Last week, I let it slip that I was looking to get back into the housing market. I figured that since the cat’s out of the bag, so to speak, I’d go ahead and take you on a journey with me. As you already know, buying in the current market is a complicated dance between lender and Realtor and seller and buyer — and it’s not always easy to know your part.
Of course, there is a certain order to things, and that’s how we’re going to approach this — one thing at a time. Thing one, as it were, is making an offer. Obviously, that’s what sets all the wheels in motion. Without an offer, you’re just hanging out with a Realtor and wasting a lot of time. Once you’ve got that offer accepted, your lazy stroll down Real Estate Lane becomes a crazed panic to make it to the closing table with your sanity intact.
Strong Buyers and Weak Buyers
There are two kinds of buyers in any market: the strong ones and the ones that are too weak to stand on their own. I don’t want any of you making lame, weak offers because you’re weak buyers, so I’m going to teach you how to do this right.
First, before you look at even one house, get yourself pre-qualified for a loan. Call a lender — call a dozen — and find out what they can do for you based on the money you can bring to the table, as well as your current income and debts. Do not, under any circumstances, lie about any of these things. It’ll just end up hurting you in the long run. Your lender needs to know everything there is to know so they can put you into the right loan program.
These are the big things every lender wants to know:
Gross monthly income. We’ve discussed debt to income on more than one occasion, but before your lender can figure it, they have to know what your income is. This is based on your gross income, not your take home.
Monthly account payments. How much you owe each month is an important part of the calculation. Look for items that report to your credit file like car loans, student loans, credit cards or other mortgages. Your lender doesn’t care how much you actually pay each month, just how much the minimum payment should be.
Available funds. Last, but not least, we need to know how much money you’ve got. You’ll need to have cash for closing, funds to verify for your reserves and your down payment. It sounds like a lot, but some of this money can come from a retirement account like a 401(k).
Once your lender has this information and has pulled a credit report, he’ll be able to tell you if you can get a mortgage or, alternatively, what problems may be keeping you from being a good buyer right now. I know rates are still low and that a lot of people are jumping back into the market, but if you’re not in a strong buying position, you might as well not bother. You’ll ultimately pay too much for your home, end up with a loan product that’s terrible and be very unhappy with the whole process. You’ll also lose that house of your dreams if you end up in a bidding war.
If the first lender says you’re out of the game, it might not be over — just call somebody else. Some lenders are looking for the slam dunks, others are willing to work a little harder. But if four or five lenders have told you it’s no dice, consider that a sign that it’s not your time to buy.
Making an Offer
A lot of websites will give you advice in this department — but there are very few that are actually coming from real, live Realtors. Most of those Realtors you see with websites are actually hiring writers to do their blogging. Why am I telling you this? Because making an offer is one of the most important things you’ll do in your life and setting the tone is important.
I helped people find their homes and achieve their buying dreams for nine and a half years — I’m not just some copywriter who happened to wash up on USMortgageCalculator.org’s door. So listen. Carefully. This is the beginning of the rest of your life here.
Step 1. Pick a house. You’ll be faced with many choices in the upcoming days and weeks, but the most important is the house you choose. Don’t rush this process, don’t look at houses that aren’t in neighborhoods where you’d be willing to live or can even afford. Instead, make two lists before you even talk to your Realtor — one should be of your “must haves” and the other will be your “like to haves.”
When my husband and I were shopping for houses, our lists looked like this:
|Like to Haves
|Central Heating and Air
|Fireplace (working or not)
|South Side Location
|1 1/2 Bathrooms
|Bedrooms measuring at least 12’x12’
|Decently Usable Kitchen
|Partially Open Floorplan
|Double-Hung Thermopane Windows
|Stone or Brick Siding
Because we knew we were buying down (yes, people really do this) and trading our large mortgage for something much smaller, we knew not to expect too much. We ended up with a fair number of those things on our “like to have” list, but we had to accept a home that needed a lot of cosmetic work in order to get there. We actually like to paint and fix up houses, so that wasn’t an issue for us.
We both knew the house when we found it. I took a little bit of convincing, because I was determined to get into a little stone cottage, but there was no denying that I felt it when I walked through the door. It’s like falling in love — you just know. No two houses are alike and not one of them is perfect, but when you know, you know. You know?
If your Realtor has been working with you any amount of time or at least has been thoroughly briefed on what you’re really wanting in a home, they’ll know, too. And they’ll get nervous, because they’ll need to show you, somehow, that you’re in the right place before someone else comes along and takes your perfect home from you.
Step 2. Read the Disclosures. Once you find a house you think is the one, your Realtor will show you the Seller’s Disclosures and any energy usage information they can get (this will vary from area to area). Usually there’s not much to see, but that doesn’t mean you should skip this step or not pay good attention when it comes.
In most markets, Sellers are required to disclose anything they know about the house that might affect its future value, condition or upkeep. For example, if their kitchen flooded because of a leaky pipe while they were on vacation and it stayed soaking wet for days, you’d want to know about it. If they did nothing but sop up the water, walk away — that’s a future of chronic mold problems waiting to happen. Most of the time, though, people will do right and have these issues repaired properly.
Don’t panic if there’s something on the disclosure — even new homes have to make certain disclosures, especially pertaining to insect treatments. They just have to make you aware.
If everything looks ok on the disclosures, you’re ready to write your offer. If something looks off, by all means have additional pre-offer inspections, request proof that the kitchen mess was remediated properly or walk away.
Step 3. Write the Offer. This may seem like the easiest part, but it’s far from it. This is where the whole tone of your relationship with the Seller and their agent is set. The tone of your offer will determine how difficult or easy the process is from here until closing.
Don’t do any of these things:
Lowball the Seller. The absolutely biggest mistake you can make is lowballing the Seller. That first offer won’t be the end of things, not in most cases, anyway, and you’ve already looked at enough houses to know that this one is the one. It’s priced right — you already know that because you’ve seen a dozen others in worse condition or in worse neighborhoods that went under contract for more. Coming in 20 percent under market isn’t getting the ball rolling, it’s destroying any negotiating power you might have had in the first place.
There are two things to keep in mind about Sellers: they’ve got mortgages that have to be paid off, too, and they will wait for a respectable offer rather than messing with someone who starts out too low. No one is that desperate. And before you think it, foreclosures aren’t going to be the deals you imagine, either. You cannot steal a house in this market — Sellers are more informed than ever and their Realtors make sure they price their property correctly.
Now, maybe you don’t think that offer was too low — but keep in mind that everything you ask for on top of a reduction in the sales price effectively reduces the sales price for the Seller. Paying your closing costs cuts into their bottom line, too. So, if your proposed price plus your closing costs equals an insanely low offer, listen to your agent when they say it’s not going to fly.
Don’t worry, you’re not the first to have these thoughts — I had to have this same talk with my husband. He wanted to come in dangerously low and we were going to wrap in our closing costs, as well. I had to intervene and explain all the same things. Our new house has been sitting empty for two years, but it’s because the Seller paid pre-Bubble prices for it and could not get out. He is in no position to take a further hit because the cash simply isn’t there — like with everybody else, despite his distress, ours was a take it or leave it situation.
That’s life and the reality of what you’re getting into — houses cost what they cost. If you think a place is significantly overpriced, keep looking. Don’t dog an already stressed out Seller with offers that will never fly.
Ask for a bunch of repairs. Now, repairs are another thing. If you’re walking through the house and see things that are obviously not right and need to be corrected, ask for those repairs. Absolutely do this — this will be your one and only chance. You get an opportunity to ask for repairs of things that aren’t obvious to someone walking through the house after the inspection, but if you decide you want that leaky faucet fixed after the initial negotiation, it’s just too late.
Again, don’t be insane about your requests — but do address those things that should be right. Do not ask for a specific model of faucet to replace one that’s defective — just ask for the defective faucet to be replaced. The Seller knows as well as anybody that your contract could still fall through, and the last thing they need is to be stuck with a $300 faucet when a $40 one would have worked just fine for anyone else.
Nitpicking is the other big one I saw a lot as an agent. Like I said before, houses aren’t perfect — not any of them. New houses aren’t perfect and things just get worse with age. So, if you’re running around the house making a punch sheet a mile long, don’t waste your energy. Just find a different house that meets your exacting standards.
Ask for a bunch of upgrades. Asking for upgrades with a near full price offer is a thing that people do, and they do it every day. Maybe you need a fence erected to keep your Border Collie from escaping while he’s having yard time, or you need a refrigerator because you don’t have one that matches the other appliances. Reasonable requests are normally not a problem, as long as you don’t ask for too many and have an understanding of what they’ll cost.
And again, you’ve got to write it in broad strokes. Don’t ask a Seller to install a Samsung model #RF34H9960S4 refrigerator — ask for a french door refrigerator with a stainless steel finish. If you can’t handle anything but your ideal model, you’re best to buy the item in question or do the upgrade yourself. Sellers are already stressed enough, adding precise requirements means that they’re going to assume you’ll be a huge pain to deal with throughout the transaction.
I hate to be the one to say it, but that assumption is probably going to be true. The Seller isn’t your personal shopper. Buy what you need when you move in, otherwise be happy someone else was willing to provide a needed appliance or upgrade for you.
Step 4. Wait. And Panic. So, you’ve written your offer and your Realtor emailed or faxed it to the Seller’s Realtor. Now we wait. Depending on the circumstances, it may take several days to get a counter-offer or acceptance in writing, but the chances are good that your agent will have a verbal offer pretty quickly. Don’t relax yet — until it’s on paper, it’s just talk. Sellers can do unpredictable things in a multi-offer situation, so keep your pants on.
While you wait, you should be considering the other houses you saw — were any of them good candidates? Keep looking and choose your backup, just in case. Pace the floor. Post a remarkable number of status updates on Facebook, do whatever you have to do — because it’s going to take some time for the Seller to evaluate your offer and determine how much they’ll actually walk away from the table with.
The Bottom Line: Remember the Golden Rule
I think everybody knows the Golden Rule. But if you don’t, it’s “treat others the way you’d like to be treated.” When you make an offer, you’re not the hard-jawed, ruthless Wall Street type you’d like to imagine, you’re just a guy trying to buy a house from another guy. Choosing a home for your family and moving to a new neighborhood can be exciting, but don’t let your lust for a bargain turn it into a nightmare scenario that alienates your family, your friends, your future neighbors and your Realtor.
Remember, Sellers are people, too, and they are well-educated in the ins and outs of their home and their neighborhood — much better than you’re likely to be. Sure, there’s the odd house that’s insanely overpriced because of a Seller with the same attitude as that bad Buyer I described, but they’re not the norm because, frankly, most Realtors won’t waste time on a house priced so high they can’t sell it.
So treat Sellers the way you’d like to be treated as a Seller. Make a reasonable offer, don’t nitpick their house to death and accept that no home is perfect. You can make all kinds of changes once you’ve moved in — it’s a great way to personalize your space and teach your kids how to work with their hands.