BUYER’S MANUAL Max Hutchison
Max Hutchison Maxwellhutchison@gmail.com 323.614.9376 DRE# 01907904
To a Future Homeowner: As you begin taking the steps towards homeownership, you will have many questions, from “what is escrow?” to “when do I get my keys?” There are no silly questions and my job is to provide you with not only all the answers, but also the market knowledge and strong negotiation skills that I have acquired working in one of the most competitive real estate markets. No matter your budget, favorite architectural style, or neighborhood, I guarantee to guide you through the home buying process smoothly and with a strong sense of direction. It is my goal to make what can be an intimidating and unfamiliar process a confidence builder and the realization of the American dream. To that end, I have prepared this manual to help familiarize you with some of the more common terms you are likely to encounter, as well as provide you with an overview of both the process and components of a successful team. Please feel free to contact me at anytime should you wish to explore any of these items in further detail. I look forward to working with you to achieve all of your real estate goals and becoming your Realtor for life. Thank you, Max Hutchison Max Hutchison Real Estate Maxwellhutchison@gmail.com 323.614.9376 dre# 01907904
OUR RELATIONSHIP My duty to you: As a full-time Realtor, I am obligated to act at all times with your best interest in mind, and to exercise the utmost care in representing you. Realtors are required to abide by a strict Code of Ethics to provide you with the highest level of service, integrity, honesty and professionalism; “real estate agents” are not. I am a member in excellent standing with both the California Association of Realtors and the National Association of Realtors. As a Realtor with John Aaroe Group, you will also have access to a powerful and established network of service providers whose expertise and reputation are unparalleled. Your duty to me: Much of a Realtor’s work is spent preparing for our time together: researching and previewing homes that meet your criteria, coordinating private showings of the most select prospects, networking with fellow professionals to find homes that are not currently on the market, evaluating recent sales data to better help you write a successful offer, assisting you in preparing financing, and staying up on the ever-changing, local legislation. I will invest substantial time and effort in treating your search for a home as if it were my own, and ask for the same loyalty in return. Whether you see a home for sale with another company’s sign in the front yard, on the MLS, or stop into an open house hosted by another Realtor or agent, I can represent you in pursuing any home without bias. In fact, most of the hosts at open houses work for the seller and are not dedicated to your best interests as a potential buyer. Having your own representation is key. How do I get paid? Realtors are not paid a traditional salary, but rather work on commission. I am paid when, and only when, you are fully satisfied and become the owner of your new home. All the services I provide up until that point, whether we see 10 or 100 homes, or make one or twenty offers, are uncompensated. Commissions are traditionally paid to buyer’s agents out of the seller’s proceeds at the very end of the process, at no cost to the buyer.
PRIOR TO MAKING AN OFFER Finding the right property is only one part of the home buying process- we need to make it yours. In order to take the all-important step of writing an offer, buyers need to first, be preapproved by a reputable lender. A preapproval letter confirms that you are approved to purchase a home in the desired price range, and offers the seller assurance that you are a qualified buyer who has done their homework in advance. I maintain a network of contacts with local mortgage brokers and financial institutions who service, rates, and products have proven to be exceptional, and can offer your referrals to find the best fit. After reviewing your income, credit, and assets, the lender will provide us with a PREAPPROVAL LETTER, which is required to submit along with our offer to purchase. Some sellers also ask to see PROOF of FUNDS with the offer, which is a bank statement showing a balance that covers the down payments you plan to make. It is also important to ensure that 3% of the purchase price is liquid and ready to be delivered as a deposit, should your offer be accepted. This EARNEST MONEY DEPOSIT is part of your down payment and held by the escrow company, a neutral third-party licensed by the state of California to manage the transfer of funds and facilitate a smooth transaction. Should you choose not to proceed with the transaction due to inspection or loan issues (and cancel the transaction within an agreed-upon period), this deposit is returned to you. With your preapproval letter and deposit ready to go, we can write the offer.
MAKING THE OFFER The most important points of an offer include: -Purchase price offered -Length of escrow period/time until the home is yours (typically 30 days) -Percent down payment -Length of inspection contingency period (typically 7-14 days from the date your offer is accepted) -Length of loan/appraisal contingency period (typically 17 days from the date your offer is accepted) -Any items we are requesting that seller provide with the home (washer/dryer, stove, refrigerator) It is my job to ascertain the seller’s motivation for selling, evaluate the time the home has been on the market, and whether or not we will be competing with other buyers for your home. With these facts in mind, I am able to advise you on how best to structure your offer and get an acceptance. It is important to know that sellers can also reject an offer outright or provide us with a counteroffer if we have not met their needs in the initial offer. No agreement is binding without a signed acceptance from both parties, and you have no commitment to the home until you have signed off on all your contingencies (see next section).
LIFECYCLE OF A TYPICAL 30-DAY ESCROW Day 1
-Offer accepted by seller -Buyer’s deposit wired to escrow company -Our team transaction coordinator delivers signed offer to escrow company and lender -Escrow writes “escrow instructions”, which recap the price and terms of our offer, orders state-mandated reports, and sends package to both buyer and seller for review and signature -Lender locks in rate for your loan and orders appraisal of home
Day 1-14
Prepare and coordinate INSPECTIONS (I strongly recommend that you obtain a general inspection of the home as soon as possible after acceptance of your offer. In addition, you may wish to employ the services of specialists to examine particular areas in greater depth, such as a fireplace or pool) Receive and review state-mandated DISCLOSURES from seller. These include any known defects in the home’s operating systems, environmental hazards, issues in the surrounding neighborhood, and any other items that may be of material interest to a prospective purchaser These disclosures should never take the place of our own inspections, and are completed only to the best of the seller’s knowledge
Day 14
Sign off or “remove” INSPECTION CONTINGENCY, indicating we are pleased with our investigation and wish to proceed with the purchase At this time, we may also have the option of requesting that seller correct or credit you for any major health and safety deficiencies found, though seller is not obligated to do either
Day 17
After confirming with lender that there are no unforeseen circumstances that could affect your loan, and that the home appraised at the price in our offer, remove LOAN/APPRAISAL CONTINGENCY. This is the last contingency in your offer, and the “no-turning-back” point of the process
Day 17-30 This is the time when your lender is finalizing the particulars of your loan and working closing with the escrow company to coordinate paperwork and funding requirements At this time, you will need to provide evidence of HOMEOWNER’S INSURANCE to the escrow company and prepare to WIRE THE BALANCE of your down payment plus CLOSING COSTS
Day 25
Closing costs average about 2% of the purchase price of the home, and include the fee you pay to the lender, escrow, and the title company Perform FINAL WALK-THROUGH of home to ensure it is in the same condition and that any repairs requested have been completed as agreed The escrow company will make an appointment with you to sign your LOAN PAPERWORK, and ask you to deliver the balance of your down payment and closing costs
Day 30
The escrow company receives your final funds as well as the funds from your lender, and works with the title company to RECORD the home in your name
Congratulations- you are now a homeowner and receive the keys
SHORT SALES, BANK OWNED PROPERTIES AND THE DISTRESSED PROPERTY MARKET Anyone who has watched the news over the last few years has undoubtedly heard the terms “short sale” and “bank-owned property”. While these situations have always existed, the recent financial crisis has produced a flood of inventory that fall into one of these two categories and, as a result, successful Realtors and homebuyers have had to adapt to the particular challenges associated with these transactions. You are likely to have seen a short sale or two, or been curious as to why that bank-owned home is priced so amazingly low. While there are good deals to be had for the more resilient homebuyer, there are a few catches. First let me explain how a home comes to be a short sale or REO (bankowned property): A SHORT SALE is, simply put, a home listed for sale at a price that is less than what the current owner owes on their mortgage. It is being sold “short” of what is owed. This is a home in pre-foreclosure, and the seller may be behind on their mortgage payments or property tax bills. Typically, these sellers bought the home at the peak of the market, with a small down payment, for a price that would be unrealistic in today’s market. If BOTH the seller and the bank approve the price being offered, the seller must then demonstrate sufficient financial hardship to the bank(s) to qualify for a short sale. This is usually not initiated until an offer is made, so be prepared to wait many months for a final outcome. The challenge is that there are oftentimes multiple loans on the home from more than one bank, and getting approval from all of the parties involved is a long and arduous process. As banks are not in the business of forgiving debt, some statistics state that less than one-third of short sale transactions ultimately close. If they do, they are often strictly as-is with more financial and investigative burdens placed on the buyer than in traditional sales. The bottom line is…since the seller still owns the home, and the banks are inundated with thousands of distressed sellers, at times there is little motivation (or sufficient staffing) for them to approve and expedite a short sale. I am a good friend of Richard Petz, President of MRM & Associates, who, along with his partners are a leading brokerage that specialize in short sales. They have consulted and worked on over 3,000 short sales and educated over 10,000 agents on the distressed property market. Working with Richard, I am more confident and adept on short sales than many other agents out there.
THE OTHER OPTION If the short sale home you loved never sold, and the seller has missed three mortgage payments, it is likely to be foreclosed upon and become BANKOWNED. Now the banks are interested in expediting a sale as the home is an “asset on their books” that they are paying to maintain. Liquidating their “asset” now becomes a top priority, and there is no longer an individual seller in the mix. REOs (we use this term interchangeably with bank-owned) are priced to sell, but a distressed homeowner likely had no incentive (of funds) to maintain the home properly. Be prepared for some fixing-up, as REOs are also sold strictly as-is, with none of the usual disclosures and reports we receive from individual sellers in a standard transaction. Finally, be prepared to move quickly as the banks typically impose much shorter contingency periods for inspections and for your loan to be approved. Despite these issues, the competitive pricing on REOs often results in multiple offers, so you may be competing with many seasoned investors offering more than the asking price, paying all cash, and making contingency-free offers. On these homes, negotiating terms, offering below the asking price, or utilizing unconventional financing is not usually successful unless they have been on the market for an extended period of time. The bottom line is…be prepared to move quickly and aggressively on these well-priced homes, allocate extra funds for repairs, know that you’ll often be competing with seasoned investors, and that you’ll be purchasing your home from a large, bureaucratic entity-not a warm-blooded owner.
COMMON REAL ESTATE TERMS Acceptance A seller’s consent to enter into a contract and be bound by the terms of the offer. Adjustable rate mortgage (ARM) A mortgage loan whose interest rate fluctuates according to the movements of an assigned index or a designated market indicator—such as the weekly average of one-year U.S. Treasury Bills—over the life of the loan. To avoid constant and drastic fluctuations, ARMs typically limit how often and by how much the interest rate can vary. Agency The legal relationship between a buyer or seller and his/her agent. Amendment A modification to an existing contract, mutually agreed to by all parties, and executed by the escrow company. Examples include a change in the closing date or any repair credits negotiated after the inspection. Appraisal A determination of the value of something, such as a house, jewelry or stock. A professional appraiser—a qualified, disinterested expert—makes an estimate by examining the property and comparing it with recent sales of similar homes. Your lender will typically arrange the appraisal to ensure the home is valued at the purchase price agreed upon. Asking (list) price The price placed on a property for sale. Assessor A local government official who determines the value of the property for taxation purposes. Brokerage The company that agents work for is the brokerage. Examples include Prudential, Coldwell Banker and Sotheby’s. I can, and often do, sell homes listed with any other brokerage. Closing costs Costs the buyer must pay at the time of the closing in addition to the down payment. These may include lender fees or points, title fees, and escrow company fees. A good rule of thumb for calculating closing costs is 2% of the purchase price.
Closing statement A detailed written summary of a real estate transaction, showing all charges and credits made, and all cash received and paid out. Commission The compensation paid to a licensed real estate broker or by the broker to the salesperson for services rendered. Usually a percentage of the selling price of the property. Comparables/comps Properties that are similar to a particular property and are used to compare and establish a value for that property. Contingency A provision in a contract stating that some or all of the terms of the contract will be altered or voided by the occurrence of a specific event. A typical offer will include an inspection contingency, as well as a loan/appraisal contingency. Counter offer The rejection of an offer to buy or sell that simultaneously makes a different offer, changing the terms in some way. A counter offer can address price or terms- anything from the closing date to possession of the refrigerator. Counter offers to multiple buyers competing for the same home are not necessarily the same. Covenants, conditions & restrictions (CC&Rs) The restrictions governing the use of condominiums, usually enforced by a homeowner’s association. CC&Rs typically address whether you can have pets, monthly dues, and general rules and regulations. Deed
A written instrument by which title to land is conveyed.
Disclosures During the inspection period, sellers are obligated to provide to buyers many disclosures addressing physical defects, environmental hazards, and neighborhood nuisances, to the best of their knowledge. Down payment The percentage of the purchase price paid by the buyer. Dual agency Representing the buyer and the seller in the same transaction. Since there is an inherent conflict in fiduciary obligations to two different principals, dual agency, at best, is a risky undertaking.
Earnest money deposit A deposit made by the buyer as evidence of good faith in offering to purchase a home. Typically 3% of the purchase price, the earnest money deposit is held by the escrow company during the period between acceptance of the offer and the closing. Easement A right to use another persons real estate for a specific purpose. The most common type of easement is the right to travel over another person’s land, known as a right of way. In addition, property owners commonly grant easements for the placement of utility poles, utility trenches, water lines or sewer lines. Encroachment A fixture, or structure, such as a wall or fence, which invades a portion of a property belonging to another. Solutions range from playing the rightful property owner for the use of the property to the court-ordered removal of the structure. Equity The difference between a home’s value and the mortgage amount. Escrow The neutral third-party, that acts as intermediary between buyer and seller. The term “escrow” has also come to mean “under contract”, as in, “the home is in escrow”, or “the home fell out of escrow”. Fixed rate mortgage A mortgage with an interest rate and monthly payment, that don’t vary for the term of the loan. Fixture Personal property which has been attached so as to become part of the real property. Examples include light fixtures or window treatments, which are commonly included in the sale. For Sale by Owner (FSBO) An individual homeowner who is attempting to sell his property without a real estate broker. The acronym “FSBO” is pronounced “fizbo”. In foreclosure A legal process instituted by a lender after the owner’s default. Foreclosed-upon homes are also known as “bank-owned” or “REO” properties.
Home warranty A service contract typically paid by seller and provided to buyers in a standard sale that covers that major systems and appliances for one year from the date a house is sold. Leaseback A scenario in which a buyer closes escrow on a home but allows the seller to remain in possession for a fixed period of time, typically 30-45 days after closing. During this period, the seller is renting the home from the buyer at an agreed-upon price, and the buyers acts as landlord. Market value The price that a willing buyer and a willing seller, both given full information, and neither under pressure to act, would agree upon. Mediation A dispute resolution method designed to help warring parties resolve their dispute without going to court. In mediation, a neutral third-party meets with the opposing sides to help them find a mutually satisfactory solution. Mortgage broker A person or company having contracts with financial institutions or individuals wishing to invest in mortgages. Mortgage brokers “shop” different banks to find you the best rates and terms on your loan, whereas banks like Bank of America and Wells Fargo do not. Multiple Listing Service (MLS) An online, members-only site by which a number of real estate firms share information about homes that are for sale. I typically provide buyers with access to the MLS so they are made aware of new listings that fit their criteria as soon as they become available. Multiples When a home “is in multiples”, it means that the seller has received offers from more than one buyer. This indicated that the home is highly sought-after and will likely sell for more than the asking price. NHD (Natural Hazard Disclosure) A required report paid for by seller and provided to buyer with other disclosures. The NHD includes information regarding any fault-lines, flood zones, fire severity zones, and industrial use zones within the home’s immediate vicinity. Open house An opportunity for prospective buyers to view a house in a lowpressure environment.
PITI
Principal, interest, Taxes and Insurance, which comprise a buyer’s monthly payment.
Property taxes Taxes that are paid annually in two installments on real property. Property taxes are ad valorem, based on the assessed value of the real property. Annual taxes are currently 1.25% in Los Angeles county. Prorate To divide or distribute proportionally. At closing, various expenses such as taxes, insurance, and interest are prorated by the escrow company between seller and buyer. REALTOR A special designation for a real estate associate who holds active membership in a local real estate board affiliated with the NATIONAL ASSOCIATION OF REALTORS. Not to be confused with a “real estate agent”, who has no obligation to abide by the Board’s strict Code of Ethics. Recording The act of entering in the public records the written record of title to real property. Rent control Laws that limit the amount of rent landlords may charge, and that state when and by how much the rent can be raised. Most rent control laws also require a landlord to provide a good reason, such as repeatedly late rent, for evicting a tenant. Many communities in Los Angeles county are subject to rent control provisions-if you are purchasing an income property, it is imperative to investigate local laws that may affect your investment. Retrofitting Los Angeles county requires that all homes sold be retrofitted with low flow toilets, gas shut-off valves, water heater bracing, and smoke detectors in all hallways and sleeping areas prior to closing. It is customary in standard transactions for the seller to complete the work required and submit evidence of “certification” to the escrow company. Short sale A sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a lengthy and costly foreclosure, and the owner is able to pay off the loan for less than what they owe.
Termite Termites are an example of a wood-destroying pest, and typically must be eradicated prior to closing. In standard transactions, the seller will obtain a termite inspection, and provide the report to the buyer along with other disclosures. It is customary for the seller to complete the work required to rid the home of any active infestation and submit evidence of “termite clearance� to the escrow company. Time is of the essence A clause which makes failure to perform by a specified date a material breach or violation of the contract. Purchase agreements in Los Angeles contain strict timelines that good agents will monitor closely to ensure that all agreed-upon deadlines are met. Title
The right of ownership of a property
Title company A company that provides title insurance policies. Title companies conduct title searches ensuring that no one else has any right or claim to the home being purchased. Title insurance Protection for lenders or homeowners against financial loss resulting from legal defects in the title. Title search Checks all the records relating to the property to determine whether the seller can sell the property, and can do so free of liens. Underwriting The process of verifying data and approving a loan. Unpermitted Additions or modifications to a home made without the benefit of a permit, such as a converted garage. Though common, these structures or improvements may not be in compliance with current building codes. Walk through A buyer’s onsite inspection of the property being purchased, just prior to closing, in order to ensure the home is in substantially the same condition.