Conceptually I understand the process of buying a home, or in our case a duplex. You review the available properties in your market, secure a bank loan, make an offer where both sides agree, then go to the closing table to finalize the purchase. Easy, right? In theory it is! But in reality, there were a number of additional steps along the way. Here is what we experienced over the course of 30-45 days.
1. Preliminary Property Search Online
I began the process of searching for a home long before setting foot in our new city. Thanks to the power of the internet, there were a number of realtor sites I could visit to search the Multiple Listing Service (MLS) system for available properties. I was able to search from the comfort of my college apartment for homes, duplexes, and even small apartment buildings!
All the basic information was included too, from number of bedrooms/bathrooms, square footage, additional features, and even pictures. Looking back I think this was a very helpful step because I could quickly start to get the feel for the local market and discover what I like and did not like.
2. Find a Realtor
It would be foolish to go through a home purchase alone. I understand the desire to save money, but a good realtor is immensely valuable in many ways. The really good ones know their local market, guide you towards the truly good properties while helping you avoid the bad ones, provide valuable advise, and better negotiate terms and conditions. They are true professionals that can make all steps involved considerably easier too. Plus on the buyer’s side of the table there is no cost. Did you know that? The typical arrangement is for the seller to pay the buyer’s agent and seller’s agent at closing. You really have no reason to avoid a realtor when you’re a buyer.
Our search for a realtor went quickly. We asked trusted friends living in our new city for recommendations and quickly received a short list of realtors to call. The first one impressed us very much with her knowledge, kindness, and advice. It was an easy decision that felt right, so we picked her! We signed an agency contract that stated she would represent us as a buyer’s agent. We could terminate the contract at any time with 14 days notice. The contract protects the realtor from would-be buyers that might waste someones time by jumping ship to another agent at the last moment. We had no issue signing the agency contract.
3. Bank Loan Pre-Approval
Although we had a good feel for what we felt was affordable, the bank loan pre-approval process helped to legitimize it all. We worked with our local bank to secure financing. I initially had concerns about using our local bank since we were looking out-of-state for our property purchase. But they were licensed and registered to provide loans for the State where we were moving. They also had interest rates and other terms that were highly competitive with other banks. In fact, we were given a little bit of a discount since we maintain multiple deposit accounts at the bank already.
As part of the process for pre-approval, we had to fill out and submit all sorts of paperwork on our work and living history. Since both of us were starting new jobs, we had to submit letters from our respective Human Resource departments that listed our position, salary, and starting dates. We also had to put together a net worth statement. In our Net Worth Updates for the website, we consolidate various accounts into single line-items such as “Roth IRA” or “Cash & Savings”. For the bank, they needed individual account details it in the form of a balance sheet listing out all assets and liabilities. So instead of simply using “Cash & Savings”, we had to list out “My Checking Account”, “Fiance’s Checking Account”, “My Savings Account”, for example.
We also had to show documentation for any monies we planned to use for our down-payment. They want to see that money has been deposited for 30+ days and is accessible. They want to avoid situations where another family member may quickly deposit funds just to “beef up” the strength of a would-be home buyer’s account. We did not have any issues with the step, because we had already saved up enough for a 20% down payment. The money we planned to use was sitting in our checking account and taxable brokerage account (due to sale of some stocks and mutual funds).
4. Additional Property Search with Realtor
While my own online searches yielded some great results, we also received some great recommendations from our realtor. She first took time to discuss a variety of home options with us in order to learn what we liked and what we didn’t like. The questions she asked of my fiance and I spurred quite a bit of discussion too. I quickly learned there are TONS of options to consider when buying a home. They were good discussions that helped us better determine our “needs” and “wants” when it came to available properties.
She also created a few filters that would continuously run and alert us all via email when new homes were listed that met our criteria. It was fun to receive the emails too. They came in without any warning at all throughout the week. We would quickly review the new listing and make a determination if we wanted to pursue or drop.
5. Tour Properties with Realtor
If we were already living in the city where we intended to search for a new home, then it may have been easier to do more tours more frequently. But in our case, we live out-of-town, in another state no less! When it came to property tours, we had to be strategic. It was very easy though. We would let our realtor know with ones we were interested to see. Then during our trip down to the city, we would spend an entire day visting all of the properties.
In addition to the ones we selected, our realtor would also throw in few extras of her own choosing. Those extra ones would sometimes “challenge” our thinking about a particular house feature or get us to reconsider something. The ultimate aim was to find something we liked.
I should say I absolutely loved touring properties. My fiance on the other hand, well….she would suffer from burn out after a couple hours. I loved touring the different suburbs and neighborhoods. Each house was so different. And we mixed in several duplex buildings too, as we had not yet decided between single family home or rental property.
6. Make An Offer and Send Earnest Money
After finding the perfect property, it was time to make an offer. This is where our realtor’s expertise and strength started to shine even more. She pulled several comparable properties in and around the neighborhood we were interested in. We could see what was for sale currently and compare it to what had already sold in the months prior. This gave us a clearer picture as to the “true value” of the property. Without this sort of comparative analysis, we would not know if the price the sellers were asking was too high or low.
Once we had this information and had time to discuss strategy with our realtor, we all felt strongly that we could offer less than the full asking price. As part of the negotiation strategy, the price we decided to offer was below what we ultimately were willing to pay. Call it standard negotiating tactics, always ask for less but expect to meet somewhere in the middle. In our case, the sellers were asking $195,000 for the duplex building. Our analysis made us thinking the property value was closer to $190,000. So we were decided to come in with an offer price of $180,000.
Our realtor drew up the appropriate paperwork that included all the conditions and contingencies. It’s not just the price that gets listed in the official “offer”, but you also need to include certain conditions that are meant to protect ourselves or may be required by the bank. For instance, the bank requires a formal appraisal before the final paperwork can be signed at closing. So that was added as a condition. We wanted to have a formal home inspection done as well as the option to back out of the purchase if unfavorable things were discovered. So that was added as a condition. Since the property was fully rented out, we needed to make sure that the tenant’s deposit money was officially transferred to us at closing. That was also added as a condition. There were a few more, but in general you get the idea. It’s not just a simple “I’ll buy the property for XXX number of dollars”. No, you need to protect yourself with these conditions and contingencies.
Finally, we included a check for $1,000 as earnest money. If the purchase moves forward ultimately, this earnest money will simply get applied to what pay at closing. But if we back out in a way that is not described in the offer, the sellers would get to keep the money. The gesture of sending earnest money is just a show of good faith. It tells the sellers that you are serious about making the purchase and that you will not back out unnecessarily. Now if we had to back out as a result of a bad home inspection or low appraisal, in each of those cases we still get our money back. It’s fairly standard operating procedure, but it’s all spelled out in the offer too.
7. Review Counter Offer and Renegotiate
The sellers did not accept our original offer as written. The contingencies were all okay, but they thought our offer price was just too low. I expected this outcome since we asked for less. The expectation was to have them submit another number and then we hopefully meet in the middle. Although I would have loved to be surprised had they just accepted it outright.
As part of the “rejection” to the original offer, they submitted a counter-offer. The conditions and contingencies remained the same, but the are now offered the property for $188,000. This seems like a fair number and I was glad to see them come down from their original price. Most sellers are going to ask for as much as they can originally — and probably a little more! Again, this is where a good realtor will come into play. A lesser realtor may price the property slightly below what it “could” sell for in order to make a quicker sale; and make a quicker commission.
We decided to continue the negotiation game by rejecting their counter-offer. We then submitted a new offer, changing the price to $185,000. But we added one more condition. As part of the sale, we are asking the sellers to provide a one-year home warranty policy. This is meant to protect us in case anything major would occur to major appliances or the property itself (ie, roof, air conditioner, etc). I was told the price is roughly $500 for such a policy — so it really wasn’t asking “too much” to throw it in as an added condition.
With the rejection and new offer ready to go, our realtor submitted all the paper work to the sellers.
8. Accept Offer
It did not take long to hear back from our realtor. Less than 24 hours after submitting our new offer, we were informed that the sellers have agreed to the price and conditions. It looks like we will be buying a duplex for $185,000. Woo hoo!!! It looks like the hard part is over – I hope! But don’t pop the champagne just yet, we still have a number of things to complete before we sign papers at the closing table.
More To Come
Who would have expected the purchase process to be so involved? For the sake of any readers and due to the size of the content I am breaking up this post into two parts. You just read about steps 1 through 8 in this part 1.
I’ll get to work writing about steps 9 through 16 and publish them in a follow-up post. Stay tuned! Now in the second post I will talk about the following steps:
9. Get an Appraisal
10. Hire a Home Inspector
11. Send Counter-Offer and Renegotiate
12. Accept Offer and Schedule Closing Date
13. Finalize Home Insurance
14. Finalize Bank Loan
15. Final Closing Date
16. Receive Keys