Referrals Benefit First Time Homebuyers

lighthouse70First time homebuyers get better agents from referrals

Referrals are the lifeblood of real estate agents. A referral is a recommendation, most valued when introduced by someone both the agent and client regard highly.  Since the majority of referrals come from clients that an agent has worked with before, this is highest form of flattery an agent can receive. Having never bought a home, first time homebuyers might be most comfortable with this process, because they can rely on the experiences of friends they trust to help them find the right agent. The next best thing is working with an agent who specializes in dealing with first time homebuyers, like our Team For YOUr Dreams. First time homebuyers take a lot more time, need many more questions answered, and require more care in making a decision, so it is important to find an agent who can provide this extra level of service.

Referrals also come from other agents. In this case, a referral fee is paid to the referring agent if the lead results in the sale of a property. This arrangement is often used when a client relocates from one region to another and asks their local agent for help with their impending move. Keep in mind, however, that North Carolina law restricts payment of a referral fee only to licensed real estate agents. 

However, there are some companies that have found a way to sully the process of getting referrals.  There are companies who generate leads for Realtors, then refer the clients to anyone who will pay the fee.  In the normal referral relationship, a Realtor finds a qualified agent in another area and confirms that their clients will be well cared for.  Unfortunately, in the lead generating process, the care in selection provided by your Realtor in your home town goes out the window, and you get stuck with anyone who can pay the fee.

If you are trying to find the right Realtor, ask a friend who has bought a house in Cary, Raleigh, Apex or anywhere else you want to live in the Triangle area of North Carolina.   If you are a first time homebuyer who is new to the area, find a team that specializes in first time homebuyers so they can give you the extra care you deserve.

First Time Homebuyers Need To Know How Realtors Get Paid

pay70Understand how your agent gets paid when you buy your first home

Most people do not understand how Realtors get paid, particularly first time homebuyers.  Realtors are paid on commission, and commissions are only paid when a sale closes.  So, there is no payment for all the work that is done for people who do not buy a property.

Also, a Realtor only gets paid when his client buys or sells a house.  So, if one Realtor shows a first time home buyer many properties, but another Realtor takes over representing the buyer, writes up the sale and closes it. the second agent gets paid, even though the first agent did some of the work.  If you look all over town with one agent, then buy from another agent, the first agent did all that work for nothing.   First time homebuyers need to appreciate how commissions work in order to understand why it is so important to your Realtor that you are a loyal customer.  If you do not show loyalty, they cannot devote their full time and effort to finding the best homes and negotiating the best deals.

Some first time homebuyers see the commissions paid at closing and think, “Wow. That’s a lot of money.” And the total amount paid usually is, considering that the purchase price of real estate typically involves many thousands of dollars. But what looks like a windfall is actually divided among multiple principals. Let’s look at a typical transaction, where the seller is represented by a Seller Agent, and the buyer by a Buyer Agent.

A closing statement (HUD) shows the commission as being split into two portions—part of which goes to the firm which the Seller Agent works for, and the rest to the firm which the Buyer Agent works for. Most often it is split equally between the two firms, but in Wake County North Carolina it is typical that the selling firm receives a higher percentage. You might note that the real estate fees earned from the sale of the property are paid by the seller.

Now here’s where it gets complicated. Since both firms pretty much divide earnings the same way, we’ll focus on what happens to the funds going to the firm representing the buyer. Any time a firm receives funds from a real estate transaction, it takes a bit off the top for their fees before passing the remaining funds to the actual Realtors who did the work. Now, if the Buyer Agent got their client as a referral from another Realtor, then a referral fee is first paid to firm of the referring agent. Finally, any remaining funds go to the Buyer Agent. However, most agents work as part of a team, thus those funds are actually split between the team leader and the Buyer Agent.

Whew! So, as you can see, real estate commissions are used to compensate every firm and agent involved with a transaction. And, perhaps more importantly, nobody gets paid anything until the property closes.

Escrow Deposits Take Cash for First Time Homebuyers

money-deposit-stack70First time homebuyers have to put money in the escrow account

 

 

At the closing where you get the keys to your first home, you will set up a fund to pay for the property taxes and the homeowners insurance.  On page two of the closing statement, you will see a small money pit.  On line 1001 of the HUD closing statement,  there is a payment to start the escrow account with homeowners insurance.  You look above that on line 903 and you see that you just bought a one year homeowners insurance policy.  So, what is this for? 

 

Every month as a part of the mortgage payment the lender will collect some money to apply to purchasing next year’s homeowners insurance policy.  The payment at closing begins the account that collects this money.   The lender wants to have a couple of months worth of this payment as a reserve to be sure there will be enough money in the account next year to buy the homeowners insurance policy.

 

On lines 1003 and 1004 of the HUD closing statement, there are payments for property taxes that also go into the escrow account.  In a similar manner, the lender wants to have a couple of months worth of this payment in reserve so that there will be enough money to pay the property taxes when they are due.   By the way, property taxes can be paid when the bill comes out, but hardly anyone pays them then, as there is no penalty on the payment until the beginning of the next calendar year.  So, your lender will pay the taxes at the end of the year.

 

On line 1008 of the HUD closing statement.  there is a number with a minus sign in front of it.  The Real Estate Settlement Procedures Act (RESPA) sets a limit on how much of a reserve the lender may collect, which is generally two months of payments.  Before laws were enacted to limit these reserves, some lenders collected excessive amounts for their escrow accounts because the lenders did not have to pay interest to the homeowner on the amount collected.  This number on line 1008 subtracts from the reserves the bank would like to have in order to reach an amount that is allowed under federal law. 

 

At the closing, not only will the taxes be pro-rated and a one year insurance policy purchased, but an escrow account will be set up to start a fund that will pay for the taxes and insurance.  Then, each month, your mortgage payment will include some money for taxes and insurance that will go into this fund so that there will be enough money to pay the tax bill and insurance premium when they come due.

 

First Time Home Buyers and the Purchase Contract

drive-thru-lawyer-70x701The North Carolina Offer to Purchase and Contract is prepared by the North Carolina Association of Realtors in cooperation with the North Carolina State Bar.  So, the Realtors and the Lawyers take part in drafting the standard contract.  You should look at this link to the North Carolina Offer to Purchase and Contract, so you can see the entire documents.

 

The first part introduces the cast of characters.  You are buying the house from the seller so the blanks are filled in with the appropriate names.  The house is identified by its mailing address, legal description and references to the tax records when the blanks are filled in.  The contract wants to be sure the house is properly identified, so you do not get the wrong one.

 

Next, there is a discussion of fixtures to specify what is included in the purchase price, so that you get the light fixtures and plumbing fixtures that you expect.  There is also a discussion of any personal property included in the sale, like a washer, dryer and refrigerator. 

 

The total price to be paid for the house is in the first blank of the next paragraph.  The blank after that has the amount of the earnest money.  Earnest money is a deposit to show that you are serious about the purchase, and to get you to have some “skin in the game.”  The contract goes into detail in other provisions specifying when you would get that earnest money deposit returned and when the seller would get to keep the earnest money.

 

There are a series of blanks for other deposits and payments, most of which are usually zero in the average purchase agreement.  The last blank is the balance of the purchase price, so the amount in that blank plus all the other blank lines above it should equal the total purchase price, unless your real estate agent cannot add J .

 

The next paragraph talks about the financing.  If the blanks in that paragraph are filled in, then the sale is contingent on you being able to get financing.  The blanks specify the type and amount of financing that you need, as well as the interest rate.  So, if you can get that type of loan at that interest rate, or better, you are saying you will proceed with the purchase of the property.  If you cannot get that financing, there is a time limit where you need to cancel the contract before that time limit runs out in order to get your earnest money back.  

 

The first two pages of the North Carolina contract are where most of the information is entered by the buyer.  So, if you understand what the questions you will be asked when you make an offer, you will know the answers and it will be easier to proceed with buying your first home in the Raleigh area of North Carolina. 

 

 

First Time Home Buyers and New Construction

solonglandlord-new-construction701First Time Home Buyers Need to Understand New Home Sales

When you are doing something as important as buying a home, you should not try to figure it out all by yourself.  That is what buyers agents are for, to guide you through the process and help you make good choices.   This is particularly true when you are buying your first home, because you do not know the way through the maze.  So why do so many first time home buyers go alone to the builder’s onsite sales office and buy a new construction without any assistance.  This is one of the top first time home buyer mistakes.

If you were going into court, would you go without your lawyer?  If you did go without your lawyer, would you rely on the other party’s lawyer to represent your best interests?  Then, why would you go into a sales office, meet with the person who represents only the builder, and expect to get the best result?

On site agents are generally good people, and they want to make the buyers happy.  But, they represent the builder.  So, at each decision point, they are trained to get to the result that favors the builder.  Since they negotiate for a living, and you probably do not, who do you think will get the best result?  If you have a buyers agent representing your interests, you get a professional negotiator in your corner and advice that supports what is best for you.

For example, some major builders have their own lenders that are part of their family of companies.  The builder will pay some of the first time home buyer’s closing costs as an incentive  if the buyer will use their lender.   Making the loan is a profitable part of the sale of a home, so this makes the builder some more money.  This arrangement works to everyone’s benefit if both sides are well represented and have equal bargaining power, as the buyer will get the closing costs paid and the builder will makes some profit from making the loan. 

 But, if the buyer is not represented, it is easy for the builder to give the buyer a loan that does not have the best rate and terms so that the builder will make an excessive profit from the first time home buyer’s mortgage.  The profit from making the loan can come from the fees charged to originate the loan, but there can also be a profit from selling the loan.  Most lenders do not keep their loans, they sell them to investors, and the price that they can sell them for depends on the terms of the mortgage.  Mortgages that have a higher than market interest rate can be sold for a larger profit for the builder.  But, there is a higher monthly payment for the buyer.  So, the buyer needs to be represented so that the terms of this incentive are worded properly in the contract in order to protect the buyer from getting a bad loan.

For example, there was a large builder in Cary, North Carolina,  that would pay $2,000 toward the first time home buyer’s closing cost if the mortgage was made by the builder’s lender.  The builder tried to give my client a mortgage that was 0.5% higher than the going rate, which would have made the builder much more than the $2,000 paid for the closing costs when the loan was sold.  Also, my client would have a substantially higher monthly payment and over the course of the 360 payments in a 30 year loan, the additional amount paid would be huge.  Since I had placed wording in the contract that the financing would be within 0.125% of any alternative loan that I could find, the lender revised the interest rate.

Some first time home buyers fail to get representation because they do not know that they usually do not pay a buyer’s agent for their services.  Since there is no charge to the first time home buyer, this lack of knowledge results in a poor decision to skip the services of a buyer’s agent. 

The classic first time home buyer mistake is to believe that the builder will give them a better price if the builder does not have to pay a buyer’s agent representing the first time home buyer.   You will not get a better deal without a buyer’s agent.  Also, since you are negotiating against a professional without your own professional, you will probably get a worse deal.  Builders have found that Realtors sell the vast majority of their homes, so they are not going to create a system to try to alienate the biggest part of their sales force. 

Instead of cutting out the buyers agents, many builders have incentives to pay bonuses to Realtors in order to encourage them to sell their product.  So that you will have all the information to make a good decision, the state of North Carolina requires that any bonus for the Realtor be disclosed at the time you are making a buying decision.   This requirement just went into effect, as the state did not want the buyers to be unaware of any bonuses paid to the agent.

Remember Winnie the Pooh?  “You can’t go down to the edge of town unless you go there with me”.  You can’t go to the on site sales office unless you go with your agent.

Every First Time Home Buyer Needs an Inspection & Deals with Repairs

Rotten Roof

When you buy a home you have the right to inspect it to learn whether it is in need of repair or not. And if it is, you can ask the seller to make those repairs. But the seller does not have to make them. So how does that all get worked out? Much of it is spelled out in the contract that you and the seller will have agreed to, but some of it is open to negotiation. So yes, after you reach agreement on a home’s purchase price, the deal can still fall apart if the parties disagree about repairs. Therefore it is important to understand this part of the process.

It begins with the contract. There are two approaches, or alternatives, defined in the standard contract. Alternative 1 says that you (the buyer) have narrowly defined rights to inspect and request repairs, that the seller has rights and responsibilities, and resolution must be negotiated, or the contract is terminated. Alternative 2 says that for an agreed upon fee, you can inspect the home, have all the rights defined in Alternative 1 described above, plus have the right to decide to terminate the contract, for any reason or no reason, and walk away. Both alternatives need more discussion than we’ll go into here, but the point is that both alternatives give you the right to inspect the home and make decisions based on what you learn.

Who does the inspection? Your Realtor, more likely than not, is not a qualified inspector. You probably aren’t either. That does not keep you from looking for problems, but the objective here is to find what should be found, not what is easy to spot. Inspectors are trained for the specific tasks, and experienced inspectors have “seen it all before” and know what to look for. Inspections are not free, and are optional, but highly recommended.

What kinds of inspections are there? The following are common: home, pest, radon, well, and septic. Each is separate and distinct. There are more kinds of inspections, depending on the specific nature of the property being purchased. Why would you get the above inspections? A home inspection looks at appliances, heating and air conditioning, plumbing, insulation, roofing, doors and windows, and much more. The objective is to find out if all systems and major components of the home are performing the intended function and if they are in need of immediate repair. Cosmetic concerns (needs paint, dead lawn) and old but working systems are not “in need of immediate repair”.

Pest inspections look for evidence of termite or other troublesome infestations. North Carolina has a lot of termites, and they can do extensive damage, and it can be hidden from view. Radon is an odorless and colorless gas that has been proven to increase the risk of cancer if present in sufficient quantity. It occurs naturally, and can be found in Wake County in concentrations that exceed EPA-defined safe limits. Well water can be tainted and unsafe to drink. Septic systems can be in need of immediate repair, or even replacement. The point is that inspections by qualified inspectors can find things that you, as the buyer, absolutely need to know – and you need to find out about them before the deal is done.

The repair issues create a second round of negotiations, after the first round of reaching an agreement on the sale. If the dishwasher leaks, you can ask that it be repaired or replaced. The seller can say no, say yes, or offer compensation in lieu of repair. If the seller says no, you have to decide if you want the home anyway. If the seller says yes, you have to realize you have little control over the quality of the repair, other than that the dishwasher must work and not leak when done. Agree on compensation instead, and you can control the quality of the repair or replacement, after closing, not before. You will repeat this process for each item “in need of immediate repair”. Again, your Realtor, having done this many times before, can advise you on approach, and should handle the negotiations, but the decisions are ultimately yours, and the sellers.

If repairs are made, you have the right to re-inspect and make sure the repairs were effective. This may require the services of a qualified inspector again, but usually it is easy enough to see if the repair was properly done, particularly if you get a receipt showing that the repair was properly done.

Before you close the sale on your first home, it is important that you get an inspection, so that you know all about the home that you are buying.  Also, if you negotiate well, you may be able to move into a home where all the necessary repairs have been done, so that you can spend your time enjoying your new home instead of battling with things that are broken.

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