The Most Common Thing Missed When Buying a Home
Sometimes, I hop on Google to check on housing trends, mortgage rates, all that super fun and exciting stuff that most of the populace wouldn’t really care about. I came across an article this morning that discussed just what the title says- the most common mistake that people come across is forgetting about closing costs and other miscellaneous costs that are incurred when owning a home. So, since I’ve had an awful case of writer’s block for the last couple of weeks, I’m going to go over how to easily beat this common problem and keep more money in your pocket. It’s quick, easy, and something you should be doing for your first home.
I get a call from Joe Schmoe saying that he wants to buy a house and would like to get together for coffee soon to discuss what he’s looking for. Say that Joe’s budget is 200,000-250,000. Before you know it, every home that he likes is coming in at 245,000-250,000. Very typical when that is the upper range of your budget, and sellers are pricing at that number because it’s a really hot price point right now. The issue, however, with it being at the top end of Joe’s budget, is that it’s already going to have him really strapped for cash if that is the price point that he ends up buying. As a real estate agent, it then becomes my job to educate him. As I’ve been saying in the last couple of articles, real estate is a game. And what the game comes down to is very simple- dolla dolla bills y’all. Sellers are trying to net as much money as possible on what they’re selling, and buyers are trying to keep as many Benjamins in their pockets as they can. As it is in football, every game is won “in the trenches”. The trenches of a real estate transaction is the contract and the terms inside of it. How to manipulate those terms is how you can get the upper hand (and how the seller won’t feel like they’re necessarily losing in the process).
My game plan for this would start around telling Joe Schmoe to focus on the properties that top out at $240,000 if his budget can stretch to $250,000. Joe finds a home that he likes (DOES NOT have to be perfect, this is his first home; not his forever home) at $235,000. We go and view it, Joe Schmoe gets all excited envisioning what he would do for upgrades, layouts of rooms, all the things that people begin to stew on when they circle the wagons on a particular home. When it comes to discussing the contract, here are the areas that Joe can make sure that he keeps money in his pockets to be able to make said upgrades happen.
1. Seller pays title. I’ll save the title explanation for later when I have Hillary guest write for the blog, but in short title insurance is making sure that you own the property free and clear and that none of the previous owners can stake a claim saying that they have rights to it once you own it. In the Davidson metro area, seller pays title 99% of the time. Sometimes you’ll get an agent that is adamant that it’s a buyer expense, but that is not customary. I always ask for this unless it’s a multiple offer situation and I can make numbers move correctly on the back end to make the seller feel like I am presenting the best offer.
2. Seller paid closing costs. This is what the article was talking about that people miss when it comes time to buy. Lender fees, title and settlement fees, appraisal fees; there are a lot of fees and work that goes in to the closing of a home. And everyone wants to get paid for their work. These fees can range from 1-3% of the purchase price for most purchases. So a lot of the time, if my client needs help, I will ask for the seller to pay a portion of the closing costs. I’ll discuss this more in the next section since it’s where a buyer can get the most help.
3. Appliances to be conveyed with the property. A lot of people are buying townhomes or condos for the first purchase, just because Nashville has more of these as the city grows. Who wants to have to move out a washer and dryer from the second floor of a townhouse if they can avoid it? You can ask the seller to leave the appliances in the home and to be conveyed inside of the purchase price. You don’t have to buy a washer and dryer (and subsequently have to move them upstairs) and the seller can go buy brand new appliances. Win win.
Options one and three will obviously save you some money, but where buyers have the most room to manipulate the transaction in to their favor is in closing cost or prepaid help. Along with the fees that come along with using businesses to get you through the transaction, you will have prepaids that you have to pay for at the closing table. There is your escrow account, which houses your tax and insurance costs for the year. When you close, the lender is collecting prepaids for the remainder of the year (more fiscal than calendar, because taxes aren’t necessarily collected at the end of the year) for taxes and insurance. You can choose to not have an escrow account, but that means you’re personally responsible for saving up and paying those items yourself. As I said, this can total up between 1-3% of the price of the home for most transactions.
So- we have a purchase price of $235,000. Joe Schmoe is trying to save as much money as he can for some quick upgrades after closing. Without further education from yours truly, he could be on the hook for up to $7,000 in closing costs. Or, since we know his buying power goes up to $250,000, we can bump up the price of the home to $240,000 and ask for $5,000 in closing cost and prepaid help. A couple reasons that this works in Joe’s favor- the seller is still netting the exact same amount as a full priced offer, and now Joe’s closing costs (if the offer is accepted) just got reduced by $5,000. And while it’s not as common for a property to go stale and sit on the market for a couple of months, if that is the case, then Joe could probably even keep the purchase price what it is listed at and still ask for the closing cost help. This leans the scale heavily in Joe’s favor, because if the seller doesn’t have a realtor that has taken the time to educate his clients on the importance of looking at the net return on the sale, then they might see that they have a full priced offer and not even take in to account that they’re really getting $5,000 less. This sounds a bit harsh, but a contract is a contract once it’s signed. It’s like an offense running play action. The play starts, and the quarterback goes to hand the ball off to the running back. The defense bites, and everyone attacks the line of scrimmage thinking it’s a run play. However, the quarterback kept the ball, deceiving the defense and ends up throwing it deep for a touchdown. While a buyer is definitely not deceiving a seller by asking for closing costs, if the seller has an agent that hasn’t educated them properly or hasn’t made them aware that this will result in them netting less money at the closing table, then Joe Schmoe just pulled off the ultimate play action pass and scored one for the home team. Like I said, this isn’t a deceptive tactic, but a useful tool that buyers can and should be utilizing if they’re strapped for cash and do not have the ability to pay a high amount of closing costs.