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Buying a Home in a Seller's Market, Your Survival Guide

Buying a Home in a Seller’s Market, Your Survival Guide

The Colorado Springs Real Estate market has quickly shifted from a strong buyer’s market to a strong seller’s market. Home buyers had just gotten familiar with the jargon and practices of a buyer’s market, like short sales and foreclosures, when suddenly, the market changed.

Now a few short years later, buyers have a whole new set of jargon and practices to deal with. If you are considering purchasing a home in Colorado Springs, read on to learn everything you need to know about our new seller-friendly landscape. Consider this your survival guide in a seller’s market.

How to Be a Competitive Buyer

Buying a Home in a Seller's Market - Be A Competitive BuyerBefore we discuss some of the seller’s market tactics you need to understand, let’s talk about how to increase your chances of getting your offer accepted.

Pre-Approval

Back in the buyer’s market days, buyers had the option of being pre-qualified and/or pre-approved for a home loan before house hunting.

This was helpful when the buyers were ready to make an offer on a home. Pre-qualification, and especially pre-approval, strengthened offers. They indicated to the sellers that the buyers would most likely be able to secure the funding needed to close the deal. This made the sellers more comfortable accepting the offer.

But in today’s seller’s market, pre-approval is a minimum requirement (pre-qualification no longer carries much weight in getting your offer accepted). Before you even begin your home search, you should contact a lender to get pre-approved for a home loan.

Buying a Home in a Seller's Market - Cash offers

All-Cash Offers

In many instances, buyers are now competing with all-cash offers.

And if the deal falls through, the seller has to put the house back on the market and start from square one. So, all other factors being equal, sellers would prefer to work with a buyer who can pay cash so no one has to worry about obtaining financing.

If you’re competing with an all-cash offer, a personal letter to the seller could be useful. You could assure the sellers of your strong financial position and ability to secure financing. You could also express your plans for the house as a loving home. Many all-cash offers are made by real estate investors, who would flip or rent out the house. So you could sway a seller who has an emotional attachment to the house and wants the future owner to love and care for the home the way they have.

Tactics Employed in a Seller’s Market

Buying a Home in a Seller's Market - Deferred showings Now let’s discuss some of the tactics you’ll see sellers and their agents use under today’s market conditions.

Deferred Showings

Deferred showing is a tactic used to create a sense of urgency and demand for a particular property.

The tactic works like this:

The listing agent puts the home into the Multiple Listings Service (MLS) early in the week, ideally on a Monday morning. This timing brings the listing to the attention of all those buyers (and buyers’ agents) who are currently in the market for a home but didn’t find one over the weekend. The showing instructions for the property state that there will be no showings until the upcoming Saturday or Sunday at a particular time, usually 10 or 11.

The idea is to create a busy “Open House” environment with lots of potential buyers waiting to get in to see the property. The listing agent and home seller are hoping to generate and sense of urgency that will produce multiple offers and maybe even start a bidding war. This tactic is especially successful for the sellers in a seller’s market when many of those buyers have most likely lost out on previous homes because they were outbid.

There are a few additional details that make deferred showings even more effective.

First, it helps if the property is in a popular price range. This means the price should be close to the median sales price for the neighborhood. This ensures that many buyers will be interested because many buyers are looking in that price range.

Secondly, the location needs to be desirable. The property needs to be in an area that will appeal to many buyers.

An overpriced listing in an unpopular area isn’t a great candidate for deferred showings.

Deferred showing is a tactic used to create a sense of urgency and demand for a particular property.Click To Tweet

The Upside of Deferred Showings

Creating a potential bidding war isn’t the only upside of deferred showings for the sellers.

First, the schedule created by deferred showings is far more convenient for the sellers. Rather than working their schedules around multiple showings on multiple days for multiple buyers, the sellers can simply work around the Saturday/Sunday showings. They may even go away for the weekend and return to multiple offers.

Deferred showings also create an environment where the sellers feel in control. If they receive multiple offers, they can compare the offers and vet the buyers side-by-side to find the best offer. This is much easier on the sellers than receiving a single offer and deciding whether to accept, counter, or wait to see if a better offer comes in.

When a property is well-priced and well-staged in a hot seller’s market, buyers’ agents will often write a good offer with a short timeline for acceptance. This gives the sellers an appealing offer, but it also creates a sense of urgency for them to accept the offer before it expires.

The Downside of Deferred Showings

Buying a Home in a Seller's Market - Deferred showingsOne of the notable downsides of deferred showings is missing out on buyers because of simple scheduling conflicts.

Consider well-qualified, but out-of-area buyers, for example. It’s quite common for out-of-area buyers to schedule trips to Colorado Springs specifically to buy their new house. These relocation buyers (called “relo” for short) are often assisted with the move by their new local employer, so they are serious buyers and are able to secure financing. But if the deferred showing date doesn’t coincide with their buying trip, the seller could miss out on these well-qualified buyers.

Another significant downside of deferred showings is buyer’s remorse.

A bidding war environment creates buzz and excitement (especially for the winner!). But once the excitement wears off, buyer’s remorse usually sets in. Bidding wars pressure buyers to make hasty decisions and take advantage of the human impulse to win. This can leave the buyer with regret and maybe even a feeling of having been taken advantage of.

Unlike most bidding situations, sales of real estate aren’t final as soon as the bid is accepted. The escrow process typically takes 30-60 days, and offers buyers many opportunities to back out of the deal based on any of the many contingencies found in a real estate contract.

And if the buyer backs out, the seller is left at a serious disadvantage. And not only because they are back at square one in terms of finding a buyer. The real disadvantage is that the market will assume the buyer backed out due to a defect with the property.

After all, that’s the most common reason homes fall out of escrow: something is found during the home inspection which causes the buyer to walk away from the deal. So even if a buyer walks away because of buyer’s remorse or cold feet, the house will still be stigmatized. Once the buyer backs out, the house is categorized as Back on Market (BOM). And many of the homes on the BOM list are ignored by buyers and buyer’s agent because of the assumption that there was a problem with the inspection.

So this BOM category is bad for the sellers but could be a good opportunity for buyers. During a hot seller’s market, savvy buyers and their agents will ignore the deferred showings circus and will watch the BOM list instead. They know many of the BOM listings are simply the result of a bidding-war buyer getting cold feet, not a problem with the property. And they know they’ll have lower buyer competition for these properties because of that BOM stigma.

Highest and Best

The term “highest and best” has become very popular in the Colorado Springs Real Estate market. It’s the listing agents’ way of saying, “offers should be the top dollar you’re willing to pay with the most favorable terms you’re willing to offer the seller.” Then the listing agent will present these “highest and best” offers to the seller and help the seller choose the winner.

This has created a fair bit of controversy in the local market for a few reasons.

First of all, good Realtors pride themselves on correctly pricing listings. This includes pricing properties in a rapidly rising market. When you say highest and best as an agent the message being conveyed is that you have no idea what this home could sell for, so let’s just let the market dictate the maximum value.

On one hand that sounds like a decent idea, the problem with this approach is that it creates a feeding frenzy, you might end up with a great offer and terms that ultimately end up closing. You are more likely to end up with a deal falling out due to a case of “buyer’s remorse”.

A Realtor’s role is to give pricing advice and guide a contract through to closing. This type of pricing model alleviates the real estate professional from their responsibility of correctly pricing a home. If the deal goes sideways and the buyer develops remorse, the agents don’t have a firm pricing foundation to stand on.

In a strong seller’s market, good agents will advise their clients to present their best offer if they are serious about owning a particular home.

Highest and best also indicates that the listing agent may be uncooperative. They may be unwilling to work with buyers’ agents to find solutions which are fair to both parties (buyers and sellers) because they know they have the upper hand in a seller’s market. And remember, the offer and acceptance is only the first round of negotiations in a real estate deal. Another round may be necessary after inspections to address any issues with the property. Agents need to be willing to work together throughout the transaction to ensure that both parties are getting a fair deal.

We should note that the term “highest and best” may actually be somewhat useful in those few areas of the country where real estate has gotten out of control (Silicon Valley or Manhattan, for example). In those extreme markets, prices may be on the rise faster than buyers can keep track of fair market values. So offers for the same property can vary widely between buyers offering rates in line with last month’s sales and buyers anticipating next month’s prices.

This is simply not the case in our Colorado Springs market. Offers the sellers receive will all be similar (it’s rare to see an extreme outlier).Additionally, we have enough new construction in the region so that buyers can choose to build if they become too frustrated with the resale Market. Commute times are not as severe in Colorado Springs as they are in other big cities.

Highest and Best Survival Tips

The most important thing to remember in a highest and best scenario is the you need to keep your emotions in check. Don’t get so attached to a property that you take the attitude that you must have it at any cost.

Base your offer and terms on numbers and conditions you are comfortable with. If you are working with a good agent, they will advise you of what the property is actually worth. It’s ok to stretch a little but don’t set yourself up for remorse and regret. Remember, markets rise and fall, you just might have to wait a little while to get what you want.

If you lose out on a property as the result of a highest and best war, don’t give up. Both you and your agent should keep an eye on this home to see if it closes or more likely comes back on the market. Back on the market might mean there was an inspection or financing issue with the house. The more likely scenario is that the winning bidder got cold feet and decided to back out. This creates a great opportunity for you the buyer, to swoop back in and put it under contract, maybe for better terms.

“Coming Soon” Signs

“Coming Soon” signs are another tactic used by listing agents and sellers to create buzz around upcoming listings. This tactic requires the seller to authorize the listing agent to pre-market the home before actually listing it on the MLS.

Buying a Home in a Seller's Market - Coming Soon Sign

Here is the stance taken in by our local Pikes Peak Association of Realtors. This comment speaks to just how controversial this practice is:

The RSC Board of Directors, with legal counsel, has concluded the following with respect to this practice:

  • Per NAR, the PPMLS cannot make a rule concerning the posting of signs. Therefore, the PPMLS cannot prohibit a broker from posting an “Available Soon” sign.
  • PPMLS Rules require that all Exclusive Right to Sell listings be submitted within 72 hours of seller signature.
  • If RSC receives a written (or emailed) violation complaint that a property is listed, but is not in the PPMLS, then the RSC can request a copy of the listing agreement which would confirm whether or not there is an office exclusive. If RSC verifies that a listing is in force, and there is no “pink slip/office exclusive” then RSC will ensure that the listing is input into the PPMLS. (Note: currently there is no fine or sanction for not having put the listing in within the required 72 hours.)
  • If the broker has an office exclusive agreement, then the listing is not required to be input into the PPMLS computer system (although a copy of the listing agreement is required to be filed with RSC).
  • The RSC will not prohibit a listing broker from inserting additional terms in the contract such as withholding the listing from the PPMLS for a specified period of time.
  • The RSC will not prohibit the listing broker from submitting the listing to PPMLS, but then, with the Seller’s authorization, temporarily withdrawing the listing from the PPMLS.
  • If there is no listing agreement, but the seller has simply agreed to allow the broker to place a sign on the property, then the RSC has no jurisdiction in the matter, and no action will be taken.

The listing agent installs a sign with an accompanying rider that advertises “Coming Soon”. Seems innocent enough, right?

Well, the goal of this tactic isn’t only to build hype. It’s also to prey on anxious buyers looking to get the jump on the competition. Buyers who see the sign think, “I should contact the agent on that sign to see when the house will be on the market.” So they contact the agent on the sign directly, and that can lead to trouble.

You see, when buyers contact the agent on the sign directly, they are actually reaching out to a real estate professional that has an agency agreement with the home sellers. This means that until you enter into some type of agency agreement with that same Realtor, anything you say can and will be passed along to the sellers and used against you.

If you do end up deciding to buy that house and work with the listing agent you contacted from the sign, that agent will represent you as a “transaction-broker”. This means the agent facilitates the transfer of the property but doesn’t advocate for the buyer. It also means they receive a much higher commission.

In cases where the buyers and sellers each have their own agent, the real estate commission is split between the two agents. But if the agent working with the sellers (either as a seller’s agent or a transaction-broker) can close this deal as a transaction-broker for the buyer, they are the only agent involved, so they get to keep the full commission themselves.

What’s Wrong with Using a Transaction-Broker?

The problem with using a transaction-broker is that you miss out on representation. You won’t have a professional advocating for your interests. A transaction-broker must follow certain legal requirements regarding disclosures and communication, but they do not work on your behalf.
Many buyers think this arrangement is acceptable as long as the agent is also acting only as a transaction-broker (not a seller’s agent) for the sellers. That way the agent isn’t advocating for anyone, so it will be a fair transaction.

In theory, this sounds fine. But in practice, humans find it very difficult to be entirely impartial. Even if the agent doesn’t intend to favor one party over the other, they may do so subconsciously. This conflict of interest is the reason dual-agency (where the agent advocates for both the buyers and the sellers) has not been allowed in Colorado since 2003.

For a fair transaction in which each parties’ interests are represented, it’s best for buyers and sellers to each retain their own agents.

Protecting Yourself as a Buyer in a Seller’s Market

The best way to protect yourself and your interests as a buyer in a seller’s market is to engage the services of a buyer’s agent. Buyer’s agents are advocates, working on your behalf to get you a fair deal.

It just takes a few pages of paperwork to confirm that you wish to be represented by your buyer’s agent, then he or she can get to work for you. Their services include:

  • Offering professional guidance throughout the buying process
  • Negotiating on your behalf
  • Assisting with the required legal documents
  • Overseeing the transaction through to closing

And here’s the best part: their services won’t cost you anything. The seller traditionally pays the real estate commission, so it costs you nothing to add this important layer of protection.

And once you’ve engaged the services of a buyer’s agent, take advantage of their knowledge and experience. Heed their advice, and you won’t fall victim to these seller’s market tactics!

Here are some additional resources that support the ideas in this post:

Buying a Home - 04/19/2018
shopping

What You Should Know When Shopping for a Mortgage

Housing may be a necessity, but real estate is certainly an investment. In fact, it’s the investment of choice for many. In a recent survey, “Bankrate.com” discovered that 25% of the “Financial Security Index Survey” respondents answered “Real Estate” to the question: “Which would be the best way to invest money you wouldn’t need for more than 10 years?”

Investment choices

For most people, their home is the single largest investment that they’ll make –and it’s worth spending some time to make sure that investment is financed using the best loan possible.

Sadly, though, nearly half of all mortgage buyers don’t end up shopping for a mortgage first. This is unfortunate since shopping around can lead to a far better loan; savings that could add up significantly over time. For example, finding a lender that could give you even a 1% lower interest rate can easily represent a savings of thousands of dollars –per year.

Shopping for a mortgage

Sometimes, seemingly small things can make a big difference over the long haul. Here is a great article on just how interest rate can influence your buying power by Ellen Pitts

For homebuyers and investors alike, it’s important to obtain a favorable loan in order to get ahead. Much like buying a home below market value is something that savvy investors look for; the terms of the loan will also have a big impact on your investment.

To help make the process a bit easier, we’re going to walk you through the process, showing you how to shop for a mortgage.

What You Should Know: The Consumer Financial Protection Bureau

While shopping for a mortgage may sound confusing and overwhelming, the process itself is relatively straightforward.

The Consumer Financial Protection Bureau (CPFB) has simplified the entire disclosure process in order protect consumers from predatory lenders. This means that rules are in place to help protect mortgage buyers. For example, mortgage brokers (but not lenders) must charge the same percentage on every deal, meaning they can’t just increase their margin “just because.” Other rules include the Ability-to-Repay (ATR) rule that requires lenders to make a reasonable, good-faith determination that prospective borrowers have the ability to repay their loans. These rules, and more help to provide strong protections for homeowners and are designed to help prevent risky lending practices which were common before the financial crash of 07/08.

With this in mind, there’s a lot that you can do, as a buyer, to find a loan that’s favorable. Let’s take a look at some steps that you’ll want to take when shopping for a loan.

Get Pre-Qualified

It’s an all-too-common scenario. A home buyer walks into a Realtor’s office to discuss buying a home. The buyer’s excited, and has been looking at properties online, and has a list of homes that they want to see. Unfortunately, though, the buyer hasn’t talked to a lender and hasn’t been prequalified. Sadly, it turns out that they can’t afford any of the homes that they were looking at. This is unfortunate and can be extremely disheartening.

To prevent this from happening, it’s a good idea to try to pre-qualify for a loan, before you start shopping. At Springs Homes, we do pre-qualification with home buyers as the first step in the home buying process. In order to pre-qualify, you’ll want to meet with a couple of lenders. You’ll give them some basic information about your current financial situation, including your credit score, wages, and the amount of money that you have for a down payment.

The goal at this stage is to see if you qualify for a loan, and if so, what terms you qualify for: how much can you borrow, and what type of loan you’ll be eligible for –such as a conventional loan, an FHA loan –a first-time homebuyer’s loan with a low-interest rate, or a VA loan.

Before you go, you’ll want to check your credit score. This will help lenders to see where you stand and will give you an idea about whether you should move forward with the mortgage lending process, or whether it may be better to wait a few months and work to improve your credit score. If you’re worried that asking for your credit score will hurt your credit, don’t be –you’re entitled to a free credit report every year. Generally, a score that’s lower than 760 can negatively impact the loan that you qualify for, and you may be required to pay a higher interest rate or pay a fee to keep the rate down.

Once you’ve taken a look at your credit score, you’ll know whether to move forward. If you proceed with the pre-qualification, you’ll want to ask your lender for a fee worksheet. This is a breakdown of the fees that they’ll be charging you, such as an origination fee and interest rate; as well as some costs that will be out of the lender’s control, including taxes and insurance. While the lender isn’t required to give you this, their refusal should certainly be a red flag and may indicate that you’ll want to shop elsewhere or go with a company that’s more transparent about their costs.

If your credit score is a bit lackluster, there are a few things you can do to bring your rating up.

Tips for Improving Your Credit:

  • Get a credit card –and make payments on time
  • Bring any past-due accounts current
  • Pay bills on time
  • Consider consolidating any credit card debt by moving it onto a card with a low-interest rate
  • Correct credit report errors
  • Become an authorized user on someone else’s card
  • Set up accounts with automatic payments
  • Try to maintain credit card balances that are lower than 30 percent of your credit limit

Start Home Shopping

Once you’re prequalified, you’ll have a much better idea about the type of properties that are within your price range. When shopping for a home, it’s generally a good idea to start out looking at properties that are on the low to mid-range of what you can afford, and then slowly raise the bar until you find a place that you’re happy with. You’ll also want to keep location in mind when searching. It’s one of the most important criteria for most people. Since it’s important to be near work, schools, and other places –it’ll be a key factor when making your decision. Plus, it’s one thing that can’t be changed unless you move again. You could always upgrade the kitchen at a later date, but location is something that’s a bit more difficult to change.

Full Loan Application

You’ve found a house, written an offer, and the offer has been accepted. Congratulations! This is an exciting stage of the home buying process.

Once you’ve reached this stage, you’ll want to send a copy of the contract to any lenders that you’re still considering after the pre-qualification process. You’ll also need to make a full loan application with any lender that you want to obtain a true estimate from.

What Is a Loan Estimate? Obtaining a Loan Estimate

The Loan Estimate form is a three-page document that lenders are required by law to give you after you apply for a loan. This form helps borrowers to understand the full cost of the mortgage, including fees and interest. It’s an easy way to compare mortgage options and can help you to discover which lender is offering the best loan.

Since October 3, 2015, the Loan Estimate has replaced the good faith estimate and the Truth in Lending Disclosure –except in the case of “Reverse Mortgages.”

The new form is set up to be simpler, and to eliminate any kind of closing table or last-minute bait and switch, thereby protecting uninitiated consumers. For an excellent detailed line by line description of the Loan Estimate Form, have a look at The Consumer Financial Protection Bureau’s website.

The Loan Estimate must be given to the borrower within three business days of loan application.

To submit an application all that is required is:

  • Your name
  • Your income
  • The property address
  • An estimate of the value of the property
  • The desired loan amount

Note: Your loan officer cannot require you to provide documents verifying this information before providing you with a Loan Estimate.

You’re not required to provide written documentation to obtain a Loan Estimate, and the only fee that can be charged is a small upfront fee for pulling your credit report, usually no more than $20.

Comparing Loan Estimates

It makes financial sense to shop around for the lowest interest rate that you qualify for –and the loan with the most favorable conditions. Fortunately, Loan Estimate forms make it easy to compare lenders.

Once you’ve obtained your Loan Estimates, you’ll want to take the time to look at what different lenders are offering. Comparing Loan Estimates is an important part of the home-buying process, and the best way to shop around for a mortgage.

The two areas that you’ll want to pay special attention to are origination fees and the interest rate. You can also look at things like prepayment penalties, what a late payment will cost you, and whether the lender intends to process your loan or sell it –if this matters to you. You’ll also want to check to see if there’s a balloon payment –a large one-time payment at the end of the loan term. Make sure you take the time to look at these different terms and conditions. The last thing you’d want is any surprises after closing.

You’ll also want to ensure that the monthly payments match your expectations and that you’ll have enough funds to pay your estimated cash to close.

If you find anything that you’re not sure about or if you have any questions, be sure to talk to the lender. They’ll be able to answer any questions you have.

Note: Make sure you compare the total dollar amounts if you’re looking at different-length terms. For example, a 15-year mortgage will have a higher interest rate, but will cost less in the long run because you’ll pay off the debt 15 years earlier.

Finally, keep in mind that while a loan is a commodity, the lender is not. An inexperienced or unprofessional lender can cost you hundreds if not thousands of dollars. For instance, missed closing dates, or neglecting to lock in an interest rate could all cost you significantly. Before you go with a lender, take the time to ensure that they’re experienced and reputable. Talk with people that you know to see if they have anyone they recommend, and research potential lenders online to see what people are saying.

Remember: the right loan can have a significant impact on your investment –so it’s worth taking some time to get this right. By shopping around, you can increase your chances of securing a lower interest rate, so do your research and find a lender that’s right for you.

Additional Resources for Shopping for a Mortgage:

Buying a Home / Full Loan Processing for Buyers / General News - 01/24/2018
committed

Understanding Loan Commitment

The loan commitment is the beginning of the final stage in the home mortgage financing process. It is the lender’s conditional promise to offer a mortgage loan to a specific buyer for a specific property.

Two conditions must be met before a loan commitment can become a full approval:

Condition #1: The property must meet the standards of the lender in terms of value and condition. Lenders need to be sure the property is a reasonably sound investment because they could acquire the property if the buyer were to default on the loan.
Condition #2: The buyer’s finances must meet the standards of the lender. The lender needs to evaluate the buyer’s ability to repay the loan.This typically means confirming that the buyer’s financial situation has not changed since the pre-approval was granted. For example:

  • Major purchases, especially those that increase the buyer’s total debt, negatively impact the buyer’s ability to repay the loan.
  • Missing a payment negatively impacts the buyer’s creditworthiness.
  • A change in income, perhaps because of a change in employment, alters the buyer’s original debt to income ratios.

Both Realtors and lenders will advise home buyers to avoid making any major purchases, job changes or late payments in between the time they make loan application and close on a house. Unfortunately, buyers often underestimate the seriousness of this warning. They see loan commitment as a green light to move on with their lives and go out and make purchases to prepare for that new life. This can leave them with a bunch of new stuff and no place to keep it.

The loan commitment is not some legally binding guarantee of a mortgage. It’s simply a signal from the lender to all parties in the transaction that the deal is on track and can proceed to the final stage of the mortgage process as planned. This is a reassurance to the seller who has taken their home off the market (and off the radar of other potential buyers) in anticipation of closing this sale. It is also helpful to the Realtors® who are investing time and energy into closing the transaction smoothly.

The loan commitment comes in the form of a letter. This letter outlines:

  • The type of mortgage being obtained
  • The amount of money being borrowed
  • The terms or length of the repayment period
  • The agreed-upon interest rate

Here is a Sample Loan Commitment Letter:

Attention:

[Real Estate Agent]
[Real Estate Company]RE:
[Client Name]
[Subject Property]

This letter is to inform you that I have reviewed:

  • Borrower’s income, credit & asset documentation
  • Loan amount
  • Interest rate
  • Loan type

Based on my assessment of these items, [Client Name] has been approved for a [Type of Home Loan] to purchase the subject property at the offer price of [$$$,000] and terms listed in the purchase contract.
Please note this approval is subject to the following conditions:

  • Fully executed sales contract
  • Acceptable appraisal meeting or exceeding sales price
  • Acceptable title insurance
  • Acceptable home owner’s insurance coverage
  • Verification of all information supplied at the time of application.

I am looking forward to working with you towards the successful close of this transaction. You can trust that my team will keep you informed every step of the way.

If you have any questions or need additional information, please feel free to contact me.

Sincerely,
The Buyer’s Lender

[Today’s Date]

The Difference Between Pre-Qualification, Pre-Approval, and Loan Commitment

Many buyers are confused by the loan qualification process. The terms “pre-qualification”, “pre-approval”, and “loan commitment” all sound like they might mean the same thing. But they are, in fact, all different stages of the mortgage approval process. Buyers should progress through each stage in order.

Stage 1: Pre-Qualification

Pre-qualification simply provides a guideline for how much money buyers can afford to spend on a home, given their financial situation. Buyers can get pre-qualified online in minutes. Because pre-qualification is helpful in determining a housing budget, buyers should get pre-qualified before they even begin looking at homes. This will ensure that they are looking in the correct price range.

For more information on pre-qualification, visit our Mortgage Pre-Qualification Guide.

Stage 2: Pre-Approval

Pre-approval goes a step further; it looks at the buyers’ creditworthiness and the likelihood that they will repay the loan.

Pre-approval requires a credit check by a lender.

This stage should be completed before making an offer on a house. Offers from pre-approved buyers are stronger than offers from buyers who are only pre-qualified. Pre-approval demonstrates to the seller that the buyer is serious and most likely will be able to obtain financing to close the deal. Again, sellers do not want to take their house off the market unless they are fairly certain the transaction will be completed.

If you’d like more information on pre-approval, read our article, What is the Difference Between Pre-Qualification and Pre-Approval?

Stage 3: Loan Commitment

Once the buyer’s offer on a home is accepted by the seller, the buyer can request loan estimates from multiple lenders to find the lender offering the best terms.

And once a lender has been selected, the lender will review the file and provide a loan commitment letter confirming their intention to provide funding for the purchase, as long as both the property and the buyer’s financials meet the lender’s criteria.

You’ll notice that, unlike the pre-qualification and pre-approval, which each evaluate only the buyer, the loan commitment conditions require an evaluation of both the buyer and their chosen property.

To satisfy the condition relating to the buyer’s financials, the buyer must provide up-to-date documentation of their financial position, source(s) of income, and creditworthiness.

To satisfy the condition relating to the property, the property must appraise for the purchase price (or greater) and may need to pass a physical inspection.

 

Path to Loan Commitment

The Buying Process Leading Up to the Loan Commitment

To clarify how the pre-qualification, pre-approval, and loan commitment all fit into the big picture, here is a look at the steps in the buying process leading up to the loan commitment:

  1. Buyers obtain pre-qualification so they know what price ranges to consider.
  2. Buyers start house-hunting.
  3. Buyers obtain pre-approval from a lender so they will able to make a strong offer on a house when the time comes.
  4. Buyers make an offer on a house (accompanied by the pre-approval letter).
  5. The offer is accepted, creating a purchase contract. The contract will outline dates and deadlines for contingencies, including a finance contingency for the buyer to obtain a home loan.
  6. The buyer sends the contract to all lenders they are considering for the home loan.
    Within three days, each of the lenders to which the buyers applied will provide a loan estimate.
  7. The buyers evaluate the loan estimates and choose the lender offering the best loan option for their situation.

From this point, the chosen lender can provide the Loan Commitment Letter and move the transaction into the final stage of the financing process.

The Final Stage of the Financing Process

To reiterate, the loan commitment is conditional, so the loan commitment letter does not constitute official approval of the loan. Official approval can only be granted after the two conditions are met.

This final stage of the financing process includes evaluations to satisfy those two conditions:

    • The buyer’s financials and creditworthiness will be thoroughly reviewed and documented.
    • The chosen property will be appraised and its condition will be assessed.

Evaluating the Buyer

You’ll recall that buyers have already been pre-qualified and pre-approved by this point. But now is the time the lender will really scrutinize the buyer’s financials, credit, and source of income.

Buyers will need to provide complete documentation to confirm that they are financially stable and likely able to accept this new debt in addition to their existing debt payments and other living expenses. Buyers will need to provide their most recent financial documents to show that their financial position has not changed since their pre-approval.

This typically includes:

  • account statements for all checking, saving, and investment accounts
  • loan statements for any other current real estate owned by the buyer
  • paycheck stubs showing year-to-date earnings
  • most recent W-2 or I-9 tax forms
  • statements for any new debts not yet listed on the credit report

The lender will also contact the buyer’s employer multiple time throughout the course of the loan application process to confirm that the buyer is still employed in good standing.

Condition of Loan Commitment

Failing to Meet the Buyer Condition of the Loan Commitment

It is possible for the buyer to fail to meet the condition of the loan commitment, whereby losing their loan commitment and even their pre-approval.

Lenders are looking for financially stable borrowers. And any disruption in a buyer’s finances during the loan application process can return the process to square one. Examples of behavior that could result in a revocation of the loan commitment and pre-approval include:

  • Employment changes (a reduction in hours, a lay-off, or even accepting a new job)
  • Late or missed payments on any debt, bill, or even rent
  • Applying for another loan (perhaps an auto or a business loan)
  • Legal issues, including marriage and divorce
  • Closing a credit card account or settling an old debt (both of which alter your credit score)
  • Making a large deposit or taking a large withdrawal (which will make the lender question where your money comes from and where it goes)

As a general rule, buyers should avoid doing anything that might change their financial position from the time pre-approval is granted until the close of escrow.

Massachusetts Realtor Bill Gassett has a great article that explains 14 things a home buyer can do to inadvertently get a mortgage pre-approval revoked.

Evaluating the Property

Evaluation of the property always includes an appraisal and often includes an inspection of the physical condition of the property.

The Appraisal

The lender will order an appraisal, to be paid for by the buyer, and a licensed appraiser will assess the chosen property. The appraiser’s assessment compares the chosen property to similar properties in the area that have recently sold, which allows the appraiser to determine the value of the chosen property under current market conditions. For more information on the appraisal process, check out What You Need to Know About Appraisals.

The property’s appraised value must be greater than, or equal to, the contracted purchase price to meet the condition of the loan commitment. This is mainly to protect the lender from loaning money on a property that doesn’t provide enough collateral for its loan.

Appraisers have also started to require inspections, or even repairs, of items that materially affect the value of the home (like the roof, heating and cooling systems, or electrical work).

The Physical Condition

The physical condition of the property itself may also be considered during the property evaluation.

The standards for the physical condition of the property depend heavily on the type of loan for which the buyer has applied. This is because many home loans are packaged by type and sold on the secondary market to investors. Government-backed loans, such as FHA and VA loans, will have more stringent requirements than standard conventional loans. Learn more by reading Everything You Need to Know About Mortgages.

Regardless of loan type, the lender needs to factor in any health and safety issues including lead paint, water intrusion, and potential electrical hazards. Lenders are also concerned about any issues that could potentially damage the structure. Cracks in the foundation, termite infestations and defects in construction could all disqualify a property.

If material defects are identified, they may need to be repaired to satisfy the condition of the loan commitment. Afterward, the Appraiser may need to review any repairs or replacements and update the appraisal accordingly.

It should also be noted that not all home loans will cover all residential property types. For example, it can be difficult for manufactured homes (often called mobile homes) to qualify for a VA loan.

Failing to Meet the Property Condition of the Loan Commitment

It is possible for the property to fail to meet the condition of the loan commitment and to cause the buyer to lose their loan commitment.

The most common reasons properties fail to meet the conditions of the loan commitment include:

  • Appraising for a value under the agreed-upon purchase price
  • Existing health or safety issues
  • Structural concerns
  • A mismatch of the loan type with the property type

Final Approval of the Home Loan

Final approval for a home loan can be given only after the two conditions of the loan commitment are satisfied. This is the very last step of the home mortgage financing process and typically occurs immediately before the close of escrow.

Until then, buyers should remain exceedingly careful with their finances to ensure a smooth transition from pre-qualification, through pre-approval, through the loan commitment, and finally, to full approval of their loan.

Additional Resources:

Buying a Home / Full Loan Processing for Buyers - 01/23/2018
interview

Checklist to Assess Your Wants and Needs

Establishing What a Buyer Wants vs Needs

A needs assessment with a potential buyer is an essential first step in the home buying process. This type of assessment helps clarify the needs and wants of the buyer, as well as their ability to buy.

The Wake-Up Call

The needs assessment starts as a list of wants, needs and ability, but it really continues until the buyer finds their home. Once the Realtor has a good idea about your wants and needs in conjunction with your price range, they’ll put together an initial list of homes to see. After touring these initial homes, buyers sometimes feel disappointed and frustrated. They’re now starting to realize they most likely won’t be able to get everything they want in a home. The Realtor can now use the needs assessment in order to help the buyer manage their expectations.

The Balancing Act

For most people there are more criteria than just the earlier mentioned ‘needs,’ and depending on how much house you can afford, other wants might be included in the needs category. When working with a limited budget, though, you’ll likely need to prioritize your wants so that both you and your Realtor know what you’re willing to compromise on.

An experienced Realtor will help you prioritize your wants and needs. The best Realtors are also masters at finding creative compromises. For example; knowing about a house for sale in your price range on a street that appears to be in a school district you aren’t interested in, but is actually just across the boundary from the district you want but didn’t think you could afford. They will help you shift your wants and needs according to your price range.

How Do You Make Tough Choices?

These are some examples of the variety of things that fall under the wants of the buyer: a basement, a finished basement, a deck/patio/sunroom, the age of the house, a gas or wood burning fireplace, the view, vaulted ceilings, a large and/or fenced in backyard, backing up to an open space or golf course, a property with trees, privacy from neighbors, acreage, upgrades (anything from granite countertops or hardwood floors to stainless steel appliances), and natural water.

Unfortunately, natural water like a running creek through the property or a house backing a lake is unlikely to be found in the Colorado Springs area. There are several small lakes in the “Tri-lakes” area (Monument, Palmer, Woodmoor and now Forest Lakes), some creeks running through the Ute Pass area and on the northwest side of town slightly south of the Air Force Academy, and creeks in Fountain and the Cottonwood area. Other than that, if you’re looking for a home in the Colorado Springs area, you’ll likely need to be flexible about whether or not a house with natural water is available.

The most important factor when buying a home is the location because it’s the one thing that can’t be changed. The second most important factor is most likely home size because it is extremely expensive to add on to a home.
Buying a home that has good resale value is often also a very important factor. If you know you’ll be transitioning out of the community within 3 to 5 years for military, job, family or any other reason, you might need to resist your desire to buy the most expensive or unique home in the neighborhood. A classic home in a popular, well-kept neighborhood will often be the best bet for good resale potential.

When you can’t find a home within your budget with the desired age, size, style, and location, it’s time to start talking about what criteria you’re willing to compromise on. If you’ve already prioritized your wants, this is a little less of a speed bump than it otherwise might be. If not, you’ll need to consider if you’re willing to accept an older home in the right area, a longer commute for an ideal house, etc. In this high-demand market, buyers are forced to make more sacrifices than they might be expecting. For example, you won’t be able to live on 35 acres and have amenities close by on a budget.

After the needs assessment, a Realtor will take all of the factors discussed into account and set up a search for the buyer. To avoid human error on either end it’s best to keep these searches basic and use pictures, descriptions and virtual tours to decide if each house is worth a showing. Too specific of a search might exclude potential houses that the listing agent wasn’t specific enough when describing. This way you won’t miss out on a potentially perfect match for you.

Every homebuyer has a unique set of wants/needs, and your Realtor is ready to work with you to find the perfect house. If you’re ready to review your Home Buyer Needs Assessment, give us a call!

Buying a Home / Defining Needs & Wants for Buyers - 11/29/2017
The 5 Real Estate Contingencies You Need to Understand

The 5 Real Estate Contingencies You Need to Understand

Whether you’re buying or selling, you need to understand real estate contingencies – what they are and how they work. Contingencies effect every real estate transaction and must be directly addressed before the deal can be finalized.

I’ll provide a quick overview of real estate contingencies in general, then discuss the details of the five real estate contingencies you’re most likely to come across in your future property deals.

What are Real Estate Contingencies?

Simply put, contingencies are conditions of a real estate transaction which must be met in order for the deal to close. Think of them as milestones to be passed on the way to finalizing the transaction. Each contingency will be assigned a deadline in the Contract to Buy and Sell. Contingencies may be accepted by formal acknowledgment, but acceptance is also assumed when no objection to a given contingency is noted prior to its deadline. Don’t worry if that sounds confusing; we’ll go over several specific examples together in this article.

Just remember: the contingencies listed in your Contract to Buy and Sell are conditions which must be met. If a contingency is not met, your deal cannot close! That’s why it’s so important to understand common types of real estate contingencies and the requirements of each.

5 Types of Real Estate Contingencies

Any number of contingencies can be written into a real estate contract (as every transaction is unique). But there are five types of common contingencies which apply to most real estate deals:

  1. Title
  2. HOA
  3. Inspection
  4. Finance
  5. Final Walk

1. Title Contingency

The main purpose of the title contingency is to confirm that the buyer will get “clear title” to the property upon close of escrow. Clear title just means that there are no other liens or claims against the ownership of the property. Buyers want to be assured when they purchase a home that no one else can approach them after the deal closes, claiming to own a share (or all!) of the property.

A title company will be hired to research the property’s title (the ownership rights). The title company needs to confirm that the seller actually has the right to sell the property. So the title company is looking for any “clouds on title” (any items which could prevent the seller from having complete rights to sell the property).

They also research any issues which could prevent the buyer from “quiet enjoyment” of the property (legalese for living in peace on the property without interruption by claimants).

What’s Included in a Title Search?

A title search and report by your title company typically includes the following:

  • Any pending litigation. Bankruptcy filing, divorce proceedings, and lawsuits could all affect the seller’s ability to legally sell the property
  • Any liens on the property. Liens are debts against the property which must be paid prior to the sale. Tax liens for unpaid taxes and mechanic’s liens for unpaid home repairs and improvements are the most common.
  • Any easements and/or encroachments. Easements are authorized rights of others to access a portion of your land for a specific purpose. For example, you might have a utility easement for government employees to access electrical meters on your property. Encroachments are unauthorized use of any piece of your land by another. This could be a neighbor’s overgrown tree extending into your yard or their fence crossing the property line into your property.
  • Any Improvement Location Certificate (ILC) requirements: ILC’s are informal geographic reports to confirm that the structure and any other improvements on the property (like sheds, fences, etc.) are located within the boundaries of the property lines. ILC’s also show easements and any encroachments. In many cases, they are accepted in lieu of a formal geographic survey.
  • The status of property taxes. Buyers need to know if sellers are delinquent on their property tax bill.

The buyer needs to understand the status of the property’s title and agree to the covenants in the title report. If the buyer objects to any covenant, or if the title company discovers a cloud on title, the seller has the right to cure. Clouds on title are fairly common and often easily cured by the title company and the seller.

If the title issue can be cured, the contract is still enforceable, and the deal can proceed as planned.

In the unlikely event that the seller cannot cure the title issue, the property becomes “uninsurable” for the title company. This means a lender will not finance the purchase, and the property will be extremely difficult to resell. For this reason, the buyer of a home with an incurable cloud on title has the option to terminate the contract. In this case, the buyer would be entitled to a full return of their earnest money.

2. Homeowners’ Association (HOA) Contingency

The purpose of a Homeowners’ Association (HOA) Contingency is to make sure buyers are aware of any HOA the property belongs to. HOA’s are private organizations which manage planned real estate developments. If your home is located in an HOA area, membership is mandatory; you cannot opt-out of an HOA, so you need to understand your HOA and its operations.

HOA Dues

The HOA collects dues from all homeowners with property in the development to pay for maintenance of the development. This includes common areas like private streets and landscaping, as well as community amenities like pools, clubhouses, and security services. Some HOA fees may even include some utilities like sewer and trash.

Buyers must be aware of the amount of the HOA dues, which can range widely. Suburban developments without amenities may only charge $25 per month to fund private road maintenance. Urban condominium communities with full amenities like sauna, concierge, and fitness centers may charge over $1,000 each month! Many Colorado Springs area homes do not belong to HOA’s, but those that do typically pay between $200 and $300 per month in HOA dues.

HOA Bylaws, Conditions, Covenants, and Restrictions

HOA’s also require homeowners’ compliance with HOA bylaws. Buyers need to understand the conditions, covenants, and restrictions (CC&R’s) of the HOA. Some common CC&R’s include:

  • Noise restrictions
  • Parking restrictions
  • Exterior property upgrade restrictions (for example, many HOA’s have similar-looking homes and won’t allow homeowners to change the home’s aesthetic)

It’s important to understand the CC&R’s for your potential HOA because failure to comply could ultimately result in the HOA placing a lien against your home, which as discussed previously, could affect your ability to sell the home in the future.

Finally, buyers should research any special assessments levied by the HOA. Special assessments are a way to raise money for unexpected expenses. Well-managed HOA’s will reserve a portion of the dues for large projects, like a new roof or new road, in a reserve fund. However, the reserve may not cover the complete expense, and the HOA can levy a special assessment to collect the remainder from the homeowners.

Special assessments are also common in emergency situations like floods, fires, or tornados, where the insurance cannot cover the full cost of restoring the community.

Buyers have the opportunity to review all HOA documents, bylaws, and CC&R’s during escrow. If the buyer chooses to object to any terms of the HOA, they must do so before the HOA contingency deadline.

3. Inspection Contingency

The purpose of the home inspection contigency is to allow buyers to inspect the property during escrow. And to make sure buyers are satisfied with the condition of the property prior to closing.

We recommend that every buyer take advantage of this opportunity by hiring a professional home inspector to physically inspect the property and report on its condition and any visible issues with the structure and systems.

You can research local home inspectors online to find an inspector, or you can ask your Realtor for a referral to a professional, certified inspector. If you are choosing an inspector on your own, make sure he or she is certified by ASHI (American Society of Home Inspectors) to ensure a quality home inspection.

What’s included in a standard home inspection?

It’s important to note that home inspectors can only inspect what is visible. They will not open walls or ceilings or dig below ground to search for additional potential issues.

A typical home inspection includes a physical evaluation of the following:

  • General integrity of the structure (any sagging or bowing of the frame)
  • Exterior
  • Roof
  • Electrical system
  • Heating and cooling systems
  • Interior plumbing (this does not extend to the piping leading away from the home)
  • Appliances
  • Attic, basement, and garage areas
  • Grounds (driveway, patio, etc.)
  • Any potential safety issues

We recommend that buyers attend the inspection. This gives them a chance to get to know the property and to learn about the home directly from the home inspector. It’s also a great opportunity to ask questions of the inspector regarding the condition of the home.

Warning to buyers: your home inspection will report every little issue (or even potential issue!) uncovered by your inspector. Don’t panic! Many of these items are documented simply for the buyer’s information. They are the things we all live with like cracked sidewalks, staircases without handrails, or windows that stick when you open them. Take a deep breath before reviewing your inspection report, and know that not every item needs to be addressed. The inspector just wants to make sure you understand what you’re buying.

Some items may be serious and may require a remedy before the buyer is willing to release the inspection contingency and close the deal.

Some items may require an additional inspection. For example, if the home inspector notices electrical outages in the garage, they may recommend that a licensed electrician thoroughly inspect the electrical system.

Many items will simply be noted to bring them to the attention of the buyers and won’t require any action.

Your Realtor can help you navigate through the inspection, having seen dozens or even hundreds of them! Your Realtor can help you decide which items are serious, which items may need additional inspection, and which are just noted for your information.

What’s not included in a standard home inspection?

Standard home inspections do not include:

  • Mold
  • Radon
  • Methamphetamine
  • Lead paint
  • Asbestos
  • Pests
  • Sewer lines

But if you’re concerned about any of these potential issues, you have the option to hire specialists to assess and report on these specific items.

Inspection Objection

Once the inspection report has been reviewed by the buyer, their Realtor can draft the Inspection Objection. The Inspection Objection lists any items from the inspection that the buyer wants to be corrected before the deal closes. It’s also common for buyers to request a reduction to the agreed-upon purchase price so they can afford to correct the issue(s) themselves after closing, instead of asking the sellers to correct the issue.

Inspection Objections often start a whole new round of negotiations. Buyers typically expect the seller to cure some of the issues brought to light in the inspection report. And sellers counter the buyers’ request with an offer to cure some, but not all, of the issues noted in the original Inspection Objection. As with most negotiations, it’s best to enter the discussion with an attitude of compromise.

When the buyer and seller agree on the terms of the Inspection Objection, the inspection contingency can be released and the deal can proceed.

Inspection Objection Deadline

One quick note about the Inspection Objection Deadline: Time is of the essence with inspections and submitting Inspection Objections. To ensure a timely close of escrow, it’s in both parties’ best interest to leave time to negotiate the correction of any serious inspection-related issues. So there are deadlines listed in the Contract to Buy and Sell to keep the deal moving forward.

The Inspection Objection Deadline is especially important for buyers because failure to submit the Inspection Objection by the deadline could result in forfeiture of your earnest money, or even termination of your Contract to Buy and Sell.

4. Finance Contingency

Unless the buyer is making a full-cash purchase, they will need to secure financing to buy the home. And of course, the deal cannot close until the buyer is approved for the loan. The purpose of the finance contingency is to confirm that a lender has formally approved the buyer for the loan required to purchase the home.

“Pre-qualification” for a loan is not enough to release the finance contingency. Instead, the buyer must be “pre-approved”.

Pre-Qualification vs. Pre-Approval

What’s the difference? Pre-qualification is a preliminary step to guide the buyer in their home search. Pre-qualification determines the types of loans, and potential loan amount, the buyer may be eligible for. This helps the buyer narrow their search to a more specific price-range based on what they can afford.

Pre-approval, on the other hand, requires the buyer to complete a full loan application so the lender can review the buyer’s complete credit history and financial situation, and commit to covering the loan. Learn more about prequalification vs. preapproval.

This loan commitment confirms that the buyer will be able to secure financing to complete the purchase as expected. If the buyer is unable to obtain a loan commitment from a lender, the deal cannot close, and the Contract to Buy and Sell is terminated.

Assuming the buyer is pre-approved for the loan, there’s still one last thing to consider before the finance contingency can be released: the Appraisal.

The Appraisal

The appraisal is important to the lender because the property secures the loan. Consider the lender’s point of view: if the buyer fails to make their mortgage payments, the lender will foreclose on the property, and effectively become the new owner. So the lender needs to make sure the property is worth the price the buyer is paying.

And that’s what the appraisal does. It values the property during escrow to make sure the agreed-upon purchase price isn’t higher than the value of the property.

Once the loan has been approved and the appraisal accepted by the lender, the finance contingency can be removed and the deal can proceed.

5. Final Walk-Thru Contingency

The final walk-thru contingency is the last contingency to be released prior to closing. Immediately before closing, the buyer should physically walk through the property one last time.

During this visit, buyers should confirm that:

  • The keys (including keys to any community amenities) and garage door openers work
  • All agreed-upon inspection items have been remedied and copies of any receipts for work done are provided to the buyer
  • All inclusions are still in the house
  • The property condition is as expected and acceptable
  • The property is acceptably clean
  • There are no unknown damages
  • The seller has removed all personal possessions from the property

If each of these items is acceptable, buyers can release the final walk-thru contingency.

And your real estate transaction can successfully close!

Additional Resources

 

Buying a Home / Making an Offer on a Home for Buyers - 11/27/2017

Does Your Home Have a Firewall?

Last Wednesday on November 15th this home in Rapid City, South Dakota sustained minimal fire damage. The damage could have been much worse and completely destroyed the entire home were it not for the firewall which saved it.  Most people don’t understand what is a firewall in a house. A firewall is a fire-resistant barrier used to prevent the spread of fire for a prescribed period of time. In this case, the firewall between the storage area and living space was able to contain the fire and prevent it from consuming the whole house.

Houses usually have a firewall between the garage and the interior living space. This firewall consists of fire rated sheetrock which can contain a burn up to one hour before it penetrates the interior of the home. The intent of it is to slow the spread of fire from the garage to the living space.

In order to accomplish this, several components of a house must be made of fire resistive materials, and all must be working together for the system to work. Drywall used on the garage side of walls shared with living space must have a one hour fire resistive surface.

Firewall House: What is a Firewall in a House

If the garage ceiling is not covered with drywall, then the common walls between the garage and living space must be covered all the way up to the underside of the roof sheathing. You may see open rafters in the garage which is OK as long as there is no living space above the garage. In this example, if a fire starts in the garage, it cannot easily spread to the living space or the attic above the living space. It will be contained in the garage.

If there are breaches in the firewall they must be addressed to restore the integrity of the firewall. A breach in firewall could be a hole or crack in the sheetrock or even voids where sheetrock is missing altogether. Smaller breaches could include a missing switch plate cover to an electric outlet.

When a buyer gets a home inspection, the inspector will examine the firewall(s) in the home ensuring they are intact. Any voids will be noted as hazardous and should be addressed between buyer and seller prior to closing.

Sheetrock isn’t something we think about every day. And most of us don’t go around wondering if our sheetrock can contain a fire. But I’m sure the owners of this Rapid City home are grateful their sheetrock was intact and worked properly.

Home Inspection & Appraisal for Buyers - 11/22/2017
Buyer_Agent_Man.jpg

Buyer Agency – Real Estate Super Heroes

You’ve decided that now is the time. Your home search has begun. For the past few months, you’ve been noodling around on Zillow and Realtor.com and getting a sense of what’s out there. You are checking updates in your preferred neighborhood and price range. Last weekend you even went to a few open houses. This week you are heading to check out some model homes.

That open house you walked through the other day, that house that is sticking in your mind? The listing agent will likely offer to work with you to make the purchase. But they are working for the seller. They are not obligated to look out for your best interests. It’s not that they will treat you badly. They are by real estate law obligated to a few “Uniform Duties” that all agents must perform in their work, including Performing the terms of any written or oral agreement with Buyer; presenting all offers to and from Buyer in a timely manner regardless of whether Buyer is already a party to a contract to purchase the property; and disclosing to Buyer adverse material facts actually known by Broker;

Why do you Need a Buyer’s Agent?

What’s missing from this equation? ADVOCACY. This is where a Buyer’s Agent comes in. You’ve got questions: Should we focus on resale or new construction? Are the homes we’re looking at really worth the asking price? Are online estimates really accurate? What can we even afford? I keep hearing it’s a seller’s market – does that mean jumping at the first opportunity? We have a list of “must haves” – How should we prioritize?

You might wonder why you would sign some small pile of paperwork for a buyer’s agent. You are doing all this research on neighborhoods, homes, lenders, etc. But that’s just a part of the process. Gathering data is great – but a good agent will help you prioritize, offer advice based on experience in your market, and serve as your unswerving advocate throughout the process. Once an agreement is signed, they will make sure you understand your rights, guide the inspection process, help you order title, keep the loan process on track – all the crazy details that come with transferring ownership of land from seller to buyer. There is a LOT to keep track of!

Another side of this equation: a buyer’s agent has an obligation to keep your confidence. During negotiation on a property, you may say, “We really want to get this for $350,000 but we’re willing to go up to $362,000.” A buyer’s agent will help you negotiate without letting the seller know too much. In some markets and for some properties, your agent might advise going in a bit lower. For a popular property in a popular neighborhood, your agent might advise an “escalation clause” that gives you a leg up in the event of multiple offers on a given property.

Jennifer Boylan managing Broker here at Springs Homes has an excellent example of how a “Buyer’s Agent” armed with the right tools can be an invaluable asset.

Jennifer was working with a set of First Time Homebuyers. This couple was very savvy about what it took to buy a house. These buyers were referred to Jennifer by past clients, and they followed our home buying process to the letter.

The buyers understood that they were in a competitive neighborhood (Downtown Colorado Springs) and price range. When they found a home they fell in love with; they immediately moved to make an offer.

Knowing the market was hot and this home was most likely going to see multiple offers, the buyers decided to offer above asking price. Jennifer prepared a Market Analysis, which showed the home was already priced at the top of the market. Additionally, the home was older and was going to require some repairs.

Jennifer advised them to go in at full price with an escalation clause. The clause said the buyers would pay $1,000 over the highest offer the seller received (we’d, of course, have to see the offer). This made the buyers nervous because they had heard stories of bidding wars driving prices up tens of thousands of dollars. Jennifer assured them that the clause was simply to keep them in the running for the home and reminded them that if the price got out of their comfort zone, the Colorado Contract offered some important contingencies they could take advantage of in order to get out of the contract.

The buyers ultimately got the home at asking price. It seems like the other buyers feared the bidding war as well. The sellers ended up doing a good deal of repairs after the inspection as well. This also saved the young buyers several thousand dollars after moving in.

The combination of knowledge on pricing, contract contingencies, and inspection issues helped save these buyers a large sum of money. A Transaction Broker or Non-Buyers Agent could not have done this. They would have been obliged to counsel the buyer to seek professional advice. The Transaction Broker simply takes directions, they cannot be a true advocate.

What to Look for in a Buyer Agent

So as you enter the fray of the home search process, one of the first steps is to interview for a good buyers’ agent. Some things to look for:

  1. A balance of experience and energy. Don’t discount a newer agent who is eager to serve you. A newer agent with great training can be a real asset. And an experienced agent who knows the market and remains engaged – great choice! What you DON’T want is a newer agent who doesn’t know what they don’t know, or an experienced but “adios” agent who is burned out and doesn’t seem to have time to engage in helping you find the home of your dreams.
  2. Transaction know-how. Ask prospective agents about their most challenging transaction and how they handled it. Sometimes sellers can gum up the works with unreasonable demands, and homes are not always what they appear to be on your first walk-through. Knowing how your agent handles adversity can help you make the right choice.
  3. Advocacy, advocacy, advocacy. At the end of the day, this is what you are looking for. Someone to look out for your interests, educate you about the process, and advise and guide you through a process that probably involves the largest purchase you are going to make in the foreseeable future.

If you think working with a “Buyer’s Agent sounds like a good idea, we know a great place to start. Take a look at the Agents here at Springs Homes. We are proud of the work these people do and their reviews and testimonials prove it.

Additional Resources: These are 3 additional articles I felt did a great job of conveying the concept of Buyer’s Agency, hope you enjoy them.

Buying a Home / Defining Needs & Wants for Buyers - 11/21/2017
new-home

Why Building Your New Home in Colorado Springs is a Great Idea

Building a New Home

You hear it all the time – the real estate market is booming right now. But this level of activity does bring its challenges. Things are tough all over when it comes to finding existing homes available for sale. And the resale home inventory is especially tight in Colorado Springs.

All of this makes new construction an attractive alternative. Right now, you have access to so many great, quality options when it comes to builders in the region. I’ll introduce you to a few of them – but first, let’s look at what’s happening in the Colorado Springs housing market more broadly.

Lower inventory in resale homes means prices are moving up – that’s simple supply and demand. Those factors are compounded in the nearby Denver market, driving prices higher and bringing some buyers to Colorado Springs willing to get a bit more bang for their buck in exchange for a longer commute.

New Communities in Colorado Springs

These days, much of the new home construction is focused in the northern sections of town.  With the mountains to the west and Fort Carson to the south, the north is where the most buildable land is located – in neighborhoods like Forest Lakes, Sanctuary Pointe, and The Farm.

The aptly named Forest Lakes is a Classic Homes development just south of Monument. It’s a pristine location, with two small lakes, interconnected walking trails, and amazing mountain views. Around the corner from Forest Lakes is Sanctuary Pointe – I’m telling you this area is growing fast! Homes from three area builders are available here – Classic, Saddletree, and Vantage Homes offer a mix of single family and paired patio homes.  An ambitious planned community, The Farm offers homes from half a dozen area builders, and a community gathering place with pool, picnic area and canoe/kayak launch.

What these communities offer is a sense of being close to nature, but with easy access to the vibrancy and amenities of Colorado Springs and Denver.

On the southern end of town, you’ll find Lorson Ranch. With homes starting in the $200,000s,

Lorson Ranch brings the dream of new construction ownership within reach for many more potential buyers.

Richmond Homes has also started construction in the new Mountain Valley Preserve. This is located in the rapidly growing eastern edge of Colorado Springs. Prices in this community will start in the Upper $200,000’s.

Recommended Builders

Over the years, the team here at Springs Homes have helped hundreds of home buyers find the ideal fit in a newly built home. We are fortunate to have several local builders we can highly recommend for their high construction standards and top-notch customer service.

Clearly a standout in the Colorado Springs market, Keller Homes has won “Best of the Springs” home builder award 7 years running. With a real focus on customer experience, Keller seeks to integrate high building standards, a focus on exterior and interior design choices, and energy efficiency.

Vanguard Homes is another builder with a great reputation we love to work with.  Their designs manage a great balance between a classic look without a cookie-cutter feel. And they go out of their way to make each customer feel catered to from start to finish. One of our top agents, Nicole Happel writes: “One of my favorite recent builder experiences was at closing with Vanguard Homes. Typically, builders do not attend closings.  Instead, they pre-sign their docs and buyer is alone at the closing table with me. Not with Vanguard!  The owner, Mark Long, attends all closings.  He engages with the buyer and establishes a personal relationship with them and with me as their Realtor. After the paperwork was signed, he presented my client with a beautiful closing gift and thanked her and me for our confidence in them.  Truly impressive!”

Campbell Homes has a strong business and military relocation program. So whether you are moving to Colorado Springs for a new business opportunity, or taking that transfer to Fort Carson, of Peterson or Schriever Air Force Base, Campbell will guide you through the home buying process and build with their trademark comfort and style.

Another area builder with a solid track record of quality and value is Saint Aubyn Homes. Saint Aubyn builds in several communities including Lorson Ranch and Wolf Ranch. A recent Facebook reviewer had this to say about his experience with Saint Aubyn: “Great community, high-quality homes with exceptional standard options. Mark Ewell and Steve Kandarch will handle your buying experience perfectly. They are experts and made the new home construction process an experience of a lifetime. I can’t recommend these guys enough. Great team! great experience!”

Vantage Homes works with a simple, people-centric philosophy that seems to be working very well for them. A portion of their mission reads, “We are in the ‘people business’ and the product we deliver is homes. Our mission is to be the builder of choice and have fun.” With homes going up in at least seven communities, it seems that Vantage is the builder of choice for many who choose to live and work in greater Colorado Springs. And the fun starts with over 20 floorplans to hit most everything on your new home wish list.

For a true custom home experience, Goetzmann Homes is a clear choice. Brooke Mitchell, a Springs Homes Broker Associate shares, “Phil Goetzmann built my first mentor’s home while I was working for them. I appreciated the attention to detail and multiple meetings throughout the process. Very engaging!”

Pros and Cons of New Construction

New construction has many advantages: New homes are much more energy efficient, with the latest in utilities, mechanical systems, insulation and building materials bringing a level of efficiency it’s hard for resale homes to compete with. You also get more of what you want – your wish list can get checked off more easily when you have a hand in designing your new home. Renovation of an existing home is just not everyone’s cup of tea – why not start off with exactly what you want? Another advantage…fewer surprises after settlement. Your house is under warranty! Everything is brand new – and if something is not right – get it on a punch list and a builder who values reputation will stand by their product and fix problems that may arise.

Disadvantages: new construction does come at a premium. You’ll pay a bit more for the newness factor. Timing can get complicated in new construction. You’re selling your home – but will the new one be finished when you want to move? Short term rental or (*gulp*!) living with in-laws might become a necessity. Also, if you love the feel of an established community, living in a place that is constantly under construction may not be the right fit for you.

For many, many people, the pros far outweigh the cons. And as you can see, there is so much available to choose from in the new construction market here in Colorado Springs. Please feel free to contact us with any questions. We’re here to guide you to the right fit for you.

Additional Resources:

Buying a Home / New Construction - 11/21/2017
water-basement

Sump What? What You Need to Know About Sump Pumps

We’ve had record amounts of rainfall this past summer. Colorado is known for its sunshine, 2nd behind in Florida with nearly 300 days of sunshine a year. However, this past summer was a bit different. In July, 6.23 inches of rainfall compared to our normal 2.83 inches fell (usclimatedata.com). By the middle of August, we already had 2.02 inches of rainfall. That’s .41 inches from the total amount of rainfall we had in August of last year. AND it’s .29 inches MORE than the total rainfall in August of 2015. This last week of September carrying over to the beginning of October brought us more cloudy, Seattle-like weather with grey skies and even more rain

Colorado Springs ended September with 1.6 inches of rainfall. Our normal September rainfall? 1.18 inches.

We can all agree that rain is better than forest fires, so I’m thankful we’ve had a good amount this year. We’ve had a true monsoon season which is typical in these parts during July and early August. Yet, it was more than a typical monsoon season by 3 and a half inches. That’s A LOT of rain for a high desert mountain climate.

So, YAY for rain. It makes “Colorful Colorado” just that — COLORFUL!

The grass is growing with less water from our sprinklers, the trees and bushes are greener, the wildflowers are blooming everywhere, and the red rocks seem more vibrant with all that color popping in and around them. Colorful Colorado is showing up in all its glory. And now we’re enjoying fall with some vibrant, stunning colors throughout aspen groves as far as the eye can see. Lots of rain makes for a stunning fall season around here.

With all this rain it may mean beautiful colors everywhere you look outdoors and lack of forest fires, but it does come with other challenges. Flooding! Which is so hard to comprehend in such a dry climate that we would deal with floods. I grew up in Louisiana, so I totally get floods. Not only would neighborhoods flood anytime there was the smallest of hurricanes, sometimes a bit too much rain on any given day would flood certain parts of town. When you live at a low level, sometimes below sea level, tropical climate area floods are to be expected.

Floods in a High Mountain, Arid Desert? Yup!

In Colorado Springs it has always seemed so strange that anything would flood. I am always using so much lotion, chapstick, eye drops, and other products to keep from shriveling up in this dry climate! How could we flood in such a dry place? Well, it’s our soil. In most of Colorado, we have expansive soils. Basically, the ground here is laced with layers of various types of clay (Homeowners Guide to Soil in CO). This type of soil doesn’t like too much water too fast. It doesn’t drain the water quickly. The water it does take on causes it to swell. And due to our semi-arid climate, usually, a good amount of the water runs right off it like you got a Rain X windshield treatment. Then that runoff follows the path of least resistance and piles up somewhere. And wherever that somewhere is…well, it causes floods and expands the soil in that area. Bottom line…

Too much water too fast…NOT a good thing.

That brings us to the actual topic of this post. Sump pumps. With all the water that has accumulated around your house’s foundation in July, August, and September, it is a critical part of protecting your home from water damage and maintaining the structural integrity of your home.

What is a Sump Pump?

A sump pump removes water that has accumulated in a water-collection system’s basin. And it’s a key component to protecting from water damage not only in your space and personal items located in the lowest level of a home but also critical to the protecting your most important structural feature in a home — your foundation. What does that word “sump” mean?

Sump. That was a funny word to me for a long time too. In this context, “sump” refers to a low area that collects unwanted water.

Kinda like swamp…but sump. Low area that collects water. 

How Does a Sump Pump Work?

The sump pump system located in a basin at the lowest level of your home. Usually, you find the basin in a crawl space or basement. As we covered above, the sump refers to the low-level area. In that basin, you’ll find the pumps. Comprised of the main and a secondary backup pump, the sump pump is part of the overall water collection and removal system.  These pumps in the basin, remove all the water collected in the basin from the drain pipes or tiles located around the perimeter of your home’s foundation.

Your main sump pump runs off of an electrical connection. The pump has a dedicated electrical connection or plugs into a wall outlet. It sits in the bottom of the water-collection basin, and when the water level gets high enough a switch is triggered. The most common trigger is a float switch. Once triggered, it pumps water out of the basin through the discharge pipe outside to a safe point away from your home. There should always be a check valve on the discharge pipe to make sure water only runs in one direction — out.

Any sump pump system should include a battery backup. This is critical! It’s not a matter of if but when your main pump will have some sort of failure. The primary pump can fail due to a switch failure, main pump clog, main pump dies, or loss of electrical power. And that last reason the main pump could fail is all too common during storms when you’re getting the most amount of rainfall accumulating in your water collection system. It has its own trigger switch, discharge pipe, and check valve.

Again, your sump pump system is NOT complete without a battery backup pump.

Why Are Sump Pumps Are Important?

Protecting your home from unwanted water in and around the foundation is CRITICAL! And, of course, no one wants water to get in their home causing damage to walls, flooring furniture, personal belongs, etc. And here in Colorado, water accumulation in the soil around your home affects the expansion of the ground which impacts your foundation and the structural integrity of your home.

There are many important choices a homeowner can make to protect your home from water damage. Sump Pumps may be at the very top of that list!

If you have any other questions about sump pumps or other ways to protect your home, please contact me! As your neighborhood Realtor, I’m not only interested in helping you buy or sell a home, I want to make sure you are an educated Buyer and have your eyes open during any real estate transaction.

Home Inspection & Appraisal for Buyers - 11/21/2017
inspection

What You Need to Know About Appraisals

Congratulations, you have finally found the house you wanted! But you should ask yourself one question before signing all the paperwork, is the house you are planning to buy really worth the money you will invest? Can’t decide?

The asking price on the house is an amount which your lender has already approved, so you probably won’t have any issues with the mortgage. Actually, this is not always true, and there are instances in which you can have an issue getting a mortgage if the investment is not worth the approved amount. In such a case, the lender will provide you with a lower loan amount or none at all.

The situation may seem a bit complex, but this is exactly why you need a mortgage appraisal. Once you go through this process, you will find out the true worth of your house to be, and accordingly, you can make a decision on whether the purchase is a smart decision or not.

A home appraisal is a process in which an expert evaluates the house, performs a thorough analysis and then determines the worth of the home. The appraiser is hired by the lender through an Appraisal Management Company or the AMC, but you will have to bear the costs. Once the results have been prepared, they are reviewed, and accordingly, the deal is finalized.

The lender orders an appraisal when you have a house ‘under contract’. Your Realtor will establish a value of the house by performing a Comparative Market Analysis or CMA.  Negotiation is carried out on the offer and a written contract is prepared. If this is accepted, it is sent to your lender, who then gets in touch with an AMC and appoints an appraiser.

Purpose of an Appraisal

The main purpose of a mortgage appraisal is to determine the value of the house which you plan to buy. The process does incur fees, and you will have to pay them, but you should still get a home appraisal conducted considering the magnitude of the overall investment. By doing so, you will know that you are not paying an unfair amount of the property. Your lender will also be sure that they are not lending you excessive amounts, which may eventually lead to a foreclosure should you default on the mortgage.

In other words, a mortgage appraisal protects both you and the lender by ensuring that the deal you are about to finalize is indeed, worth the invested amount.

Types of Appraisals

A mortgage appraisal can be conducted by many methods, but two of them are popular. One is the sales comparison approach and the other is the cost approach.

The Sales Comparison Approach

In this method, the appraiser will compare the home with a number of other homes that are of the same size and located in the same locality. These are referred to as the comps or the comparables.  While comparing, many factors are considered such as the area, amounts of finished and unfinished space, age of the house, design features, kitchen styles, garages, fireplaces, and so on.

The Cost Approach

The Cost Approach method is primarily used to appraise new property. The appraiser will figure out an amount which will be required for reconstructing the home if it was completely destroyed. The analysis is also based on other things such as depreciation and land value. Accordingly, an appraiser determines the true worth of the house.

The Appraisal Process

When you decide the house which you want to buy, you get it under contract. This means that your Realtor performs a Market Comparative Analysis or CMA, and determines the value of the property. Using this, an offer is made and negotiated, and then a written contract is prepared. Once accepted, this is sent to your lender who then orders an appraisal through an AMC.

The appraiser will then visit the home to initiate the process. During that time, your presence is not mandatory but is still recommended so that you can get better insight.

Here are the main steps of the process.

  • The appraiser will perform a visual inspection of the home and assess its condition. He will note down details such as the construction quality, number of rooms, floor plan and the design. If there is any need of repairs or improvements, you will be notified and also provided with an estimate of the costs involved.
  • The appraiser will take photos of the property for record purposes, and conduct necessary measurements of the floors.
  • The appraiser will analyze the neighboring area and if any amenities are located nearby such as a park, shopping mall or hospital, they will determine their influence on the home’s worth.
  • The appraiser will get in touch with the local planning department or another governmental body, and determine the zoning rules and taxes for the property. This information can be used for figuring out the highest and best use, which serves as critical data in the home mortgage appraisal process.
  • All appraisers have access to a lot of data, which they get from agents and brokers. Using these resources, an appraiser will determine the average value of homes in the locality and go through recent sales report. In this step, the MLS and legal data of your chosen home is also reviewed.
  • The appraiser will then use any of the above methods to determine the worth of the home and will prepare a report. This will include a summary of the method, a review of the house’s conditions and the improvements that were carried out. The report will also contain details of problems such as cracked foundations and wet basements, a summary of market trends and their effect on the property and a complete analysis that will support the results. Maps, sketches, and photographs are also included for reference.
  • A copy of the report is sent to the lender.

The Appraisal Outcome

A home appraisal can have two results; the asking price is equal to or less than the appraised value or the asking price is more than the appraised value.

In the former case, the sale can proceed as per the plan. But what if the appraised value is lower than the amount which the seller demands? Should this be the case, the lender will not provide you with a big enough loan.

There are a number of options which you can take to deal with such a situation.

  • Negotiate with the seller and convince him to drop the price.
  • Pay the difference in amount yourself.
  • Have another appraiser go through the process one more time.
  • Forget about that home and search for another one.
Buying a Home / Home Inspection & Appraisal for Buyers / Home Inspection & Appraisal for Sellers / Selling a Home - 11/20/2017

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