1. Why Purchase?
There are many reasons to purchase a home, but they are not the same for everyone. Figuring out the real reason(s) for purchasing is the most important step as it will layout the groundwork for each subsequent step. You may not want to put too much emphasis on a reason such as price, interest rate, or something else financially based if you are moving for a quality of life issue such as having more room for your family or being closer to work. Conversely, you may not want to focus on interior finishes that fit your personal taste if you are purchasing a rental property and looking at maximizing cash flow.
Step 1 is to make a list of why you are deciding to make a purchase. We have created this interactive list to help you prioritize your reasons. Included are some of the more popular reasons and customizable spaces to include your own.
Financing a home purchase can be a rather large obstacle so starting on the process early can help the process go as smooth as possible. There are 3 ways to pay for a home; obtaining a loan, paying cash, or exchanging property.
The most common way to pay for a home is through obtaining financing. There are many different loan programs available and even different types of lenders. Since there are so many options, it is very advantageous to find one that works best for your specific situation.
- FHA – For owner-occupied homes and allows a down payment of as low as 3.5% of purchase price, 31/43 debt-to-income ratios, up to 6% seller contributions, allows gifting from family members, up front mortgage insurance premium in addition to monthly mortgage insurance.
- VA – For veterans and allows 100% financing requiring no down payment, no mortgage insurance, 41 debt-to-income ratio, up to 4% seller contributions, VA funding fee will apply.
- Conventional – A conforming loan under 417k. This is the broadest type of loan allowing as little as 3% down, both fixed and adjustable rates, lower monthly mortgage insurance that FHA, lower allowable debt-to-income ratios, max seller contributions range from 2-9%, available to investors and second homes as well.
- Jumbo – A conforming loan that exceeds 417k and requires lower debt-to-income ratios, as low as 10% down payment, and higher credit scores.
- Seller Financing – Although it is a less common practice, the seller can become the lender. This may be advantageous for the buyer that may have problems with obtaining traditional financing. There are often higher down payments required.
- Hard Money Loans – More common for fix-and-flip investors, loans will be shorter terms with much higher interest rates. Usually requires higher down payments and much higher interest rates, but have little requirements and can be quicker to obtain.
- Cash – The surest way to get that property is to pay cash. Cash buyers have an advantage because they can close on a property sooner and appraisal contingencies are sometimes removed. They also have lower closing costs since they do not have to pay any lending fees.
- Exchanges – An exchange happens when an individual trades real estate for other real estate. It does not have to be a single piece for another single piece, the number can go up or down. This is usually done to delay paying taxes on the sale of an investment property as with a 1031 Starker Exchange.
Also, some loans have different attributes. For example:
- Fixed vs Adjustable – A fixed rate loan will maintain the same interest rate throughout the life of the loan whereas an adjustable rate loan will adjust at predetermined intervals and is usually tied to an index and margin. Adjustables can be lower initially but lack the certainty that fixed rate loans offer.
- Amortized vs Interest Only – An amortized loan will contain both principle and interest in each payment. Over time the amount of each payment goes more towards principle and less towards interest. Interest only loans have no principal reduction during the interest only period and may revert to an amortized loan after that period is finished.
Once a decision is made on what method will be used to purchase the property, things can always change. The important thing to do is start this process early so that any surprises that come up are minimal and that you are ready once the perfect place comes available.
3. The Search
Finding a home can be a daunting task. In the last 10 years, we have seen as many as 55,000 residences available to purchase at a given time in the Valley alone. The primary goal is whittling that number down as much as possible in order to make a more manageable number of properties to decide upon.
- Location – This is what is truly unique about real estate. You can build another house to the exact specifications, but it cannot occupy the same space as another. That may seem pretty obvious, but that is why such a premium is placed on certain homes and why real estate can be such a good investment. Choosing a certain neighborhood is key. You may decide to be within a certain proximity from work, within a certain school’s boundaries, or near where you prefer to socialize. These are all good ways to start the search.
- Dwelling Type – A single-family house is the most common. This is described as a freestanding residence. A townhouse adds attached residences to one or more sides, but not above or below. A condo will have will have neighbors above, below, or both. There are also mobile and manufactured homes, but these are less common.
- Size – How large of a space do you need? This can refer to either building size, lot size, or both. This is measured in square footage, however it can be quantified in other ways such as number of bedrooms or enough room for a pool.
- Features – By now, the number of results on the search should have reduced considerably. The features search is kind of like the fine tuning. This is by no means the least important, it is just more logical to discuss this after the other three have been discussed. Features can include pools, fireplaces, number of bathrooms, types of appliances, number of stories, size of rooms or any number of other options available. It is most likely that this is the area where compromises may be made.
At this point the search should be at a manageable number so we can compare these results with what you are able to afford. This may require you to remove features or make more compromises. Conversely, you may be able to add in more features that you may not have necessarily needed. Or, you can always just be happy with spending less per month on that house.
We have created a system to allow you to create, modify and save your own searches. We created this knowing that most people are going to be doing there own research before or while we are working together. This will allow us to see what you are seeing and liking while you can’t sleep at 3am.
Pictures and virtual tours are great, but these homes and neighborhoods have to be seen in person. At the beginning of the search there are usually more homes to see. As time goes on, the right home may not be on available, so it is waiting for new ones to come on the market. Now that we are connected to the internet 24/7 with smartphones and tablets, we have the ability to change the showing appointment on the fly. After seeing your reactions to certain neighborhoods or features, we may recommend changing or expanding the search criteria. If a house is vacant or can at least get a last minute appointment we may be able to see additional places that we had not intended on seeing.
This is the most dynamic part of the process and can change quite a bit. Aside from changes in what you are looking for or changes in inventory, other market forces are at work. A change in interest rate can affect how much you can afford as well as an increase or decrease in housing prices in general.
4. Negotiating the Deal
At this point in the process you have decided on a place you would like to write an offer on. Although price is by far the biggest consideration, there are other factors that go into negotiating a deal that works for you, yet something the seller will accept.
- Price – No matter what anyone says, there is no rule of thumb on what to offer based on a list price. Sometimes a house can be priced aggressively in order to attract many buyers who may compete with each other and drive the price up. Another strategy may be to price it a little higher assuming the buyer won’t offer full price anyway. Regardless of the strategy that a seller is using, there are three things to consider when coming up with a price.
- What is the most you are comfortable paying?
- How much does the home comp out at?
- What is the perceived competition from other buyers?
- Close of Escrow Date – This is when the property will officially become yours. A cash sale may be completed in a week while a financed transaction may take a month. Many sellers like to see something relatively quick assuming they don’t need too much time to move. The danger lies in making this date too soon and the loan cannot get funded in time. This could lead to needing to extend this date which may cost additional money per day or even cancellation of the contract.
- Earnest Money – This is the amount you are willing to put up as good faith that you will be able to close on this loan. Sellers like to see more, buyers like to pay less. This is applied towards your down payment and/or closing costs, but may be forfeited to the seller if you do not close on the transaction and are not within your rights for it to be refunded to you. One way to get a deal through in a seller’s market may be to make the earnest money hard immediately or after a certain date. This removes the ability for the earnest money to be refunded even if you would normally be able to get it back if the contract is cancelled.
- Inspection Period – By default this period lasts for ten calendar days. This can be changed if you need more or less time to complete the inspections. Since your earnest money can be refunded within this period, changing this period gives you more time to pull out of the transaction or less time that the seller has to be concerned of you pulling out.
- Appraisal Contingency – Normally you can withdraw from a transaction if the property does not appraise for purchase price. Removing this contingency means that if the property does not appraise you are willing to make up the difference in cash or lose your earnest money if you cancel.
- These are just some of items that can be negotiated upon. There are others that may come up in specific situations. There could also be multiple offers on a property and there could be counter offers going back and forth until both sides come to an agreement.
5. Title and Escrow
In Arizona, most escrow companies are owned by title companies so both can be handled by the same company. The escrow company is a third party between the buyer and seller. The contract will instruct the Escrow Agent of their responsibilities. These responsibilities include:
- Collect and hold all funds
- Order title search to verify seller’s legal right to sell and discover all encumberances
- Order title insurance policy and HOA CCR’s
- Create settlement statement and calculate prorations of taxes, liens, interest, and insurance.
- Payoff all liens and disburse money to appropriate parties
- Send documents for recording
The title company is in charge of running a title search. This will make sure the seller has legal right to sell the property and uncover any encumberances on the property such as liens or easements. The other responsibility of the title company is to offer title insurance. This is an insurance policy that is paid by the buyer for the benefit of the lender. This will protect the lender’s interest against any defects in title.
6. Inspection Period
Once both sides agree and you have entered into a contract there are still quite a few things left to do. The inspection period, or the due diligence period is the opportunity to perform any inspections to find out if you still want the place and if there are repairs that you will be requesting. This period starts on the day one party delivers acceptance to the other. By default, this period lasts ten days unless a different number is negotiated upon. It will end at midnight on that final day unless or when the buyer gives notice to the seller, whichever is sooner.
This notice has three options; proceed without requesting and repairs, proceed as long as repairs are made, or cancel the contract. If repairs are requested, the seller has the option to make these repairs, some of them, or none of them. If they choose to not make every repair, the buyer can in turn cancel or proceed.
Since it is not practical to perform inspections on every house you are interested in prior to having an accepted contract. This is your opportunity to make your decision as informed as possible. There are many types of inspections that can be done. The most common are general home inspections and pest inspections. Others include mold, radon, sewer, septic, etc. This is also a chance to have technicians further inspect specific areas such as HVAC, plumbing, electrical, roof, pool, etc. This will allow you to get estimates of anything that may need to be repaired. There are other ways to further educate yourself as well such as talking to neighbors, reading over Seller’s Property Disclosure Statement or CCR’s.
An appraiser is a neutral third party who is trained to give an estimate of value on a property. If you are trying to obtain financing, an appraisal will be required. A bank wants to be sure that they are not loaning you more money than a property is worth. The market based approach is an attempt to compare the subject property to others that have recently sold that are as similar as possible. This is most common for the resale of residential real estate. Adjustments are made for items based on the Home Valuation Code of Conduct. These items include seller concessions, location, market changes since sale, building square footage, lot square footage, age, bedrooms, bathrooms, parking, pool, quality of construction, condition, upgrades, and others. Once adjustments are made for each item an adjusted comparable price is given. These are compared to give an appraisal of value.
- If this amount comes in at or above purchase price, the transaction proceeds as planned. If it comes in lower, there are a few options:
- Seller reduces the sales price to meet the appraised value.
- Buyer comes up with the difference in cash since the bank will only lend based on the appraised value.
- Both sides figure concede some and meet somewhere in the middle.
- None of these options are agreed upon and the buyer cancels the transaction and may receive a refund of their earnest money.
This is the moment everybody has been waiting for. The inspection period has completed, the appraisal is finished and has either came in alright or both parties have agreed on a solution. Assuming there is financing involved there are a few items left. By now, the lender’s underwriter should have already received everything they need such as tax returns, bank statements, pay stubs, verifications of employment, and other items they may ask for. Once the underwriting process is complete, the documents can be drawn and sent for signing.
In Arizona, buyers and sellers sign separately and can be done with any Notary Public. This is often done with the escrow officer at the escrow/title company, but can even be done with a mobile notary at a coffee shop. After buyers and sellers have completed signing their respective documents, the lender will review and send fund the loan. Once the escrow company has the money from the lender, buyer, and seller if it is required, they are can go ahead and record the sale. Once it is recorded, it is now public record and has officially closed. Congratulations!
9. After The Close
Just because the transaction has completed doesn’t mean our job is finished. We are always available for anything relating to real estate. If you need a repair, remodel, refinance or anything else let us know and we can provide a referral to one of our trusted vendors. We do not receive any kind of kickbacks from these vendors, we just want to be able to refer out quality services to our clients. We also have the ability to keep you up to date with the real estate activity in your neighborhood. Of course whenever you decide to sell or have anybody else you know that are looking to buy or sell, we are always here to serve you!