you want to buy -- or less, if a freeway or other dividing line splits the neighborhood.

Hot Market - In competitive areas, homes sell quickly -- often for 10%, 30% or more above the asking price -- as bidding wars erupt among frenzied buyers. You'll want to arrive at a bid amount that will beat out the competition -- but only just. Then again, some buyers deliberately bid sky-high in order to stop the madness and find a home, reasoning that by the time they would have otherwise had a bid accepted, prices would have risen anyway. In a cold market, however, you'll have more room to negotiate with the seller, and you may get a bargain.

The seller's needs - Remember that price alone is not the only consideration for sellers. Your ability to close the deal quickly -- for example, by getting loan approval or lining up inspections in advance of presenting your offer -- is often crucial, especially in hot markets. Finally, your flexibility and sensitivity to the seller's needs -- whether it's extending the closing date for a seller who can't move for a few months or paying for repairs -- may make or break your offer.

Your Dream Home? - A modest house listed at a reasonable price may be a bargain if you have three kids, the house is in an excellent school district and the lot is large enough to add on a few rooms. The same house may be overpriced, however, for a couple not planning to have children. Don't get so carried away with judging objective market considerations that you forget your personal needs.

How much you're willing to pay - While tactical considerations -- the temperature of the market, the seller's needs -- are important, nothing should overweigh your own honest assessment of how much you are willing to fork over.
Contract of Sale      

What exactly is involved in a real estate contract? Here's a breakdown of what most contain, although the exact structure might vary based on your location.

What: A legal description of the property as well as the street address.

How much: The selling price.

Mortgage contingency: Subject to obtaining a mortgage (if applicable) and the specifics of the mortgage--amount, rate and term. Application to be made in X number of days.

Deposit: How much money accompanies the contract and who will hold it.

Closing: When and where.

Inclusions and exclusions: What is and is not included in the sale of the property.

Home inspection: Contingency for and to be done in X number of days.

Warranties: Any that are included with the house and description of the warranty.

Condominium: If the property is a condo, other provisions will apply.

Well and Septic: If applicable, they must be tested (and pass).

Termite and Pest inspection: Who will pay and if there is infestation or damage, who will repair.

Possession Date: When the buyers take possession of the house--before, at or after closing.

Acceptance: How long the sellers have to respond to the offer with either acceptance or a counter-offer.

Arbitration: Any provisions for arbitration of disputes.

Insurance: Whose insurance covers the property up until the closing date.

Property Disclosures: Notices of any property disclosures concerning the house.

What is Escrow?      

Once the offer is agreed to by all parties concerned, the agent will take the written final agreement and the deposit check and deposit them "in escrow." Escrow will then be deemed open.

The purpose of an escrow is to enable a buyer and seller to deal with each other without risk. Before title to the property can be transferred to the new buyer, the buyer must deposit into escrow all monies necessary to pay for the home. This is most commonly done when the buyer obtains a loan.

Then, the seller must be paid, the seller's old mortgage paid off, and any other liens on the property must be paid off. All responsibility for handling funds and documents is delegated to the escrow holder, a neutral third party, which is usually a title insurance company or escrow company.

Your title insurance officer can answer many of the frequently asked questions about title insurance, preliminary reports, and alternative ways of holding title to property in California. In a simple transaction, the buyer delivers the agreed upon funds to the escrow holder. The buyer also instructs the escrow holder to deliver to the seller the stated sum only after all conditions have been met, and title is vested in the buyer. Concurrently, the seller deposits his deed and other documents with the escrow holder, authorizing their delivery when the buyer has deposited the agreed purchase price.

The contracting parties deposit funds or documents with the escrow holder, for delivery to the respective parties upon performance of all conditions of the agreement.

 

Closing the Deal      

Closing is the last step in buying a home. Unless you are paying cash for the house, you cannot buy without backing from a lender, which comes in the form of a commitment letter. The lender will require that you have a homeowner's insurance policy on the property, so you will need to arrange this before the closing.

At closing you will be asked how you want to hold the title, which basically refers to ownership. If you alone will own the house, it's sole ownership; joint tenancy applies when two or more people are purchasing, but each holds the right to dispose of his or her share. Tenancy in common applies when the property is owned jointly with an agreement that if one owner dies, the share goes to his or her heirs. Tenancy by entirety is only an option for married couples who will make joint financial decisions and, if one spouse dies, the property is inherited automatically by the survivor.

The down payment is due at closing and must be provided in the form of a cashier's check. Usually there's already a deposit on the house being held in escrow by the real estate agent; the deposit is produced at closing and included in the down payment.

Closing costs are an aggregate of itty-bitty administrative fees incurred behind the scenes to process the loan, the appraisal, the title search, and so on. These many individual costs add up, but they are also beyond your control, so it's really a matter of accepting the inevitable early on. When you first apply for a loan, the lender is required by law to give you a Truth-in-Lending estimate of what the closing costs will be.

Costs payable in connection with the loan alone include points, loan origination fee, assumption fee, application fee, credit report, appraisal fee, home inspection fee, and processing fee. Depending on the loan package you select, you may not have to pay points. Consider that one point is equal to about 1 percent of the loan amount. This is negotiated when you decide on a lender.

The main purpose of closing is to review and sign all appropriate documents. While it is essential that you understand everything you sign, it's not feasible to read through the volume of documents put before you on the actual day. Whenever possible, try to get documents you will be signing ahead of time so you can review them. This way, you can get your questions answered before you sign.

After all signatures are on the dotted lines and the money is transferred to the proper accounts, you are finally the proud owner of a home. Many buyers make the mistake of thinking they can move out of the old and into the new on a very tight schedule. It's far wiser to give yourself a five- to seven-day overlap in case loan closing gets delayed or the seller doesn't meet the deadline. In the long run, paying a little extra rent is not nearly so expensive as holding up moving trucks and camping in hotels. Plus, you'll have that added peace of mind at a very nerve-wracking time.