Home Buying Power

by Marti Kilby

  The big house sat on the market for another four months before the seller accepted an offer for $1.5 million; $90,000 less than my buyer’s final offer! In the meantime, my buyer decided to rent a large home for a year, which was certainly disappointing for me! His rental was in the same neighborhood, but not nearly as elegant as the home he had tried to buy. When I checked back with him several months later, I learned that he had negotiated with the owner of the property he was renting and purchased directly from him for $1.65 million—$60,000 more than his highest offer for the better property!

  Your Offer Has Been Submitted

  You’ve done your homework and written an offer that you hope will be well-received. Your agent has submitted it and confirmed receipt, and now you wait for a response according to the time frame specified in your offer, which is generally 1–3 days.

  But a million questions swarm through your head: Did I offer too little to be competitive? Did I offer too much? How many other offers has the seller received? Should I have waived certain contingencies? Do I really need a termite clearance?

  Whoa! Settle down. The game is just beginning. The whole idea is to get your foot in the door with an initial offer that is attractive enough to get you to the next round. I should add that occasionally there is a situation where an offer is so stellar the seller accepts it without countering. But generally, whether or not there is more than one offer, a seller will counter to see how they can negotiate their best deal.

  Receiving the Counteroffer

  If you’ve received a counteroffer, congratulations! You’re in the game. The first thing you need to realize is that almost everything in a real estate transaction is negotiable, and the key to success is based on several factors:

  Be prepared! Learn as much as you can about the seller’s motivation and situation. This is your real estate agent’s job. The more you know about what the seller is looking for, the better you can respond to their counteroffer. It makes a big difference if you know that the seller owns the property free and clear, versus having only 10% equity. Or, if the seller is relocating and needs a quick sale, you’ll have better leverage than if you’re dealing with a seller who’s in no hurry.

  You may be one of several buyers being countered, and it is likely that each counter is slightly different, depending on the original offer. You may also be asked to respond with your “highest and best” offer, indicating that the seller has multiple offers and doesn’t want to go through several rounds of counters. In either situation, you need to figure out how to sweeten your offer, and as I describe in the next section, it isn’t just about the money. However, if you know that you’re in a multiple-offer situation and the seller has countered at a specific price, you might beat your competition by simply offering $500 more than the seller’s counter.

  Understand your own parameters and stick to them. If $450,000 is the absolute max you can afford comfortably, you cannot accept a $480,000 counter. You must know when to sweeten your offer, hold, or just walk away.

  Just What Is Negotiable?

  As noted earlier, almost everything is negotiable, so don’t get fixated on the price. For many sellers, price is just a part of the equation. Ask yourself, “What can I offer that will be attractive to the seller while still allowing me to get the best deal?” Most negotiations involve a certain amount of compromise and concession on both sides. The goal is for the seller to sell and the buyer to buy, each feeling like the transaction was fair to both parties.

  Here are a few negotiable items, other than price, to consider:

  Seller concessions. If a seller is considering two offers, and one requests a $5K contribution to buyer closing costs and the other does not, it is pretty clear which has an advantage.

  Earnest money deposit. A larger or increased deposit generally demonstrates that you are a serious buyer.

  Escrow time frame. Would the seller favor a longer or shorter escrow? If going for less than 30 days and you’re financing the purchase, make sure that is a realistic expectation for your lender.

  Service providers. Often times, a seller will have a specific escrow or title company they prefer to work with.

  Seller rent-back. Perhaps the seller needs to rent back the house from you for a month while closing escrow on their next home.

  Seller financing. Often sellers like the idea of carrying back a small second mortgage. Or conversely, he or she may want all of their money out of the deal.

  Contingencies. Be careful about removing contingencies for inspection of the property. Buyer beware! You need adequate time to satisfy yourself about the condition of the property, but shortening the inspection period might be seen as favorable by the seller.

  Fees. There are many fees involved in a real estate transaction, including transfer tax, escrow, title insurance, and HOA transfer fees and docs. Offering to pay a fee that might traditionally be paid by the seller may put your offer in a stronger position.

  Personal property. This can work both ways. In one transaction, it might be better not to ask for the new appliances as part of the deal, while in another, allowing the sellers to leave an old refrigerator or piano might be doing them a favor.

  Repairs. Depending on the condition of the property, who pays for repairs can be an item for negotiation. However, be realistic about costs, time, and your skill set. As the saying goes, “Don’t bite off more than you can chew.” Also, be aware of any lender-required repairs and who is allowed to pay for what, particularly with VA or FHA loans. Your loan officer should be consulted regarding required repairs for the type of loan you are getting.

  Home warranty. While purchasing a home warranty is advisable, it doesn’t necessarily mean that the seller should pay for it. Perhaps the buyer, their agent, or for first-time buyers, maybe their parents would like to buy it? There are many providers of home warranties that range in price from about $300-$1000, depending on the size of the home and the coverage.

  Before we wrap up this section, I’d like to share another personal story. This one is about the negotiation my current husband, Ronn, and I did while shopping for our first home together.

  We began our home search in September 2001, but then came 9/11, and everything was put on hold. The whole country was frozen in uncertainty, but we decided to resume our search at the start of October.

  We quickly found a home that was perfect for us! It was a fixer, but the layout of the home was great and the location was ideal. The house had been on the market for a couple of months. The owner was in an assisted living home, and the home was being sold by his children to help pay for his care. I believe they were asking $389,000, which was a little bit high, considering that everything in the house was terribly dated. We really wanted the house, so we offered $349,000, which was really about as high as we could go at that time. They countered at $375,000. We took a deep breath and decided we couldn’t really go any higher and just walked away.

  Two weeks later, the house was still on the market, and the seller’s kids were getting nervous. With all of the confusion caused by 9/11, the real estate market had come to a virtual standstill. No one was buying or selling. We took advantage of the uncertainty and decided to re-submit our $349,000 offer. Not knowing when another offer would come along, the seller accepted our offer, and we ended up with a great deal without overpaying. Our walking away and then coming back left the seller far more motivated and ready to make a deal.

  What to Do When It Comes Down to Price

  Often, a negotiation will go back and forth with counteroffers, arriving at agreement on all terms except the price. This usually occurs for one of three reasons:

  The seller has unrealistic expectations about the value of their home.

  Inventory is low, and the market is so competitive that the seller is hoping to drive up the price through a bidding war.

  The buyer wants a great deal and refuses to pay market price.

  The most important piece of information you’ll need at this point is a clear pic
ture of the property’s actual market value. Prior to writing your offer, your real estate agent should have provided you with comparable active and sold listings. Before increasing your offer, it’s a good idea to have your real estate agent check the comps again to see if there are any new listings or closings that will affect market value one way or the other.

  If after reviewing the comps you and your real estate agent determine that the seller’s price is still above market value, you have several choices:

  You can hold at your price and hope that no one else will bid higher. If the market is not competitive, this might mean waiting a couple of weeks for the seller to agree.

  You can just pay the extra money out of pocket and consider it a premium you paid to get the house you really want.

  Depending on the dollar amount of the gap between your offer and the seller’s price, you can increase your offer by slightly more than 50% of the difference, which might be enough to let the seller feel like they won.

  You can agree to the higher price, but with the condition that you will not pay more than the actual appraised value.

  Savvy Shopper Tips: Negotiation is not just about price. Make sure you are exploring all options that might be favorable to you and/or the seller. Don’t be afraid to walk away for a few days, or even longer, depending on how competitive the market is. Be clear in your mind about what part of your offer is not negotiable and what other terms might have some room for flexibility. Every successful negotiation includes compromise. Don’t be blinded by your own need to be right or to win to the extent that you lose the whole deal.

  Chapter 11

  Who Pays for What

  When Buying a Home?

  A few years ago, a young woman came to me hoping to buy her first home. She had a job as a corporate attorney and had been with the firm for over two years. Armed with a well-paying job and great credit, she was pre-approved and ready to buy. The only problem was, with over $40,000 in student loan debt to pay, she hadn’t been able to save as much as she would have liked for a down payment and closing costs. In fact, she only had $10,000 saved and didn’t really want to spend every penny and leave herself with no cushion.

  We found a local credit union that offered 100% financing for people with great credit and she qualified. They also had low closing costs, which we knew would be important.

  After looking for about two weeks, we found the perfect condo, and she was ready to write an offer. However, before doing so, I worked up a cost sheet for her and estimated that her total closing costs would be around $8,750. That was just cutting it too close, and she was starting to think that she’d have to wait until she could save more money.

  I suggested we ask the sellers for help. The property was listed at $345,000, which was slightly under market value, but the sellers needed a quick closing. We offered $350,000 and asked for a seller credit of $5,000 to help pay her closing costs. Her offer was accepted, and 30 days later she was a happy homeowner. Her payments were slightly higher than if she had bought the condo for $345,000 or less, but she could afford the payment, and she still had some money in the bank for a rainy day.

  Buying a piece of property is not a simple transaction, and buyers are often surprised by the number of parties involved, who of course all need to be paid. But how is it determined who pays for what? What is a seller expense, and what will you, the buyer, need to pay?

  Interestingly, who pays for what is often based on regional or state customs. My company, Steele Group Realty, is based in San Diego County, so we’ll examine expenses for a typical Southern California purchase transaction using the Residential Purchase Agreement developed by the California Association of REALTORS and an ALTA Final Settlement Statement as our guide. Typical closing costs in Southern California run 2–5% of the sales price. Understanding who pays for what, and even who chooses the different service providers, will vary from state to state and should be discussed with your real estate agent prior to writing an offer.

  Inspections and Reports

  Typically, the seller pays for a Natural Hazard Disclosure (NHD) Report delivered to the buyer by a third-party provider. The NHD Report discloses known information about potential hazards or conditions surrounding the location of the property being purchased (more on this and other disclosures in Chapter 15). Often, a buyer will also request a C.L.U.E. (Comprehensive Loss Underwriting Exchange) Report that reveals past insurance claims on the property. The C.L.U.E. Report can only be ordered by the homeowner. The seller will also generally be responsible for paying for a termite and wood-destroying pest inspection and report. As the buyer, you would pay for a general home inspection, unless the seller paid for an inspection prior to listing the home, in which case you may still want to pay for a second inspection. You would also pay for any other specialized inspections, such roofing, plumbing, or electrical inspections. If there is a well or septic system on the property, it is usually up to the seller to have those systems inspected and certified. On a large property, you may also want a survey that marks the corners of the lot. This may or may not be paid by the seller. Keep in mind, just because one party pays for an inspection does not mean they will pay for any repairs that might be necessary as a result of that inspection. Repairs are subsequently negotiated between the buyer and seller.

  Government Requirements

  There are certain minimum state and local safety requirements that must be met prior to close of escrow, unless the seller is exempt. Generally, the seller is required to pay for the installation of smoke and carbon monoxide detectors as required by California law. The seller is also responsible for the correct water heater bracing to protect against tipping in an earthquake. If there are other minimum safety standards that must be met, the seller is generally responsible for those expenses.

  Escrow and Title Insurance

  In California, most real estate transfers are managed by escrow companies, not lawyers as they are in many parts of the country. Escrow companies are neutral third parties, licensed to manage the accounting and accurate distribution of the funds of both the buyer and seller (more on escrow in the following chapter). As such, both sides of the transaction are charged for the services of the escrow company. It is customary for buyers and sellers to each pay their own escrow fees, or to split the total fee 50/50. Escrow fees are based on the sales price of the property.

  Title insurance is designed to protect both the new owner and lender from financial loss due to title defects, liens, or other title-related issues. The seller generally pays for the owner’s title policy, and the buyer pays for a title insurance policy to protect the lender if the purchase is being financed.

  Taxes and Fees

  In California, there is a transfer tax paid to the county when real estate title is transferred. Throughout most of the state, that tax is $1.10 per $1,000 of the purchase price. This is generally paid by the seller. Information about transfer taxes in other states is generally available from your agent or the local assessor’s office. Property taxes are prorated to the date of closing and are paid by the buyer and seller accordingly.

  If the property has a homeowners’ association (HOA), the association charges a transfer fee as well as a fee for providing all of the HOA documents to the buyer. The preparation of certain HOA documents is required by law to be paid by the seller, and, in most cases, the seller pays for all fees associated with the HOA transfer.

  Home Warranties

  A home warranty protects the buyer against certain defects or failures in the home’s systems for 12–13 months after close of escrow. Policies vary considerably as far as what is covered and the cost of a service call. Home warranties are not a part of every transaction, and who pays for a home warranty is definitely negotiable.

  Commissions

  Commissions paid to real estate brokers are generally paid by the seller. Commissions in California are negotiable, but generally range from 5–6% of the sales price, normally split equally between the listing broker (the seller�
��s broker) and the buyer’s broker. The brokers then pay the agents a percentage of the commission based on their contractual agreement with the broker.

  Other Buyer Expenses

  There are other expenses you will incur that are associated with your new home loan, including an appraisal fee, loan origination fee, notary fee, recording charges, an underwriting and loan processing fee, and a credit report fee. Depending on your loan type and lender, some of these loan-related expenses may be wrapped into the loan. The buyer will also pay for hazard insurance. Most lenders will require the annual premium to be paid in full (more on insurance in Chapter 17). Your escrow officer might also add a pad or contingency fund of several hundred dollars just to make sure there are sufficient funds to close in case closing is delayed or there is an unexpected fee or expense. Any unspent portion of the pad will be refunded to you after closing.