Published by Greg Foster on 03 Mar 2008 at 07:09 pm
Buy
Index
1. Why own your own home?
2. How do you find the right home for you?
3. How do you determine your offering price?
4. What should you consider in writing an offer to purchase?
5. How do you determine the condition of the property?
1. Why Own Your Own Home?
Real estate is usually an excellent investment As a general rule, homes have appreciated about an average of five percent per year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region. Stocks may appreciate much more, but take a second look…if you buy a $200,000 house, you probably do not pay cash for the home. You get a loan too. If you put 20% down – that would be an investment of $40,000. At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earn $10,000 with an investment of $40,000. At that rate your annual “return on investment” is 25%. This rate would be even higher with a lower down payment. With this leverage of your money, your rate of return when buying a home is higher than almost any other investment you could make. Of course, you are making mortgage payments and paying property taxes, along with a few other costs, including maintenance. At this time, it may be not be advisable to purchase property unless you expect to live there for at least two or three years.
Income Tax Savings Because of income tax deductions, the government is basically subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income. Property taxes are deductible, too.
Stable Monthly Housing Costs When you rent a place to live, you can expect your rent to increase each year. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Can you imagine how much rent might be ten, fifteen, or even thirty years from now. Which makes more sense?
Forced Savings Some people have difficulty saving money, and a house is an automatic savings account. You accumulate savings in two ways. First, every month a portion of your payment goes toward the principal. Second, your home appreciates. Average annual appreciation on a home is approximately five percent, although it will vary from year to year, and in some years may even depreciate. Over time, history has shown that owning a home is one of the best financial investments.
Freedom & Individualism When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. It also does not make sense to spend thousand of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you. Since your landlord wants to keep his expenses to a minimum, he or she will probably not be spending much to improve the place, either. When you own a home, however, you can do whatever you want. You get the benefits of any improvements you make, plus you get to live in an environment you have created.
More Space If you are moving to a home for the first time, you are going to be very pleased with all the new space you have available. Both indoors and outdoors, you will probably have more space. Even moving to a condominium from an apartment, you are likely to find you have much more room available – your own laundry and storage area, and bigger rooms.
2. How do you find the right home for you?
There are thousands of homes on the market at any single time. There are more ways available to find information on homes today than every before. Anyone can look for information in the newspaper, on the internet and drive neighborhoods looking for signs. How can you gather the information you need, as quickly and easily as possible, without wasting gas and time? We’re prejudiced, but we believe the best way is to use a Realtor you trust.
First, select a Realtor who asks pertinent questions and really listens to your answers. What are your priorities? Why do you want to live in a certain neighborhood? How do you plan to use that extra bedroom? How long do you anticipate living in the home? What do you like and dislike most about your current home?
The best-priced properties in the best condition in the best locations sell quickly! Select a Realtor who will research your search criteria on a daily basis and can get you information on possible properties right away by e-mail or fax. Be flexible in scheduling appointments to see homes that look particularly appealing. It is important to get out and see a few homes with a Realtor early on to see how closely they match your criteria. Offer as much input on those selections as you can…everything you like and dislike about each one. The more an agent knows about what you’re looking for, the more easily he or she can narrow choices and find that special home for you.
In determining a price range to search, you need to have an idea of what you have available for a down payment and a target monthly payment range. If you have a home to sell, have a market analysis completed for your home to determine your equity after payoffs and selling expenses. Have a reputable lender do a pre-qualification of what payment you can qualify for. The lender can write a pre-qualification letter to submit with an offer.
3. How do you determine your offering price?
When you prepare an offer to purchase a home, you already know the seller’s asking price. But what price are you going to offer, and how do you come up with that figure? Determining your offer price is a three-step process. First, you look at recent sales of similar properties to come up with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending upon your negotiating style, you adjust your “fair” price and come up with what you want to put in your offer.
Comparable Sales The first step in determining the price you are willing to offer is to look at the recent sales of similar homes. These are called “comparable sales.” Comparable sales are recent sales of homes that compare closely to the one you are looking to purchase. Specifically, you want to compare prices of homes that are similar in square footage, number of bedrooms and bathrooms, garage space, lot size, and type of construction. If the home you are interested in is part of a tract of homes, then you will most likely find some exact model matches to compare against one another.
There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, an, in some cases, impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service.
The most accessible source of information on comparable sales is the public record. When someone buys a home the property is deeded from the seller to the buyer. In most circumstances, this deed is recorded at the local county recorder’s office. The county combines sales data with information already known about the property so it can assess property taxes correctly. Provided there have been no additions to the property, the information available from the public record is usually correct regarding sales price, square footage, and numbers of rooms. County records are often available online. However, the information is usually only as accurate as the information that has been provided to the county by the property owners. Another problem with the public record is that it tends to run at least six to eight weeks behind. Add another four to six weeks for the typical escrow period and you can see the data is not current. The most current information is the most valuable.
Most of the public is aware that the Multiple Listing Service is a private resource where Realtors list properties available for sale. Recently, the public has been able to access some of that information on such sites as Realtor.com, ColoradoHomeStop.com, and others.
Once a property is sold and the transaction has closed, the selling price is posted to the listing in the Multiple Listing Service. Over time, it has become a huge database on past sales, containing much more information on individual homes than can be gleaned from the public record. This information is only available to real estate agents who are members of the local Multiple Listing Service. Your agent will provide you with this data to help determine your offer price.
Pending Transactions The most valuable information would be the most current, of course. A sale last week has more validity in helping you determine a purchase price than a sale from six months ago. The problem is that there is no actual record of the sales price until the transaction is completed. The information is not available in the public record because no deed has yet been recorded.
Neither is the information available in the Multiple Listing Service. Once a property is sold, it becomes a “pending sale”.
Other Factors Influencing Your Offer Price Gathering and analyzing information from comparable sales helps to establish the range of prices you should consider when making an offer to buy a home. More weight should be given to the most recent sales, but even so, you need to do a bit more analysis before deciding upon the price you will offer. You also need to consider the condition of the property, improvements, the current market, and the circumstances behind the seller’s decision to sell.
- Property Condition Since you have toured the property you are interested in, you should know how it compares to the general neighborhood. When evaluating a home’s condition, there are a number of things you should consider. Structural condition is most important. Look at items such as walls, ceilings, floors, doors and windows, then paint, carpets, and floor coverings. Your agent can obtain information about the condition of the homes from your comparable sales list. We may have actually seen many of those homes or will be able to get that information from the listing agent.
- Home Improvements Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account. Most important would be room additions, especially bedrooms and bathrooms. Other items, like kitchen and bath remodels, expensive floor coverings and extensive landscaping should be taken into account, too, but should be discounted. Your agent can provide guidance in this area.
- Market Conditions A hot market is a “seller’s market.” During a seller’s market, properties can sell within a few days of being listed and there are often multiple offers. Sometimes homes even sell above the asking price. Although most buyer’s want to get a “deal” on a home, reducing an offer by even a few thousand dollars could mean that someone else will get the home you desire.
A slow market is a “buyer’s market.” During a buyer’s market properties may languish on the market for some time and offers may be few and far between. Prices may even decline temporarily. Such a market allows you to be more flexible in offering a lower price for the home. Even if your offered price is too low, the seller is likely to make some sort of counter-offer and you can begin negotiations in earnest.
More often than not, the market is simply “balanced,” or in transition.
- Seller Motivation It is rather rare that a seller’s motivation will dramatically affect the price of a home, but it is often possible to save a few thousand dollars. The most common “motivated seller” is someone who has already bought his or her next home or is relocating to a new area. They will be under some pressure to sell the home quickly or face the prospect of making two mortgage payments at the same time. There are also family crises that can motivate a seller to make a quick deal.
There are times when a seller is truly distressed, willing to make a quick sale and sacrifice thousands of dollars. With the seller’s permission, the listing agent will post this information along with the listing in the Multiple Listing Service. They may also inform other agents during office and association marketing sessions or by flyers sent to other real estate offices. Provided this information has been made generally available to Realtors, your agent should know when a seller is truly motivated and when it is just “puff” designed to elicit interest in a property.
The Final Decision on Your Offer Price
The fair price should be approximately what you are willing to agree on at the end of negotiations with the seller. The price you put in your offer to begin negotiations is totally up to you and depends on your negotiating style. Most buyers start off somewhat lower than the price they eventually want to pay. Although your agent, if working as a buyer’s agent for you, may provide advice and guidance, you are the one who makes the decision. The price you put in the offer is totally up to you.
4. What should you consider in writing an offer to purchase?
Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, put yourself in the seller’s shoes and imagine his or her reaction to everything you include
Because of the large dollar amounts involved, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk. In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your down payment, who pays what closing costs, what inspections are to be performed, time deadlines, what personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you will get physical possession of the property, and how to settle disputes should they occur.
- Contingencies in a purchase offer You want to anticipate potential problems so that if something does go wrong, you can cancel the contract without penalty. These are called “contingencies”, and you must be sure to include them when you offer to buy a home. You may want to make closing on the sale of your present home a condition of your offer to avoid the possibility of making two mortgage payments if you present home doesn’t sell and close. If you are obtaining a loan, successfully obtaining suitable financing should be a condition of your offer. Another condition should be that the property appraises for at least what you agreed to pay for it. You are likely to require certain property inspections, and another contingency should be that the property pass those inspections. Contingencies protect you in case you cannot perform or choose not to perform on a promise to buy a home. If you cancel a contract without having built-in conditions and contingencies, you could find yourself forfeiting your earnest money deposit.
- Earnest money deposit After you have come up with an offer price, the next step is to determine how large a deposit you want to make with your offer. You want the “earnest money deposit” to be large enough to show the seller you are serious, but not so large you are placing significant funds at risk. Although significant problems are the exception and not the rule, they do occasionally occur. Just in case there is a nasty or prolonged dispute between you and the seller, the less money you have tied up in a deposit, the fewer funds you have placed at risk. There are exceptions to this rule, too. During a hot market when there may be multiple offers on the property, a large deposit may impress a seller enough to accept your offer instead of another, perhaps even when the competition is offering a slightly higher price. You may also find that by making a large deposit you can convince the seller to accept a lower offer.
- The closing date You must include a closing date as part of your offer. Although most transactions do close on the right date, allow a little flexibility. Otherwise, if your purchase closes a few days late you could find yourself staying in a motel with your belongings packed in a moving van somewhere while you pay storage costs, or you may be liable for penalty fees for not delivering timely possession on your current home.
- Transfer of possession It is not always possible to occupy your new home immediately upon closing. The seller may be purchasing another home also, and may need funds from your purchase to close on their new home. As a result, it has become customary to allow the seller several days to turn over actual possession and keys to the home. When transfer of possession actually occurs should be clearly stated in the contract. .
5. How do you determine the condition of the property?
Disclosures from the seller Although you have toured the property, looked at the walls and ceiling, turned on the faucets and played with the light switches, you have not lived in it. The seller has years of knowledge about his or her home. For this reason, you will require a seller’s disclosures as part of your offer. This is contained in a standard clause in
Property inspection It is important to have an expert assess the physical condition of the property. Even new homes can have issues that need to be addressed. As a buyer you will want an expert to inspect important systems, such as heating, plumbing, structural and roof. A home inspector will perform a detailed inspection of the home and provide a written report of findings. A qualified home inspector may or may not be an engineer. An inspector may suggest needed repairs and can usually provide some kind of estimate of what repairs will cost. If repairs are needed, it is usually best to get a firm bid from a contractor. Sometimes a contractor can also provide a certification for a roof or furnace.
Final walk-through inspection Before closing, you will want to revisit the property to ensure it is in the condition you have required in your offer, and to inspect that any required repairs have been performed. Be sure this right to do a final inspection is included in your offer to purchase the home.
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