You just wrote and an offer, the seller accepted and you’re telling your friends you just bought your dream house. (Search for homes here.) You are super excited, but what happens now? The first thing that happens is your agent is going to make sure all the papers are correctly signed by all parties, then they or the other agent will send the contract to escrow who in turn assigns an escrow number. This is called opening escrow. Escrow is the neutral third party assigned the task of being the hub, through which all buyer and seller, lender and agent documents pass. The escrow officer is the person in charge of your escrow. Escrow is going to order a preliminary title report or “prelim,” along with all the other necessary reports as required by local ordinance or other government statute, including Home Owner Association (HOA) docs and any particular items requested by the lender. Once open, escrow will send you a package that will also include the escrow instructions. Escrow instructions will reiterate the terms of the agreement including address and names of the parties.
Assuming you are financing a portion of the purchase, you will be speaking with a lender and providing them an executed contract. They will need your financials including W-2, tax returns, asset statements etc. and they will run your credit. Truthfully, you have probably already done this since no offer is taken seriously today without 3 things: The proof of funds (evidence of down payment), preapproval from a reputable lender (preferably local) and the purchase contract. As a result of recent changes in the lending world specifically as it relates to the Dodd- Frank legislation, there will be a 3 day period after you apply for the loan to look over the lender disclosures. Anytime the loan terms change substantially, the lender is required to re-disclose and another 3 day wait ensues. This delays everything which is why you really need to sew up your loan decisions quickly. Often times a buyer wants to shop for the best interest rate and they do this in the days immediately following their offer’s acceptance. (Contact Tim for help here.) Please note that while you should absolutely look for a lender who has competitive rates, finding a mortgage lender you trust is really the most important thing to seek in my opinion. By all means, explore different companies, but remember time is of the essence and it will take the better part of 3 weeks to get a loan approval. The longer you wait to begin the process, the longer it takes to get an approval. Since the California Association of Realtors (C.A.R.) Residential Purchase agreement (R.P.A.) defaults to 21 days for due diligence, loan approval and appraisal (your investigation and loan contingency periods), you really don’t have the luxury to play the loan rate game. Given this reality, I recommend you ask your agent for their favorite lender or lenders and see if you “click” with them. More important than the interest rate on a given day from one lender to another, is whether you connect and develop trust the person you are dealing with. Customer service and watching out for your best interest will always eclipse an 1/8 percentage point one way or another in my opinion. Don’t get me wrong, we all want the very best rate but since rates are changing every day and sometimes several times a day, having someone you trust to have your back, is essential. Give me customer service every time over a slightly better rate. Getting a loan is hard enough already, hire a mortgage person who is going to help you; someone who you can meet face to face. Seriously, you’ll thank me later.
While the escrow and lender are working behind the scenes on their stuff, you the buyer are also on the clock to do your due diligence. Remember, the C.A.R. R.P.A. provides for 17 days during which time you have to investigate all aspects of the home you are purchasing. This is your contingency period, but it doesn’t go on indefinitely. What’s that mean anyway? Due diligence is your responsibility to investigate all aspects of the home you are purchasing. This means, insurability, title, schools, taxes, neighborhood characteristics. I showed a home last week where when we went outside, two monster dogs ran up to the fence and were snarling and barking so loud that we all took a step back, so we went back a second time a couple days later and the same thing happened. My client passed on that home. It’s impossible to know everything about a neighborhood or house when you buy it, but the 17 days afforded for investigation are there for a reason. Do your research! Included in all of this investigation, is the physical inspection. I describe the physical inspection as our “first line of defense.” What I mean is that there are many inspections you might want to have. Mold, radon gas, roof, geological, sewer line, structural… but all that costs money and it adds up, so the first thing you do is hire a home inspector to give you a solid overview of the home you are buying. If there is no sign of water intrusion, perhaps a mold test or roof inspection isn’t necessary. Your home inspector is going to be able to give you an idea of the condition of the home you are buying and make suggestions if he or she senses further investigation is necessary. Another practical note: many times an inspector will make a “further investigation” recommendation because they have to cover their tail. So it’s important that you ask the inspector, “Is this a big deal?” More often than not, the inspector will say something like, “This is a terrific home and if it were me, I probably wouldn’t worry about it, but I always recommend that if you’re concerned, you should have a detailed inspection by… a plumber, or engineer etc.” In other words, he’s saying he wouldn’t worry about it so unless you’re worried, don’t worry.
After the inspector issues their report, there are undoubtedly going to be things that need correction. However, some may be upgrades to new standards that weren’t in effect when the homes was built, while others may be cosmetic. I always tell my clients that we start with “Health and safety” issues first. It’s not reasonable to ask a seller of a 40 year old home, to bring it up to the latest codes if not required by law. Examples of code changes that are required would be, garage door sensors for child safety, CO detectors, smoke detectors and water heater strapping. As a buyer you can ask for anything you want but you shouldn’t get your hopes up that the seller is going to make your home like a new one. Measure your expectations and put yourself in the seller’s shoes. As a new homeowner there are going to be things you are going to want to update and upgrade. This is part of the joy of owning a home.
One thing I tell my clients is that there are two negotiations: the first is price and terms: what’s the price, how much down payment, when do we close, what’s included? The second negotiation is the “Request for Repairs,” and this is often the most contentious. Typically sellers are resistant to fix things after they’ve agreed to a price especially if they’ve had to come off their asking price to make the deal. One of the comments I hear a lot from sellers is, “I lived with it for all these years, so can they, it’s not a new house.” Can’t really blame them for that attitude, but this is why I recommend health and safety first. It’s equally hard to blame a buyer for asking for an unsafe situation to be rectified. After health and safety comes things that should be working. Today I was on an inspection where the gas oven didn’t ignite. It’s a pretty safe bet that the seller is going to agree to fix the oven. The same would be true had it been the A/C, heat, windows, garage door etc., etc. Problems often arise when the inspector notes something like this: “The roof is 25 years old and with a life expectancy of 25-30 years you should expect you’re going to have to re-paper or re-roof in a few years.” However, when there’s no evidence it’s ever leaked, this can be a tough sell to get the seller to agree to pay for new roof. Same comes up on water heaters and A/C compressors. They don’t go forever and eventually they’ll need replacement, but when there’s nothing wrong now, how can the seller be responsible or a future problem or repair?
How does a buyer protect themselves then, from a problem in the future? Sometimes a seller will acknowledge a certain likelihood and offer a credit or reduce the price a little. But this is why the second negotiation can be so difficult, sellers really aren’t that interested in what happens after they sell. One possible solution is ask for a Home Protection Policy (HPP) in your offer. There are various degrees or features of these policies which you should research, but in general the HPP will help offset many unexpected expenses in the future. Another note is that they are renewable so you can actually keep you plan in place many years after you originally purchased. It’s a type of insurance and it’s worth exploring especially if you purchased an older home.
Once the request for repair is done, you’ve verified insurability (can it be insured and for how much?), HOA docs, title, neighborhood noise and whatever else you can think of, it’s time to lift your contingencies. This is a big deal but it an inevitability if a transaction is going to go through to fruition. Lifting contingencies is a big deal because until you “lift,” you can always withdraw cancel, quit and still get most if not all of your deposit back. You are always supposed to have a reason when you cancel but the point I’m making is that you can cancel and usually not lose your deposit. Once you lift your contingencies however, your money is on the table. Cancel after you lift and you will likely lose most or all of your deposit. On a $700,000 home that can be up to $21,000. 3% is the maximum “Liquidated Damages” allowable in California, so your earnest money deposit (EMD) is typically 3% of the purchase price because the seller wants you to have the maximum amount of “skin in the game” when you buy their home. You can’t get hit with owing the total purchase if you quit, but 3% is still serious business.
Once you’ve made your offer, had it accepted, opened escrow, reviewed all the documents, done your inspection and due diligence, negotiated your request for repairs, obtained your loan approval and lifted your contingencies, all you have to do now is plan your move and await your loan documents. Once in escrow, your loan documents are the last step between you and your new home. Sign them, wire in your down payment and wait for the lender to “fund” your loan. After your loan funds, the title company will record the deed in your name. That’s when you get the call from your agent: “Congratulations, you just bought a home.” And that really is music to the ears, isn’t it?
I liked this article and found it very helpful. Thanks Tim for sharing your knowledge and professionalism.