Tuesday, April 26, 2016

My Advice To Home Buyers

My Advice To Home Buyers
By Jim "Gymbeaux" Brown, April 24, 2016

I recently retired from the real estate business with over 33 years service as a sales person, manager, Team Leader, Broker and Trainer.  I have read over a thousand books on sales and motivational subjects.  I tell you the reader this because I want to give credibility to what I am about to say to you the home buyer who is considering buying  their next home.

Should I try to buy my home myself or with the help of a REALTOR?  Having been in the real estate business for more than 33 years, a very good argument could be made that my answer to this question would be biased and it probably is.  But it is also based upon issues that were discovered during those 33 plus years that have caused a lot of home buyers to regret not working with a professional.  There is an ending to a poem that states “If you don’t know where you are going, you can get to a whole lot of places you might not want to be”  That is it in a nut shell!  When you work with an ethical professional, I might add, REALTOR, that real estate agent will or should interview you to ascertain two things.  First what you would LIKE to have in your next home and Second, what you NEED to have in your next home – they are not the same thing.  You might LIKE to have a pool but would you buy the home of your dreams if it does not have a pool?  Absolutely you would.  A real estate agent will also FIRST qualify you or have a mortgage lender qualify you to see what is the maximum loan you can qualify for is and then show you ONLY those homes within that price range.  Why look at a home you can’t possibly buy?  If you begin the process by just calling on and looking at homes yourself without the aid of a real estate agent, like the poem you will find yourself ending up at a lot of places you probably didn’t want to go.  A real estate agent WILL have access to just about every home that is on the market through the Multiple Listing Service (MLS) which is a service provided by the local Board of REALTORS where real estate agents post their listings so everyone can see them and sell them.  The one exception would be homes that are being sold by their owners without the benefit of a real estate agent.  See the next section in this regard.

Not working with a real estate agent.  You may “think” you are saving money buying a home listed with a seller but not listed with a real estate agent.  The seller is attempting to “save” paying a commission to sell the home but the home will be priced similar to homes in the area that have been sold by a real estate agent.  Therefore the seller is attempting to not only maximize the sales amount, they are also attempting to earn the commission the real estate agent would have made on the sale of other homes in the area.  Then comes a buyer looking to buy a home listed only by the seller.  Knowledgeable buyers looking at For Sale By Owners do so KNOWING what other homes have sold for and therefore the first thing they do in their minds is reduce the asking price by the amount that would have been paid to a real estate agent for selling these other homes.  That is a lose-lose situation for more reason than you can first imagine.  The buyer and the seller are attempting to engage in an activity that has serious legal ramifications if one or both parties screw up the deal which is easy to do since neither one knows all of the legal ramifications that are in play.  A licensed real estate agent has been trained to be aware of such legal ramifications and then navigate their buyers and/or sellers through this maze to avoid people taking court action based upon what they did or did not do.  It is like the Midas Muffler commercial use to say, “you can pay me now or you can pay me later; your choice.”

There are dangers involved in buying your next home; know what they are.  If you should choose to attempt to buy a home list only with a seller and no real estate agent involved on either the selling side or the buying side, you must be aware of the dangers.  These dangers still exist even when real estate agents are involved but they know what to look for and what and how to avoid the dangers.  

·         Property Disclosure Reports: In a lot of states sellers are required to provide buyers with a property disclosure statement identifying all the known defects/repairs applicable to the property (not just the home itself but the lands it sits on as well).  A lot of home sellers are not aware of this requirement.  If a seller does not provide such a report ask for one.

·         School Districts.  Districts change and change often.  If a seller has no children, a particular school district may not be important to the sellers and they only “think” they know which schools would apply in their area.  If a school district is important to you, a real estate agent can help but my advice would be for you the buyer to call the local school authority and confirm for yourself which school district a particular home resides in.

·         Subdivision Restrictions.  Sellers may have a copy of the local subdivision restrictions or covenants but these change and change often as well.  If you plan to use your home for anything other than just living in it, like conducting a business from your home, you need to confirm for yourself from the subdivision committee itself what you can and cannot do within your home or on your property.  For example, a lot of subdivisions prohibit the parking of boats and RVs in your driveway or on your property.  You need to know this and you need to confirm this.  When you do, you will be starting from scratch and in most cases a licensed real estate agent will already have been through this process and guide you very easily to get the answers you need.

·         Flood Zone.  This may not apply to every buying a home in every location but when you see the devastation all around the country, this should be a question you want answers for.  Is the home IN a flood zone area or is it NOT in a flood zone area.  More importantly is the home in an area where adjacent areas have been known to flood.  As an example.  I have been licensed in real estate for more than 33 years.  My home is NOT in a flood zone area.  Why is this important to you to know?  First flood insurance is NOT required by my mortgage company in order to get a loan on my home.  That is always a good thing.  Second; if I choose to have flood insurance on my home, the policy is typically hundreds if not thousands of dollars cheaper than a home located in or near a flood zone. That too is a good thing, especially for me.  But as I would tell every home buyer I have ever worked with in the State of Louisiana, “When you see the sign on the Interstates that read Welcome to Louisiana, it is English for You are now entering a flood zone.  Even though flood insurance is NOT required on MY personal home, I have it.  I personally believe it is not even a choice.  People reading this NEED to thoroughly research the areas they are looking in for their next home regarding flooding and flood insurance.  Most home sellers will not volunteer all this information, a licensed real estate agents KNOWS to look and research the issue for you.

·         Out of Place Homes.  By out of place I mean that if you buy a home in a subdivision, most of the homes will look similar in a great many ways.  Design, square footage, and architecture are three of the things that could separate a specific home from the other homes in the area.  For example, if all the homes look similar but then there sits a log home, that home may affect prices in the subdivision and it may have been built contrary to subdivision restrictions.  A home that is much larger than all the other homes in the area may have had additions made to it.  Were they built according to code?  Did the additions have permits before they were added on?  These are things that licensed real estate agents are constantly aware of and know to ask the questions of the sellers.  Here is a personal example.  I bought a home and never questioned the wooden fence in the back yard.  I later discovered it was built much too close to the sidewalk and was built contrary to subdivision restrictions.  I also discovered that the fence has been in place for so long that it is now legal because it has “prescribed” or using the terms of a crime, the status of limitations kicks in.  But if I were to sell my home, I would still disclose this to a potential buyer.  Real Estate agents know to ask questions like this; buyers typically do not know of such things.

Should I work with an agent from a small independent company?  For the most part it shouldn’t matter except for one thing.  Real Estate agents oftentimes “know” of properties that are coming on the market but they are not as yet listed with a real estate agent.  This is perfectly legal because a seller may not want the general public or even other real estate agents to know they are going to sell their home as yet.  The reasons for this are usually personal in nature but must be honored by the agents.  So when an agent announces within the office they have a buyer for a particular type of home, agents knowing of upcoming listings will typically contact their sellers to get permission to share the information with the agent who has the buyer.  When you work with a larger company you simply increase the potential of this happening.  Otherwise all licensed real estate agents who are members of the local Board of REALTORS and subsequently members of the local Multiple Listing Service (MLS), all have access to the same information.  Still, not all real estate agents are the same.  Some of far more experience, some have far more training than others making them better and hopefully more professional at what they do for their customers, buyers and/or sellers.  In this regard the size of the company is not as important as you the buyer taking the time to ask qualifying questions of the real estate agent you are about to hire and then taking the time to follow up on their references.

Does the actual agent I choose to work with make a difference or all they all pretty much the same?  This is much the same thing as the preceding section.  Just like all of your friends are not the same, neither are real estate agents.  Some are very personable.  Some are very knowledgeable.  Some are very easy to get along with.  Some are all of these things; some are none of these things.  A personal referral from a friend or a real estate agent from your area that you have worked with usually is a good referral and should work out for you very nicely.  For example, if you put your home on the market in Seattle and worked with an agent to sell that home, that agent could and should refer you to an agent within the area you are moving to.  Those are typically very good referrals for you.  Still, it is your responsibility to take the time to interview the agent you choose to hire to work for you and then follow up on their own personal references.  The best question to ask is “Why should I work with you?”  Asking past clients how it was to work with so-and-so typically will provide you with the answers you need.  Ask the agent for a list of references; good agents will have them.  Average agents will not.  One question that I like to ask people and it comes from way out there in space, “What was the last book you have read on the subject of real estate sales?”  That tells me volumes.  First most people don’t read books any more.  If your potential agent tells you about a book involving sales or better, real estate sales, you most likely have a good agent to work with; they are staying on top of their business through self-education.

What will my agent do to hopefully enable me to buy a home?   Ask them.  Seriously, ask them why you should be working with them and what they are going to do to find that perfect home for you.  Here is my list of things that “should” be done but it is certainly not all inclusive.

·         Initial qualifying interview.  Not only will it provide you with the opportunity to meet your agent but more importantly provides an opportunity for your new agent to find out exactly what you are expecting of them and exactly what you are looking for in your next home.  They will or should take this opportunity to discover your “likes” and your “needs”.  But most importantly of all, your agent should take this time to introduce you to a qualified mortgage loan officer who will work with you to ascertain the maximum amount of loan you can obtain.  That will enable your agent to zero in on the home of your dream at a price you can afford.  This is so vital in the process otherwise you will be wasting a lot of time looking at homes you don’t like and maybe can’t afford.
·         Multiple Listing Service (MLS).  Your new real estate agent will then search the MLS, preferably with you, to find a list of homes that are currently on the market.  Once a workable list has been created, your agent will call the listing agents to find out if they are actually still on the market and if any offers have been submitted on them (very important information). Your action through conversation with other agents within their company may come upon a home or two that  will be coming on the market as discussed above.  A great question to ask you agent is if they are a member of the local multiple listing service.  If not, it is because they are not member of the local board.  It may be unfair to say, but I would avoid working agents not a member of a Board and/or Multiple Listing Service (MLS).
·         The Process:  Your new agent should then discuss with you the buying process so that there are no surprises for you.  During this period, you may be provided with copies of the various forms used to purchase a home like the purchase agreement, disclosure forms, etc.  This is the time when you should be asking questions regarding anything you may not fully understand.
·         Buyer’s Agent:  This is one of my favorite subjects.  Home Sellers typically sign an agreement to literally hire a real estate listing agent to sell their home.  Yet Home Buyers more often than not do not sign such an agreement.  Why?  Two reasons, First they have not been introduced to the Buyer Agent process and Second, a lot of real estate agents do not want to approach the subject.  Knowing what I know after 33 years, I would never buy a home through an agent that does not ask me to sign a Buyer’s Agency Agreement Form.  Why?  I want that agent working for me and the agreement spells out all of the agreeable terms INCLUDING a way to terminate the agreement if I do not like what my agent is doing or not doing or I later find out that my new agent may be an agent that other agents would prefer not to work with – that is a bad thing.  It literally defines “this is what I want to do as a buyer” and “this is what I will do for you as your agent.”  It also defines how any compensation will work and who typically pays the compensation (which is usually the seller in most areas).

What are my options if I don't like what my real estate agent is doing or not doing?  Most buyers tend to work with an agent with no paperwork defining what the agent will do or how you terminate your relationship with the agent or the agent with you.  It just happens and that is no way to do business.  If you do not have an agreement in place as to how you terminate your business relationship, you are on your own as to how you achieve this.  Usually you just tell the agent.  Let us say you verbally terminate your business relationship, does that also then terminate any private and confidential information you may have provided to that agent like your income, expenses, what you can afford, etc.?  In most states the agent is required to safeguard that information but wouldn’t it make more sense to get that type of agreement in writing with your agent?  Again, what would I do if I were to buy a new home?  I would find an agent who would be knowledgeable about Buyer’s Agency and be in agreement to sign such a document with me that includes what I want it to include.

Who has the authority in this new business relationship?  This is a great question to know and ask.  When you work with an agent, who has the ultimate authority over what that agent does?  In some companies that authority rests with the Designated Broker and/or Manager for the company.  In other words the agent must get the agreement of that person to change the terms of your relationship, advertise properties, or release you from your agreements.  In some larger companies that authority has been assigned to the actual agent you choose to work with.  That is the type of agent I would choose to work with – the one who has the authority to terminate our agreement if I am not satisfied with the work of my agent.  I simply prefer to work with the agent who has the authority and not have to worry about a third party, someone I don’t even know.

What if it is not a good time to look at homes when asked to do so?  Sellers often say they can’t show a home for whatever reason but buyers as well find reasons not to look at a home when their real estate agent calls to let them know about a new home on the market.  The problem is that every real estate agent who has access to the Multiple Listing Service (MLS) knows when a home comes on the market for the first time and they too are calling buyers they are working with to ask them to see the property.  When you tell your real estate agent you are too busy (for whatever reason), you may be missing out on the opportunity to purchase the home of your dreams because there will be a flood of activity on the new listings.  Make it your policy to see homes whenever asked whenever you can.

Get Pre-Qualified!  The home buying process goes much easier when you take the time to meet with a mortgage loan officer and begin the loan application and qualification/approval process BEFORE you look at the first home.  Why?  First you will know exactly what you can afford to buy and save considerable time NOT looking at homes that you cannot possibly buy.  Far more importantly, if you can actually become pre-approved for a loan contingent ONLY upon finding a qualifying home that appraises for the sales value, you are looked upon as a cash buyer by real estate agents and that makes a huge difference in the buying process.  It means that you are ready to buy, you do not have to wait out the mortgage loan process to ascertain if you qualify for a loan, you have already been approved as if you have the cash in your hand ready to purchase your next home..  This could actually result in a lower sales price for your home because the application/approval process that could take weeks to complete has already been completed and you could close on the home in a very short period of time.  This would be a great asset to sellers of real estate and as such may look at a lower price for their property because you are considered a cash buyer, already approved for the loan.  Again, the ONLY contingency(s) would be receiving a satisfactory appraisal on the home and any contingencies you the buyer put on the home like a satisfactory home inspection.  Becoming pre-approved for a loan is a very good thing for a buyer to do, very good thing.  It removes the biggest obstacle in the buying process.  As an example, let’s say that you the pre-approved buyer and another non-pre-approved buyer make an offer on the same home at the same time.  A knowledgeable seller or a seller represented by a real estate agent will look upon your offer as being in the best position because you have already been pre-approved whereas the other buyer is only beginning the loan approval process and there is no guarantee that buyer could be approved whereas you already are.

What should I offer a seller?  My suggestion would be a “fair price.”  A lot of buyers are very afraid that they may be paying too much for a new home.  Most if not all areas have built in protection against this PROVIDED the home is being purchased using a mortgage.  Most if not all mortgage companies require that the property be appraised and that means that the property must appraise for at least the loan amount otherwise the loan will not be issued.  This brings up two problems.  If a buyer is paying cash, usually there is no appraisal REQUIRED.  You, the buyer, can still purchase one and your purchase agreement should contain a clause that indicates that the property must appraise at the sales price otherwise the contract may be voided.  The second problem is that mortgage companies are more concerned that the property appraise for the amount of the loan you are trying to obtain.  Therefore if you are putting $20,000 down (for example) on a $100,000 home, if the home is appraised at $80,000, you probably will be required to purchase the home UNLESS the contract stipulates that the property MUST appraise at the SALES PRICE.   This is one more reason buyers should work with licensed real estate agents to help insure they purchase not only what they like but that what they like is worth what they have agreed to pay for it.  By the way, that is another principle I always used when selling real estate.  I always asked my buyers to buy what they love and love what they buy.  I want them happy with their purchase.

Contingencies:  What are they?  Some may appear obvious such as the buyer must qualify for a loan or the seller must provide a seller’s property disclosure that is satisfactory to the buyer.  There can and should be other contingencies specifically addressed in the offer to purchase and if not satisfied the buyer may cancel the purchase agreement.  What are these contingencies?  Only you the buyer can answer that question.  But for example, if it is critical that your son and/or daughter attend a specific school, you should write a contingency that the home is located in that school district; if not you can cancel the agreement.  You may want to have the seller’s confirm in writing that to their knowledge the home and/property have never flooded.  You may be coming into money through an inheritance, insurance settlement or otherwise and as such you would want the purchase agreement to specify that the sale is contingent upon actually receiving that money.  In other words, if something is important to you, include it in the purchase agreement as a contingency that must be satisfied BEFORE the sale can be completed.  If the seller objects, it becomes something that must be negotiated.  Questions you may want answers to include but certainly not limited to are, can I park my boat and/or RV on the driveway or somewhere on the property?  Can I operate a business, say a CPA business from my home?  If there is no fence are there any restrictions preventing a fence from being constructed pt if permitted what type is permitted?  Another one may involve the number of insurance claims submitted against the house (not the owner(s))  This number could drive up the cost of homeowner insurance.  In fact you may want to include a contingency as to the maximum amount of insurance, homeowner, flood, wind and hail premiums that you agree to pay otherwise the contract can be cancelled.  You have ask yourself what is important to you and address it on the agreement to purchase.  When you do, don’t simply address it, provide a time limit as to when the contingency must be satisfied and if there is a cost involved, who is going to pay for it.  Two areas of concern would be when two or more homes share a water well or driveway access.  In these cases you want the seller to provide a well use and maintenance agreement and/or a driveway use and maintained agreement – who is going to pay for the repair and upkeep of these two entities.  Mortgage companies should required if they know about it.

Should I reject counter offers submitted by sellers that they return to me?  NEVER!  NEVER!  NEVER!  I truly believe that for effective negotiations, always make the other party do the rejecting.  If a seller counters an offer you made to purchase their home, accept what you feel comfortable accepting and submit a counter offer back to the seller even if it is the same offer you have already made.  Make the seller do the rejecting.

What should I disclose to a seller or seller’s agent if anything?  NOTHING!  This is where buyers who are buying a home from a For Sale By Owner make huge mistakes – they tell the sellers way too much about themselves and why they are buying.  Most of the time the more words shared between buyers and sellers  the buyers lose their negotiating edge.  For example, my family is in town and we need to get into a home as quickly as possible.  This tells the seller that you the buyer are desperate and therefore would stand by their price more firmly.  The reverse of this is also true, sellers tend to tell buyer far more than they should, like we have to be in Atlanta in three weeks – the price just went down.  Let your real estate agent do the talking for you.  If you happen to see the seller, be polite but say nothing more.  NOTHING!
Should I get a home warranty?  Would you buy a car without a warranty?  You shouldn’t.  So why would you buy a home without a warranty?  You shouldn’t.  Do all sellers purchase home warranties when they list their homes?  Absolutely not; but should.  If you are looking at a home where there is no warranty, if you want the home, and if I were your agent I would write into the contract that it is contingent upon the seller providing a home warranty at the closing at the seller’s expense.  They can always reject that portion of the contract but if your contract is reasonable, most sellers agree to provide the warranty.  If you buy a home without a warranty, you, the buyer, can purchase one and I would highly recommend that.  Very few For Sale By Owners offer home warranties but you can still ask for one and should.  Later in my real estate career, I refused to take a listing when a seller refused to provide a warranty.  I did not want buyers calling my sellers or me when the air conditioning system suddenly quit working at 3:00 AM in the morning.

Should I get a home inspection?  ABSOLUTELY!  You are purchasing a home that may or may not have issues.  A great many issues may be known by the sellers and they may attempt to conceal them.  You should want to know what you are buying and what may need to be repaired.  A home can be sold with defects as long as the sellers disclose them to you.  If there are enough defects, the home should be priced accordingly if the seller refuses to fix them.  Warning, a lot of home inspectors feel it necessary to make a long list of discrepancies so they can prove their worth to the person purchasing the inspection.  As a buyer, be prepared for this list.  Review the list to see what would be minor discrepancies that you would expect in an older home that has been lived in as compared to major issues that may require a lot of money to repair.  You can ask sellers to repair anything in the home in your purchase agreement.  A seller can repair the item or refuse to repair it and then it is up to you to decide if you want the home “as is” including the defects identified.

Final thought.  Most of the time it does not cost you a dime to work with a real estate agent when you buy a home.  The real estate agent’s commission is typically paid for by the seller.  As part of your Buyer Agency Agreement you may stipulate that you will pay your agent’s commission and that is perfectly permissible.  When this occurs you usually deduct that amount from the price you are offering the sellers for their property.  Income tax rules and regulations constantly change and you may want to consult a tax expert to see if there are any advantages to you paying your real estate agent when you buy a home.  Seller’s, for example, can reduce the cost of sale from the sales price to take full advantage of income tax laws.  Buyers at one time could do the same thing but again, tax rules/laws change often – consult a tax expert to ascertain what is best for you.

But wait!  Buying your home could and should be made a great deal easier when you work with a qualified real estate agent.  Failure to do so opens the door to unscrupulous sellers and other people involved in the sale of your home.  Various real estate studies have shown that the number of real estate contracts that actually close, meaning they sell, are in the high 90% range when licensed real estate agents are involved.  When you consider this plus the fact that 80% to 90% of all buyers work with real estate agents should indicate that it is in your best interest to work with a qualified, licensed real estate agent.  In my opinion, buying your next home without a licensed real estate agent is like walking a high wire without the benefit of a net in case you fall.  It is really that simple!

Final thought:  When you buy a home from a builder there are things you need to know.  Builders normally cannot discount the sale of a home they build because it would ultimately adversely affect appraisals on all of the other homes the builder builds.  Therefore when you approach a builder who is building in a subdivision, the builder will not deduct what the cost of a real estate agent’s commission would be just because you do not have an agent representing you.  You normally pay the same price whether you have an agent representing you or not.  Therefore why would not hire a real estate agent to represent you and take you through the process of buying a home under construction?  Most builders have built the real estate agent’s commission into the sales price of the homes they are building.  Builders may say they look after your best interests but this is not necessarily so.  There are no laws requiring builders to be totally honest with you.  For example, a builder may have built in the cost of a fence around the back yard.  You indicate you want to buy the home you are looking at but the fence has not yet been installed.  Chances are you will get the home without the fence.  I am not trying to suggest builders are dishonest only that unlike REALTORS, they do not have a Code of Ethics guiding them in their business and they represent themselves not the buyers buying their homes. 

I sincerely hope this helps buyers to be.  Just about any licensed real estate agent can answer these questions for you.  When you choose to NOT work with an agent you are really on your own.  With so many legal things that can go wrong, that would not be my first or best choice.

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