Common Real Estate Questions: Buying a home in the “Perfect Storm”


There are a new type of home buyers on the horizon for years to come – Generation Y, also known as Echo Boomers. This generation is known as the generation with their own identity, who is very familiar with digital technology. Echo Boomers are also known to manage their money very well, unlike other generations before, most likely due to the assistance of technology (online banking, eChecks, ePayments, etc).

I could go into socioeconomics (which I enjoy very much), but my blog is dedicated to real estate and how this relates to real estate.

So there is a LOT of people about to buy their first home. If you’re one of those people, most likely you’re either a GenX or GenY person. I am going to explain the most common questions, and answers, when buying a home – as well as the process involved in purchasing a home in today’s market.

Let me first say that the real estate industry is rapidly changing each year with the incorporation of technology, iPhones, iPads, GPS, and other tools of the business. Other ways the industry has changed in the past 10-20 years in the incorporation of the internet with real estate transactions. I’m sure you’ve already been apart of this, with such sites as REALTOR.com, HOMES.com, ZILLOW.com, TRULIA.com, etc.

It can be overwhelming. I know. I was there once. I completed my first real estate transaction when I was 23 years old. I will say it is a learning process, and I’ve done multiple transactions since then. Sometimes I have to remind myself of that, and how complicated of a transaction transferring real estate can be.

Not to worry – as I am going to first explain the entire process of buying a home in today’s market, and explain why we’re in a “buyers market”.

First, you must understand if it is a good time for you buy right now. This is a question you will have to ask yourself. I can’t give you this answer, but I can offer some suggestions.

Take a look at the Trulia Rent vs. Buy Index for 2011, and see if it is better for you to own than rent – this is all variable based on where you live, as you will see below.

So as you can see, if you live in Houston, it is more beneficial to you to own rather than rent. At the same time, if you lived in New York, it would be more beneficial to you to rent than own. This information is based on the average price to rent, and the average price to buy.

Always keep in mind that if you are renting, you are paying for someone else to own. This is how many people create wealth in real estate. Keep in mind, that when you become a homeowner – you are the “landlord”. There is not a property management company to call to fix repairs, or replace broken items on your house. It is your duty to maintain your home, and there is a cost associated with that.

So why does everyone keep saying its a “buyers market”?

 You must first understand the real estate cycle and interest rates – to understand why its a buyers market.

This is what the real estate cycle looks like. Theory, and years of recorded values, suggest that peak real estate values (good for sellers, bad for buyers = sellers market) is related to excitement, and euphoria. This is considered a high risk, low opportunity time to buy real estate, due to values most likely on the way to decreasing.

Vice versa, the low-end of the cycle presents low risk to buy, with high opportunity. This is associated with times of a depression, recession, fear, and panic. This is a good time to buy, because values are low, and will significantly increase over time.

Now that you understand the real estate market cycle, what part of the cycle do you think we are currently in – for 2011?

We now know that it is cheaper to buy than rent in Houston, that the values are currently low (due to the real estate boom/bust cycle), but what about lending? You’re going to need to finance this home, and get a mortgage – so how about interest rates?

Here is what historical interest rates looks like from 1972 to 2011. You will notice that if you bought a home in the early 1980’s, you could be paying 15-18% interest on your loan. Today, you will pay from 4-5.5% on your house note.

The data suggests that there is currently a “perfect storm” for buyers right now in specific real estate markets. Houston is one of them. This is why investors are flocking to the Houston area to buy up undervalued homes, because the goal is to buy low and sell high – so they buy at the bust, and sell at the boom.

So what are the costs associated with purchasing a home? Here is a break down of what you can expect to purchase a home. Some of these are variable, and can be negotiated with the offer on the home you wish to purchase:

Out of pocket fees:

  • Inspection fee  – $300-400 – This is a must for any first time home owner. You will pay a licensed home inspector to check the entire home out, and they will give you a detailed report of what works, and what doesn’t – before you purchase the home. This is great, because as a buyer, you have the ability to request for repairs to be completed before you buy.
  • Option fee – $100-500 – This is a required deposit that you must put down to have the “option” to walk away from the deal, in the first X number of days of the contract. This is a protection for the buyer – you want this. When the deal closes, this will be credited back towards the sale price of the house.
  • Earnest money deposit – $500-2,000 – Typically this is $1,000, and this will reserve the home for you after the 11th day of the contract. This puts your skin in the game, and lets the seller know you are serious about purchasing their home. When the deal closes, this will be credited back towards the sale price of the house.
  • Down payment – 3-20% of purchase price – Depending on your loan, you will need at least 3% to 20% minimum down payment for the house. If you have a VA loan, you will qualify for no money down. FHA is 3% down. Conventional loans are 20% down.

Fees rolled into your note:

  • Lender fees – $800-2,000 – This is the cost associated with originating your loan, underwriting your loan, and other fees your lender might charge you. Most likely, these will be paid at closing and will not require you to pay them out-of-pocket. They can be financed into your mortgage. Check with a few lenders and find out their rates, and fees – then compare to see who has the best deal.
  • Survey – $400-800 – Your lender will require a survey on the property ou are wanting to purchase. Hopefully the seller will have a survey, and you can use that. If not, the contract has a spot for the seller to provide a new one (and pay for it) – or you have too. This is another fee that will be rolled into your note, and you do not pay out-of-pocket.
  • Title company fees / closing fees – $500-$1,500 – These are fees that the title company will charge you to close on the house. These fees include recording fees, document preparation fees, and other miscellaneous charges that you might incur when closing on a house.

So now you know the fees associated with purchasing a home.

Did you notice that you did not pay a REALTOR commission? That is because buyers do not pay REALTORs’ commissions, only sellers do! This is why it is important to work with a buyers agent – and not the listing agent of the house you want. Your agent must legally have your best interest in mind, during the entire transaction. If you work with the listing agent, whose job it is to sell the house, whose interest do they have before yours? Essentially, it cost you $0 to work with a buyers agent, and it will (if you have a good agent) save you thousands.

So after you have decided you want to buy a house, you know the costs associated with buying a house, you know it’s better for you to own than rent – whats the next step?

You need to get pre-qualified through a loan officer to originate your home loan. The pre-qualification process is fairly simple. The person I use needs to speak with you 10-15 minutes over the phone, and you’re done. He will run the numbers, and find out how much of a home you can afford. They will prepare a “pre-qualification letter”, and email it to you. This letter will give you the dollar amount you can spend on your new home. This process should take less than 30 minutes of your time.

Once you have been pre-qualified, you will need to find a realtor to work with. Most likely you know someone, or you know someone who knows someone. I would recommend going this route. You can also search your local MLS for an agent, such as Houston’s public MLS access is HAR.com. Let your agent know that you have been pre-qualified, and the specifics you are looking for.

Spend time looking at houses, and once you find the one you want, ask your agent to run a CMA (comparative market analysis) on the house want. This will give you data that is very helpful in the offer you want to submit on the house. It will show you active, pending, and sold listings within 60 to 90 days, with comparable houses. That way you’ll know if you’re getting a good deal, or need to negotiate the price down..

After you decide on the price you want to pay, you will submit your offer to the seller. This can include the purchase price of the house, as well as funding needed at closing from the seller to help you out with out-of-pocket expenses.

Negotiations occur, and once all parties have agreed on the price then the contract is signed and executed (all parties sign). Your agent will send you a copy of the contract, and send the contract to your loan officer. Your loan officer will begin the process of underwriting your loan, and might need more information from you.

Things will be happening fast here. Your agent will be working. Your loan officer will be working. The listing agent will be working. They will all need cooperation from you.

You will submit the option fee of $100 to the buyer, and send the earnest money deposit of $1,000 to the title company.

The first 10 days of the day after the contract is executed (depending on how the contract is written, I always do 10 days $100 for option periods) you will be in the option period. This gives you the unrestricted right to terminate the contract and risk losing $100 – for no reason.

During the option period, it is critical that you get your inspections done. If something comes up, and the seller will not agree to fix, you still have the option to back out in the first 10 days. After inspections are complete, you will most likely do some minor negotiations on repairs.

The 11th day of the contract you go into whats considered the earnest money period. If you back out of the deal, you will lose $1,000. It ensures that you will not tie up the sellers house with no “skin in the game”.

From here on out, everything is simple. If you are financing the house, your lending will order an appraisal on the subject home. Keep in mind the house must appraise for the price you agreed upon (or more!), or you will have to renegotiate again on price.

Typically deals close in about 30 days. The closing process is fairly simple, and you should be in and out within an hour. Your loan officer will tell you how much money you will need to bring to closing for your down payment.

After the deal closes and funds, you are now a homeowner! Enjoy the American dream.