Buyer’s Resources for Miami Properties
Field Guide to Buying vs. Renting
- (Updated July 2012)
- Is it better to buy or rent? Whether renting is better than buying depends on many factors. The information listed here will assist you in helping answer this question. Included are statistics and studies on home owners and renters as well as financing options and tips.
Buy vs. Rent Comparison
- The chart below shows a cost comparison for a renter and a homeowner over a seven year period.
- The renter starts out paying $800 per month with annual increases of 5% The homeowner purchases a home for $110,000 and pays a monthly mortgage of $1,000
- After 6 years, the homeowner’s payment is lower than the renter’s monthly payment
- With the tax savings of homeownership, the homeowner’s payment is less than the rental payment after 3 years
- Source: Ginnie Mae, (ginniemae.gov).
10 Ways to Prepare for Homeownership
- Decide what you can afford. Generally, you can afford a home equal in value to between two and three times your gross income.
- Develop your home wish list. Then, prioritize the features on your list.
- Select where you want to live. Compile a list of three or four neighborhoods you’d like to live in, taking into account items such as schools, recreational facilities, area expansion plans, and safety.
- Start saving. Do you have enough money saved to qualify for a mortgage and cover your down payment? Ideally, you should have 20 percent of the purchase price saved as a down payment. Also, don’t forget to factor in closing costs. Closing costs — including taxes, attorney’s fee, and transfer fees — average between 2 and 7 percent of the home price.
- Get your credit in order. Obtain a copy of your credit report to make sure it is accurate and to correct any errors immediately. A credit report provides a history of your credit, bad debts, and any late payments.
- Determine your mortgage qualifications. How large of mortgage do you qualify for? Also, explore different loan options — such as 30-year or 15-year fixed mortgages or ARMs — and decide what’s best for you.
- Get preapproved. Organize all the documentation a lender will need to preapprove you for a loan. You might need W-2 forms, copies of at least one pay stub, account numbers, and copies of two to four months of bank or credit union statements.
- Weigh other sources of help with a down payment. Do you qualify for any special mortgage or down payment assistance programs? Check with your state and local government on down payment assistance programs for first-time buyer’s. Or, if you have an IRA account, you can use the money you’ve saved to buy your fist home without paying a penalty for early withdrawal.
- Calculate the costs of homeownership. This should include property taxes, insurance, maintenance and utilities, and association fees, if applicable.
- Contact a REALTOR®. Find an experienced REALTOR® who can help guide you through the process.
® 1995–20132012 NATIONAL ASSOCIATION OF REALTORS® All rights reserved.
Why You Should Work With a REALTOR®
Not all real estate practitioners are REALTORS®. The term REALTOR® is a registered trademark that identifies a real estate professional who is a member of the NATIONAL ASSOCIATION of REALTORS® and subscribes to its strict Code of Ethics. Here are five reasons why it pays to work with a REALTOR®.
- You’ll have an expert to guide you through the process. Buying or selling a home usually requires disclosure forms, inspection reports, mortgage documents, insurance policies, deeds, and multi-page settlement statements. A knowledgeable expert will help you prepare the best deal, and avoid delays or costly mistakes.
- Get objective information and opinions. REALTORS® can provide local community information on utilities, zoning, schools, and more. They’ll also be able to provide objective information about each property. A professional will be able to help you answer these two important questions: Will the property provide the environment I want for a home or investment? Second, will the property have resale value when I am ready to sell?
- Find the best property out there. Sometimes the property you are seeking is available but not actively advertised in the market, and it will take some investigation by your REALTOR® to find all available properties.
- Benefit from their negotiating experience. There are many negotiating factors, including but not limited to price, financing, terms, date of possession, and inclusion or exclusion of repairs, furnishings, or equipment. In addition, the purchase agreement should provide a period of time for you to complete appropriate inspections and investigations of the property before you are bound to complete the purchase. Your agent can advise you as to which investigations and inspections are recommended or required.
- Property marketing power. Real estate doesn’t sell due to advertising alone. In fact, a large share of real estate sales comes as the result of a practitioner’s contacts through previous clients, referrals, friends, and family. When a property is marketed with the help of a REALTOR®, you do not have to allow strangers into your home. Your REALTOR® will generally prescreen and accompany qualified prospects through your property.
- Real estate has its own language. If you don’t know a CMA from a PUD, you can understand why it’s important to work with a professional who is immersed in the industry and knows the real estate language.
- REALTORS® have done it before. Most people buy and sell only a few homes in a lifetime, usually with quite a few years in between each purchase. And even if you’ve done it before, laws and regulations change. REALTORS®, on the other hand, handle hundreds of real estate transactions over the course of their career. Having an expert on your side is critical.
- Buying and selling is emotional. A home often symbolizes family, rest, and security — it’s not just four walls and a roof. Because of this, home buying and selling can be an emotional undertaking. And for most people, a home is the biggest purchase they’ll ever make. Having a concerned, but objective, third party helps you stay focused on both the emotional and financial issues most important to you.
- Ethical treatment. Every member of the NATIONAL ASSOCIATION of REALTORS® makes a commitment to adhere to a strict Code of Ethics, which is based on professionalism and protection of the public. As a customer of a REALTOR®, you can expect honest and ethical treatment in all transaction-related matters. It is mandatory for REALTORS® to take the Code of Ethics orientation and they are also required to complete a refresher course every four years.
® 1995–20132012 NATIONAL ASSOCIATION OF REALTORS® All rights reserved.
Calculate Your Income Vs. Debt
Most lenders don’t want you to take out a loan that will overload your ability to repay everybody you owe.
By John Adams
As you think about applying for a home loan, you need to consider your personal finances. How much you earn versus how much you owe will likely determine how much a lender will allow you to borrow.
First, determine your gross monthly income. This will include any regular and recurring income that you can document. Unfortunately, if you can’t document the income or it doesn’t show up on your tax return, then you can’t use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation. If you have questions about your specific situation, any good loan officer can review the rules.
Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt like a credit card, use the minimum monthly payment for this calculation. If it is installment debt, use the current monthly payment to calculate your debt load. And you don’t have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up and it is a figure we’ll call your monthly debt service.
In a nutshell, most lenders don’t want you to take out a loan that will overload your ability to repay everybody you owe. Although every lender has slightly different formulas, here is a rough idea of how they look at the numbers.
Typically, your monthly housing expense, including monthly payments for taxes and insurance, should not exceed about 28% of your gross monthly income. If you don’t know what your tax and insurance expense will be, you can estimate that about 15% of your payment will go toward this expense. The remainder can be used for principal and interest repayment.
In addition, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36% of your gross monthly income. If it does, your application may exceed the lender’s underwriting guidelines and your loan may not be approved.
Depending on your individual situation, there may be more or less flexibility in the 28% and 36% guidelines. For example, if you are able to buy the home while borrowing less than 80% of the home’s value by making a large cash down payment, the qualifying ratios become less critical. Likewise, if Bill Gates or a rich uncle is willing to cosign on the loan with you, lenders will be much less focused on the guidelines discussed here.
Remember that there are hundreds of loan programs available in today’s lending market and every one of them has different guidelines. So don’t be discouraged if your dream home seems out of reach.
In addition, there are a number of factors within your control which affect your monthly payment. For example, you might choose to apply for an adjustable rate loan which has a lower initial payment than a fixed rate program. Likewise, a larger down payment has the effect of lowering your projected monthly payment.
Just plan on contacting and investigating a number of lenders to find a loan program that meets your needs.
5 Factors That Decide Your Credit Score
Credit scores range between 200 and 800, with scores above 620 considered desirable for obtaining a mortgage. The following factors affect your score:
- Your payment history. Did you pay your credit card obligations on time? If they were late, then how late? Bankruptcy filing, liens, and collection activity also impact your history.
- How much you owe. If you owe a great deal of money on numerous accounts, it can indicate that you are overextended. However, it’s a good thing if you have a good proportion of balances to total credit limits.
- The length of your credit history. In general, the longer you have had accounts opened, the better. The average consumer’s oldest obligation is 14 years old, indicating that he or she has been managing credit for some time, according to Fair Isaac Corp., and only one in 20 consumers have credit histories shorter than 2 years.
- How much new credit you have. New credit, either installment payments or new credit cards, are considered more risky, even if you pay them promptly.
- The types of credit you use. Generally, it’s desirable to have more than one type of credit — installment loans, credit cards, and a mortgage, for example.
For more on evaluating and understanding your credit score, visit www.myfico.com.
Daily Real Estate News | July 20, 2007 |
6 Ways to Quickly Boost Credit Scores
As lenders tighten their underwriting guidelines, borrowers are wise to raise their credit scores to qualify for loans, secure better loan terms, and receive lower interest rates.
“Individuals can positively affect their credit scores in as little as three weeks,” says Edward Jamison, a Los Angeles-based credit attorney. “It’s just a matter of getting educated and focused on the best, fastest, and most reliable course of action.”
Jamison, who you may know as a credit expert on the NBC show, â€œStarting Over,© offers these six tips for improving credit strength quickly.
1. Know your limits. Borrowers should first check their credit limits and evenly distribute the balances they’re carrying to help increase their credit scores, or better yet, pay them off in full to get the highest score increase. “Make sure your maximum limit is reported,” Jamison says. “When no limit is reported, credit scoring software presumes the account is maxed out.”
2. Bring the balances near zero. The credit scoring software scores more favorably to those with a closer balance to zero. Balances over 70 percent damage credit the most, followed by the next tier of 50 percent and then 30 percent of the maximum credit limit. “Rather than carrying a large balance in an unfavorable tier, redistribute outstanding balances over several credit cards,” advises Jamison.
3. Don’t cancel your cards. “Closing credit card accounts can hurt your score unless the accounts were opened less than two years ago, and you have over six credit cards,” Jamison says. Fair Isaac’s credit scoring software assumes that people who have had credit for a longer time are at less risk of defaulting on payments.
4. Eliminate late payments (but ask nice). Get rid of late payments listed on the credit report. “Contact the creditors that report late payments and request a good faith adjustment that removes the late payments reported on your account,” Jamison says. The creditor may work with you, but it may require more than one phone call; patience is required. Your odds of success will dwindle if you’re rude or unclear about your request, he adds.
5. Get rid of collection accounts. But only if the collection agency agrees to delete them in return. Paying them off can otherwise actually lead to a decreased credit score due to the date of last activity getting updated to the current date when you pay. The consumer should contact the collector and request a letter explicitly stating the agreement to delete the account upon receipt or clearance of the payment, Jamison says. Not all collection agencies will delete reporting, but it’s certainly worth the effort.
6. Pay off past due amounts on accounts that are not in charge-off status. After that, Jamison advises getting rid of charge-offs and liens that are less than two years old. “Charge-offs and liens that are older than 24 months do not affect your credit score nearly as much as ones under 24 months,” says Jamison. “But if they’re newer than 24 months, they can seriously damage your credit.” If you have both charge-offs and collection accounts, but have limited funds, pay off the past due balances first, then pay collection accounts as long as the collectors agree to remove all references to credit bureaus.
– REALTOR® Magazine Online
How Much Do I Have to Save to Buy A Home?
The first thing to understand about buying a house is that you don’t have to have all the cash saved up in order to make your purchase.
By John Adams
The good news is that there are lots of folks out there who are very interested in lending you as much as 95% of the purchase price of your home, at very favorable interest rates. Furthermore, they are willing to spread out the payments over a long period of time so that you can afford the house you want.
Just to cover the basics, let’s elaborate on the points in the last paragraph:
If you have a steady job and a reasonable credit history, there is a good chance that you can find a home lender who will lend you most of the purchase price of your new house. Home loans are also called “mortgages,” which comes from a Latin phrase meaning “pledge unto death.” While lenders don’t take your promise to pay quite that seriously, they DO expect to get repaid on time. Just to make sure you remember, lenders take an ownership interest in your house until the loan is paid in full.
Home loans typically are offered in amounts of 80%, 90% and 95% of the price you are paying for the house. You are expected to pay the remaining amount in cash from your own savings. As you might imagine, the lower percentage loans are somewhat easier to qualify for.
The reason the lender is willing to lend you up to 95% of the value of your house is that history has shown real estate to be such an excellent investment. Lenders expect that your home will be worth more in the future than it is today — so their investment in your home is considered very safe.
That’s also why the interest rate you can obtain on a home loan is one of the best around. Consider that America’s largest and strongest corporations borrow at what is called the “prime rate,” and that today you can borrow a home loan — fixed at the same rate for many years — at substantially less than the prime rate. Lenders have found that home loans tend to be excellent investments, and you benefit every month when you make your loan payment.
Finally, home loans are available to be repaid over terms of usually 15 or 30 years. The shorter term loan offers a slightly lowered interest rate, so if you can afford the higher monthly payments, you’ll save in interest costs by choosing the 15 year loan. At today’s interest rates, a 15 year loan costs about 27% more than a 30 year loan in terms of your monthly payment. But the amazing thing is that lenders are even willing to offer a fixed rate loan for that time period. It’s better financing than you can get on just about any other investment.
The Basics of Making an Offer
A written proposal is the foundation of a real estate transaction.
Oral promises are not legally enforceable when it comes to the sale of real estate. Therefore, you need to enter into a written contract, which starts with your written proposal. This proposal not only specifies price, but all the terms and conditions of the purchase. For example, if the sellers said they’d help with $2,000 toward your closing costs, be sure that’s included in your written offer and in the final completed contract, or you won’t have grounds for collecting it later.
REALTORS® usually have a variety of standard forms (including Residential Purchase Agreements) that are kept up to date with the changing laws. When you use a REALTOR® these forms will be available to you. In addition, REALTORS® cover the questions that need to be answered during the process. In many states certain disclosure laws must be complied with by the seller, and the REALTOR® will ensure that this takes place.
If you are not working with a REALTOR®, keep in mind that you must draw up a purchase offer or contract that conforms to state and local laws and that incorporates all of the key items. State laws vary, and certain provisions may be required in your area.
After the offer is drawn up and signed, it will usually be presented to the seller by your REALTOR®, by the seller’s REALTOR® if that’s a different agent, or often by the two together. In a few areas, sales contracts are typically drawn up by the parties’ lawyers.
What the offer contains
The purchase offer you submit, if accepted as it stands, will become a binding sales contract (known in some areas as a purchase agreement, earnest money agreement or deposit receipt). It’s important, therefore, that it contains all the items that will serve as a “blueprint for the final sale.” These purchase offer items include such things as:
- Address and sometimes a legal description of the property
- Sale price
- Terms — for example, all cash or subject to your obtaining a mortgage for a given amount
- Seller’s promise to provide clear title (ownership)
- Target date for closing (the actual sale)
- Amount of earnest money deposit accompanying the offer, and whether it’s a check, cash or promissory note, and how it’s to be returned to you if the offer is rejected — or kept as damages if you later back out for no good reason
- Method by which real estate taxes, rents, fuel, water bills and utilities are to be adjusted (prorated) between buyer and seller
- Provisions about who will pay for title insurance, survey, termite inspections and the like
- Type of deed to be given
- Other requirements specific to your state, which might include a chance for attorney review of the contract, disclosure of specific environmental hazards or other state-specific clauses
- A provision that the buyer may make a last-minute walk-through inspection of the property just before the closing
- A time limit (preferably short) after which the offer will expire
- Contingencies, which are an extremely important matter and discussed in detail below
If your offer says “this offer is contingent upon (or subject to) a certain event,” you’re saying that you will only go through with the purchase if that event occurs. The following are two common contingencies contained in a purchase order:
- The buyer obtaining specific financing from a lending institution. If the loan can’t be found, the buyer won’t be bound by the contract.
- A satisfactory report by a home inspector “within 10 days (for example) after acceptance of the offer.” The seller must wait 10 days to see if the inspector submits a report that satisfies you. If not, the contract would become void. Again, make sure that all the details are nailed down in the written contract.
You’re in a strong bargaining position — meaning, you look particularly welcome to a seller — if:
- You’re an all-cash buyer; or
- You’re already pre-approved for a mortgage; and
- You don’t have a present house that has to be sold before you can afford to buy.
In those circumstances, you may be able to negotiate some discount from the listed price. On the other hand, in a “hot” seller’s market, if the perfect house comes on the market, you may want to offer the list price (or more) to beat out other early offers.
It’s very helpful to find out why the house is being sold and whether the seller is under pressure. Keep these considerations in mind:
- Every month a vacant house remains unsold represents considerable extra expense for the seller;
- If the sellers are divorcing, they may just want out quickly; and
- Estate sales often yield a bargain in return for a prompt deal.
This is a deposit that you give when making an offer on a house. A seller is understandably suspicious of a written offer that is not accompanied by a cash deposit to show “good faith.” A REALTOR® or an attorney usually holds the deposit, the amount of which varies from community to community. This will become part of your down payment.
Buyer’s: the seller’s response to your offer
You will have a binding contract if the seller, upon receiving your written offer, signs an acceptance just as it stands, unconditionally. The offer becomes a firm contract as soon as you are notified of acceptance. If the offer is rejected, that’s that, and the sellers could not later change their minds and hold you to it.
If the seller likes everything except the sale price, or the proposed closing date, or the basement pool table you want left with the property, you may receive a written counteroffer, with the changes the seller prefers. You are then free to accept or reject it or to even make your own counteroffer. For example, “We accept the counteroffer with the higher price, except that we still insist on having the pool table.”
Each time either party makes any change in the terms, the other side is free to accept or reject it, or counter again. The document becomes a binding contract only when one party finally signs an unconditional acceptance of the other side’s proposal.
Withdrawing an offer
Can you take back an offer? In most cases the answer is yes, right up until the moment it is accepted, or even in some cases, if you haven’t yet been notified of acceptance. If you do want to revoke your offer, be sure to do so only after consulting a lawyer who is experienced in real estate matters. You don’t want to lose your earnest money deposit, or find yourself being sued for damages the seller may have suffered by relying on your actions.
For sellers: calculating your net proceeds
When an offer comes in, you can accept it exactly as it stands, refuse it (seldom a useful response), or make a counteroffer to the buyer’s with the changes you want. In evaluating a purchase offer, you should estimate the amount of cash you’ll walk away with when the transaction is complete. For example, when you’re presented with two offers at once, you may discover you’re better off accepting the one with the lower sale price if the other asks you to pay points to the buyer’s lending institution. Once you have a specific proposal before you, calculating net proceeds becomes simple. From the proposed purchase price you can subtract:
- Payoff amount on present mortgage;
- Any other liens (equity loan, judgments);
- Broker’s commission;
- Legal costs of selling (attorney, escrow agent);
- Transfer taxes;
- Unpaid property taxes and water bills;
- If required by the contract: cost of survey, termite inspection, buyer’s closing costs, repairs, etc.
Your present mortgage lender may maintain an escrow account into which you deposit money to be used for property tax bills and homeowner’s insurance premiums. In that case, remember that you will receive a refund of money left in that account, which will add to your proceeds.
For sellers: counteroffers
When you receive a purchase offer from a would-be buyer, remember that unless you accept it exactly as it stands, unconditionally, the buyer will be free to walk away. Any change you make in a counteroffer puts you at risk of losing that chance to sell. Who pays for what items is often determined by local custom. You can, however, arrive at any agreement you and the buyers want about who pays for:
- Termite inspection;
- Buyer’s closing costs;
- Points to the buyer’s lender;
- Buyer’s broker;
- Repairs required by the lender; and
- Home Protection Policy.
You may feel some of these costs are none of your business, but many buyers — particularly first-timers — are short of cash. Helping them may be the best way to get your home sold.
A gift for buyers: Real-estate pros stuff your stocking with advice
December Buying Advice: Here are the best tips for making a smart home purchase, from agents, investors and other experts.
By Melinda Fulmer of MSN Real Estate
Sound advice is always a smart gift. In this holiday edition of Buying Advice, we’ve asked real-estate agents, investors and other housing pros around the country to give us their best tips for making a smart home purchase, and we’ve included a couple of our own favorites. We’ll also review the latest housing statistics and what they mean for the fledgling real-estate recovery and look at 10 surprising factors that could cause your mortgage application to be rejected.
The top 10 buying tips
1. Create â and keep — a good credit score. All lenders use a credit score to help them understand what kind of risk you would be as a borrower. Pull a copy of your credit history and FICO score. The better the score, the better the interest rate you will be offered. To get the best mortgage deals, you need a score above 760, says Ilyce R. Glink, publisher of ThinkGlink.com and author of “Buy, Close, Move In!” Once you have it there, don’t jeopardize it with bad financial decisions. (For more on this, keep reading.)
2. Find a good agent. Don’t just use a friend or family member, or someone you run into regularly at your kid’s school. Do some research, says Melissa Anderson, an agent with Coldwell Banker Homestead Group in Harrisburg, Pa.
“The best advice is to look for a highly respected buyers agent,” she says. Ask your family and friends for recommendations and then meet with several agents. “Find someone that you feel comfortable with, feel you can trust and that has experience in the areas you are searching for your home.“
Alicia Trevino, president and CEO of Century 21 Fine Homes & Estates in Dallas, also advises working with an agent who has a lot of experience with distressed properties, including short sales, as they make up a good portion of available homes.
Just be sure the agent sells real estate full time, so he can respond quickly. Ask the agent for the names of buyers he has helped in the past six months, Anderson says. If the agent can’t come up with several, you should keep looking.
3. Set a budget and get preapproved by a lender. “It is important to know what you can afford and what a comfortable monthly payment would be,” says Dallas Croft of ERA Oakcrest Realty in Winchester, Va. Some homebuyers learn the hard way that they can qualify for more than they can comfortably afford to pay, says Amber Arwine, an online mortgage broker with Guaranteed Rate in Chicago. “Getting a preapproval before starting shopping for a home is also a must,” she adds. That way, when you see a house you like, you’re ready. And we do mean preapproved, which means submitting pay stubs and tax returns, not prequalified, which is more of a cursory estimate.
4. Check out the neighborhood just as carefully as you check out the house. “Once you find a house that you really like, drive by that house at several times during the day and during different days of the week to really gauge the type of neighborhood you are buying into,” says Jennifer Darby Metzger, of ERA Justin Realty in Rutherford, N.J.
5. Be ready to pull the trigger when you see the perfect home. The supply of for-sale housing is limited in many parts of the country, and that means good houses go quickly.
Buyers need to be ready to sign when they see a keeper, which means having their financing in order, says Tony Geraci of Century 21 HomeStar in Highland Heights, Ohio. Likewise, don’t “overnegotiate.“
“Sometimes we’re so busy worrying about getting a ‘good deal’ or negotiating small deal points that we miss the opportunity to buy the house we want,” says Bill Lublin of Century 21 Advantage Gold in Philadelphia.
6. Don’t be penny-wise and pound-foolish. Spend the money on any and all inspections that are suggested in the primary home inspection — and for heaven’s sake, don’t forget to get an inspection before you buy. Some buyers skip this step, because the house looks OK and because they figure they are getting a home warranty, so why worry? But often this doesn’t cover all of the property’s problems. “The amount you could end up spending in the long run because of a defect you didn’t know about is far greater than the expense of having a professional come out and take a look before you buy,” says Raylene Lewis of Century 21 Beal in College Station, Texas.
7. Buy the cake, not the icing. You can change the paint, paper, carpet and fixtures fairly easily, but you can’t readily change the home’s layout, size of the rooms or location. Look past the cosmetics to the bones of the house. And think about resale. While a one-bedroom home may fit you just fine, how easy will it be to sell five years from now? Likewise, will that extremely busy street be a turn-off for others?
8. Get on the same page with your spouse. So many times, couples have a hard time agreeing on a house because they’re not exactly sure what they want, says Jessica Riffle Edwards of Coldwell Banker Sea Coast Advantage in Wilmington, N.C. “Know your must-haves and would-like-to-haves early in the process,” she says. Both spouses should sit down and make their own lists and then get together and see what they agree on and where they differ and talk this through. This will save a lot of time and arguments down the road.
9. Know the landscape. Once a home that looks interesting comes up on the multiple listing service, you and your agent need to do some research. How many homes are on the market in the blocks around it? How long have they been on the market? What condition are they in? What’s in escrow? What have houses nearby sold for in the past 90 days? These questions will help buyers recognize a good deal when they see it, says Doug Clark of SpikeTV’s reality show â€œFlip Men.©
10. Don’t get emotional. Don’t stretch your budget just because you love a home. Think like an investor and tell yourself, “There will be others out there for me.” It’s kind of like dating, Clark says: You need to know what else is available, rather than falling in love with the first one.
Why You Need a Lawyer When You Buy or Sell a House
Buying a home will probably be the largest and most significant purchase you will make in your life. It also involves the law of real property, which is unique and raises special issues of practice, and problems not present in other transactions. A real estate lawyer is trained to deal with these problems and has the most experience to deal with them. Some states certify lawyers as “Real Property Specialists” as a result.
In the typical home purchase, the seller enters into a brokerage contract with a real estate agent, usually in writing. When the broker finds a potential buyer, negotiations are conducted through the broker, who most often acts as an intermediary. Once an informal agreement is reached, buyer and seller enter into a formal written contract for the sale, the purchase agreement. The buyer then obtains a commitment for financing. Title is searched to satisfy the lender and the buyer. Finally, the property is transferred from the seller to the buyer, and the seller receives the purchase price bargained for in the contract. This seems simple, but without a lawyer, the consequences may be more disastrous than purchasing a car that turns out to be a lemon, or a stock investment that was unwise.
A lawyer can help you avoid some common problems with a home purchase or sale. For example, a seller may sign a brokerage agreement that does not deal with a number of legal problems. This happens quite often; realtors often use standard forms, expecting that they will cover all circumstances or will be easily customizable for unusual circumstances.
In the absence of an agreement to the contrary, the seller may become liable to pay a brokerage commission even if a sale does not occur, or to pay more than one brokerage commission. If the agreement allows the seller the right to negotiate on his or her own behalf, for example, you may avoid this problem. A lawyer can explain the effect of multiple listings. He or she can negotiate the realtor’s rights if the seller withdraws the property from the market, or can’t deliver good marketable title.
The seller should have the advice and guidance of an attorney with respect to a brokerage agreement. Even if the agreement is a standard form, its terms should be explained to the seller and revised, if necessary. An attorney should also determine if the agreement was properly signed.
Even if a lawyer is not needed during the course of negotiations, the buyer and seller each may have to consult with a lawyer to answer important questions, such as the tax consequences of the transaction. To a seller, the tax consequences may be of critical importance. For example, the income tax consequences of a sale, particularly if the seller makes a large profit, may be considerable. An attorney can advise whether the seller can take advantage of tax provisions allowing for exclusion of capital gains in certain circumstances.
The purchase agreement is the single most important document in the transaction. Although standard printed forms are useful, a lawyer is helpful in explaining the form and making changes and additions to reflect the buyer’s and the seller’s desires. There are many issues that may need to be addressed in the purchase agreement; below are some common examples:
- If the property has been altered or there has been an addition to the property, was it done lawfully?
- If the buyer has plans to change the property, may what is planned for the property be done lawfully?
- What happens if a buyer has an engineer or architect inspect the property and termites, asbestos, radon, or lead-based paint is found?
- What if the property is found to contain hazardous waste?
- What are the legal consequences if the closing does not take place, and what happens to the down payment? This question raises related questions: Will the down payment be held in escrow by a lawyer in accordance with appropriately worded escrow instructions? How is payment to be made? Is the closing appropriately conditioned upon the buyer obtaining financing?
Most buyers finance a substantial portion of the purchase price for a home with a mortgage loan from a lending institution. The purchase agreement should contain a carefully worded provision that it is subject to the buyer’s obtaining a commitment for financing.
Again, it is important to remember that printed contract forms are generally inadequate to incorporate the real understanding of the buyer and seller without significant changes. In addition, there are many kinds of mortgages that may be available. Mortgage loan commitments and mortgage loan documents are complex. Lawyers can review and explain the importance of these various documents.
After the purchase agreement is signed, it is necessary to establish the state of the seller’s title to the property to the buyer’s — and the finance institution’s — satisfaction. Generally, a title search is ordered from an abstract or title insurance company. In some states, and in outlying areas of others, title insurance is not typical. In such cases an attorney is essential to review the status of title and render an opinion of title in lieu of a title policy.
Assuming you are in an area where title insurance is customary, an attorney can help review the title search and explain the title exceptions as to what is not insured, and determine whether the legal description is correct and whether there are problems with adjoining owners or prior owners. He or she can also explain the effect of easements and agreements or restrictions imposed by a prior owner, and whether there are any legal restrictions which will impair your ability to sell the property.
The title search does not tell the buyer or seller anything about existing and prospective zoning. A lawyer can explain whether zoning prohibits a two-family home, or whether planned improvements violate zoning ordinances.
The closing is the most important event in the purchase and sale transaction. The deed and other closing papers must be prepared. Title passes from seller to buyer, who pays the balance of the purchase price. Frequently, this balance is paid in part from the proceeds of a mortgage loan. A closing statement should be prepared prior to the closing indicating the debits and credits to the buyer and seller. An attorney is helpful in explaining the nature, amount, and fairness of closing costs. The deed and mortgage instruments are signed, and an attorney can be assure that these documents are appropriately executed and explained to the various parties.
The closing process can be confusing and complex to the buyer and seller. Those present at the closing often include the buyer and seller, their respective attorneys, the title closer (representative of the title company), an attorney for any lending institution, and the real estate broker. There may also be last minute disputes about delivering possession and personal property or the adjustment of various costs, such as fuel and taxes. If you are the only person there without a lawyer, your rights may be at risk.
Perhaps the most important reason to be represented by an attorney is conflicting interests of the parties. Throughout the process, the buyer’s and seller’s interests can be at odds with each other, and even with those of professionals involved in the sale. The broker generally serves the seller, and the lender is obtained by the buyer. Both want to see the deal go through, since that is how they will get paid. Neither can provide legal counsel. The respective lawyers for the buyer and seller will serve only their own clients’ best interests. Seeking the advice of a lawyer is a very good idea from the time you decide to sell or to buy a home until the actual closing.
10 Questions to Ask Home Inspectors
Before you make your final buying or selling decision, you should have the home inspected by a professional. An inspection can alert you to potential problems with a property and allow you to make an informed decision. Ask these questions to prospective home inspectors:
- Will your inspection meet recognized standards? Ask whether the inspection and the inspection report will meet all state requirements and comply with a well-recognized standard of practice and code of ethics, such as the one adopted by the American Society of Home Inspectors or the National Association of Home Inspectors. Customers can view each group’s standards of practice and code of ethics online at www.ashi.org or www.nahi.org. ASHI’s Web site also provides a database of state regulations.
- Do you belong to a professional home inspector association? There are many state and national associations for home inspectors, including the two groups mentioned in No. 1. Unfortunately, some groups confer questionable credentials or certifications in return for nothing more than a fee. Insist on members of reputable, nonprofit trade organizations; request to see a membership ID.
- How experienced are you? Ask how long inspectors have been in the profession and how many inspections they’ve completed. They should provide customer referrals on request. New inspectors also may be highly qualified, but they should describe their training and let you know whether they plan to work with a more experienced partner.
- How do you keep your expertise up to date? Inspectors’ commitment to continuing education is a good measure of their professionalism and service. Advanced knowledge is especially important in cases in which a home is older or includes unique elements requiring additional or updated training.
- Do you focus on residential inspection? Make sure the inspector has training and experience in the unique discipline of home inspection, which is very different from inspecting commercial buildings or a construction site. If your customers are buying a unique property, such as a historic home, they may want to ask whether the inspector has experience with that type of property in particular.
- Will you offer to do repairs or improvements? Some state laws and trade associations allow the inspector to provide repair work on problems uncovered during the inspection. However, other states and associations forbid it as a conflict of interest. Contact your local ASHI chapter to learn about the rules in your state.
- How long will the inspection take? On average, an inspector working alone inspects a typical single-family house in two to three hours; anything significantly less may not be thorough. If your customers are purchasing an especially large property, they may want to ask whether additional inspectors will be brought in.
- What’s the cost? Costs can vary dramatically, depending on your region, the size and age of the house, and the scope of services. The national average for single-family homes is about $320, but customers with large homes can expect to pay more. Customers should be wary of deals that seem too good to be true.
- What type of inspection report do you provide? Ask to see samples to determine whether you will understand the inspector’s reporting style. Also, most inspectors provide their full report within 24 hours of the inspection.
- Will I be able to attend the inspection? The answer should be yes. A home inspection is a valuable educational opportunity for the buyer. An inspector’s refusal to let the buyer attend should raise a red flag.
Source: Rob Paterkiewicz, executive director, American Society of Home Inspectors, Des Plaines, Ill., www.ashi.org
Negotiating to Yes
These tips can help you turn a negotiation into a win-win agreement.
Negotiating a purchase agreement is perhaps the trickiest aspect of any real estate transaction. Most home buyers and home sellers want to arrive at a win-win agreement, but that’s not to say either side would regret getting a bigger “win” than the other. Successful negotiating is more than a matter of luck or natural talent. It also encompasses the learned ability to use certain skills and techniques to bring about those coveted win-win results.
Here are six tips and suggestions to turn negotiation into agreement:
1. Start with a fair price and a fair offer. There’s no question that significantly overpricing your home will turn off potential buyers. Likewise, making an offer that’s far lower than the asking price is practically guaranteed to alienate the sellers. Asking and offering prices should be based on recent sales prices of comparable homes.
2. Respect the other side’s priorities. Knowing what’s most important to the person on the other side of the negotiating table can help you avoid pushing too hard on hot or sensitive issues. For example, a seller who won’t budge on the sales price, might be willing to pay more of the transaction costs or make more repairs to the home, while a buyer with an urgent move-in date might be willing to pay a higher portion of the transaction costs or forgo some major repairs.
3. Be prepared to compromise. “Win-win” doesn’t mean both the buyer and the seller will get everything they want. It means both sides will win some and give some. Rather than approaching negotiations from an adversarial winner-take-all perspective, focus on your top priorities and don’t let your emotions overrule your better judgment.
4. Meet in the middle. Can’t decide who will pay the recording fee? Can’t agree on a close-of-escrow date? Arguing over cosmetic repairs? Splitting the difference is a time-honored and often successful negotiation strategy. Pay half the fee. Count off half the days. Fix half the blemishes.
5. Leave it aside. Politicians and corporate executives are famous for their “for future discussion” agreements. If you have a major sticking point that’s not material to the overall contract (e.g., the purchase of furniture or fixtures), finish the main agreement, then resolve the other difficulties in a side agreement or amendment. This technique allows both sides to recognize and solidify basic areas of agreement, then move ahead toward a fair compromise on other terms and conditions. Summarizing the points of agreement in writing is another helpful strategy.
6. Ask for advice. Successful REALTORS® tend to be experienced negotiators. They’ve seen what works and what doesn’t in countless real estate transactions, and they’ve established a track-record of bringing buyers and sellers together. Consult your REALTOR® about negotiating strategies, win-win compromises and creative alternatives.
The Bottom Line on Contract Negotiation
Ask these questions before you decide to go ahead with a contract.
By Marcie Geffner
The natural focal point of a real estate purchase contract is the selling price of the home, but the price isn’t the only factor that determines the net bottom line for both the buyer and the seller. Is a bargain for the buyer really a bargain if he or she is paying all the transaction costs? Is a top price for the seller really a top price if the buyer wants all the furniture to be included in the purchase price? Or if the buyer they can’t come up with the downpayment or qualify for a mortgage?
Before you decide to go ahead with a great price, here are five other bottom-line points to consider:
1. What are the estimated transaction costs and who will pay for what? Typical costs include the brokers’ commission, a home inspection, a termite inspection, escrow or attorney’s fees, a title search, an owner’s title insurance policy, transfer taxes and recording fees. The price tags on these items vary greatly around the country. Who pays for what is a matter of both local custom and negotiation.
2. How much money is the buyer putting into escrow and how soon? A big deposit — called “earnest money” — and a substantial down payment are generally seen as a sign that the buyer is serious about completing the transaction. From the seller’s point of view, the more money the buyer places in escrow and the sooner the money is transferred, the better.
3. Is there a mortgage financing contingency and how specific is it? The mortgage escape clause is a must for buyers, unless they’re paying all cash for the home. Without this contingency, buyers can be legally obligated to purchase the home even if they can’t obtain financing. Further, an open-ended statement that says the buyer will obtain a loan “at the prevailing rate of interest” leaves the buyer completely exposed to interest rate fluctuations. A statement that says the loan must be at an interest rate “not to exceed xx percent” and on specified terms is preferable.
4. What furniture, fixtures and appliances, if any, are being sold with the property? Technically, anything that’s permanently affixed to or installed in the home is real property. Everything else is the seller’s personal property. This distinction is a narrow one and it naturally leads to a fair amount of confusion. Are built-in appliances real property or personal property? What about a shelving system? A chandelier? Window coverings? Potted plants in the backyard? Sellers who intend to remove anything that’s attached to the home should have that spelled out in the contract. And the same goes for buyers who expect to acquire any of the furniture or other movables.
5. What will happen if either side breaches the contract? Unless an unmet contingency triggers the abandonment of the contract, it’s a binding legal document. Buyers who fail to perform can lose their deposit money. Sellers who try to back out can be sued for “specific performance,” which forces the sale of the home to the buyer. Many contracts also specify that disputes must be brought in small-claims court or presented for arbitration or mediation.
Tip: Ask your real estate agent to go over the standard contract with you before you receive or make a purchase offer. That way, you’ll know what to expect and be prepared to negotiate the best deal you can get.
Fannie to Tighten Loan Criteria for Condos, Refis
Daily Real Estate News | Tuesday, October 02, 2012
Starting on Oct. 20, Fannie Mae will be tightening some of its underwriting standards for condo buyers and home owners wanting to refinance. The changes have some in the industry concerned, Realty Times reports.
The new guidelines are aimed at reducing Fannie Mae’s risk as well as forcing more borrowers to shop around for mortgages.
Among the changes coming Oct. 20 to Fannie-backed loans:
Because of the new two-year average approach, one bad year out of two could sink a self-employed home owner’s application even if the most recent year would have qualified him or her under the old rules,© San Jose, Calif., mortgage lender Shashank Shekhar writes for Realty Times.
Source: Fannie Mae Tightens Underwriting Rules for Condo, Refinance Loans, Borderline Borrowers,© Realty Times (Oct. 3, 2012)
Appraisals Remain Big Hurdle, Agents Say
Daily Real Estate News | Monday, October 15, 2012
Appraisals have been blamed on derailing a lot of sales in recent years. In fact, more than one-third of REALTORS® recently reported that deals were canceled, delayed, or renegotiated to a lower price due to a low appraisal.
The National Association of REALTORS® has spoken out against faulty appraisals, blaming it on holding back the housing recovery.
More real estate professionals are starting to include appraisal contingencies in their contracts. These contingencies specify how much a buyer would be willing to pay in cash in case the appraisal comes in lower than the agreed upon sales price.
Appraisers have been criticized for using foreclosures as comparable homes in their valuations and for failing to take into account market conditions like the low inventory and bidding wars in many areas, according to NAR’s report. NAR also has criticized many banks for increasing their requirements to six comparable sales instead of three, particularly at a time with low inventories.
It’s holding sellers off the market, Jed Smith, NAR’s managing director of quantitative research, told The New York Times. Sales volume could probably be an additional 10 to 15 percent higher if we had normal lending practices and if we had normal appraisal practices.©
Appraisers say they’re not making valuations lower but they’re reflecting the current value of homes.
Appraisers don’t set the market, they reflect what’s happening in the market,© Ken Chitester, a spokesman for the Appraisal Institute, told The New York Times. So don’t shoot the messenger. Blaming the appraiser for a bad housing market is like blaming the weatherman because you don’t like the weather.©
Appraisers don’t always make adjustments if they use bank-owned homes in comparables because not all REOs sell at a discount and not all are in bad condition, says Dan McKinnon, who operates an appraisal company in Phoenix. When neighborhoods are dominated by REOs, those homes need to be factored in to help determine the value of homes, he adds.
If that property is in similar condition to your subject, it is direct competition,© McKinnon says.
Source: Scrutiny for Home Appraisers as the Market Struggles,© The New York Times (Oct. 12, 2012)