Buying a home can be super fun but also super confusing and bring about a ton of questions whether its your first time or your fiftieth time at the closing table. Over the years, we’ve found that the people we work with often have similar questions so we decided to answer as many of those as we could here!
Does it cost money to use a Realtor®? How does commission even work?
The short answer is, it doesn’t usually cost a buyer anything to have a Realtor® working for them. Traditionally, the seller agrees to the commission that will be paid to the agent that is working for them. That relationship is set before the sign goes in the yard and before the listing becomes available to you as a buyer. From there, the listing is typically posted in the Multiple Listing Network (MLS) and the commission that agent will pay to a cooperating broker (your agent) is posted there. Essentially, this means that both buyer and seller agents are working for free until the deal is closed and that you as a buyer will almost never be paying for representation since that is taken care of by the listing agent and their broker.
What are the upfront costs of buying a home?
Inspection – Inspection costs vary based on the size of the home and the services the inspector is providing. For a standard home inspection with a termite inspection in Arizona, a buyer should budget for around $300-$500 to be paid at the time of inspection. You may also be looking at other inspections such as a roof inspection, ac inspection, or pool inspection depending on the inspector’s findings and those can vary from $50-$150 per inspection and we can help you with suggested vendors for completing those.
Appraisal & Lender Fees – Your lender fees are often lumped into your closing costs that are paid at the end of the transaction and your lender will review those with you when you are prequalified with them. Typically a buyer will pay 2-3% of the purchase price in closing costs which include your lender fees, title fees, and any prorated taxes on the property. The only fee that is typically required up front is your appraisal fee which the lender will order for you after the inspection period is complete and you can expect to pay about $500 for that appraisal.
Downpayment – The largest chunk of money that you will pay in a transaction will be your downpayment and it is traditionally broken up into two portions - your earnest money and the remainder given at closing. You’ll need to bind your offer with an earnest deposit, typically 1% of the purchase price, which will be held by the title company until you complete the transaction. This earnest money is refundable if you cancel during the time periods you are afforded in the contract and which we will review with you when we write your offer. The remainder of the downpayment will be brought to closing as cleared funds, either via a wire into title’s account or via a bank check. We traditionally speak of down payments as percentages (3.5% down, 5% down, 10% down, 20% down, etc) and there are even programs that can help you get into homes with 0% down.
Utilities - You’ll want to budget for turning on the utilities in your new home and for the deposits that many utility companies charge if you are not already clients of theirs. These deposits can range from $50-$150 depending on the utility company and we’ll help you with the transfer using our branded Updater.Com service we provide free to all of our clients.
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 home buyer programs that require between 3.5-5% as well so depending on how much you have saved, what you want your monthly payment to be and what you qualify for between your debt to income ratio and your credit score - your lender will be able to provide you with the program that is the best fit for you. 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% down payment will help strengthen an offer in a competitive market. In addition, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance which can be quite costly - all options your lender will review with you as you start to build your plan for home ownership.
What's the difference between assessed, appraised, and market value?
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 5-6 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 may deny the loan or the agents may work together with the buyer and seller to negotiate the difference.
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. The assessed value is not taken into consideration when we assign a market value to the property you are purchasing nor when a lender sends an appraiser to appraise the property if financing is being used.
Where do my offer check and deposit go?
When you give your earnest check to your agent, it is deposited with the title company and held in escrow until the transaction closes. It is made out to the title company that will be handling your transaction and they are responsible for holding the money as well as distributing it if there is a dispute. Your deposits are wired or you can bring a check with you to closing that is also made out to the title company and these funds are applied towards the money that you are paying to purchase the home. Just prior to closing (a minimum of three days), the buyer and seller will each have a chance to review a closing disclosure, which breaks down all of the finances of the transaction and you will be scheduled to sign your loan documents and bring in your final closing cost and downpayment check.
What is a bidding war?
Our current market conditions are simply a function of supply and demand meaning that we have more people looking for a house (demand) than we have houses available for sale (supply). While this can change at any time, we often find multiple buyers bidding on the same property in these types of conditions, which creates a bidding war at certain price points.
At one of our most recent listings under $300K, the scarcity of similar properties becoming available in the neighborhood led to over a half a dozen offers being submitted, the majority over asking and a handful presented as either all cash or boasting no contingencies.
It’s not always the highest price that seals the deal, but sometimes other aspects of the offer add significant value to the seller. Limiting contingencies can lessen the risk for sellers who are worried about their ability to buy their next place and additions of mutually agreeable close dates or lease back options may make an offer more appealing.
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” counter offer. 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.
“I’ll get a better deal working with the listing agent, directly, right?”
Usually and unfortunately for many who have gone this route, this is 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, the only entity that would benefit from working with the listing agent directly would be the agent working for the seller’s bottom line.
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 learns about you, they are required to disclose to the seller. The only exception to this is if you and the seller sign a dual agency agreement that allows the agent to represent both you and the seller, they can help both of you but will only be able to be a messenger between the two of you. Simply put, if you work with the listing agent directly, you have no representation or advocate in your corner which is why our agents promise to only represent you in 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 and concerns about us entering a bubble abound. 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.
3. We are not in a bubble: If we look at the current conditions of the market as compared to those before the crash, our buyer demand is much lower and our inventory is much higher, despite inventory being very tight at most price ranges. With tighter lending guidelines and appreciation in a healthy range, the market is healthy and fast not erratic and scary.
Is a condo or single family more liability?
There really isn’t a right or wrong answer when choosing a condo or single family home, it just depends on your needs, your lifestyle, and understanding which is a better fit for you. From a cost perspective, your homeowner’s insurance will be more expensive on a single family home than a condo policy and general maintenance and repairs will be solely your responsibility to take care of. You can help offset some of these costs by leveraging a home warranty which can be purchased at the time of your home purchase or added to your home at a later date. A condominium spreads the 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 like roof repairs making it a great option for an investment property or first time home purchase. It’s important to work with our team and your 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 a certain amount 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, with one of our recommended lenders, begin compiling the following items:
- Tax returns for the past two years
- Pay stubs for at least three months. If you are changing jobs or relocating, a copy of your offer letter is a must have. 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
- Bank statements for the past three months
- Other assets/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property
- If obtaining money from a third-party (friend or family member), a gift letter, which your lender can help you with
- An idea of your credit score and monthly debts – student loans, car loans, etc will be used to calculate your debt-to-income ratio, an important factor in mortgage lending
- If you have a mortgage already, a couple of months statements may be needed by your lender
- 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 process your preapproval quickly but if you don’t know where to start, don’t fret. The lenders we work with give you all of this information up front and once authorized to pull your credit, will be able to pre-approve you in no time.
Selling a home comes with a ton of questions...