Recently, the paperwork in the Real Estate got a facelift not just to facilitate the process of financing property sales, but in an effort to hinder mortgage fraud. Like in any big enterprise, there are a few bad apples in the market that buy homes under the pretext of occupying them, only to flip the property and turn it into a rental as soon as the ink is dry. To avoid giving the appearance that you are trying to scam the lenders, and to ensure both sellers and buyers are educated about the process, I wanted to use my recent experience as an example of what to look for and what not to do.
1.The power of the pre-qualification letter:
If you are buying, make sure you already have an approval letter from your preferred lender that clearly states how much you can borrow and how much down payment you are willing to offer. Why? Sellers are often disappointed when a property falls through during escrow because the prospective buyer could not secure a loan. Depending on the area, many buyers could be considering cash or rental property financing which will require at least a 20% down payment. Those offers will result in a better deal for the seller.
2. Owner Occupied to Rental Unit ratio:
The problem with buying a home and later renting it, barring any mayor circumstance that forces you to do this, is that it creates a condition in which future lending to those attempting to acquire a property in your community or Home Owners Association/Condo, could be hindered if 50% or more of the units are not owner occupied. Some people buy the home, live in it for 6 to 12 months and then proceed to rent the property, but if enough people do this, you could face a situation where you cannot sell your home to a buyer soliciting a conventional or FHA loan. Most HOA public offering statements will have clauses prohibiting a certain number of units to be rented out, forcing you to sell it if you didn’t qualify for relief. When you decide to sell your home, make sure you know if the community has a good healthy ratio that will not be tipped over by an investor. This can not only delay the loan approval process but can result in losing a strong buyer because everyone in the community is renting.
3. Be prepared to make an offer after viewing a property and take all the stakeholders to the open house:
If you wait to long, most properties will have multiple offers to consider and as a buyer, you may end up overpaying for a property if you get into a bidding war. Have multiple choices when seeing properties and have your pre-approval letter ready to show the seller you are serious and not just an onlooker. Successful sellers list the property and post enough pictures to create intrigue, showcasing the best features of the house and pricing according to the average market price for the area where the house is located. Ask for too much and your house may sit for a while without any offers. Ask for too little, and you will lose the opportunity to make top dollar for a property, even if you think it is not worth the price. A good appraisal will quell any doubts about the subject and will ensure you get what you deserve.
4. If you are in a hurry to move in or move out, ask if the seller can or is willing to rent you the property during the last month of escrow:
Friends and acquaintances have mentioned that they rented the listed property to the prospective owner while the loan approvals and escrow cleared. If you are interested in following this path, have the listing agents negotiate a contract and a price that works for all parties. For a seller, this may reduce or help ease the burden of paying closing costs since the buyer will have to give you some money up front to cement the deal, just in case escrow falls through. This would secure some income to pay for the next property, especially if the new purchase is contingent upon sale.
5. Contingent upon sale offers are usually overlooked by sellers:
If you need to sell your home to purchase a new one, you are better off selling your property and then buying the new one. Unless it is new construction or the seller of your new home is patient and willing to cooperate, most will prefer to sell to someone that already has secured the financing and the down payment. Not having the burden of the old loan can help your credit score and income to debt ratio, which can result in better financing deals. As a seller, be prepared to negotiate closing dates in case of contingencies occur and if you don’t feel comfortable, don’t accept the offer.
6. Ask, ask, ask and don’t sign anything until you are satisfied with the answers:
If you don’t understand a term, don’t agree with a clause, or if there are maintenance items that need to take care of, do not sign the offer acceptance letter, inspection paperwork or any going ahead materials. Regardless of how good the inspection was or how nice the buyers or sellers are, take your time and read through all the materials. Unless financing failed or a force of nature struck, you would be stuck with the transaction and any additional costs that may incur.
7. Remember to print all documents or save them in reliable digital storage:
Digital documentation is everywhere. Back in 2006 when I bought my primary residence, documents needed to be signed and faxed, and if you were lucky scanned and emailed. Now, there are multiple tools like Authentisign and encrypted drop boxes in cloud access that are used to download, print sign and upload or electronically sign that are even smartphone accessible. Create a file on a secure drive or print out and store in a fire and waterproof safe. At the very least, make sure you keep all the relevant documentation together and take it to the escrow signing meeting to verify that the information hasn’t changed due to underwriting errors or conditions. Most sales are transparent but some lenders get creative with last minute fees.
8. Closing cost estimates will contain items that have to be paid in advance of closing:
Appraisals, certificates of sale, inspections and property questionnaires need to be paid upon request. The money will not be taken out of the escrow Earnest Money payment, which is the good faith cash advance to show you are serious about the transaction. Some of these items can fall under the responsibility of the seller if negotiated ahead of schedule. Always have at least 10% more money set aside for last minute fixes or additional documentation depending on the lender or community/HOA.
9. Be patient:
After many last minute surprises, loan documentation issues, new rules and regulations, underwriting hiccups and closing date changes, I can tell you that the best advice people gave me was to stay calm and be patient. Don’t snap back at people; work with your loan officer and realtor to get things cleared and flowing. Everyone wants to get you into your new home. Follow the guidelines and answer requests quickly for a better success rate. Flipping desks or throwing chairs won’t help your case. When in doubt, solicit the help of the appropriate professionals.
10. Make sure all keys, garage door openers and HOA instructions are ready to be handed off upon closing:
Both times I bought properties the keys were missing or incorrectly labeled. I had to wait for people to show up with master keys to access the dwelling. Because you need to set up utilities and pick up mail, it can be a nuisance and inconvenience to have to wait for keys to be made and/or delivered. If you can, change the locks as soon as you move or ask for new hardware as part of the deal. This way no one but you can access the property.
11. Thank your loan officer and realtor by leaving a great review on social media:
Yelp. Facebook page. Yellow pages. The works. Find as many places as you can to praise your home buying or seller team. This helps other people find good services, especially when they are new to the area or the process. Be specific about how the helped or about what distinguished them from other professionals. An excellent review ensures they will get clients and referrals for future work. Always sponsor what you like so their business prospers.
Good luck an enjoy your new home!