What to Know Before Buying a Home
1. How do I buy a house?
The first step is research. Be an informed consumer; buying a house is one of the most complicated and expensive purchases you will ever make. As with most other things, you get what you pay for. Look at and compare many houses in different areas. Once you have seen something you like, assess its location. How far will you have to commute? What is the traffic like? How does the neighborhood look? What services are available? Visit the home on multiple occasions and at different times of the day. Remember: location, location, location. It's one of the biggest factors in setting the price of the home.
Step Two - When viewing properties check the condition of the house and any appliances, window coverings and other items that you want included in the sale. Consider purchasing a home warranty. For a minimum fee, the home warranty company will insure that the house and the appliances are in working condition. Many companies will provide coverage for washers, dryers, pools and pool equipment, air conditioning, and some roof repairs.
Step Three - Once you find a home that fits your criteria, consider making an offer. Before you make a written offer, know exactly what you are buying and what the costs will be after you own it. For example, in addition to the monthly principal and interest payments that you will have to finance the purchase of your home, you will need to budget for utility bills, property taxes, insurance and maintenance costs. If you buy a home that has a homeowner's association, such as Point Hamiltair, Fern Rock, Arrowhead Lake Estates, Village Cove, Willow Creek or others you will also have to pay association fees. Some homes have special assessments in addition to the regular property taxes. Make sure that you ask the seller for copies of the past years bills for these services, and that you inquire as to whether there are any assessments scheduled to be placed on the property in the future. Also, check the condition of the house and of any appliances that are included in the sale. If you buy a "fixer-upper," make sure you know what you are getting into.
2. Do I need a real estate agent or an attorney?
An experienced local real estate agent can assist you in finding a home that meets your particular needs. You will also have information about the home and area that an outsider would never find just by looking at the particular home. Most homes are listed for sale by a real estate broker who is referred to as the seller's agent. The seller's agent represents the seller. The agent who helps you find the home is called the buyer's agent. Usually you will not have to pay your agent a fee for the time and energy he or she spends in finding the home and assisting you in closing the sale. The buyer's agent's fee will be paid by the seller when you complete the purchase of the home.
Your real estate agent can also assist you in negotiating the price, learning about the community, obtaining a loan, inspecting the home, and in closing the escrow. In some instances, a real estate agent can represent both the buyer and the seller. This is referred to as a dual agency. This must be disclosed to you before you make an offer. It is advised that you proceed carefully in this situation, since your agent will be working for both the seller and you at the same time.
If you are not sure that you understand all of your rights and responsibilities, it is advisable to see an attorney who is experienced in the purchase of residential real estate. An attorney can help you with legal and tax questions that come up during the purchase of the home, and can assist you in reviewing all of the documents and reports that will be provided to you in the process of purchasing the home. For more information on how to locate a qualified attorney, order a free copy of the State Bar pamphlet: How Can I Find and Hire the Right Lawyer? To find out how to order a free copy of this pamphlet and other State Bar consumer education pamphlets, call 415-538-2280.
3. What information must the seller provide me?
In most cases, when you are preparing to buy a home, the seller must provide you with a Real Estate Transfer Disclosure Statement. This is a pre-printed form that lists many features or conditions about the home, the land, and the area where the home is located. The seller must list on this form any possible problems he or she is aware of that might affect your willingness to purchase the home. This includes, for example, easements, rights of others to control how you use the property, environmental problems, nonfunctioning equipment, zoning and building violations, and special assessments. The seller's agent must visually inspect the home and report all facts that he or she feels might affect your decision to buy this property. If you want information that is not covered in the Real Estate Disclosure Statement or additional information that is disclosed, put your questions in writing and ask the seller to respond in writing.
You should review the Disclosure Statement immediately and carefully. In most instances, you will have a limited period of time to decide whether you wish to proceed with the purchase despite the stated disclosures. Depending upon your purchase agreement, some sellers will require a written acceptance of the conditions contained in the statement. Other sellers will consider your silence as acceptance of all of the conditions contained in the Disclosure Statement.
If you buy a condominium, the seller must give you copies of the homeowners association's rules and bylaws, and financial statements, and must inform you if there are any unpaid assessments. You should also ask to see the past minutes of the association board meetings. You might find that there are pending or future lawsuits or defects in the construction of the complex being discussed in these meetings. All of which would affect the value of what you are buying.
4. Should the house be inspected?
Before buying any property, it is advisable to have it inspected by trained specialists. The kinds of inspections you need depend on the location and condition of the property. For example, in a hillside area, you might want a soil stability inspection. If you are buying a home built before 1978, you should seriously consider an inspection for lead-based paint. At a minimum, you should have the home inspected to determine if it is structurally sound, a pest control inspection to see if the house has been infected by termites or dry rot, and a natural hazards inspection to see if the home is located in an area subject to fire, earthquakes or flooding. The real estate agent can advise you about additional inspections that might be warranted under the circumstances.
Keep in mind that while the seller has to tell you about anything he is aware of that is wrong with the house, he is not insuring the quality of the house; for this reason, an inspection is a good idea.
5. How do I make an offer on the house?
Most homes are sold through real estate agents who have expertise in valuing homes. Once you have found the home of your choice and have determined how much you are willing to pay, you need to make a deposit (called earnest money) to show the seller that you are serious about buying the house. The deposit is considered a down payment on the price of the home. In some instances you may have to increase your deposit or increase your offer, especially if there are multiple offers on the home. Usually the deposit placed on a home would be 3% of the purchase price.
The deposit is usually deposited in escrow upon the acceptance of your offer. You submit a written offer on a form known as the Residential Purchase Agreement and Receipt for Deposit. This form sets out the terms upon which you are willing to purchase the property. The price you offer on a home will, in most cases, be less than the amount you will need to purchase the home. There will be expenses incurred in purchasing the home that will have to be paid by either the buyer or the seller. These include, for example, title reports, document preparation, recording fees, local taxes, fees for inspections, escrow fees, homeowner's insurance, and notary fees. Ask your real estate agent to provide you with an estimated closing statement. This will give you an idea of some of the additional costs you will incur in purchasing your home. You do not want any surprises.
6. What is a Residential Purchase Agreement and Receipt for Deposit?
This agreement is an offer which, upon acceptance by the seller, results in a binding contract. It should cover all of the important terms of the sale. For example, it should include a complete description of the property and of any personal property that will be sold with the house, such as window coverings, kitchen appliances, washers and dryers. It should state the exact purchase price, including the amount of your initial deposit, any increases in that deposit, the amount you will pay in cash, check or wire transfer, and the amount you will need to finance to complete the purchase price. This agreement should also list any conditions that may allow you to back out of the contract. You will want a condition that allows you to cancel the contract if you cannot obtain a loan on favorable terms or if the inspections reveal substantial defects or problems with the home. You may also need a condition that allows you to cancel the sale if you cannot sell your current home. Please understand, however, the more conditions you have, the less likely the seller is to accept your offer.
This agreement should also set forth what will happen to your deposit if you cancel the sale, what will happen if you and the seller have a disagreement over the terms of the sale, and how the brokers will be paid. The agreement should also indicate whether you are purchasing the property in "as is condition" or the seller is warranting the condition of the property. Take the time to go over each and every term of the agreement with your agent before you sign the agreement.
7. Can I change my mind?
You should not make an offer to purchase a house unless you are serious about buying it. You can, however, revoke your offer before it is accepted by the seller. This revocation should be in writing. If your offer has already been accepted by the seller, you may be able to terminate or revise your offer if you are unhappy with what your inspections reveal or if other conditions of the offer are not met.
The Residential Purchase Agreement and Receipt for Deposit contains several provisions that discuss what will happen in the event the sale does not go through. There is a mediation provision, an arbitration provision and a liquidated damages provision. The liquidated damages provision can result in you losing most if not all of your deposit (up to 3% of the contract price) in the event you elect not to complete the purchase price, and your election is without good cause. There is no provision in the standard contract for liquidated damages in favor of the buyer in the event the seller wrongfully refuses to go through with the sale. You do not have to agree to this provision. Carefully discuss the pros and cons of initialing this provision with your agent or attorney.
8. How can I get a loan?
Most home loans are made by financial institutions such as banks, savings and loan associations, and credit unions. Other sources of loans are insurance companies, mortgage bankers, finance lenders, mortgage loan brokers, pension funds and investment trusts. Lenders charge different fees and offer different interest rates so it pays to shop around. Your agent will be able to recommend lenders in your area.
When you apply for a home loan, the lender will check your credit rating and review your past employment, income history, and credit and debt obligations. It will also obtain information about the property that will be security for the loan. This will include an appraisal or estimate of the fair market value of the home, a review of the preliminary report prepared by the title insurance company to determine what liens, easements and other conditions will be superior to its loan, and a review of any taxes, assessments and zoning regulations that affect the property.
Some lenders will charge you a loan application fee, document preparation fee, appraisal fee and other fees to consider or close the sale. You should discuss these fees with your lender before you submit your application.
9. What types of home loans are available?
In exchange for cash from the lender, you agree to pay interest and to make payments over a period of time. In most instances, the property you purchase will be security for repayment of the loan.
Sometimes a seller will offer a seller-financed or carry back deed of trust. This financing method is often used when a seller wants to receive income over a period of time or when lenders are stringent in their loan requirements. The terms of these loans should be discussed with your agent or attorney. He or she is best qualified to determine if the loan documents and agreement meet all legal requirements.
Occasionally, you can "assume"a loan or take over a loan that the seller has been paying off. You should be careful in assuming any loan. Most loans have an acceleration or due on sale clause. This means that the lender can demand that the seller's loan be paid in full when the property is sold. If you wish to assume a loan, you should have your agent or attorney review all of the seller's loan documents and make approval by the lender a condition to your offer.
Most home loans that are available to Californians offer one of two interest rate structures. A fixed rate loan offers a set interest rate, so that your monthly payment never changes. Some fixed rate loans are federally insured or guaranteed, such as a Veteran's loan or an FHA loan. These loans usually have a lower interest rate and require smaller down payments. For more information on these loans, get in touch with a local office of the California Department of Veterans Affairs, the U.S. Veterans Administration or the U.S. Department of Housing and Urban Development (HUD).
Another type of loan that is available is an adjustable rate mortgage loan, sometimes called an ARM. An ARM is a mortgage loan which provides for adjustment of its interest rate as market rate interest rates change. The ARM's interest rate is tied to an index that reflects changes in the market rates of interest. Some indexes used are the Cost-of-Funds Index published by the Office of Thrift Supervision, and the Federal Reserve Discount Rate. These loans usually have interest rates that are lower than the fixed rate loan interest. ARMs can be complicated. Make sure that you understand all of the terms of these loans before you agree to accept one.
Occasionally, new mortgage plans become available that are intended to meet specific needs of a community. These include loans for first-time homebuyers, and loans for teachers. Check with your local consumer affairs office and housing departments for up-to-date information on these types of loans.
10. What occurs when I "close" on a home?
For the protection of the seller and the buyer, a person or company that has no connection with you or the seller holds the money and papers involved in the purchase. This procedure is called escrow. The escrow holder's job is to make sure that all of the terms and conditions of the agreement are met. He or she will also coordinate all of the activities of the broker, the lender and the title insurance company. The escrow holder will deliver the deed to the county for recording when it can pay the seller the money. Escrow services can be provided by title companies, banks, savings and loan associations, independent escrow companies, realtors or lawyers.
The escrow holder does not act as a mediator, a lawyer or an advisor. The escrow holder is required by law to remain neutral. Its only job is to carry out the terms of the escrow instructions. In Southern California, escrow instructions are signed when the escrow is opened. They are modified throughout the course of the escrow as the agreement between the buyer and seller change. In Northern California, escrow instructions are executed just prior to the close of escrow. These instructions should be clear and certain as to the intentions of the parties and the duties of the escrow holder. Make sure your Purchase Agreement does not conflict with your escrow instructions. If they do conflict, the escrow instructions may be considered your final agreement as to the terms of the purchase. If you are uncertain as to what the instructions say, discuss them with your agent, your lawyer, and the escrow holder.
After the close of escrow, the escrow holder will provide you with a Settlement Statement. This document will show you, as the buyer, all of the costs incurred by you in purchasing the property. You should review this document carefully and save this statement for later. Many of these costs may be deductible from either your state or federal taxes. If you have any questions or concerns about the charges you incurred, contact the escrow holder immediately and ask for an explanation.
11. How should title to the home be held?
Prior to the close of escrow, the escrow holder will ask you how you wish to hold title to your new home. How someone holds title will affect what will happen to the property in the event of the death of one of the owners. It also will affect whether certain taxes will be incurred or whether a probate of the estate will be necessary. You should discuss your options with a tax specialist and your agent before you make your selection.
You can hold title to the home by yourself, as separate property, with your spouse, as community property, or with your spouse or a third party, as joint tenants or tenants in common. You can also hold title to the property in a family trust. For more information on the different forms of ownership, see the State Bar pamphlet Do I Need Estate Planning? To obtain a complimentary copy of this pamphlet, mail a self-addressed envelope (with 55 cents in postage) to the Estate Planning, Trust and Probate Law Section, The State Bar of California, 180 Howard Street, San Francisco, California, 94105-1639. For information on ordering multiple copies, call 1-888-460-7364.
12. Do I need title insurance?
Title insurance is necessary for your protection when you buy a home. It is, however, not a guarantee that problems will not arise after the close of escrow. When you make an offer to buy a home, you, as the buyer, have the right to choose the title company. This decision should be based on the local office's expertise, and the company's record for fairly handling claims under its policies. You should discuss these issues with your agent.
Once you have chosen a company, you should make one of the conditions of the close of escrow clear title to the property. "Clear title" means that when the sale to you is completed, the title to the property will be free from liens, judgments and other claims that you have not agreed to accept. You should also discuss with your agent the need for a survey of the property and title insurance coverage for boundary line disputes. In many instances, especially in rural areas, boundary lines are not where they should be. A survey and survey coverage can help eliminate future disputes with your new neighbors.
Before a title company issues an insurance policy, it will make an investigation to find out if anyone besides the seller claims to own the property. It will also search the public records for claims against the property. The title company will provide you with a report, called a preliminary report. You should carefully review this report to determine if it describes all of the property you are interested in buying. You should also review this report and determine what items you are willing to accept when you purchase the property and what items you wish removed or taken care of as a condition of the close of escrow. If you are uncertain as to what the report says, you should discuss the matter with your agent, the escrow holder and/or your attorney.
There are different kinds of title insurance available. Often the difference in cost for the better policies is nominal. "Basic" or "Standard" coverage is, in most instances, not the best policy available. For an additional one-time cost or no charge at all, you can obtain protection for losses resulting from illegal construction, zoning violations, unrecorded liens, prescriptive easement claims, and post policy forgeries. Be aware that different companies charge different rates. Discuss with your agent and the escrow holder what policies are available in your area and the differences in prices on each of the policies.
Whether you are purchasing a home for the first time or for the fourth time, the day of closing should be a cause for celebration. And since a portion of your purchase price is paying for the agents and the escrow holder's expertise, utilize their services throughout the process leading up to the day of closing. Ask questions; ask for an explanation of any item you do not understand. Request copies of any documents you do not understand; keep copies of all documents relating to the purchase of your home. And, if necessary, seek advice from a qualified real estate attorney or tax advisor. Asking questions during the purchase of your home will help insure that you and your family will enjoy your new home for many years to come.
Excerpted from The State Bar of California