Ricardo Fornesa, Jr. - THE HOME BUYER'S GUIDE

THE HOME BUYER'S GUIDE

Ricardo Fornesa, Jr.

Table Of Contents

How Real Estate Agents Help Home Buyers

Owning Vs. Renting

Buyers' Needs And Desires

Real Estate Horror Stories To Learn From 32

Searching For The Right Home

Buying A House: Negotiation Dos And Don'ts 48

What To Know About Home Inspections

Shopping For A Home Loan

Programs For Home Buyers

10. Deciding To Buy A House Brings Many

Challenges, Especially So For Those Unfamiliar With The Intricacies Of Real Estate Purchase, Transfer, And Financing. This Section Is A Brief, User-friendly Guide To Help You Find Your Way Through The Issues Of Insurance, Warranty, Appraisal, And Mortgage Statement On The Property. In This Section, We Also Present “10 Things To Know If You’re Closing A Home Deal For The First Time,” Which Offers Some Of The Best Tips To Follow In Order To Avoid Letting Things Get Out Of Hand. HOMEOWNER’S INSURANCE: MAKE SURE YOU’RE COVERED! Unless You’re Paying The Sale Price Of The Home In Cash, Your Lender Will Require The Purchase Of Homeowner’s Insurance Before Closing. After The Agreement To Purchase, But Before Closing And Title Has Transferred, It’s The Seller’s Obligation To Ensure Appropriate Insurance Coverage On The House And Property. Immediately On Closing The Sale And When Title Transfers, The Seller No Longer Has An Insurable Interest In The Property, Hence Seller’s Coverage Ceases. The New Owner Must Have Homeowner’s Insurance

Coverage In Place. In Most Cases, You’ll Be Asked To Provide Proof That You’ve Prepaid One Year’s Worth Of Coverage Before The Lender Will Set Closing. The Lender Holds A Lien On The Property Until The Mortgage Has Been Paid Off. To Safeguard Their Interest, Lenders Want Financial Protection In The Form Of A Home Insurance Policy To Pay For The Cost Of Rebuilding Your Home, Should Disaster Occur. A Standard Homeowner’s Insurance Policy Generally Protects Against: Fire And Lightning Damage From Hail And Windstorms Theft And Vandalism Smoke Damage Falling Objects, Like Tree Branches Damage From The Weight Of Ice, Snow, Or Sleet Frozen Plumbing, Heating, AC, Or Other Household Systems Vehicles (And Even Aircraft) — Not The Vehicle Itself, Which Is The Object Of Auto Insurance, But Damage From Vehicles — E.g., In The Event A Car Runs Into Your Home. Riots Or Civil Commotions Explosions Homeowner’s Insurance Policies Also Generally Include Coverage For Liability, Personal Belongings, Other Structures On Your Property Like Carports And Fences, And Additional Living Expenses If Your Home

Becomes Temporarily Unlivable. There Are Advantages Of Paying Homeowner’s Insurance Up Front At Closing, Rather Than Escrowing The Cost Within Your Monthly Mortgage. Paying Your Homeowner’s Insurance Premium All At Once And Before Closing Allows You To Exclude That Premium From Your Closing Costs, Which Generally Include Lender And Other Fees For Which You’re Responsible, In Addition To Your Down Payment. Closing Costs Are Generally Paid In One Lump Sum. You May Also Choose To Set Up An Escrow Account, Depending On Your Mortgage Agreement, To Avoid Paying Large Sums For Homeownership Costs. Essentially, An Escrow Is A Savings Account Designed To Help You Pay Your Mortgage, Property Taxes, And Even Homeowner’s Insurance In Smaller, Periodic Installments. Your Lender Usually Deals With Payments From Your Escrow, Which Means Less Stressful Financial Management For You. A HOME WARRANTY LETS YOU SLEEP BETTER AT NIGHT Whether You’re A First-time Home Buyer Or Empty Nester Downsizing After Several Previous Home Buys, It Might Be A Smart Idea To Have A

Warranty Plan, So That You Can Sleep Well At Night. The Advice Also Applies To The Experienced Real Estate Owners Who Just Don’t Want To Have The Thought Of Maintenance And Repairs Hanging Over Their Heads. A Home Warranty Is A Way Of Protecting Yourself From Expensive, Unexpected Repair Bills. Depending On The Local Market As Well As On The Deal, The Home Warranty Can Be Paid Either By The Seller Or By The Buyer. A Home Warranty Paid For By The Seller Can Be A Negotiation Point Or Inducement Offering To Protect The Buyer From Having To Do Any Additional, Expensive Repairs To The House After The Deal Is Closed. The Cost Of A Home Warranty Is Generally Not Too High — Often Between $350 And $600, Depending On The Coverage. The Payment Must Be Made One Year In Advance. In Case You Need To Use Such A Warranty, The Procedure Is Simple. When There’s A Problem, The Owner Calls The Warranty Company, Which Then Announces The Service Provider Who Will Be Fixing It. The Provider Will Call The Owner To Schedule An Appointment And Fix The Problem. The Insurance Company Will Pay The Service

Bill. Be Careful When Choosing A Plan Because There Are Many Existing Coverage Differences. Pay Attention When Reading The Fine Print Relating To The Conditions For Coverage And The Reasons Claims May Be Denied. The Secret To Getting A Good Insurance Plan Rests In Dealing With A Reputable Company And Knowing All The Details. GETTING AN APPRAISAL DIFFERS FROM THE EVALUATION BY A PROPERTY INSPECTOR A Real Estate Appraiser Is A State-licensed Expert Who Determines The Value Of A Certain Property. When It Comes To Closing A Financial Transaction Involving A Property, Both The Seller And The Buyer Depend On His Or Her Evaluation. This Procedure Is Meant To Protect The Buyer — As Well As The Bank That Offers The Mortgage Loan — From Purchasing An Overestimated And Overpriced Piece Of Real Estate. Property Appraisers Aren’t The Same As Property Inspectors. The Difference Between An Appraiser And An Inspector Is That The Former Will Look Only For Obvious Issues, While The Latter Checks, In A More Detailed Manner, Items Such As The Plumbing Or The Air Conditioning

System. The Appraisal Report Is Required By The Bank, And The Cost Is Included In The Mortgage Cost. The Appraisal Expert Evaluates The Property Using One Of These Two Methods: Sale Comparison Approach, By Comparing Your Home With Other Similar Ones That Were Sold In The Area, Or The Cost Approach, Used Mainly For New Buildings — A Method That Evaluates The Cost Of Replacing The Structure Of The Home. VALUE OF PREPAYING YOUR MORTGAGE It’s A Great Idea To Prepay Your Mortgage If You Can. By Doing So, You Can Reduce The Costs Incurred Together With Interest And Save Thousands Of Dollars In The Long Term. To Prepay The Mortgage Means That You Pay The Amount You Owe To The Lender Before Due Term. To Do So, It’s Important To Understand Some Of The Most Popular Methods Of Doing This. Some People Decide To Pay A Monthly Sum Above The Mortgage Payment. This Amount Gets Applied To Principal (Not The Interest), And Doing So Consistently Can Save You A Small Fortune In The Long Run. Another Way Of Reducing Interest Is Through A System Of Making 13

Payments In A Year Instead Of 12. This Is Part Of Shopping For A Mortgage. Some Mortgages Have A Flexible Policy, Which Allows You To Make Extra Payments As You Consider Fit And Without Restrictions. In Other Cases, However, The Terms Of Returning A Loan Are Strict And Require A Penalty For Those Who Are Planning On Prepaying The Mortgage. These Terms Are Detailed In The Prepayment Penalty Disclosure Section Of The Documents. Be Sure To Examine The Documents Carefully. THINGS THAT CAN DISRUPT YOUR DEAL Until The Closing Statement Is Signed By Both You And The Seller, Nothing Is Certain. The Deal Might Fall Apart From One Day To Another. Here’s A List Of Common Mistakes That May Seem Insignificant For The Buyer At The First Glance, But For The Lender May Mean A “Yes” Or A “No.” Be Careful With Other Big Purchases While Trying To Obtain A Mortgage. Avoid Charging Your Credit Cards With Thousands Of Dollars For Unnecessary Things. Buying Furniture Or Opening A New Line Of Credit May Threaten The Deal, As The Lender May Suspect That You’re Cutting Funds Reserved For The Real

Estate Payment. It’s Highly Important To Act Responsibly And Turn In All The Required Paperwork On Time. Ensure You Have Enough Time To Review The Closing Statement; Don’t Be The Reason The Signing Is Delayed. One More Detail Involves The Money You Receive From Family Or Friends. This Kind Of Income Should Be Cleared With The Lender Early In The Process, In Order For The Sums To Avoid Being Considered As Further Debt. Another Way To Delay The Closure Is By Changing Jobs Or Switching Positions. These Actions Are Highly Questioned, Especially If They Lead To Your Main Income No Longer Based On A Monthly Salary, But On Commissions Or Performance Bonuses. The Unstable Nature Of A Commission-based Income Might Threaten The Deal. 10 THINGS TO KNOW IF YOU’RE CLOSING A HOME DEAL FOR THE FIRST TIME #1. Open An Escrow The First Step To Closing The Deal And Unlocking The Front Door Of Your Own House Is To Open An Escrow. An Escrow Is A Contractual Arrangement In Which A Third Party Receives And Disburses Money Or Documents For The Primary Transacting Parties,

With The Disbursement Dependent On Conditions Agreed To By The Transacting Parties. Escrow, On Average, Will Last Approximately One Month. During That Time, The Third Party Is Taking Care Of Transactions On Both The Seller And Buyer’s Behalf. For Example, If You’re Providing An Inspection As A Buyer, You Deposit Funds To The Escrow Account. Costs Of This Service Are To Be Negotiated Beforehand. Be Conscious Of The Escrow Company’s Fees. Some Contain Unexpected Fees You Might Only Become Aware Of During Payments Because They’re Hidden. Understand Escrow Company Fees Before Entering Into An Agreement. #2. Lock In The Interest Rate The Price For A Mortgage Loan Is Typically Expressed As “Points” Paid To Get A Certain Interest Rate. Points Are Essentially Prepaid Interest, So The More Points Paid, The Lower The Interest Rate. One Point Equals 1% Of The Loan Amount. A Mortgage Rate Lock Guarantees That A Mortgage Lender Will Give A Buyer A Certain Interest Rate, At A Certain Price, For A Specific Time. A Rate Lock Protects The Borrower From Rising Interest

Rates In The Period Between Sales Agreement Execution And Closing (Often A Month). If The Buyer Locks In A Rate Of 4.5%, She Will Only Have To Pay 4.5% Interest Even If Rates Rise While Going Through The Loan Application Process. A Rate Lock Is Commonly Good For 30, 45, Or 60 Days, Though That Time Period Can Be Shorter Or Longer. After That Period Expires, The Buyer Is No Longer Guaranteed The Locked-in Rate Unless The Lender Agrees To Extend It. This Is Why Arranging A Prompt Closing Is Crucial. #3. Have A Home Inspection Making Sure Roofing Shingles Don’t Fall Off On The First Day In Your New Home Or The Furnace Doesn’t Operate Under 45 Degrees Is Generally Enough Reason To Have A Home Inspection. Engage Specialists To Check The Conditioning System, Plumbing, And Electricity. This Could Save You Thousands Of Dollars By Uncovering Existing Issues. Even New Houses Need To Be Checked Duly And Thoroughly. It Doesn’t Matter That The House Recently Had All The Municipal Inspections By The Builder. #4. Have A Pest Inspection The Best Approach Is To Hire A Licensed Pest Inspection Company.

They’ll Check Your Future Property For Contamination By Flies, Mosquitoes, Cockroaches, Fleas, Rats, Mice, Bedbugs, Termites, Beetles, Carpenter Bees, Ants, And Other Types Of Pests. There’s No Need To Explain How Much Harm Even A Small Number Of Termites Can Do. These Issues Will Lead To Major Repair Expenses And Even Health Issues. Presence Of Any Kind Of Contamination Is A Subject Of Renegotiation Of Terms, Or A Reason To Rethink The Deal Completely. #5. Fix All The Issues After The Inspections If Inspections Revealed Any Problems, You May Want To Ask For A Price Adjustment To Cover The Cost Of Repair Or Ask The Seller To Fix The Problems. Some Inspectors Advise To Look Deeper Into The Issue. They Say You Should Ask For A Second Opinion, Or Evaluate It Further With A Specialist. It’s Highly Recommended To Discuss The Estimates And Fix The Issues As Soon As Possible. #6. Ask For Title Search And Insurance Title Insurance Is Needed To Eliminate The Potential Of Loss By Third-party Ownership On The Property That You’re Buying. Title Insurance Protects Real

Estate Owners And Lenders Against Loss Or Damage Due To Liens, Encumbrances, Or Defects In The Title. Each Title Insurance Policy Is Subject To Specific Terms, Conditions, And Exclusions. Auto And Homeowner’s Insurance Protect Against Potential Future Events, And Is Paid For With Monthly Or Annual Premiums. A Title Insurance Policy Insures Against Past Events For A One-time Premium Paid At The Close Of The Escrow. Title Defects Include Another Person Claiming An Ownership Interest, Improperly Recorded Documents, Fraud, Forgery, Liens, Encroachments, Easements, And Other Items Specified In The Insurance Policy. #7. Conduct A Home Appraisal A Home Appraisal Determines The Estimated Market Value Of Your Soon-to-be Property. The Appraiser Evaluates It Based On General Condition, Geographic Location, Proximity To Objects Of Interest, Value Of The Nearby Houses, Recent Sales, And Neighborhood Growth And Potential, Among Other Factors. Mortgage Lenders Use This Information To Make Sure The Amount You Borrow Is Supported By The Home’s Value. There’s Always A Risk Of A

Low Appraisal. In That Case, The Lender Won’t Go Through With The Transaction At That Price. The Seller Might Adjust The Sale Price Accordingly But Also Might Not. Appraisal Value Isn’t A Binding Figure — What The Seller Sells For And The Buyer Pays Determines The Sale Price. The Situation Might Be That You Negotiated A Deal With The Seller For A Price Already Lower Than Initially Wanted. This Likely Is Due To The Home Selling In A Buyer’s Market And Its Location In A Declining Market Area. This May Slow Or Disrupt The Closing Process While Further Negotiations Are Conducted. #8. Set The Time And Date Of The Closing The Closing Date Is A Negotiable Factor During The Offer And Acceptance Phase Of A Home Sale Transaction. When Making An Offer, The Buyer Will Include A Closing Date, And, Depending On The Seller’s Circumstances, It Might Be Acceptable Or Could Be Countered With Other Terms. Don’t Choose A Date Casually. The Right Date Can Ensure A Smooth Closing And Reduce Closing Costs; The Wrong Date Puts The Home Buyer At Risk Of Not Closing On Time, Needlessly Complicating The Move,

Increasing Expenses, And Even Losing Your New Home. Expenses Are Prorated Through The Closing Date, So Generally, There’s No Better Day Of The Month To Close. However, In Financing A Mortgage, There Are Some Differences In What Is Collected As A Prepaid Item And When The First Mortgage Payment Is Due. Some Advice And Tips: Give Yourself Enough Time. Don’t Set A Short Closing Date Unless You’re Paying Cash. There Are Many Steps Involved With A Home Purchase. It Takes Time For The Loan Process. A Short Closing Date Might Predate Final Loan Approval. Avoid Closing At The End Of The Month, If Possible. This Is The Busiest Time. Unexpected Issues Are Better Dealt With If Title Officers And Lenders Are Readily Available. Make Your Closing Align With The Actual Move From Your Old Residence To Your New House. Ideally, Your Move Should Be From One To The Other Without A Hotel Stop In Between. Arrange With Your Local Utility Companies To Ensure They Can Start Service On The Closing Date. Living Without Water, Heat, Air-conditioning, Or Wi-Fi Until They Are Activated Is Unnecessary — Not

To Mention Unpleasant. Mortgage Payments Are Almost Always Due On The First Day Of The Month And The Payment Is For The Preceding Month. As An Example, If You Close In July, Your First Payment Is Due On The 1st Of September. However, Interest Is Due For The Month Of July From The Date Of Closing. If You Close Early In The Month, Say On The 10th, You Would Have To Pay For 21 Days, But If You Close On The 25th, You Would Have To Pay Six Days Of Interest. If Money Is Tight, Closing Toward The End Of The Month Will Reduce Your Immediate Out-of-pocket Expenses. If You Schedule A Closing And Fail To Complete It On That Day, There Are Consequences. You’ll Face Increased Closing Costs The Next Month, In Addition To Any Penalty For The Delay. Although Most Sellers Will Work With You If The Transaction Does Not Close On Time, Failure To Close Opens The Door To Canceling The Sale. This Is Most Likely To Occur In A Seller’s Market, In Which The Seller May Have Taken Backup Offers That Are Potentially Better Than Yours. Closing Can Be Held In Any Agreed-upon Location. For Example, At The Attorney’s Office,

Or At Your Lender’s Or Title Company’s Offices. #9. Be Present At A Walkthrough A Final Walkthrough Is A Last Chance To See Your Future House Before You Buy It. Commonly, It’s Scheduled 24 Hours Before The Closure. The Property Should Be In The Condition That’s Specified In Your Sales Contract. You May Inspect For Any Changes Made Subsequent To The Home Or Pest Inspections. Check If Everything Is In Order And If Any Additional Replacements Are Necessary. If There’s An Issue, The Closing Day Could Be Shifted, Or, Upon Agreement, The Repair Costs Will Be Submitted To The Escrow Account. Don’t Skip This Step Because Missing The Final Walkthrough Is One Of The Reasons For Closure Delays. #10. Get Ready For Your Closing Day Now You Have Run The Escrow Marathon And Survived All The Possible Obstacles In Your Way. It’s Finally Time To Sign The Papers And Get The Keys To Your New Home. Prepare All The Paperwork That You’ve Collected During The Process. This Includes The Title Search And Insurance, Inspection Reports, Bank Statements, Home Appraisal, Checks Of

Down Payment Closing Costs, And Prepaid Interest. Several People Could Be Present At The Closing, E.g., Your Attorney, A Seller Or Seller’s Representative, Seller’s Attorney, Real Estate Agents (Both Yours And Seller’s), Lender’s Representative, A Title Company’s Representative, Closing Agent, And A Public Notary. The Exact Number And Function Depends On The State And County. In Some States, It’s As Few As The Buyer(s) And The Closing Agent, With All Documents Pre-executed By The Other Parties. Basically, The Purpose Of The Meeting Is To Sign The Following Documents: Closing Disclosure (CD). This Document Contains Your Final Payments, Costs, And Charges Upon Agreed Terms And Periods. You’re Supposed To Receive It Three Business Days Before The Closing Date And Compare It With The Conditions Of The Initial Loan Estimate. Mortgage Note. In Signing This Document, You Agree To Your Mortgage Terms And Conditions, As Well As Penalties, In Case You’re Not Able To Pay Duly And On Time. Deed Of Trust Or Mortgage. In Real Estate, A Deed Of Trust Or Trust Deed Is A Deed Wherein Legal

Title In Real Property Is Transferred To A Trustee, Which Holds It As Security For A Loan (Debt) Between A Borrower And Lender. The Equitable Title Remains With The Borrower. Certificate Of Occupancy (For New Houses Only). The Certificate Of Occupancy Provides Authorization From The Local Government For A Building To Be Used As A Public Edifice Or As A Private Residence. The Purpose Of The Certificate Is To Provide Verification That The Building Is In Full Compliance With Current Building Codes And Is Safe For Occupancy. This Type Of Certificate Is Issued Whenever A New Building Is Constructed Within The City Limits Of The Local Government. Inspections Are Conducted To Ensure The Basic Construction, Wiring, Plumbing, And Other Elements Of The Building Are Up To Code, And Can Be Certified As Being Safe For Occupation. Such A Document Is Needed To Move Into A House. If Your Home-buying Team Is Competent Enough, You Won’t Be Seeing Those Documents For The First Time At The Closing. Don’t Sign Anything That’s Unclear To You, Different From What You Agreed To, Or Seems Wrong. Make Sure That

You Understand What You’re Signing And How Your Payments Will Be Distributed Over Time. Charges Change Differently Depending On The Mortgage Type And May Also Depend On Your Insurance Or Taxes. AFTER YOU SIGN THE PAPERS Take The Keys And Start Moving Into Your New House. Now You’re A Legitimate Owner And A Person Who Is Responsible For A Mortgage Loan. Nothing Can Be Compared To Buying Your First Home. When You Finally Get Through With It, You’ll Be Able To Relax And Enjoy Your New Property. Don’t Worry — Most Of The Time, You’ll Reach The Finish Line With A Smile On Your Face And A Beautiful New Home To Call Your Own. So, Get Out There And Start Searching For The Perfect Home For You And Your Family. After All, We All Know That There Is No Place Like Home. Hopefully, These Basic Steps Will Help The First-time Home Buyers Handle This Incredible Process With Less Stress And More Energy.

11. Organizing Your Move

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CHAPTER 1 How Real Estate Agents Help Home Buyers

We’ll come right out at the start and tell you we’re real estate agents — proudly so! Nice to meet you! We’re not trying to sell you anything, but we’re pleased to be of service. In fact, generally, real estate agents for buyers are paid for out of the listing agent’s commission. So, we’re not looking to part you from your money. Instead, we’re giving you the benefits of experience and advice we have gleaned throughout our career selling houses and being in real estate transactions — for both sellers and buyers. If you want us to help you find a house, we can talk. Call us if you need us. Technology has changed the way homes are sought and bought today. In this “Information Era,” most buyers are first introduced to the home they eventually purchase via the internet, through Zillow, Trulia, Yahoo! Homes, Realtor.com, Redfin or one of hundreds of other real estate websites. So that means there’s no real need for a buyer’s real estate agent, right? The reason to use a real estate agent is to find a home and show homes available for sale, right? If a buyer can find and visit a home on the web all on their own, why involve another party?

WHY HOME BUYERS NEED A REAL ESTATE AGENT

Ah, not so fast, friend. The reasons to use a real estate agent today are as valid as yesterday. The ease of online transactions and proliferation of services to assist buyers in handling their 2

own real estate transactions came about recently, throughout the last decade. This has caused buyers to wonder if using a real estate agent is no longer necessary or if it's an expense that can be avoided. While doing the work yourself can save you money if you buy a “For Sale By Owner” (FSBO) house and the seller agrees to reduce the price by 3% (half of what a listing agent would receive), for many, a do-it-yourself home purchase might be pricier than a real estate agent’s commission in the long run. Besides, a buyer generally doesn’t directly pay any commission to an agent on a house purchase. On most home sales, there is a listing agent (the agent engaged by the seller to sell the property) and a selling agent (the agent who introduces the eventual buyer into the transaction). The selling agent is sometimes called the “buyer’s agent” because he or she is often working on a certain buyer’s behalf, and it’s easier than explaining that the selling agent is not the listing agent but really the buyer’s agent. There are some real estate agents that market themselves as “buyer’s agents,” “exclusive buyer’s agents,” or “buyer’s representatives.” These real estate agents have chosen to make a business of finding homes for prospective buyers and handling the negotiations and transactions attendant to the purchase. These agents want to accentuate the reasons a buyer shouldn’t go directly to the listing agent when they purchase real estate. A buyer who goes directly to the listing agent and allows that agent to “manage” both sides of the transaction is dealing with an agent who has conflicting responsibilities. Their job is to get a good price for the seller, and they might not zealously represent the interests of the buyer. Those who market themselves as buyer’s agents indicate they’re only working for the buyer in a real estate transaction. The buyer’s agent's commission is paid by the seller, with rare exceptions. They either get paid directly by the seller or set up the

transaction so that the seller provides a “credit” to the buyer for how much the real estate commission is — then the buyer pays the commission. A maxim in real estate is, “No matter how it’s set up, the buyer still walks away with the house and the seller still walks away with 94% of the purchase price.”

MORE ACCESS TO THE REAL ESTATE MARKET

A real estate agent will have better access to the market and a special knowledge of local conditions. The agent is a full-time liaison between sellers and buyers. An agent will have ready access to other properties listed by other agents. Buyers’ and sellers’ agents know how to put a real estate deal together. A real estate agent will track down homes that meet your criteria, contact sellers’ agents, and secure appointments for viewing the homes. On their own, buyers have a more difficult time with these things. This is even more so the case when a buyer is moving due to relocation or employment opportunity and does not engage a buyer’s agent to handle matters.

NEGOTIATING IS HARDER ON YOUR OWN

A real estate agent will keep the transaction “at arm’s length,” such that personalities and emotions do not become involved. Price negotiations take a special skill and understanding of the psychology of offering and counter-offering. Agents keep the transaction dispassionate and rational. For example, a buyer (you) might like a home but despise its wood- paneled walls, shag carpet, and lurid orange kitchen. When you work with an agent, you can express your opinions on the current owner’s decorating skills and complain about how much it will cost to upgrade the home without insulting the owner. Your agent will translate that to the seller — that you very much like the property, but can see having to spend a certain amount in

decorating costs, and thus can offer that much less.

CONTRACTUALLY SPEAKING...

There are many contracts and documents involved in purchasing a house. The stack is more than an inch thick. Unless you’re a real estate lawyer or title agent, these documents will be foreign to you. Yet, they require detailed and accurate completions. Buying a property is not necessarily a “fill-in-the- blanks” transaction. One mistake, let’s say in title work, could haunt the buyer well down the line after purchase. This very situation happened. A property that sat on a double lot was put on the market. The neighbor bought it to carve off a bit of the second lot to expand his own yard. The seller then put the home back on the market, and it sold. Months later, through a property tax notification, it came out that, in preparing new deeds for the properties, the expanded yard area was correctly in the name of the neighbor; however, the house had been transferred to the home buyer. The new homeowner now owned both houses, and the neighbor owned his expanded driveway and yard. Fortunately, they were good neighbors and settled the matter with a few signatures. A real estate agent deals regularly with these contracts, conditions, and unexpected situations and is familiar with which conditions should be used, when they can safely be removed, and how to use the contract to protect you.

YOU WON'T NECESSARILY SAVE MONEY

The point of not using a real estate agent would be to save money, right? Otherwise, why would someone turn down professional assistance in finding a home?

However, it’s unlikely that both the buyer and the seller will reap the benefits of not paying real estate agent commissions. It works like this: An owner selling on his own (FSBO) will price the house based on the sale prices of other comparable properties in the area. Many of these properties will be sold with the help of an agent; therefore, the seller profits in getting to keep the percentage of the home’s sale price that might otherwise be paid to the real estate agent (usually 6%). Buyers looking to purchase a home sold by owner without an agent may believe they can save money on the home by not having an agent involved, and so they look solely at FSBO houses. They might expect money to be saved and make an offer accordingly. Unless the buyer and seller agree to split the savings, they can’t both save the commission — and that’s if the listing price was not already lowered by near the commission amount to make it more market-attractive. Here’s a short list of the advantages that using a real estate agent can bring to your buying experience:

• Education and experience • Neighborhood knowledge • Price guidance • Market conditions information • Negotiation skills and confidentiality • The ability to handle paperwork • The ability to handle closing questions • Relationships for Future Business

It’s extremely important to know the “ins and outs” of real estate agents before you bring one along with you to help in your search for a home, just so that you might know what to expect, and what will be expected of you. 6

WHO A REAL ESTATE AGENT IS

Simply put, a real estate agent is someone licensed to list and sell real estate, including homes, multi-family properties, commercial, and industrial buildings. A Realtor®, however, is somewhat different. A Realtor® is a member of the National Association of Realtors®. While an agent is always a real estate agent, a real estate agent isn’t always a Realtor®. As mentioned, real estate agents who work on behalf of the best interests of the buyer are commonly called buyer’s agents. All listing agents represent the seller, but other agents who don’t have buyer-agency agreements with prospective buyers — even though they may show homes to those buyers — are working on behalf of the seller and must obtain the best price they can for the seller. In contrast, buyer’s agents work on commission, which is contracted in the listing agreement. When a buyer’s agent brings the buyer, the listing agent must split the contracted commission with the buyer’s agent.

HOW TO CHOOSE THE BEST AGENT FOR YOUR NEEDS

You might feel the urge to pick the first real estate agent who appeals to or approaches you, but that’s something to avoid. As with any professional, there are degrees of professionalism, dedication, and experience. The “wow factor” will simply wear off. Meet with prospective buyer's agents in their offices. A good buyer’s agent will want to know whether you’re preapproved for a loan by a financer, what kind, and the terms of the loan you’re getting. They should spend adequate time to discover what you’re

looking for in a house. They should listen as much as talk and ask questions. Watch to see if the agent makes notes. If the agent doesn’t broach the topic, ask for an explanation of his understanding of agency relationships and obligations to you. The law requires agents to explain whether they’ll be working for the buyer or the seller whenever they have substantive contact with a customer or prospective client. If the agent doesn’t offer you a buyer’s agency agreement, that agent is representing the seller, not you. If the agent can’t explain agency concepts to you, then move to the next agent. Be sure that the agent will be showing you all listings or properties on the market that meet your requirements, and not only listings that are handled in-house. Buyer’s agents have the legal duty to put the buyer’s needs ahead of their own. Even when an agent will be paid more for selling an in-house listing, they must inform you about other available, suitable listings and take you to see viable prospects. A good buyer’s agent will provide a home-buying education. The listing agent will point out all the features of a home; a good buyer’s agent will point to the faults — or advise when they can be overlooked. Competent buyer’s agents help their buyers to think clearly as the home-buying process unfolds. For example, if a house is a good buy, a buyer’s agent might suggest looking past the dated bathroom and kitchen and look at the space above the garage that will make the perfect art studio you desire. Likewise, a cute house with all the amenities but with knob-and-tube wiring or a 40-year-old roof might not be worth the asking price. If you decide to buy with the intention of building an addition, the agent should advise you to check the zoning before making an offer.

Agree to sign a buyer’s agency agreement after you have met with an agent. Some people sign an agency agreement after attending a showing given by the agent. Working with a seller’s agent is a mistake, according to an article by Amy Fontinelle of Forbes’ Investopedia. Any information you reveal will become leverage that the seller can use in a purchase negotiation. A buyer’s agent is legally required to maintain your confidentiality, disclose material facts to you, and maintain loyalty to you. These are fiduciary duties.

LOOK FOR PROPER CREDENTIALS

You wouldn’t trust a doctor who didn’t have the proper credentials and licensing. Don’t trust a real estate agent who doesn’t present theirs or doesn’t have them at all. It’s easy to find real estate agents who can take the job, but finding agents with special credentials — those who have gone that extra step to take additional classes in certain specialties of real estate sales — is worth looking into. Here are just a few credentials within real estate that you should be on the lookout for: ✓ Accredited Buyer’s Representative (ABR): Completed additional education during representation of buyers in their transactions. ✓ Certified Residential Specialist (CRS): Completed additional training during the handling of residential real estate, such as houses and apartments. ✓ Seniors Real Estate Specialist (SRES): Completed training for the purpose of helping sellers and buyers 50+ years old. Similarly, if you choose to use a real estate agent who’s also a member of the National Association of Realtors®, it will be a bonus. However, ensure they have credentials that are relevant to your need(s).

RESEARCH LICENSING

Your state will have a license board for all active Realtors® and agents, which you can easily access. You will also be able to see their contact information, disciplinary actions, complaints, or any other information that you’ll need to help influence your decision — especially since most of the information is now posted online.

GIVE THE "WHAT ELSE" TEST

A good agent will know about all the other properties for sale in the area. Also, a good agent always does their research regarding the events in the current market, and those homes that are out there for the taking. In short, you want an agent who’s an expert of the current market, and someone who always stays on top of things.

RESEARCH THEIR BUSINESS ACTIVITY

Learning the type of market presence that a real estate agent has is the best way to figure them out. Ideally, you’re going to want an agent who specializes in one or two real estate markets, and who understands which types of homes and amenities are available within your price range. You can unearth this information by asking them or by asking the state licensing authority if you’re not comfortable with asking the agent directly. You’re better off with an agent who’s engaged actively in one area and price range — e.g., residential homes around the $800,000 to $950,000 range or the $1.2 million and up range.

GOING THE BUYER'S AGENT ROUTE

So, you’re ready to take the plunge and look for a place to call

“home.” To get the most out of it, use a buyer’s agent to avoid a flurry of paperwork, stampedes of buyers competing for the same property, and other challenges. Home buying can be exciting and exhilarating, but it can also be complex and stressful — which is why having a pro by your side can make an enormous difference. As discussed, you’ve probably heard of buyer’s agents, seller’s agents, listing agents, and so on. You’re a buyer, so what’s a buyer’s agent? True to the name, buyer’s agents assist home buyers every step of the way; they can also save you both time and money on the road to homeownership. When you find the right one for you, these real estate agents will work day and night to ensure all your needs and requirements are met when it comes to finding the right home.

WHAT BUYER'S AGENTS DO FOR YOU

Your buyer’s agent will have a vast knowledge of the current real estate market for the area, which will include neighborhood amenities and conditions, the law, zoning issues, price trends, negotiations, taxes, financing, and insurance. Once you meet with the buyer’s agent, they’ll generally help you determine your needs and wants when it comes to finding a home and a neighborhood. The agent will teach you what you can afford, help you set a budget, provide some insight on the current conditions of the market, and explain what you should expect while shopping for a home. During the shopping period, you’ll meet with your agent for tours of homes in which you might be interested. They will give your insight into the floor plans, the home’s pertinent selling points, and the overall crime rate of that neighborhood. They will also give you the rundown for local activities, restaurants, shopping centers, and schools nearby.

Your agent is responsible for ensuring inspections of the homes are complete, as well as the disclosures therein. They’re also in charge of ensuring coordination and completion is done through the roof inspector, attorneys, lenders, and all other professionals involved with the purchase of the home. If bargains need to be made over the price, you won’t have to negotiate yourself. Your buyer’s agent will do that for you, along with signing the final closing documents. They will be present whenever there are documents to go through and sign.

DUAL AGENCY: THE BASICS

A “dual agency” relationship occurs when a buyer is being represented by a brokerage firm that controls the listing. Once an agent represents both the seller and the buyer within the same transaction, the situation is known as “dual agency.” In multiple states, this is illegal because of the conflicts of interest that can arise regarding the broker. All agents hold the same responsibility, which is to inform their clients of all potential risks that could arise due to conflicts of interest. Legally, agents are not allowed to work on both sides of any transaction without consent from the clients. If you’re selling your home and you don’t want your agent to also work with the buyer of your home, it’s your right to say so in the listing agreement. This is also true for buyers. A buyer can get out of an agreement with an agent if they are interested in purchasing a home their agent is listing. When it comes to dual agency, there are definite advantages for the seller.

• Trust has already been gained with your listing agent, so representation for the buyer has been established. • Your agent brought you the buyer knowing that you’re selling, even if your property has not yet hit the market. • Your listing agent will have already covered and researched your neighborhood’s market to gain buyer inquiries, which means your agent will be working from all sides of the deal to sell your house faster, and with more incentive. • Your agent works together with corporate relocation buyers who need to find a house quickly, and they will ensure it’s your house that’s bought. There are also cons for the seller when it comes to dual agency, and they are: • You can’t be advised by your agent as thoroughly when they must act as a dual agent because impartial facilitation is required. • Your listing agent is not allowed to negotiate the best or highest price for you if also negotiating both the best and lowest terms for the buyer. • Earning a full commission, if the opportunity arises, may tempt the agent to coerce a deal that you might not accept otherwise. • Your agent may inhibit all access to your listing through buyers with agents. To avoid surprises or missteps in a dual agency sale, always ensure you have clarified important details with your agent ahead of time. You can do this by using an exclusive buyer agency agreement, or a listing agreement.

HOW REAL ESTATE AGENTS ARE PAID

The National Association of Realtors® 2017 Profile of Home Buyers and Sellers states approximately 8% of homeowners opted to put their homes up for sale in 2017 without using a real estate agent or Realtor®. A handful of For Sale By Owner (FSBO) transactions dealt with sellers and buyers who previously knew each other or were directly related; 87% of buyers chose to work with a real estate agent or Realtor®, on the buyer’s side. Real estate agents and Realtors® — unlike professionals in different categories who bill by hourly rates or earn a salary — get paid through a transaction (commission) at the end of each sale. For example, if an agent has worked with a seller or a buyer for months, they don’t get paid for the time spent if there is no transaction during that period. Agents receive a commission once the transaction goes through to settlement (closes) based on the selling price of the home. At that point, the commission is earned. The commission itself is negotiated — in most cases, between the seller and the agent. Typically, an agent will earn a commission of 6% from the sale price, but some brokerages have commission discounts for the sellers with whom they work. Essentially, the listing agent and the buyer’s agent will split the commission. That can bring forth some issues. For example, sometimes the split might not be negotiated evenly. A seller could have agreed to pay a commission of 5.5% that, if further divided, the buyer’s agent would receive 2.5% while the listing agent receives 3% of the commission.

Even though some agents are associate brokers, or brokers in general, all commission payments are instructed to go through to the broker who’s managing the brokerage where the agent is working. From there, the commission is then split to the agent and the broker, according to the agreement that’s been made. The split will vary; sometimes, newer agents will earn a small portion of the commission compared to the experienced or successful agents who generally sell more expensive properties or homes.

PAYING THE COMMISSION ITSELF

The overall commission is paid for at the settlement period by the seller. The fee is taken from the proceeds of the sale of the home or the property. However, the buyers pay the commission because they’re literally paying to purchase the house, while the sellers take the commission for the agent into account during the process of determining the price for the listing. From there, the commission is then divided during the settlement process between the buyer’s agent brokerage and the listing agent’s brokerage. Afterward, the agents who made the real estate sale are further paid by their brokers.

CHAPTER 2 Owning vs. Renting

Owning your own home might be one of the defining qualities of the “American Dream:” the set of ideals that includes opportunity for prosperity and success and an upward social mobility for the family and children, achieved through hard work. Home ownership is surely ingrained as one of the strongest representations of that vision — 66% of Americans own their own home, and more hope they will or wish they did. Something about home ownership plucks a strong chord with Americans. Financial security, permanency, status, and pride are values many of us seek. Lifestyle plays a big role in the decision to own versus rent. Home buying is most often driven by household formation, such as marriage and growing a family. Less than 40% of people under 35 years old own homes, 60% of people over 35 years old own homes, and more than 80% of people 65 years old or over own homes. Interestingly, for the millennial generation, the primary reason for buying a home? Owning a dog. The U.S. homeownership rate has fluctuated between 62% and 70% since the 1950s. Most young people begin their independent lives renting an apartment, maximizing lifestyle flexibility and minimizing the hefty upfront costs associated with purchasing a home. As they build careers, save money, and start families, many choose to buy a home, recognizing that home ownership, as opposed to rental living, is more appropriate to their growing family needs. At the other end of the age spectrum are homeowners nearing 16

retirement who may desire to sell their homes, downsize, avoid the maintenance and other obligations and go back to renting.

WHICH IS BEST?

Is it better to rent or buy a home? Most adults ask themselves this at some point as they form their goals and plan for the years ahead. Before you answer the question, here are some things to ask yourself. Owning and renting each have their advantages, but what’s best for you depends on your circumstances. What will be the duration of your stay in the home? Each market is different, but whether the time you plan to spend in the house warrants its purchase is possible to predict. In general terms, it takes four to seven years to break even on a home (i.e., where there has been enough appreciation to pay back the cost of the transaction and cost of ownership). If you’re thinking about buying a home and selling it in two years, buying is very unlikely to be cheaper than renting. Do you think of or need your house as an investment in your retirement plan? Americans are used to their homes being a store for wealth to liquidate in retirement when downsizing their lifestyle. In 2015, Gallup reported that for the second straight year, more Americans named real estate than stocks, gold, savings accounts/CDs, or bonds as the best long-term investment. Real estate leads, with 31% of Americans choosing it, followed by stocks/mutual funds at 25%. A cautionary note though — although home prices have recovered their pre-2006 market slump and continue to rise, the price of your home can fall, as well as rise. Are you financially ready? Owning a home is a financial commitment that requires planning how home ownership fits into where your life is headed. Ask yourself what your budget is and if either buying or renting would require you to stretch

your finances. Crunch all the numbers. A frequent mistake of first-time home buyers is comparing a month’s rent to a month’s mortgage payment. Many people don’t have all the numbers. There are many additional fees necessary to include to make a fair comparison: principal interest, property taxes, property insurance, homeowners’ association (HOA) fees, and ongoing maintenance. Are you prepared for the down payment? This is the lump sum payment that funds your equity in the property (how much of the property you actually own). Down payments vary; 20% is preferred and gets the best rates. There are some loans that allow down payments as low as 3%. Sometimes relatives help with the down payment. If you have a choice, take a gift rather than a loan because lenders will add the loan debt to other monthly obligations and potential mortgage payments to determine your debt-to-income ratio, which generally can’t top 43% to qualify for a home loan. Can you afford the monthly mortgage and its components? Generally, a mortgage includes loan principal and interest (both amortized over the life of the loan) plus homeowner’s insurance and property taxes (prorated). These items can affect the monthly loan-only payment by several hundred dollars. Are you emotionally ready? Can you handle the stress? A big factor to consider when buying a home is stress. The Holmes and Rahe Stress Scale, a landmark stress study, ranks many events that go along with buying a home in the top 43 most stressful circumstances in life. Four events are specifically home-related: change in financial state (No. 16), large mortgage or loan (No. 20), change in living conditions (No. 28), and change in residence (No. 32). If someone has recently made other life changes, such as marriage (No. 7), switching careers (No. 18), or having a child (No. 14), it might be wise to postpone buying a home. Stress overload can lead to missed payments, which can result in

destroyed credit or even losing the home. It’s better to rent if your life is in flux and then buy when your stress levels are lower. Are you ready for commitment? Are you ready to make lots of decisions, from picking a real estate agent to picking paint colors? Are you confident enough to choose a neighborhood where you believe home values will continue to appreciate and that will serve your needs (i.e., proximity to schools, shopping, recreation, etc.)? Are you ready for devoting the time and attention to maintaining a home (i.e., leaf-raking, grass-cutting, appliance maintenance and repair, etc.)? Taking care of your biggest investment can be gratifying, but only if you’re ready.

ADVANTAGES OF BUYING YOUR HOME

Control over housing expense. By selecting a fixed-rate 15-, 20-, 25-, or 30-year mortgage, the homeowner has assurance that housing costs won’t increase over the period, and, in fact, will be eliminated at the end of the term (subject to refinancing). You build equity. Some of each monthly mortgage payment goes toward the loan’s interest. Other portions may go to homeowner’s insurance and county taxes. The remainder pays down the loan principal. Every dollar put toward your loan’s principal represents a dollar of equity — actual ownership of the property. Further, the property should appreciate in value each year, further adding to equity (what the house could be sold for versus what is owed on it). Discounting certain blip periods, such as the 2006 housing bubble burst, home prices in the U.S. appreciate nationally at an average annual rate between 3% and 5%. Remember, though, home value appreciation in different metro areas can appreciate at markedly different rates than the national average. Improvements increase your home’s value. A homeowner can also increase a home’s value through home improvements, thus

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