I am a Home Buyer… What do I need to know?
Location, location location… The adage is true. And by selecting Colorado, you have chosen well. The friendly people, temperate climate, industry and spectacular scenery make the Centennial State a first rate choice to live and work.
A TEAM OF PROFESSIONALS
Most prospective buyers have two immediate concerns/questions – how to find the right home and how to pay for it. If these are your concerns, you will discover that the answer is a team of real estate professionals working together for you. Even if you have already found a home and you are a cash buyer, you may deal with one or more of the individuals described below.
Buying a home is a process and throughout the process your realtor1 will wear many hats.
Chances are, you will start the process with some guidelines as to what you are looking for – perhaps a three bedroom, three bath, multi-level located on the West side of town within 25 minutes of work. Hundreds of homes will meet your criteria. But there is a world of difference among a Victorian fixer-upper built in the 1920s, a Colorado-style and a patio home in a subdivision with a homeowners’ association that takes care of exterior maintenance. Your realtor is the one who will ask the probing questions, help establish your priorities and watch your non-verbal cues in order to find the right one for you. To complete this task, she2 must be part interrogator, part psychiatrist, and part mind reader.
Once you settle on a home, your realtor will don her quasi-attorney hat to draft a purchase offer and negotiate with the seller in order to get you under contract on agreeable terms. When you go under contract, she will transform into a task master (keeping you on track to perform your due diligence) and a conductor (keeping all of the home buying instruments in harmony) as you move toward closing.
Your lender is not only a source of purchase funds; she is your trusted financial advisor.
For many home buyers, the first contact with a lender3 is to pre-qualify for a loan. Pre-qualification involves an informal review of your finances. Based on this review, your lender determines an amount that you could borrow. A pre-qualification letter can help you establish a purchase price range. That is, if you pre-qualify for a $250,000.00 loan, your purchase price ceiling is that amount plus your anticipated down payment.
Once you write an offer, you will begin the formal loan application process. You may be a candidate for a standard 30 year fixed rate, or perhaps a loan with a shorter term (20, 15 or 10 years), or a variable rate. You will also choose among different classes of loans – conventional or government-insured (e.g., FHA). In the latter class, if you are active military or a veteran, you may be best-served by a VA loan. Your lender will explain various loan options and terms and guide you to the one that is best for you.
In order to approve you for a loan, your lender will need to review information about your income and assets. You will be asked to supply bank statements, pay stubs, tax returns and other pertinent financial documents. You must provide the required information quickly to keep the application process on track.
Perhaps your future home is (today) but a rendering of what will be built on the corner lot of a brand new subdivision. Whether you purchase a tract home or work with a custom builder, many buyers prefer the flexibility and control of buying new. You put together a list of your needs and wants and your builder delivers them; rather than searching and settling for something that is almost right, but not quite.
For a tract home, you will preview models and work with your builder (or your realtor) to identify a style you like. Once you settle on a style, you will have the opportunity to upgrade from the standard inclusions by choosing among a generous package of extras (e.g., granite countertops, an over-sized garage, a “mother-in-law” suite). Alternatively, you may decide to purchase a vacant lot and then work with a custom builder and an architect to design and build your home from scratch.
In either case, you will probably have the option to work with an “in-house” lender. This has the advantage (and perhaps the synergies – easier underwriting of your loan) of one stop shopping. Of course you can choose your own lender, but it may be advantageous to work with someone familiar with your future home site and/or builder.
Your title company…
Most real estate purchase transactions are consummated with the assistance of a title company. Our dual role is to insure your lender’s lien position and/or your ownership interest in the property and to coordinate the signing and recording of closing documents and the exchange of purchase funds.
Your insurance agent, inspector, surveyor and attorney…
Others will assist you during the home buying process. Their roles may be ancillary to that of the realtor, lender, builder and the title company, but their contributions are no less important. You will want to insure your home4 against damage or destruction (e.g., by fire, wind or hail). If you already have an insurance agent for other matters, such as auto insurance, you may choose to work with her. If not, your realtor can make a referral.
Most likely, you will work with a home inspector and perhaps a surveyor after you are under contract. Their roles are discussed below. Some home buyers retain the services of an attorney. Her expertise relates to review of all the paperwork that is a part of every real estate transaction.
DUE DILIGENCE AND OTHER CONTRACT CONTINGENCIES
Due Diligence (dü di-lə-jən(t)s) n. 1. With regard to real estate, a process of information gathering and review. 2. A rigorous investigation of all aspects of a property to evaluate its suitability for the intended use.
Buying a home is a process. First you choose a general location, establish a budget, and put together a list of requirements and amenities. Next, you preview properties that fit your budget and otherwise meet your needs. Then, you write a contract on the one that best fits your criteria. At that point, the process begins in earnest – the signing of a contract marks the beginning of your due diligence period.
From a buyer’s perspective, the Colorado Real Estate Commission standard form contract5 can be viewed as a series of contingencies that provide a framework for due diligence. Those contingencies fall into two categories: (i) the physical condition of the property; (ii) rights and duties associated with the property.
Physical condition contingencies involve your assessment of the home and the land on which it is situate. To assist with your assessment, you will review the seller’s property disclosure form.6 In addition, you may elect to hire a general inspector and/or a surveyor.
A general inspector will go through the entire home – interior and exterior, room by room – and check the condition of the structure and fixtures (e.g., the foundation, roof, windows, doors, heating, plumbing and electrical) and the personal property (e.g., the refrigerator, stove and microwave). She will provide you with a detailed report of her findings. Occasionally, an inspector will note items that warrant further evaluation by a specialist.7 For example, warped or buckling roof shingles may give rise to a suggestion that you have the roof further evaluated, or perhaps certified, by a professional roofer.
Your assessment of the physical condition of the property may include a survey.8 A surveyor will prepare a drawing that shows you the location of improvements to the property (e.g. the house, out-buildings, decks, fences) relative to boundary lines, the location of easements benefiting or burdening the property and so on.
A Bundle of Rights…
It is natural to think of home ownership in concrete terms – the rooms you will furnish and use… the lawn and gardens you will seed and maintain… But for proper due diligence, you must think about ownership in the abstract as well. What you are really buying is a bundle of rights.
Different sized bundles have different names. The largest bundle (and the one applicable to most home purchases) is called “fee simple absolute.” There are several contract contingencies related to your bundle of rights – (i) title matters; (ii) off-record matters; and (iii) covenants.
Your owner’s title insurance policy protects your bundle of rights. Though coverage is broad, an owner’s policy has limits. The exceptions (B2) page of your title commitment sets forth limitations to your policy coverage and is generally based on underlying record documents. You will want to review those underlying documents (included with the commitment) and make sure you understand the nature and extent of any limitations.
Off-record matters relate to information within the purview of the seller that does not show up on your title commitment – for example, unrecorded lease agreements, informal easement agreements, public improvements that have been approved but not installed (e.g., new curbs and gutters that will be funded through property taxes assessed against homeowners benefiting from the improvements). You must be comfortable with terms and conditions of any such matters, as they affect your bundle. Another important off-record matter involves special taxing districts. If your future home is part of such a district, you will want to satisfy yourself9 that the district is adequately funded and that the costs and benefits of special assessments are acceptable.
The home you are buying may be governed by covenants. If so, you will want to carefully review the covenants to make sure all of the terms and conditions are acceptable. You will receive a copy of recorded covenants as part of your title work. In addition, you may want to review board minutes and other documents retained by the association or the management company. These documents can give you information and insight about future plans for the community and its general direction.
Each due diligence contingency has a corresponding deadline. On or before that date, you may object to any items that you uncover during your investigation related to that contingency. Generally, an objection is a written statement providing the seller with notice of the issue and instructing that it be remedied to your satisfaction.10 For example, you may discover that the master bedroom has a broken window. An objection notice could instruct the seller to fix the window. Or, you may learn that a prior owner has reserved a mineral interest in the property. An objection notice could instruct the seller to obtain a deed transferring the interest to you, or (most likely) the notice may request that the title company insure against loss or damage related to the reserved interest.
Not every objection has a remedy. It is unlikely that a seller can effectuate change of subdivision covenants. Alternatively, an objection may have a remedy, but the seller may be unwilling to incur the cost. In such cases, you must either come to terms with your concern and waive your objection or terminate the contract.
In addition to your due diligence contingencies, the CREC contract includes several financial contingencies. You will spend a substantial sum of money on your home – you want to make sure that it is money well-spent.
If you are borrowing money to purchase your home, you will want financing on terms that are acceptable to you. For example, you may want to borrow 80% of the agreed-to purchase price with a loan amortized over 30 years at a particular fixed rate of interest. The contract can be written with a contingency (the loan conditions deadline) specifically related to securing financing on your terms.
As noted, you will want to insure your home. There is a CREC contract contingency specifically related to your ability to purchase insurance that is acceptable to you in terms of both coverage and cost.
Finally, even if you do not intend to borrow purchase funds, there is one finance-related contingency that you may want to include in your purchase offer – an appraisal. Generally, your offer will be based on an analysis of recent sales of like properties in the surrounding area. You may want a professional appraisal to confirm that analysis. If you do intend to borrow money, your lender will almost certainly require an appraisal.
TAKE THE FIRST STEP
Leading up to the writing of a purchase offer, you will work with trained professionals who will help you carefully consider location, home features and budget. The contract itself is a series of contingencies and each contingency will afford you the opportunity to make sure that the home you think you love is everything you image it will be. But one part of the home buying process is missing – the first step. As you contemplate the prospect of home ownership, you may have fears, doubts or misgivings… what if I dislike my neighbor… what if I need to fix a leaky faucet…
The first step – overcoming your fears and resolving to take the plunge – is big, indeed, it is the biggest. But if you prepare yourself, by assembling a first-rate team and by gearing up to perform your due diligence, you can develop the peace of mind necessary to proceed. And with that peace of mind you will soon realize the great American dream of home ownership.
1. Unified/Stewart Title Company believes that your home buying experience will proceed more smoothly if you retain the services of a real estate agent. The “journey” is challenging and an experienced professional is your best guide. In addition, in most instances you will incur no cost – a buyer’s agent will earn a co-op commission at closing that is paid by the seller.
2. Real estate professionals are an extraordinarily diverse group representing the entire spectrum of cultures, races, ages and income levels. This narrative adopts the convention of feminine pronouns to describe various members of the group. It is convention only and should not be interpreted as gender bias.
3. You may begin the home buying process with a preferred lender or mortgage broker. If so, you would be well-advised to consult with her early on. A home is expensive and a prudent home buyer, coached by an experienced lender, will come to view the expense not in terms of purchase price or the total debt incurred at closing, but rather in terms of its ongoing budget effect. At a minimum, the “cost” of your home is your monthly mortgage payment, plus ancillary fees (e.g., utilities, HOA dues) plus periodic maintenance and repairs. And don’t forget food, clothes, medicine and an occasional vacation. Determining what you can afford before you begin looking is the best way to avoid overspending. Your lender has the expertise to help you determine affordability.
4. If you are borrowing money to purchase your home, your lender will require that you maintain hazard insurance in an amount at least equal to your loan. If your home is located in a flood zone, you will need (and want) to purchase flood insurance.
You may write an offer on a home that is marketed with a home warranty. A home warranty is a separate insurance policy, usually offered as an incentive by a seller, and generally covering fixtures and appliances for a limited period of time (often the first year you own the home). Such a policy gives you peace of mind that if the furnace fails during your first winter, it will be repaired or replaced at little or no personal expense.
5. Not every buyer will utilize the CREC contract. However, most real estate purchase and sale contracts (e.g., an attorney-prepared form, or a builder form) will mirror the CREC form in broadest terms – at least as far as creating a series of due diligence contingencies.
6. The CREC has created a standardized disclosure form that must be completed by any and every seller who retains a licensed realtor as his or her listing agent. As part of an inspection of the property, buyers should review the form carefully as it may point to issues that warrant further investigation.
7. Other, more specialized evaluations related to the physical condition of a home include environmental assessments (e.g., a radon test), soil assessments (generally for new construction) or engineering assessments (e.g., to evaluate structural integrity).
8. There are a variety of survey types (e.g., boundary surveys, topographic maps). The most common type for a home purchase is an Improvement Location Certificate (“ILC”). Your title company or lender may require an ILC – particularly in cases of new construction, if you are buying a large, unplatted property, or if you are buying in a neighborhood where survey matters are a common concern. The ILC must be delivered prior to closing in order to insure matters related to lot lines, encroachments and the like. The CREC contract includes a section assigning responsibility for delivery of a survey, specifying the type and allocating responsibility for its cost.
9. You can gather information related to special taxing districts by contacting the local taxing authority – the county treasurer and/or assessor.
10. Under the terms of the CREC contract, sellers are afforded the opportunity to cure some objections (e.g., title, off-record or survey matters). Some matters (e.g., satisfactory property insurance) afford you a unilateral and absolute right to terminate the contract.