This article was written to address what I consider the really "big ticket" items that simply cannot be ignored when buying or selling a home. These are things that, in my opinion, must be done to start the process of putting a house on the market to sell or to initiate the purchase of a home.
For most of us our homes are the biggest asset we will ever have. Increasingly, it is the one asset by which we have accumulated equity or "wealth" of any significance and by which we can borrow against to restructure debt, use as collateral for lines of credit and even draw on for a retirement fund. Consequently, when we purchase or sell our home it is often much more than just providing for, or changing the roof over our heads.
Throw into the mix the emotional component of the "home is where the heart is" and you have an extremely complex and layered investment. It is rare the individual that sees the rooms of a house only as a structure rather than the nursery they will bring home their first born, the first place they can call their own where they will entertain friends and family, the "nest" where they will begin a marriage, the room where grandmother will have her own space and be close by to care for, the place where a son or daughter will remember a childhood and maybe even a place to celebrate a wedding.
When faced with the sometimes daunting, sometimes exhilarating, sometimes scary, sometimes frustrating task of a home purchase or sale it is often helpful to have a plan of action; a set of goals; a blue print (no pun intended) as it were for navigating the process of purchasing or selling a home. To that end, the following attempts to provide knowledge, advice and guidance gathered and compiled from many professionals, with years of experience.
So, let us begin. Some of it may be repetitious to you as you may already be aware of, or have the knowledge of, the information provided. But, taken as a whole, the intent is to provide a complete picture for a fairly wide spectrum of individual experiences that addresses, at some point, an issue or point of view not only relevant to the reader, but valuable to them as well. It is quite possible, actually probable, that just one point, of and by itself from the list provided here will save you thousands of dollars and/or monumental heartache.
Number 1 – Get a Realtor
First a disclaimer, I have a Real Estate Sales License in the State of Texas. Now that we have that out of the way, let me also say that my license is inactive and that I am not a writing this on behalf of the Real Estate industry. As a matter of fact, just a few years ago you would have heard me say, "I hate real estate agents. They have figured out a way to stick you for 6%. Twelve thousand dollars for a $200,000 house, that's ridiculous!!! Getting a Realtor to list your house is a waste of time and money." Well, let me just say I like my crow without salt and pepper. I take mine straight up.
What caused the change you may ask? First and foremost, I bought a few investment properties along with another homestead and I started to get an inkling of what I didn't know. Then, to obtain my real estate license I was forced to gain additional knowledge. By the end of both processes, I had had a change of heart. Rather than you have to learn the hard way as I did, let's take a look at seller and buyer reasons to get a realtor.
I'm going to pretend that you are Joe Schmoe, the average home buyer. I'm also going to assume that you know about widgets of some sort or you wouldn't be buying a house because you have to be able to pay for it. Odds are, your Realtor, me and many other people don't know widgets like you do. The knowledge you have about widgets that I don't have, not only gives you an advantage over me in the widget business but actually allows you to operate, when compared to my knowledge of widgets, from a position of superior knowledge. Without comparable knowledge and experience in the same widget field, there is no way I can compete fairly with you in the marketplace.
Now, if you're a first time home buyer, you will be like me and the widget example we just discussed. I know how that must sound but if it is true for widgets, it is true for Real Estate. A Realtor does this stuff every day, if they are good. More than likely you don't and unfortunately we live in a litigious society. There are many ways to get sued in a real estate transaction. And remember the nursery mentioned previously? Buying your home is an emotional experience because just like picking a spouse, usually, you fall in love on some level to do it.
The complexities of a real estate transaction, even with two very, very willing parties is formidable at best. The entire process is not only multi-layered but can be effected by the time of the year, economic forces, circumstances that could aid or hinder motivation by either party, market knowledge of impending conditions (like a builder that knows he has to sell this particular house to get more financing to continue building out a subdivision), comparable sales prices in the area, existing inventory affecting sub markets within the area you are desiring to make your purchase and it goes on and on. A good Realtor will have encyclopedic knowledge of all of these factors and more. Sometimes, there just isn't a price you can put on what they are able to provide for you.
If you have purchased many homes, then you already know how important it is to have a valuable team member at your side. In any real estate transaction you want knowledge, relationships, experience and a comfort level that guarantees you your interests are being represented. If you have purchased several properties, you gladly pay a good Realtor because you know that they are worth every penny. If it is your first time and you have secured a good Realtor, by the time you are through, you will know they are worth every penny. Bottom line, you go do widgets, find a good Realtor and let the Realtor do real estate.
Did you read the above? Add in the emotion of how much you loved/hated your house. Did you parents own it and now you have to settle the estate with your sister and your favorite brother in law? If it is your property, it tends to be worth a lot more when you are selling. When you are buying, the same property tends to be worth less.
Generally, statistical evidence shows FSBO (For Sale by Owner) properties are listed about ten percent above market value. They stay on the market longer and then have to be reduced farther to be sold. Could you sell your widgets and expect to succeed without starting with a realistic price, knowing how long to expect to have your widget on the market before it sold, know the feature comparisons to your competition and have knowledge of local and national market trends?
Throw in showing your home to strangers, hearing comments about the condition, decorating, style of furniture, etc, etc, and see how willing you are to keep your emotions out of the process to secure the best price possible. In my estimation, a third party is essential to not only maximize the price and complete the sale but to deflect the stress that often will just eat you alive.
Number 2 – Get a Copy of Your Credit Report and Scores
This is huge. Not only does it apply to first time buyers, but umpteenth time buyers and (surprise!) sellers as well. Yes, I know the mortgage "model" is different from consumer scores. However, it gives you, your Realtor, even your loan officer a pretty good idea of where you stand and it does not lower your credit score when you purchase it yourself. Mortgage loan officers normally will vehemently advise you not to do this. As Shakespeare said, "Me thinkith you protestith too much". The reason, they want control and if you find an error or see the score is not what you think, they have another objection to overcome. Bottom line for you the consumer, no one looks after your interests like you do.
The average home buyer, either prior to putting a contract on a house or after doing so, contacts a mortgage broker whom they trust or has been referred to them or that they find in the Yellow Pages. Once this has taken place they begin the process of securing financing. During the course of the conversation the broker gathers your personal financial information and says something to the effect of "Let's pull your credit scores and with all the other information you have provided we will be able to give you an idea of the type of financing we will can offer you". Sounds innocuous enough and ultimately you will have to do exactly that.
However, in this situation, just like in the inspection process (see below), if ever the saying, "Knowledge is Power" were true, it is now. My recommendation is to never, ever under any circumstances follow that procedure. Wow, that's pretty radical you might be thinking! No, not really. Because, as I said, ultimately you will go through the same process described above just as I have before and just as I will more than likely at some point in the future, but with one major difference: I will have, and I recommend that you get, scores and reports prior to ever talking to any loan broker or make any large item credit purchase.
Why? Because the credit score is the key to what interest rate you will be charged on a loan or even if you can get a loan. The number on the score is the key to getting the best interest rate you are charged for the money you borrow. (A higher interest rate will cost you thousands and thousands of dollars more). And, this is important, every time your credit score is viewed by a potential lender or provider of credit and therefore accessed as an "official inquiry", your score is lowered by as much as four points!
Think four points wouldn't have any effect or not merit concern? Have a mortgage broker calculate for you the cost of the interest paid for a home loan on the amount you will need to complete your purchase of the house you have in mind with a credit score of 699. Then do the same for one that is 700. Not only will you find that the amount will be thousands and thousands of dollars of higher interest charges but some loans are not even available to a credit score of 699 that are to a 700. One point can make and often does make a difference. I know. It has happened to me.
Therefore, go to a web site that provides credit scores and get a copy. Your realtor may have one on their site or I own one, http://www.iwantafreecreditreport.com . The point is, there are plenty of places to purchase your reports and scores. Get a copy of all three of your credit reports and credit scores. Yes, the mortgage computer model that computes your credit score will vary, sometimes significantly, with the scores you will find provided by the credit reporting agencies. But, knowing them up front will stop any unnecessary credit "pulls".
I have had five or six "pulls" before as different brokers shopped around for me a loan. Although it is said multiple "pulls", or official inquiries, when you are purchasing a car or home are factored in and don't lower your scores, I have received credit reports wherein one of the factors mentioned for my lowered scores were excessive credit pulls. At the time, my only purchases were for real estate. Make no mistake. Excessive credit pulls lower your scores. Why have any more than necessary when only one official inquiry is all that is required if you are prepared in advance?
Also, by having your credit score in hand when discussing different loan packages with a loan officer you not only make their job a little easier but you immediately have a bit more credibility in that you have taken the time to educate yourself as to your credit situation. Further, by knowing the credit score provided by the credit reporting agencies you can ask the loan officer to predict what type of packages might be available to you without an official inquiry as in: "My middle score as provided by the credit reporting agencies is 595. If that score does not vary a great deal when you calculate a mortgage industry model score, what type of loan and interest could I expect to receive from your company?"
Had you rather be ignorant of your credit scores and contact a mortgage loan office and say, "Walk me through the process, pull my credit and possibly lower the score, then tell me what type of loan you think I can get"?
Or, would you rather have your scores in hand, know what they are and how they rank with other scores? Would you rather be prepared to ask the loan officer to provide the best deal available to him given your score as it stands now, without pulling your credit and thus lowering your score? And then, if you don't like the offer being presented to you let them know you are prepared to move on to the next mortgage broker? Do you see a difference in the two approaches?
Be aware that after you purchase a home, you may want to purchase furniture, appliances, eventually a new car, etc, etc, etc and your credit score will still need to be in good shape. Do everything possible to maintain your good credit scores.
Most of us, once we sell our home, become a buyer again. Some go to live with someone else, pay cash for their next home, live on a boat or for whatever reason don't purchase another home. If that is your case, you still need to know what your credit score is simply to be an educated consumer. If not, you will be purchasing a home upon the sale of yours.
Number 3 – Have Your Home Inspected
Does that seem like a redundant and unnecessary item to add to the list? "Geez, it's part of the sale, what an idiot". I can hear it now. Well, let's look at this item a little from both perspectives, that is: from the Buyer and Seller. Then, make up your own mind.
If you don't have your home inspected by a licensed professional home inspector prior to putting it on the market you are risking not only the sale of your home, but possibly thousands of dollars in a lowered sales price. In fact, you could not design a worse possible negotiating position to put yourself in if you tried to, should something unexpected be discovered.
Let's look at the sales process for just a moment. When you sell your home or any other residential property, you must disclose any potential deficiencies with the property and cannot hide or fail to disclose any deficiencies. Further, you must fill out a form covering all the components of the structure from top to bottom. Got that? "Oh, I forgot about the" fill in the blank here (termites, crushed water main, broken air conditioner, flooded basement, etc) just doesn't cut it. Nor does, "that's none of your business". You have to disclose everything you know about the property and then sign your name to it.
Now, let's just suppose for the sake of discussion that your buyer has found their dream home in your house. Through starry eyes the contract is signed, funding paperwork is submitted (more about that later) and the inspection is scheduled. You get a call from your agent. The inspector has found the spent nuclear rods you brought home from your job at the reactor. And oh by the way, the electrical box in the garage doesn't meet city code requirements and the vent-a-hood is sending red hot sparks from the gas cook top into the attic right beneath the original cedar shingle roof.
Negotiating now from a position of strength? I don't think so! Why set yourself up for that when all you had to do was have the property inspected prior to listing it and include everything from the report in the disclosure? It is better to adjust the price prior to putting your property on the market than have to reduce it to please a disgruntled buyer surprised by findings unknown to you. Further, simply by fixing or solving problems which are often easily remedied in an inspection you initiate, you have negated objections before they can be made and have a much better opportunity to obtain the maximum market price.
The cost of an inspection prior to placing your home on the market is a very small price to pay for the knowledge and security you will gain, not to mention the position of strength you will have in negotiations with the buyer.
It is a normal part of the process to have the home inspected prior to the purchase. Make sure it is conducted by a licensed inspector and the sooner the better. Again, use a Realtor to walk you through the process. The report prepared for you will clearly indicate whether you are indeed purchasing everything that has been represented as part of the sale. Very often it is simply a perfunctory confirmation of the property presented to you, but when a surprise is discovered, you are protected from purchasing problems unknown to you.
Number 4 – Arrange Your Personal Financial Information in Advance
Raise your hand if you have had to qualify for a home loan before. For those who have their hands raised, you already know the drill and how impersonal, probing and detailed it can become. You have found your dream home, you envision holidays, birthdays, weddings, hopes, dreams, family, friends, love and happiness. Then the screech and collision of qualifying for a home loan meets the dream. A little advance preparation will do wonders for getting one ready for the reality of what to face as well as smooth the process for all parties concerned.
The list provided below is what I recommend first time or anytime buyers to prepare in advance of looking for a home and certainly in advance of talking to a mortgage broker. This information combined with your credit scores and reports, puts you in a distinct advantage when discussing loan packages available, requirements necessary to complete a loan package and time savings if critical to the completion of the purchase. In addition, and maybe even most importantly, having prepared all of this in advance creates the accurate perception by your team of professionals representing you, that you are serious about purchasing a home. I will assure you, commissioned professionals get real serious with people that make their jobs easier and don't waste their time.
Last two years of tax returns.
Financial statement prepared by an accountant if possible.
If renting, copy of lease and twelve months of cancelled checks showing rent payments on time.
Copies of last two months utility bills.
Photocopies of drivers license and social security card.
The final purchase contract for the house (if applicable).
If you’re self-employed, the mortgage company may require your personal and business tax returns for the previous two years and your company’s year-to-date Profit and Loss statement.
Divorce settlement papers, if applicable
Updated account statements for listed assets in the application that may have changed in value.
Information about debts or credit report items that may have been delinquent or not accurate.
Evidence of your mortgage payments, such as canceled checks.
An irrevocable gift letter if you are receiving a monetary gift from a relative.
Your bank account numbers and the address of your bank branch, along with checking and savings account statements for the previous 2-3 months
Last two pay stubs, W2 withholding forms, tax returns for two years, or other proof of employment and income verification
Credit card bills for the past few billing periods, or canceled checks for rent to show payment history and amount of revolving debt
Information on other consumer debt such as car loans, furniture loans, student loans and retail credit cards
Organize and place all of this information in a three ring binder with labeled dividers. Make three copies, one for your mortgage broker and two additional copies, one for yourself and one extra in case it is needed (which more than likely will happen).
Number 5 – Common Sense Do's and Don'ts For Both Buyers and Sellers
I never cease to be surprised that there are people for whom the following section is a profound breakthrough of ground breaking knowledge. Often, common sense is just not that common. It seems to me, one would want to make the best impression on strangers coming into your home even if they aren't coming to give you thousands of dollars in exchange for it. I guess sometimes life gets us going round and round so fast, we forget the obvious. To that end, the following is a compilation of good sound advice to spruce up your home when putting it on the market.
If you are buying a house, for goodness sakes don't go out and purchase a car or any other big ticket item right before after applying for a loan. This includes applying for credit cards and making credit card purchases. If you have to buy something on a credit card make sure it is less than 30% of the available credit.
If you are selling a home do clean it up. Slap a coat of off-white paint on the walls, shine the bathroom fixtures, clean the carpet, replace a cat box so that it doesn't smell, oil the windows and doors so they open easily without creaking, clean the windows, polish the door knobs. Do remove all the appliances and anything else from the kitchen counter to show off the counter space. Do remove all clutter from shelves, closets and store rooms.
When pricing your house for sale, don't price it too high. Yes, you can always come down but by that time your buyers may have bought something else. Besides, lowering the price significantly signals desperation or that something is keeping this property from selling.
Do plant some flowers in the front if at all possible or get potted flowering plants to spruce of the front when selling. Make the front door look as fresh and new as possible. If need be, paint the front door, definitely shine up the door hardware, clean the back yard and do anything possible to make the yard look neat and clean like racking leaves and mowing the grass. Put a plush new door mat at the front door. You can always take it with you but it helps give a good first impression.
Thank you for allowing me to share this information with you. Hopefully, you have found something of value that is useful for you and which you can apply to your own unique situation. Good luck and best wishes to you for a successful transaction whether buying or selling.