Path to Home Ownership: The Buying Process
The Perfect Property – in today’s world of compromises and rushed decisions, does it even exist? I believe it does. In fact, I know it does. Because every day, in all of Chicago’s 77 neighborhoods and it’s beautiful surrounding suburbs, I help my clients with the buying process & assist them in finding their perfect home. Of course, it’s not as simple as clicking through properties online and unlocking doors.
Finding the perfect property is about understanding. Understanding your wants and needs, priorities and concerns, tastes and lifestyles – most importantly knowing your end goal.
It’s about networking. I often draw on relationships and resources, information and support to get the ideal property for my clients because often times it’s not yet listed.
It’s about professionalism. Maintaining honesty and integrity, dedication and respect, communication and transparency.
And it’s about hard work. Employing energy and hustle, passion and drive. At the end of the day, the perfect property is out there waiting for you & I’m going to outline how we can find it.
Disclaimer: This is going to be a longggg post. Grab some coffee or a snack & let’s get into it.
The Advantages of Home Ownership
A home is most likely the biggest purchase you’ll ever make, and it marks a major step in life. There’s no scientific formula that tells someone when they’re ready to buy, but you should take stock of your financial situation as well as your personal lifestyle. In general, there are a number of advantages to homeownership, both tangible and intangible, that you’ll want to consider.
• Investment – Every payment you make on your mortgage puts you one step closer to acquiring a major possession. And every improvement you make to your property not only enhances your way of life, but also adds value to your home.
• Protection from Inflation – Once you purchase a home, the bulk of your housing costs are not exposed to inflation. That means your only housing expenses that will rise over time with inflation are property taxes, homeowners insurance, and maintenance costs.
• Equity – Because a home increases in value even as you are paying down your loan, most buyers effortlessly build equity. Equity creates wealth and can help you accomplish any number of financial goals, such as paying for retirement and funding a child’s education.
• Tax Advantages – Your real estate taxes and the interest on your mortgage are deductible from your income tax. For many buyers, that tax break can go a long way toward making home ownership just as affordable as renting.
• Satisfaction – For many people, but certainly not all, home ownership simply makes life more enjoyable, whether it’s the pride that comes from decorating and maintaining your home or the knowledge that your family will grow up in the neighborhood of your choice. I believe homeownership is still the American Dream.
CHOOSING A BROKER
Choosing an advisor to guide you through a transaction is as important as buying a home. So homebuyers should give just as much consideration to hiring a buyer’s representative as sellers give to hiring a listing agent. That means conducting interviews, seeking referrals and researching the company as well as the individual. While it’s important to ask potential agents a number of questions relating to their experience and routines, it’s also important to listen for the questions they ask you to get a feel for if they’re really intent on understanding your needs. Experience in your preferred neighborhood and/or style of home is important, but so is the comfort level between agent and client, because buying a home is a highly personal experience. Ultimately, you only work with one agent, so it should be someone you like, trust and respect and who feels the same way about you.
GETTING PRE-APPROVED FOR A MORTGAGE
In today’s home-buying environment, a mortgage pre-approval is not only essential; it is also incredibly simple to obtain – whether online, over the phone, or in-person. A mortgage pre-approval lets you know exactly what you can afford to buy, but it also demonstrates to a seller that you are a willing and able buyer. It also gives you a head start in getting an actual loan commitment.
If you aren’t quite ready to take this necessary step, you can easily use an online mortgage calculator to get a sense of your buying power and monthly mortgage payments. As a general rule, most experts say that your housing expenses should not exceed 28 percent of your gross monthly income, but a variety of factors – from your credit score to other debt – can open this ratio up to a pretty wide range. Remember that there are other costs involved in buying a home outside of the down payment, such as closing costs, moving, decorating, and remodeling expenses. You should also consult with your accountant or financial advisor to talk about how real estate affects your financial goals. Knowing where you will come out of the transaction will give you a lot more confidence going in. Some lenders I HIGHLY recommend:
CREATING A WISH LIST
Almost every home purchase involves some degree of compromise, which is why it is important to prioritize your wants and needs before you begin your search. There are many variables to think about depending on your lifestyle, budget and future plans, but some universal considerations include:
Location – Location matters. Each individual neighborhood offers it’s own unique flavor and sense of community. Consider the factors that are important to you, such as schools, transportation, and neighborhood amenities like restaurants, shops, and parks.
Here are some ways to research an area you’re considering:
• Tap local resources like the Chamber of Commerce, which can provide information about area businesses and community events.
• Seek out neighborhood residents and get their opinion about where they live. Online neighborhood groups are great.
• Drive or walk through the neighborhood at various times of the day and evening.
• Leverage your agent’s expertise in the neighborhood. Hi – Talk to me 🙂
Type of Home – A great diversity of housing exists: single-family homes, condominiums, lofts, new-construction, gated communities, rural, and vacant land. You probably have a preference for a certain style of construction. Weigh the pros and cons to narrow your focus. Be sure your agent has experience in whatever type of home you prefer.
Features and Amenities – Garage parking, hardwood floors, a fireplace, outdoor space, a large yard close to parks, doorman, etc. In the end, these are the kinds of details that drive the decision to purchase one home versus another. In creating this list, some things to consider are resale value, your daily routine, walkability, and the cost of making changes or additions down the road.
FINDING YOUR HOME
Once you have created your wish list, obtained a mortgage pre-approval, and selected a real estate agent, you are ready to begin your home search!
Review Listings
Using the guidelines you set forth, your agent will present you with available listings. In addition to price and property attributes, pay close attention to data like property taxes, market time, and monthly assessments for condos and town homes.
View Properties
Your agent will schedule showings and accompany you on each appointment. When you walk through a home, some things to consider are: how the space functions for your lifestyle, what’s included in the total square footage (balcony, decks, basement or garage), and, in new construction, which features are standard and which are upgrades.
According to the U.S. Department of Housing and Urban Development, the average buyer will view 15 homes before buying one. But that is just an average. Some buyers will purchase the very first home they see – which has happened to many of my clients!
Open Houses
Remember, if you are attending Open Houses without your agent, be sure to mention that you are being represented by an agent. You are encouraged to go to as many as you want, but this will not only save you from being inundated with calls from other agents trying to represent you, but will give the host a point of contact should you want more information or if they are calling for final offers, pre-market price reductions, etc.
Compare Properties
Your expectations and the marketplace will begin to converge, and your agent will be able to adjust certain parameters such as location and features in order to present you with alternatives. Be sure to track each listing with your thoughts and feedback so you have something to reference when decision time rolls around. The more homes you see, the less vivid the details are. When you find a home and are ready to make an offer, your agent will perform a Comparative Market Analysis or CMA. This report compares the subject property with other properties that are currently listed and recently sold to help you formulate your offer.
Property Types
From towering skyscrapers to lakefront estates to fantastic fixer- uppers, our area gives homebuyers virtually limitless options when looking for a home to call their own. Just about any neighborhood offers a variety of housing styles to choose from. The following is a brief rundown of the types of residences you’re most likely to encounter during your home search:
• Single-Family Homes
Officially defined as a residential structure that includes only one dwelling, single-family homes are readily available in most of Chicagoland neighborhoods. Especially in the city, buyers should be prepared to pay a premium for the extra land, privacy, square footage and outdoor space a single-family home affords.
• Condominiums
Purchasing a condominium in a multi-unit building means the buyer owns an individual unit as well as a share of the building’s common areas, such as the lobby, corridors and amenity areas. Many buyers choose condominiums because they require little maintenance, frequently offer amenities such as a swimming pool or fitness center, and in most cases are relatively affordable compared to town homes or single-family homes.
Because of the shared ownership, a condominium association
is responsible for decisions regarding the operations of the building, and owners must abide by the rules and regulations set forth by the association – meaning you can’t make significant changes to your unit without approval. Condominium owners also pay monthly assessments, which cover maintenance and repairs of common areas as well as costs associated with shared amenities.
• Lofts
Lofts are commonly found in the city & are traditionally adapted from a large open space in a factory, warehouse or other commercial building. Hallmark features of an authentic loft include high ceilings, large windows, exposed timber or concrete support columns, timber or concrete ceilings, exposed brick walls and exposed ductwork. In recent years, buildings in many of Chicago’s former manufacturing and industrial districts have been converted to residential lofts. Loft homes have become so popular that many developers now build “soft-loft” or “loft-style” buildings.
• Townhomes
Townhomes are multi-level dwellings that share at least one com- mon wall with a neighboring home, which typically has a similar façade. In downtown Chicago, where land costs are high, town homes tend to be more affordable than single-family homes since they use land more efficiently. In the suburbs, a townhome is often a great entry point to the market or ideal for someone wanting less maintenance. Townhomes offer buyers many of the features they would typically find in a single-family home, such as ample living space, a private garage and an outdoor area.
• Two- and Three-Flats
Ubiquitous in Chicago and some surrounding suburbs, traditional two- and three-flats are brick or grey stone residential buildings with a common front entrance and separate residences on each floor. Many two- and three-flats are vintage buildings that are popular with rehabbers, who update them with luxury interior finishes and modern floor plans. Likewise, purchasing a two- and three-flat building is becoming more and more popular for owners to occupy one unit while collecting rent from the other(s).
MAKING AN OFFER
Chances are, when you find a home you absolutely love, someone else may love it too. So it’s important to act quickly and make an educated offer based on a rational approach to pricing and negotiating that you and your agent have discussed. To start the process rolling, your agent will draw up a contract that includes your offering price and other terms and contingencies. Buyers often focus on price, but there are other important terms to a real estate contract. You can include any terms you like, but the more you add, the more likely the seller is to object. Here are the most common elements of a real estate contract:
• Price
The market will determine the final price, but your agent will help you formulate an offer based on comparable listings, sales, and current market conditions.
• Mortgage Contingency
A mortgage contingency stipulates that you will buy the home subject to obtaining a mortgage. If you cannot obtain a mortgage by said date, and the seller will not agree to finance the sale, then the contract will be void. The terms of the mortgage must be stated in the contract, and you will also need to establish a timeframe for securing financing. This is why I suggest you have everything to your lender during the pre-approval period, so when the perfect home comes up you are ready to jump into action.
• Home Inspection Contingency
A thorough inspection of the property by a licensed home inspector protects you against structural or material problems that are not detectable in a casual walk-through. Home inspections are just as important in new construction as they are in resale. Obviously, buyers can’t inspect a home that isn’t built yet, but you should always require an inspection prior to closing.
In new construction, an inspector will make sure that all mechanical systems are working properly. They may also spot repairs that need to be added to the builder’s punch list (a list of items that need to be completed). I recommend my clients who are purchasing new construction to write in the contract that they will do a walk through prior to close as well to verify all items are complete, understand the functions of the home, and ask the builder any relevant questions around maintenance. The buyer, not the seller, is responsible for hiring and paying the inspector.
• Attorney Review
Attorney review is generally a 5-7 day period, in which your attorney will review the contract and suggest alterations, negotiate remedy requests from the inspection, & iron out any details. Alterations will usually focus on the language of the contract in an attempt to protect the buyer from any undue obligations. Your attorney will also add language to address points that were agreed to as part of the negotiation but that aren’t a part of a standard contract.
Even when using the standard-form real estate contract, an attorney’s review is always highly recommended. ALWAYS use someone who specializes in real estate transactions. Something that is obvious to a real estate attorney might be overlooked by an attorney who’s sole focus isn’t real estate transactions or real estate contracts. All attorneys are not well versed on the legalese in these agreements & real estate attorneys are hired to make important modifications to the contract with the sole intention of protecting the buyer. A good real estate attorney will have a 20 point modification letter, ultimately saving buyers $1,000’s+.
Upon attorney review, if the contract is not acceptable to either party, both have the option to cancel. If the contract is acceptable, then the transaction moves forward & additional Earnest Money is due.
• Earnest Money
Earnest money is a deposit, given by the buyer to the seller, which secures the contract until the closing. Initial earnest money & additional earnest money: 2 separate checks (or wires) that will contribute to your downpayment. The initial earnest money, is a ‘good faith’ deposit showing that the buyer is indeed intent on buying said property. The initial deposit, usually in the form of a check, must be given to the seller or seller’s agent along with the contract, and the additional earnest money is usually due upon attorney approval. Earnest money is typically held in an escrow account until the closing, when it may be applied to the down payment and/or closing costs. If the sale does not go through due to contingencies covered within the contract, then the earnest money may be returned to the buyer. However, if a buyer is in breach of contract or fraudulent in any way, then a seller may be entitled to keep all or a portion of the earnest money. I have only had 1 instance where the seller threatened to keep the buyers entire earnest money deposit, 5% of the purchase price, & it was due to an egregious error on the lenders part. However, I got creative & we ended up closing 30 days after original closing date.
• Closing Date
One of the most important terms of a real estate contract is the closing date – the date when ownership changes hands. This is usually, but not always, the date that the seller must vacate and the buyer may occupy the property. Flexibility on the closing date can give a buyer a big advantage over other potential buyers. Occasionally, it can also allow you to negotiate a lower price or other more favorable terms.
NEGOTIATING COUNTEROFFERS
In every transaction there is a fair amount of negotiation – offers and counteroffers – before both parties are satisfied. This is one aspect of a real estate transaction in which an agent is invaluable. Not only can an agent draw upon their experience and market knowledge to offer sound advice during a negotiation, but we can also serve as a buffer between the buyer and the seller/ seller’s agent. Negotiating for a home can be a highly charged and emotional process. But the most emotional buyer will look like one cool customer behind the right agent, and in the end, you usually wind up with what’s important to you.
CONTRACT TO CLOSING
In a real estate transaction, there are dozens of loose ends to tie up between signing the contract and closing the sale. It is a critical time, with strict deadlines that must be met.
• Deliver earnest money (initial & additional).
• Recommend and schedule a home inspector and accompany the buyer on the inspection. It is always highly recommended that the buyer attend the inspection along with his or her agent in order to make sure that any issues that come up are properly relayed to the buyer’s attorney.
• Recommend real estate attorneys. I personally have 3 favorites who I work with often & have saved my clients thousands of dollars.
• Obtain important documents, such as property disclosure forms and condominium documents (budget, declaration, condo association minutes), and coordinate with attorney’s.
• Help expedite the loan-application process with your mortgage broker.
• Monitor all contingencies to ensure that they have been met.
• Recommend service providers for moving, home-improvement, and repairs.
• Schedule a final walk-through. Again, both buyer and buyer’s agent should be present.
• Coordinate and attend your closing – or pre-sign your documents & have your broker go in your place.
CLOSING
Your broker will work closely with you, your lender, your attorney, and the seller’s agent to make sure everything is in place for a smooth and efficient closing.
Typically, a day or two prior to the closing, your lender will forward all loan documentation to the title company and let you know the amount required to close. You will be responsible for bringing the balance of your down payment and closing costs (such as lender fees, title company fees, and state and city transfer taxes) to the closing in the form of a cashier’s check (these are those forgotten additional fees I mentioned previously). At the closing, your attorney will guide you through the many documents you need to sign, including the bill of sale, the deed, and the affidavit of title.
Your agents goal should be to provide you with all of the information you need to feel confident at your closing. Cheers to home ownership!
AFTER YOU BUY
While your transaction is complete, your agents work is not. I maintain the relationship with my clients long after closing. I am always glad to help you find a variety of service providers and tradesmen to perform work on your home or make life a little easier.
As you’re getting settled into your new home, here are a few situations you may encounter in the coming months and years that are important to think about…
• Rebuilding Your Savings and Maintaining Financial Discipline
Buyers should definitely take the time to review and evaluate their finances after a home purchase. One important step to consider is setting up an automatic electronic payment with your mortgage lender, which lets you avoid costly penalties associated with late payments.
Also, make a plan for gradually rebuilding your savings account, which many buyers deplete in order to make their down payment and pay for moving costs. As a homeowner, it’s more important than ever to have a cash reserve set aside for unanticipated maintenance that your home may require. In fact, a general rule of thumb is that homeowners should expect to spend about 1 to 3 percent of the cost of their home per year on maintenance and repairs.
• Refinancing
Keep an eye on interest rates even after you purchase your home. If rates go down, you may be able to save money by refinancing, which simply means you take out a new mortgage at a lower interest rate to replace your original loan. Another common situation that calls for refinancing is the expiration of the initial, fixed-rate period on an Adjustable Rate Mortgage (ARM). If prevailing fixed rates are substantially lower than the rate your ARM will carry once it adjusts, then it might make sense to refinance into a fixed-rate loan.
Today, many lenders offer no-cost refinancing, which basically means they take the costs and fees associated with refinancing and roll them into the interest rate. It’s a way for homeowners to lower their monthly payment with little or no money out of pocket. With historically low interest rates, it’s always smart to stay in touch with your lender even after closing to figure out the best time to refinance. If you didn’t love your lender from your previous purchase, let me know & I can connect you with some great people!
While refinancing a mortgage has become much easier in recent years, it is still a major financial transaction with important implications. So be just as diligent in a refinance as you were in securing your original mortgage.
• Home Improvement
Whether it’s a fresh coat of paint, new hardwood floors, DIY project, or a major kitchen remodel; Most new homeowners have at least a few projects they want to undertake once they move in. Always reach out to your agent for their advice & preferred vendors so you know you will get the quality you deserve! Check out some of my favorite power tool kit + must have’s below – Yes, I have a favorite power tool kit – Don’t judge me.
There you have it – The guide to purchasing your next home. It’s as easy as that! But if you ever do have any questions, as always, reach out to me for all of your Chicago real estate needs!