Congratulations, you are among the millions of Americans who choose to nurse their New Years Eve hangover by searching for homes online. In fact, New Years Day ranks among the top three most active days for people to search for a home online, along with July 6 and the weekend after Thanksgiving.
Question: We are planning to buy a home in the DC area sometime in the next 12-24 months and want to make sure we take that time to prepare. What should we know before buying a house that we can get started with now?
Answer: Whether you’re a first-time buyer, experienced buyer relocating from out-of-state, or moving locally here’s a list of things I review and plan out with clients before getting into the full swing of house hunting:
Local Customs, Requirements, Timelines, and Contracts
The home-buying process varies greatly across and within states. I think the most important thing you can do as a buyer is take an hour at the beginning of your buying process to become educated on the process, timelines, and key contractual terms/obligations in the area(s) you plan to search. This is also a good way to meet and vet different real estate agents early on to get a feel for who is willing to spend time with you up-front on education and planning vs pushing immediately for a sale.
Choose the Right Financing, Get Pre-Approved
Not all lenders offer the same loan products so it’s important to identify a lender who not only provides high quality service, but also has access to loan products that fit your profile (down payment, credit score, job industry, etc). Real estate agents, friends, and co-workers are all great sources of recommendations.
You’ll also want to get a pre-approval from at least one lender, one that actually reviews and verifies your financial documents, income, and employment instead of just running credit and reviewing an information sheet. This will decrease the chances of you being rejected from a loan, allow the lender to provide the most accurate recommendation, increase your leverage in contract negotiations, and reduce the amount of work required of you once you’re under contract.
Don’t Forget A Monthly Budget
I find that most people qualify for more than they actually want to spend, especially dual-income buyers, so budgeting is important. The biggest mistake most buyers make is budgeting strictly around the sale price, which is often driven by the amount you have for a down payment. It’s just as important to set a monthly budget for total housing expenses including mortgage, taxes, insurance and if applicable Association fees and/or mortgage insurance. Your lender can help you project monthly expenses at different price points based on different down payment amounts.
Do You Want Representation?
Determine if you want to have a real estate agent representing you in the transaction (breaking news…I highly recommend it) and, if so, what level of service you’re looking for. In most cases, the seller pays commission to their representing broker and the buyer’s broker, so representation often comes at little or no cost to buyers.
Push Yourself on Your Criteria
It’s very easy to come up with your top 3-5 criteria for a home and rare for most couples to disagree on the short list, but push yourself/yourselves to rank your top 10-12 criteria. This list can and will change as you search for homes, but it pushes you to think about more than bedroom count, schools, commute, and an open kitchen. This is especially valuable for couples. Just because you have the same taste in music, food, and TV shows that brought you together, doesn’t mean you’re on the same page about housing criteria.
Cash Needs + Savings
You need cash savings to pay for your down payment + closing costs of 2.5-3% of the sale price (in the DMV). Within a few days of your offer being accepted, you’ll have to transfer 1-5% (negotiable) of the sale price into an escrow account as deposit to secure the sale. You’ll spend about $1,000 out-of-pocket between contract and closing on inspections and the appraisal. Don’t forget how expensive moving is either, so keep enough savings for incidental moving expenses, new furniture, painting, etc. You should aim to haver 3-6 months of emergency savings tucked away after everything is paid for.
Other Key Providers
Most buyers are familiar with the role real estate agents and lenders play in the transaction, but don’t forget about the importance of working with a quality title attorney and home inspector. Your agent should be able to make a great recommendation.
How Long Will You Live There?
This is probably the most underrated conversation for buyers to have when they’re setting a budget and determining criteria. Your home-buying strategy should look very different if you’re planning to own for 3-5 years vs 10-12 years so give it serious thought and be realistic.
Deadlines and Lease Terms
Figure out if you have any strict deadlines for the move and iuf there are direct or indirect costs of buying before or after that deadline. It can be difficult in a low-inventory market to time a purchase, so make sure you’re aware of the pros and cons of purchasing before or after your deadline. If you’re renting, make sure you find out the cost of early termination or if month-to-month leasing is an option.
Reason for Your Purchase
I still haven’t met somebody who asks for a bad investment when they buy a house, everybody wants their home purchase to be a great investment, but you have to define what a great investment means to you. Does it mean your home appreciates in value well above the market over a certain period of time? If so, you’ll likely be in under-developed areas or in a house nobody else wants. Does a great investment mean you wake up every morning so happy with your home and neighborhood that the money is a secondary concern? I often remind clients that sometimes the best investment is buying a house that allows you to live there longer and eliminates one or more real estate transactions in your lifetime. In other words, the value you get out of being in a home for 10 years vs 3 years far surpasses a small increase in your budget.
I hope this list is helpful not just for local DC Metro readers, but for anybody getting started with their home search and wondering what you should know before buying a house. These are the conversations and steps I take with my clients every day to make sure they’re prepared, educated, and have the right strategy in place before we even step foot in a house together. I’m sure I left a few things off this list, but this should get you 95% of the way there. Feel free to give me a call or send me an email at Eli@EliResidential.com for the 5% I missed.
Question: A few of our friends who bought homes recently told us that we should expect to use an Escalation Clause/Addendum when we make an offer, if we want our offer accepted. Is that your experience and is there a better way of making a competitive offer?
Answer: I thought this would be an appropriate follow-up column to last week’s columnon the dangerously under-supplied housing market and it’s also become a frequent topic of conversation with clients.
With so much competition for hard-to-find homes that have just come to market, it’s critical for buyers to understand the purpose and risk/reward of using Escalation Clauses/Addendums in their offer.
Please note that this column is specific to contracts in Northern VA; Maryland and DC contracts vary in language and use.
What Is An Escalation Clause/Addendum (EA)?
An EA allows you to make an offer at a starting price while agreeing to increase your offer to a higher price if another offer is higher than yours. It includes a ceiling/maximum escalation value and an escalation factor, the amount your offer will increase by, over the next highest offer.
The contract allows for the seller to execute a purchase contract (ratify) at an escalated value, without the buyer having to agree to the new price. However, to protect buyers, the seller is required to deliver the next highest contract that was used to escalate your offer.
That other offer must also be materially similar, meaning the other offer cannot include seller credits or a material difference in contingencies (e.g. the other buyer has to sell a home before buying this one).
When To Use an EA
EAs are best used when there are multiple confirmed or expected offers and the seller has set a deadline, asking for best-and-final. It is very common in our market for sellers to set an offer deadline after their first full weekend on market and often those deadlines are set with the expectation that all offers will be best-and-final and the seller will make a decision shortly after the deadline, without any back-and-forth with buyers.
Buyers are often skeptical of this practice and assume that sellers will come back for more negotiating anyway, but in my experience, most sellers stick with the plan and a buyer who leaves something on the table is often informed that another offer was selected.
Managing the Risk & Reward of an EA
Used correctly, EAs allow you to maximize the chances of your offer being selected, without grossly overpaying relative to the rest of the market. It allows you to offer as much as you’re willing to pay for a home, without actually committing to pay your maximum if nobody else in the market values the home as much as you do.
In my experience being on both sides of the transaction, and speaking with colleagues, the winning offer in a multiple offer bid almost always includes an EA, however, the winning offer escalates all the way to its ceiling only about half of the time.
The clear risk to you is that you’re exposing the highest price you’re willing to pay to a seller and if there aren’t other offers that justify automatically escalating your offer, the seller may attempt to simply counter your offer at a number equal to or close to your escalation ceiling.
There are things both the seller’s agent and buyer’s agent can/should do ahead of accepting/offering EAs to avoid a potential messy situation where this occurs.
As the buyer, you should think about how you will respond if the seller attempts this. I have had (buyer) clients walk away from a deal when this occurs, leaving the seller with nothing or a much worse offer, but have also had (buyer) clients thrilled to be countered at a price below their escalation ceiling, even if there weren’t other offers to support it.
- EAs have become common-place in the market
- EAs should be used when there are confirmed or expected multiple offers and a deadline has been set by the seller
- EAs help the seller get the best price and allow buyers to maximize their chance of securing a home without grossly overpaying relative to the market
- EAs carry a lot of risk and reward, so be sure to understand them before including one in your offer
If you are thinking about getting into the market for a home purchase and would like to discuss strategies that will help you maximize your chances of a successful home purchase, without exposing yourself to unnecessary risk, feel free to reach out to set-up a meeting with me. You can reach me any time at Eli@EliResidential.com.