Frequently Asked Questions From Buyers
Selling a home comes with a ton of questions. Over the years, we found that the buyers we work with ask similar questions. So, we decided to answer all of those questions (and more!) below.
Does it cost money to use a Realtor? How does commission work?
In most cases, the seller agrees to the commission that will be paid to the agent that is working for them. From there, once the listing is posted publicly on the Multiple Listing Service, the commission that agent will pay to a cooperating broker is posted there. Essentially, this means that both buyer and seller agents are working for free until the deal is closed! The buyer will almost never write a check to pay a broker, and the agent working for the seller is paid out of the proceeds of the sale.
What are the upfront costs of buying a home?
Inspection – Inspection costs vary based on the area, size of the home, and the services the inspector is providing. For a standard home inspection on a single-family home, a buyer should budget $350-$500. Of course, other inspections require additional fees, so if you’re thinking about a lead inspection you should budget $400-500 at a minimum, a pest inspection will be additional, and so on. Lender Costs/Fees (Appraisal, Credit Report, etc) – These fees are often lumped into your closing costs that are paid at the end of the transaction, but sometimes are charged up front. Expect to pay about $475 for an appraisal. Attorney/Legal Fees – Real estate attorneys traditionally charge a flat fee and do not charge by the hour. A real estate attorney that is able to work on behalf of your lender will often waive the personal representation fees on your behalf, as they will be compensated by the lender and/or title company, with some additional recording fees up to $500. Downpayment – The largest chunk of money that you will pay, your downpayment is broken up into two deposits and a final payment. You’ll need to bind your offer with an earnest money deposit, typically $500-5000, but sometimes higher or lower depending on purchase price and the situation. The remainder of the downpayment will be brought to closing as cleared funds, either via a wire into the title company's account or via a bank check. Any small adjustments at closing can be made via personal check. We traditionally speak of down payments as percentages (3.5% down, 5% down, 10% down, 20% down, 30% down, etc).
How much do I need for down payment?
This is an interesting question because there are actually some loan programs out there that require 0% down! There are a number of first-time buyer programs that require between 3-5% as well. That being said, many homes end up with multiple offers and financing is a big consideration as to the strength of an offer, so oftentimes if a buyer has the ability to do so, a 10-30% downpayment will help strengthen an offer. But if you can't, that should NEVER discourage you! In addition, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance, which can be quite costly (when using a Conventional Loan).
What's the difference between assessed, appraised, and market value?
Assessment/Appraisal Difference - We get asked all the time about the different values assigned to a property, and why they often seem to be so substantially far apart! Here’s a quick rundown - Market Value: Simply put, this is what a buyer is willing to pay for a property. A real estate professional will use their knowledge of the market as well as a comparable market analysis to give a range of value for a specific property; however, there is both an art and a science to this process so each real estate professional may have a different opinion of value. Appraised Value: An appraisal takes place if there is financing being obtained on a home (or some other situation arises, such as for estate/probate purposes). Basically, a lender wants to be sure that the home is worth what the buyer is paying (and what they are lending), as they will be holding a mortgage on the home as collateral for their loan. Appraisers traditionally will create a radius around a property and select 3-6 comparable properties that have sold, and add or subtract value based on the finishes, overall condition, and basic specs of a property. If financing, it is important that the property appraises. If it does not, the lender cannot lend more than the appraised value minus down payment. Assessed Value: An assessment is done for tax purposes. The city/town assessors’ office places a value on each property in the municipality each year in order to ascertain what the tax on each property should be.
Where do my option fee and earnest money go?
Option fees are paid directly to the seller and typically only refundable at closing, while earnest money in Texas is typically paid to and held in escrow by a Title Company; earnest money is either paid to the seller or refunded to a potential buyer, depending on a number of factors.
The termination option paragraph of the contract gives a potential buyer, in return for paying an "option fee" to the seller, the unrestricted right to terminate the contract by giving notice of termination to the seller within a specified number of days after the effective date of the negotiated contract. The number of days and the amount of the option fee, like sales price and earnest money, are among those features negotiated between a seller and potential buyer in the sale contract; in Texas, option fees typically range from $50 to $250, while earnest money ranges from zero to several thousand dollars. When the transaction is settled, then the deposit is applied to the buyer's portion of the remaining costs.
What is a bidding war?
Our current market conditions are simply a function of supply and demand, because of this, there are often multiple buyers bidding on the same one property, which creates “the auction effect” – or a bidding war. At one of our most recent listings, the scarcity of similar properties becoming available in the neighborhood lead to over a half dozen offers being submitted, the majority over ask and a handful presenting as either all cash or boasting no contingencies. It’s not always the highest price that seals the deal, sometimes, other aspects of the offer add significant value to the seller. Limiting contingencies can lessen risk for sellers who are worried about their ability to buy their next place, and adding a use & occupancy for a seller after leaseback might help with the timeline on their purchase or significantly increase their buying power. Oftentimes, when there are a number of offers on a property, the agent working for the seller will work with their client to narrow the field to 3-5 of the strongest offers and circle back to those buyers for a second round or “best and final”. This represents an opportunity for the seller to communicate their most desired terms and for the top offers to improve their position before the seller makes a final decision. In our market, there is often an emotional desire to “win” that overpowers the need to make a sound investment decision. It’s very important to discuss goals with your agent after signing a Buyer Agency Agreement in order that they make be able to effectively advise you while keeping your investment goals in mind to avoid making a decision that could negatively impact your financial future.
“I’ll get a better deal working with the listing agent, directly, right?”
Usually – wrong. A listing agent is better defined as “the agent working for the seller”. When the listing contract is signed, the commission being paid by the seller to the listing firm is legally bound; therefore, generally speaking, the only entity that would benefit from working with the listing agent directly would be the agent working for the seller’s pocket. In addition, when the listing contract is signed it also creates a fiduciary responsibility between the agent working for the seller and the seller. What this means is that anything the agent working for the seller can only enter into a facilitator role and cannot advise you or the seller, only facilitate the transaction.
Why shouldn’t I wait to buy once the market cools down?
This is a common question given the market that we work in. With rising prices all over the area, it can be daunting to think about making such a large investment. There are a couple of variables to consider here: 1. Interest Rates: As interest rates continue to rise, buying power decreases. The negative correlation of rising rates outweighs the impact of a market slowdown. When you look at the overall cost of interest rates rising, for every .5 rate increase, it represents an additional 5.5% that you'll be paying each month. To put this into perspective - for a 30-year loan on a $500,000 purchase with 20% down, you're looking at an additional $43,000 in mortgage payments over the term of the loan for each .5 rise. 2. Do you have something to sell?: If you are planning to leverage equity from a current home, or need to sell before you will buy, keep in mind that should the market cool down, so does your investment. Talk to a mortgage professional sooner rather than later to discuss various scenarios for your next purchase.
Is a condo or single family more liability?
It’s not necessarily a matter of “more” liability, it’s a matter of how it’s shared. With a single-family home, your homeowner’s insurance will be more expensive than a condo policy, and general maintenance and repairs are solely the owner's responsibility, so there could be more work/additional cost associated with a single family home. A condominium spreads the liability and burden of maintenance and repair costs across all of the owners, and your condo insurance policy is generally less expensive as the association’s master insurance covers a lot of the larger ticket items (roof, etc). It’s important to work with your agent and lender to understand the implications of each when deciding which is a better fit both financially and from a maintenance standpoint longterm.
What do I need for a pre-approval?
A solid pre-approval can certainly give you the leg up on competing offers, so it’s important to be ready when it comes to working with a lender. In short, your pre-approval is the lender saying you can afford “x” after taking a quick glance at your financial situation. The majority of lenders will have very similar rates; however, a local lender on the ground in the area you’re looking in will likely be more competitive and better-known amongst agents, which surprisingly can have an impact on the pre-approvals credibility. You’ll also want to consider access to your mortgage banker throughout the process – a big question to ask is whether they are available on weekends (and whether you will be able to access them via cell phone!). In order to be best prepared for getting pre-approved, begin compiling the following items: 1) Tax returns for the past two years 2) Pay stubs for at least three months. If you are changing jobs or relocating, a copy of your offer letter. You’ll want to talk to your lender about your career change prior to a preapproval, as it may impact your ability to obtain a loan 3) Bank statements for the past three months 4) Other asset/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property 5) If obtaining money from a third-party (friend or family member), a gift letter, which your lender can help you with 6) An idea of your credit score and monthly debts – student loans, car loans, etc will be used to calculate your debt-to-income, an important factor in mortgage lending 7) If you have a mortgage already, a couple of months statements may be needed by your lender 8) If you are divorced, a copy of your divorce decree and documentation of any child support or alimony may be necessary Getting all of these items together in advance will help you and your lender be prepared. Many lenders, if given all of this information up front and authorized to pull your credit, will actually be able to pre-underwrite your loan, meaning that you will be approved as a buyer and they will simply need to “approve the home” via appraisal and if needed, a condo document review and verification of facts through a condo questionnaire. This can be a huge bonus and help you shine amongst multiple offers.