Orange County , Irvine, Rancho, Mission Viejo, Lake Forest, Coto de Caza, Aliso Viejo, Trabuco Canyon, and Portola Hills. Danielle and Jim Corliss helping to find and buy the home of your dreams.
The Buying Process:
Buying a home can be one of your most significant
investments in life. Not only are you choosing your dwelling place, and the
place in which you will bring up your family, you are most likely investing a
large portion of your assets into this venture. The more prepared you are at
the outset, the less overwhelming and chaotic the buying process will be. The
goal of this page is to provide you with detailed information to assist you in
making an intelligent and informed decision. Remember, if you have any
questions about the process, we're only a phone call or email away!
The Best Investment
As a fairly general rule, homes appreciate about five
percent a year. Some years will be more, some less. The figure will vary from
neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks
(at times) appreciate much more, and you could earn over six percent with the
safest investment of all, treasury bonds.
But take a second look…
Presumably, if you bought a $500,000 house, you did not pay
cash for the home. You got a mortgage, too. Suppose you put as much as twenty
percent down – that would be an investment of $100,000.
At an appreciation rate of 5% annually, a $500,000 home
would increase in value $25,000 during the first year. That means you earned $25,000
with an investment of $100,000. Your annual "return on investment"
would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying
property taxes, along with a couple of other costs. However, since the interest
on your mortgage and your property taxes are both tax deductible, the
government is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most
any other investment you could make.
Income Tax Savings
Because of income tax deductions, the government is
basically subsidizing your purchase of a home. All of the interest and property
taxes you pay on your primary residence, in a given year can be deducted from
your gross income to reduce your taxable income.
For example, assume your initial loan balance is $400,000
with an interest rate of 4.5%. During the first year you would pay $13,745 in interest. If your first payment is January
1st, your taxable income would be $13,745 less – due to the IRS interest rate
Property taxes are deductible, too. Whatever property taxes
you pay in a given year may also be deducted from your gross income, lowering
your tax obligation.
When you rent a place to live, you can certainly expect your
rent to increase each year – or possibly even more often. If you get a fixed
rate mortgage when you buy a home, you have the same monthly payment amount for
thirty years. Even if you get an adjustable rate mortgage, your payment will
stay within a certain range for the entire life of the mortgage – and interest
rates aren’t as volatile now as they were in the late seventies and early
Imagine how much rent might be ten, fifteen, or even thirty
years from now? Which makes more sense?
Some people are just lousy at saving money, and a house is
an automatic savings account. You accumulate savings in two ways. Every month,
a portion of your payment goes toward the principal. Admittedly, in the early
years of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a
home is approximately five percent, though it will vary from year to year, and
in some years may even depreciate. Over time, history has shown that owning a
home is one of the very best financial investments.
When you rent, you are normally limited on what you can do
to improve your home. You have to get permission to make certain types of
improvements. Nor does it make sense to spend thousand of dollars painting,
putting in carpet, tile or window coverings when the main person who benefits
is the landlord and not you.
Since your landlord wants to keep his expenses to a minimum,
he or she will probably not be spending much to improve the place, either.
When you own a home, however, you can do pretty much
whatever you want. You get the benefits of any improvements you make, plus you
get to live in an environment you have created, not some faceless landlord.
Both indoors and outdoors, you will probably have more space
if you own your own home. Even moving to a condominium from an apartment, you
are likely to find you have much more room available – your own laundry and
storage area, and bigger rooms. Apartment complexes are more interested in
creating the maximum number of income-producing units than they are in creating
space for each of the tenants.
Other Things to Avoid
Before Purchasing a Home
Don’t Move Money
When a lender reviews your loan package for approval, one of
the things they are concerned about is the source of funds for your down
payment and closing costs. Most likely, you will be asked to provide statements
for the last two or three months on any of your liquid assets. This includes
checking accounts, savings accounts, money market funds, certificates of
deposit, stock statements, mutual funds, and even your company 401K and
retirement accounts. If you have been moving money between accounts during that
time, there may be large deposits and withdrawals in some of them. The mortgage
underwriter (the person who actually approves your loan) will probably require
a complete paper trail of all the withdrawals and deposits. You may be required
to produce cancelled checks, deposit receipts, and other seemingly
inconsequential data, which could get quite tedious.
Perhaps you become exasperated at your lender, but they are
only doing their job correctly. To ensure quality control and eliminate potential
fraud, it is a requirement on most loans to completely document the source of
all funds. Moving your money around, even if you are consolidating your funds
to make it "easier," could make it more difficult for the lender to
properly document. So leave your money where it is until you talk to a loan
officer. Oh…don’t change banks, either.
The Effect of
For most people, changing employers will not really affect
your ability to qualify for a mortgage loan, especially if you are going to be
earning more money. For some homebuyers,
however, the effects of changing jobs can be disastrous to your loan
How Changing Jobs
Affects Buying a Home
If you are a salaried employee who does not earn additional
income from commissions, bonuses, or over-time, switching employers should not
create a problem. Just make sure to remain in the same line of work. Hopefully, you will be earning a higher
salary, which will help you better qualify for a mortgage.
If your income is based on hourly wages and you work a
straight forty hours a week without over-time, changing jobs should not create
If a substantial portion of your income is derived from
commissions, you should not change jobs before buying a home. This has to do
with how mortgage lenders calculate your income. They typically average your
commissions over the last two years.
Changing employers creates an uncertainty about your future
earnings from commissions. There is no track record from which to produce an
average. Even if you are selling the same type of product with essentially the
same commission structure, the underwriter cannot be certain that past earnings
will accurately reflect future earnings. Changing jobs would negatively impact
your ability to buy a home.
If a substantial portion of your income on the new job will
come from bonuses, you may want to consider delaying an employment change.
Mortgage lenders will rarely consider future bonuses as income unless you have
been on the same job for two years and have a track record of receiving those
bonuses. Then they will average your bonuses over the last two years in
calculating your income.
Changing employers means that you do not have the two-year
track record necessary to count bonuses as income.
If you earn an hourly income but rarely work forty hours a
week, you should not change jobs. There would be no way to tell how many hours
you will work each week on the new job, so no way to accurately calculate your
income. If you remain on the old job, the lender can just average your
Since all employers award overtime hours differently, your
overtime income cannot be determined if you change jobs. If you stay on your
present job, your lender will usually give you credit for overtime income. They
will determine your overtime earnings over the last two years, then calculate a
If you are considering a change to self-employment before
buying a new home, don’t do it. Buy the home first.
Lenders like to see a two-year track record of
self-employment income when approving a loan. Plus, self-employed individuals
tend to include a lot of expenses on the Schedule C of their tax returns,
especially in the early years of self-employment. While this minimizes your tax
obligation to the IRS, it also minimizes your income to qualify for a home
If you are considering changing your business from a sole
proprietorship to a partnership or corporation, you should also delay that
until you purchase your new home.
No Major Purchase of
Review the article title "Don’t Buy a Car," and
apply it to any major purchase that would create debt of any kind. This
includes furniture, appliances, electronic equipment, jewelry, vacations,
…and automobiles, of course. Don't Buy a Car
When an individual’s income starts growing and they manage
to set aside some savings, they commonly experience what may be considered an
innate instinct of modern civilized mankind...The desire to spend money.
Since North Americans have a special love affair with the
automobile, this becomes a high priority item on the shopping list. Later,
other things will be added and one of those will probably be a house.
However, by the time home ownership has become more than a
distant and hopeful dream, you may have already bought the car.
It happens all the time, sometimes just before you contact a
lender to get pre-qualified for a mortgage.
As part of the interview, you may tell the loan officer your
price target. He will ask about your income, your savings and your debts, then
give you his opinion. "If only you didn’t have this car payment," he
might begin, "you would certainly qualify for a home loan to buy that
and Car Payments
When determining your ability to qualify for a mortgage, a
lender looks at what is called your "debt-to-income" ratio. A
debt-to-income ratio is the percentage of your gross monthly income (before
taxes) that you spend on debt. This will include your monthly housing costs,
including principal, interest, taxes, insurance, and homeowner’s association
fees, if any. It will also include your monthly consumer debt, including credit
cards, student loans, installment debt, and….
How a New Car Payment
Reduces Your Purchase Price
Suppose you earn $5000 a month and you have a car payment of
$400, you would qualify for approximately $50,000 less than if you did not have
the car payment.
Even if you feel you can afford the car payment, mortgage
companies approve your mortgage based on their guidelines, not yours. Do not
get discouraged, however. You should still take the time to get pre-qualified
by a lender.
However, if you have not already bought a car, remember one
thing. Whenever the thought of buying a car enters your mind, think ahead.
Think about buying a home first. Buying a home is a much more important
purchase when considering your future financial well being.
The Business Cycle
and Buying a Home
There are times when the economy is brisk and everyone feels
confident about his or her prospects for the future. As a result, they spend
money. People eat out more, buy new cars, and….
…they buy new homes.
Then, for one reason or another, the economy slows down.
Companies lay off employees and consumers are more careful about where they
spend money, perhaps saving more than usual. As a result, the economy
decelerates even further. If it slows enough, we have a recession.
During such a time, fewer people are buying homes. Even so,
some homeowners find themselves in a situation where they must sell. Families
grow beyond the capacity of the home, employees get relocated, and some may
even find themselves unable to make their mortgage payment - perhaps because of
a layoff in the family.
Supply and Demand
When the supply of available houses is greater than the
supply of buyers, appreciation may slow and prices may even fall, as happened
in the early eighties and the early to mid-nineties.
If you are lucky enough to purchase a home during a slow
period, you can be reasonably certain the economy will begin to show strength
again. At times, real estate values may even surge drastically. In many regions
of the country, this is precisely what occurred in the late eighties
Should You Try to "Time the Market"?
One problem with attempting to time your purchase to the
business cycle is that no one can accurately predict the future. Another
challenge is that interest rates are generally higher during a depressed market
and income may not be keeping up. For that reason, fewer people can qualify for
a home purchase than in more prosperous times.
Why You Should Not
Plus, this strategy generally works best for first-time buyers.
People who already have a home usually need to sell it in order to buy their
next one. If a "move-up" buyer wants to buy a home during a depressed
market, that means they usually have to sell one during the slow market, too.
If a seller wants to sell his home to take advantage of a "hot"
market when prices are fairly high, they generally have to buy their next home
during that same hot market. It tends to equal out.
Finally, the business cycle can change over time. Since
1983, we have had two fairly long expansions with only a slight recession in
between each. You would not want to wait nine years to buy a home, would you?
You could miss out on a substantial amount of appreciation by waiting, and end
up paying much higher prices.
Determining Your Offer
When you prepare an offer to purchase a home, you already
know the seller’s asking price. But what price are you going to offer and how
do you come up with that figure?
Determining your offer price is a three-step process. First,
you look at recent sales of similar properties to come up with a price range.
Then, you analyze additional data, such as the condition of the home,
improvements made to the property, current market conditions, and the
circumstances of the seller. This will help you settle on a price you think
would be fair to pay for the home. Finally, depending on your negotiating
style, you adjust your "fair" price and come up with what you want to
put in your offer.
The first step in determining the price you are willing to
offer is to look at the recent sales of similar homes. These are called
"comparable sales." Comparable sales are recent sales of homes that
compare closely to the one you are looking to purchase. Specifically, you want
to compare prices of homes that are similar in square footage, number of
bedrooms and bathrooms, garage space, location, lot size, and type of
If the home you are interested in is part of a tract of
homes, then you will most likely find some exact model matches to compare
against one another.
There are three main sources of information on comparable
sales, all of which are easily accessed by a real estate agent. It is somewhat
more difficult for the general public to access this data, and in some cases
impossible. Two of the most obvious information sources are the public record
and the Multiple Listing Service.
Comparable Sales in
the Public Record
The most accessible source of information on comparable
sales is the public record. When someone buys a home the property is deeded
from the seller to the buyer. In most circumstances, this deed is recorded at
the local county recorder’s office. They combine sales data with information
already known about the property so they can assess property taxes correctly.
Provided there have been no additions to the property, the
information available from the public record is usually correct regarding sales
price, square footage, and numbers of rooms. This makes it easy to use the
public record as a source of data for comparable sale information.
Accessing the data is another matter, at least for the
general public. Real Estate Professionals can generally look up this
information through title insurance companies. The title companies either
compile the data directly from the county recorder’s office or purchase it from
One problem with the public record is that it tends to run
at least six to eight weeks behind. Add another four to six weeks for the
typical escrow period and you can see the data is not current. The most current
information is the most valuable.
Comparable Sales in
the Multiple Listing Service
Most of the public is aware that the Multiple Listing
Service is a private resource where Real Estate Professionals list properties
available for sale. The public can access some of that information on such
sites as Realtor.com, MSN HomeAdvisor, and others.
Once a property is sold and the transaction has closed, the
selling price is posted to the listing in the Multiple Listing Service. Over
time, it has become a huge database on past sales, containing much more
information on individual homes than can be gleaned from the public record.
This information is only available to real estate agents who are members of the
local Multiple Listing Service. Your agent will provide you with this data to
help determine your offer price.
Comparable Sales –
The most valuable information would be the most current, of
course. A sale last week has more validity in helping you determine a purchase
price than a sale from six months ago. The problem is that there is no actual
record of the sales price until the transaction is completed. The information
is not available in the public record because no deed has yet been recorded.
Neither is the information available in the Multiple Listing
Service. Once an offer is accepted, it becomes a "pending sale" and the
sold prices are not posted until it becomes a "closed sale." This
protects the seller in case the transaction falls apart and the property is
placed back on the market. It would give an unfair advantage to future
potential buyers if they already knew what price the seller had been willing to
accept in the past.
Influencing Your Offer Price
Gathering and analyzing information from comparable sales
helps to establish the range of prices you should consider when making an offer
to buy a home. More weight should be given to the most recent sales, but even
so, you need to do a bit more analysis before setting upon the price you will
offer. That is because you also need to consider the condition of the property,
improvements, the current market, and the circumstances behind the seller’s
decision to sell.
Condition Affects Your Offer
Since you have toured the property you are interested in,
you should know how it compares to the general neighborhood. When evaluating a
home’s condition, there are a number of things you should consider. Structural
condition is most important - items such as walls, ceilings, floors, doors and
windows. Then paint, carpets, and floor coverings. Pay special attention to
bathrooms and bedrooms and whether the plumbing and electricity work
efficiently. Look at the fixtures, such as light switches, doorknobs, and
drawer handles. The front and back yards should be in reasonably good shape. The
missing ingredient will be information on the condition of the homes from your
comparable sales list.
How Home Improvements
Affect Your Offer Price
Even when comparing exact model matches within a tract of
homes, you should note whether the previous owners have made any substantial
improvements. Most important would be room additions, especially bedrooms and
bathrooms. Other items, like expensive floor tile or swimming pools should be
taken into account, too, but should be discounted. A pool that costs $60,000 to
install does not normally add $60,000 in value to the home. Rely on your agent
to give you guidance in this area.
How Market Conditions
Affect Your Offer Price
A hot market is a "seller’s market." During a
seller’s market, properties can sell within a few days of being listed and
there are often multiple offers. Sometimes homes even sell above the asking
price. Though most buyer’s want to get a "deal" on a home, reducing
your offer by even a few thousand dollars could mean that someone else will get
the home you desire.
A slow market is a "buyer’s market. During a buyer’s
market properties may languish on the market for some time and offers may be
few and far between. Prices may even decline temporarily. Such a market would
allow you to be more flexible in offering a lower price for the home. Even if
your offered price is too low, the seller is likely to make some sort of
counter-offer and you can begin negotiations in earnest.
More often than not, the market is simply
"steady," or in transition. When a market is steady, no real rules
apply on whether you should make an offer on the high end of your range or the
low end. You could find yourself in a situation with multiple offers on your
desired house, or where no one has made an offer in weeks.
Transition markets are more difficult to define. If the
economy slows unexpectedly, as it did in the early nineties, people who buy on
the high end of a seller’s market (like the late eighties) could find their
home loses value for several years. So far, no one has proven reliable in
predicting when markets change or how good or bad the real estate market will
How Seller Motivation
Affects Your Offer Price
Truthfully, it is rather rare that a seller’s motivation
will dramatically affect the price of a home, but it is often possible to save
a few thousand dollars. The most common "motivated seller" is someone
who has already bought his or her next home or is relocating to a new area.
They will be under the gun to sell the home quickly or face the prospect of
making two mortgage payments at the same time. Since that can drain a bank
account quickly, most sellers want to avoid such a situation and may be willing
to give up a few thousand dollars to avoid the possibility.
There are also family crises that can motivate a seller to
make a quick deal. However, when you see a real estate ad that mentions
"divorce," "motivated seller," "relocation," or
something to that affect, beware. Although the facts may be true, that does not
necessarily mean the seller is motivated to make a quick and costly sale. Most
likely, the ad is more designed to generate phone calls and leads rather than
sell the home.
However, there are times when a seller is truly distressed,
willing to make a quick sale and sacrifice thousands of dollars. With the
seller’s permission, the listing agent will post this information along with
the listing in the Multiple Listing Service. They may also inform other agents
during office and association marketing sessions or by flyers sent to other
real estate offices. Provided this information has been made generally
available to Real Estate Professionals, your agent should know when a seller is
truly motivated and when it is just "puff" designed to elicit interest
in a property.
The Final Decision on
Your Offer Price
Comparable sales information helps you to determine a base
price range for a particular home. Adding in the various factors like property
condition, improvements, market conditions, and seller motivation help
determine whether a "fair" price would be at the upper limit of that
range or the lower limit. Perhaps you will feel a fair price is outside of that
The "fair" price should be approximately what you
are willing to agree on at the end of negotiations with the seller. The price
you put in your offer to begin negotiations is totally up to you and depends on
your negotiating style. Most buyers start off somewhat lower than the price
they eventually want to pay.
Although your agent may provide advice and guidance, you are
the one who makes the decision. The price you put in the offer is totally up to
Writing an Offer to
Purchase Real Estate
Once you find the home you want to buy, the next step is to
write an offer – which is not as easy as it sounds. Your offer is the first
step toward negotiating a sales contract with the seller. Since this is just
the beginning of negotiations, you should put yourself in the seller’s shoes
and imagine his or her reaction to everything you include. Your goal is to get
what you want, and imagining the seller’s reactions will help you attain that
The offer is much more complicated than simply coming up
with a price and saying, "This is what I’ll pay." Because of the
large dollar amounts involved, especially in today’s litigious society, both
you and the seller want to build in protections and contingencies to protect
your investment and limit your risk.
In an offer to purchase real estate, you include not only
the price you are willing to pay, but other details of the purchase as well.
This includes how you intend to finance the home, your down payment, who pays
what closing costs, what inspections are performed, timetables, whether
personal property is included in the purchase, terms of cancellation, which
professional services will be used, when you get physical possession of the
property, and how to settle disputes should they occur. It is certainly more
involved than buying a car. And more important.
Buying a home is a major event for both the buyer and
seller. It will affect your finances more than any other previous purchase or
investment. The seller makes plans based on your offer that affect his
finances, too. However, it is more important than just money. In the half-hour
it takes to write an offer you are making decisions that affect how you live
for the next several years, if not the rest of your life. The seller is going
to review your offer carefully, because it also affects how he or she lives the
rest of their life.
That sounds dramatic. It sounds like a cliché. Every real
estate book or article you read says the same thing.
They all say it because it is true.
Contingencies in a
In most purchase transactions there may be a slight
challenge or two, but most things will go quite smoothly. However, you want to
anticipate potential problems so that if something does go wrong, you can
cancel the contract without penalty. These are called "contingencies"
and you must be sure to include them when you offer to buy a home.
There are common contingencies you should include in your
offer. Since you probably need a mortgage to buy the home, a condition of your
offer should be that you successfully obtain suitable financing. Another
condition should be that the property appraises for at least what you agreed to
pay for it. During the escrow period you are likely to require certain
inspections, and another contingency should be that it pass those inspections.
Basically, contingencies protect you in case you cannot
perform or choose not to perform on a promise to buy a home. If you cancel a
contract without having built-in conditions and contingencies, you could find
yourself forfeiting your earnest money deposit. Or worse.
Earnest Money Deposit
After you have come up with an offer price, the next step is
to determine how large a deposit you want to make with your offer. You want the
"earnest money deposit" to be large enough to show the seller you are
serious, but not so large you are placing significant funds at risk.
During a hot market there may be multiple offers on the
property that interests you. A large deposit may impress a seller enough so
they will accept your offer instead of someone else’s, even when your unknown
competitor is offering the same price or slightly higher.
Since large deposits do impress sellers, you may also find
that by making a large deposit you can convince the seller to accept a lower
offer. More money up front may save you money later.
There are also times when closing can be delayed by weeks,
through no fault of your own. Have back-up plans prepared for such a
The Closing Date
It is absolutely essential that you include a closing date
as part of your offer. This way both you and the seller can make plans for
moving, and the seller can make plans for buying his or her next home. Though
most transactions actually do close on the right date, do not be so inflexible
that a delay creates insurmountable problems.
For example, if you are renting and need to give the
landlord notice that you are moving out, you may want to allow a little
flexibility. Otherwise, if your purchase closes a few days late you could find
yourself staying in a motel with your belongings packed in a moving van
somewhere while you pay storage costs.
A transaction is considered "closed" once the
deeds have been recorded. Then you own the home. However, it is not always
possible for you to occupy it immediately. This can happen for several reasons,
but the most common is that the seller may be purchasing a home, too. Usually,
it is scheduled to close simultaneously with your purchase of their home.
It is sort of like being at a red light when it turns green.
Although all the cars see the light change at the same time, the guy at the
back of the line doesn’t begin moving until all the cars ahead of him have
As a result, it has become customary to allow the seller up
to a maximum of three days to turn over actual possession and keys to the home.
When transfer of possession actually occurs should be clearly laid out in your
offer to prevent confusion later.
Writing an Offer -
Safeguards Regarding the Property
Disclosures From the
Although you have toured the property, looked at the walls
and ceiling, turned on the faucets and played with the light switches, you have
not lived in it. The seller has years of knowledge about his or her home and
there may be some things you want to find out about as quickly as possible. For
this reason, you will require certain disclosures as part of your offer.
Basically, you want the seller to disclose any adverse
conditions that may have a substantial impact on your decision to purchase the
home. This would include any problems with the house, whether the property is
in a flood zone, a noise zone, or any other kind of hazardous area.
Besides appraisal and the termite inspection, you should
also have a professional go through the house and seek out potential problems.
Of course, you will have inspected the home, but you are not used to looking at
some things that a professional will find. Even if they are not things the
seller is expected to repair, at least you will have foreknowledge of any
The seller will want this inspection performed quickly, so
that you can approve the results and move forward with the purchase. Once you
receive the inspection, you will want to allow yourself sufficient time to
review and approve the report. Remember, in California, the Real Estate Purchase
Contract (RPA) provides for an "As Is" purchase. However, you may attempt
to negotiate with the sellers on which repairs should be performed and who
should pay for those repairs. Otherwise, you can cancel the purchase without
penalty, provided you have included this as a contingency with your offer.
Before closing, you will want to revisit the property to
ensure it is in essentially the same condition as when you wrote your offer,
and to inspect that any required repairs have been performed. You should do this
no sooner than five days before you intend to close.
How Financing Details
Affect Your Offer
Most buyers do not have enough cash available to buy a home,
so they need to obtain a mortgage to finance the purchase. Since you will
probably make your purchase contingent upon obtaining a mortgage, the seller
has the right to be informed of your financing plans in order to evaluate them.
That is one of the major reasons that financing details are included in your
As part of your offer, you will need to disclose the size of
your down payment. Once again, this allows the seller to evaluate your
likelihood of obtaining a home loan. It is easier to get approved for a
mortgage when you make a larger down payment. The underwriting guidelines are
How FHA and VA Loans
Affect Your Offer
Extra Costs to the Seller
If you are obtaining a VA
or FHA loan in order to finance your purchase, you must include that
information in your offer. This is because government loans place additional
financial and performance obligations on the seller.
VA and FHA Appraisals
Home appraisal inspections
on FHA and VA loans are a little more detailed than on conventional loans (and
more expensive). The appraisers are required to perform certain minimum
inspections as well as evaluate the market value of the property. Although
these inspections are not as detailed as a professional home inspection and
should not be considered a substitute, sometimes repairs are required.
These are additional costs
the seller would not be obligated to pay for someone obtaining conventional
financing, so your offer should include a maximum figure for these repairs.
Otherwise the seller is signing the equivalent of a blank check, and they do
not want to do that.
At the same time, whatever
figure you put in will most likely affect the seller’s willingness to negotiate
on price. If you put $500 as an estimate, the seller may be $500 less
negotiable on their price. If no repairs are required, you may have been able
to get the house for $500 less than what you and the seller agreed on as the
price. The solution is to add a clause to your offer that goes something like
this. "If required repairs cost less than the maximum amount allowed, the
excess will be credited toward buyer’s closing costs."
Escrow or Settlement
For example, you are going
to need an escrow or settlement company to act as an "independent third
party" between you and the seller. In this area we call it
"Escrow". Without having a third party involved, how do you know that
when you write a check to Escrow, you are going to get the deed? This is the
type of service provided by escrow. They will hold your deposit and coordinate
much of the activity that goes on during the escrow period.
Since this third party is
very important to both you and the seller and both of you will pay fees to this
company, it is important to agree on which service to use. Therefore, your
choice should be part of the offer. Since you do not buy a home every other
week or so, you are probably unfamiliar with companies that provide this
service. Your agent can make a recommendation.
Title insurance is
important because, by providing you with an Owners Policy, they insure that you
have clear title to the property. If there are any problems later, you can
always go back to the title insurance company and have them clear it up. Since
it is customary for the seller to pay for the owner’s policy, they have an
interest in which company is used.
However, you are going to
pay a fee to the title insurance company, too. This is for the Lender’s Policy.
The lender’s policy insures your mortgage lender that there are no liens or
judgments against the property and that the mortgage will be in first position.
In other words, should you sell the property or refinance it, their mortgage
gets paid first, before any other claims against the property.
The lender’s policy is less
expensive than the owner’s policy because the lender's policy is based on the
loan amount and the Owner's policy is based on the Sales Price.
Termite and Pest Inspection
As part of your offer, you
may require a termite and wood destroying pest inspection. This company not
only inspects for termite damage and pest infestations, but also inspects for
dry rot and water damage, among other things.