By Russell Barneson
By Russell Barneson
Along with getting married and having children, buying a home is amongst the most defining moments in life.
The buying process can be stressful and overwhelming; it's a major investment and one may be dealing with their life savings.
Making an offer on a home or investment property needs to be approached in a cautious and educated manner.
After finding the right property, it's important to do your homework before finalizing the purchase in order to minimize risk and maximize returns.
If done correctly, an investor stands to make significant amounts of money; conversely, a bad decision can cause financial turmoil for years to come.
Below we cover the most important steps to ensure you're getting the best deal.
Hiring a realtor with local knowledge is essential to better understand an area you may not be fully familiar with.
These realtors oftentimes have pocket listings (listings not found on the MLS or other online portals).
While lots of data such as price per square foot and recent home sales is available online, a local realtor can point out the intangibles of a neighborhood.
When purchasing a property, neighborhood selection is key. Use sites like NeighborHoodScout to gather data and learn about the demographics of an area.
Be sure to consider the following factors:
Check your credit score using one of the major credit bureaus such as Experian, Equifax or TransUnion.
Scores range from a low of 300 to a max of 850 and determine your eligibility for a loan.
Lenders will use this score to determine your interest rate. Having a low interest rate can save you hundreds of thousands of dollars over the life of a loan.
If you have a low credit score check out these tips to improve it.
Generally your mortgage is something you are going to be paying for 20 or 30 years therefore you should shop around and get 3 to 5 different estimates and select the lowest rate.
If you don't do this you could wind up paying substantially more for the property over time.
One rate could be tens of thousands of dollars higher over the lifetime of the mortgage.
If inexperienced, you should consider using a mortgage broker.
A mortgage broker usually costs half a point (depending on the loan amount), but can still be well worth the investment.
Mortgage brokers have many contacts with different lending institutions.
These brokers are very familiar with the mortgage application process and will be able to assist you if you have any problems, or unique needs.
Getting pre-approval from a lender usually takes 30 days (unless you are borrowing from a private money lender).
This approval is generally good for 90 to 180 days, depending on the lender and the terms of the deal.
Having pre-approval will establish a purchase price budget and give you an idea of your monthly mortgage payments.
Additionally, with pre-approval from a lender, your offer will stand out to sellers and differentiate you from other prospective buyers without pre-approval.
When seeking pre-approval, be ready to provide your lender with documentation relating to your financial situation such as:
Be sure to shop around for a lender, and even consider getting a mortgage broker to find you the best deal.
Housing markets are complex. Getting a professional appraisal will ensure you're not over paying for a property.
Lenders often require an appraisal to approve a loan.
This appraisal will give you strong negotiating power and knowledge when making your offer.
Hire a certified real estate inspection company to avoid potential disaster in the future.
Never take the word of the seller, there is always a small chance they will try to deceive you and not disclose hidden problems with the property.
Be sure to clarify with the inspection company what will be included in the report.
A good inspection company will give you a rundown on the following:
A good inspection company will also give you an estimate of the property's annual upkeep.
This is important to project the net operating income of the property.
Oftentimes, if the home inspector can identify issues, these problems can be used as a bargaining chip to negotiate a lower purchase price.
Most properties have minor code violations, because truth be told, the code is changing all the time.
Even a home built even 10 years ago, may not be up to date with the latest code.
In many instances you might not even have to bring the building up to code, unless you are doing a major renovation.
Be on the lookout for large scale code violations such as:
To avoid these types of problems, obtain a property code inspection (this is different than a home inspection).
These violations can result in fines or costly renovations, so bear in mind you could be liable.
While it's possible to do a title search yourself, it's recommended to hire a professional title company.
Small mistakes in legal documents are easy to miss and can result in large financial losses.
A title company will verify the seller is in fact the owner of the property.
The property should be free and clear of liens, claims and back taxes to avoid future liability issues.
Title companies take approximately 2 weeks to close.
Title insurance is often purchased as protection against complications with the title.
If getting a mortgage, title insurance will be required by your lender.
Title insurance is a one time payment and is based on the value of the property and varies from state to state.
Aside from your monthly mortgage bill, understand the other large operating expenses, these include:
Finalizing the purchase of a property using the 12 steps above will help you avoid losses and maximize returns.
Disclaimer: Crescent Lenders, DBA CrescentLenders.com ("CL") is a California licensed broker under California Bureau of Real Estate License No. #01792267. Regardless of this license, CL considers itself a “finder” for purposes of applicable laws and regulations (California Business & Professions Code § 10130, et. seq.).