Find and buy house that’s right for you

I’ve recently went through the painful process of buying a home. Being a first time home buyer I’ve obviously made quite few mistakes so I’m writing this post as a future reference for myself, while also hoping that it may help somebody out there who is in the same situation as I was.

Homeowner myths

To begin, let me focus on few things that I, subjectively, view as completely false now that I am a homeowner. I really believe that before making final decision you should revisit your list of reasons to buy house. There are quite few myths floating around, and before proceeding any further we need those debunked.

House as an investment

This is probably one of the biggest myths fueled by real estate industry and government. When you take into account closing costs, yearly maintenance costs, association fees, taxes and bunch of other costs you never needed to worry about when you were renting, it’ll be obvious to you that in BEST case scenario you are looking at 1% yearly return. To emphasize again, I am talking about BEST case scenario. Would you ever buy a stock that will probably lose value, but could MAYBE give you 1% yearly return? Of course not.

And it’s not housing market, but never-ending string of fees that will bury you. For example, on my closing statement, for $345K house purchase, between me and seller we’ve paid about $40K in closing fees (me about $13K, him about $27K). To even better illustrate the point – seller’s agent, who did nothing to sell the house for about 6 months, and my agent who just showed me 3 properties before I decided to purchase (I’ve done extensive research before purchasing) have split about $17K in commissions.

The only way the make whole “House as an investment” / “Buy house to make money” idea work is to flip houses. Purchase, quickly remodel, sell. However, this is obviously not for you as you don’t have your own full time lawyer, agent and contractors. But even if you did, time is of the essence – you don’t want to end up owning a house, paying all the taxes (which go up because of improvements), insurance, association fees – you want to sell as soon as remodeling is done.

To conclude – house as an investment is a fairy tale fueled by real estate industry and government – they both profit immensely in real estate market. Real estate agents obviously make hefty commissions while government pockets taxes. Speaking of taxes…

Buying house is good for your tax return

Another huge myth. The ONLY real tax benefit that comes from home purchase is that you are able to deduct INTEREST generated by your mortgage payments. To quote my case – I am to have about $10K in interest during first few years. But I am also to have about $6K in property taxes. So, me and my wife will get to deduct about $16K rather than $12.4K (standard deduction in 2014). But, while previously we didn’t need to spend a dime to get standard deduction, we now need to spend money. Also, since house was purchased in August, obviously for the first year standard deduction will be bigger then itemized deduction we are talking about. And few years down the road I’ll obviously need to add more itemized deductions if I am to see any tax benefit from owning a house.

You need to settle for X

X can be a house you have found and is OK, agent that you started working with, lawyer, process, fees. Reality is that you do not need to settle for anything. As a matter a fact, if your agent tells you this – change your agent.

Believe me, if you are bothered by anything in the house the first time you see it – once you own it – it’ll bother you even more. Especially if you have a good credit and can afford to pay for a good house – until you sign closing statement – you are in control. As soon you sign closing statement and get the keys, you are on your own and anything that was left unsolved is burden you’ll be carrying solo.

Don’t be fooled thinking that your agent and your lawyer are looking out for your best interest. They work on commission, which means that they are extremely interested in closing house purchase as quickly as possible so that they can move onto next client. Do not give in and do not settle. If the house that you have found doesn’t WOW you – do NOT buy it. If your agent is not responsive or is rolling his/hers eyes when you request to see yet another property – change your agent.

Often people you deal with during house purchase will try to use your inexperience to shun you and make you give in to their interests. Again – do NOT give in and do NOT settle. You are the one that’ll end up with bill worth hundreds of thousands of dollars, so you better be extremely happy with what you are getting, rather than just satisfied.

Valid reasons to buy house / home

So, now that we’ve gone over few things and understand that house is generally a terrible investment, which will substantially increase your yearly expanses (taxes / maintenance / fees) and that you acquire through intimidating, complicated multi-month process, you may end up saying – OK, why would I even consider buying a house? Well, here are few reasons:

You like the neighborhood

Simply put it’s a good neighborhood, good location, you like it there and you know that you’ll be staying for a while. I STRONGLY recommend that before buying a house you do quite bit of traveling. I won’t get into market out of USA, but before purchasing a house, it would be ideal if you’ve lived and worked in different neighborhoods in at least 3 or 4 cities in the USA. Of course, this is not something many people can do … but also don’t be complete opposite – born & raised in certain neighborhood and you end up buying house there. With so many great places to live, use the advantage of being young to try out what’s out there. In 99% cases you’ll end up in much better area.

To confirm your reasoning on this topic, be sure to look into Rent vs Buy calculator. If the one I’m linking is too intimidating for you, Google for Rent vs Buy calculator – there are quite few options and you are bound to find one that you can use.


As soon as you have kids, lots of priorities shift. That downtown condo that’s close to clubbing scene now doesn’t seem like a good idea. Simply put, if your family is growing, it’s quite benefitial to buy a house in a good area. Most of your property taxes go toward things like schools and parks, so you need to make use of what you are paying for. If you take schools into account, you are well off paying huge chunk of extra money just to be in good school area. With private schools currently running at about $9K/year per child on average, you are looking at $108K for 12 years of education at minimum. I won’t even get into increasing education costs, frustrations of having your child in a bad school, potential college bills for those without scholarships and other things. Just be aware that if you have 2 kids, paying $50K more for a property in a great school area is a bargain.

Tired of moving

Simply put, at certain point of time, it’s no longer economical to rent bigger places just to be able to keep all the stuff you’ve aquired. Maybe you finally want to be able to improve few things in place you live – like unlocking front door with your phone. Or maybe you are just tired of moving whenever it’s convenient for landlord.

Less neighbors

Sure, we all love our neighbors (right?), but as we grow older it is quite beneficial not to influenced by whoever is living left/right or, god forbid, above you. Living in a condo and densely populated areas has it charms and it’s advantageous when you are young, but believe me, by the time you hit 30, you are best off if you have a home that’s sufficiently isolated and not influenced by anyone. If you or your significant other simply don’t like houses (or can’t afford the one you like), look into purchasing townhouse – they often have somewhat more modern architecture, are more affordable and come with few neighbors.

What’s ahead

Through the series of blog posts that follow I’ll try to explain the process of home purchase from the perspective of first time buyer. I’ll try to share everything I’ve learned and give practical advice whenever possible. If you have any questions or you advice to share, feel free to leave comments – anything that can help prospective home buyers is welcomed.

Home loan pre approval, research with Redfin, Trulia and Zillow

After deciding that it’s time to purchase a house you basically need to do two things:

1. Get pre-approved for home loan so that you know which houses are within your reach
2. Start browsing popular sites like Redfin, Zillow and Trulia and building up your list of properties you want to look in person

Most people start with #2 because it’s easier. Also, first time home buyers obviously have no idea how the whole home loan preapproval process goes, so in most cases they are thinking “let me first find a house I like, then I’ll figure out financials”. This thinking can actually work in your favor in case you are not 100% sure you’ll be buying house. We’ll explore that, along with other scenarios in section that follows.

Home loan pre approval process

The benefits of home loan pre-qualification boil down to two things: real estate agents taking you more seriously and getting insight into financials of house purchase.

Before you are pre-approved, your or seller’s agent don’t have any firm guarantee that you’ll be able to purchase house they are showing you. So, if you are already pre qualify they’ll be bound to take you more seriously.

Also, pre-approval helps you kickstart longest part of home purchase – closing loan. Instead of finding your dream house and then figuring out financials, you’ll be bound to figure out financials right away. When you truly understand how the process goes, financials are not that hard. We can break them down into:

1. Credit score – this influences loan APR you’ll be offered. Say ranges are 760-850+ for 4%, 700-759 for 5%, 670-699 for 6%, etc… If you credit score is 710 you’ll obviously get base APR of 5%. Take a look at How credit scores affect mortgage rates article that gives more detailed example.

2. Ratios tied to your income – the simplest check I can offer is: your mortgage payment (including taxes and HOA) should not exceed 25% of your monthly paycheck. Keep in mind that you should subtract all fixed credit payments you currently carry… like car loan payment for example. Zillow has great Affordability calculator. Simplest version just requires that you provide your annual income, monthly debs and down payment in order to get maximum house price that you can afford. Even better, calculator has advanced mode in which you can add property taxes, HOA dues, etc… so definitely check the given link to home loan calculator.

Finding loan issuer that can pre approve you is not hard in today’s market. Both Zillow and Trulia offer great mortgage marketplaces in which you can see all the lenders available, plus customer reviews for each of them:

Zillow even offers step-by-step home loan preapproval wizard that can guide you through the whole process. I found it too cumbersome – during my search for pre-approval, I just emailed agents that had best combination of offered APR and customer reviews on Zillow Mortgage Marketplace.

Before closing this section, a word of warning on something we talked about. In case you haven’t firmly decided that you will be buying a house, it’s actually better NOT to get pre-approved. First off, process is not exactly trivial. You’ll need to fill detailed application that includes giving away your Social Security Number (SSN). On top of that, each pre-approval process includes credit score check, which brings down your score by at least 5 points (each time).

In my case, I reached out to 3 lenders, and after talking with them I’ve filled full application only with 1. In ideal scenario, I advise you to do the same.

Besides, now that you know that basic ratio (mortgage payment not exceeding 25% of your monthly paycheck), have link to affordability calculator and know where to get preapproved, you already better positioned then I was. Since I didn’t knew that basic ratio, I needed to get pre-approval just to get solid idea on home loan I can afford. You already enjoy knowledge of what comes next and what is it that you can afford. So inverting steps – visiting a few houses and getting pre approved only before you want to give formal offer – is something you can easily do.

Tips and tricks of house hunting over Internet

Nowadays, there are numerous sites that can help you find houses worth visiting in person. I would recommend using following three, in order in which I’m giving them:

1. Redfin – the best site in my book because of two things: they have most accurate data and they allow you to easily schedule tours with their agents. Other positives of Redfin that I would emphasize include advanced search, nice integration with school reviews and finally recently launched 3D Walkthough that allows you virtually walk through some of the houses.
2. Trulia – out of three Trulia is probably the sexiest looking, true HTML5 website. The biggest selling point of Trulia are easy to use map overlays – so when searching you can easily see the crime rate of an area, schools, amenities nearby, whether or not property is in a flood zone, and so on.
3. Zillow – third place doesn’t mean that Zillow is a bad site. On the contrary, as you saw in pre-approval section, Zillow offers lots of great tools for prospective home owner. Just, everything search-wise, Redfin and Trulia do slightly better. Finally, data on Zillow is noticeably worse, especially when compared to Redfin.

Chances are that you’ll be finding all available houses for purchase by just sticking with these three websites. But of course, your options don’t end there – just Googling for “find house to purchase” gives you tons of real estate websites – like Realtor and HomeFinder . Use whatever is easiest for you.

Somewhat different are sites like ForSaleByOwner and Remember how in previous article I’ve talked about hefty real estate agent commissions? Well, these sites may contain listings not found on Redfin/Trulia/Zillow since owner decided to list property on their own and not give in to extra real estate agent fees.

Other than strictly real estate, there are some other useful websites. First that comes to mind is Walkscore which shows you how walk-able certain neighborhoods are. For most people, driving is not a problem… but some of us want to have a grocery store, park or coffee shop nearby – one that we can walk to in under 5 minutes. For example, area in which I live now has a sports bar with 1/2 off burgers and $2 draft beer during every Monday or Thursday Night Football… it’s truly nice perk in winter when you just want to get out of house, but don’t want to deal with traffic.

Also, review sites like Yelp can be quite helpful. They can show you whether or not property is in popular area. I mean, if houses cost approximately the same and one is in area with 10 great food joints, while the other is 5 minute drive away from closest store, you’ll obviously go with the first one.

One thing that I couldn’t find is definite forum on which you can get answers to questions you have and interact with other buyers/sellers. Don’t get me wrong, it’s not like there are not options. Redfin has pretty good forums. Zillow has nice Q&A website. Just I can’t truly recommend either – so if you are stuck with questions, the best thing I can recommend is leaving comment here.

Wrap up

Now that you are armed with knowledge on home loan pre approval process and websites for home search, start building your list. Again, do not start home loan preapproval process until you are 100% sure you’ll be buying a house. Ideally, you should be aiming to give formal Home Offer within 30 days of getting pre-approved. Once they start house searching process most people overwhelm themselves. To repeat myself, for now just FOCUS on two things:

1. Building a list of at least 5 houses you want to see in person
2. Making sure that monthly payment for each house (mortgage+taxes+hoa) on the list is below 25% of your monthly income (paycheck – existing credits you carry, like monthly payment for car loan for example). If in doubt, use Zillow Affordability calculator.

That’s it. Do not worry too much about anything else. To give you a peek of what follows, and how easy it is overwhelm yourself, here are the steps that stand between having a list and moving into house that you’ve just purchased:

1. Getting home loan pre approval
2. Finding an agent to take you on a house tour
3. Signing contract with agent to represent you during house purchase
4. Hiring building inspector and giving formal Home Offer for property you want to buy
5. Hiring attorney to guide you through closing process and help you with contingencies on the purchase contract
6. Closing loan with issuer that pre-approved you
7. Final inspection
8. Closing date, scheduling date when you and seller will be signing 100+ papers and exchanging money and house keys

Keep in mind that steps I gave are for conventional house purchase. Meaning, if you are looking to purchase foreclosure or a short sale – there may be extra steps – like both you and seller waiting few extra months on whoever is holding the deed (loan issuer / bank) to approve the purchase.

Also, ordering of steps is not set in stone. You can hire an attorney before giving formal offer – so that he goes through offer you are signing and make sure that it doesn’t bind you to purchase house in case inspector discovers something quite problematic. Also, you can reject signing contract with an agent or getting home loan pre approval all the way until you give formal offer. There are lots of intrinsic details that I’ll be covering and that can save you quite some time / money… for now just follow what I’ve said in this and previous article, revisit your reasons for becoming a home owner and make sure that properties you are looking at align with those reasons.

Find real estate agent / realtor or purchase house without one

Your real estate agent (realtor) is basically person that should be telling you all this that I am telling now through series of these blog posts. In a perfect world, buyer’s real estate agent would start by hearing your wishes (I want house this big, in this type of neighborhood, I want to pay this much, etc), work toward compiling list of suggestions for you, communicate with you on your schedule so that he knows when he can take you on a tour. While we are at it, he should be your best friend during whole process – giving you informed choices on whether or not price for certain house is too low / too high and also picking up tab whenever you take a stop for a lunch / coffee to take a break. To top it off, it would be great if he has law background so that he can make sure all the contracts (like Home Offer) that you are signing leave you well protected in case things go south.

Quite unrealistic, right?

Realtors in reality

In reality, (most) real estate agents nowadays see their role as someone who shows houses, helps you with making Home Offer, and gives you a hand with small things like scheduling with home inspector or communication with buyer’s agent during closing process. Now, I am not saying that there are no awesome real estate agents out there. Just, like most things in life, there is variance – how experienced certain agent is, how much time does she/he has, how well agent performs in frustrating situations, etc.

To be fair, when you look at things from agent’s perspective – it’s not like their situation is all rosy. If they don’t have representation contract signed with you, most often than not they’ll end up with $0 – i.e. all the time they’ve spent on you will be for nothing. In today’s world of Internet where everyone has the ability to browse listings and where sites like Redfin beat the hell out of most restricted “real estate agent only” databases, they don’t have any competitive edge.

Everything taken into account, paradoxically, I think that those agents that are being assholes are probably the ones getting the best deals. I.e. give prospective buyer a day worth of your time, try to get him to sign a representation contract, and if he doesn’t give in to your sweet talk, blow him off. Your loses as agent are minimized, your time is freed up so you can look elsewhere for easy money. I mean, only after truly getting informed can I understand what kind of home run I was for my agent – since I’ve done all the homework and research, got pre approved on my own, had my wife search for houses she liked, he effectively pocketed $9K for about 8 hours of work.

Can I buy house without realtor?

Now, all that said, most of you reading this are probably asking – OK, I don’t want to pay $9K for few house showings and small communication help. Can I say to prospective seller, instead of giving 2.5%-3% of purchase price to my agent – lower the price of the house that much for me?

Well, actually – YES, you can. Redfin has a great subsection in their Home Buying Guide titled Working Without Agent. I would especially emphasize the section in which they talk about seller’s agent doubling his commission by posing as your agent too. This is extremely easy to happen in case you are yet to hire attorney, and you are coerced into signing something without truly understanding what’s written there (which will be 90% of the time when you are dealing with real estate documents).

If you decide to buy real estate without agent, be prepared for a bit of negotiation. For example, licensed real estate agent needs to be present during inspection and appraisal. In most cases you can persuade sellers agent to do that free of charge in interest of selling property. It’s possible that seller’s agent just won’t budge, i.e. he can start asking for $$$ in exchange for his cooperation. As I’ve said in introduction, if you are well qualified buyer, in 99% of cases you don’t need to settle for anything – especially if you are well informed and know options that you have. In this case you have pretty good options:

1. If you are able to directly contact seller, do so and explain what agent is doing. I’m sure you can guess seller’s response. I mean, how would you react if you found out that agent hired to sell your property is risking a sale for minor fee in his pocket?
2. Find licensed agent that’s willing to be there for whatever fee your are willing to pay.
3. If this is appraisal (not inspection) we are talking about – since it’s your lender that’s ordering appraisal you can get him to help.

One thing that is not covered in Buying Property without Real Estate Agent article I’ve linked is part when you give an offer. In most cases, you can always get seller to lower the price by at least 5%. I will talk more about how give a good offer and what things you can use to your advantage in negotiation in sections that follow; what is truly important now and related to working without Real Estate Agent – try to get that extra 2.5%-3% AFTER you agree on price and before giving formal offer. This can be tricky to pull off if seller is represented by a good agent. Unless you have a friend that’s licensed real estate agent who is willing to tag along for free, you need seller’s agent to open doors of house for you. In that situation first thing seller’s agent will try is to wiggle his way in as your formal representative (and collect both buyers and sellers commission – 5%-6%). Once he discovers that you are not budging he’ll understand that you are already in for 2.5%-3% discount and will try to use that against you during price negotiation.

Simply, good seller agent will understand that for you it’s not as easy to schedule viewings as it is to someone who is working with agent – instead of scheduling with one person, you are scheduling with all these different seller’s agents. If you are already thinking about giving offer, he’ll know that you like the property and will more easily settle for listing price than somebody who is unaware of details / inexperienced – i.e. you are already getting 2.5%-3% discount, inexperienced person will try to get that trough negotiation.

Now, I started writing this article to help first time buyers – those who are inexperienced and are just looking not to be swindled. Now that you have more knowledge about process, it’ll actually be quite easy for you as a buyer to swindle things to your advantage. For example, nothing prevents you from finding a real estate agent and getting him to open doors to all the houses you want to see. After using the agent for a day, you can just say – thanks I’ll proceed on my own and either get another agent to work with you, or give offer on your own if you found house you liked.

I warn you – DO NOT BE AN A..HOLE. Risking to sound too Yoda-like, let me say: knowledge is not to be abused. Plus, karma is a … interesting concept. If real estate agent found out that you knowingly wasted his time, it’s quite likely you will be sued for commissions. And in that legal fight, oddly enough, I would cheer for real estate agent.

Say again, how do I find real estate agent / realtor

Now that we have all that under our belt, the easiest part – actually finding a real estate agent. In today’s world, this is truly a piece of cake. Redfin offers great directory of real estate agents. Zillow has real estate agent directory too. Surprised that Trulia is also doing it? Didn’t think so.

Also, when building my list of houses I saw that Redfin has pretty neat option of scheduling. You just select date and time when you want to visit properties and they try to assign you an agent that will take you on tour. Another reason why I’m recommending and putting Redfin first (can’t vouch that Zillow or Trulia offer similar option – but knowing the market, they probably do).

You may be tempted to go with somebody that your family or friends recommend as your real estate agent. My advice – don’t do it. If you hire your realtor through Redfin, you get a chance to pick from thousands real estate agents that have been reviewed hundreds of times. Worst case scenario – you start with someone you don’t like, it’s walk in the park to change him. And on top of that working with Redfin agent you’ll most likely get thousands of dollars worth of refund.

If you decided to do everything yourself and pocket 2.5%-3% you have both my admiration and envy. Support too – if you are unsure about anything, post a comment here, I’ll be glad to help if I can.

Home Offer, negotiation tips for house purchase

You’ve visited several properties, debated whether or not something is good with your significant other, and you are finally at the point of thinking to give offer for certain house. How to know whether or not house is really good? How much should you offer? What comes after that? Let’s continue with our journey and find answers to those questions.

In first part of this series, I’ve urged you to go through your list of reasons why want to be a home owner. This is a good place to remind you of that consideration. If you are not truly excited about a property – do NOT buy it! Decision to own a real estate is a big one. When you are renting you are in so much better position on number of fronts. Problems with local economy? Property is due for big maintenance – AC, water heater, kitchen needs replacement? Ratings of local schools are going down? Your new neighbors seem like they’ve came straight from hell? If you are renting, all these and many other problems are, ultimately, resolvable by simply moving away.

But, for sake of continuing this article let’s say you’ve decided – yes, you want to own that particular property. And yes, you’ll learn how maintain stuff around the house, figure out a way to live peacefully with your neighbors and even take that seat on board of local school if need be. How to get from giving an offer for property to moving in?

How to give a good Home Offer?

This is where your agent should shine. Really good real estate agents are sharks when it comes to price negotiation – they’ll latch onto whatever is weakness of other side and try to magnify significance just to get better deal. However, one thing is important here – realtors work on commission, so regardless on whether they are representing seller or buyer, they both benefit on higher prices. Meaning, don’t expect your agent to be fully on your side. If he sees that you like the property and won’t mind moving in, even if the thinks it’s a bad purchase, more often than not your agent won’t raise additional doubts. Why induce doubt with saying that crime rate in area is rising? Or that local schools are getting worse? It could be temporary blip long term… and why bring that up when $10000 commission is waiting?

Another constraint is time. Whether acting as seller’s or buyer’s agent, realtor tries to minimize time spent on client. You’ll rarely see your agent object too much on house purchase because if you think about buying a property and he talks you out of it – he is losing both money and time. Now he needs to find you another property you’ll like. In case you buy, worst case scenario is that you are completely unsatisfied with how he lead you through the process. Considering that average person doesn’t buy house every 5 years, it’s easy to understand why in 80% of cases your agent will go with the flow.

I’ve said all this so that you understand how time is probably the biggest leverage you have over both your (buyer’s) and seller’s agent. I mean, you can see it yourself on real estate market all the time – after failing to sell certain property, what is it that seller’s agents do? They work harder to find prospective buyers? Advertise more? Figure out why property is not selling and target the problem? Of course not, in 80% of cases, all they do is just talk owner into lowering the price. Job done, right?

So, when deciding to give the offer, first thing I would look at is how long property is on the market. Rule of thumb, for every month on the market you should aim at taking down 2% of the initial price off. Obviously this is not applicable on foreclosures. New constructions are also somewhat resistant to such aggressive price degradation.

Another thing related to time that influences the price is the season. Is it winter? If it is, you’ll most likely get better deal, since market is way slower than in summer. Most families simply can’t afford the luxury of moving in winter when kids are in school. If you are without kids or are not constrained by it, you may save quite some money by making home purchase in winter. Again, rule of thumb – you are probably looking at 3% discount if you are making your purchase in winter outside of hectic, spring/summer break cycle.

Another showcase of how Internet and free data destroy competitive advantage is ability of anyone to see price history for any property on the market. I mean, good luck trying to buy low, do few simple renovations and sell high to anyone who knows how to type in in their browser. I can’t vouch for correctness of data on Trulia and Zillow, but after my experience with house purchase, I think that data on Redfin is pretty spot on. I had some doubts during purchase process since my agent came with different values. But in the end I found that agent’s data was incorrect.

Finally, last, but not least important are results of home inspection. We’ll talk more about it in section that follows, but regardless of price you agreed, keep in mind that you’ll probably need to sink in at least $5000-$10000 on small repairs once you move into house. You know those houses that are advertised as “in top condition, you just need to move in”? They would be better off advertised as “you’ll probably need to spend just $1000-$2000”. I am yet to see a house in which you don’t need to do anything.

Whether or not you want to pay that price out of your pocket, or get seller to pay it – it’s up to you. The issue is that home inspections are not that cheap nowadays, you are probably looking at paying $400 per property. Will seller be willing to give you $300 to paint a wall that’s not perfect? Probably not. And you also don’t want to get to nitpicking. It’s bad for your karma and you don’t to be haggling before your offer is accepted, especially if by then you’ve already lowered the price by using advice I’ve gave previously.

Regarding price in Home Offer, again, be confident that what you are giving is fair. If in doubt and you have nowhere to turn, feel free to leave comments, I’m obviously not real estate professional, but am willing to help and give you unbiased opinion.

Preparing Home Offer

Giving Home Offer is the place where tricky lawyery stuff starts. Also known as “here are some documents, they are all good, you only need to sign them” point. As I’ve said in previous parts, don’t allow to be intimidated by your lack of knowledge and coerced into signing stuff. Chances are that after reading all 20 pages of documents you still don’t know whether you are protected in case things go south or not. That’s completely normal. As a matter of fact majority of legal documents are purposely so long and written in terrible fashion in order to demotivate people from reading them. This is why I recommend that you hire a lawyer before signing anything. Then focus on things that matter and leave form and formalities to lawyer, hoping he’ll do his job.

Regarding Home Offer, you want to be protected against two things:
1. Home Inspection discovering non functional parts of house
2. Failure to come to terms with your lender, i.e. being unable to close the loan

As long as those things are in offer and you are allowed to withdraw your offer without any consequence – you are good. From standpoint of buyer the important parts of Home Offer are:
1. Home Offer will contain the price your agent and seller’s agent have reached through informal negotiation
2. By giving formal Home Offer, if accepted you are required to post certain deposit (earnest money)
3. Deadline by which you need to close the loan, and deadline by which you need to close house purchase

We’ve already discussed price in detail. Once price is in the Home Offer it’s harder to change, but not impossible. Especially if Home Inspection uncovers potential problems with the home. For example, you probably won’t get buyer to lower the price if inspector figures out that dryer in the unit is old. But, if inspection uncovers high levels of Radon, you can be pretty sure that price of home will need to go down to accommodate cost of Radon System installation. I’ll talk more specifically about Radon mitigation systems in separate post, but if you do get high levels of Radon ask that you are given a minimum of $2500 credit. Take charge of Radon system installation since if you leave it to seller, he’ll go with cheapest, easiest solution. This means that you can end up with Radon pipes in places you don’t want them (going through closets or bedroom ceilings).

Rule of thumb – anything that seller is legally obliged to disclose, and was not disclosed before giving Home Offer can easily bring the offering price down. Radon levels are good example, if seller truly never tested for Radon and he didn’t knew the levels, he doesn’t need to disclose it. Once he is informed by potential buyer, and purchase falls through, for every future potential buyer he legally obliged to either fix the problem or disclose it. Same goes for ceiling leaks, basement flooding, toxic materials, and so on. Take a look at this article that gives pretty good overview of the subject – what defects need to be disclosed when selling a home.

Now, onto earnest money. Basically, if your offer is accepted you need to deposit certain amount of money showing good faith – i.e. that you are serious about offer and will work toward closing the purchase by the time specified in the offer. Traditionally, following rules apply when there is earnest money:
1. If deal falls through because of a condition present in the offer, buyer gets back his deposit, seller gets nothing
2. If deal falls through because of buyer, for example he simply drops the purchase or refuses to proceed, seller keeps the money
3. If deal falls through because of seller, for example he got better offer, seller is obliged to give the buyer twice the money he deposited

Now, again, these are traditional rules. Your Home Offer could be completely different – all depends on the wording of the contract. But, if you are a buyer and are confident that you are getting a great price on the property, do this:
1. Make sure that twice the money back condition is enforced in the Home Offer that’s accepted
2. Double check that you are comfortable with conditions under which you can withdraw the offer
2. Agree on deposit amount which’ll prevent seller from looking elsewhere

So, with those conditions present, if you as a buyer deposit $5000, someone needs to outbid your price by at least $5000 for seller to even consider going with the alternative offer. Increase deposit to $15000, and it’s that less likely you’ll lose the property in price bidding war in month or so it’ll take you to close the loan and other details.

Of course, if you are seller, you’ll try to nudge things into your favor. You’ll try to keep conditions under which offer can be withdrawn to a minimum. If you are confident you are getting good deal of course that you’ll ask for bigger deposit. On the other hand if you are not satisfied with price, you’ll try to keep deposit to the minimum and explore the market in the meantime while buyer is dealing with financing.

Closing house purchase, between offer and moving in

Once your home offer is accepted, you’ll be almost there. Almost meaning about month or two, depending how fast your lender works. But first things first – home inspection.

I know that paying $400 for a guy just to come and look around doesn’t sound too attractive. Especially if you end up having an inspector that’s all suited up, i.e. if when you first meet him he immediately starts talking about things he won’t be vouching for or won’t be inspecting… well, you’ve likely paid $400 for nothing. As with agent, I really suggest that instead on relying on your friend’s recommendation you rely on scores by hundreds of people. Redfin has pretty nice Open Book of Inspection Services for every city (Chicago linked). Also, they have good Interactive Home Inspection guide. But, if you are already set on hiring professional inspector, you should only focus on one thing: get the inspector which promises that after he is done with inspection, he’ll spend time with you SHOWING you the problems and allowing you to take your own notes.

Nowadays many inspectors prefer to skip this part because it can be time consuming. Instead they take stance of – let me send you written report and everything will be in there. The problem with written reports is that they are not interactive. More often than not they are really just predefined checklist through which inspector goes and puts functional, non-functional or some variation. Dryer needs repairs. Awesome, now what exactly does that mean? Should I spend more money just to know how bad it is? Do I need to completely replace dryer? Those are the type of questions you’ll be asking yourself if you settle for just written report.

Another thing inspection wise that I recommend is testing for Radon. This decision is even harder. Radon self test kits cost something like $13. Sure, you need two (to ensure test was valid), but that doesn’t justify price tag of $150 which is how much most inspectors charge nowadays. For that amount you can easily get digital Radon meter that’ll last you for a full year.

The reason why Radon testing price is so high is that inspectors play on the price tag of Radon mitigation system. Standard system can easily cost over $2000 (when you are purchasing house for hundreds of thousands of $$$, what is two thousand more, right?). So, if you do not test and end up having to mitigate Radon anyway, instead of spending $150 you are now spending $2000. As a consequence, most people play safe and pay for Radon testing. The only advice I can offer is that you take a look at EPA’s map of Radon Zones. From my experience state EPA agencies have more accurate maps and you may wish to search for those. But, if you are in Zone 1 or Zone 2 – you should definitely test. Zone 3 – you can take a gamble, but… you know how they say – better safe than sorry.

Closing the loan

As I’ve said previously, in your Home Offer there should be two deadlines – first deadline is date by which you should secure your loan. If you were ever wondering why purchases of houses take few months, this is where you figure out why. Theoretically, closing the loan is not that complicated:

1. It starts with you signing few documents giving loan issuer authority to start the process
2. After you are done signing, you’ll be paying various fees
3. Your loan issuer will order property appraisal
3. Appraisal will need to confirm that purchase price is not too inflated or deflated
4. After appraisal is successfully completed, you’ll be asked to provide various documents for purposes of closing the loan
5. You’ll need to jump through few hoops, send in new documents, move money to that bank account, etc
6. Finally, you should get notification that you are approved
7. After this all that is left is for your lawyers figure out any outstanding issues and date two dates: final inspection and closing date

Time in which you can do all listed steps can vary greatly. I’m pretty sure that with responsive lender you can close this process under 2 weeks. Then again, it’s possible that with your lender it will take more than 2 months. This is something you need to plan in advance. Before signing off Home Offer, reach out to your lender and ask whether or not he is comfortable with date given as financing deadline. If he is not, put contingency that you get your earnest money back or that deadline is automatically pushed if your lender fails to deliver by the date. If lender is confident he’ll get job done by listed date, still put contingency just in case.

Dealing with lenders can be pretty frustrating, because more often than not you’ll start the process with one person and then when paperwork starts, you’ll be assigned to someone else. And you know how switch from sales guy to tech guy goes – suddenly there is no more yes, yes, sure. Instead you’ve get less than polite emails saying: give me this and give me that. Can I give you this? No, I’ve asked for that, go and get it. This can especially be frustrating when it comes to time sensitive material like bank statements. God forbid you send all the required documents right away and be done. If process tags along for month or so, be sure you’ll be asked to send bunch of documents again.

This is by no means complete list, but expect to be asked to send:
1. Scans of your IDs, driver’s license, passport or green card, all depending on your situation
2. Last two pay-stubs and scans of pay checks (yeah, scan those before depositing)
3. Tax returns and W2s for last two years
4. Bank statements for past two months. If you are going for 20% down payment you need to show you have enough money to close the loan
5. Company letter showing that they are aware of your house purchase and that they support it

As I said, documents may vary. Some lenders may not ask for #5. Some may say – without that we can’t proceed. Just be ready for the roller coaster ride and try to get it over as soon as possible.

My loan is approved! Am I done?

Well, almost. Depending on your situation you could be days or months away from moving in. This is where lawyers are pretty active, going over final details and figuring out closing date (before second deadline listed in Home Offer).

Now, if there were any outstanding contingencies, try to figure them out as soon as possible. If seller took upon himself to remedy Radon issue, that needs to be done before closing date. Especially in case where something was being fixed, be sure to schedule final inspection. Property may have completely changed between you giving Home Offer and now. For all you know maybe it was humid summer and mold started growing.

I’ve had really bad experience of skipping final inspection (because I was unaware of it). When I moved into my new home, radon pipe on the bedroom ceiling greeted me. Good luck sleeping in there. I’ve reached out to my lawyer and 2 days later he replies – well, you signed papers, it’s your problem now.

So, learn from my mistake. Agree on closing date, but set final inspection date a day before it. Tour the property and check if everything is as it was when you gave Home Offer, or if it’s been fixed as agreed. Everybody other than you will be gone tomorrow and there is nothing you’ll be able to do. Until you sign the papers, you have the power to change the things and get others to help fix the problems. That power is gone immediately when you get the keys to the property.

Moving and how it fits into the picture

I plan on writing separate blog post regarding moving as it is complex topic. In the context of closing house purchase, just be aware how it’ll influence you. Especially if you are moving to a new city or state, there are tons of things that need to be done. Those things can keep you occupied and shift your attention from important house purchase decisions. Do not let that happen. Especially if you are moving to new city plan to arrive there at least a day or two before closing date. Do that final inspection and work on any issues that have popped up in the meantime.

Closing house purchase process, closing date

Closing date is an interesting combination of exciting and boring. You lawyer should guide you through signing more than hundred papers. You’ll probably be amazed at how majority of those 2 page documents can be explained in a sentence.

Again, the most important thing – everyone will be gone after the meeting is over. Your agent and your lawyer are not there to help you. Unlike you, everyone else is there to collect their share of money you are providing; so they’ll try to get things over as soon as possible. If you are satisfied with terms and conditions, by all means, do not waste people’s time and let them proceed. But if you are not comfortable with ANYTHING, speak up. If there were problems during your final inspection, postpone closing date. Do not give in to any promises that are not on written down and signed.

Once closing is over – it’ll be you and keys to your new home. Your bank account will probably be quite lighter. You’ll be in for a few decades of mortgage payments.

You better be happy with what you’ve got now.