by Joshua B. Rosenzweig (Fall 2017)
The largest transaction, strictly from a dollars-and-cents standpoint, that most people will engage in during their lifetimes is that of a home purchase. After all, where else will you decide to spend $100,000, $200,000, or $500,000, and then agree to pay an additional $100,000, $200,000 or $500,000 to finance your purchase?
Since buying a home is the largest transaction most people will ever make, it would stand to reason that all people would make sure to understand the entire process from offer to closing. However, what is expected and/or prudent is not the norm when it comes to home-buying.
Why? Well, the home-buying process can be incredibly confusing and unclear. The confusion often leads people to put off worrying about the details. Instead, most people think, “Well, my realtor will handle this,” or “my attorney will handle that.”
In many instances, a realtor can handle the initial contract negotiations and the payment of an earnest money deposit. And, sure, an attorney will handle making inspection requests on her/his client’s behalf. But, in the end, neither the realtor nor the attorney are financially responsible for this new monstrosity that you intend to call “home.”
If you are making a 30-year commitment to bricks and mortar, and siding and roofing, and windows and appliances, shouldn’t you know what you are getting into beforehand?
As an attorney, I have several advantages over a typical homebuyer. First, I have handled dozens and dozens of real-estate transactions during my career, which provides me with a unique perspective on the home-buying process. Second, through all of the transactions in which I have been involved, I have reviewed hundreds of contracts, addenda to contracts, change requests, inspection reports and inspection-repair requests. Third, I have an experienced staff of professionals who have worked on more real-estate transactions than I have, which makes my role much easier. Fourth, I worked for a mortgage company prior to going to law school, so I have plenty of familiarity with the mortgage process (even though the process has changed over the last decade).
But a typical homebuyer does not have the same knowledge and experience as I do. I doubt a first-time homebuyer understands how to read a title commitment. I doubt an individual who bought her first home 19 years ago remembers how the process works from offer to acceptance to inspection requests to mortgage contingency to closing. And I doubt an individual that is selling the home in which he raised his family in is able to remove his personal feelings about the home so as to consider contracts to purchase and/or inspection requests without some sense of personal attack by the prospective buyer. The home-buying process is tough, and that is true even for someone with a law degree.
If you are buying a home, you have several considerations to take into account as you move through the purchase process. First, understand why you are buying the property in the first place. If you are buying the property as an investment property, you need to look at several issues. For example, what are mortgage rates for investment properties? An investment property represents a higher-risk loan than a typical home purchase for a primary residence. Therefore, you can expect that your mortgage rate will be higher than if you were applying for a mortgage to buy a new home.
Also, what is the condition of the property? If you are buying an investment property, every issue that comes up during your ownership and someone else’s occupancy of the property is going to be your responsibility. Do you want to buy a house that needs a ton of work just to get it ready for someone to rent? If so, then make sure you know who you can rely on to do the work. Do not think for one second that the issues will take care of themselves – they won’t.
Second, understand the process of offer and acceptance. As buyer, you control the terms of the offer. Remember, buying a house is not like buying a loaf of bread. There are contingencies – attorney-review, inspection and mortgage – and there can be closing credits and home warranties and tax prorations. Each of these details impacts your bottom-line whether it be at the closing table in determining the amount of money to bring to closing or down the road when your tax bill comes the following year(s).
When making an offer, do not rely on prior purchase experience because no other transaction is similar to purchasing real estate. You should do research to understand home prices in the area. You should know what your tax rate is, and you should understand whether you are buying property in a planned unit development with an association. All of these items should factor into your offer.
Third, once your offer has been accepted, you move on to inspection and attorney-review periods. Get a licensed inspector to look through the entire home, and again, ask questions. If there are issues with the house, you need to know what those issues are so you can ask your attorney to request repairs and/or concessions. And, don’t hesitate to have a contractor come out to advise you what repair costs will be. Again, you are buying a house – not a loaf of bread. If it is going to cost you $5,000 to repair a plumbing issue, that is something you need to bring to the attention of your attorney so she/he can make an appropriate request.
Fourth, as I alluded to before, understand the impact of the type of property you are purchasing. As I said, a mortgage on an investment property is going to be higher than a mortgage on a property your purchasing as your primary residence. And, while the rate may change, one aspect of the mortgage process never will – it is frustrating! The best advice that I can give someone applying for a mortgage – based on my experience as a home-purchaser, a real-estate attorney and a former loan officer – is to be organized.
For the 45 days or so that it takes to get through underwriting for a loan, there will be several requests for information from the underwriter and/or processor reviewing your loan application to make sure you are an appropriate applicant for the sought-after loan. Therefore, make sure you know where the following documents are, and make sure they are readily accessible: last two-years worth of tax returns; 60-days worth of bank statements; last two paystubs; letters of explanation for any deposit into your bank account that is not work-related; and copies of most recent 401(k) statements or IRA statements.
While it is important to be organized so as to ensure you don’t blow the mortgage contingency deadline in the contract, another important issue is to make sure you understand the loan paperwork. Prior to closing and after your preliminary approval, the lender will send you copies of the loan documents to review and sign. These documents will identify the loan program, interest rate, payment amount and escrow amount. Make sure you understand what the paperwork says. And if you have a question, ask your loan officer. Remember, this is the biggest transaction you will likely ever enter into – if you are not comfortable asking for clarity, then you shouldn’t be buying the property.
Finally, you have made it to closing. Congratulations – now you have to sign your name 100 times so you can get the keys to the property. Remember, closing is not a time to “tune out.” Just because your attorney and realtor are present, questions still need to be asked. Understanding each document is important because each document is being signed for a specific purpose.
The home-buying process is not easy. It is confusing and frustrating and exciting and complicated. Make sure you ask questions so you understand each step of the process. And if you need representation, several members of Ottosen Britz can help you navigate the process.