One of the biggest hurdles homebuyers face is deciphering all the information and advice they receive from various reliable sources.  As soon as you let people know you are buying a house, everyone who has ever bought a home will graciously offer you their expert opinion and knowledge they gained when they bought their home many years ago.  However, the real estate market and laws are constantly changing.  The way in which homes were bought and sold years ago may not apply in today's market. 

The following FAQs will hopefully put to rest many of the misconceptions you may have about how homes are bought and sold in today's market.  If you have any questions that are not answered, please feel free to contact me.

What is the MLS?
How can I use the Internet to help me find a home?
Should I view new home tracts?
Do I need to go to "Open Houses"?
What about "For Sale By Owners"?
Should I sell my home first?
If it is a seller's market, shouldn't I just wait to buy a home?
Who pays the commission?
Should I work with more than one agent?
If I work with you, will I only see REMAX Olson's listings?
Is there an advantage to buying through a large company?
What's the harm in looking at homes out of my price range?
What is the difference between pre-approved and pre-qualified?

When I find a home I like, what's the harm in thinking about it a few days?
Should I make a low-ball offer to see what they will counter?
How much should I offer?
When writing an offer, should I find out what the seller paid for the home?
How important are comparable sales when making an offer?
How much do I need to put down?
What is escrow?

What are contingencies?
What is the earnest money deposit?
Can I lose my deposit?
How does the inspection process work?
What if my inspector finds a major problem with my new home?
What if I can't get my loan?
What is the final walk through?
How does the final closing take place?
What is the appraisal contingency?
How much are closing costs?
 
 

What is the MLS?
The Multiple Listing Service (MLS) is a database of all of the listed property for sale used by REALTORS.  Only a REALTOR can add a home to the MLS and distribute the information.  It is the most accurate and used database of available properties available today.  Approximately 65% of homes are sold through the MLS.  If you would like to find out how you can get MLS properties emailed to you weekly for free, click here.

How can I use the Internet to help me find a home?
The Internet can be a useful tool to help find a home.  Over 40% of buyers use the Internet at some point during the home buying process.  Realtor.com is the official site of the National Association of Realtors.  Most homes for sale are posted on this site.  However, the information on the site is not the most current information available.  You are better off having an agent call you or email you listings from the Multiple Listing Service on a regular basis for the most current information.  The Internet can be very helpful to familiarize you with neighborhoods and the real estate process.  (For a list of some helpful websites, click here).

Should I view new home tracts?
Absolutely.  Most new home tracts actively work with real estate agents and the commission is typically not built in to the asking price of the home.  In other words, the price of the home is the same whether you use an agent or not.  However, your agent can often negotiate certain items and upgrades for you on your behalf plus provide you with representation during the transaction.  Be sure when you register with the builder that you have your agent with you, otherwise you will lose your representation. 

Do I need to go to "Open Houses"?
Open houses can be a great way to familiarize you with neighborhoods and current homes for sale.  Go to as many as you like, just remember that the agent sitting the open house would probably love to pursue you as a client.  Make sure you tell the agent sitting the open house that you are currently working with an agent and give them your agent's card. 

What about "For Sale By Owners"?
Most FSBOs will gladly pay an agent who brings them a buyer.  Why?  The real estate transaction is very complex.  Most FSBOs want at least one agent involved to oversee the transaction.  Remember, the seller pays the commission, not the buyer.  Don't give up your right for representation for the benefit of the seller.  If you see a FSBO, have your agent contact the seller first.  Most of the time the seller will be happy to cooperate with an agent.

Should I sell my home first?
Yes.  Sometimes people will want to look for a new home before putting their own home on the market.  Typically, this is not a good strategy.  Sellers are reluctant to accept an offer to purchase their home when it is contingent on the buyer selling his or her home.  It's not necessarily a bad idea to take a look at some of the competition before you list your home, but what happens if you find your dream home?  Chances are it won't be available by the time you list and sell your current home.  So consider selling your current home first before you spend a lot of time searching for your new home.

If it is a seller's market, shouldn't I just wait to buy a home?
A buyer's market exists when there are more sellers than buyers.  During a buyer's market, home prices typically go down.  The reverse is true for a seller's market.  When there are more buyers than sellers and there are no clear indicators that that will change in the near future, then prices should continue to go up.  Most people would rather buy a home and have its value go up rather than down.  Plus, a recent article was published in the L.A. Times that predicted home prices in Ventura County would increase 57% between 2001-2005 and the California Association of Realtors estimates an 10% increase in median home prices in 2003. 

Who pays the commission?
The seller.  When a seller lists his or her home, they sign a contract agreeing to pay an agreed upon commission to the listing office.  When the home is put in the Multiple Listing Service, the listing office agrees to split the commission with the agent who brings the buyer. The commission typically ranges between 5-7% of the sales price.  The buyer pays no commission to either of the agents unless there is a special arrangement.

Should I work with more than one agent?
You are better off finding an agent who is knowledgeable and trustworthy and to stick with that agent unless a problem arises.  A good agent will commit a lot of time and resources helping a buyer find a home.  As a homebuyer, it is good business to reciprocate that commitment to your agent.  Plus, any agent who is a member of the local real estate board has access to the same listings, not just their own company's listings.  However, just like you would if you were selling a home, it is a good idea to sit down with your agent first and decide if you can work together before you commit to them.

If I work with you, will I only see RE/MAX Olson's listings?
Absolutely not.  You will see all listings regardless of the company.  Many buyers believe that agents benefit by selling their own company's listings.  It is a conflict of interest for any real estate company to make an incentive for agents to sell company MLS listings.  The vast majority of sales typically involve two completely separate companies.

Is there an advantage to buying through a large company?
Large companies typically have vast support services that many smaller companies do not. This includes relocation services, concierge services, strong management support, transaction coordinating, plus much more.  Secondly, what happens if a problem arises years after you purchase your home and the company who represented you is no longer in business?  For the most part, you are much better off with a large, well-established company than a company who may or may not be around in a few years.

What's the harm in looking at homes out of my price range?
Buyers will often want to look at homes that are out of their price range in hopes of negotiating 10-20% below the asking price.  This strategy may have been effective during the buyer's market, but it does not work in this market.  What tends to happen is this:  when you look at homes out of your price range, the homes that you see within your price range will not look nearly as nice and you may end up frustrated and disappointed. 

What's the difference between pre-approval and pre-qualification?
Pre-qualification simply means the lender has run a credit report and reviewed the loan application.  Based on these factors, the lender estimates what the buyer would qualify for without verifying all the information given by the borrower.  In practice, pre-qualification does not mean much.  Many loans fall through even though the borrower has been pre-qualified.

Pre-approval is a different story.  Pre-approval means all the information has been verified and the lender has agreed to make the loan subject only to the title report and appraisal of the new property.  Pre-approval carries a lot more weight than pre-qualification and typically does not cause a purchase to fall through. 

When I find a home I like, what's the harm in thinking about it a few days?
If you see a home you like, be prepared to act quickly.  The inventory for desirable homes is very low.  If you see a home that you like, chances are there are several other buyers who like it too.  This is not the same market we had in the early 90's where buyers had the luxury of taking their time.  Be prepared to write an offer immediately if you find a home you like.  There is a saying in real estate:  While you are sleeping on it tonight, the people who slept on it last night are writing an offer today. 

Should I make a low-ball offer to see what they will counter?
This is not a good strategy in today's market.  Offering too low creates a knee-jerk reaction.  The seller will often be insulted by your offer and not take you seriously and, if they bother to counter you, they will typically counter you higher than they would have if you made a reasonable offer.  On average, homes are selling within 1% of the asking price in California.  This is not to say that sellers won't negotiate price, but your offer should have a basis that is determined with the help of your agent.  If the home is priced reasonably, make a reasonable offer or you may risk losing the home. 

How much should I offer?
There are many variables in determining an offer price.  It is important to sit down with your agent and discuss these items before you make an offer.  Your offer will depend on the following:  Your motivation to buy, the sellers motivation to sell, how long the home has been listed, the strength of your offer (i.e. Are you pre-approved, what's your down-payment, are there any contingencies such as selling your home first, etc.), what were the most recent sales, what time of year is it, plus many more.  It is important to realize that there is more to an offer than just price. 

When writing an offer, should I find out what the seller paid for the home?
Buyers will often want to know what the seller paid for the home before they make an offer.  This is irrelevant information.  A home is worth what a buyer is willing to pay for it today, not yesterday, not 5 years ago.  Plus, even if you know what they paid for the home, you don't necessarily know other important information like what the condition of the home was when they bought it or what was the previous seller's motivation for selling.  Knowing what the seller paid is about as important as finding out what your friend paid for Microsoft stock 10 years ago before you buy it today.  It doesn't matter.

How important are comparable sales when making an offer?
Comparable sales provide a good ballpark figure for what a home is worth, but they don't determine what a home is worth.  A home is worth what someone is willing to pay for it as long as it's within reason.  If comparable sales were the only tool used to determine a home's value, prices would always stay the same.  So use comparables as a guide for a home's worth, not the determinate.

How much do I need to put down?
There are an abundance of loan programs available today that allow people to buy homes with no money down.  Some people can even qualify for loans that cover the down payment and their closing costs.  However, the amount you should put down on your home depends on your personal situation and should be discussed with your lender or accountant.  One of the benefits to putting down 20% or more is avoiding paying private mortgage insurance.

What is escrow?
Escrow is simply a neutral third party that helps facilitate the real estate transaction.  Escrow will not provide any advice (including legal).  They only do what they are told to do based on the escrow instructions provided by the buyer and seller.  It is the job of the agent representing you to ensure that you are acting in accordance with the escrow instructions. 

What are contingencies?
A contingency is a condition of the contract.  In other words, if your offer is contingent on you qualifying for a loan and you are unable to qualify within the contingency period, then you can cancel the escrow and keep your deposit.  However, contingencies usually have an expiration date.  If you try to cancel an escrow based on a contingency that has passed, you risk losing your earnest money deposit.  Other contingencies can include:  appraisal, selling current residence, job transfer, inspection period, plus many more.

What is the earnest money deposit?
The deposit is what you give the seller when escrow is opened (held in an escrow account) as a good faith deposit to demonstrate the seriousness of your offer.  The deposit is usually 3% of the purchase price, but it can be any dollar amount agreed to by buyer and seller.  The deposit usually ends up being credited towards the downpayment during escrow.

Can I lose my deposit?
The buyer risks losing the deposit if the buyer cancels the deal beyond the contingency period unless both parties agree to the cancellation. (For more information on the earnest money deposit, consult a real estate attorney)

How does the inspection process work?
Unless otherwise agreed, the buyer has 14 days from the date of acceptance to complete all inspections.  The buyer is permitted (at the buyer's cost) to complete any inspection desired.  Buyers are strongly advised to get at minimum a physical inspection by a licensed inspector.  The physical inspector will check things like the appliances, electrical switches, air conditioner, plumbing, and more.  The inspector then gives the buyer a room-by-room report outlining any problems that may exist. 

What if my inspector finds a major problem with my new home?
If the inspection is performed within the inspection contingency period, the buyer can request repairs to be performed by the seller.  If the buyer and seller cannot come to an agreement regarding the repairs, the escrow can be canceled and the deposit returned to the buyer. 

What if I can't get my loan?
If obtaining financing is a contingency of the sale (it usually is), then the sale can be canceled if the buyer is unable to obtain financing within the contingency period.  Sellers will usually request 21 days from the date of acceptance for the loan contingency to pass.  If the date passes and the buyer is unable to obtain financing, the buyer may lose his deposit.

What is the final walk through?
The final walk through is usually done within the last 5 days prior to the close of escrow.  The purpose of the walk through is to make sure that the home is in the same condition as the day your offer was accepted (ie. The lawn is still green, no fixtures have been removed, etc.), and to verify that the buyer requested repairs have been completed.

How does the final closing take place?
A few days before the close of escrow, the buyer meets with the escrow officer to sign the loan documents.  The documents then go to the lender for final review.  Once they have been reviewed, the lender funds the loan.  After the loan is funded, the deed is recorded and escrow closes (usually the day after the loan funds).  Once the deed is recorded, the home is yours!

What is the appraisal contingency?
The appraisal contingency (if selected in the purchase agreement) states that the agreement is contingent upon the property appraising for no less than the specified total purchase price.  In other words, if the home does not appraise for at least the price you agreed to pay, the sale can be canceled and the deposit returned to the buyer.

How much are closing costs?
Closing costs can vary greatly from deal to deal.  A good ballpark figure to expect is between 2-4% of the purchase price.  However, your closing costs will depend on how many (if any) points you are paying on the loan, if the seller will be paying any of the buyer's closing costs, plus many more variables.  During escrow, you should receive a good faith estimate to prepare you for your closing costs.
 
 
 
 

The following information contains the opinions and viewpoints of Michael Rice and may or may not be the opinion of RE/MAX Olson or any other real estate agent or company.