Are you ready to buy real estate? Perhaps you’re considering the benefits that come from real estate ownership, such as building equity, cash flow producing assets, and tax deductions. Buying real estate is an exciting opportunity, one that can provide long-term financial gains and opportunities down the line.
Purchasing real estate involves over a dozen people, contracts, contingencies, due diligence, wire transfers, piles of paperwork, and major decision making. It's easy to understand why newer buyers can get overwhelmed. This page breaks down in depth the specific process to purchasing real estate.
(in 8 Steps)
Before you can anything else, you must decide real estate ownership is the right choice for you. If this is your first home purchase, you are probably grappling with a mix of emotions, financial considerations, short and long term goal setting. Truthfully, no one can make this decision for you; Of course, you can talk with family, trusted friends and advisors, but ultimately, you have to determine if real estate ownership makes sense for you.
Once you've decided, take it one step further with a strong commitment. Depending on your experience with real estate, you may have A LOT to learn, decisions to make, and perform a good deal of extra tasks outside of work and regular life. Like everything that is good for you, a sound real estate purchase takes commitment to accomplish.
Once you've made your decision based on sound financial reasoning and you've are fully committed to the ups and downs of the process, you are ready to move forward with the next steps.
In Washington, real estate agents are called real estate brokers (don't ask me why), sometimes people will call us Realtors or real estate salespeople. At Sagareus, we call ourselves Real Estate Advisors to underline the fact that our job is educate, advise, and support our clients through their transaction. All of these terms are used interchangeably.
Whatever you call them, choosing the right professional to work with is vital to your success. As the buyer, you don’t pay any fees for the service, the property seller pays all commissions, but you should still expect a high level of service.
A Sales Advisors responsibilities include:
I recommend you interview at least 3 sales advisors.
Choose someone you feel comfortable with, but most importantly, that you trust. Learn about them locally by researching their reputation. Get a sense of how they work, if they are competent and, remember, this person will be negotiating on your behalf.
Similar to interviewing a sales broker, you also need to "hire" your mortgage broker. Once you choose your Sales Advisor, start with their recommended Mortgage Lenders. Brokers and Lenders work together and have likely closed many deals together in past. By going with their preferred lenders, you ensure you have an experienced team that understands each other's work style and flow.
Again, you'll want to interview at least 3 lenders to ensure that you are getting the best rates and program for your situation and can see yourself working with this person through the transaction.
Items to discuss with your lenders:
Once you choose a mortgage broker, you’ll submit a formal loan application, usually done online. To complete your full underwriting, every lender will request copies of the following for everyone on the loan:
Once you have submitted this information, the lender can provide you with pre-approval. With this, we will know your upper limit, the top purchase price you can qualify for. This is obviously vital information for the the next step.
The Federal Housing Administration, or FHA, provides financial backing for consumers purchasing a home. They do not provide the loan outright. Instead, of a buyer stops making payment on their mortgage, the lender is able to file a claim with the FHA to recoup some of the money they’ve lost in the transaction.
Because it has this type of security, an FHA loan is more accessible to those who may not qualify for a conventional loan. FHA loans are ideal for those who are lower-to-middle-income borrowers. There are still qualifications. Some of the qualifications for these loans include:
Individuals must have proof of a steady income and must show they are purchasing a safe home. Interest rates on these loans are also very affordable, making the home purchase more affordable to borrowers.
A VA loan is much like that of an FHA loan in the way it works, but it is backed by the U.S. Department of Veterans Affairs. It’s only available to those who have served or who are serving in the U.S. Armed Forces. These loans are meant to help men and women, and their families, serving the country to qualify for a loan to purchase a home.
VA loans have some of the lowest restrictions, but there are still some requirements. They include:
VA loans tend to be the ideal way to buy a home if you have served time in the Armed Forces. For many, they are an affordable opportunity because interest rates are typically very low.
You may hear the term conventional home loans. This term refers to any loan that is not associated with a government-backed program, such as FHA and VA loans. In short, lenders set most of the terms for these loans. Lenders can set the interest rate, down payment requirements, and other requirements for consumers to meet in order to secure the loan. As a result, they can be harder to obtain in some situations.
Still, you should consider applying for a conventional loan if you meet the requirements. These loans can process faster and may come with good interest rates, as well. Key factors to keep in mind with these loans include:
Most consumers apply for conventional loans. With a range of options from lenders, it’s important to know the terms before moving into these loans.
If you haven't already, download the Buying Criteria Worksheet to help "set in stone" what you are really looking for. Some of these items are more important than others for individual clients, so you may disregard or put a lower priority on any items you want.
This is a very important topic, which goes back to our discussion on Housing Cost as a Liability. Ideally, we will NOT increase your housing cost much, if at all. So we need to calculate your monthly payment based on the down payment, interest rate, and if you will have another income source from the property (such as a tenant or roommate).
Are we doing a House Hack? BRRRR Ownership? Or just a simple Stepping Stone model? These strategies are discussed in depth in the How to Buy your 1st Home like an Investor resource. If you are enrolled in the Tenant to Homeowner Program, this is the next module; But here is a quick overview of the 3 basic owner occupant models:
Depending on your price range, acquisition model, and lifestyle needs, you can start to narrow down what property types will work for your immediate and long term plans. It is likely that more than one option will work for you:
What cities and/or neighborhoods are you willing to live in? Again, this will greatly depend on your plan. How long do you plan on living in this property and how long do you plan on keeping this property?
List anything your property must have. This list should be short and justified. You will not purchase the property if it does not have these items, you will not even consider buying the property if it is missing this item. Bear in mind, you can add a lot of things over time.
Must Not Have(s)
List anything your property must not have aka Deal Killers. This list should be short and mostly related to items you cannot change, such as lot size, position of the home on the property, parking situation, and proximity to community amenities.
Nice to Have(s)
List items that you feel would be nice, but are not absolutely necessary to make the deal have.
Value Add Plan
How will you add value to your property immediately or over time? This is when you think about skill sets available to you, including your own as well as your social resources. For example, my brother is a roofer. So I add a new roof to every property I purchase to immediately add value. Because of this, I am always looking for properties that need a roof so I can get a better deal.
How will you get out of this deal? Will you keep it long term for a rental, or will sell it at some point? How will you know when to sell?
As you become more and more familiar with the types of deals that are available, pros and cons of each option, the short and long term pay offs coupled with your short and long term goals, you will become clear on what model(s) and property type(s) will work best for your situation.
The most important point of this entire section is understanding your long term plan BEFORE purchasing a property. This sets you up for success in the long term.
Once you find the property that fits your criteria, do not hesitate, make an offer. This is a formal contract that you sign with the help of your broker. It outlines what you are willing to pay to purchase the property as well as other requirements you have. Here’s a breakdown of some key components of the Purchase and Sale Agreement:
Contingencies: These are factors that your deal rides on. For example, they may include:
When we submit an offer, the seller may 'counter' that offer. For example, if the list price is $485,000 and we offer $450,000 with a $5,000 Earnest Money; The seller may counter this offer at $465,000 with at $10,000. As the buyer, you can 'counterback' this counter. The Buyer and Seller can go back and forth as many times as needed to come to an agreement. Sometimes, an agreement cannot be made and we move on to the next opportunity.
Once the Seller and Buyer have come to an agreement and have both signed off on all the paperwork, the deal reaches Mutual Acceptance.
At Mutual, the Buyer has 48 hours to deposit earnest money with escrow and their due diligence timelines begin, as outlined on the contingencies.
This is where things get very interesting. We have a mutual acceptance, which means the deal meets our criteria and the seller has agreed to move forward with terms that work for us. That’s all good, but we have to do your homework to make sure the deal is worthwhile, confirm the information we have is accurate, and ensure the property is in the condition we believe it to be.
Most often, we start with a complete property inspection with a licensed inspector. He or she will look through the property and provide you with a complete report containing current condition of all major systems including electrical, plumbing, siding, decking, foundation, crawl space, roof, attic, windows, flooring, and any minor repair / cosmetic issues. The report will contain any safety concerns, code violations, and long term planning items.
Every inspection contains a very long list of items, this is normal. Every property has on-going maintenance needs and the report is simply outlining the current condition of each system. It is normal for a 15 year old roof to show some signs of age; We will plan to replace the roof in the next 10-15 years.
If the property is currently rented to tenants, we'll include a lease review contingency so we have the opportunity to review current leases and ensure all terms are consistent with what was advertised, most importantly the dates and rent amounts.
Your broker and title rep will review the Title Report to ensure that no one else can lay claim to the property through a divorce, inheritance, or other transaction. Here we will also ensure the property use code is consistent with how it is being sold. For example, I have worked on transactions that were being presented as a duplex, but when we dug a little deeper we found that the property was zoned for a single family, the seller added another unit without necessary permits and without updating county records. This can be a big issue with some lenders.
Seller Disclosure Review
The seller provides all the information they know about the property in Form 17. We take the time to review this information and compare it with our findings during the inspection.
With all of this information in hand, we need to make decisions on how to proceed.
Did we find anything so alarming that we just want to walk away from the property? If so, we simple provide notification to seller within the required timeline and you will get your earnest money back.
Did we find major items in disrepair that we were not expecting? If so, we can decide to negotiate the price down or ask the seller to repair these items. Depending on the situation, we this can get us back into the countering and countering back situation, which is all part of the negotiation process.
If we come to terms, we are fully pending. The only remaining item is the bank financing, which requires an appraisal.
Finally, the bank will send out an appraiser, who will provide an opinion of value. This is how the lender verifies that the property is worth the amount you plan to borrow. The appraiser looks at many factors to determine the value including current condition, property features, and an analysis of similar properties in the area.
If the appraisal comes in low, it's back to negotiations. Either the seller can reduce the price (they never want to) or the buyer pay the different out of pocket (they never want to). A third option is getting a 2nd appraisal, if the lender will allow it, and challenging the appraisal. This situation is very case by case, but some resolution needs to happen or the deal will fall apart.
Usually, though, the appraisal comes in at value and we move to the next stage.
You will be contacted by Escrow (a lot) to review documents and bring funds to close. You will either wire in or bring a cashier's check for the amount needed to fund the transaction; The lender will send "loan docs" to escrow, and you'll be scheduled to sign all the paperwork with a notary.
You're broker should always review your Final Settlement Statement prior to your signing and challenge anything that is questionable, such as prorated tax amounts, escrow / title fees, and / or prorated rent amounts from the transfer of a rental property.
Once you’ve signed all of your loan documents with escrow, the funds to close are wired from the lender and buyer, escrow will "Release to Record" which means they've wired the seller their funds and recorded the transfer with the county.
The transaction is complete, but you are not done!
In Step 4, you created a short and long term plan to raise value and build wealth. You have to follow through on your plan in order for that plan to work! If you have repairs or upgrades to make, the sooner better. If you need to get renters in, the sooner the better. Celebrate your closing, quickly, then get back to creating your financial future!
Of course, your Sagareus Advisor is here to help you every step of the way, including through the execution of your plan. You have access to our vendor list as needed, our team will help with leasing and property management, as needed, as well as on-going property maintenance.