Buyer's
Advice
Benefits of Owning Your Own Home
Income Tax Savings
Determining Your Offer Price
Writing An Offer
to Purchase Real Estate
Contingencies in a
Purchase Offer
How Financing
Details Affect Your Offer
How FHA and VA
Loans Affect Your Offer
VA and FHA Appraisals
Interest Rates
Earnest Money Deposit
Closing Costs and
Financing Incentives
The Closing Date
Transfer of Possession
Disclosures From The Seller
Inspections You Should
Require
Final Walk Through
Inspection
Benefits of Owning Your Own Home
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Generally homes appreciate about 5% a year, some
years will be more and some less. The figure will vary from
neighborhood and region to region
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Five percent may not seem like that much at first
but take a second look. Assume you bought a home for $200,000 and
you got a mortgage. Let's say you put 20% down, that would be an
investment of $40,000.
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At an appreciation rate of 5% annually, a
$200,000 home would increase in value $10,000 the first year. This
means you earned $10,000 with an investment of $40,000. Your annual
return would be 25%.
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Of course you are making mortgage payments and
paying property taxes along with a couple 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.
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Your rate of return when buying a home is higher
than most other investments you make.
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Income Tax Savings
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All of the interest and property taxes you pay in
a given year can be deducted from your gross income to reduce your
taxable income.
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For example, assume your initial loan balance is
$150,000 with an interest rate of 8%. During the first year you
would pay $9,969.27 in interest. If your first payment is January
1st, your taxable income would be almost $10,000 less - due to the
IRS interest rate deduction.
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Property taxes are deductible also, whatever
property taxes you pay in a given year may be deducted from your
gross income, lowering your tax obligation.
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Determining Your Offer Price
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When you prepare an offer to purchase a home you
already know what the seller is asking, but what price are you going
to offer and how you determine this figure?
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Basically this is a three step process, first
look at the recent sales of similar properties to come up with a
price range. Second, you analyze additional data such as the
condition of the home, improvements made to this property, current
market condition and the circumstances of the seller. Third,
depending on your negotiating style, you adjust the fair price and
come up with what you want to put in your offer.
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Writing An Offer
To Purchase Real Estate
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Once you have found that special home the next
step is to write on offer. Your offer will be the first step of the
negotiations with the sellers. Try to put yourself in the seller's
shoes and just try to image their reaction to your offer.
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The offer is much more complicated than simply
coming up with a price. Because of the size of the purchase both you
and the seller will want to build in protections and contingencies
to protect your investment.
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In this offer you will want to include not only
the price you are willing to pay but many other details as well. For
example, how you intend to finance the property, what your down
payment will be, who will pay for closing costs and don't forget
what kind of inspections will be needed.
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Other items to make sure are added should be
timetables, what if any personal property is included, terms of
cancellation, repairs you want taken care of and time of possession
of the property.
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Buying a home is a major event for the buyer as
well as the seller. It affects your finances more than other
previous purchases or investments. Likewise the seller makes plans
based on the offer that will affect their finances as well.
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Contingencies in a Purchase Offer
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Most of your offers to purchase may cause a
slight challenge or two, for the most part things will go quite
smoothly. You should anticipate potential problems so that if
something does go wrong you can cancel the contract without penalty.
This is where contingencies come in.
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An example of an contingency - some buyers often
agree to purchase property before selling their existing home. You
should make closing your own sale a condition of your offer. If you
don't include this as a contingency you could find yourself making
two mortgage payments.
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There are some other common contingencies that
you should include in your offer. Since you probably will be needing
a mortgage to buy the home, a condition of your offer should be that
you will obtain suitable financing. Another condition should be that
the property appraises for at least what you are agreeing to pay.
During the escrow period you should probably require certain
inspections, and another contingency should be that it passed all
inspections.
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Contingencies are to protect you in case you can
not perform or choose not to perform on a promise to buy a home. If
you cancel the contract without having built in conditions and
contingencies, you could find yourself forfeiting your earnest money
deposit.
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How Financing
Details Affect Your Offer
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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 on
obtaining a mortgage, the seller has the right to be informed of our
financing plans in order to evaluate them. This is one major reason
that financing details are included in your offer.
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As part of your offer you will need to disclose
your down payment, 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 less strict.
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How FHA and VA Loans Affect Your Offer
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If you are obtaining a VA or FHA loan in order to
finance your purchase, you must include that information in our
offer. This is because government loans place additional financial
and performance obligations on the seller
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First VA and FHA loans prohibit buyers from
paying certain types of fees that are often charged by lenders,
escrow companies, settlement agents and title companies. They are
called "non-allowable" fees. They still get charged anyway, but as
the buyer you are "not allowed" to pay them. The result is that the
seller ends up paying them.
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Most of the "non-allowed" fees come from your
lender. By the time you are making an offer you should already been
pre-qualified by a loan officer, so you and your real estate agent
can ask how much the lender's "non-allowed" fees will be.
Experienced agents should also have an idea of what "non-allowed"
fees will be charged by the escrow or settlement agent and the
title insurance company.
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Since these are fees the seller would not pay on
an offer with conventional financing, this information must be
included in your offer. You should also realize that since the
seller will be paying these additional fees, they may be a little
less negotiable on the price.
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VA and FHA
Appraisals
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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.
These inspections should not be considered a substitute for
professional home inspections, sometimes repairs are required.
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These 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.
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Whatever figure you put in will most likely
affect the seller's willingness to negotiate on the 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 home 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 towards buyer's
closing costs."
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Interest Rates
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Another reason for including financing
information in your offer is to protect yourself. If interest rates
suddenly become volatile and rise quickly, as sometimes happen, you
may looking at a mortgage payment much higher that you anticipated.
By putting a maximum acceptable interest rate in the offer, you are
protecting yourself form such an occurrence.
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At the same time the seller will probably want to
see that you have some flexibility in the financing terms you are
willing to accept. If interest rates are currently at 8% and you
indicate this is the highest rate you will accept you would be able
to cancel the contract without penalty if interest rates rose past
that point. The seller would suffer because they have lost valuable
marketing time and may have made their own plans based on
successfully closing the transaction.
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Earnest Money
Deposit
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Once you have come up with an offer price, the
next step is to determine how large a deposit you will want to make.
This is called the earnest money deposit and you want this to be
large enough to show the seller you are serious but not to large
that you are putting significant funds at risk.
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One recommendation is to make your sure your
deposit is less than 2% of your offered price. The reason for this
is that if your deposit is larger than that, the lender will pay
particular attention to how you came up with the funds. You might
have to provide a copy of a canceled check along with a bank
statement showing you had the money to begin with. This in not
normally a problem, but if you have a short escrow period or are
barely coming up with your down payment, it could pose an
inconvenience.
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One other reason to limit your deposit if "just
in case" Sometimes significant problems are the exception and not
the rule., they do occur. For example, just in case there is a
nasty or prolonged dispute between you and the seller, the less
money you have tied up in a deposit, the fewer funds you have placed
at risk.
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There are exceptions to this rule, during a hot
market there may be multiple offers on the property that interests
you. A large deposit might impress the seller enough so that they
will accept your offer instead of someone else's.
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Closing Costs and Financing Incentives
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There may be times when part of your offer
requests that the seller will pay all or a portion of your closing
costs, or provide some other financial incentive. A common request
is asking the seller to provide funds to temporarily buy down your
interest rate for the first year or two. Such incentives can be
especially effective if a buyer is tight on money or pushing their
qualifying ratios to the limit.
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Asking for these incentives, you will probably
find that the seller is less willing to negotiate on the price.
After all you are really asking the seller to give you money to help
you buy their home.
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The Closing Date
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It is essential that you include a closing date
as part of your offer. This way both you and the seller can make
plans for moving, the seller can make plans for buying their next
home. Most transactions actually do close on the right date,
but you should be flexible knowing that there could be delays.
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There are also times when the closing can be
delayed by weeks, through no fault of your own, have back up plans
prepared for such a contingency.
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Transfer of
Possession
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A transaction is considered closed once the deeds
have been recorded. Then you own the home. Sometimes it is not
always possible for you to occupy the home immediately. There can be
several reasons for this, but the most common is that the seller's
may be purchasing a home also. Usually, it is scheduled to close
simultaneously with your purchase of their home.
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As a result of this, 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.
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Disclosures
From the Seller
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Even though you have toured the property, looked
at the walls and ceilings, checked faucets and light switches you
have not lived in the home. The seller has years of knowledge about
the home and you will probably want to learn some of these things as
quickly as possible. In order to do this you will require certain
disclosures as part of your offer.
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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.
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When you have an agent representing you this is
automatic. Many states still do not require individuals selling
their own home to provide you with this information. Often banks are
not required when selling foreclosed properties. Obtaining these
type of disclosures should always be part of your offer and time is
of the essence.
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Inspections You Should Require
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Besides appraisal and the termite inspection, you
should probably have a professional go through the house and seek
out potential problems. There may even be things that the seller is
expected to repair, at least you will have foreknowledge of any
potential problems.
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The seller will want this inspection preformed as
quickly as possible, so that you can approve the Results! and move
forward with the purchase. You will review the inspection and
approve the report. If you do not approve the report you may
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 include timetables in
your offer.
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Allow a maximum of ten to fifteen days to receive
the report and five days to review it.
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Final
Walk Through Inspection
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Before closing you will want to revisit the
property to ensure it is in the condition you have required in your
offer, and to inspect that any repairs have been performed. You
should do this no sooner than 5 days before you intend to close.
Make sure that this right to a final inspection is included in your
offer to purchase the home.
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786 S. Main St. Lapeer, MI 48446
