Benefits of Owning Your Own Home
- Stable Monthly Housing Costs
- Forced Savings
- Freedom and Individualism
- More Space
Important Things to Avoid Before Buying a Home
- Don’t Move Money Around
Don’t Buy a Car – or Did You Already Buy One ?
- When Income Grows and You Want to Buy “Stuff”
- Debt to Income Ratios and Car Payments
- How a New Car Payment Reduces Your Purchase Price
The Business Cycle and Buying a Home
- Recession and Expansion
- Supply and Demand
- Should You Try to Time the Market
Comparable Sales and Your Offer Price
- Determining Your Offer Price
- Comparable Sales Mulitple Listing Service
- Comparable Sales – Pending Transactions
- Other Factors Influencing Your Offer Price
Major Factors Influencing Your Offer Price
- How Property Conditions Affect Your Offer
- How Home Improvements Affect Your Offer Price
- How Market Conditions Affect Your Offer Price
- How Seller Motivation Affects Your Offer Price
- The Final Decision on Your Offer Price
Offering to Purchase Realestate the Basics
- Writing an offer to Purchase Realestate
- Buying a Home
- Special Conditions in a Purchase Offer
- Deposit Money
- The Settlement Date
Writing an Offer
- Pest Inspection
- Termite or Pest Inspection
- Condition of the Property
- Inspections You Should Require
- Final Walk Through Inspection
How Financing Details Affect Your Offer
- Cash Offers
- Other Financing Details in Your Offer
Selecting Service Providers
- Selecting Service Providers
- Building and Pest Inspections
- Transfer of Possession
- Settlement
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase each year – or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage and interest rates aren’t as volatile now as they were in the late seventies and eighties.
Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense?
Don’t Move Money Around
When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes check accounts, savings accounts, money market funds or stock statements.
If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.
The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it “easier”, could make it more difficult for the lender to properly document.
So leave your money where it is until you talk to a broker.
When Income Grows and You Want to Buy “Stuff”
Don’t Buy a Car
When an individual’s income starts growing and they manage to set aside some savings, they commonly experience what may be considered an innate instinct of modern civilized mankind – The desire to spend money.
Australians have a special love affair with the motor vehicles, this becomes a high priority item on the shopping list. Later, other things will be added and one of those will probably be a house.
However, by the time home ownership has become more than a distant and hopeful dream, you may have already bought the car.
It happens all the time, sometimes just before you contact a lender to get pre-qualified for a mortgage.
As part of the interview, you may tell the loan officer your price target. He will ask about your income, your savings and your debts, then give you his opinion. “If only you didn’t have this car payment,” he might begin, “you would certainly qualify for a home loan to buy that house.”
Recession and Expansion
There are times when the economy is brisk and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more, buy new cars, and they buy new homes.
Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment – perhaps because of a layoff in the family.
Determining Your Offer Price
When you prepare an offer to purchase a home, you already know the seller’s asking price. But what price are you going to offer and how do you come up with that figure?
Determining your offer price is a three-step process. First, you look at recent sales of similar properties to come up with a price range. Then, you analyze additional data, such as the condition of the home, improvements made to the property, current market conditions, and the circumstances of the seller. This will help you settle on a price you think would be fair to pay for the home. Finally, depending on your negotiating style, you adjust your “fair” price and come up with what you want to put in your offer.
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 metreage, number of bedrooms and bathrooms, garage space, lot size, and type of construction.
There are three main sources of information on comparable sales, all of which are easily accessed by a real estate agent. It is somewhat more difficult for the general public to access this data, and in some cases impossible. Two of the most obvious information sources are the public record and the Multiple Listing Service eg. the web.
How Property Conditions Affect Your Offer
Since you have toured the property you are interested in, you should know how it compares to the general neighbourhood. All you have to do is put the home in one of three categories – average, above average, or below average.
When evaluating a home’s condition, there are a number of things you should consider. Structural condition is most important – items such as walls, ceilings, floors, doors and windows. Then paint, carpets, and floor coverings. Pay special attention to bathrooms and bedrooms and whether the plumbing and electricity work efficiently. Look at the fixtures, such as light switches, doorknobs, and drawer handles. The front and back yards should be in reasonably good shape.
The missing ingredient will be information on the condition of the homes from your comparable sales list. Provided you chose the right agent to represent you, they may have actually visited some of those homes and be able to provide key insights.
Writing an offer to Purchase Realestate
Once you find the home you want to buy, the next step is to write an offer – which is not as easy as it sounds. Your offer is the first step toward negotiating a sales contract with the seller. Since this is just the beginning of negotiations, you should put yourself in the seller’s shoes and imagine his or her reaction to everything you include. Your goal is to get what you want, and imagining the seller’s reactions will help you attain that goal.
The offer is much more complicated than simply coming up with a price and saying, “This is what I’ll pay.” Because of the large dollar amounts involved, especially in today’s litigious society, both you and the seller want to build in protections and contingencies to protect your investment and limit your risk.
In an offer to purchase real estate, you include not only the price you are willing to pay, but other details of the purchase as well. This includes how you intend to finance the home, your deposit, what inspections are performed, timetables, whether personal property is included in the purchase, terms of cancellation, any repairs you want performed, which professional services will be used, when you get physical possession of the property, and how to settle disputes should they occur.
It is certainly more involved than buying a car. And more important.
Buying a home is a major event for both the buyer and seller. It will affect your finances more than any other previous purchase or investment. The seller makes plans based on your offer that affect his finances, too. However, it is more important than just money. In the half-hour it takes to write an offer you are making decisions that affect how you live for the next several years, if not the rest of your life.
The seller is going to review your offer carefully, because it also affects how he or she lives the rest of their life.That sounds dramatic. It sounds like a cliché. Every real estate book or article you read says the same thing.
They all say it because it is true.
Pest Inspection
As part of your offer, you may require a building and pest inspection. The pest company will inspects for termite damage and pest infestations or past termite damage this will be provided in a detailed report.
The company that performs these inspections is important to you as a buyer, because you want to be sure they do a good job.
You should determine which company you want to perform these inspections and make it a part of your offer. If you do not know which company to engage, your agent may be able to recommend some.
Cash Offers
If you are one of those rare individuals making a cash offer to buy a home, meaning that the finance clause on the standard contract remains blank it makes sense to provide some documentation with your offer that shows you have the funds available. If you have to liquidate stock or some other asset, your offer should give a timetable to allow the assets to be converted to cash.
Selecting Service Providers
Buying a home does not occur in a vacuum, involving only you and the seller. There are all kinds of people and services involved behind the scenes to make it happen. You may need to engage a solicitor to handle the purchase of your new home or maybe there is someone you have used in the past.
When you make your offer, you should advise your agent to ensure that time remains of the essence. If you are unfamiliar with these service providers, you can get recommendations from your agent.
Forced Savings
Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately five percent, though it will vary from year to year, and in some years may even depreciate. Over time, history has shown that owning a home is one of the very best financial investments.
Debt to Income Ratios and Car Payments
When determining your ability to qualify for a mortgage, a lender looks at what is called your “debt-to-income” ratio. A debt-to-income ratio is the percentage of your gross monthly income (before taxes) that you spend on debt. This will include your monthly housing costs, including principal, interest, taxes, insurance, and homeowner’s association fees, if any. It will also include your monthly consumer debt, including credit cards, student loans, instalment debt and car payments.
Supply and Demand
When the supply of available houses is greater than the supply of buyers, appreciation may slow and prices may even fall, as happened in the early eighties and the early to mid-nineties.
If you are lucky enough to purchase a home during a slow period, you can be reasonably certain the economy will begin to show strength again. At times, real estate values may even surge drastically. In many regions of the country, this is precisely what occurred in the late eighties and nineties.
Comparable Sales Mulitple Listing Service
Most of the public is aware that the Multiple Listing Service is a private resource where Property Agents list properties available for sale. Recently, the public has been able to access some of that information on such sites as Realestate.com.au, Property.com.au, 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.
How Home Improvements Affect Your Offer Price
Even when comparing exact model matches within a tract of homes, you should note whether the previous owners have made any substantial improvements. Cosmetic changes should be largely ignored, but major improvements should be taken into account.
Most important would be room additions, especially bedrooms and bathrooms.
Other items, like expensive floor tile or swimming pools should be taken into account, too, but should be discounted.
A pool that costs $20,000 to install does not normally add $20,000 in value to the home.
Rely on your agent to give you guidance in this area.
Buying a Home
Buying a home can be one of your most significant investments in life. Not only are you choosing your dream home, and the place in which you will bring up your family, you are most likely investing a large portion of your assets into this venture. The more prepared you are at the outset, the less overwhelming and chaotic the buying process will be. The goal of this page is to provide you with detailed information to assist you in making an intelligent and informed decision. Remember, if you have any questions about the process, I’m only a phone call or email away!
Termite or Pest Inspection
As part of your offer, you may require a termite or pest inspection. The pest company will inspects for termite damage and pest infestations or past termite damage this will be provided in a detailed report.
The company that performs these inspections is important to you as a buyer, because you want to be sure they do a good job.
You should determine which company you want to perform these inspections and make it a part of your offer. If you do not know which company to engage, your agent may be able to recommend some.
Other Financing Details in Your Offer
Your offer should also contain information on whether you are obtaining finance this clause has a time frame inserted which on an average is seven to twenty one days, Your mortgage broker or bank should give you an indication of the time frame required to ensure that your loan is approved.
Once you have received finance approval you need to inform your solicitor they will notify the sellers solicitor that this clause has been satisfied.
You need to ensure that your finance is approved prior to the finance clause date on your contract. If your finance approval is taking longer than first anticipated, and you will not have approval in accordance with the terms of the contract, you need to contact your solicitor and have them request an extension of time this could be only a couple of days or weeks.
Building and Pest Inspections
As part of your offer, you may require a building and pest inspection. The pest company will inspects for termite damage and pest infestations or past termite damage this will be provided in a detailed report.
The building report should be carried out by a registered building inspector. This company will inspect the dwelling to ensure the soundness of the structure and in addition inspects for dry rot and water damage, among other things, this will also be provided to you in a detailed report.
The company that performs these inspections is important to you as a buyer, because you want to be sure they do a good job.
You should determine which company you want to perform these inspections and make it a part of your offer. If you do not know which company to engage, your agent may be able to recommend some.
Freedom and Individualism
When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend thousand of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you.
Since your landlord wants to keep his expenses to a minimum, he or she will probably not be spending much to improve the place, either.
When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make, plus you get to live in an environment you have created, not some faceless landlord.
How a New Car Payment Reduces Your Purchase Price
Suppose you earn $5000 a month and you have a car payment of $400. At current interest rates (approximately 8% on a thirty-year fixed rate loan), you would qualify for approximately $55,000 less than if you did not have the car payment.
Even if you feel you can afford the car payment, mortgage companies approve your mortgage based on their guidelines, not yours. Do not get discouraged, however. You should still take the time to get pre-qualified by a lender.
However, if you have not already bought a car, remember one thing. Whenever the thought of buying a car enters your mind, think ahead. Think about buying a home first. Buying a home is a much more important purchase when considering your future financial well being.
Should You Try to Time the Market
One problem with attempting to time your purchase to the business cycle is that no one can accurately predict the future. Another challenge is that interest rates are generally higher during a depressed market and income may not be keeping up. For that reason, fewer people can qualify for a home purchase than in more prosperous times.
Why You Should Not Wait!
Plus, this strategy generally works best for first-time buyers. People who already have a home usually need to sell it in order to buy their next one. If a “move-up” buyer wants to buy a home during a depressed market, that means they usually have to sell one during the slow market, too. If a seller wants to sell his home to take advantage of a “hot” market when prices are fairly high, they generally have to buy their next home during that same hot market.
It Tends to Equal Out.
Comparable Sales – Pending Transactions
The most valuable information would be the most current, of course. A sale last week has more validity in helping you determine a purchase price than a sale from six months ago.
The problem is that there is no actual record of the sales price until the transaction is completed.
The information is not available in the public record because no deed has yet been recorded.
Neither is the information available in the Multiple Listing Service. Once a property is under contract, it becomes a “pending sale” and all pricing information is removed from the listing.
Prices are not posted until the property has settled.
This protects the seller in case the transaction falls apart and the property is placed back on the market.
It would give an unfair advantage to future potential buyers if they already knew what price the seller had been willing to accept in the past.
However, if a Realestate Agent has a reason to know a sale price, they can usually find out through professional courtesy. Also, some real estate brokerages post sales information on a transaction board in their office.
How Market Conditions Affect Your Offer Price
Hot market is a “seller’s market.” During a seller’s market, properties can sell within a few days of being listed and there are often multiple offers. Sometimes homes even sell above the asking price. Though most buyer’s want to get a “deal” on a home, reducing your offer by even a few thousand dollars could mean that someone else will get the home you desire.
A slow market is a “buyer’s market. During a buyer’s market properties may languish on the market for some time and offers may be few and far between. Prices may even decline temporarily. Such a market would allow you to be more flexible in offering a lower price for the home. Even if your offered price is too low, the seller is likely to make some sort of counter-offer and you can begin negotiations in earnest.
More often than not, the market is simply “steady,” or in transition. When a market is steady, no real rules apply on whether you should make an offer on the high end of your range or the low end. You could find yourself in a situation with multiple offers on your desired house, or where no one has made an offer in weeks.
Transition markets are more difficult to define. If the economy slows unexpectedly, as it did in the late nineties, people who buy on the high end of a seller’s market (like the late eighties) could find their home loses value for several years. So far, no one has proven reliable in predicting when markets change or how good or bad the real estate market will become.
Special Conditions in a Purchase Offer
In most purchase transactions there may be a slight challenge or two, but most things will go quite smoothly. However, you want to anticipate potential problems so that if something does go wrong, you can cancel the contract without penalty. These are called “special conditions” and you must be sure to include them when you offer to buy a home.For example,Some buyers often agree to purchase a home before selling their existing home. Therefore, you should ensure that a condition of your offer be subject to the sale of your property giving yourself sufficient time to obtain a unconditional contract on your property and additional time for settlement.
In some instances the sellers may not be too negotiable on their price and may insist on a 72 hour clause to allow the seller to continue to offer the property for sale.Some buyers often agree to purchase a home having a contract on their property. Even if the home is already sold, it probably is not unconditional and has not settled. Therefore, you should ensure that a condition of your offer be subject to the satisfactorily settlement and completion of the sale of your property.Since you probably need a mortgage to buy the home, a condition of your offer should be that you successfully obtain suitable finance. If you do not include this as a contingency, you may find yourself making two mortgage payments instead of one.Another condition should be Building and Pest inspections this is to ensure that the property you are intending to make an offer on is structurally sound and is good condition and that there are no live white ants in the building.
There may be other standard conditions you should include in your offer. Basically, special conditions protect you and your earnest money in case there may be problems with the property.
Condition of the Property
The last thing you want when you assume possession of your new home is to find it in a total mess. Therefore, you should make it clear in your offer that certain minimum standards are required. If you do not, you might find out the seller or neighbors have begun using the back yard as a trash dump, or something worse and you would not be able to do anything about it.
Some of the requirements you might want to include in your offer are that the the appliances work, the plumbing does not leak, that there are no broken or cracked windows, the yard has been kept up, and any debris has been cleared away.
Transfer of Possession
A transaction is considered “closed” once the deeds have been recorded. Then you own the home. However, it is not always possible for you to occupy it immediately. This can happen for several reasons, but the most common is that the seller may be purchasing a home, too. Usually, it is scheduled to close simultaneously with your purchase of their home.
It is sort of like being at a red light when it turns green. Although all the cars see the light change at the same time, the guy at the back of the line doesn’t begin moving until all the cars ahead of him have started.
As a result, your agent will release the keys to your new home once they have been advised by fax from both solicitors involved in the transaction, this can take up to several hours.
More Space
Both indoors and outdoors, you will probably have more space if you own your own home. Even moving to a condominium from an apartment, you are likely to find you have much more room available – your own laundry and storage area, and bigger rooms. Apartment complexes are more interested in creating the maximum number of income-producing units than they are in creating space for each of the tenants.
If you are moving to a home for the first time, you are going to be very pleased with all the new space you have available. You may have to even buy more “stuff.”
Other Factors Influencing Your Offer Price
Gathering and analyzing information from comparable sales helps to establish the range of prices you should consider when making an offer to buy a home. More weight should be given to the most recent sales, but even so, you need to do a bit more analysis before setting upon the price you will offer. That is because you also need to consider the condition of the property, improvements, the current market, and the circumstances behind the seller’s decision to sell.
How Seller Motivation Affects Your Offer Price
Truthfully, it is rather rare that a seller’s motivation will dramatically affect the price of a home, but it is often possible to save a few thousand dollars. The most common “motivated seller” is someone who has already bought his or her next home or is relocating to a new area. They will be under pressure to sell the home quickly or face the prospect of making two mortgage payments at the same time. Since that can drain a bank account quickly, most sellers want to avoid such a situation and may be willing to give up a few thousand dollars to avoid the possibility.
There are also family crises that can motivate a seller to make a quick deal. However, when you see a real estate ad that mentions “divorce,” “motivated seller,” “relocation,” or something to that affect, beware. Although the facts may be true, that does not necessarily mean the seller is motivated to make a quick and costly sale. Most likely, the add is more designed to generate phone calls and leads rather than sell the home.
However, there are times when a seller is truly distressed, willing to make a quick sale and sacrifice thousands of dollars. With the seller’s permission, the listing agent will use this information in their marketing programe. Provided this information has been made generally available to agents, your agent should know when a seller is truly motivated and when it is just designed to illicit interest in a property.
The exception is when an agent is selling a home they have listed themselves or selling a home that was listed by another agent from their own company. In such a situation, the agent may be acting as an agent for the seller, or as a “dual agent,” representing both you and the seller. In such a situation, they cannot legally provide you with information that would give you an advantage over the seller.
Deposit Money
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 deposit to be large enough to show the seller you are serious, the amount of deposit can only be a maximum amount of 10 percent of purchase price.
As with practically everything in real estate, there are exceptions to this rule, too. During a hot market there may be multiple offers on the property that interests you. A large deposit may impress a seller enough so they will accept your offer instead of someone else’s, even when your unknown competitor is offering the same price or slightly higher.
Since large deposits do impress sellers, you may also find that by making a large deposit you can convince the seller to accept a lower offer. More money up front may save you money later.
There are also times when closing can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
Inspections You Should Require
Besides appraisal and the termite inspection, you should also have a professional go through the house and seek out potential problems. Of course, you will have inspected the home, but you are not used to looking at some things that a professional will find. Even if they are not things the seller is expected to repair, at least you will have foreknowledge of any potential problems.
The building report should be carried out by a registered building inspector. This company will inspect the dwelling to ensure the soundness of the structure and in addition inspects for dry rot and water damage, among other things, this will also be provided to you in a detailed report.
The seller will want this inspection performed quickly, so that you can approve the results and move forward with the purchase. Once you receive the inspection, you will want to allow yourself sufficient time to review and approve the report. If you do not approve the report, you may negotiate with the sellers on which repairs should be performed and who should pay for those repairs. Otherwise, you could cancel the purchase, provided you have included timetables in your offer.
Settlement
For example, you are going to need an solicitor or settlement company to act as an “independent third party” between you and the seller. Without having a third party involved, how do you know that when you fork over the money, you are going to get the deed? This is the type of service provided by solicitors and conveyancing companies. They will hold your deposit and coordinate much of the activity that goes on during the contract period.
Since this third party is very important to both you and the seller and both of you will pay fee for this service, it is important to decide on which service to use. Therefore, your choice should be part of the offer. Since you do not buy a home every other week or so, you are probably unfamiliar with companies that provide this service. Your agent will make a recommendation. You have the authority to accept this recommendation and include it in your offer, or make your own choice. Even so, everything in real estate is negotiable
The Final Decision on Your Offer Price
Comparable sales information helps you to determine a base price range for a particular home. Adding in the various factors like property condition, improvements, market conditions, and seller motivation help determine whether a “fair” price would be at the upper limit of that range or the lower limit. Perhaps you will feel a fair price is outside of that price range.
The “fair” price should be approximately what you are willing to agree on at the end of negotiations with the seller. The price you put in your offer to begin negotiations is totally up to you and depends on your negotiating style. Most buyers start off somewhat lower than the price they eventually want to pay.
Although your agent may provide advice and guidance, you are the one who makes the decision. The price you put in the offer is totally up to you.
The Settlement Date
It is absolutely essential that you include a settlement date as part of your offer. This way both you and the seller can make plans for moving, and the seller can make plans for buying his or her next home. Though most transactions actually do settle on the right date, do not be so inflexible that a delay creates insurmountable problems.
For example, if you are renting and need to give the landlord notice that you are moving out, you may want to allow a little flexibility. Otherwise, if your purchase closes a few days late you could find yourself staying in a motel with your belongings packed in a moving van somewhere while you pay storage costs.
There are also times when settlement can be delayed by weeks, through no fault of your own. Have back-up plans prepared for such a contingency.
Final Walk Through Inspection
Before settlement, you will want to revisit the property to ensure it is in the condition you have required in your offer, and to inspect that any required repairs have been performed. You should do this no sooner than five days before you intend to settele. Make sure this right to do a final inspection is included in your offer to purchase the home.
