Drama-Free Real Estate: Top 10 Ways to Buy a Home Without All the Drama
Buying a home is a life-changing event that involves 3 M’s: mortgage, money and moving, so it's natural to experience some stress. Factor in today's market -- with tighter credit restrictions and a tougher buying process -- and you've got more drama than you need.
Perhaps you don't get approved for a mortgage or find a home you like. Or if you do, you don't know how much to offer or get outbid by another buyer. What if your closing costs end up being more than you expected?
FrontDoor Insider and freak-out prevention specialist Tara-Nicholle Nelson breaks down the 10 surefire ways to take the drama out of buying a home.
#1: Know when it’s the right time in your life to buy.
One of the most stressful issues homebuyers face is the question of when the time is right to buy. Today’s would-be buyers are obsessed (understandably) with determining the precise moment in time they should close escrow for maximum tax and investment advantage. But a home is much more than an investment. While real estate does have wealth-building potential, that is only one of several factors that should be in the mix when you decide that homeownership is for you.
My rule is that you should decide whether to buy based on your life and what makes sense for you, your family, your plans and your finances. Then, use the news about what’s going on in the market to decide how to buy: what kind of house to buy, what sort of loan to use, how much to offer, and other strategies for executing your homebuying plans.
Most avid observers of real estate agree that this is a great time in the market to buy a home. But what factors need to be considered when deciding whether it is the right time in your life to buy? If you're feeling the itch to own, it might be the right time if some or all of the following describe your life:
- Your credit score is at least 620, and you’ve saved at least 3.5 percent of the purchase price of your home.
- Your family, lifestyle and/or housing needs are evolving.
- Your current home is becoming a time, money or energy pit.
- Your income has increased and you need a big tax deduction.
- Your job is relocating.
- You have a level of comfort that your income is secure.
- You have a long-term view of homeownership and are okay with staying put for at least 5 years, give or take.
- You feel that you are mature enough to make a major financial and emotional commitment.
- You want to own a home.
On this last point, peer pressure is probably the worst reason to buy a home. The fact that those around you want you to buy is totally irrelevant. If you are not emotionally or otherwise motivated, within yourself, to own a home, then your experience of homeownership will be a burden, not a blessing. Conversely, if you crave to own a home, and are financially equipped to do so, homeownership can be the adventure and experience of a lifetime!
#2: Get a good grip on what to expect during the homebuying process.
The Buddhists say that expectation is the root of all human suffering. I’m no expert on human suffering in general, but when it comes to the causes of suffering during real estate deals, I’d say inaccurate or shattered expectations rank right up there at the top of the list! To minimize drama, make sure that your homebuying expectations are accurate and realistic.
When you’ll need to write checks. Surprises that involve you having to write checks with multiple zeros at the end are really unwelcome, but common, sources of homebuying drama. Expect to come up with cash:
- When you write your offer -- Your offer includes an earnest money deposit, which lets the seller know you are serious or “in earnest,” about buying their home.
- At inspections -- Inspectors may charge more to bill fees to escrow. Save money by writing them a check on-site.
- During escrow -- When you remove contingencies or your objection period expires, you may need to increase your deposit money.
- At closing -- At or around close of escrow, you’ll need to wire or bring certified funds with your down payment and any unpaid closing costs to the escrow holder.
When you’ll need to show up or take time off from work. Expect to show your bright, shiny face at your property and pest inspections, if you want to know how your future home 'works' (a few hours), and to sign your closing documents (an hour or so).
#3: Manage your mindset.
With most things in life, how you think about them is more important than the substance of the actual thoughts. It’s not just semantics -- think about the difference between “What time will I go to the gym today?” and “Wonder if I’ll have time to go to the gym today?” Guess which question leads to you actually working out? See, mindset matters! Same thing with buying a home -- two buyers can go through the same events and experience them differently, even get different results, depending on their real estate of mind, so to speak.
Shatter your fears with education, preparation and surprise prevention. Humans fear what they don’t understand, and the process of buying a home is complicated enough that even those who have done it a couple of times often don’t completely understand every detail. Before you even find a Realtor, make a list of your fears, concerns and issues about buying that make you nervous. Then, make a project out of researching those items, point-by-point; you’ll find that many of them have solutions of which you were simply unaware!
Getting ready for homebuying by writing out a clear Vision of Home, finding a Realtor who is a great fit for you and getting a strong mortgage preapproval from a trusted professional empowers you to approach the process from a bold position of decision-making power. Then, get clear on what you can expect from the process and what common surprises you can anticipate or avoid. When you are done with this three step process, there will be nothing to fear about buying a home -- not even fear itself!
Cultivate clarity. When papers don’t make sense or what comes next is unclear during your purchasing process, it immediately ratchets up even the hardiest homebuyer’s heart rate. Once you’re on edge, anything can send you right over -- even comments and events that would otherwise seem benign. That readiness to panic is a recipe for poor decision-making; panickers tend to either freeze in paralysis or act impulsively -- neither of which are ideal elements of real estate decision-making.
Throughout your homebuying experience, keep the goal of clarity or the image of “crystal clear” in the back of your head as your aspiration anytime you read a listing, a contractual document, an inspection report or disclosure, or even have a conversation with your Realtor or mortgage broker. When something is not clear, ask questions until it is. (Even if you have to ask the same question a million times!)
Expect the unexpected and search for the workaround. Expect the mortgage folks to ask you for updated check stubs 10 times. Expect the asset manager in charge of the foreclosure you’re buying to take 49 years (slight exaggeration intended!) to sign off on the deal. When you expect the unexpected, you deactivate the glitches’ power to distress you. Instead of reacting to homebuying hiccups with the-sky-is-falling-style dismay, make it your mantra to simply take a deep breath and ask, “How can we work around this?” I promise you’ll be surprised at the powerful solutions that simple question elicits.
#4: Learn how to prevent money surprises during escrow.
I once saw a mortgage advert on a billboard that read, simply, “surprises are for birthday parties.” This alludes to the very common fear of homebuyers that they will show up at the closing table and having their closing (and their keys!) held hostage until they produce thousands of dollars more than they expected. There are tools already built into your transaction that, paired with some smart conversations with your real estate and mortgage brokers, can virtually eliminate the potential for these sorts of nasty surprises.
Good Faith Estimate. When you apply for a mortgage, the loan officer will prepare a good faith estimate -- a standardized list of costs associated with obtaining the mortgage and a breakdown of the monthly mortgage payment due on the mortgage for which you were approved. The keyword here is estimate. The actual costs due at closing, the interest rate and the mortgage payment itself may vary significantly between the time the estimate is issued and the time you close escrow. When you first receive your good faith estimate, read it! Talk with your mortgage professional to determine which numbers are likely to change and by how much. Then, when you are preparing to make an offer on a home, ask your mortgage rep to draw up another good faith estimate using the specifics of the price and terms you are offering.
Prepaids. When you close escrow, as part of your closing costs, you pay prorated mortgage interest and property taxes from the date of closing till the end of the month. The date of closing can make a difference in thousands of dollars required to close. Ask your Realtor to help you set your closing date in accordance with the cash you have at your disposal.
Expert support. When you first get preapproved and start house hunting, be up front and just tell your real estate and mortgage pros how much cash you have available to put into the transaction. This empowers them to tweak the timing and terms of your purchase in advance to avoid money drama at closing.
Avoid surprise costs as escrow by being honest with your real estate and mortgage professionals about how much money you have available to put into the transaction.
#5: Get the right Realtor.
Buying a home is not an ordinary business transaction. As such, your relationship with your Realtor is not like your relationship with your accountant. In an ideal situation, your Realtor will learn all sorts of private financial, emotional and relationship details about you and your family, and you will be comfortable making these true confessions. On the other hand, if you don’t like -- or trust -- your Realtor, or they are unable to translate your vision into a home, a traumatic transaction is virtually inevitable!
What to look for. The right Realtor for a drama-free homebuying transaction is not necessarily the famous, fancy agent whose sign you see on every lawn. You want someone who has the time to hold your hand and patiently explain real estate basics, local standard practices and how the news applies to you (or not). You also want someone who:
- is a member of the National Association of Realtors (not just a licensed agent)
- is your 'flavor' of person (communicates in language and via media that works for you, e.g., emails if you like email, calls if you prefer the phone);
- is experienced with the type of transaction you envision (has represented buyers of bank-owned foreclosures, if you think you might buy such a place);
- is a great problem-solver, and can give you examples of transactions where she had to come up with novel solutions to get a derailed transaction back on track; and
- has a team of trusted mortgage, inspection and escrow providers she can refer you to and help you manage.
Find the right fit. You do want someone with a basic level of competence and who has worked in the general geographic area you’re looking in, but they don’t necessarily have to be a 20-year neighborhood specialist to be the advocate and representative you need.
- Referrals. Look in your circle of contacts for someone who bought a home from a Realtor they absolutely loved. Or, visit www.REThinkRealEstate.com and ask Tara to find you a tech-savvy buyer’s representative in your area.
- Seminars. Attend local homebuying seminars presented by Realtors, and see if you click with any of them.
- Real Estate Buyer’s Agent Council. Visit www.REBAC.net and search their membership database to find an Accredited Buyer’s Representative in your area.
Finding a Realtor you trust and feel comfortable with is key for a positive homebuying experience.
#6: Solve the puzzle of how much to offer.
How much to offer for a home is the ultimate homebuying conundrum. There’s just no way to know in advance if you are offering more than necessary, or so little that the seller will get teed off or choose another offer. Many buyers feel that they’re just taking a shot in the dark on one of the most important decisions they will ever make. Here are a set of factors you absolutely must consider when deciding how much to offer for your target property:
- Comparative Market Analysis (CMA). Ask your Realtor to prepare an analysis of similar, nearby homes that are active, pending, or recently sold or expired from the market. Pay attention to the difference between list price and sales price, and also to the average number of days the pending and sold properties were on the market prior to contract. Ask your Realtor what offer price or price range they would recommend, based on this data, and to explain their rationale.
- Seller’s situation. How many days has this particular home been on the market, compared with the sold and pending properties in your CMA? Compare this property’s condition and aesthetic appeal with the neighboring comparables, too.
- Ask your Realtor to check in with the listing agent. What is the seller’s situation? Is the seller a bank or an individual? Why are they selling, and what is their time frame or motivation level? Are you the only offer on the table? If not, how many others are there?
- Market factors. How many similar homes are on the market? Is it a strong buyer’s market, seller’s market, or neutral -- in your area and your price range, not on the national news! Is it Springtime, when many other buyers are looking to buy, or the holiday season, when very few homebuyers are bundling up to house hunt. What are standard negotiating practices in your area? Ask your Realtor whether a lot of back and forth in counteroffers is normal, or whether few or no counteroffers is more the norm.
- Your situation. What are the mortgage payments corresponding with the beginning and end of the price range recommended by your Realtor? How much can you afford to come up with in down payment and closing costs, and what purchase price corresponds with your available cash to close? Finally, how badly do you want the place? Will you be heartbroken if you lowball the sellers and don’t get the place? Or is this the sort of place you will kick yourself for losing unless you make your highest and best offer?
Making an offer on a home can feel like trying to solve a complex puzzle. Studying market conditions and comparable sales can take some of the guesswork out of the process.
#7: Avoid buying a lemon.
In the midnight hour, every homebuyer wakes up at least once to wonder, “is the home I’m buying a lemon?” Many buyers are haunted by visions of their dream home transforming into a shambles immediately after closing, complete with pans collecting roof leak drips, a crumbling foundation and surprise! -- an infestation of wood-gobbling crawlies.
You’re not the first buyer to have these real estate nightmares. Fortunately, real estate deals everywhere have some features built in to help you manage the risks of being exposed to catastrophic surprises with your home later on. Once you know what they are, you might just get yourself a few nights of peaceful sleep, even during escrow!
Disclosures. In every state, sellers are required to disclose any property condition or defect that would materially impact a reasonable buyer’s decision-making. When you get disclosures, even if there are dozens of pages, read them! Many times, you will learn critical details about the property’s history, the neighborhood, and past or needed repairs and upgrades. You may want to ask the sellers for more details, contractor invoices or contact information, or even warranty paperwork, based on what you read in the disclosure documents.
Inspections. In most areas, it is advisable to have at least pest, property and roof inspections conducted at your own cost (check with your Realtor about which inspections make sense in your situation). But don’t stop at having the inspections. Attend them and ask questions when something is unclear. You’ll get all sorts of details that will not make it into the written reports, and you might also learn how to work all the emergency utility shutoffs! Afterwards, read the reports and follow up on the contents.
Contingencies. After reviewing your disclosures and inspection reports, you might need further inspections by specialists, you might need to renegotiate your agreement with the seller to have some repairs completed or get the price reduced, or you might need to back out of the deal entirely, if the needed repairs are beyond your threshold. In order to have these options for avoiding a lemon, you and your Realtor must be sure to include an inspection contingency in your contract.
Home Warranty. All homes require maintenance over time; smart homeowners minimize the risk of major repair costs by maintaining a home warranty policy that will cover many major malfunctions for a service call fee of $40 or $50. Most of the time, the seller will pay for your first year’s home warranty, but it’s up to you to maintain it. That’ll run you about $350 or so a year, but if your water heater starts leaking or your furnace goes bust, it’ll pay for itself several times over with one repair!
Avoid buying a lemon by getting involved in your home inspections: read the reports and ask questions when something is unclear.
#8: Master the art and science of the house hunt.
Some buyers are easy -- beds, baths, square feet, location -- check, and done. Others are, uh, let’s say a smidge more particular. I’ve had buyers bring compasses, crime scene-style outlines of every piece of furniture they own, and even their dogs along for input on every property in their effort to find the right one. Some folks buy the first home they see and never look back, while others don’t feel comfortable picking a property until they’ve seen dozens of homes over months or (heaven forbid!) even years.
House hunting is as much an art as it is a science; there’s no one way to find the right place that will work for every buyer. Though house hunting experiences are about as diverse as house hunters are, there are a few strategies every homebuyer should harness to achieve whatever they define as house hunting success.
Cultivate clarity up front. If you aren’t clear on what you want, you will never be able to clearly communicate your vision to your Realtor, mortgage broker, inspectors and the other professionals whose job it is to help you manifest that vision. In addition to getting real with yourself about your priorities for the process (i.e. how you will define a successful house hunt), before you start seeing homes is the time for you to create a clear, written vision of what you want your life to look like after you buy your home.
Don’t start with things like bedrooms, bathrooms and square feet; instead, sketch out what you want your life to look like in the new home, addressing things like:
- who lives with you;
- what you do for work, how much you work and where;
- what you do in your leisure time (e.g., stroll downtown to shop, have dinner parties or work on the house); and
- how you get to the places you need to go.
From there, it’s an easy path to describe the sort of property that will get you as close as possible to your personal edition of the life fantastic.
Get pre-approved well in advance. Once you see a $500,000 home, you’re going to hate the $300,000 ones you can actually afford. And vice versa -- why despair that you can't find a home you like in your price range before you even know precisely what your price range is?!
Be a smart e-buyer. The California Association of Realtors found that e-buyers -- buyers who relied on the web as a primary homebuying resource -- spent about a third of the amount of time driving around looking at homes as traditional buyers.
Smart e-buyers use sites like HGTV.com to prepare for and narrow down their house hunt. Before you ever get in the car to view properties:
- educate yourself about real estate transactions and mortgage options;
- research cities, neighborhoods, property taxes and school districts;
- narrow down the architectural styles that appeal to your personal tastes; and
- learn what sort of home you can buy at various price points in your area.
Keep the deal-breakers to a minimum. Minimize the number of home features you absolutely exclude. Talk with your Realtor about your vision of home and your absolute must-haves, then give her as much flexibility as possible in showing you homes that may align with your vision, at least until you’ve seen enough homes together that you know she understands what does and does not work for you. Remaining as open as possible allows you to benefit from your Realtor’s experience with unconventional, counterintuitive or non-obvious home/lifestyle matches.
Check your manners at the door. Remember what your Mom used to say about not saying anything at all, if you can’t say anything nice? Forget that rule of thumb, at least for the duration of your house hunt. Don’t hold back in fear you might offend your Realtor -- it’s not her home! If you see things you really dislike and don’t say a word, chances are you’ll end up seeing those features again. If you let her rip, your Realtor will grow increasingly more effective at screening properties for you, and your house hunting tours will become increasingly filled with homes that might actually fit the bill!
Provide clear, detailed feedback. Like the cheerleaders say, “Be aggressive -- B. E. Aggressive!” Tell your Realtor what you dislike about the homes you view, but don’t just turn up your nose and sigh. Be detailed and constructive when you tell her just how you feel about each place you see, both pro and con.
Starting your house hunt online is a great way to narrow down your options and cut down the time you spend driving to showings.
#9: Know when to remove contingencies or waive objections.
In real estate-speak, removing contingencies is the equivalent of pulling the trigger: it’s that last chance point of no return. See, your contingency period runs anywhere from 10 days to 3 weeks after you enter into a contract to buy a home; if you live in a contingency state, you have that period to conduct your due diligence and decide either to bail or to seal the deal. If you back out after you remove your contingencies, your deposit money becomes non-refundable and is forfeited to the seller. If you live in an objection state, you have a certain number of days to object to the terms of the deal; if you let that period elapse without making a written repair request or backing out of the deal, your objections are considered waived and the seller can keep your deposit money if you don’t close the deal for any reason.
Removing contingencies or waiving objections usually puts thousands of dollars on the line, so it’s not a step to be taken lightly. Plus, by removing contingencies or waiving your objections, you are essentially telling the seller that you plan to close the deal -- something you just shouldn’t do unless and until you are satisfied with the following items:
- Title. The title search has been completed and revealed nothing your Realtor, mortgage lender or real estate attorney finds objectionable.
- Disclosures and Inspections. You have reviewed all applicable seller and HOA disclosures, plus all the inspection reports, and feel comfortable that you understand the condition of the property. Hopefully you will have attended inspections and spent some time getting comfortable with the property and the neighborhood.
- Condition Issues. You are comfortable taking the property in an "as-is" condition, or you have renegotiated the terms of your purchase with the seller to account for the condition issues revealed by the inspections.
- Appraisal and Underwriting. The home has appraised for at least the purchase price, and your mortgage lender has issued a final loan approval for your purchase of this particular property.
Once you’re good to go on all of these items, do a last check-in with your Realtor and mortgage broker -- a final “speak now or forever hold your piece” ultimatum of sorts. Then it’s gut-check time: are you ready to commit to this property? If so, and if all of the above items pass muster, then and only then should you consider removing contingencies or waiving your objections. And then and only then can you give your move-out notice to your landlord, pick colors and let your kids pick their rooms!
Before removing contingencies or waiving your objections, be sure you are satisfied with the title, disclosures and other items.
#10: Know what to look for in your closing papers.
300 pages. A pen. A table. And you. Thus starts the surreal experience of signing your closing papers to get the keys, possession and mortgage payments that go with your new home. Most homebuyers know they should read these papers, but have no clue what to look for and wonder if they should be perusing the pages there and then, in front of the notary, Realtors and maybe even sellers and attorneys (on the clock, of course). Let the high drama begin.
Fortunately, out of the 6-inch stack of title and loan docs, there are a select few documents and items that are truly critical:
- Essential Details. Peruse the entire package to ensure that your name (and your co-buyer’s name(s)) and the property’s address are accurate and appear the way you would like them to show on the County records. Typos are not infrequent, but they are super easy to have corrected.
- The Note. This is your promise to repay the loan. Look for the loan amount, the term of the loan, interest rate, monthly payment, due dates, late fees and other critical terms like whether there is a balloon payment or prepayment penalty. Make sure these details jive with the good faith estimate you were given early on in your transaction.
- The Mortgage or Deed of Trust. This paper secures your IOU (the note) with the property, allowing the lender to take your home back if you fail to pay. It should list any “riders” -- additional documents that add terms to the note, like an adjustable rate rider or prepayment penalty rider. Check to be sure that any riders listed on the mortgage or deed of trust are included in the document package.
- Estimated HUD-1/Settlement Statement. Review this standardized list of closing costs, debits and credits to your escrow to ensure that it accurately reflects seller credits agreed on in the contract, deposits you’ve made, and inspection or appraisal fees that you have had billed to escrow.
Strange as it may seem, the closing table is not the place to read your closing documents. Smart homebuyers ask their Realtor, mortgage professional or escrow holder to provide them with a copy of their closing documents as far in advance as possible, ideally at least 72 hours before the signing appointment. This gives you time to review the documents, discuss them with the appropriate pros and initiate revisions, if necessary.