Disclaimer: The following is based on my personal experience in a competitive SF Bay Area market with multiple offers at well above list price. I am not an expert, but I have stayed at a Holiday Inn Express before. Please consult a professional.
Buying a house is stressful. Buying a house for the first time and not knowing all the ins and outs is even more stressful. This is a quick rundown of some higher level things I wish I knew before we set out to buy our first home.
The real estate market isn’t the supermarket. Just because a home is listed at $200,000 does not mean you can march down to your local realtors office to plop down $40,000 and some loan docs nd walk away with a home. This is obvious to most people, but it bears repeating.
One important figure to make note of is the Sale-to-List Ratio in your specific market. This is found by taking the final sale price of a home and dividing it by the last list price. For example, if a home listed at $100,000 and sells for $105,000 this is a Sale-to-List Ratio of 105% (
$105k/$100k). Take a bunch of these ratios for recent sales in your area and you have some reasonable representation of what to expect in your market.
Fees, Taxes, and More Fees
When you look online for closing costs the general estimate is in the neighborhood of 2% to 5%. This varies for almost every individual situation. If you are paying in 💰 cold hard cash 💰, there’s a good chance your fees will be lower, but there are all sorts of things to pay for like transfer taxes (you get taxed, just for a property changing hands), government recording charges (yes, there’s a transfer tax and then they throw on a fee to record the transfer), and little things like paying for a courier or a notary.
You should 100% expect to pay more fees than you expect. Plan accordingly.
Oh and another thing about taxes…
You can look up your local property tax rate online for the county you are purchasing in. Calculate this in to your affordability calculations along with an estimate of your potential homeowner’s insurance cost. This will give you a rough idea of the recurring costs going forward. Rough because your taxes will likely go up over time!
Ok, so you’ve got the $krilla to purchase a house. Congrats! Now you actually have to get through the offer and escrow process before you finally close. One of the most important things to note about your offer is what contingencies to include and which to waive with your offer. Contingencies are a buyers best friend. The most common of these are:
Sale of Current Home Contingency
This one is just as it says. Your purchase of the home is contingent on your ability to sell your current home so you can cash out. This specific contingency is unlikely to be attractive to any seller so keep that in mind.
The appraisal contingency allows the buyer to back out or renegotiate the offer price if an independent appraiser values the home at a price lower than the offer price. For example, you offered $110,000 for a home but it came in with an appraisal of $100,000. This especially important if you are financing the home and there is a large gap between the appraisal and the offer. The bank will still expect you to make a 20% down payment on the actual appraised value and make up the difference between the offer and appraisal. In the example above instead of a $22k downpayment you’d be expected to make a $30k downpayment.
The financing contingency allows the buyer to walk away if they fail to secure a loan. This is obviously tied very closely to the appraisal contingency above. If you are at the very edge of where a bank might approve you or by some random act of God something falls through with your loan this will save you from losing your deposit and potentially a lawsuit.
The inspection contingency allows a buyer to void the offer or request the seller make repairs as part of the offer if an independent inspection comes back with findings. Almost every inspection will have findings of some sort so there are cases where a pass/fail type of inspection might be offered rather than the seller making repairs. In any case, it is great to have an out. Water is the enemy of any home and it is good to know what is going on structurally so it really behooves you to get an inspection whether or not your offer is contingent upon it. Or if you are bulldozing the home to build your McMansion ¯\_(ツ)_/¯.
An alternative is to perhaps do a pre-inspection before actually submitting an official offer. It might cost you a bit out of pocket for a home you do not even end up making an offer on, but it could mean waiving your inspection contingency to present a stronger offer. Which leads us to…
A Competitive Offer
In a competitive market you will want to bring your best foot forward. In some markets that means writing a personal letter to the seller telling them why it is important that you be picked above other offers (cute pictures of your newborn baby work well here). At the end of the day money talks. A great offer will have minimal contingencies, a short closing period, and for you to prove you have the financial capability of buying the home.
When we were shopping for our home in the SF Bay Area in 2013, we were beat a few times by all cash offers with 7 or 10 day closing periods that were lower than our offers in terms of price. We were usually offering a 30-day close with varying contingencies waived depending on the home.
If you are somewhere in the ballpark, always make an offer. The worst that could happen is they say no!
Congrats! You own a home! The American Dream, right? Well, yeah… it isn’t all it’s cracked up to be. You have shielded yourself from rent increases, weird landlords, and you are slowly building equity in your home. But if you are like me, the bank owns most of your home and you are probably their indentured servant for the next couple of decades. There’s no property manager to call to fix the water heater leaks when it leaks and when the garbage disposal stops working you’ll be the one sticking your head under the sink. Owning a home is great, but it’s not for everyone. And that’s ok!
I am leaving out a lot of details about things like earnest money and getting contingency extensions, but these were the main things I wish I knew from the get go. Happy home buying!
Comments, corrections, or questions? Hit me up on the Twitter Machine @pistevo.