Early last year, my wife and I tentatively stepped into the housing market here in Southwest Florida. We'd been saving for a down payment for a few years, and we felt we were getting close. Our process began with some simple searches on Trulia and some other real estate sites, looking around the area where we were renting.
When we had found a few properties we were interested in, I asked my wife to check with her friends on recommendations for realtors so that we could arrange some showings. My wife participates in a local Mom's club, and we found our realtor team through there, The Fagan Team at John R. Wood realtors. Initially we had 2 or 3 properties to look at, mostly in and around the neighborhood we were in, and we set out on a beautiful Saturday morning to take a look around.
That first morning, we only found one property we were in love with. The home was vacant, but it's price was still about 15% above the market in our opinion. We wouldn't have been able to cover 20% down at the time, and while we were in love, we had to walk away for the time being. Less than a month later, we had a bit of a windfall money-wise, and the house was in our reach - however, the owners had taken it off the market and rented it out by then. We would quickly learn that such coincidences are commonplace when you're house-hunting, especially the first time.
What prompted our house hunting was the discovery of a house right down the street from us, which in our opinion was listed about 10% less than market value. When I contacted the realtor for that one, I was told that they weren't showing it to anyone who wasn't prequalified (for a mortgage) or buying with cash. By the time I had prequalified, the house had gone into contract, and ultimately sold for about 5% less than the asking price. We were shocked, but motivated - if someone else could buy that house, maybe we could find one just as great.
After our initial disappointments, I told our realtor that for the moment, we were going to step back. When you buy a house, you need to consider a great deal more than having the down payment and the monthly mortgage. Three other very pricey numbers come to the party, and most of them are non-negotiable.
Can We Afford It?
If you're in the market for, say, a $250,000 home, you will be scrimping and pinching to come up with your 20% down payment: $50,000. When you get there, you'll probably be very eager to get start looking at homes. Unfortunately, "20% down" really isn't. There are many expenses that come up between when you place your offer and when you go to closing. You're probably heard of "closing costs" - at least I had - but I really had no idea how much that would cost.
You'll also probably pull up a loan amortization calculator and use it to determine your monthly payment. Again, however, the calculator doesn't tell the whole story. When you own a home, you'll be required to carry property insurance (and for some properties, separate flood insurance) and you must account for property taxes. These numbers can be substantial depending on where you're looking. Property tax rates vary widely, and can be anywhere from 1% to 7% of your property's value annually. Homeowner's insurance is also location dependent, and if you live in hurricane, earthquake or tornado country, you can expect a good chunk of change there.
Finally, in many neighborhoods nowadays you will be required to join a homeowners association (HOA), and pay dues to them. It's not impossible for taxes, insurance and HOA to come to 50% or more of your mortgage payment. These are things every would-be homeowner must consider. A realtor will help you figure these things out, but they won't do the math for you. Your realtor wants to help you buy a house - how you pay for it is your responsibility.
In Our Case
In our case, when we looked at all of the costs for the one home we really loved, then took a good hard look at our income and spending, it simply didn't add up. While nearly any bank would've gladly approved us for a mortgage, the fact of the matter was we would be buried by the extra-cost triumvirate of taxes, insurance and HOA. Armed with this knowledge, we stepped out of the market for a time and started working out what we really could afford.
Serendipity
Some six months later, fortune smiled upon us and led opportunity to our door. My wife had been receiving updates from the MLS (multiple-listing service, the definitive source of real estate listings) server that our realtor had provided us access to. Most of the time she ignored the e-mails, but one morning she clicked on it just to see what was out there. Two listings were included, one of which had recently reduced its listing price by more than 20%. She forwarded me the e-mail, and I contacted our realtor.
I'm a realist, some would say a pessimist, so I imagined something was seriously wrong with the house. My family and I were about to leave on a week's vacation to California, but I scheduled a viewing with my realtor just to find out if there's was anything to it. When we entered the house, I was both awe-struck and shocked. The house was simply beautiful, but it was a horribly cluttered mess. When we finished our tour, I told our realtor I wanted to bring my wife by the next day. The next morning my whole family did another walk through, and my wife was as impressed as I.
The Offer
While we toured, my wife and I decided that we should put in an offer. The house was listed as a short sale, which some realtors (as buyer's agents) won't even touch. Even in the best of circumstances a short-sale can fall through very easily, and if it does then the realtor gets nothing. It's a risky proposition for them, but since ours was showing us the house, we knew she would present the offer.
In my opinion, the house was listed at least 10% below market value. I wanted to think on it, but our realtor pressed a bit - about the only time she did so - explaining that as a short sale, they would take only 2-3 offers to present to the bank, and that if we were to hesitate, we might lose the opportunity to make an offer at all. Usually, I would low-ball in a situation like this, but as I stood by the pool and tried to compare the house to others I'd seen, I was nearly inclined to offer above the asking price. I consulted with our realtor and ultimately decided to offer the asking price.
The offer was communicated informally at first, which established our place in line. The next day, I stopped by her office and filled out the first in a long line of forms, and provided a check as a deposit, for $1,000 - often called an "earnest check". I had no idea what to expect next, and was concerned that something would happen while my family and I were on vacation the next week in California. I was assured that was very unlikely...
Short Sales in a Nutshell
When a house is "sold short", it means the bank allows the owners to offer the house for sale for less than what is owed on it. This doesn't usually happen, but in today's environment with home prices crashing it's more common than not. The bank agrees to a certain price level, and if the house can be sold for that price the bank will take that money and release the current owners from their mortgage (if you are thinking of selling short, please look elsewhere for information - I'm greatly oversimplifying this.)
So the short-seller's realtor will usually accept multiple offers for the home, and then allow the mortgage holder (the bank) to choose which offer they'd like to accept. In our case, three offers were submitted to the bank, ours and two others. Under ethics guidelines, I as one of the potential buyers couldn't find out anything about the other offers. For all I knew, I was the only one who'd offered the full asking price, or worse, the only one who'd only offered the asking price.
At that point, it leaves the realtors hands. Neither the seller's agent nor the buyer's agents have any information until the bank has had time to evaluate the offers. We quickly learned that can be a very, very time-consuming process.
We made our offer in August. We went to California and showed off pictures of the house. We researched insurance costs, tax costs, and started to develop a budget to make the purchase possible. And then we waited. And waited. Then we waited some more.
(Next time: Approval!)
