FREQUENTLY ASKED BUYER QUESTIONS
What should I expect from my BUYER AGENT? (See answer above in "Why should I use a REALTOR®?")
If using a buyer agent is free, why not use more than one agent? This means more agents working for me, right?
Although I have not had many people ask me this question directly, I have observed many buyers who work under the assumption that using many agents must be a better idea than using just one. Many buyers—particularly first time buyers—simply don’t realize that they can rely upon just one Realtor® to take care of everything. Here’s a common scenario to illustrate how a buyer might end up working with numerous agents:
What the Buyers failed to understand (and what agents sometimes fail to explain) was how buyer agency works. Firstime and Clueless had no idea that they could work with just one REALTOR® who was a member of the Multiple Listing Service to see all the homes on the market. Once each agent realized that the Buyers had been working with many agents, they lost interest. From an agent’s standpoint, the Buyers were not likely to result in a commission. From the Buyers’ standpoint, they lost out on valuable representation and on the opportunity to develop a relationship of trust with one REALTOR® who could have been a tremendous help during their home purchase.The Buyers, Firstime and his wife Clueless, have never purchased a home before, and they have never worked with a REALTOR®. Once Firstime and Clueless decide they should buy a house, they begin watching the newspaper for advertisements, and they begin dutifully visiting open houses. As the Buyers visit open houses, they meet different agents each week from many different companies. One fine Sunday afternoon, the Buyers visit an open house, hosted by Sammy Salesman from RELAX Realty. Sammy is very friendly and offers to take the Buyers out to look at other homes. A few days later, Sammy schedules an appointment with the Buyers to show them other homes. Sammy does not realize, however, that the Buyers have been going out on similar appointments with many other REALTORS® whom the Buyers have met at other open houses.
Eventually, all the agents who have invested time with Firstime and Clueless discover during conversation that the Buyers have other agents working for them. The Buyers start noticing that agents do not return their calls promptly anymore (and some agents don’t return calls at all). When the Buyers have questions, they discover that all the once friendly agents no longer pay much attention to them or their questions. The poor Buyer couple doesn’t know what happened. Alas, Firstime and Clueless finally buy a house that Sammy showed them, using a loan broker that Amanda Agent had recommended and a home inspector that Horis Homeseller had suggested. Firstime and Clueless finally purchase their home without representation, going directly through the listing agent instead.
Since the Buyers had no representation, they paid full price. Since the listing agent works only for the seller, he did not volunteer that a nuclear waste dump was to be built the following year behind the Buyers’ new home. When the house purchase was finally complete, the Buyers felt disappointed. The entire transaction had been an ordeal; the Buyers would both be glowing in the dark once the nuclear waste dump was complete; and they were left with a bad impression of REALTORS®.
A consumer who allows numerous agents to invest time in him is like a restaurant customer who demands to have several servers wait on him, while only paying a one-server tip. One good server (just like one good REALTOR®) could have taken excellent care of the customer and would have been fairly compensated for his work.
Once I find a home that I like, how do I know how much to offer? Buyers should never pay full price, right?
After investing a great deal of time and effort to find the right home, many buyers find themselves paralyzed with indecision when it comes time to make an offer. Buyers commonly dread the thought of buying a home (or any other major purchase), only to wish later that they had waited a little longer or bargained a little harder. On the other hand, many buyers realize that a home good enough to appeal to them will certainly attract other buyers, too. By waiting too long or holding out for too low a price, buyers can very easily lose a house to someone else who is willing to act more quickly.
Having a good buyer agent working for you can make a big difference in this situation. Your agent can help you evaluate several major factors that should influence the amount you decide to offer and/or pay. With a Comparative Market Analysis (CMA), your agent should be able to show you:
- How much other similar homes in the area have sold for recently;
- How long homes in the area typically stay on the market; and
- The ratio between average list price and average selling price for homes in the area.
SHOULD YOU EVER PAY FULL PRICE? Understandably, buyers want to find a bargain. Often, this means attempting to purchase a home for less than the list price. While buyers can frequently (but not always) negotiate a purchase price that is slightly below the list price, paying full price (or even more than full price) can sometimes be desirable. (Really, I’m not kidding!) Here’s an example of one such situation:
Under certain circumstances, I’ve recommended that my clients pay above list price when it is to their advantage. This can be advantageous if the buyers can get the sellers to pay points (i.e., buy down the interest rate on the buyers’ loan), or if the sellers agree to provide cash back at closing to pay for improvements (e.g., replacing carpet or new siding). In these instances, the buyers pay slightly more than they otherwise would have, but they get something of value in exchange.Ben and Eileen Dover have been looking for the right home for their family for months with the help of their REALTOR®, Larry Loookout. Larry contacts the Dovers one day to let them know that he’s found a brand new listing that meets the criteria that Ben and Eileen have discussed with him. Larry knows from his familiarity with the neighborhood that the home is priced very attractively and that it definitely won’t last long on the market. Larry schedules an appointment the very next day to show the house to the Dovers. After looking the house over carefully, Ben and Eileen are in love, and they want to make an offer.
Larry finds out from the listing agent, Amanda Agent, that the house has already been shown by several other REALTORS®, some of whom have brought their buyer over more than once. After performing a CMA for Ben and Eileen, Larry Lookout shows them that the house is priced very well—slightly below what most other homes in the neighborhood have been selling for recently. Since the Dovers are in love with the house and don’t have an acceptable second choice, Larry recommends an offer of full list price. Ben and Eileen get the house of their dreams! Even though Larry didn’t brow beat the listing agent for a lower price, Larry knows that his clients got a very fair price. Ben and Eileen were even more thrilled with their decision when they found out that the sellers received another good offer just a few hours after accepting the offer from the Dovers.
If you have a buyer agent whom you trust, your agent should be familiar enough with your needs and priorities to recommend an appropriate offer for your situation.
Will you show me all the homes that meet my criteria, or are you biased toward your own listings?
When I represent buyers, I commit myself to working in their best interests. I will provide them with information and show them any home that meets their criteria—whether the listing belongs to me or to a competitor. In general, I do tend to show buyers more Coldwell Banker Devonshire listings than anything else. Here’s why: My company has a market share of more than 50% in the Champaign County area. Even if I pick listings at random, odds are that there will be more listings from my company than from any other company. Additionally, many of the agents from my company go on a "caravan" each Tuesday morning to check out new Coldwell Banker Devonshire Realty listings. Because I see most of my company’s listings as they hit the market, I often show my buyers any homes that strike me as particularly desirable or well suited for them.
How much house can I afford?
(Added July 4, 1999)
Since most prospective home buyers do not wish to set themselves up for financial ruin J, it is important to determine how much house you can afford before getting too far into the house hunting process. The two most important questions to answer are:
- How large a mortgage do I qualify for, and at what rate and terms?
- How much do I feel comfortable spending each month?
When my wife and I purchased our first home, the entire mortage lending process was a mystery to us. When we sat down to go through the financial pre-qualification process with the loan officer at a local bank, we had no clue about what sorts of mystical formula the bank used to determine how much we could afford. He asked us several questions about our debts, income, and credit. While we answered the questions, he scribbled furiously onto a legal pad. When he was done, he sent us home with a photo copy of the page from the legal pad. Even if the writing had been legible (and it was nowhere close to legible), we never could have figured out how he arrived at the maximum purchase price we could afford. In an effort to save you from this same confusion, I will try to provide you with a detailed--but simple--explanation mortgage lending guidelines.
Although rates and closing costs will vary somewhat from one lender to the next, all lenders will use the same uniform guidelines for determining your ability to qualify for a conforming conventional mortgage. Here they are in a nutshell:
Provided that you have a good credit history and adequate down payment funds, you will qualify for the purchase of a home with total monthly costs as high asNow, aren't you glad that I clarified that for you? J Let me try to make sense of these guidelines for you:1. 28% of your gross monthly income
--OR--
2. 36% of your gross monthly income less all monthly debt payments--whichever is less!
If you are completely debt-free or have only minimal debts, it stands to reason that you should be able to afford a larger house payment than someone with the same income but who is saddled with a bunch of monthly debt payments, right? RIGHT! After all, you have more of your income available each month to spend as you please (i.e., discretionary income). That's where the 28% rule (also known as the "font-end ratio") comes from. Modern mortgage lending guidelines assume that you will need to spend most of your income on required expenses, such as food, clothing, insurance, utilities, taxes, etc. Keeping this in mind, lenders figure that you should be able to afford up to 28% of your gross monthly income (before any taxes or other deductions) for your housing payment, while still having enough of your income available to pay your other bills. For example, Danny Debtfree has no debts and has a gross monthly income of $3,000. Therefore, Danny qualifies to spend up to $840 per month (28% x $3,000) on housing.
If you have all the normal required expenses, PLUS you have quite a bit of debt, then lenders figure that you can afford to spend up to 36% of your gross montly income on all of your debts and housing expenses combined, while still meeting your other financial obligations (also known as the "back-end ratio"). This means that to determine how much you can afford for your house payment, you must calculate 36% of your gross monthly income and then subtract out all of your other monthly debt payments. Here's how that might look for a typically borrower:
Carrie Credit earns a gross monthly income of $3,000 (just like in the debt-free example above). Unlike Danny, however, Carrie has several debt payments that she must make each month:
|
A store credit card with a minimum payment of |
$75 |
| A car loan with payments of | $250 |
| Student loan payments of | $60 |
| A Visa card with minimum payments of | $100 |
| Total Monthly Debt Payments | $485 |
You may have noticed that the person with no debt could actually be at a disadvantage. Even though Danny Debtfree has no debts, he is still not allowed to spend the entire 36% on his house payment--only a maximum of 28%. If you do some arithmetic, you'll see that Danny could spend up to 8% of his gross monthly inome on debt payments and still qualify for the 28% maximum housing payment. Basically, these mortgage lending guidelines figure that--regardless of your other debts--your housing budget should not consume more than 28% of your gross monthly income.Since Carrie is not debt-free, she must calculate her maximum affordable house payment using both formulas--taking whichever result is less. Carrie's maximum affordable house payment is figured as follows:
Back-End Ratio
36% of $3,000 gross monthly income = .36 x 3,000
= $1,080 Less total minimum monthly debt payments - $485 Total Allowable Housing Payment $595 Front-End Ratio
28% ir gross monthly income = .28 x $3,000
= $840 Since traditional lending guiedelines require using whichever formula produces the lesser amount, Carrie would be able a maximum total house payment of $595.
Before moving on, here are some other factors to keep in mind:
The fine print: The material on this page is intended for example purposes only and is not a commitment for financing. These guidelines are intended for use on primary residences. Your mortgage amount and price range will vary depending upon the size of your downpayment, the specific terms of your loan, other monthly obligations, and the amount of association fees, if applicable.
If you receive child support, you can probably count that as additional income. If you pay child support, you'll either have to deduct it from your income or count it as a monthly debt payment.
Special loan programs--especially those designed for first-time home buyers--may allow for "expanded ratios," meaning that they might allow you to spend more on your house payment than conventional mortgages allow. Be careful, however, not to overextend yourself financially with such programs. Regardless of how much a bank is willing to lend, you mus be certain that your house payment fits comfortably within YOUR budget.
Total Monthly Payment Defined...
Your total monthly housing payment consists of more than just your mortgage payment. Your total payment has four parts, which banks often refer to as "PITI." Those four parts are:
- Principal: the portion of your payment that actually reduces the size of your total debt on the property.
- Interest: this portion of your payment represents the cost of the money that you borrowed to purchase your home. Remember that this type of interest is not necessarily bad, since most homeowners can deduct all interest payments on their primary residence from their taxable income.
- Taxes: The monthly amount that must be budgeted (or paid into an escrow account at the bank) to pay the property tax bill for the property, equal to 1/12 the annual tax bill. This portion of your payment is tax-deductible, too!
- Insurance: The monthly amount that must be budgeted (or paid into an escrow account at the bank) to pay the annual homeowner's insurance bill for the property, equal to 1/12 the annual insurance premium.
Turning Your Monthly Payment Into a Purchase Price...
While it's a real thrill to know your maximum monthly payment (so thrilling that I can barely type J), it's an even greater thrill to know how expensive a home that monthly payment will let you buy. To figure this out, there are three basic steps:
The trickiest part of this process is turning your maximum affordable principal and interest payment into a mortgage amount. It requires a somewhat complicated financial function that you can see derived here. For people who are not math or finance junkies, use this online calculator to automatically figure out how much house you can afford. When you access the online pre-qualification calculator, here are some good sample values to use for some of the fields:
- Figure out what portion of your payment will be required to pay for taxes and insurance.
- Calculate your maximum mortgage amount, based upon current interest rates, loan term, and the amount of your payment left for principal and interest (the mortgage payment portion of your total housing expense).
- Add your available down payment to your maximum mortgage size.
Now that you understand how the banks determine how much you are allowed to spend, let's consider how much you should spend. The answer to this question is a very personal one that you will have to decide for yourself. If you have no kids, few debts, and you anticipate that your income will rise each year in the future, then you might feel perfectly comfortable with the largest mortgage payment the bank will allow. On the other hand, you might have kids, be maxing out your 401(k) at work or your IRA, and be saving for a major purchase (other than a house). If you have many other financial obligations, you may not feel comfortable spending even close to what a lender is willing to loan you. Be sure you spend some time getting a good feel for your total financial status and outlook before getting married to an oversized house payment for the nest 30 years!
- Annual Income: Note that this asks for an ANNUAL figure, not monthly.
- Monthly Debt: Note that this requires a MONTHLY figure.
- Property Tax Rate: For the Champaign County area, try using 2.5. This corresponds with an annual tax bill of $2,500 for a $100,000 house, which should provide you with a conservative estimate of your projected annual tax bill.
- Home insurance rate: Try using .35 for a good conservative estimate. This corresponds to annual premiums of $350 per year for a $100,000 house.
- Since market rates for home mortgages change from day to day (and even within an individual day), I will not suggest to you an appropriate figure here. Just remember to be realistic; you do not want to set yourself up for disappointment.
If I buy a house, how long do I have to live there before I can expect to at least break even when I sell?
This question is critcally important for many buyers, particularly here in the Champaign County area where the average home turns over approximately every seven years. If you would like to own your own home, but you aren't sure you'll be here for many years, then you should carefully analyze a home purchase scenario versus simply renting for the amount of time you anticipate staying in the area. The answer to which choice--renting or buying--is best for you depends on many factors, including:
- the length of time you anticipate living in that home;
- the rate of rent inflation,
- the rate of appreciation for homes in the area,
- whether or not you are eligible to itemize your deductions on your federal tax return, and if so, your marginal tax bracket %;
- mortgage interest rates and property tax rates in your area;
- the amount that you will have to spend when you sell your home in the future;
- and the amount of anticipated insurance and maintenance expenses
Based upon recent trends in the Champaign County area, you can generally expect to at least break even if you purchase a home and own it for at least 2 - 4 years. In some cases, I have helped buyers purchase homes which have appreciated far faster than anticipated. In those cases, those buyers enjoyed enough appreciation that they could have broken even within a year! Of course, if this subject makes your head spin, please email me. I'll be happy to answer any questions that you might have!