Having spent the last 12 months buying a home, a condo to be exact, I want to document and share my experiences so that others may learn from it.
Basics: Condo in Southern California
Previously sold in 2006 for ~$450K; Short-sale.
Buying a home can be a long and complex process. As a perfectionist, I wanted to understand everything. But even with a good head on my shoulder, I quickly found there is too much to read and understand. If you are juggling full-time work plus buying a house, likely, you won't have time to read and understand everything.
Tip 1: Don't try to understand and micro-manage everything. There is simply too much information. Instead, prioritize and get the most important pieces of information correct.
I started the home buying process by doing some general research (e.g., reading a whole lot of "first-time home buyers" type of info. Looking back, I it was an disorganized process and I probably read and re-read a bunch of information that I didn't know exactly how to use.
Thus, to help you, first I'll summarize the key people you'll have to deal with throughout the process.
1. Buyer: YOU
2. Buyer's Agent: The person showing you the homes, "helping" you through the process.
3. Mortgage Broker / Direct Lender: The person(s) giving you the loan to buy the property, unless you are paying all in cash.
4. Escrow Agent: The person helping with the closing process, making sure what the Buyer and Seller are doing is compliant with various instructions and regulations.
5. Title Agent: The person giving you title insurance for the property.
6. Homeowner Insurance Agent: The person giving you hazard insurance (fire, flood, earthquake).
7. Homeowner Association / Homeowner's Association Mgmt Company: If you are purchasing a property in a planned community, the community association.
8. Seller's Agent: The person helping the Seller sell the home.
9. Seller: The current person trying to sell the home.
10. Seller's Lender: The lender(s) that own the loan on the property you want to buy, if there is a loan.
11. General Property Inspector / Pest Inspector / Appraiser / Others: Other folks you'll have to talk to likely at some point in time during he process. More on some of these folks later.
As you can see, there are a lot of people involved in the process. I definitely didn't recognize this until I reflected back on the process a few days before closing. Most likely, when you start shopping for a home with your Buyer's Agent, he or she won't tell you all of the above. He or she will just start asking you about what house you want to buy and show you around. Not the route I'd go, but let me tell you why I think most Buyer's Agents don't tell you the above:
1) tell you all this information takes a lot of time and you might be only a potential client. If I spend all the time educating the Buyer but the Buyer uses another Buyer's Agent, I'd have wasted a lot of time for little gain
2) if most people knew how complex the home buying process is going to be, they'd walk out the door
Tip 2: Learn what role each of the person above will do for you. Research it online. Ask your Buyer Agent. (Some of the folks will be recommended by your Buyer's Agent.) In any case, your Buyer's Agent is there to "help" educate you, but recognize that he or she won't help with everything.
For me, I began by interviewing a bunch of Buyer's Agent (as recommended by several websites) before picking my agent. Good evidence in general, but pretty useless in hindsight. Why? Because even after spending time doing a bunch of interviews, in hindsight, my Buyer's Agent didn't live up to my expectations (perhaps my expectations are high).
Tip 3: Interview a few Buyer's Agent and pay them some money to ask an experienced agent to go through the ENTIRE home buying process with you. For first-time home buyers, the more knowledgeable education you have ahead of time, the better the actual process. While most agents are going to say "I'll be there to guide you when it's time", usually, guidance at that point in time is too little too late. Recognize that once an offer to buy an house is accepted, there is only typically 17 days to get everything done and you likely have a job to balance at the same time.
My first agent: I picked because he had 1) great credentials, 2) good recommendations from past customers that I personally called and 3) lots of experience (been an agent for 10+ yrs). But after I started working with him, he started handing me to his daughter (also an agent) to lead. I didn't mind that at the beginning, but wasn't the excited about the idea.
Perhaps I didn't have the right working style and had asked more questions than typically, but ultimately our relationship didn't work.
My second agent: I picked someone again with experience and specific knowledge of the condo area I was looking to purchase. She's been extremely helpful to getting everything together and pushing me to make decisions. Again, an extremely nice person, but overall, I didn't feel I got everything I had "expected" from my agent.
I think its partly because I couldn't really trust my agent to act in my best interest knowing the incentive structure for an agent (more on this later) and partly because I wasn't always the most communicative with her about all my intentions (again, back to the incentive structure).
Tip 4: Having a Buyer's Agent who is willing to educate you and put you first is the most important. If you are smart and hardworking, you can probably pickup all the other pieces of information. But an experienced agent who can tell you about the pitfalls is key. The fundamental problem for first-time home buyers is that there will be questions you do not know you need to ask until too late. That's where a good Buyer's Agent comes into play.
But recognize most good/great agents probably don't like first-time home buyers. Why? Several reason.
1. First-time home buyers are more needy and require more hand holding, as you can see from this post.
2. First-time home buyers typically buy smaller/cheaper homes => resulting in smaller commissions for the Buyer's Agent.
3. First-time home buyers may talk to multiple agents before either picking an agent or not going through with the process => thus if the first Buyer's Agent spends a lot of time educating the first-time home buyer, he/she would have wasted time with no gain.
Note: Incentive structure for Buyer's Agent. Buyer's Agents get paid by the Seller. It seems odd to me that they get paid by the Seller, because they technical have a duty to put the Buyer's interest first. Inherently, the current incentive model creates a conflict of interest in my mind, but recognize there is probably little way out. While you might structure a different kind of incentive structure (e.g., Buyer pays Buyer's Agent a fixed fee), most Seller's property listing specifically states the commission percentage for the Buyer Agent when the property is sold. Thus, even if you pay your Buyer's Agent and the Buyer's Agent doesn't pick up the typical commission, the Seller's Agent just gets to keep more.
After touring a couple of different properties with my 2nd Buyer's Agent, I quickly knew 1) what I liked and didn't like and 2) the type of property I could afford given my budget. Hopefully, you've already created a budget way before even starting the entire house hunting process. With a set of fixed criterias (e.g., location, purchase price, must haves, nice to have, etc.), searching for the "right" property for you should be simplier. When you finally find that property you want to buy, then comes the offer stage. But one quick detour before I get into the details.
In the Southern California market as of 2011, you will find a large percentage of the listed properties to be either short-sales versus standard sales/REOs. (I am not covering foreclosure auctions, because that's an entirely different ball game.) Let's understand the difference between a short-sale and a standard sale/REO.
Short-Sale: Seller typically still lives in the proerty and holds title (i.e., "owns" the property). However, Seller is trying to sell the property before the bank forecloses on the property because the Seller can't/doesn't want to pay the mortgage. Furthermore, the Seller is trying to sell the property for less than that is owed on the mortgage to the lender and the lender must forgive/write-off the difference (i.e., accept the short-sale.
Standard sale/REO: Standard sales, as the name suggests, are normal transactions. REO (Real Estate Owned) are sales of the property directly by the lender. Typically, the lender has already foreclosed on the proerty and held a foreclosure auction, but no buyers were found. Thus, the lender took control of the property.
My experience is with short-sale properties given the market condition. Let me illustrate: The condo I purchased previously sold in 2006 for a little north of $450K to a Mr. K. Mr. K took out two loans, a 1st and 2nd (junior loan to the 1st) from New Century Financial Corp (look them up Wiki...interesting history) to buy the property, basically paying 0% down. At some point, Mr. K couldn't pay the mortgage anymore. Mr. K was therefore in default and the lender started the foreclosure process on the property (i.e., to take the property from Mr. K.). Instead of going through the entire foreclosure process, Mr. K wanted to try to sell the property before the lender foreclosed (short-sale is better than foreclosure from a credit reporting POV). Mr. K put the condo on the market for around $290K. This is a short-sale because to get the sale completed, the lender must forgive/write-off $170K because as the Buyer, I would only pay $290K for the property.
Tip 5: Understand if you are buying a standard sale/REO or short-sale. Next, understand if it is an approved short-sale or not.
Because Mr. K wanted do a short-sale, he has to get the lender to approve this $170K write-off. An approved short-sale means the Seller has already gotten the lender to commit to XX dollar of forgiveness. So, if the Seller is listing an approved short-sale property at $290K, the lender would have already approved at least a $170K loan writeoff if the original loan was $450K.
Knowning whether the short-sale is approved is important for 2 reasons.
1) All Buyer's Agents prefer approved short-sales because they are faster to close whereby the Buyer's Agent can collect his/her commission faster
2) Getting approval for a short-sale can be a time consuming process (weeks if not months). This is also another moment to reiterate why you want an experienced Buyer's Agent to guide you through the process.
Note: Put yourself in the shoes of the Buyer's Agent. Because you get a commission from a sale, you want to generally guide people to standard sales, REOs, or approved short-sales before non-approved short-sales because the time to closing the home is faster. Who doesn't want to earn money faster? You got kids to feed and stuff to buy too.
As the Buyer, you have little influence on the short-sale approval process. In this stage, the Seller, Seller's Agent, and Lender must work out the details. A good Seller's Agent can be very helpful to guiding the Seller to get all the paper work to the Lender so the Lender can approve/reject the short-sale. But again, as the Buyer, its all comes down to luck. Now, if the Seller's Agent doesn't know what to do, the Buyer's Agent can help the Seller's Agent through the short-sale approval process. (Another reason why a good Buyer's Agent is important).
Once you know whether the property is a a short-sale or standard sale/REO and if its an approve short or not, now comes the offer. If it is not an approved short sale, recognize that you will be helping start the short-sale approval process (2 - 6 months) to get the lender to approve/negotiate/reject the short-sale. During that time, recognize that the Seller is in default on the mortgage (i.e., not paying the mortgage), thus the property can be foreclosed by the lender. Also recognize that even if you made an offer and the Seller has started the short-sale approval process, the property can still be foreclosed by the lender and go to foreclosure auction whereby it is either bought or not. Recognize that if it is not bought (i.e, becomes REO), the lender may not relist the property immediately.
I don't know exactly why the short-sale approval process takes a very long time, but I suspect its because
1) Seller has to get all the paper work to lender and Seller is slow getting such paperwork
2) Given the current market, lenders probably have tons of short-sale approvals to review. Recognize that each time there is an approval, the lender is taking a guaranteed loss and people don't like losses.
3. Multiple different lenders maybe involved the there are multiple loans for the property. These lenders have to work together, which isn't easy.
Tip 6: Buying short-sale properties requires patience and options. If you are set on buying a particular short-sale property, recognize that you may not get it, because 1) lender(s) may not agree, 2) Seller's Agent can't get the Seller to complete the short-sale process, 3) Seller may not qualify for short-sale, 4) lender may decide foreclosure is better because foreclosure auction can fetch a better price. Therefore, have backup properties in mind and make offers to more than 1 non-approved short-sale property if you are comfortable living in another property.
Now, after that long detour, we finally get to the Offer or what will be call the Residential Purchase Agreement (RPA). This is basically a long document where you make an offer to the Seller for the property and it lists out a whole set of information.
Tip 7: Find a blank RPA and read it. The California Realtors Association should have a copy somewhere online.
The RPA has all kinds of information, but there are a couple that are key:
1. Offer price and earnest money deposit
2. Loan rate and type
3. Inspection period before you can cancel offer limited financial impact
Most of the other information on the RPA are disclosures and notices of one type or another. I'll talk about one key disclosure in detail that applies specificallyl to short-sales: General Home Inspection.
Because a short-sale requires lender approval since the lender has to write-off some part of the original loan, lenders are very fixed on pricing. Once you make an offer for the purchase price of the property and it is approved, there is generally no room for further negotiations. Don't imagine there are necessarily several rounds of back and forth. Nor do you really want several rounds of back and forth. While it will only take you may a few minutes to come up with an offer price, your offer goes into some pile at the lender for some person to review and get back to you. Likely, you aren't the only offer because there are a lot of short-sales at the moment. Thus, you might wait weeks before the lender gives you an yes or no of an offer or re-offer.
So, let's say you offer $200K for a property and the offer is accepted by the Seller. (By the way, while the Seller will probably accept just about anything offer, its the lender who has to agree to the terms). So, now the offer goes to the lender for approval. In that time, you hire an home inspector to look over the place and the inspector discovers that most of the appliances are bad and the water heater has to be replace at a total cost of $2K. At that point, if your original offer is accepted by the lender, it is very hard to even negotiate a $2K discount. Basically, you'd have to withdrawal your original offer and make a new one for $198K, starting the lender review/approval process of the short-sale all over again.
Tip 8: Find a good home inspector (certified, with years of experience) and hire him/her to inspect the home prior to making an offer.
A home inspection in Southern California runs anywhere between $250 - $350. It isn't cheap, but you'll need to have someone inspect the place anyways. Don't be penny wise pound foolilsh here. Unless you are a general contractor or inspect, you'll need someone.
Note: Most inspectors will give you a report and in it, it'll list some mundane problems and some series problems that require repairs. A good inspector is someone who is willing to speak honestly to you and tell you which are series and which aren't. Many inspectors will simply tell you that he/she thinks there is a problem, but you need someone more specalized to look into the issue. For the general public, that's not very helpful information, but due to lawsuits, inspectors have gotten more and more "conversative" about the advice they'd give. Thus, find an inspector who is willing to do everything by the books, but also speak to you freely and offer advice on the property.
After you've inspected the property and you still likely it, you are ready to make the offer...but before you start, let's take another detour to explore "how to get a loan."
If you are like me, you probably require a loan to buy a house because you don't have tons of cash lying around. Therefore, you will need to speak to a mortgage broker/direct lender to get a loan. Given there is too much information on mortgages, I'm only going to cover the most basic (for more, please google Mortgage Professor).
Mortgage Documentation:
You are going to have to get quite a bit of documentation ready to get a mortgage. Gone are the days of no-doc loans. I had to have at least the following (you may require more if you have credit issues, income issues, or anything else).
-Valid ID (i.e., driver licenses)
-w2 statement
-last two month paystubs
-last month bank statement (front and back)
-last three years federal tax return
With the most basic information, the lender is going to run a credit report on you to get your credit score. This score while influence the interest rate for your loan. Now, I went with the most simple of loans (conventional, 30yr fixed, no points, 20% down, no PMI). Again, because picking a loan type (e.g., fix, ARM, w/points, no points, downpayment %) is an entire topic on its own, I'd suggest you go to the Mortgage Professor website and read up all about it.
Tip 9: If you are doing all the homework regarding the type of loan you want, a direct lender is the best route to do. Generally, they are the cheapest route because a mortgage broker typically buys from a direct lender, who does the underwriting for the loan. However, recognize that as a first-time buyer, you won't get a lot of hand holding from direct lenders. This isn't to say all mortgage brokers are better, but generally, at least brokers can talk to you and educate you about the process.
Once you pick the lender, write down all his information (company, address, contact person, phone). You'll need to provide this information later to Escrow. Now, onto the formal mortgage application process and opening of escrow, assuming your offer has been accepted by the lender.
Note: At this point, I'd like to talk a little bit about paperwork. All this process creates a lot of paperwork. The offer requires a RPA. If there is an counter or amendment to the RPA, there's paperwork. The Buyer's Agent will give you paper notices/disclosures about the Short-Sale process. At this point, most of the paper work, except the RPA, is just that, a notice. It seems all important, but a lot of is really "junk/educational" paper in my opinion.
Once the lender accepts the offer, you as the Buyer have a set number of days to open escrow and being the formal process of inspecting and completing or cancelling the transaction. At this point, things get real! Why? Because if you recall, you signed a RPA and made an offer. In that RPA doc, you stated that if the offer is accept, you (BUYER) will have certain obligations and you signed you stupid name on that piece of paper.
So, first obligation is to give the earnest money deposit to the Escrow Agent. Who is the Escrow Agent? Either you've already stipulated that or more likely, the Seller/Seller's Agent/Lender has stipulated the Escrow Agent. In any case, it's stated the RPA when you submitted it. Now you know why the RPA is important.
Tip 10: Have a personal check ready with the funds for the Escrow Agent written on, but not signed. This will move this process forward very quickly without you having to "wire" any funds to the Escrow Agent, as your Buyer's Agent may suggest (to the detriment of your wallet).
Once you hand the Escrow Agent the earnest money deposit and escrow opens, the clock is now ticking. As stated in the RPA, you have a certain number of days where you can still pull out from the transaction (i.e., walk away). After that day, you may 1) not be able to walk away from completing the transaction or 2) be able to walk away, but forefit your earnest money deposit plus additional compensation. Again, this is why the RPA is important, even though many agents may ask you to just sign and state that it's only an offer.
To open escrow, you will now meet your Escrow Agent and sign opening escrow papers. These documents are very important. Review the documents and compare them to the RPA. If it is a short-sale, in all likelihood, some of the things you listed out in the short-sale has/is not approved by the lender. In other words, that $500 dollars you wanted the Seller to give to you to help pay for repairments, the lender probably said no. Also, those 1 yr Home Warranty plans you wanted is also probably out the window. Why are these things gone?
1. The original lender is doing a large write-off. If the Seller is paying you anything out of pocket, the original lender is basically saying that "I [lender] should be getting that money or the Seller shouldn't have any money because he/she can't even pay the mortgage."
2. If the Seller doesn't have any money, then the Lender is technically paying these other expenses and the lender is basically saying no.
So, review the opening escrow docs carefully.
Note: The escrow doc will also list out certain obligations the Escrow Agent "must" perform. Once you sign the docs, the Escrow Agent will do what the doc says and use the earnest money deposit you in to pay for some of those activities. Example: Notify the HOA for and get HOA incorporation docs and various other information. Start the preliminary title insurance.
Next, you are now also going to formally start the mortgage application with your lender. But before I talk about that, let's take detour number 3 and talk about closing costs briefly.
Note: Most important part of this application is to lock in the interest rate and get a formal Good Faith Estimate for the cost of the loan.
To buy a house, there are various expenses, which I'll call closing costs for this article. I've group closing costs into three categories and provide you my experience.
Mortgage/Loan Costs:
1. Origination Fee - Technically, cost to "originate" start the loan.
2. Underwriting Fee - Technically, cost to research and underwrite this loan.
3. Processing Fee - Technically, cost to get the loan through the "proces."
4. Lender Wire Fee - Technically, costs to wire funds between parties (my lender to original property lender)
5. Appraisal Fee - Technically, cost to hire someone to appraisal the price of the property as part of underwriting
6. Flood Cert - Technically, getting a certificate from a third-party regarding flood information for the property (underwriting related)
7. Tax Service - Technical, cost for tax related expenses, especially to manage an escrow account
8. Credit Report - That credit report you got earlier, you're paying for it.
9. Interest for Partial Month - If you close your loan say on the 25th, this it he interest from the 25th to the end of the month.
With the exception of 9, all of the above can vary and technically, there is room to negotiate with your lender. Obviously, if you put your self on the lender side, you want to make as much money from the Buyer as possible, so you can create or pass through various costs. Another way to look at it, the lender could eat the cost in certain areas by "waiving" or discounting the costs.
For my loan of $200K, I basically paid $2.5K or 1.25%. I'm not sure if that's great or terrible, but based on my research, loan costs should be between 0.5% to 2% of the loan amount.
Escrow Costs:
Courier Services - Technically, cost to send things overnight. A lot of the documents, especially the notarized docs need to be sent to the lenders overnight so you have to pay for this fee.
Notary Fees - Technically, the cost to notarize the various docs, but more likely, source to make some money because your Escrow Agent generally has the notary powers.
Admin Fees: - Got to have an official place for the Escrow Agent to make money somehow for his/her service.
I paid $1K.
Title Insurance Costs:
Owner's Title Insurance - Price for insuring the Buyer
Lender's Title Insurance - Price for insuring the Buyer's Lender
I paid ~$1.5K
Note: Title insurance is ensure that other parties do not have some lien on the title, which will be passed from the Seller to Buyer (you). Lenders require, at a minimum, you buy Lender's Title Insurance so that the loan amount is protected.
Hazard Insurance (Fire, Flood, Earthquake): Insurance you have to buy, various depending on what you buy, but your lender/loan type will tell you the minimum you have to buy to get the loan. This is where you talk to that Insurance Agent.
Government Costs: Various government taxes and administrative expenses. Not much you can do about them, but you should be able to get these figures early on in the process.
Grant & Deed
Property Tax
Summplemental Property Tax
Other
Most of these costs various significantly between state to state and even county to county. Also, property tax depends upon the size and state you live in.
HOA Costs/Community Association Costs: To be honest, this is all administrative fees to the HOA management company. I have no control over the fees, but basically, it is a way for the HOA to make money.
Upfront Demand Fee
Move in / Post Closing Fee
Transfer Fee
I paid close to $1K to my cringe.
Inspection Costs
1. Pest Report - Technically, a report to discover if you had some fungus problems or rodent eating through the drywall
2. Home Inspection Report - Cover prior
3. Others - You can get a ton of different type of inspections (Radon, Heating, Roof, etc.). The sky is the limit, but you have to ask yourself, what's the risk/reward trade-off at some point.
I paid close to $400, to my delight.
Other Costs
HOA Dues - You pay dues for the following month to the HOA + any penalties that the Seller may have incurred if the Seller is late or owes money.
more to this later....
