Shopping and Finding

Shortchanged by Shortcuts?

In almost every case in which a client came to me wanting to use their big bank for the loan, the reason they gave was that it was simplest solution for them and not that they had vetted many alternatives. They hadn’t determined through a screening process of any kind that their bank was the best choice, the criterion they used was they already bank there. Pure Availability and Representativeness in action. There was no thought given to the moving parts or how the bank performs, or might fail to perform, when the buyer needs them most. These buyers used their bank because that bank was at the top of their mind when they thought of getting a loan. Hello!? The word bank is synonymous with a place to get loans – you can’t get more representative than that. Even though in a competitive market your ability to close on time could make or break the deal, few consider this aspect when choosing where to get their money. It’s a pretty impactful shortcut.

As with Realtors, banks know that they can get your business by focusing on getting to you first. The reality of your susceptibility to the Availability Heuristic trains the banks the same as it trains Realtors. They both know their actual performance can take a back seat to speed. They don’t need to be good to get your business. They just need to get to you first. The masses are driven by Availability and Representativeness and your bank knows this. Every time you walk in (or log in) to your bank, you see that person smiling at the desk, the signs and ads for what great rates they have, and it’s pretty much over. They own your mind share. They don’t need to worry that their loan underwriters are underpaid, work 2,000 miles away, and can’t be reached easily when needed. Nobody is going to tell you that the smiling person in your branch, your loan officer, is almost as disconnected from the process as you are and won’t be able to help when something goes south.

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But of course, they don’t care about that because they don’t need to care. They aren’t getting customers based on the strength of their service or the performance they deliver. They’re getting the customers because they’re masterful at creating and keeping mind share.

If you start the home-buying process with your Realtor, they will undoubtedly have a preferred lender or two to whom they’ll be glad to refer you. If you don’t have a lender you love, use theirs. Interview them to make certain you’re simpatico and their rates and service are acceptable. The Realtor gets nothing from referring them to you. There are strict, well-enforced laws preventing any kind of kick back in that relationship. Your Realtor’s only motivation is to have you use a lender who has proven track record of delivering products and services that get the job done.

Think about it: If the lender your real estate agent refers you to doesn’t get the job done, who are you going to think poorly of and blame? And since we already know that you hired a Realtor who relies on your referrals and repeat business, they’re likely to be super careful about the lender referrals they provide. It’s a fair expectation that anyone they recommend will deliver. If you’ve already been pre-approved (as you should have been before shopping) and your Realtor recommends a different lender (because you’ve made a poor choice by picking a big bank, internet-based lender, etc.), I suggest you repeat the pre-approval process with the recommended lender.

It’s also important to keep in mind the fact that the Realtor and lender have worked together in the past is not inconsequential. As you’ll see in later chapters, moving a deal from contract to close is not simple. Selecting a team that already works well together, as a Realtor and lender will need to do, is a smart move.

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Shortchanged by Shortcuts?

I could write for days about this but will spare you. Suffice it to say, if you insist on going with your big bank, I wish you good luck and Godspeed. Just don’t say I didn’t warn you!

Popping the Question

As part of your preparation, the question you’re out to have answered is simple: “How much house can I afford?”

To answer this, the lender will have to collect information from you. It could be during an initial phone call, a web-based survey or an in-person meeting. With some basic information and based on a series of formulas, they’ll give you a ballpark sense of how much you can afford to spend on a house. This happens before they collect any documentation and is known as pre-qualification.

Pre-qualification is the least you need if you’re just starting to think about a home purchase. It will help you keep your “browsing” in realistic neighborhoods with more realistic property sizes and amenities.

However, and this is a pretty big however, I recommend you take the next step – even if you’re “just shopping” – and get pre-approved. In a seller’s market, it’s required. Pre-qualification is for your benefit only. You won’t be able to place a viable offer on a property in any sort of competitive market if you’re only pre-qualified.

Side Note: If you’re shopping in a market that’s even slightly competitive, I can’t imagine any good Realtor who’d be willing to take you to see houses more than once, if you’re only pre-qualified and not pre-approved. In most cases if you find an agent willing to drive you around before you’ve done the work to get pre-approved, I’d think they have too much time on their hands and might not be very good at what they do. Why else would they spend that kind of time on someone who wasn’t serious yet?

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Even if you think you’re a year out from making a purchase, it still makes sense to get pre-approved for a loan. Here’s why: In the pre-approval process, your lender is going to collect a wide range of documentation including pay stubs, bank statements, W-2s, etc. They’re going to review your finances, and, if the lender is good and has your best interests at heart, they will do so with a fine-toothed comb.

All this so you wind up with a pre-approval for a loan. In essence, you want the lender to say, “Yes, we have seen all we need to see from this person and we’re ready to write them a loan; the only thing we need is the address.”

The process will bring up anything and everything that’s between you and getting a loan in a way that pre-qualifying conversations won’t. Suppose you’re a year or more out and discover a blip on your credit report, a problem with the documentation of income, or if you’d qualify for a better loan with a little more down payment. Given you started early, you now have time to address those issues. Get pre-approved as early in the process as possible – it will save both time and money down the road.

I’ve encountered my share of clients who resist doing this early in the process. It’s a particular form of Confirmation Bias expressed in the belief that they already know they’ll be pre-approved, so why bother? I’ve encountered an equal number of people who, thanks to the same bias, won’t go through the process because they already know they’ll never be approved, so why bother?

The safer, less risky question is, “Why not bother?” The downside of waiting is, if there’s something discovered in your finances with which the lender will have a problem, you won’t have time to correct it. The downside of getting pre-approved early? Call me when you find one.

Once you’re pre-approved, you’ll know exactly how much house you can afford to buy, and you’ll be ready to take the next step.

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Shortchanged by Shortcuts?

Pre-Shopping Consultation

You’ve talked to a lender, you have your pre-approval, and you’re ready to go. That means you’re ready for the second step (the fun part!) – meeting with a Realtor and starting to match your wants with your means.

It’s possible the amount for which you’re pre-approved may be more than you’re comfortable with when it comes to monthly mortgage payments. You don’t have to spend every dollar for which you’re pre-approved. In fact, I recommend you always spend under your max. While, it’s not a great way to market my business as a Realtor, it’s a matter of integrity to let you know all houses are money pits. There’s a never-ending list of possible ways to upgrade, improve, remodel, etc. Houses have a fascinating way to find a use for any extra money. With this knowledge, it’s important that you’re comfortable with the monthly payment and are honest about that with your Realtor.

When you do meet with your Realtor, share what you have in mind regarding the type of house you want and need: • Number of bedrooms • Number of bathrooms • Location • Possible school district or zone • Yard space • Garage • Construction style

Add to this list whatever matters to you.

At this point, and with the information you’ve provided regarding price and what you want in a house, your Realtor should sit down with you and show you where houses that match your budget and your wants/needs are located.

Think about this process as having three facets: what you want to pay, what you want the house to look like, and where

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you want to house to be. It helps to go into this phase understanding you might only be able to get two out of three of these. It’s rare enough to get everything you want in any area of life and the home-buying process is no different. If you hang on to some illusion that you must get every single thing on your list, you’re setting yourself up for an upset. You could get lucky and get everything you want, but it’s more likely that some compromise will be in order.

Normally price is not one with a lot of wiggle room so that leaves either size/amenities or location on which to be flexible. This is the step of the process in which you’ll need to get clear about the difference between a “want” and a “need” with the “two out of three rule,” being a small way to help keep your sanity.

This pre-shopping phase is the time to learn (and accept) where and how you might have to compromise on price, location, or amenities. This is the time to measure how realistic or unrealistic your expectations may be. If it’s the latter, now is the time to make those mental adjustments. Can you afford to live where you want and in the type of house you want? This is the time to answer that question.

Remember: Real estate is cyclical. There will be times when any given market area could be a buyer’s market (meaning lots of houses to choose from, prices staying steady or heading lower) or a seller’s market (few houses for sale, prices head up). If you happen to be shopping in a buyer’s market, you’re less likely to need to compromise, and if you’re in a seller’s market, you’ll likely need to move off your point to get the home you want.

Watch for the Anchoring Heuristic at play here as well. Perhaps you remember what houses cost the last time you bought a home, so there’s some expectation of what you should pay now. Or perhaps you have an anchor in the form of the type and size of the home you grew up in, making shopping for your current home disappointing, frustrating, and/or upsetting.

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