The home-buying process is no walk in the park, but with some guidance you can avoid the big pitfalls and heartache that comes with it. Here is my list of the Top 4 Mistakes When Buying A Home!
1. Not Knowing Market Value.
When you’ve fallen in love with a home and it’s time to write an offer, Your agent should be able to educate you on market value. The market value of a property is two-pronged:
Number 1) It should be supported by the comparable sales in the area [comparable sales in most areas of Orange County and Riverside County should be similar properties that sold within the last three months within one mile of the property and within 20% of the property’s square footage, within the same Homeowners Association if applicable, and an extra plus of built by the same builder. In slower markets, your agent may have to look back up to 6 months to find accurate comparable sales data] and
Number 2) It is what one buyer will pay for the home in today’s market. Since a home is ultimately worth what one buyer will pay for it, that leads me to. . .
2. No Pre-Offer Communication.
This is one of the most critical duties for a Buyer’s Agent to do, and yet it is not always done. It’s imperative that your agent speaks to the listing agent prior to writing an offer. This is a time-saver and it is critical to getting your offer accepted! Suppose the home you want has already received two offers today. Your agent needs to know that before writing and submitting yours!
Here’s an oversimplified example: Suppose the house is listed at $500,000, and one buyer is offering the full asking price of $500,000 and needs no closing cost credit from the seller. Suppose the second offer is for $510,000 and that buyer needs $5000 closing cost credit from the seller. One would assume the second offer is the one to beat, as it yields $5000 more to the seller. Assuming the home will likely appraise for $510,000, and assuming both offers are non-contingent (meaning the buyers don’t have a home they need to sell first), then yes, most likely the second offer is the offer to beat.
This information is invaluable and your agent should develop a sound strategy to ensure your offer is accepted out of the three (not just with offering a higher purchase price, but also with terms). Your agent should always ask the listing agent what is important to the sellers. Sometimes giving the sellers 2 or 3 days of extra possession after the close of escrow can make your offer stand out from a similar offer.
3. Not Knowing Appraisal Value.
Perhaps the least talked-about of all the mistakes when buying a home is the appraisal process. So, here it is! First, you got your offer accepted and you are in escrow on the purchase of your home! Yay! Because you are financing the purchase with a mortgage, the lender is assuming a potential risk and he wants to ensure that the asset is actually worth the investment. In order to minimize his risk, he connects with a certified appraiser who will inspect the property.
The appraiser will research comparable sales the same way your agent should, and then will make value adjustments for the differences in the comparable sales until he arrives at the subject property’s appraisal value and provides it to the lender. Sometimes the appraisal value will come in right at purchase price [which is great!], and sometimes it will come in below. The appraisal value can sometimes have unexpected results even for the most prepared agents.
For example, an appraiser gave a value of $334,000 on a model-match right across the street from my listing. And yet, our appraisal value for still came in at $325,000. There were only two differences between the properties: the first property had turned the open loft into a bedroom, which that appraiser valued at $+2500. The first property also had no backyard at all, whereas my listing did have a fenced-in backyard. But no adjustment was given for the difference.
Even without the backyard adjustment, one would assume our appraisal would have come in at least at $331,500, apples to apples. The discrepancy is due to a difference in the values that different appraisers give to their adjustments. Regardless of what adjustments the appraiser ultimately makes, it’s important that your agent has a very close guideline for you. This way you won’t have to worry about a scary surprise, because as buyers, the burden falls on you to pay out-of-pocket the difference of the appraisal value and the agreed upon purchase price if the appraisal comes in low.
It is important to note that in many markets in Southern California, appraisals do often come in slightly low, because market value and appraisal value are two different things, and ultimately a home is worth what one buyer will pay for it regardless of the appraisal. Before writing an offer, you’ll want your agent to explain the appraisal process to you and what you can likely expect. This may influence the way your agent structures your offer.
4. Writing Lowball Offers.
The BIGGEST of mistakes when buying a home is to write a lowball offer. Once you’ve decided to move forward on a home, you will lose out on that home by writing a lowball offer. Your offer should be supported by market value — remember, that includes comparable sales and what one buyer will pay for the home in today’s market. So if the sellers have already received a higher or better offer, it’s in your best interest to attempt to beat it. By this point, you’ve been fully educated by your agent about the appraisal process, she has uncovered the terms of any other offers received, and she has found out what’s important to the seller in terms of their timeline or other needs.
Trying to get an unjustified discount is only going to offend the seller, who won’t want to hear from you or your agent a second time. Not only will you be disappointed, but in this amazing market, $400,000 homes are appreciating $2400 per month! So the longer you wait, the more your home will cost you. For first-time homebuyers, the important thing is getting your foot in the door and letting that appreciation do the work for you by building your equity! It may not be your forever home, but you will be one step closer to financial independence.
For a free educational seminar on the 5 Economic Benefits of Real Estate, RSVP HERE so I can save your seat. I’m excited to meet you there!
Looking for an overview of the home-buying process? Get started by reading my Guide to Buying a Home.