Introduction
Why purchase a property?
How much can I afford?
Cash buyers
Financing buyers
Finding the right property
The purchase contract
Inspections
Contingencies
Homeowners Associations
Preparation for closing
Closing

Introduction

Real estate purchases are typically the largest financial decisions that individuals and families make. The decision, including selection of the most appropriate property, how to finance, etc., should be made with care. Most of the discussion in this section is for purchase of a primary personal residences. Purchases of other types of property, vacation homes, residential investments, commercial, vacant land, etc. follow different criteria and are not discussed in detail here although some of the same criteria may follow.

As discussed below, the process of selecting and purchasing a piece of real estate is a complex process with a lot of  moving parts. Involving a licensed real estate agent at an early stage of the process will often help to make the entire process more efficient. An experienced agent will be able to develop tailored checklists for an individual buyer based on various characteristics of the planned purchase.

Why purchase a property?

There are many reasons for purchasing a new home. As compared to renting, home ownership offers a number of financial and tax advantages. In addition, it makes more sense to customize and upgrade a property that you own instead of a rental. Many people have pride in a home that they own.

Changes in family status are another important reason for considering a new home. This can include need for more space due to a larger family or, at the other extreme, downsizing as children become independent.

Geographic change is a big factor in driving home ownership changes. The overall trend in the United States has been for people to relocate from colder northern climates to the south. Career and job changes can also be a factor in moves.

Typically, homes that are more expensive are nicer so changes in income are another important driver of home purchases. People with higher incomes can typically afford nicer homes. There are various guidelines to suggest how much home can be afforded on a specified income when financing is involved.

How much can I afford?

Potential buyers should have some idea of how much they can afford to spend on a property before they start looking. In general, more expensive properties are going to be in nicer neighborhoods, have more attractive lots, and be larger and newer. As a general rule, more attractive and appealing properties are going to be more expensive—it simply creates disappointment to look at homes that are beyond one’s budget.

Home purchases can be done with cash or financed. Home mortgages are a big business and those that meet certain standardized criteria are typically packaged and sold to investors. While a cash deal is much simpler and involves less cost to the purchaser in terms of fees, financing a property allows consideration of a wider range of home characteristics and resulting prices. In addition, the are a large number of programs available to help purchasers including special programs for first time home buyers, government-guaranteed loans offered by the Federal Housing Administration and United States Department of Agriculture.

More complex situations can arise when a home in one community or areas needs to be sold before closing on a new home.  In some cases, looking for a new home may need to be deferred until there is a contract in place to purchase a currently owned home.

Cash buyers

For cash buyers, determining how much one wants to spend involves a balancing of the resources available—the most that is spent on a home, the less cash is available for other expenses. Most cash buyers have a range of price in mind—as they begin to see what is available in the market, they can decide to be in the higher or lower end of that range.

The seller in a cash deal is typically going to want a proof of funds before entering into a contract. When a seller accepts an offer, they are taking their property off the market, so they want to have some assurance that the buyer has the ability to perform on the contract. Proof of funds can be a bank or investment statement showing adequate funds available for the purchase. Buyers can redact account numbers and other personal information from those statements.

Financing buyers

Buyers looking for financing are going to need to have quite a bit more information than cash buyers. Normally a buyer needing financing will want to do a fair amount of homework to determine how much they can afford in payments and how that translates into a range of prices that they can consider. The point of collecting financial data and having it analyzed by a financing professional is to determine the maximum amount of housing expense and related home price that the buyer can afford. Of course, spending less is always an option.

The following kinds of information are typically required of buyers seeking financing.

• Financial summary (summary of assets and liabilities)
• Bank accounts and current balances
• Investments and current balances
• Credit cards and current balances
• Auto loans and amounts owed
• Recent pay stubs showing gross pay
• Two years of Federal income tax returns
• Information on investment properties owned
• Other assets, 401K statements, life insurance, stocks, bonds, and mutual account information.

Credit Reports and scores 

Your credit report and score will have a huge impact on what type of property you can buy, and at what price. The Federal government requires that the three credit reporting agencies, Equifax, Experian and Trans Union, provide consumers with a free credit report on an annual basis. These free reports are available at the Internet site https://www.AnnualCreditReport.com/. By switching between the three credit reporting agencies, consumers can get a free credit report from one of the agencies each four months. Note that there are many other services that offer “free” credit reports if you are a subscriber to their service but the site mentioned above is the official site for getting the credit reports that reporting agencies must provide consumers under Federal law.

Instead of examining the detail in credit reports, most lending institutions based decisions on a numeric score derived from the detailed information found in the credit report. One of the most commonly used credit score is called FICO which is named after the Fair Isaac Corporation which computes and published credit scores. Various services sell access to credit scores (Discover Card provides them at no cost to its customers) but the credit score provided by a service might not be the one your lender uses.

FICO scores range from a low of 300 to a high of 850, which is the best possible score. Creditors commonly deem a FICO score of 650 to 699 as moderate and 700 or better as a good-to-excellent score. As of 2010, about a quarter of consumers who have an open credit file have scores of less than 600 and the median FICO score for consumers was 732.

The Federal site above does not provide a numeric credit score but provides the detailed information that is used to generate the actual scores. Anyone planning to apply for credit should probably obtain their credit reports as discussed above and make sure that the information in them is correct. Errors in credit reports are not uncommon and can have a major negative effect on credit decisions. Anyone finding errors in their credit reports should challenge them using the procedures provided.

Lenders

Most commercial banks and credit unions issue home mortgages, some for their own account and other for investors such as Fannie Mae and Freddie Mac, two corporations chartered by the Federal government to trade in standardized home mortgages. There are also mortgage brokers who do not make loans directly but arrange for loans with a lender on behalf of their customer.

Before getting too serious about buying a property, a buyer who is going to need financing should make some preliminary inquiries with a lender. Real estate agents can recommend lenders who are known to be active in the market but the first stop a buyer makes should be with the bank that he or she primarily does business with. Many banks will look more favorably on loans to existing customers.

The three primary mortgage loan types are conventional, FHA (Federal Housing Administration) and VA (Veteran’s Administration). Conventional loans are the most flexible in terms with FHA and VA loans having more specific requirements and restrictions. VA loans are available to eligible veterans and feature relatively low down payments. Another loan program available in Citrus County is the USDA (United States Department of Agriculture) Rural Development program.

The first step is to check your credit rating with an experienced lending institution who can determine what you can afford. The lender will research your credit ratings from the three credit reporting agencies as well as other financial information.

It is a good idea to ask lenders for a “pre-qualification” letter. This is a document which specifies the maximum loan which the bank is willing to issue given a property that meets the banks other criteria, e.g., appraisal, survey, wood destroying insects, etc.. A pre-qualification letter is used as a credential like the proof of funds for the cash buyer in order to convince the seller that the buyer will be able to close on the purchase contract.

Once the process is started, it is best to hold off on sudden career changes or large purchases which may affect your credit report and/or score. Lenders want to see their borrowers have a relatively stable financial situation.

Another financing option that is sometimes available is seller financing. If the seller owns the property outright or has a small loan balance, he or she may be in a position to offer financing. Most seller financing is shorter in term that traditional mortgages (usually no longer then 7-10 years), interest rates are usually higher than found in institutional financing and loan terms may be different. For example, a seller might offer a 3 year balloon note collecting interest only. This might be appropriate for someone with a good income but previous credit impairments. For example, someone who has had a short-sale will be unable to obtain institutional financing for at least a years despite having sufficient income.

Finding the right property

Determine what specific minimum requirements that you have. These can be type of construction, age of building, number of bedrooms, number of bathrooms, availability of garage, size and type of lot, etc. Other possible important considerations are location of schools and shopping, commuting patterns, community amenities, etc.

Once you have an idea of the kind of property you are interested in, there are a number of approaches that can be followed. These days, most buyers prefer to become familiar with the neighborhoods, complexes, or subdivisions, that interest them before contacting a real estate agent. Driving around is a good way to get a feel for what it would be like to own a property in the area. Looking at for sale signs helps to start getting a sense of the properties available in those areas.

Select a few properties that interest you the most and have your real estate agent make appointments to visit them. The are a variety of online tools available to assist buyers in finding properties of interest but the most powerful tools are parts of the proprietary MLS systems that real estate agents pay to have access to.

The agent can identify comparable properties that have sold recently as well as comparable properties that are currently on the market. This will give you an idea of the market in the selected region.

Once you have picked out the property you want to purchase, your real estate agent can help you make an offer that the seller will accept or counter. The agent can provide a rough estimate of the costs and expenses associated with the new property. An agent can also help you tailor you offer to appeal to the seller.

The Purchase Contract

In Florida, there are two types of residential contracts, “As-is” and regular. In the “as-is” contract, the buyer is agreeing to purchase the property for the agreed upon price in its current condition. In a regular contract, the seller is agreeing to make repairs to the property up to a particular limit. Both contracts provide a right of inspection giving the buyer the opportunity to make sure the condition of the property is satisfactory.

A ratified contract is one that has been agreed to by both buyer(s) and seller(s). The buyer makes a deposit of funds, typically held by a title company, to ensure performance on the contract.

Inspections

Inspections are an important part of the process for the buyer. The purpose of the inspection is to identify hidden or difficult to find defects in the property that have a material affect on the value. The inspection is not designed to identify deficiencies which are readily observable by an untrained person or minor cosmetic issues with the property. For example, if it is obvious to an untrained person that the roof is fairly old, the contract offer should factor in the condition of the roof. As long as the roof is not leaking, it will be considered to be acceptable for sale purposes.

Some “inspections” are typically required by vendors. These include the wood destroying organism (termite) inspection, an appraisal and a survey. For some of these, the inspection will be actually ordered and paid for by the lender who will then seek reimbursement from the buyer at closing. For financed projects, the buyer should make sure that they understand what inspections will be arranged for by the lender.

Home inspection—A home inspection covers the major systems of the home, Heating/Air Conditioning (HVAC), electrical, plumbing, major appliances, condition of structure and roof, etc.

Septic inspection and pump-out—For properties with septic tanks, a septic tank company can be hired to do an inspection and pump-out of the tank. At this time, the location of the septic tank and drain field lines will be identified.

Water testing—The most common water testing is for coliform bacteria which are suggestive of possible contamination of the well or water system. Any presence of coliform bacteria is considered a failure. If any coliform bacteria are found, a secondary test for fecal coliform is made. Fecal coliform is indicative of fecal contamination of the water supply. If there are coliform bacteria present, the usual solution is to chlorinate the well and water system.

Wood destroying organism (termite) inspection—This inspection is typically required by lenders and involves looking for evidence of active wood destroying organisms. If any are found, a  treatment is required.

Appraisal—An appraisal is typically required by lenders and is used by the lender to make sure the market value of the property is consistent with the loan they plan to make. For standard (conforming loans) appraisers must be conducted by a licensed appraiser using standardized techniques. In general, appraisers are specialists in determining the value of properties, based on a combination of square footage measurements, building costs, recent sales of comparable properties, operating income (for income generating property), etc. It is always a good idea to check with the lender to make sure that the appraisal results are consistent with the loan terms spelled out in the contract.

Survey—A survey is typically required by lenders. The survey will locate the property boundaries and locate buildings on the property. Fences are also identified on the survey. A survey will reveal whether or not anything encroaches on the property or whether any of the structures on the property encroach on neighboring properties.

If issues are discovered in any of the inspections ordered, these items become a subject of additional negotiation. In the regular contract, the sellers have to pay up to a specified limit to address any inspection issues discovered while in the as-is contract, the seller does not have to correct any deficiencies. How best to handle any issues is dependent on the totality of the circumstances of the purchase.

Contingencies

Contingencies are items spelled out in the contract that may affect the ability of the parties to complete the contract. Inspections, discussed above, are one major category of contingencies that affect almost all contracts.

For purchases that are to be financed by an institutional lender, a financing contingency is usually put into the contract. That contingency means that the buyers can be released from the contract if they are unable to secure financing in accordance with the terms spelled out in the contract. The buyers are required to make a good faith effort to obtain such financing.

Another common contingency is the sale of another property, typically the buyer’s current residence. During slow market conditions, sellers are unlikely to accept contract that are contingent upon another sale unless there is already a sales contract in place. Remember, once a seller accepts a contract, the property is removed from consideration as an “active” listing.

Homeowners Association

If the property that you are purchasing is subject to a homeowner’s (or condominium) association, the applicable rules and regulations have to be provided to the buyers.  In some cases, the association may have to approve the transfer of the property so that needs to be factored into both the contract and time line.

Preparation for closing

Under Florida state law, contracts involving real estate have to be in writing in order to be enforceable. In essence, that means that oral contracts are not legally binding—they cannot be enforced in court proceedings. In many cases, oral offers and counteroffers may be exchanged but those do not become official until put in writing and signed or initialed by both parties.

Once a sales contract is ratified (agreed to and signed by buyer and seller), its terms control the transaction. The contract should spell out any contingencies in adequate detail and a closing date that is realistic should be agreed upon. Changes to the contract have to be agreed to in writing and are typically handled by contract addendums. If, for example, the buyer decides they need additional time before closing, that needs to be requested from the seller and if the seller does not agree, the contract becomes null and void.

Some important tips to keep in mind:

Make sure that the written documents that you sign are consistent with your understanding of the contract arrangement and any oral agreements.

Deadlines in contracts are important and must be adhered to. For example, extension of the closing date requires agreement of both parties. If the buyer needs or wants a couple more weeks and the seller does not agree, the contract will be become null and void.

The buyer will be responsible for transferring utilities and establishing property insurance.

Once a property insurance policy is established, most institutional lenders will escrow part of the monthly payment to pay the premiums. Buyers should make sure that the property insurance they are shopping for will meet their lender’s criteria.

Allow at least a week to obtain property insurance. It is a good idea to contact 3 or 4 agents to obtain the best price. Property insurance rates vary dramatically in Florida – some carriers require costly additional “inspections” before they will underwrite a property. Here are some suggestions as to how to lower property insurance costs.

Consider a higher deductible. Increasing your deductible by just a few hundred dollars can make a big difference in your premium.

Ask your insurance agent about discounts. You may be able get a lower premium if your home has safety features such as dead-bolt locks, smoke detectors, an alarm system, storm shutters or fire-retardant roofing materials. Persons over 55 years of age or long-term customers may also be offered discounts.

Insure your house not the land under it. After a disaster, the land is still there. If you do not subtract the value of the land when deciding how much homeowner’s insurance to buy, you will pay more than you should. (The policy value for the insurance should be at least 80% of the estimated replacement cost of the improvements to avoid “coinsurance” deductions in the event of a partial loss).

The buyer will need to find out what utilities service the property. Electric utilities usually need at least a day to start service and some may require deposits. If the property is served by city water and/or sewer, those arrangements will need to be made at will. Usually if there is propane service, the amount of gas in the tank is included in the purchase—the gas vendor will need to be contacted prior to the tank being refilled. Most propane tanks are owned by the propane company who services it.

Closing

Either a title company or an attorney will be selected as a closing agent. The custom in Florida is for the seller to pay for the title insurance policy that protects the buyer from title defects and determine the closing agent. Of course, like any provisions of the contract, these provisions can be changed. For example, the seller may agree to the choice of closing agent by the buyer and agree to pay and amount towards closing equal to what he would expect to pay were he to pick the closing agent.

The closing agent or buyer’s real estate broker will hold the deposit in escrow. The closing agent will research the complete recorded history of the property to ensure that the title is free and clear of encumbrances by the date of closing and that all new encumbrances are properly added to the title. Some properties are subject to restrictions which limit various activities such as building or parking restrictions. There may be recorded as easements and encroachments and will limit the rights to use your property.

They buyers need to decide how to hold title. Different methods of holding title have different legal, estate and tax implications, especially when selling or upon death of the title holder. Certain homestead exemptions are available to owners who occupy a property as a principal residence. Note that when mobile homes are involved, the mobile home titles must be transferred as well as the land since mobile homes are not considered to be “attached” to the real property.

The closing agent will provide a closing statement detailing all charges a few days before closing. The final amount due will be specified. That amount will be due at closing, either as a bank check or via a wire transfer. Check with the closing agent to determine which is the best method.

The day or or a day before the closing, the buyer should conduct a final walk-through inspection. The buyer will visit the property to verify that all is in working order, everything is the same as when you last viewed the property, that there are no extra items left behind, and that everything included in your purchase is still at the property.

The closing itself will typically be conducted at the offices of the closing agent. In addition to the necessary funds, buyers should have identification as some documents may require notarized signatures. If the property is financed, the loan documents will need to be signed at this time.

Possession of the property is normally provided at closing. Keys are turned over at this time.