| Whether you are buying or selling, a thorough
understanding of what happens along the way will help you close more
deals with less stress and a happier outcome for both parties.
(Note: This process is based upon buying a home in Massachusetts.
Regional variations do occur and you are encouraged to seek the counsel
of your local Home Investor Specialist for information on your local
market).
Step One - Consider Requirements
The buyer considers the primary requirements they are looking for in
a new home such as style of property, location, number of rooms, number
of bedrooms, size of yard, proximity to neighbors, etc.. (Tip: Since the
ideal property never exists, these requirements frequently change as a
buyer researches properties on the market and determines which factors
are the most important and which ones can be compromised).
Step Two - Financing
The second step should always be seeking the necessary funds to
finance the purchase. Typically this will be in the form of a
pre-approved loan commitment from a lender. A pre-approval takes into
account the credit score of the applicant(s) and should be based upon a
review of the applicant(s) income and assets. (Tip: Since many purchases
fail due to an inability to secure adequate financing, it is worthwhile
seeking a reputable mortgage broker or lender in your local area to
undertake the pre-approval process. You want to be able to meet with
your loan officer in person and look them in the eye. When you are a
real person to them and not just another number on a piece of paper, any
problems that arise are more likely to be resolved quickly and
effectively).
Step Three - Selecting Properties
Selecting properties to view is a highly subjective process.
Experienced buyers might take advantage of the services of a Buyer's
Agent to assist them in this process, saving considerable time and
effort. Some buyers may be more comfortable using the services offered
by a Seller's Agent to show them around properties; just remember who
the Agent is working for at all times. Both types of Agent have a duty
to be fair and honest with a buyer. Despite this, Buyers are typically
best served by having a professional looking out for their interests
before those of the Seller.
Step Four - Comparing Properties
The Buyer compares each property against the primary requirements
identified in step one. Using comparison checklists helps here. These
checklists help to focus attention on how each home matches up against
the Buyer's primary needs. Regardless of the checklists, the final
selection is likely to be an emotional one for most buyers looking for a
new home. For investors however, the decision should be based almost
entirely on the fit to the requirements. The emotional evaluation helps
only to show how future buyers might perceive the property. Sometimes
emotions can lead investors astray, especially with a property that
needs a lot of work to make it appealing.
Step Five - The Offer
Having selected the best property, the Buyer (or their Agent)
prepares an Offer To Purchase. How the Offer is put together has a
significant impact upon how well it is accepted by the seller. The terms
of the Offer might include price, timing, inspections, permits, funding
and other contingencies. (In some areas buyers use a Purchase and Sale
Agreement in place of the Offer To Purchase). The Offer will include an
amount of money as an Earnest Money Deposit, typically $500 to $1,000,
to be held in an escrow account by the Seller's Agent or Attorney.
Step Six - Negotiating the Deal
To get an offer accepted the buyer will want to accentuate the
positive aspects of the property and the Offer. The Buyer's Agent may
introduce the offer to the seller by describing the buyer in a positive
light and by presenting all of the positive aspects of the offer to the
seller. If the offer is close to being acceptable the seller may wish to
counter offer, and so begin negotiating the deal. (In reality, subtle
negotiations typically begin well before an offer is placed).
The price may be just one aspect that requires negotiation;
frequently the other terms of an offer can prove more contentious to
either buyer or seller. The role of the Broker is to find common ground
between Buyer and Seller such that both parties feel they can come away
with a win-win transaction. The Buyer gets the home they want and the
Seller gets to move on, both at an acceptable price. If the Broker is
unable to bring the negotiations to a successful conclusion, the Buyer
will go back to Step Three and continue from there.
Step Seven - Inspections
Once an offer has been accepted, the Buyer moves into high gear to
get the property inspected quickly in order to remove any contingencies
and secure the deal. Until all of the contingencies have been removed,
the sale is in the balance from the Seller's perspective. (Note: some
sellers might insist on Buyers presenting offers without contingencies
so that the sale will go through unhindered. This is typically how a
purchase is made at auction).
If any problems or defects surface as a result of property
inspections, the Buyer might request the Seller to correct the
problem/defect, or they may suggest an adjustment in the agreed upon
price to compensate for the Buyer having to rectify the defect. If
neither option is acceptable to the Seller, the Buyer can typically
revoke their offer within a specified timeframe and receive their
earnest money deposit back or go ahead at the agreed price and with the
defects in place. If the buyer revokes the offer they will return to
Step Three and start over (or go to their second choice from previous
selection activity).
Step Eight - Purchase and Sale Agreement
Once an offer is agreed, and while the Buyer is carrying out
inspections, the attorneys will typically agree upon wording for a
Purchase and Sale Agreement. This document conforms to the language of
the Offer To Purchase with respect to any remaining terms and
conditions, and spells out in more detail the contract between Buyer and
Seller. While a Purchase and Sale Agreement may be signed at any time
prior to closing the sale, it is commonly signed shortly after the Offer
to Purchase has been agreed and after the inspections have been
completed. At this time the Buyer will be expected to place a
substantial deposit behind the offer (at least 5%). This money is
"at risk" should the buyer fail to meet their obligations
under the Agreement (regardless of whose fault it may be).
Step Nine - Mortgage Application
If the buyer is funding part of the purchase through a home loan,
they must submit a formal Loan Application for the subject property.
Many offers are written so that the Buyer has between 30 and 45 days
from the date of application to the Loan Contingency date (this is the
date by which the Buyer needs to obtain a Loan Commitment from the
lender on the subject property). To provide this, the lender will order
an independent appraisal of the property to determine its value relative
to the size of loan requested, and request verification of any income
and assets stated on the loan application.
Step Ten - Underwriting
Once the loan company has processed the paperwork for the loan, they
will seek to secure underwriting for the loan. This means they look for
a bank to commit to lending the money on the terms agreed with the Buyer
(if the lender is a bank, the bank's underwriting department must
approve the loan). If the lender is unable to secure underwriting
commitment on the loan, the purchase will not be able to proceed through
that lender. The Buyer may need to secure alternative financing or, if
the loan contingency on the offer will allow it, revoke the offer to
purchase and receive back the deposit. (Note: failure to secure a loan
after the date given in the Offer for removal of the loan contingency
can result in the Buyer losing some or all of the money held in escrow
by the Seller's Agent).
Step Eleven - Title Exam
In order to provide the Buyer with a final Loan Commitment the bank
will request a title search to be undertaken by a title company (a firm
of attorneys specializing in researching real estate title and providing
evidence of unencumbered property title). Clear Title on the property
will show that the Seller has a legal right to sell the property without
any liens upon it. A Title search does not verify the details of the
property as described by the Seller or the Seller's Agent are accurate.
Upon receipt of Clear Title the bank's attorneys will schedule the date
and time of the closing with Buyer and Seller. Note: Although a Title
search may not reveal any encumbrances upon the Title, it does not mean
none exists. Title insurance protects the new owner and the lender from
any claims upon the title that might surface after the Title is
transferred to the new owner.
Step Twelve - Insurance and Utilities
At this time the Buyer will be required to purchase homeowner's
insurance on the property in order to protect the bank's interest in it.
The buyer and seller also need to coordinate switching over all the
utilities for the property on the date of closing. A fire department
inspection certificate may be required at closing and can be obtained
from the local Fire Department before closing. (Note: Some fire
departments needs one or two weeks notice to schedule an inspection so
don't leave this to the last minute).
The day prior to closing the closing attorneys should be able to
provide Buyer and Seller with a copy of the costs to be paid at closing.
(This will typically be in the form of a HUD Settlement Statement; a
formal statement of settlement charges as defined by the Department Of
Housing And Urban Development and required to be given to Buyers and
Sellers at the closing of Real Estate transaction).
Step Thirteen - Walkthrough
Prior to closing on the purchase, the Buyer will conduct a
walk-through of the property to ensure that it is being delivered in the
same condition as it was shown to them at the time of the offer (or such
amended condition as may have been agreed).
If the Buyer discovers any new defects at this time, the closing may
need to be rescheduled so that they can be resolved. (Note: Sellers
should disclose any latent defects in the property at the time the offer
is agreed). Buyers who discover latent defects should consult their
Agent to reschedule the closing and provide time to consult with their
attorneys with regard to any options they may have for compensation or
revocation of the contract to purchase.
Step Fourteen - The Closing
At the closing the Buyer may need to sign a significant number of
papers for the Lender as well as the Deed. The Buyer will also need to
show a photo ID and have a banker's check for the balance of the
purchase price and closing costs (Purchase price plus closing costs less
the amount held in escrow and the amount of the bank loan).
The closing attorney will record the sale with the Registry of Deeds
for the Town/City and the Buyer gets the keys to a new home. (The
seller's existing loan, if any, is paid off so as to release the
lender's lien upon the title and the seller is paid the balance of the
purchase price less any Broker commissions and legal fees). |
