Home Buyer’s GuideMoretti Homes

Mike Moretti’s Home Buyers Guide

Table of Contents
1. Advantages of Home Ownership
2. Disadvantages of Home Ownership
3. The Real Estate Team
4. How an Agent Gets Paid
5. The Wants and Needs Analysis
6. The Hunt
7. Showing Properties
8. Brokers’ Tour
9. Presenting Your Offer
10. Real Estate Financing
11. Making Repairs
12. Home Protection Plans
13. Agency Relationships
14. What’s it going to Cost?
15. Buyer Obligations and a Few Words about Myself

1. Advantages of Home Ownership
Leveraging: the ability to only invest 20 percent, 10 percent or less and still control 100% of the property. If the property increases in value, the owner reaps the full value of the growth in equity. Tax benefits of ownership: The state and federal governments have encouraged the ownership of principal residences by providing income tax deductions for the payment of mortgage interest and property taxes. These benefits often reduce the net out-of-pocket costs of home ownership well below that of renting. Owning a Home Can Increase Your Savings: Mortgage payments help build your net worth. Unlike rent payments, a portion of the money you pay goes towards building equity. Mortgage interest payments are deductible: By owning a home, you can write off the interest of your mortgage on your tax return. In some cases, this will allow you to itemize additional deductions. Additional tax benefits: The tax code is generous to homeowners. Not only can you deduct the interest on your home mortgage, you can avoid taxes on the profit from selling your home, if you buy another home of equal or greater value within two years of the sale. Also, IRS rules allow you to avoid taxes on up to $250,000 (or $500,000 if you are married and filing jointly) of profit from the sale of your home, if you have lived in that home for 2 out of the last 5 years. Equity Buildup: Each mortgage payment will consist of principal and interest components. During the early years of ownership, the principal accumulation is relatively small, although it does increase with every payment. If the loan is paid for its full term, the original amount of the loan (plus appreciation) will form the owner’s equity in the property. I can provide historical data but you need to ask yourself how much you think property values will change, if at all, over the next few years. Remember that you are driving the market any time you decide to sell or buy.

2. Disadvantages of Home Ownership
Just as there are reasons for most people to own a home, there are valid reasons for people not to own a home. These would include:
You don’t plan to stay in the area for at least 3 years.
You like the flexibility of renting.
You don’t have the need for tax benefits of home ownership.
You don’t want to lock up cash in a down payment.

If properties decrease in value, then the leveraging benefit will turn into a negative, multiplying the effects of the drop in value. Buyers should be aware of this fact.

3. The Real Estate Team

Here is a snapshot of all players involved in helping you buy a home. You should learn what each of these people do so you know how to work with them.

The Listing Agent: Works with the seller to market a home. They usually have a contract that promises them a commission no matter who sells the home, including the seller. The listing agent will share the commission with my company if I’m the selling agent.

The Selling Agent: Let’s say, for instance, that I work with you (the buyer) to help you locate a home that exactly meets your needs. I will ask a logical set of questions to find out what properties meet your needs. I will search every available property, take you to the properties, negotiate a contract with the seller, conduct inspections to make sure the home is sound, help the buyer obtain a loan at favorable terms, open escrow to insure that title is free from liens and defects and much, much more. As an agent, I must get to know your needs. By asking a logical set of questions, I can ascertain what property will meet your needs. The answer to these questions will help you, the buyer, narrow the search for a home down to a city, an area, or perhaps even a specific neighborhood. This will save you valuable time and help you find the exact property you’re looking for.

The Lender: The lender is the big hand in the sky. They will loan you money to purchase your home, unless you have all cash. There are many different types of loans, from fixed to variable, (see Real Estate Financing) and various programs from FHA to VA to Community Funding. The loan must be tailored to meet your specific needs.

The Appraiser: The appraiser must value your potential property to make sure it’s worth the full amount of the loan that the lender is planning to make. If it does not appraise for what you paid for it, then I’ll have to renegotiate with the seller, or take other action.

The Inspectors: There are many home inspections that may be available including but not limited to: Termite Home inspections Roof report Environmental hazards Structural Engineer Soils Engineer Earthquake Smoke detector Soils Septic (if applicable) Well (if applicable) Please let me know when we write the Purchase Agreement which one you would like. I will give you the names of some inspectors from each category you request. With your approval, I can schedule appointments and coordinate reviews with you and the inspector. Inspections will vary in cost and coverage. Feel free to ask any inspection company their costs and their scope of coverage up front. Unless the seller agrees otherwise, you will be responsible for the cost of any inspections. Remember, this is one of the biggest purchases you will ever make so do not be “penny-wise and pound-foolish” when it comes to home inspections.

The Escrow Company: The escrow company/agent handles much of the paperwork involved in the transfer of home ownership, which includes providing title insurance. Title insurance helps to assure that you are the legal owner of the property and it’s free of encumbrances when you take possession.

4. How an Agent Gets Paid
As an agent, I receive a commission from the seller of real estate. The agent who represents the seller is the “Listing Agent” and the agent who represents the buyer is the “Selling Agent”. These agents will share the commission in a typical transaction. However, just because you may purchase a property listed from my company, but not by me, I will not be compensated. I only get paid when you purchase a home directly through me as your agent. Confusing? Simply put, if I don’t write the offer, I don’t get paid. Very few people understand what selling agents do for a living. Most people think that an agent simply shows a few homes, writes an offer, goes to escrow and collects a commission check. As you can see, that couldn’t be farther from the truth. All of the members of the real estate team are involved in helping you buy a home and my job is to coordinate the team. Remember, I’m on your side. As with everything else, what you read and what you learn in this package could never replace the need for an experienced professional with a proven track record.

5. Wants and Needs Analysis
Use this page to determine your “Wants” and “Needs”. A Want is something that’s nice to have, but isn’t absolutely essential. A Need is something you cannot live without.

6. The Hunt
In addition to the Multiple Listing Service (MLS), I will use all available sources to find the right home for you. This will include: local newspapers, real estate magazines, direct mailings, and networking through other Realtors.

7. Showing Properties
My job is to save you time! This part of the process is a team effort. In a market like we have today, it is critical to keep an open mind and a malleable schedule. The key here is not to stress (leave that to me) and have faith that your home is right around the corner.

8. The Brokers’ Tour
Brokers and agents scurry every Wednesday and Thursday to verify that new listings are all that they promised to be. Many times, when a listing is being shown for the first time, it happens on a Brokers’ Tour. It is most likely that agents will coordinate bringing their clients to the first open house to give them a shot at making the first offer. In today’s climate, it is not unusual to have a listing agent designate a specific date and time they intend to entertain offers, which takes away the need to rush to the first open house. My feeling is always to be ready and never wait to see something that has promise.

9. Presenting Your Offer

When it is time to write the offer, I will present the document to the Listing Agent and/or the owner of the home. Sometimes it may not be possible to present the Purchase Agreement directly to the owner. Following your offer, the owner has three choices:

The owner can accept your offer: It is rare that an owner would accept the offer exactly as it was presented. If it is accepted without any counteroffer, it means that I’ve worked very hard on your behalf to keep them from changing anything in your offer.
The owner can reject your offer outright: If the owner feels that we are too far apart from what you are offering, then he or she can simply reject the offer. If you wish to make another offer once the original offer has been rejected, we must write a new offer. An outright rejection of an offer is rare.
The owner can make a counteroffer to your offer: This can change some of the details of the offer and I will explain those changes to you at a later date in time. At this point, you can accept the counteroffer, reject it outright, or we can draft a counter to the counteroffer. You can see that this can be a very trying event. Keep in mind that purchasing a home is a complex process, so be prepared to be patient and keep the faith.

10. Real Estate Financing
There are many ways to purchase a home, and the way you finance the home can have a long-term effect on your investment. The two most common types of mortgages are fixed-rate mortgages and adjustable-rate mortgages (ARM’s).

Fixed-Rate: Fixed rate mortgages come with an interest rate that remains the same for the life of the loan. The life, or term of a mortgage, is generally 30 years, but 5, 15 and 20-year term loans are also available. Fixed rate mortgages protect you from the risk of rising interest rates. Since you are locked into a given rate, you could end up with a higher rate than the going rate, should interest rates fall.

Adjustable Rate: Better known as (ARM’s), or adjustable rate mortgages. These mortgages come with interest rates that adjust up or down, depending upon current economic conditions. An ARM rate is based on a money market index. The one-year U.S. Treasury Bill is commonly used because its yield is similar to the 30-year Index. ARM’s might also be tied to other indexes like certificates of deposit (CD’s) and the London Inter-Bank Offer Rate (LIBOR).

11. Making Repairs
If repairs are suggested by any inspection, the cost can be paid by the buyer or the seller, or can be split by both of you. There are no standards in this area therefore negotiations are dealt with differently for each purchase. The following sample reports (not included) will give you an idea of what you’ll see from a few inspectors in this county. You’ll be able to pick from an extensive list of available contractors whose reports vary in appearance and content.

12. Home Protection Plans
Home Protection Plans offer limited protection of certain components of the home, usually for a year. I will provide you with several brochures from home protection companies explaining their coverage. You have the option of purchasing such a plan and paying it yourself, or asking the seller to pay for the plan in the Purchase Agreement.

13. Agency Relationships
The Agency Relationship disclosure explains the choices you have and how I work with you. Though we will work together exclusively, my company is actually representing you. This can get confusing, but it is fairly simple and important to understand. Our company agrees to act as your agent in one of the following ways: 1. Dual Agency is representing both you and the seller if you want to view and present offers on a property listed with our office. 2. Single Agency is exclusively representing you, which prevents me from showing you properties and presenting offers on properties listed with our office.

14. What’s it going to Cost?
Probably one of the reasons that buying a home is such an emotional experience is because not only do you have to deal with buying the home, you also have the mortgage process to navigate. This can be a smooth and uneventful process, or it can be an unnerving one. A great deal depends on your preparation as well as the right choice of an efficient mortgage broker. I’ll be happy to provide you with some names of good mortgage brokers I’ve worked with in the past. Let’s begin this section with some basic terms. Financing a home is the purchase price minus the down payment. In addition to the down payment, you will need money for closing costs (the final costs associated with closing the loan). Although closing costs can vary, you can incorporate them into your loan if needed. These costs are better known as nonrecurring closing costs. You can use the following example as a guideline to the costs associated with buying a home.

Example # 1: Let’s say you’re going to buy a home for $500,000 and you’re putting down 20% of the purchase price, or $50,000. What’s it going to cost? Please keep in mind that these are general formulas, and the costs will vary from house to house along with changing economic conditions. With this formula you will find that:P stands for Principal: Principal is the amount of money you borrow from the bank. This amount will depend on the purchase price and the amount you decide to put down. The principal will be part of your monthly payment. I stands for Interest: This is the amount of money the bank will charge you to borrow the principal amount. Although interest rates can be fixed or adjustable, we will use a fixed interest rate of 7%. The interest will be part of your monthly payment. T stands for Tax: The amount of money you will have to pay in property taxes every year while owning your home. Property taxes pay for things like school bonds, streets, fire departments, hospitals, police etc. The formula for calculating taxes is: T = $ 500,000 (Purchase Price) x .0125% T = $ 6,250 / 12 (Months) T = $ 520.83 (Monthly Cost) I Stands for Insurance: The amount of money you will have to pay every year while owning your home. The essential idea behind real estate insurance is to protect you from a catastrophe. Most lenders will require you to have insurance for them to lend you money. The formula for insurance is: I = $ 500,000 (Purchase Price) x .0033 I = $ 1,650 / 12 (Months) I = $ 137.50 (Monthly Cost) Using these formulas, and a mortgage calculator, we find that the cost of buying a home will be: Cost of Buying a Home = P(368.87) + I(2,625.00) + T(520.83) + I(137.50) Monthly Cost of Buying a Home = $3,652.00

Example # 2: For this example, let’s say you’re buying a condominium for $250,000 and you’re putting down 10% of the purchase price, or $25,000. What’s it going to cost? With the PITI formula you will find that: Cost of Buying a Home = P(368.87) + I(1,312.50) + T(260.41) + I(0)* HOA Home Owner Association Dues ($250.00)* Monthly Cost of Buying a Home = $ 2,191.78 Generally, there is no insurance when you buy a condominium. It is usually incorporated into the HOA payments. These dues generally include insurance, water and common area maintenance (CAM). Remember that you can write off your monthly mortgage payments (interest amount only) from your annul income to save even more money! Contact your accountant and have him/her explain how this works.

15. Buyer Obligations And Few Words About Myself
In exchange for my efforts on your behalf, you agree to work exclusively through me. Don’t ever hesitate to ask me questions about the home-buying process; I’m here to help you buy the home of your dreams using my expertise. Don’t forget, I’m working for you!