So, You Want to Buy a House? Here Are the 10 Must Do's
Most people (including first-time homebuyers) know real estate makes a good investment, but few take maximum advantage of its full financial potential.
My intention is to arm you with all the information, tools, and tricks you will ever need when buying a house or condo and make you a ninja homebuyer by the end of this article - sort of a one-stop to become a very savvy homebuyer.
Please read the entire article to make sure you have a good command on all aspects of buying a property.
What You Will Learn In This Post
- 1. How to Pick the Right House
- 2. Housing Affordability
- 3. Property Inspection and History
- 4. Condo vs. House: Which one should you buy?
- 5. Top Real Estate Search Engines
- 6. Finding a Top Real Estate Agent
- 7. Making the Offer
- 8. Getting the Right Financing for You
- 9. Understand the Meaning Behind the Numbers
- 10. Buying a Home vs. Renting
The process and tools available for buying real estate might seem a little bit counterintuitive at first, but you maximize your results and get a much better home for the same money if you know how to use them wisely.
Usually, people sign up online with a typical online broker service, drive familiar neighborhoods in search of an ideal property, and talk to friends and family for potential real estate deals they might come across. Then they start putting offers before exploring deeper into all available options. Sound familiar?
Take this example: two couples are looking to buy a piece of real estate. Couple A starts by educating themselves on the current market conditions, financing options, property availability and inventory, and so on. On the other hand, couple B is eager to start looking at houses, so they do basic research, but nothing deep enough. It takes couple A three months to buy their house, and it takes couple B just one month. I can guarantee you that 9 times out of 10, couple A would get a much better house for less money.
Making the best real estate purchase is simply a matter of looking deeper into each aspect of the buying process for properties that are already out there but might not necessarily come up on the first result of a Google search.
Think about it: if you Google the phrase “single-family home for sale near Anytown, US” (a very broad search), what are the chances you’re going to end up with your ideal home at the best price? But if you first take the time to understand the meaning behind the current market numbers for single-family versus multi-family, financing options, affordability, price trends, and so on, you would know exactly what is available, and you’re probably more likely to end up with your ideal property at budget or below.
Obviously, you’re going to draw fewer listings when you’re more exclusive about the properties you consider, but the listings you do draw will be much better: bigger and better homes that have more value, are more affordable, and are much closer to your dream house.
1. How to Pick the Right House
The two most important things when searching for a house are 1) your wish list and 2) a comparison chart.
First things first, how good is it to get a great real estate deal when you don’t like anything about the house? It is true you want to be moneywise, but it has to be aligned with your needs and wants, otherwise it isn’t worth it.
Buyer's remorse is a terrible feeling. That's the reason why I want you to create your ideal home wish list first.
Then you can create the comparison chart, which is a spreadsheet you will use to enter all potential properties. It is a crucial tool to help you visualize the best deal without any emotional attachments.
Don't worry, I will provide you the tools and templates to create both your wish list and your comparison chart; I will also walk you through the entire process for each one.
Creating Your Home Search Wish List
The first thing is to start daydreaming about everything you would like in a house or condo; I recommend you go through this exercise when you are the most relaxed, perhaps after a nice hot bath, over a nice glass of wine, or cup of coffee (tea works too if you are into that, but I am more a coffee guy).
The point is to go wild with your thoughts - the sky's the limit. You might not get all the things in your list, but I can guarantee you, it will help you pick the house that gets closest to it.
Additionally, you may want to glance through some of the home and garden magazines for ideas. This will also help you visualize the rooms of prospect houses (basically, am I going to be able to make this room look like the one in the magazine?)
Below are some magazines you can use for ideas:
I have created a wish list tool to help you identify some important property features when looking at properties. Use the tool below to help you complete your list, and make sure you print your wish list before looking at any properties. Always bring your wish list when looking at potential properties.
Creating Your Comparison Chart
Now that you have your wish list, it is time to start creating a list of potential properties. I will be walking you through the process of searching prospect properties and creating a comparison chart in order to identify the best deals.
Keep in mind that this is strictly an exercise of finding the most financially attractive property, designed to look at the list of properties without any emotional attachment. This is a very important step in choosing the best property.
The end goal is to identify a shortlist of properties you will schedule a time to walk through.
The process is as follows:
I have created a spreadsheet template you can use to input each property you search. This will be your comparison chart. Information such as price, square feet, the number of bathrooms, and so on will be entered for each property.
The spreadsheet was designed to easily visualize and compare the different properties. This will allow you to select a shortlist with the most financially attractive properties you can go visit. This process will also save you a lot of time by only scheduling walkthroughs for the best properties.
So let’s get started…
Download the comparison chart spreadsheet and save it on your computer:
Open the spreadsheet, which will look as follows:
You will need to enter both financial and feature-related information. Financial information such as price, square feet, and the number of bedrooms is easy to compare. For example, the lower the price, the better, etc. However, feature-related information is more subjective and depends on your taste and what you are looking for, such as floor type (wood, tile, or carpet).
The fact that you have all properties listed side by side will allow you to visually spot check the properties that interest you the most. This way you can create your own shortlist and schedule a walk-through for each one.
Below is an explanation of the most important fields in the spreadsheet:
Comparison Spreadsheet Categories
Financing: Asking price, SqFt, Price / SqFt, Est Insurance (yearly), HOA Fees (yearly), Est Monthly Law Service, Total Est Monthly Pmt.
Housing Features: Days on Market, Lot Size, # of Rooms, # of Bedrooms, # of Bathrooms and so on.
Neighborhood Features: HOA, Surrounding Homes, Industrial Area Nearby, Traffic, Community Pool/Park, Gated and so on.
Proximity: Workplace, Family, Grocery Store, Church, School, Bus Stop, Child Care, Parks, Public Transportation, Entertainment, Expressways and so on.
Schools: School District, Reputation, School Size, Class Size, Achievements, Dress Code, Tuition and so on.
I once went to a real estate investment seminar by Dolf de Roos, who is a very famous real estate investor. The most important thing I learned was to look at one hundred properties before deciding on one. It was also explained that this is not to be taken literally - the point is to exhaust every effort searching as many properties as possible.
I have a variant of the same concept for you to apply in your house search endeavor: enter at least 30 properties to the spreadsheet before comparing them. There are two reasons for this rule: 1) unless you have enough data, you won’t be able to identify patterns and trends, and 2) the best deals are not always in the most obvious places.
Believe me, due diligence pays off in this process.
Now it’s time to search for properties we can add to our spreadsheet…
Here is a video to show you how to search properties in your area using Zillow.com.
Also, pay attention to the following things when searching and looking at potential properties:
1. Renovation/Repairs Required - Determine if the house you like needs improvements. It is okay to buy a property that needs some work as long as it meets your other criteria such as price, location, features, and so on.
Categorize the repairs or renovations as major or minor, then assess whether you can do the repairs yourself or a contractor is required. Even if you feel you can do the upgrades yourself, allocate a monetary value to your own time.
2. Size and Storage - Measure your largest furniture, and bring a tape measure when doing a walk-through. Take a close look at the storage space, and account for future expansions, such as new kids or aging in-laws or parents who might need to stay with you in the future, either temporarily or permanently.
3. The Neighborhood - Many people only look at the quality of the neighborhood, but it is equally important to make sure it has a close proximity to things that fit your lifestyle. For example, you will want to be close to a gym if you are into fitness, good schools if you have kids, or simple things like trendy coffee shops and restaurants.
2. Housing Affordability
There are two main questions you should be asking yourself about housing affordability:
How much house can I afford?
It is quite important to calculate and determine the level of affordability yourself; relying on real estate agents or mortgage brokers is not recommended. Think about it, once the house is sold, the realtor doesn’t have any liability since she/he already made her/his money. If you can’t afford the payments, that’s your problem. Too often, realtors will tell you what you want to hear.
The same goes with mortgage brokers and banks. You would think banks do care whether you can afford the payments on your mortgage or not; however, many banks sell your mortgage to other financial institutions within a month of closing. Although banks will generally be more honest about your housing affordability, you still need to be cautious. Remember the old saying, “Trust but verify.”
Look, the worst thing that can happen is that your affordability numbers match those of the realtor and bank, but at least you will have peace of mind that you can trust their numbers. There will be many numbers you won’t be able to thoroughly verify during closing, but affordability shouldn’t be one of them.
Which one is more affordable, renting or buying?
Many factors affect the answer to this question, including your own personal goals and financial situation, the location/region of interest, the economy, and so on. The answer to this question today might be totally different a year from now.
Timing matters when it comes to making a decision about housing. Generally speaking, buying a house is a good long-term investment, but the time when you buy it makes a big difference. Take for instance 2007 before the housing crash of 2008; if you would have bought a house then, you would still be owing more on your house than it is worth.
It might be that it is better to rent and wait a few years before buying. That’s why it is important to compare rent prices over home prices and identify current trends for each one. I an entire section about “Buying versus Renting” later in this article.
Below, you can see an overview of how the housing market is trending in 2017 in certain areas of the country.
How much house can I afford?
Answering this question honestly can save you many headaches in the future. One of the main factors of the housing crash in 2008 was that too many people bought real estate they couldn’t afford. This was based on the notion that housing prices would rise indefinitely and you could take the excess equity out of the property as profits.
Amazingly, that was true at the time, as the value of a house would increase two months after closing. We all know now that the reason for the rapid increase in home prices wasn’t based on the true value of the property, but rather based on speculation (bubble).
To avoid repeating the same mistakes again, make sure you can afford your real estate property on day one. Don’t rely on future property pricing or upcoming promotions and raises; you should do the opposite and always buy below market value to have some leverage should home prices decline.
Use the calculator below to identify how much house you can afford…
Here’s a rule of thumb I use: calculate how much house you can afford and then buy 10% below that. You might be thinking that you would have to lower your standards on the house you get, but you don’t have to do this at all.
The trick is to buy below market value. Let’s say you calculate that you can afford houses priced at $300,000 or below. Then you decide to pay no more than $270,000 (10% less than what you can afford) to account for unexpected declining home prices. This doesn’t mean you have to get a house with a market value of $270,000. What you have to do is buy a house with a market value of $300,000 that is selling for $270,000.
You might be thinking, who in their right mind would sell a $300,000 house for $270,000? You would be amazed, there are so many reasons this happens every day. Below are some of the most common reasons this happens:
- The person’s been in the house for a long time and doesn’t know the current market value of the property.
- The person wants to sell quickly because they might have relocated, already have a house elsewhere, and can’t afford to be paying two mortgages.
- The person is getting a divorce and just wants to sell and get started with their new life.
- The house might need some minor repairs, and the person doesn’t want to spend the money fixing them.
- You can always negotiate the price. Most people neglect this.
I could go on and on about reasons why this happens every day. As a matter of fact, most houses don’t sell at market value - they either sell above or below it.
Take for example the following hypothetical case, 5 different people who bought houses in 2017 around the same area:
It is surprising how many people don’t negotiate home prices. Unlike other things we buy, it is okay to make an offer below the asking price when buying a house. The likelihood of your offer getting accepted depends on the conditions of the market.
For example, apartments in certain locations in New York City are hard to come by, so the demand and competition for those properties can be very high when they become available. I remember in 2006 having to enter a lottery to be able to put an offer on houses in Orlando, FL.
Those competitive conditions inevitably make getting offers below market value accepted more difficult, but it is still worth the try.
I learned a very valuable technique while attending a real estate seminar by Robert Kiyosaki (an authority in real estate). It goes like this - attach a thousand dollar check with your offer, indicating that the check can be cashed right away if your offer is accepted. The thousand dollars goes towards the purchase price if the check is cashed.
You would be amazed how big an incentive this is, plus it works like a charm. Now, beware that there might be a chance more than one of your offers can get accepted, so pace yourself about doing this from offer to offer. But it is something you might want to consider to increase your odds of getting your below-asking-price offer accepted.
3. Property Inspection and History
This is where things start to be fun. Once you have identified your top three properties of interest, it is indispensable to make sure the house and ground are healthy and free of unpleasant surprises.
This is a crucial part of the home-buying process. Failing to do so can cost you thousands of dollars, turn your home-buying endeavor into a nightmare, and even ruin the relationship with your partner.
So if you are thinking about skipping the home inspection and property history checks to avoid spending a few dollars, STOP! Believe me, it isn’t worth the risk.
A happy and healthy family is worth more than a few hundred dollars…
Property Inspections - When & How
At this point, you might be wondering whether you need to have all the houses you like professionally inspected before making an offer. After all, this can get very pricey if you multiply it by three or four. Below is the average home inspection cost in 2017:
Luckily, you don’t have to inspect all the houses on your short list. Only have a house professionally inspected and run a property history report after you have made an offer on the house.
It is very important you include a "home inspection clause" when you make an offer on a house. Basically, this tells the existing owner the offer is good so long as the house passes a professional inspection and the property history report doesn’t reveal anything bad that has not been yet disclosed.
Your real estate agent (if you are using one) should advise you to always include a "home inspection clause", but if he/she doesn't bring it up, make sure you do. And DO NOT MAKE AN OFFER without a "home inspection clause".
Below is a sample "home inspection clause":
HOME INSPECTION CLAUSE
Purchaser has 10 working days to complete the inspection and 7 calendar days thereafter to provide Seller with a list of items to be repaired or replaced. Seller shall have 3 calendar days to respond to Purchaser’s list of repairs. If Seller of agent requires a copy of the home inspection report, a copy will be available only if Seller tenders payment of not less than sum of the inspector’s total fee. Should Seller and Purchaser fail to reach an agreement on repairs/replacements to be made, the contract becomes void. Earnest money and accumulated interest will be returned to Purchaser within 48 hours upon written notification to Seller or his/her agent that contract has been terminated by Purchaser.
(Gather signatures of seller and buyer)
So now you are ready to hire a home inspector. What next?
The next step is to make sure you do proper vetting on home inspectors. After all, you are putting your health and financial well-being in the hands of this person.
Here is a list of the top five things to look for in a home inspector:
- How many years of experience do you have?
- Can you provide a sample report?
- How long will it take you to complete the inspection? (The longer the better)
- Can I have some references of people who have used your service?
So where do you go to find home inspectors?
There are many home service websites you can consult to find home inspectors, but the American Society of Home Inspectors is still the best place to find a good one. After all, they are the authority for home inspections.
Go to the following URL to search for a home inspector in your area:
Scroll down to the middle of the page and enter your zip code, search radius, and specialty (home type). Below is an image of how the page looks like:
Select a ASHI Certified Inspector…
As mentioned below you only hire a home inspector for the properties you have made offers, but you can always do pre-inspection yourself for all other properties of interest. Use the following form and you can inspect the properties yourself.
This is not a substitute for a professional inspection, but it can help you eliminate house that might otherwise look fine on the surface, it can also give you a lot of negotiating power for your offer.
Property History Report
Another very important part of home buying is to pull a property history report. This is different from the home inspection and will tell you what has happened to that house in the part. Fires, flood, liens and so on come up in these reports.
You only need a property history report for previously own homes, brand new homes don’t have any history. It is the equivalent of buying a new car as opposed to a previously owned car.
Note: You do want a home inspection for both new and previously owned homes. Builders and contractor can sometimes cut corners, which would come up in the home inspection report.
To get you property history report go to House Fax (There are other services that provide the same information):
As you start typing the address a list of addresses will come up. Pick yours…
You will get all the following with your report:
- 1. Property Details
- 2. Summary of Key Findings
- 3. Alerts for Your Inspector
- 4. Building Permits
- 5. Incident History
- 6. Natural Hazard Risk Check
- 7. Chemical Hazard Risk Check
- 8. Transaction History
- 9. Utility Information
- 10. School Information
4. Condo vs. House: Which one should you buy?
I have been using the word “house” loosely in this article to refer to any housing unit type, namely single-family homes, condos, multi-family, and so on. The concepts in this article apply to any of those types of housing units.
You would be shocked to learn how one housing unit type might work better for you over another once you start peeling the layers off the onion and start taking a deeper look at each one in your area.
Watch the following video by BankingRates to help you start to understand when buying a house over a condo makes sense and vice versa.
The option of a house over a condo is not always available depending on your area of interest. Take for instance New York City: chances are that if you want to live in Manhattan, a single-family detached home is not much of an option.
Although there are a few single-family homes in Inwood, it is usually not considered as much of an option. Therefore a condo is, for the most part, your only option in this area.
However, most locations in the country have both houses and condos available. Look around your area of interest to find out what’s available.
Most people base their decision to buy a house or a condo on the following 5 criteria:
The following infographic will give you a good overview of pros and cons of each of these items:
Buying condos has become very popular, especially with millennials. However, you should weigh the pros and cons of condos. There is no right or wrong decision - it depends on what you are looking for, as long as you make your decision with your eyes open.
I have put together the following short list of pros and cons of buying condos. Please read carefully, picture yourself already owning a condo, and determine if you can live with each item. Ultimately, all I want is for you to be happy with your decision.
The lower price tag associated with condos might give you an opportunity to own your own real estate, which you might not be able to do otherwise.
For instance, you might be saving up to buy a single-family home, but recent market conditions signal that real estate prices will go through roof in six months. Depending on how big the expected surge in real estate prices could be, you might want to buy a condo at the current lower real estate prices (assuming you have saved enough for a condo, but not enough for a house).
New single-family homes require much less maintenance since everything is new, so there are almost no repair costs for the first few years. Plus, the appliances and structure of the home are under warranty by the builder or manufacturer for about a year or so.
Use the following calculator to estimate your total appliance repair and maintenance cost depending on the age of the house:
If you are wondering how much you should budget for home repairs and maintenance, there are two good rules of thumb you can use:
The 1 Percent Rule
Allocate one percent of the home purchase price for ongoing maintenance and repair.
The Square Foot Rule
Allocate $1 per square foot per year for maintenance and repair costs.
City access also means parking space scarcity, so if you own a car, find out how much it will cost you to park your car monthly. For instance, it costs in average about $450 monthly for a parking garage in New York City.
Beware that not all condo units are owned - some units are rented. Generally, condo owners make better neighbors than renters since they have a long-term vested interest. Therefore, before you buy a condo, find out the percentage of units that are renter occupied as opposed to owner occupied.
That is not always the case with condos, where many times you could end up losing money. It is even more difficult to sell if other condo owners are also selling, mainly because there is nothing differentiating one unit from the other. It can quickly turn into a price war to the bottom.
Additionally, renting a condo depends on the condo association restrictions as indicated in the bylaws.
Beware that single-family homes might also incur similar fees if they are located in subdivisions ruled by a homeowners association.
Additionally, condo associations can restrict activities you enjoy, such as barbecuing on the balcony or having company overnight. Sometimes you have to request permission for someone not already listed as an occupant to stay with you, even if it is just a guest you are expecting.
Although renovation restrictions are expected, there are other restrictions that might be less obvious, such as being unable to change your car battery in the parking lot or hang a holiday decoration on your front door.
Before you buy a condo, get a copy of the bylaws and decide if you can live with them. On the other hand, when buying a house, ask if they have bylaws and also get a copy and read it if they do.
Although these rules sound like a bad thing, they help keep the neighborhood respectable and prevent it from turning into a dump, which also helps maintain your property value.
Below are some stats about buying condos and houses that might help you in your decision. Remember, there is no right or wrong decision - the only thing that matters is your long term happiness, as long as you are well-informed.
5.Top Real Estate Search Engines
There is a great chance you will end up working with a realtor from one of the big companies, namely Century 21, RE/MAX, Coldwell, and others. You will also use these companies’ websites to search for properties for sale that match your specific requirements.
RE/MAX is by far the biggest real estate agency. Below is a chart of the 2016 market share for the biggest agencies:
RE/MAX executes the most real estate transactions nationwide (and even globally), but this might not be the case regionally. For example, in southwest Colorado, the biggest real estate agency currently is not RE/MAX, but Wells Fargo:
However, in terms of recognition, Century 21 is the most popular agency. What this means is that everyday people are more likely to know about Century 21 than the other agencies.
The question still remains: Which real estate agency should you use?
The truth of the matter is that there is no reason for you to limit yourself to one single agency; rather, let the opportunity drive the process. What this means is that you should start by searching properties that match your specifications and budget in all the major real estate agencies’ websites.
Remember that you and the ideal home are the only two important variables. The real estate agency you use to transact the purchase and the real estate agent you use are simply byproducts of the process.
Start by searching for your ideal home in the following websites (I will show you how to select the best real estate agent in the next item). Below is a summary of the major real estate agencies. Click on any of them to go to their website, where you will be able to start searching for homes that match your criteria.
This is the largest real estate agency. Part of the reason for its size is that it is a franchise, which should have no impact on you as a homebuyer since they have very strict guidelines for all their agents.
Century 21 was founded in 1971 and has about 6,900 independently owned and operated broker offices.
Keller Williams is the real estate agency with the most agents. They run a massive global operation with more than 150,000 associates worldwide.
Coldwell Banker has been around since 1906 and has around 3,000 offices in 43 different countries. This is a great agency to find homes and condos for sale.
Founded in 1972, ERA Real Estate has a major global focus, but they still deliver wonderful service domestically and regionally.
Founded in 1972, ERA Real Estate has a major global focus, but they still deliver wonderful service domestically and regionally.
Most people associate Better Homes and Gardens with the home decoration magazine, but they also provide real estate services. Their website is loaded with great real estate search tools, neighborhood information, and calculators.
Zillow.com is an online real estate company founded in 2006. They have taken the real estate market by storm and provide great home search capabilities, tons of data and metrics, as well as connections with real estate agents.
Trulia.com is also an online real estate company founded in 2006. It focuses on residential real estate, which is what this article is all about. They provide great search tools and real estate agent information.
Homes.com is a real estate portal owned by Dominion Enterprises. It was founded in 1973 and provides great search tools that allow you to customize your search easily.
6. Finding a Top Real Estate Agent
Hiring a real estate agent when buying a house is a smart move. After all, it doesn’t cost you anything since the seller is the one who pays the realtor’s commission. However, just like hiring the right lawyer can make the difference between winning a court case or not, hiring the right real estate agent is the same.
Finding the best real estate agent for your situation can be a daunting task, as the number of real estate agents is massive. For instance, in 2017 there are 97,900 active real estate brokers in California alone.
To complicate matters more, there are real estate agent referrals, who are not licensed real estate agents who engage and market themselves sometimes are real estate agents. They rely on a licensed real estate agent to execute the transaction for a share of the commission.
Some real estate agent referrals come from other realtors, but many times they come from people who don’t have a realtor license.
The following numbers will give you an idea of the number of real estate agent referrals:
Everyone wants to be a realtor nowadays. We all know of a friend or family member who is studying for their real estate agent license, despite the fact that they do something totally different for a living and they plan to continue doing so. Many people get their real estate agent license to do it on the side for additional income. Think about it, how good can someone be at something they have only been doing for a few years part-time?
Now that we understand the challenges of finding the top real estate agent, let’s see where to find agents and how to vet them to select the top candidates. I recommend you take the time to do this during your home buying process. It can save you a lot of money and make the remainder of the process much easier.
Finding real estate agents
All real estate agencies’ websites have a link that says “Find Agent.” This will give you a list of real estate agents in your area. Next, I will show you how to identify and pick the best agent.
Vetting Real Estate Agents
Now that you know where to find real estate agents (go to the real estate agencies' websites listed before in this article and click the “Find Agent” link), it is time to have a process to identify the best real estate agents.
Each state has different licensing requirements, so you have to go to your state website and do a license check on the realtor you are planning to hire. All states have a way for you to easily check for realtor licenses.
I have created a small tool to help you get to the website to check for an agent license for your state. I have also spent the time to check for actual licenses on each state’s website to provide you with specific instructions on how to do it.
Below is that tool. Just select your state, and the link to the state’s website page where you can check for an agent’s license will be provided along with instructions:
Just think about your own working day. Would you have enough time to do a good job part-time at something after waking up, going to the gym, getting the kids ready for school, going to work full-time, picking up the kids, taking the kids to practice, getting dinner ready, and doing the dishes? I don’t think so. That’s exactly what part-time real estate agents try to do.
So ask the simple question out front: do you work full-time in real estate?
If the answer is no, move on to the next one.
Does the seller pay your commission?
How much do you know about the area?
Where can I see your current listings?
Will you only show me houses you are trying to sell for other clients?
Ask his past clients about his integrity, availability, doing a good job meeting requirements, and so on.
Ask his past clients about his integrity, availability, doing a good job meeting requirements, and so on.
You can go to https://www.instantcheckmate.com and run a background check easily:
The following video by Howdini is really good to further understand how to vet your real estate agent. The information in this video applies both if you are buying or selling, but it is really valuable.
Although hiring a real estate agent is a smart move, you shouldn’t limit yourself to their listings. Otherwise, you might miss on great deals. Expand your home search by looking at other listings yourself, talking to friends and family, and signing up to home alerts from services like Trulia or Zillow.
Below are the statistics from the 2016 National Association of REALTORS® Profile of Home Buyers and Sellers Analysis Report:
Source: National Association of REALTORS®
7. Making the Offer
Once you find your ideal house, you need to make an offer on it. Doing this correctly can make the difference between getting a great deal or not, or getting the house or not. There are some negotiating tricks you need to know to increase your chances. I will walk you through these step by step to make you a savvy homebuyer.
The current housing market in your area will determine how you draft your offer letter. For instance, if you are in a seller’s market (high demand for housing - more buyers than sellers), then you need to go for an emotional pitch. Basically, you need to convince the seller you are the right person for their home. Money alone won’t do it since there are ten other people throwing money at them. Plus, even in a seller’s market, you want to make sure you can get the house below market value - only the emotional pitch can accomplish this.
The best example of this can be found in the movie “5 Flights Up” by Diane Keaton and Morgan Freeman, who are trying to sell their apartment and buy a new one. It is a great movie, and I highly recommend it - okay, maybe I am biased because I love Diane Keaton and Morgan Freeman. But the movie really demonstrates the emotional pitch in a seller’s market.
Below are key points to keep in mind when writing your offer letter in a seller’s market:
If the market is a buyer’s market (there are more sellers than buyers) then you don’t have to do much convincing. In these market conditions, you have the upper hand, so you should try to get the house way below market value. Simply demonstrate that you are ready to buy - attaching a $1,000 check to the offer letter goes a long way. You let the seller know they can cash the check right away if your offer is accepted. This trick works wonders; as they say, cash is king.
Sample Offer Letter:
Lastly, here is a great video about making an offer. The video is from Khan Academy and covers key points to consider when making an offer:
8. Getting the Right Financing for You
So you found your ideal house, you made an offer, and it was accepted - now what? It is time to get a loan (mortgage). Most people get a mortgage to buy their house. Even if you are very wealthy, there are tax benefits to having a mortgage as opposed to paying cash. Plus, it is better not to tie up that large of an amount of money in a single investment.
When should you get a mortgage, before or after making an offer?
You can only get a mortgage after you have made the offer and it has been accepted, but you can get pre-approved or pre-qualified for a mortgage beforehand. It is not necessary to get pre-approved or pre-qualified in order to get a mortgage at all; actually, most people never do.
However, getting pre-approved gives you a little bargaining advantage, plus you avoid unpleasant surprises such as putting offers on houses you can’t afford. Even if you think you can afford a house, the banks might think otherwise.
So if you can get pre-approved, please do, but it is not required.
Also, understand that getting pre-approved and getting pre-qualified are not the same.
Many people confuse the two. In a nutshell, when you get pre-approved, the bank is guaranteeing you a mortgage, as opposed to getting pre-qualified, which is a non-binding document the bank provides saying that given your income and debt level, they don’t see why you couldn’t get a mortgage.
Below are the main differences between getting pre-approved versus pre-qualified.
Before we dive into the details of applying for a mortgage, let’s go over the key things everyone should know about mortgages. Understanding these concepts can help you avoid very unpleasant surprises down the road.
Types of Loans
The most common types of loans are:
VA loans are mortgages for veterans guaranteed by the U.S. Department of Veterans Affairs (VA). The U.S. Department of Veterans Affairs (VA) does not issue loans; what they do is guarantee mortgages made to you by qualified lenders.
These are the best loans because banks require very little from you. You might be able to get a loan with a bad credit score, and sometimes they don’t even require a down payment.
Think about it: banks require you to have a good credit score, put down a down payment, and have a steady income to ensure you will pay them back. But with VA loans, the government is telling the bank, "Look, I will make myself responsive to pay you back if this person defaults on his/her loan." Of course, the banks are going to say, "SWEET!"
So if you or your spouse is a veteran, check to see if you qualify for a VA loan before you talk to any bank.
FHA Loans are mortgages issued by the Federal Housing Administration (FHA), usually for first-time homebuyers. FHA loans require a bit of paperwork, but it is all worth it since you don’t need to have a high credit score (580+) and only require a very low down payment.
So if you are a first-time homebuyer, I highly recommend applying for a FHA loan. After the VA loans, FHA loans are the next best thing. They offer better terms than conventional loans.
Conventional Loans are mortgages issued by private banks and are not guaranteed by any government institution. Basically, you are on your own. Conventional loans require a higher down payment, credit score, and income over VA and FHA loans.
Despite their disadvantages, these are the most common type of loans used to buy houses. Look at the percentage of people who used conventional loans over FHA and VA loans in 2015:
Those numbers are very similar for 2017.
Also, conventional loans can be conforming loans or non-conforming loans. Conforming loans comply with the guidelines established by Fannie Mae or Freddie Mac, and non-conforming loans don’t.
I think you need to stick to conforming loans because they are designed to prevent you from defaulting on your loan in the future.
Fannie Mae or Freddie Mac set limits on the amount of money you can borrow based on your income level, credit score, and down payment. These limits are designed to prevent you from getting overextended financially and minimize the chances of defaulting on your loan.
Non-conforming loans follow guidelines set by the banks, and they are usually used for jumbo loans (large amount loans). They are riskier since they assume a level of debt that might be above what you can afford long-term (i.e. you can overextend yourself and make the monthly payments, but the minute an unexpected emergency expense comes up, you are in trouble).
So if you are trying to decide which loan type is better for you, that is quite simple to answer:
Note: I will show you how to apply for each loan type in the “Applying for a Mortgage” section later in this article, but before you start applying for a loan, I want you first to understand other important concepts about mortgages.
Interest Rate Types
The most common interest rate types are:
Fixed rate interest means you will be paying the same interest rate for the duration of the loan. If it is a 30-year mortgage, you will pay the same rate for the 30 years, with no surprises or unexpected rate hikes.
This means you have certain control of your future, and you can plan with certainty for the years ahead. We are lucky to have this type of mortgage interest rate; there are many countries where only variable rates are available.
Now, you might be thinking: if interest rates go down in the future, will I miss out on that opportunity and be stuck with a high interest rate? No, you can always refinance your mortgage for the lower interest rate.
See, fixed interest rate doesn’t mean stuck interest rate. The way I see things, a fixed rate is a variable rate that you control when to change (by refinancing).
Variable interest rate means your interest rate will go up or down based on the interest rate set by the Federal Reserve Bank. This means your monthly mortgage payment will fluctuate up or down.
Note: Variable rate is also called ARM (Adjustable Rate Mortgage)
This is not something necessarily bad since you will be paying less when interest rates are low, but the bad part is the unpredictability of your monthly payment. You could easily find yourself unable to afford your mortgage payments after years in your house.
There is also a type of variable rate called a hybrid variable rate, which means you pay a fixed interest for the first few years (let’s say five years), and after that, it turns into a variable rate.
There are legitimate cases when it makes sense to get a variable rate mortgage. An example is if interest rates are very low and are on the decline, and you plan to stay in the house for no more than five years.
Think about it: even if interest rates are projected to continue declining, they will not decline forever. Historically, recessions have happened about once every five years on average. After World War II, they became more spread out, and in the 1990s, we once went a full decade without a recession. Five years is a relatively safe benchmark when getting a variable rate mortgage when interest rates are on the decline. Basically, you want to get out before interest rates start climbing again.
Some people get into variable interest rate mortgages when rates are declining and then refinance to a fixed rate when they start going back up. You can do this as long as there are no prepayment penalty clauses on the mortgage - I will explain this later.
Personally, I think this is too risky since you need to get the timing just right. I’d rather get a fixed rate mortgage and have peace of mind, but that’s just me.
For most homebuyers who plan to stay in the house for a long time, a fixed rate is the less risky choice.
Beware, many banks will try to get you into a variable rate mortgage. Don’t let them push you into something you don’t want.
Below are three reasons why I recommend avoiding variable rate mortgages:
If you are struggling to decide which interest rate type to get, then you can use the following chart as a guide for your decision:
Note: This chart is just a suggestion. Ultimately, the decision is yours whether to get a fixed-rate or variable rate mortgage.
The two most common mortgage loan term types are:
30-year mortgages are structured to pay your mortgage in 30 years. The greatest benefit of 30-year mortgages is that you have lower monthly payments mainly because your payments are spread out across 30 years.
The drawback of 30-year mortgages is that they typically carry the highest interest rate over 15-year mortgages, and it takes you longer to build equity.
30-year mortgages are the most common ones. Most people carry 30-year mortgages on their houses.
15-year mortgages are designed for people that want to pay off their house in 15 years. There are many reasons someone might want to do this. For instance, a 52-year-old person might want to get a 15-year mortgage to pay it off by retirement age.
The benefit of a 15-year mortgage is that they carry a lower interest rate as compared to 30-year mortgages. You also build equity faster and pay off your house in half the time.
The bad part of 15-year mortgages is their higher monthly payments, which can create a real financial constraint on the borrower. Additionally, the bank will have higher income requirement for approval.
The great benefit of 15-year mortgages is that they carry a lower interest rate.
Note: For both 30-year and 15-year terms, you will be paying mostly interest for the first few years of the loan. As the years pass, you will be paying less interest and more principal gradually. Towards the end of the loan term, you will be paying mostly principal.
IMPORTANT! You pay more in interest for a 30-year mortgage than a 15-year old mortgage.
For instance, if you take a 30-year mortgage for $200,000 and you pay $956 monthly for 30 years, by the end of the 30 years you would have paid a whopping total of $344,160 in interest.
However, if you take a 15-year mortgage for the same $200,000 and now have a monthly payment of $1,420 (15-year have higher monthly payments), by the end of 15 years, you would have paid only $55,600 in interest.
That's 61% less than the 30-year mortgage.
What I am trying to tell you is choose wisely.
There is a trick many people don’t know about. It consists of getting a 30-year mortgage and paying it in 15 years. You just pay more each month, but make sure you clearly specify to apply the overpayment towards principal, otherwise the bank will apply your overpayment towards interest (ouch!).
The benefit of paying a 30-year mortgage in 15 years is due to the way the interest payment is structured for the duration of the loan term (you pay more interest at the beginning and more principal at the end).
Another benefit is that the additional payment is totally up to you. The bank doesn’t require you to make that additional payment, so if you can’t make the additional payment, there is no problem, as opposed to being locked into a 15-year mortgage with a required high monthly payment. Basically, you get the benefit of paying less interest associated with 15-year mortgages, but you are in control of the additional monthly payment.
Paying a 30-year mortgage in 15 years is not for everyone; this is only for people who have the extra money. For most people, paying a 30-year mortgage in 30 years is just fine.
Some mortgages might have a prepayment penalty clause, which means you need to pay a penalty to the bank if you pay off your mortgage before the end of the term.
Let's say you get a 30-year mortgage for a house, and 10 years into the loan you win the lottery and want to pay off your house completely to own it outright. If your mortgage has a prepayment penalty clause, you will have to pay a penalty to the bank in order for you to pay off your mortgage.
Banks do this because they want you to continue making interest payments for the duration of the loan since that’s how they make money. If you pay off your mortgage early, they don’t make any more money from you.
So make sure you ask your lender whether your mortgage has a prepayment penalty or not.
The down payment is money you need to come up with up front to get a mortgage. It is a percentage of the home price. A typical down payment today is 20% of the purchase price, but there are times when the bank may ask you to put down 25% or 30%. Other times, you can put down less such as 10% or 15%, but the norm these days is 20%.
The rest of the money comes from the mortgage. For example, if you are buying a $200,000 house, then you need to come up with $40,000 for the down payment (20% of $200,000 = $40,000). This means your mortgage will be for $160,000.
You should try to put no less than 20% for your down payment. Otherwise, you will need to buy private mortgage insurance (PMI). This is an insurance required by banks if you put down less than 20% on your down payment.
Take a look at the following example. Kerry buys a bigger house than Finley, yet they both have the same monthly mortgage payment because Finley has to pay private mortgage insurance:
The private mortgage insurance does absolutely nothing for you - this is simply another layer of protection for the bank. Must insurances (car, property, health, life insurance) provide a benefit and protection to you or your family in case of emergencies; that’s not the case with private mortgage insurance, where there is no benefit to you ever. Basically, this is money you would be wasting. The good news is that you don’t have to get private mortgage insurance if you put down 20% or more for your down payment.
So why do banks require a down payment? Banks believe that if you have to come up with some money on your own, then you will be less likely to default on your mortgage. I admit it, it makes sense.
Think about it: if you put down $40,000 on a house (the down payment), no matter how tough things get, you won’t want to walk away from your mortgage because that would mean losing your $40,000. But if you have nothing to lose (let’s say you put $0 down), then the decision to walk away becomes more appealing during testing times.
There is much more you need to know about down payments. What is really important to you is that you need to come up with some money for a down payment to buy your house.
In a nutshell, closing costs are expenses you need to pay the lender for administrative expenses they incur as a part of processing your mortgage. The most typical closing cost expenses are:
Please watch the following video to better understand closing costs:
On average, you pay around 2% of the purchase price on closing costs; however, your lender will provide you a Good Faith Estimate with all the expected expenses during closing. You won’t know the exact amount you will have to pay until the day of closing, but the Good Faith Estimate will give you a pretty good idea of how much it will be.
You will pay the closing costs the day of closing; this is another expense you need to pay out of pocket. Sometimes the lender will let you roll your closing costs into the mortgage amount, but be advised that if you do, you will be paying interest on the closing costs for the duration of the mortgage.
You can use the following closing cost calculator to get an idea of your closing costs. Be aware that this is just an estimate, and your lender will tell you the exact amount you will have to pay:
Your lender will require that you have homeowners insurance. Your lender and insurance company will take care of your loan for the closing, but it is your responsibility to get your homeowners insurance.
The process is quite simple:
The following video from State Farm does a great job explaining homeowners insurance; I recommend you watch it:
You will have to pay property taxes on your house. However, your bank will pay those taxes for you as part of your monthly mortgage payments.
The way it works is the banks puts money to cover both your homeowners insurance and property taxes. They put this money into a special account called an escrow account every month. Then when it is time to pay your homeowners insurance and property taxes, the bank takes it out of your escrow account, and they pay them on your behalf.
All you have to do is make your monthly mortgage payments. Part of the money of your monthly mortgage payment goes towards interest paid to the bank, part goes towards principal, and part goes to your escrow account.
Applying for a Mortgage
First of all, relax - the process of getting a mortgage is not as bad as it sounds. Many people don’t even consider owning a house because they think they won’t be able to get approved for a mortgage.
The truth is that the banks need and want your business, so if anyone should be throwing shade it’s you. Just start the mortgage application process and don’t think about anything else.
It used to be that you would need to put on a nice dress or a suit and tie, go to a bunch of banks, and make a great impression on the banker to get a mortgage. Nowadays, the entire process can be done reliably online.
You can use a local mortgage broker or use an online broker. I will cover applying for a mortgage using an online broker. Two of the most reputable online mortgage brokers are:
Keep in mind that neither Quicken Loans or LendingTree will give you a mortgage. They are mortgage brokers, which means they will connect you with the best lender (banks) for your specific needs.
I will walk you through the process of applying for a mortgage using https://www.lendingtree.com/. It is a multi-step process, but each step is very simple and is required to match you with the best lenders.
I will walk you through each step. Let’s start...
Step 3. Select your type of property.
Step 4. Select Primary Home.
Step 5. Enter your city and state.
Step 6. Select whether you already found the home or not.
Step 7. You probably have a real estate agent by now, so select Yes.
Step 8. Select your price range for your property.
Step 9. Select how much you plan to put down. Remember, it is recommended that you put down 20% or more.
Step 10. Select the option that falls within the range of your credit score.
Step 10. Enter the personal information you will be prompted for on the next screens.
Keep in mind that they will ask you for your social security number, which will be used to check your credit.
Then you will be prompted for some personal information to verify your identity, and you will get a list of lenders to choose from.
It is that simple these days.
9. Understand the Meaning Behind the Numbers
It is crucial you understand the core real estate metrics when buying a new house or condo. This is how you will be able to compare the true monetary value from one property to the next.
Failure to understand what these real estate metrics mean can cost you a fortune.
Below are some of the core real estate numbers you need to know before you buy...
You can arrive at the average price per square foot of a property by adding the price per square foot of properties that sold in a given area and dividing by the number of properties sold.
Price per square foot can vary based on property location, conditions, improvements, and upgrades, such as lot sizes and number of stories among others.
The main reason the price per square foot is important is to show property price trends. If you can compare the average price per square foot for the past 12 months, you can determine whether values are rising or falling.
The lower the price per square foot, the better. If your price per square foot exceeds the average price per square foot of similar properties in the area, you might be paying too much for the property.
Financial institutions and other lenders examine the loan-to-value ratio before approving a mortgage.
Typically, assessments with high LTV ratios are generally seen as higher risk. Therefore, if the mortgage is accepted, the loan will generally cost the borrower more, or the lending institution will require the borrower to purchase mortgage insurance.
The lower the LTV ratio, the better. Lenders usually want an LTV of 70% or lower, but check with the bank since the required ratio changes depending on the level of risk the bank is willing to take.
If you can convince the bank to use the higher of the appraised value or purchase price, that would be better for you, but it’s highly unlikely since the bank will almost always use the lesser of the two. You might want to argue that you have a good deal; it is worth giving it a try, and it does not hurt to ask.
Typically, a ratio of 28% is ideal from a lender's standpoint. They calculate this ratio by dividing the mortgage payment on a property by your monthly income.
Monthly mortgage payments usually include the mortgage principal, interest, taxes, and insurance payments.
A debt coverage ratio of 1.00 means you have exactly enough money to cover the mortgage, greater than 1.00 means you have enough money to cover the mortgage and some left, and less than 1.00 means you don't have enough money to pay the mortgage. Most banks like the property to have a debt coverage ratio of 1.00.
There are many other metrics available to homebuyers. Additionally, calculating each one manually is possible, but it is time-consuming and error-prone. Remember, you need to run each calculation for each prospect property you are considering. OUCH!
Just get RealBench, which is a phone app that calculates all the metrics for you automatically. The cool thing is that it tells you if the property is good or not with green and red signals…
Timing matters in the housing market. There are times when it makes sense to rent and wait and then buy. The next section will help you with that decision.
10. Buying a Home vs. Renting
Whether buying or renting a home is better depends on many factors and changes year to year. Currently in 2017, buying a home is more affordable than renting in 66% of American housing markets, according to ATTOM Data Solutions' "2017 Rental Affordability Report.”
While many people will think buying a home in 2017 over renting is a no-brainer due to the rapid rise of rent, you should also consider other factors that come into play when buying a home. These include using all your savings for a down payment or the lack of flexibility to move when you own a home.
Rent rises vary among regions
Rent is rising more quickly than home prices in 37% of the country, whereas home prices are rising more quickly in the remaining 63% of the country.
The following areas are experiencing a faster rise in home prices over rents:
At the same time, the following areas are seeing a faster rise in rents over home prices:
As you can see, making a blanket statement of whether buying is better than renting or vice versa is not wise. First, identify which way the trend is going in the region you want to buy, and then make the right decision for you.
How to find rent and home price trends in your area
Probably by now, you are wondering where you are going to find the data for your specific area to determine whether rents are rising more quickly than home prices or vice versa. No worries, I have already done the homework for you.
We will use Zillow’s data research tool, which is very reliable and freely available to anyone with an internet connection. Interpreting the data can be tricky, but the good news is that I will walk you through the entire process step by step. I will also explain to you in plain English what the numbers mean to you. Lastly, I will go over how to use the data to help you determine whether home prices or rent is rising more quickly in your area of interest.
Without further ado, let’s get started…
We will be using Zillow Rent Index (ZRI), which is an index to track the monthly median rent in particular geographical regions.
We will be using the "ZRI Time Series: Multifamily, SFR, Condo/Co-op ($)" data since it has rent prices for the last few years up to current rent levels. This is exactly what we need to identify the rent trends in our area of interest.
The data is available by different categories. I prefer the data arranged by zip code, but you can choose whatever categorization works best for you.
This will download the file with extension .csv, which can be opened using Excel. Since I downloaded the file arranged by zip code, my downloaded file name is as follows
Your downloaded file name might be different depending on the data category you selected.
Once you open the file with Excel, you can search for your area of interest. Since I downloaded the file organized by zip code, I will search for a zip code of interest as follows:
As you can see, the rent prices are available from 2011 to the present, which is more than enough data to find the rental price trend in the area.
Select the entire row of your area of interest and graph it using Excel. This will allow you to easily see the trend.
First, highlight the entire row for your area of interest. Don’t highlight the first 7 columns - we only want the columns that have rent prices. Highlight all columns from column 8 to the rightmost column with data. The rightmost column with data will be the most current rental price (the current month or previous).
a. Once you have selected your row, click the “Insert” tab on top.
b. Then click the line graph icon and then the Line graph.
The above is the rent prices trend for San Francisco zip code 94109. As you can see, rent prices have been on the rise in this area. Now we need to find the home prices trend and compare to see which one is rising more quickly.
The process is basically the same as finding the rent prices trend. However, you get the data from a different place in Zillow.
a. Click the "Home Value Data" link.
b. Click the "ZHVI All Homes (SFR, Condo/Co-op) Time Series ($)" link.
The rest is the same as the rent prices.
Compare the two. That will tell you whether home prices or rent prices are rising more quickly in your area of interest.
Pros & cons of buying versus renting
I really like comparing the benefits of renting versus buying in specific areas. I have seen many people starting off their home buying journey determined to buy a piece of real estate and end up renting. This is not because they couldn’t afford it, but because once they started looking deeper into the numbers, they realized it was the best financial decision for them at the time for that particular location.
I have also seen people who want to rent and end up buying. So take your time looking at the data and do some intelligent analysis before making any decisions.
If all you do is follow the instructions in this blog, you are off to a good start. Actually, following this blog might be all you need to do to make a wise decision.
Trust me, that's a huge plus when you get started and have little idea how to crunch all the numbers together in a way that makes sense to everyday people.
Here's a short list of the pros & cons of buying versus renting?:
Keep in mind, the most important decision factor is the current trend data for the particular area of interest. Compare whether home prices or rents are rising more quickly; if rent prices are rising more quickly than home prices, it means you might want to consider buying instead. But if the trend is reversed (home prices rising more quickly than rent prices), then it might be okay to rent. It is a matter of affordability.
In the event that buying seems more appealing than renting, you will still want to make sure the home prices trend in the area is going upwards. You never want to buy real estate in an area where prices are falling. You might end up "Upside Down," a term meaning you owe more on your mortgage than the house is worth.
If you got this far in the article (more like a book, really!), you should be well-armed with all the knowledge you need to be a savvy and well-informed homebuyer. Now it is time to put everything you have learned into action, and if you do so, I am sure you’ll be absolutely thrilled with your new house or condo.
Just one more thing: if you liked the article, please like us on social media and share this article with friends:
We are always creating amazing content like this one packed with great value for you about housing. We are currently working on our next article for home owners titled "The 8 most important things to do after buying a house", which we will published soon.
Please drop your email below, and we will notify you when new content is published. “I promise we will not share your email with anyone and will only use it to notify you of new content” - we hate spam with a passion.
Thank you! And the best of luck in your home buying pursuit. If you have any questions, just post them below, and I will answer them for you.
Whaaaat? You thought you were on your own from this point on? No, I am still here to help you.