Last updated 2/25/2016. If you have questions please reach out to me at firstname.lastname@example.org or (508)-335-1644.
Avi’s Guide for Home Buyers
Congratulations! You’ve decided to buy a new home! I’ve written this guide to help prepare you for the process and answer questions that you may have. The main text provides a high level overview, for when you are just getting started, and as your home buying progresses, click on the to expand the text and learn more.
Phase 1: Preparation
If you’re just getting started, start here. Maybe you’ve been viewing listings online, or even attended some open houses. Your goal in this phase is to learn or review how the home buying process works in Massachusetts and complete some necessary preparation. Being attentive in this phase will help prepare you for the process.
Set expectations on stress
If you feel stressed at some points during this process, it’s important to understand that this is completely normal. A major mortgage, a change in living conditions, and a change in residence are each on the Holmes and Rahe stress scale, which lists the top 43 adult stressors. When you consider that buying a new home often coincides with other major life events, such as changes in your personal relationships or job, it’s no wonder some people feel overwhelmed at times. The good news is that by learning about the process ahead of time, and knowing that I’m here to help you every step of the way, you’ll feel more prepared and better equipped to absolutely rock the home buying process.
An important step is to get pre-approved. It might seem premature at this stage, but it’s not. It's actually a critical step before you start looking.
Here are my top reasons that you should do this now:
There may be costs of a loan that you did not anticipate, so even if you calculate a monthly payment yourself, going through the process with a mortgage broker will give you a better picture. It’s better to find out now rather than be surprised later! TIP: Make sure to discuss typical closing costs with your lender.
Knowing your range will help us identify the right segment of the market to explore. Mortgage guidelines are stricter than in the past. You don’t want to fall in love with a place only to learn that it is out of your current range.
Some segments of the Boston market move very fast. If you haven’t already secured a letter when you are ready to make an offer, you’ll be scrambling -- and could lose the deal to someone better prepared.
Obtaining a pre-approval letter is a strong signal that you are a serious buyer, and makes it easier to schedule showings.
And a self-interested reason: if you don’t put in the 2 hours it takes to get a pre-approval, it makes it hard for an agent to justify spending dozens of hours researching, scheduling, and taking you to see properties that may be out of your range.
I’ll be happy to recommend a few respected, local mortgage brokers with whom I’m familiar and feel confident will treat you well, or you are free to identify your own. He or she will ask for a range of documents, such as:
Last two Federal Tax Returns
Last two W2s
Last two paystubs
Last two months of your bank, stock, and retirement accounts. (You only need to provide statements for accounts that will be used in the transaction).
Pre-approval letters are typically good for 60 days, and when your letter expires your lender can easily issue you a new one, since they'll already have most of your information and will just need updated documents. When you get closer to a purchase you can then shop around for the best rate.
In a pre-qualification, you’ll discuss your income, assets, and credit with the mortgage broker but he or she will not necessarily verify it. In a pre-approval, the lender will actually run your credit and verify your income and assets. A pre-approval is much stronger and is what I recommend that you obtain.
From Realtor.com: “In short, just because you are pre-qualified for a mortgage doesn’t mean you will get one. But when you are pre-approved your chances for a green light from a lender are greatly increased.” Further reading on Realtor.com.
When you grant a lender permission to pull your credit score, it’s considered a “hard inquiry.” It can lower your score, usually by only a couple points. The credit bureaus expect buyers to rate shop, however, and therefore consider all inquiries within a certain time frame as just one hit. From Realtor.com: “The time frame varies depending on the scoring firm. For example, the newest FICO scoring models consider all inquiries within a 45-day window as a single hard credit pull. The older versions of the FICO scores work off a 14-day span, so ask the lender what scoring model it’ll be using.” Further reading on Realtor.com.
When choosing an agent, it’s my opinion that you should look for several key traits that will make your experience much better:
Integrity. This one should be non-negotiable. Check if the agent is a REALTOR®, meaning that he/she is a member of the National Association of REALTORS® and has committed to uphold the standards of the association and its code of ethics. Additionally, if there is a conflict between REALTORS®, there is an established arbitration process.
Analytical mindset. When evaluating the market, identifying a property, analyzing its value, and negotiating a purchase, you want an agent who takes an analytical, data-informed approach, and doesn’t just “guestimate.”
Clarity in communications. Whether your preferred mode of communication is face-to-face, email, phone, or text, be sure that you and your agent are able to effectively communicate.
Responsiveness. If an agent takes a long time to respond when he/she is courting you, imagine how much worse it will be once you are already committed.
It can be helpful to check out an agent's reviews online to get a sense of their style. Then you should set a meeting, either in person if you can, or over the phone, in order to make sure you feel comfortable with him or her.
This is the entry level. An aspiring agent must complete a 40-hour pre-licensure course and then pass a written examination. After that, he or is a “salesperson.”
Salespersons must practice under the supervision of a broker – they cannot be independent.
After a licensed salesperson has worked full time for a licensed broker for 3 years, and completes a 40-hour broker education course, that agent may take the broker examination. If the agent passes, he or she can become a licensed Broker.
He or she may open an independent office and have other agents, or can associate with another brokerage.
I’ve had my Massachusetts Broker license since 2006.
A REALTOR® is an agent (salesperson or broker) who is a member of the National Association of REALTORS®, our trade association, and who has committed to uphold the standards of the association and its code of ethics. It comes with many benefits, including an arbitration process and channel for submitting complaints. Also of note, MLS PIN, the largest multiple listing service in New England, is REALTOR® owned. I am a REALTOR® as well.
Further reading on Realtor.com
Prior to the 1990’s, all agents legally owed their allegiance to the seller, even the agent working with the buyer. Back then, the agent working with the buyer was a “sub-agent” of the listing agent. As you might expect, this created conflicts of interest, and spurred the development of a new type of representation. Now, sub-agency is rarely practiced and has been largely replaced by buyer’s agency.
Today, on any given transaction, an agent may represent the buyer, the seller, both, or neither. In Massachusetts, the agent must disclose that relationship to you, the consumer, at the first personal meeting to discuss a specific property.
Imagine a typical transaction, in which the seller chooses an agent (the “listing agent”) to list a property, and the buyer has his or her own agent.
In this case, the “listing agent” is a seller’s agent who “owes the seller undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability… [this] agent must put the seller's interests first and negotiate for the best price and terms for their client, the seller."
The agent chosen by the buyer is a buyer’s agent who “owes the buyer undivided loyalty, reasonable care, disclosure, obedience to lawful instruction, confidentiality and accountability… [this] agent must put the buyer's interests first and negotiate for the best price and terms for their client, the buyer.”
That’s the short version; you can stop here, or read on for more complex cases.
What happens if the listing agent (seller’s agent) starts working with a buyer who is interested in that particular listing, and that buyer chooses not to retain another agent? With the informed consent of both parties, you might ask the seller’s agent to become a dual agent. From the official description: “A real estate agent may act as a dual agent representing both the seller and buyer in a transaction but only with the express and informed consent of both the seller and buyer…A dual agent shall be neutral with regard to any conflicting interest of the seller and buyer. Consequently a dual agent cannot satisfy fully the duties of loyalty, full disclosure, obedience to lawful instructions which is required of an exclusive seller or buyer agent.”
What happens if there are two agents, working for the same brokerage, and on a particular transaction the first agent is the seller’s agent and the second agent is a buyer’s agent. Technically, both agents are representatives of their broker, and so this could create a situation of accidental dual agency. That is why we have now the option of designated agency, whereby only the agent working with the particular client (i.e. the designated agent) represents that client, and not the entire firm.
What happens when the agent does not represent either the buyer or the seller, but helps put the transaction together? This is a rare situation, but in that case the agent may have a facilitator relationship. “The facilitator…owe[s] the seller and buyer a duty to present each property honestly and accurately by disclosing known material defects about the property and owe a duty to account for funds. Unless otherwise agreed, the facilitator has no duty to keep information received from a seller or buyer confidential.”
Whichever relationship it is, the agent must disclose it to the client at their first personal meeting to discuss a particular property, and record the disclosure with this form. The exception is at an open house, where a posted notification, often on a “tent card” is acceptable.
The buyer does not usually pay the buyer’s agent directly. Instead, the buyer’s agent is paid out of the seller’s agent’s commission. In other words, the buyer’s agent’s compensation is baked into the sale price.
Prior to listing a property, the seller and the seller’s agent (listing agent) agree on the amount of the listing agent’s commission. The listing agent then posts the listing on the MLS (Multiple Listing Service) for other agents to access, and offers a portion of his or her commission, usually half, to the agent who brings the buyer.
For example, the seller agrees to pay the seller’s agent X% on the sales price. The seller’s agent offers on the MLS to pay X/2% to any agent who, as a buyer’s agent, brings a buyer.
Selling your current home?
If you plan to sell your current home in order to purchase a new one, we need to have an in-depth conversation about it. The good news is that this scenario is not uncommon, and we have ways to do it. It is, however, more complicated, so we should discuss your goals and timeline before strategizing.
Phase 2: Find a property
Now that you’ve laid the groundwork, it’s time to start looking at listings! If we haven’t already, please set up an hour-long meeting with me. We’ll use this time to review a strategy, identify properties to see, and set up automatic alerts. To arrange a time, please contact me at 508-335-1644 or email@example.com.
Schedule some showings!
Once we’ve identified some matching properties, it’s time to visit some together. To start, we should pick 3-5 to visit on the same day. I find that visiting several in the same session helps you to determine what would make a good match.
As a rule of thumb, we need at least one day's notice to arrange showings, and we should budget 20-30 minutes per visit, plus travel time. In a hot market, I find that visiting on a Wednesday-Friday schedule is beneficial because we can visit that week’s new listings prior to their first open houses.
Set up automatic alerts
As we identify the general criteria of your ideal property, I will set up automatic alerts for you so that you stay informed as new listings are added to the market and existing listings come off the market. Your criteria can be broad or very specific, and at a minimum usually include the number of bedrooms and certain neighborhoods or towns. By the way: it’s very common for your criteria to change over time. That’s okay!
The automatic email alerts match listings from the MLS (Multiple Listing Service), which is the single most authoritative and accurate source of listing data. Each morning that you have new matches you’ll receive an email with the new listings that match your criteria. As you receive these listings, you should let me know your thoughts and how to adjust the search criteria.
MLS stands for Multiple Listing Service. Many, including ours, are owned by the REALTOR® association. The MLS is essentially a database of all the listings for sale, and it’s purpose is to facilitate sales though the co-broke system.
In the co-broke system, the listing agent (representing the seller) can offer a portion (usually half) of his or her commission to other agents for bringing a buyer to the transaction. This exponentially expands the reach of any given listing.
For example, imagine an agent takes a listing for a beautiful 3-bedroom house. The agent is currently working with ten buyers, but this particular listing is not a good match for any of them. If this agent works in a large office, the broker will make sure all the agents are aware of this listing, but it’s still only exposed to dozens of potential buyers.
However, this agent participates in the MLS, listed this property there, and offers half of his commission to any agent who brings a buyer. The 40,000 participating agents can now match their multitudes of clients to this listing.
So by participating in the MLS, the property is exposed to thousands instead of tens, and results in a more efficient marketplace.
You may notice different three letter codes to indicate the current status of a property on the listings you receive via the MLS. Here is a legend to help you interpret them:
ACT – Active listing for sale, with none of the below special event flags. Certain events trigger special statuses. After three days the status will revert to ACT. These events and tags are:
NEW – Newly added listing.
PCG – Price Changed.
EXT – Extended. The listing agreement was set to expire but has been extended.
RAC – Reactivated. The listing was withdrawn or expired and has now been reactivated.
BOM – Back on market. The listing was under agreement (UAG), but the deal fell apart and the property is for sale again.
CTG – Contingent. The seller has accepted an offer, and it has one or more contingencies. For example, the offer may be contingent on a home inspection. The listing is still technically on the market and may be available for back up offers. After the contingency is satisfied, the status will change to under agreement.
Off Market listings
UAG – Under agreement. An offer has been accepted.
SLD – Sold. The sale has been completed.
WDN – Withdrawn. The seller has temporarily withdrawn the property from the market.
CAN – Cancelled. The seller terminated their listing agreement with the listing agent.
Real estate listing aggregators (or "syndicators"), such as Zillow and Trulia do not receive their data directly from the MLS. As a result, they lack listings and show out-of-date information, whereas MLS powered searches show 100% of homes that agents list on the MLS.
The WAV Group study “found local real estate brokerage websites give consumers the most complete, accurate and timely information about homes for sale.” In Boston, the study found Zillow showed only 83% of listings and Trulia showed only 91%. Additionally, the study found that “local real estate brokerage sites show newly listed homes for sale seven to nine days earlier than national portals.”
Many sites, such as Zillow, develop statistical models to provide a starting point in valuing a home. (I’m even developing my own; click here to read about it.) The models consider data such as square footage, number of bedrooms, year built, and last sale price. As you’ve likely discovered, however, two properties identical on those basics can be very different on significant details, such as how recently they have been updated, their level of luxury, level of charm, flow of the floor plan, amount of natural light, and sound profile, for example. That’s why, for the foreseeable future, a reasonable estimate requires the input of an experienced human who has visited the property in real life.
Zillow reports that 20% (1 in 5) of their Zestimates in the Boston metro area are off by more than 20% when compared to the final sales price, and only 35.4% are within 5%. That’s not bad for an algorithm when you consider the wide variety of housing styles and conditions in this region, but it’s still no substitute for an in-depth analysis by an experienced (human) professional. A 20% error on a $600,000 estimate is $120,000!
(As of Aug 26, 2015.)
% of Zestimates with 20% or greater diff. to sale price
Open Houses are an opportunity to familiarize yourself with the market and to get to know a particular neighborhood better. It can be a good strategy to include open houses for properties slightly above and slightly below your target price range, or slightly off from your search criteria, as a way of gaining insight into what things are worth.
You’ll often be asked to sign in when you arrive at an open house. If you are already working with an agent (me!), please make sure to note on the form that you are already working with one. You don’t have to provide all the requested information; you can just provide your name.
If you have specific questions, feel free to ask the agent who is hosting. (Just remember, he or she is the seller’s agent.)
In some towns when a home is first listed for sale, the listing agent may hold a special open house during the week, specifically for real estate agents. Known as "broker tours," these are great opportunities for buyer agents to preview the newest listings and get a more tangible sense of each property than is possible with just the listing sheets. Each town has its own traditions for holding broker tours. In Brookline, for example, they are held mid-day on Wednesdays, and in Newton on Thursdays.
In a hot market, a buyer with a savvy agent can use open houses to gain an edge. Frequently the weekend open house is a property's first exposure to the public, and it is flooded with potential buyers, resulting in a bidding war. If, however, your agent checked it out at the broker tour on Wednesday, in some cases you may be able to arrange a visit it prior to the open house and make an offer. (If you have a flexible schedule, sometimes you can even accompany your agent on the broker tour.)
Lead poisoning can cause severe, permanent, and negative health outcomes in children. In 1978, Massachusetts banned the use of lead paint in homes, and the state is, justifiably, adamant about requiring lead paint hazards be removed in any property in which a child under the age of six lives. If a child becomes lead poisoned, the owner of the property will be held liable. You can read more about it on the Health and Human Services site.
In a real estate transaction, the seller is required to provide a signed “Childhood Lead Poisoning Prevention Program (CLPPP) Property Transfer Lead Paint Notification” form, which discloses any knowledge of lead paint on the property, whether any testing has been done, and any results of such testing. You, the buyer, will need to sign this form as well to indicate that you received that information. For your review, here is a PDF of the CLPPP Property Transfer Lead Paint Notification.
Phase 3: From offer to move-in
When you find the right property for you, it’s time to make an offer. Before we get into the details of that, let’s look at a typical timeline as a way to review the major steps involved in Greater Boston.
Craft an Offer to Purchase with your agent.
Negotiate price & terms, and come to an agreement. Your offer is accepted and your initial deposit of $500-$1000 is deposited in an escrow account.
The licensed home inspector that you’ve hired performs the Home Inspection and gives you the results.
The Purchase & Sale agreement is finalized between the seller’s attorney and your attorney. You make an additional deposit, typically enough to bring your total deposit to 5% of the purchase price.
(Typically 2 days after P&S): Loan application submitted, appraisal ordered, title exam ordered. You must officially apply for your mortgage by this date in order to be protected by the mortgage contingency in the event you are declined for a loan.
Bank Appraisal – your lender sends an appraiser to determine an estimate of the property’s value and produces an appraisal by now.
Prior to the closing, the seller’s agent should coordinate the Smoke and Carbon Monoxide Detector Inspection with the local fire department. This is required in order to close.
Your mortgage contingency expires. Your loan commitment should be issued.
(Approximately 6 weeks after the offer). In the morning, perform the Final Walk-Through to make sure the property is vacated and without any new damage. Then you are ready for the Closing. You pay the remainder of your down payment and closing costs, as agreed with your lender. As soon as the transaction is recorded at the Registry of Deeds you will be able to move in. Congratulations!
Anatomy of the Offer to Purchase
In this area, the Offer to Purchase is typically completed by the buyer’s agent with the buyer (i.e. not by an attorney). When you think of an offer, you may think of the price first, but the truth is that there are a number of items to specify, which together make up your offer and will affect the seller’s perception of your offer.
Price – obviously an important factor and often the sticking point. We will discuss more in depth how to determine and communicate the price.
Deposits – sometimes called “earnest money” or the “good faith” deposit. If your offer is accepted, the seller will take the property off the market. If you then back out of the deal for a reason not covered by one of your contingencies, the seller gets to keep your deposits as compensation. The listing broker keeps the deposits in an escrow account. Typically, the buyer makes an initial deposit of $500 to $1000 with the Offer to Purchase, and then when the deal progresses to the Purchase & Sale stage, will make an additional deposit to bring the total deposits to 5% of the purchase price.
Contingencies – These are special conditions that must be met, or else the buyer can back out of the deal and get the deposits back. Two common contingencies are:
Inspection – the buyer may obtain inspections, such as home inspection, pest, radon, lead, water quality, septic/sewer, etc., and if not satisfied with the results by the agreed-upon date, may terminate the agreement and get the deposits back.
Mortgage – the buyer’s obligation is contingent on obtaining a written commitment of financing by an agreed-upon date. If the buyer is declined by that date, the buyer may terminate the agreement and receive the deposits back.
Exclusions and Inclusions – By default, anything attached to the property, such as a ceiling light fixture, is included as part of the real estate. Anything not attached, such as a countertop microwave, is considered personal property and is not included. However, everything is negotiable, and to avoid confusion it’s best to spell out in the offer exactly what is and is not included if there could be any confusion.
Dates – It is not uncommon for the dates specified in the Offer to Purchase to shift a few days, by mutual agreement, as the various milestones occur. There are a number of dates specified in the offer, including;
Offer expiration. (When must the seller respond.)
Purchase & Sale agreement. (Usually 2 weeks after the offer.)
Contingency dates. (When the contingencies expire.)
Closing date. (Typically 6 weeks after the offer, but there is a lot of variance.)
Determining an offer price and terms
When determining an offer price, it’s important to consider the broader market conditions, comparable properties recently sold and for sale, and the individual property’s history, as well as your own goals.
i. Market conditions
A “seller’s market” means that there are more buyers than sellers, resulting in limited inventory of homes for sale. In this situation, it’s common to see properties sell quickly after being listed, and the final sale price will often be higher than the list price. Sometimes there are even bidding wars. Aggressive buyers may try to make their offers more attractive to the seller by being flexible on other terms, for example by eliminating the mortgage and home inspection contingencies.
A “buyer’s market” is the opposite, in which there are many homes for sale and the market will exert downward pressure on prices. In this situation, it’s common to see the average Days on Market (how long a property has been listed for sale) to be high, sometimes months long, and for the final sale prices to be lower than the list prices. Aggressive sellers may try to make their property more attractive to buyers by, for example, paying for a portion of closing costs, offering home warranties, or being flexible on closing dates.
ii. Comparable properties
Ultimately, a property is worth what someone is willing to pay for it. By examining records for recently sold and listed properties that are similar to the target property we can estimate that current market value.
In order to select an appropriate sample, the first step is to define a set of criteria to identify similar properties and the time frame. We want the criteria to be relatively narrow while still providing enough results to make a comparison feasible. For example, we might define the search set as all 3-bedroom, 1.5 bathroom condos sold in the past 3 months, in the same town and within a 0.4 miles radius of the target property. If that search returned only two matches, then we would adjust the criteria by, for example, including 4-bedroom houses, looking back 6 months, or increasing the search radius.
Next, we examine the results and make adjustments. For example, if one property sold for more money, but it was larger, had a private roof deck, or had a more updated kitchen, we want to make a note of that, and will adjust its value in our estimate.
In addition to looking at comparable sold properties, we also look at listings for homes currently for sale, under agreement, and expired. No single comparable should inform the estimate, since any one could be an outlier. Combining all this information, we select the properties that seem most informative to the target property and use them to triangulate the current market value.
iii. Property history
Of course, in any type of market, an individual property may be over or under priced. Even in a seller’s market, if a home is overpriced by too much, it will likely languish on the market for some time.
Days on market: If a property has been on the market for many days, the seller will often be more likely to consider a lower offer. On the other hand, if the property has just recently been listed the seller may want to hold out for something better.
Previous mortgage: Another consideration is how much the current owner owes on the property, which you can often estimate from the public records. When the owners have a large mortgage remaining, they may be more reluctant to sell at a discount.
iv. Your goals
As a buyer, your challenge is to like a property enough to make an offer, but not fall in love so much that you can’t walk away if the price or terms aren’t right.
If your goal is for a fair price and terms, you should consider all the above information and make an offer close to what the numbers justify. In your offer, it can sometimes help to include a personal cover letter where you introduce yourself, say that your goal is to pay what you can both agree is a fair price, and include the research justifying your terms and price. That way it frames the ensuing negotiation around what is fair rather than just haggling over a number.
The other terms beyond the price can often be just as important for the seller when considering an offer. For example, if the property is vacant, the seller may value a quicker close, and if the seller is choosing between two similar offers, the one that is sooner will win. Likewise, a larger down payment can assure the seller that your financing is less likely to fall through.
If you’re goal is to get a deal and you have patience, one strategy is to target properties with higher Days on Market, make aggressive, low offers, and keep your expectations of acceptance on any given property low. You may have to make offers on many properties until you find a seller willing to accept your terms. This strategy is, of course, more difficult in a seller’s market where you often won’t find any “deals.”
In your offer, it can sometimes help to include a personal cover letter where you introduce yourself. An advantage of including a personal letter is that it can help the seller see you as a “real person.” There are occasions in a negotiation where one side or the other may misconstrue something innocent as a bad signal. For example, imagine the scenario where the seller makes a counteroffer, but you’re unavailable to respond until you get home from work. If the seller knows a little about you, they are more likely to give you the benefit of the doubt. Little things like this can make the transaction go much smoother.
If you included a home inspection contingency in your offer, the home inspection is the first major step after the seller has accepted your offer. Depending on the terms agreed with the seller, typically you’ll have about ten days to have the inspection performed. You should schedule it as soon as possible after the offer is accepted, especially in busy seasons.
In Massachusetts, home inspectors must be licensed by The Board of Registration of Home Inspectors, which sets a standard for training and experience. You may choose any inspector, or your buyer’s agent (me), can recommend some to you. (Agents that do not represent you are prohibited from providing inspection recommendations.)
Depending on the size of the property, expect to pay anywhere from $250 to $700 for the inspection. Condo inspections tend to cost less and multi-family or large single-family properties cost more.
Plan to attend your home inspection in person, so that you can better understand the inspectors report and ask questions as they come up. The inspector will provide you a written report after the inspection as well.
The inspection can be hugely valuable to you for uncovering potential issues with the property. It’s important to understand, though, the limitations of an inspector. Although many are very talented, they do not have x-ray vision and cannot predict the future. From the board, “it should be clearly understood that a home inspection is not to be confused with an appraisal, a building code inspection, a guarantee of any kind, and/or an insurance policy on the condition of the property.” Think of the inspection as a snapshot in time. Just because the home inspection doesn’t raise an alert on the furnace today doesn’t mean it won’t break next year; stuff happens.
What they can do is highlight areas of potential concern by evaluating “readily accessible exposed portions of the structure of the home, including the roof, the attic, walls, ceilings, floors, windows, doors, basement, and foundation as well as the heating/air conditioning systems, interior plumbing and electrical systems for potential problems.”
Inspectors inevitably find issues. After all, that’s their job, and no home is perfect. It’s our role to understand their report in context and consider how to proceed. Home inspections should not be used as a tool for renegotiating the agreed price with a list of minor issues, but if something of major concern is discovered, now is your opportunity to address it.
You will typically have 24-hours after the inspection to respond to the seller. Based on the results of the inspection, these are your options:
Continue with the deal “as-is.” Appropriate if there are no major issues or surprises.
Negotiate with the seller to address the discovered issues. Within reason, you may ask the seller to fix something, to reduce the sale price, or for a credit at closing. The threshold of what I would consider a reasonable request will vary on the property. For example, if you’re buying a home built in 1900, you should not expect the home to be in like-new condition. Don’t be surprised that the electrical wiring follows an antiquated standard (unless the seller represented that it had been updated).
Terminate the deal and receive your deposit back. Only for the most extreme cases.
Depending on the particular property, you may want to consider additional, specialized inspections, such as:
The bank lending you money for your mortgage wants to make sure that the value of the loan isn’t greater than the value of the property used as collateral. Therefore, they will send a trained appraiser to the property to generate an appraisal, or estimate of the property’s value. Unlike the home inspection, you do not attend the appraisal.
Most of the time the appraisal goes smoothly and your loan application can proceed. Not often, but occasionally, the value determined by the appraiser is less than the agreed purchase price. When this happens it can prevent the sale from moving forward.
For example, imagine an agreed sale price of $500,000. Your lender is willing to loan 80% of the appraised value ($400,000), and you are planning to make a 20% down payment ($100,000). But then the appraisal comes in at $490,000. The bank is still willing to lend you 80%, which comes out to $392,000. Combined with your $100,000 down payment, you are $8,000 short of the agreed price.
If this happens, the first step is to check the appraisal and make sure there were no major errors. If the appraiser made a glaring error (for example, the report states the property has two bedrooms when in fact it has three), then we need to communicate that to the mortgage lender and request a correction. In some cases, your mortgage broker may be able to petition for a second appraisal. However, unless there were major errors, this is a long shot.
Assuming the appraisal sticks, you have a few options:
Negotiate to reduce the price. If the appraisal seems fair, then any future appraisal could be expected to have the same issues, and therefore the sellers may be willing to reduce the sale price. This is, of course, a good outcome for you the buyer. On the other hand, if the sellers disagree with the appraisal, they may hold firm. In that case, they are betting that if the deal falls through with you that they can either find another buyer who pays with cash or that the next appraiser will produce a more favorable result.
Make up the difference. In the above example the buyers were $8,000 short. They could increase their down payment from $100,000 to $108,000 to make up the difference. Buying a home can be emotional, and at this point you’ve already invested a lot of time, but you should be cautious with this approach, especially if there is a large difference between the purchase price and the appraised value so that you don’t pay more than the property is worth. As my grandma used to say, “Another bus will come along.”
A combination of the above. In this scenario both sides compromise to bridge the gap. The seller lowers the price a bit and you bring more cash.
Terminate. If you are denied for a mortgage due to the low appraisal and you are covered by a mortgage contingency in your offer, then you have the option to terminate the deal and receive your deposits back.
Avi Kaufman is a REALTOR® and Broker/Owner at Accent Realty, serving Boston, Brookline, Cambridge, Newton, and surrounding communities.
He holds a BA from Brandeis University, an MBA from MIT Sloan, and is a US Army veteran with service in Iraq.
Email him at Avi@AviRealEstate.com.