Monday, December 31, 2012

How to buy a house

When we came to our first home-buying experience, we realized we had NO idea how to do it, or any idea of all the 'hidden costs'. Here is a simple breakdown of the steps involved in buying a house.
  1. Pre-Approval. Before even looking for a home, you need to know how you are going to buy it. Either get pre-approved for a mortgage, or have other financing in place. To get pre-approved, go to a bank or a mortgage broker. 
  2. Find the house! This is fun part. You get to find and pick your favorite house within your pre-approval price range.
  3. Make an Offer. If you have a Real Estate Agent, they will prepare the contract for you. If you don't, you need to find your state or province's basic contract to use to make the offer.
    1. Fill out the legal property information.
    2. Initial all pages of the contract.
    3. Insert your conditions, such as 'subject to Home Inspection'.
    4. Choose your condition removal date, and closing date.
    5. Have part of your down payment ready to put in Escrow/Trust with your lawyer. This lets the seller know you are serious.
  4. Negotiate. The Seller will often come back with a counter offer after you submit your original offer. Be ready to negotiate the terms before finalizing the offer with the seller. You will still be able to negotiate price after the offer is accepted, depending on what you find wrong with the property during the Home Inspection.
  5. Inspection Period. See our post about this step.
    1. Set up all financing. (This can include a surprising amount of paperwork to prove to your lender that you are qualified to buy the house and pay the mortgage payments.)
    2. Get a Home Inspection. ($200-$600.)
    3. Re-negotiate the Price if there are things wrong with the property.
    4. Set up Home Owners Insurance.
    5. Set up Life Insurance. Most mortgage lenders require you to have life insurance.
    6. Set up utilities to come under your name upon closing.
    7. Understand your mortgage terms: points, interest rate, amortization period, mortgage insurance, early payments, etc.
  6. Closing
    1. Deposit your down payment in trust with your lawyer before the closing date so it is clear to be transferred on the closing date.
    2. Meet with your lawyer to sign all the documents. He will provide you with the deed and title. He will give you a closing estimate price, which you will pay him. If the estimate was high after everything clears, he will refund you the proper amount when he sends you all your official documents. (Mortgage documents, Land Title and Deed.)
    3. After you meet with your lawyer to sign closing documents, he will notify you as soon as money and title have transferred, and give you the keys to your new home!
  7. Closing Costs. There are lots of potential closing costs, and no great way to figure out how much they will be without some research. Some potential closing costs include: lawyer fees, title search and title insurance, government recording fees, adjustment for property taxes, credit check, and survey/appraiser fees. Some of these will be paid to your lawyer, others to the mortgage lender. A good article I found on closing costs can be found here.

Inspection Period

What is the Inspection Period when buying a house?

The Inspection Period is the time between when your offer to buy is accepted, until you remove your conditions and sign the final contract to buy the property. The amount of time can be anywhere from 5-14 days. During this time you have the option to back out of buying the house. You will get a Home Inspection done by a professional, to identify any problems with the house and negotiate your final price. During this time you can also show the house to potential wholesale partners. By the end of the Inspection Period, you must have financing in place, that is you must be cleared for what ever type of financing you are using to buy the property, be it a traditional mortgage, a hard money loan, investors funds or your own cash.
At the end of the Inspection Period you will sign a final copy of the contract to buy, removing conditions and settling on a final price. You then have a period of time before closing, what ever you have negotiated depending on financing and other circumstances.

Continuing the story of our first deal, we had a 7-day Inspection Period. Our original plan for the property was to wholesale it. We set up a date to get into the property when we had our Home Inspector, contractors, interested investors and a bank appraiser come. Everything happened on that one day. It was a bit of a zoo! The reason we had all the investors come at once was to create urgency. The house was a great deal, and they all knew it. We found one main problem area in the Home Inspection, but basically the house just needed updating. We gave all the investors instructions to contact us within 3 business days with their offers, and we would go from there. The day of the inspection we had an investor let us know that they were very interested in buying the house with us as a joint venture. In the end, this was the offer we accepted and thus began our first investment property experience! Immediately after this investor contacted us, they began getting financing in order and on 'condition day' we signed the final contract with them.
After Condition Day, we had 7 days before closing. We used this time to line up our contractors of choice to begin work as soon as we had possession of the property.

Monday, December 17, 2012

To put a house under contract

Real Estate Advanced Training is great. But what about Basic Training?

All those Real Estate education companies are selling Advanced Training, but when it came right down to it, I found out we knew more about OWNING a property than about how to BUY a property.

How do you buy a house???

You could get a Realtor and they take care of it for you, just tell you where to sign. However there are situations where you don't necessarily want to use a Realtor. In that case, where to start?

First, you need to know what money you are buying the house with. If you are getting a traditional mortgage, you need to talk to your banker or mortgage broker and get Pre-approved. Sellers won't waste their time on you if you can't actually buy the house.

Second, you need a contract to buy. This doubles as an offer form. You fill it out and give it to the seller. Once you agree on the terms, the offer-to-buy turns into a contract-to-buy. Where do you find a contract? Ask the seller if they have a contract for you to use. If they don't, use your state/provincial standard 'Real Estate Purchase Contract' form. Google it.

Third, fill out the contract form, and be sure to include your conditions and an inspection period. Conditions are your way of saying, "I want to buy this house, but only if...".  Typical conditions are:

  • subject to home inspection (you hire a home inspector to check out the house for any major problems).
  • subject to financing (your buying the home is conditional on being able to get the money).
  • subject to partner's approval (as an investor, this sometimes becomes your only out if you need one).
Fourth, submit the contract offer-to-buy either to the seller or the seller's lawyer, and wait to hear their counter offer!

The very first home we ever bought was an investment property. We had our eye out for undervalued homes (buy at a discount). We heard about a property going into foreclosure down the street from us, and we decided to put it under contract and try to wholesale it, or get investors to buy it with us. "Ok," I thought, "I'll put it under contract." Then I realized I had no idea how to do that.  I called a mentor, and asked who I should talk to in order to submit an offer. This house was just barely being repossessed by the bank, there was no Realtor involved, no For Sale sign; so I wasn't sure who to contact. My mentor suggested asking the owner for the contact information of the lawyer who was dealing with the foreclosure. That is a touchy subject to ask a going-into-foreclosure-owner. Ideally  we would have liked to help the owner before he went into total foreclosure, but in this case it was too late. I was able to find a phone number for the owner, and, though I felt rather brazen, I did get the information I needed: the lawyers name and phone number that was in charge of repossessing this man's house. If you can't find a phone number, a last resort is to knock on the door and talk to the owner face to face.

Because we contacted the lawyer before the bank found a Realtor for the property, I negotiated the terms directly with the bank's lawyer. It was a series of faxes and scan&email the contract. We probably had 7 to 10 versions of the contract before settling on a final version that the bank accepted. (I had a private little victory dance once our offer was finally accepted :). The final version wasn't pretty-- lots of crossed out lines, initials where anything had been changed, and a grey haze from the multiple faxings. But hey, it got the job done!

Once your offer is accepted, you have an inspection period during which you get the home inspection and secure financing. If everything checks out, then you remove your conditions and your offer to buy  becomes binding.

Stay tuned for our "Inspection Period" post to find out more about this stage of buying a house, and for more  on the story of the foreclosure!