Once you have established a relationship with your Realtor® and have your lender on board, you can look for a home with a much better perspective on what you can afford. Whether you are a first-time homebuyer, looking for a second home or building your real estate investment portfolio, knowledge brings understanding and control to the process. You will also be in a better position when making an offer because you are already preapproved for your loan.
The Silicon Valley Home Search
Your search will probably take place in two ways. If you are web savvy and enjoy getting information directly, you may utilize a program from an online source or from your agent, which enables you to receive, via email, MLS updates directly—several times a day!
Many buyers enjoy the level of control these features allow. They can set the parameters for the search (areas, size of home, age of home, various amenities), and they appreciate the speed with which they get this in formation.
Additionally, your Realtor® will be checking the Multiple Listing Service (MLS) to select homes for you to see. However, an agent is not limited to the MLS. They will probably be aware of word-of-mouth or off market opportunities. They will network with other agents as well to see what is available or coming soon. Occasionally, they may have knowledge of a home or two that the owners have not absolutely decided to sell, but who are considering it. In addition, you might see open house signs or other signs on homes that appeal to you.
Many times, home buyers may find the property online even before the Realtor. The main value in working with an agent is not finding the property most of the time – with the web marketing done today, real estate professionals are no longer the gatekeepers of most of this information.
A word of caution: Once you have selected a Realtor® and have an agreement to work together, if you see a sign on a house for sale, do not call on the sign. Call your Realtor® instead and ask them to do the research, let you know the details and set a showing if appropriate. Also, ask them how you should handle yourself in open houses. Keep in mind that the listing agent sitting at the open house or named on a front-lawn signpost usually represents the seller, and would like nothing more than to claim you as “their” buyer.
The homes selected by your Realtor® should generally encompass your stated parameters, including price range, number of bedrooms and baths, general size, garage and other physical attributes. They will be in your preferred neighborhoods, communities or school districts, and will have other characteristics you have indicated are important. As you look, you may find you cannot put all the things you want together in one package. You can get the home you want, but not in the right school district, and so on. You may have to refine your search several times. If you stick to the price parameters established between you, your lender and your Realtor®, then you may have to give up some of your preferences. If you are unwilling to give anything up, then you will have to take another look at financing—bringing in a family member to cosign, working with a partner or looking for properties in which the seller will carry all or part of the financing.
Even if you believe that the home you are purchasing is your dream home and that you will never leave it, listen to your Realtor®’s advice about which homes will have better resale value in the future. As we mentioned, many clients have traded up to better homes, often several times more than they ever imagined.
Recently, a past client approached Ken. When this couple bought their home, they swore they would live in it for 10 years or longer—this was exactly where they wanted to be. It was less than two years later, and they wanted him to list their home for sale. But they had second thoughts, because it would cost them an extra thousand dollars to sell. They reminded Ken that when they bought, he said, “I’ll bet you a thousand dollars you will not be in this home five years from now. In fact, you will probably move on in less than three years.” Ken forgot that bet, and of course they hadn’t taken him up on it anyway, but it illustrates how people’s needs and desires change over time.
You can also ask how much the sellers paid, why they are selling or about anything adverse in the neighborhood. You can’t guarantee honest answers, but you will hopefully get a better understanding of whether or not this is the home you want to commit to. The bottom line is that if you have a plan, and you stick to the plan and understand your limits, you will hopefully stave off buyer’s remorse.
There is no way to learn everything about a home before you buy it. You can learn a lot, and we will discuss some of those things here. But the neighborhood, your neighbors and future plans for the community are all factors you will discover over time. Your local government may decide to build a highway a few blocks away. Private enterprise may decide to put in a shopping center. Your job situation may change, or you may simply decide you would prefer living in another area for any of a variety of reasons. Very little in life is permanent. So while you may be perfectly happy with the home you choose to buy, do not be afraid to buy if everything is not perfect.
Home Owner’s Insurance
Even if you never plan to move again, or you pay cash so there is no mortgage company making stipulations on your loan, you need to make sure the home is insurable.
Recently, a Realtor® friend reported receiving a termination notice from her insurance company. She had been insured with the same company for more than 25 years and had never filed a claim. However, the insurance company just found out that she lived more than 10 miles from a fire station.
Another Realtor® friend received a notice from one of his sellers who had recently listed a home for sale. The notice included a copy of a letter received from his insurance company. H is insurance was being cancelled because his home was on the market for sale; the insurance company stated that having one’s home for sale presented greater risk due to the fact that strangers will be going through it.
Any property you purchase that requires financing will also require hazard insurance, otherwise known as homeowner’s insurance. Your lender will not provide financing without it. If you are purchasing a condominium, townhouse or other property that is considered a common interest community, this section may not apply. If the property has a homeowners’ association that provides insurance on all the units, you will not have to purchase your own.
Insurance covers you for a number of things, the most disastrous of which being total loss of your home by fire or other calamity. Homeowner’s insurance also provides you with liability coverage in the event that someone is injured on your property, and it covers you in the event of loss from theft or other smaller mishaps. Interestingly, however, some of the things that most dramatically affect homeowners are being decreased or eliminated from insurance coverage, such as coverage for mold and water leaks. As of this writing, we face a national insurance crisis.
The recurring theme of alarm in national, state and local meetings of Realtors® centers on the growing insurance crisis. More and more people are discovering that hazard insurance is hard to find or nonexistent. There are three primary reasons that insurance companies are refusing to underwrite insurance on new purchases:
- The seller has either filed a claim, or simply called about a problem, and the insurance company no longer wishes to insure or reinsure the home. The current seller’s insurance could refuse to renew or the refusal could come from a different company that has been contacted by the seller or buyer. The property may have had water problems, whether from leaky roofs, broken pipes or runoff, and the insurance company feels it may happen again or the property may have mold. The interesting thing is that the homeowner may not have even filed a claim. They may simply have called to see if a situation were covered and if they should file a claim. But overall, companies feel that properties that have experienced past claims are more likely to experience future claims. The property now becomes, for all practical purposes, uninsurable.
- The buyer may have had claims on a prior residence that makes the buyer, in the eyes of insurance underwriters, uninsurable. It could be because of similar problems noted above. It could be because a company had to pay a claim because the buyer’s previous home was poorly maintained. Overall, companies state that buyers who have filed past claims are more likely to file future claims. Whatever the reason, the buyer becomes uninsurable.
- The buyer may have low credit scores. What do low credit scores have to do with homeowner’s insurance? Insurance companies have started to underwrite based on their assessment of a buyer’s ability to properly maintain their home. In their estimation, people with low credit scores usually are unable to afford routine maintenance, leading the home to fall into disrepair and hence leading to claims-related damage.
Insurance companies claim a number of reasons for the current crisis. They point to the $40+ billion in losses in the World Trade Center terrorist attack and to major losses from natural disasters. They point to the surge of mold-related claims and call attention to aggressive low pricing in the past that resulted in major losses. What they do not point to, but studies have shown may be the actual reason for their loss of profits, are the losses they have suffered on their stock market investments.
The warning is clear: You can no longer take property insurance for granted. As of now, the traditional concept of automatic insurance is outdated! You must apply for and obtain homeowner’s insurance at the earliest possible date in a transaction. Then, if denied by one company, there is at least time to shop for other coverage. You might also seek out an insurance broker who works with multiple lines. A broker would have a better idea of where to place an application based on either credit scores or claims history.
What is a C.L.U.E. Report?
A claims history report on a seller’s residence called a C.L.U.E. report (Comprehensive Loss Under writing Exchange) can be obtained from either of two sources. It is managed and maintained by ChoicePoint and contains information about claims filed on properties in the United States. About 90 percent of all insurers nationally participate in C.L.U.E.
C.L.U.E. reports are available on properties, not individuals, so when you make an offer on a property, consider having your Realtor® or attorney insert a clause requiring the seller to obtain a C.L.U.E. report. It will cost them approximately $13, and they can download the report from www.ChoiceTrust.com or request it by mail after downloading the form. If you find the home is determined to be uninsurable, it’s much better to know in advance so you have time to work with the seller to check insurability with other companies. There are a few companies that do not participate in C.L.U.E., and a good insurance broker will most likely know them. Mortgage lenders require insurance, so if you are stuck with a property that is uninsurable, you would most likely have to be a cash buyer to purchase the home.
When you first contact a lender, immediately have them check your insurance scores to make sure you are not at risk of being unable to obtain insurance. And once an offer becomes a contract, make sure you apply for and obtain insurance immediately. If you have been denied coverage and received a letter from an insurance company, you can obtain a free copy of your C.L.U.E. report from www.ConsumerDisclosure.com. The report will show all claims filed in the past five years, including the nature and amount of each settlement. Examples could be water or fire damage or dog bites.
This issue of insurance has become so important that the National Association of REALTORS® has appointed an Insurance Task Force to address the growing problem. The task force has already put forth recommendations for state associations to begin working on legislation, to educate their members and to discover other ways of handling the problem.
The Sale That Didn’t Happen
One of Ken’s earliest transactions involved Julie, a single mother who was selling her home and buying another. The home Julie was selling was called a “cluster home”—that is, it was located in a home project governed by a homeowners’ association. It was just like a townhouse or condominium project, except the homes were detached. For Julie’s soon-to-be-former home, another agent had produced a buyer and it was under contract. In addition, Ken found a home Julie wanted and put it under contract for her. Everything was going smoothly, except the lender for the buyer of Julie’s former home did not get loan approval on time. Ken spoke with the lender every day and was assured the loan would be approved, even though this particular purchase was the maximum the buyer could handle. Their credit was fine and the ratios were close but acceptable, but the underwriter was overloaded, so they waited. Julie and her kids packed and scheduled a moving company.
On the day they were supposed to close on both the sale of Julie’s old home and the purchase of her new home, with the house full of packed boxes and the moving van parked outside, Ken got a call from the lender. The buyer’s loan had been denied. The lender hadn’t noticed that there were homeowners’ association dues involved with Julie’s home, and didn’t include that information in the loan package. Of course, he blamed Ken for not informing him of that fact, even though the information had been detailed in the contract, one of the first loan documents provided to the lender. Ken simply referred him back to that contract.
The situation was a disaster. The number of people negatively affected was enough to cause a relatively new real estate agent to quit the business before any more parties were hurt. The buyers’ lease had ended and they had to move out of their apartment, now with no place to go. Julie and her two children had to stay in their old home and live out of boxes until Ken could sell it again. The sellers of the home Julie was scheduled to buy wanted to keep her earnest money because they were so angry, but Ken had the sale of Julie’s home as a contingency in the contract and she got her money back. When Julie’s purchase fell through, those sellers had to cancel their pending purchase of another new home. And, although less important to all of the frustrated home purchasers and sellers involved, none of the real estate agents involved in any of the transactions got paid. They all had to do their work over again.
Ken kept telling Julie through her tears that things happen for a reason, and they would get her house sold and find her an even better home to move into—which actually happened. When all was said and done, she had a far superior house to the one she would have bought, in a nicer neighborhood, closer to the schools her children would attend and she ended up happy. But what a process getting there! We wouldn’t wish that on anyone.
Therefore, we build contingencies into contracts, and we try to cover all the bases so everything that is promised actually occurs. For example, every contract should have a clause that lets you go into the home one or two days prior to closing to do a final walk-through. This lets you verify that the home is in at least as good condition as it was when you put it under contract, and that the sellers have done what they promised. For example, if your contract called for the carpets to be professionally steam cleaned (note the language—you generally don’t want to settle for the sellers renting a do-it-yourself cleaner), you can make sure that was done. If certain things were to be repaired or replaced as a result of the inspection agreement, you can verify that they were.
It is common courtesy to have the house clean before vacating, but if that’s important to you, put it in the contract. You see, contracts simply keep everything nice and tidy. If everyone you dealt with were completely honest, had an impeccable memory and always had it in their heart to do the right thing, contracts probably wouldn’t be necessary. But even honest people have short memories, or get in a hurry, or decide they’ve already given too much, which makes contracts a valuable necessity.
Bring your Realtor® with you on your walk-through. Request copies of the receipts for all work done ahead of time, both to see that it was done and to have recourse with the service provider later if it wasn’t done correctly. Sometimes, trades people will claim that something has been fixed, such as a reverse polarity issue, only to have you find out later that it wasn’t fixed at all. Receipts help. Bring to the listing agent’s attention anything that wasn’t completed according to the contract, and have it corrected prior to closing. Practically speaking, rarely will something suddenly go wrong when everything is in place to close. You’ve probably packed or otherwise made plans to move out of your current residence, you are excited about being in a new home and the pressure is on everyone to go ahead and sign. So again, don’t sweat the small stuff.
Anything significant should be handled with a written agreement at closing, or by setting aside additional money in escrow. For example, let’s say the seller was to replace the furnace but couldn’t arrange for a repairperson in time. You could all agree to have the title company or escrow company withhold that money from the proceeds due to be paid to the seller. The title or escrow company would then pay the repairperson when the work was complete. Or if the carpet was supposed to be cleaned but wasn’t, the seller could hand you a check at closing to pay for it. Typically, if there is a holdback in escrow, we hold 150 percent (or even 200 percent) of the anticipated cost in case the job grows while it’s being handled.
What do you do if the seller refuses? You have to make a decision. Is it more important to close, or should you walk away? We’re not telling you this because it happens often, but because it does happen occasionally, it’s best to be prepared. Check your contract for the wording on seller defaults too–it may stipulate what your recourse is.
If your transaction is typical, everything will have been completed per agreement and you’ll sign the closing papers, present your check and get the keys to the house. Everybody walks away with big grins on their faces, looking forward to the new lives they have created.
Now for the fun part—it’s time to move in to your new home!