Home Buying Basics
The Seller agrees on a commission rate with the Listing agent. Part of that agreement details how much of that total commission will be shared with a cooperating Brokerage that is representing the Buyer. The amounts and details of how much will be paid depend on the services rendered, which is also agreed upon with the seller prior to listing the home.
The Groove Realty’s buyer agent fee is 3%, which is almost always paid by the seller – exceptions are rare. In event that the seller is not paying the 3% buyer agent fee, you would pay your agent directly at the time of closing. There will never, ever be a time that we will show you a home that falls under this special circumstance without you knowing, prior to choosing to view the home. That’s how we guarantee no surprise fees.
It depends. Your lender may require a different amount of down payment depending on the purchase price of the home, your credit history, and other factors. There are also financial benefits to paying different downpayment percentages. For example, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance which can be quite costly. All that said, it’s common for folks to make a 5% – 20% downpayment on their home.
While you are probably expecting to pay a mortgage once you’ve purchased a home, you will also incur some costs as part of the purchase. Those costs most commonly include:
EARNEST MONEY: Earnest money is a type of security deposit that homebuyers submit whenever a real estate contract is executed to demonstrate they are serious and sincere about completing the transaction. The earnest money serves as the seller’s default remedy if you breach the contract.
In Austin, most homebuyers put 1-2% of the sales price down as earnest money. That means if you’re buying a $500,000 house, you would put $5,000-$10,000 down as earnest money. In a competitive market, many buyers decide to increase the amount of earnest money to make their offer more attractive to the seller.
The earnest money is paid to the title company where it is cashed and deposited into an escrow account and held on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, you decide not to proceed with the purchase of the home during your “option period,” your earnest money will be refunded.
OPTION MONEY: After you execute a real estate contract to purchase a home (meaning all of the terms are agreed upon and all parties have signed the contract), you typically begin an “option period”, however, it is possible that an offer is negotiated without an option period. The option period is the timeframe in which the homebuyer has an unrestricted right to terminate the contract for any reason so long as proper and timely notice is provided to the seller. This is the buyer’s opportunity to conduct any due diligence necessary before moving forward with the home purchase. During this period (often less than 3-5 days), the home is inspected by an inspector of the buyer’s choice.
Because the seller takes a risk by changing the status of his or her home to “pending” or “under contract,” homebuyers often compensate the seller by paying for the “option” to terminate the contract. You are buying an option to terminate the contract for any reason.
The cost and length of the option period may vary, and is one of the key negotiation points in the contract. In a competitive real estate market, we sometimes increase the amount of the option fee and/or decrease the length of the option period to make your offer to purchase the home more attractive to the seller.
Here in Austin the option fee usually ranges from $500 up to $5,000 depending on the cost of the home you are purchasing or strategic negotiation reasons. Because it serves as a type of deposit to secure the contract with the seller, the option fee is not refundable if you choose to terminate the contract during your option period. If, however, you proceed with the purchase, the option fee is applied toward the final sales price of the home.
INSPECTION COSTS: Before your home purchase is finalized, we advise our clients to pay to have the home inspected by a licensed home inspector. The inspector will review the condition of the house and the primary structural and mechanical systems. Inspection costs vary based on the size of the home and the services the inspector is providing. For a standard inspection of a single family home in Austin a buyer should budget $500 – $1,000.
Of course, other inspections require additional fees. Depending on the age, construction, or special features of the home, we may recommend additional, specialized inspections. For example, homes built before 1980 may have cast iron plumbing and may need a static plumbing test to check the integrity of the system. Swimming pools, mold, and foundation are other special inspections that might be appropriate depending on the home.
LENDER COSTS & FEES: As part of processing your loan to purchase the property, the lender incurs fees that they often pass on to you as part of your closing costs that are paid at the end of the transaction. These fees cover expenses like the appraisal, credit report, recording, legal fees, and more. You will see a detailed list of the fees you are paying as part of the final Closing Disclosure (CD), that the lender provides to you prior to closing.
DOWN PAYMENT: This is the portion of the purchase price that you pay at closing, while the rest of the purchase price is typically paid over time through a mortgage. We traditionally speak of down payments as percentages (5% down, 10% down, 20% down, etc).
The downpayment is paid at closing either via a wire or cashier’s check. Any small adjustments at closing (for tax calculations and so forth) can typically be made via personal check up to $1,500.
We get asked all the time about the different values assigned to a property, and why they often seem to be so substantially far apart! Here’s a quick rundown of the various ways of valuing a home:
MARKET VALUE: Simply put, this is what a buyer is willing to pay for a property. A real estate professional will use their knowledge of the market as well as a comparable market analysis of recent sales of similar properties to give a range of value for a specific property; however, there is both an art and a science to this process so each real estate professional may have a different opinion of value.
APPRAISED VALUE: An appraisal takes place if there is financing being obtained on a home (or some other situation arises, such as for estate/probate purposes). Basically, a lender wants to be sure that the home is worth what the buyer is paying (and what they are lending), as they will be holding a mortgage on the home as collateral for their loan. Appraisers traditionally will create a radius around a property and select 5-6 comparable properties that have sold, and add or subtract value based on the finishes, overall condition, and basic specs of a property. If the appraisal is for financing purposes, it is important that the property appraises. If it does not, the lender may deny the loan.
ASSESSED TAX VALUE: This is an assessment done for tax purposes. The county tax assessor’s office places a value on each property in the municipality each year in order to ascertain what the tax on each property should be. Often the county tax value does not align with the market value of the home. This is because there are no laws in Texas that require the disclosure of what homes sell for. As a result, the taxing entity is often relying on incomplete information to calculate assessed tax value.
The earnest money is paid to the title company where it is cashed and held in escrow on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, the buyer decides not to proceed with the purchase of the home during the “option period,” the earnest money will be refunded.
The option money is also paid to and held by the title company on behalf of the seller. Because it serves as a type of deposit to secure the contract with the seller, the option fee is not refundable if the buyer chooses to terminate the contract during the option period. If, however, the buyer proceeds with the purchase, the option fee is applied toward the final sales price of the home.
Current market conditions are simply a function of supply and demand. When there is a high demand for homes but a low inventory of homes on the market, it is considered a seller’s market. In a seller’s market it is common to have multiple buyers bidding on the same one property, which creates “a bidding war”, commonly stated as “multiple offers”. Multiple offers can also occur when a seller prices their home below market value, making it extremely attractive to potential buyers. In either case, a bidding war often drives up the purchase price of the home. If multiple offers are received, the listing agent will often call for “highest and best” due by a set deadline. This means that all buyers are to submit their very highest, and very best offer by a particular time so the seller can choose the offer they wish to proceed with.
While price is often a determining factor, it’s not always the highest price that seals the deal. Sometimes other aspects of the offer add significant value to the seller. Limiting the length of the option period, increasing the amount of the option money, or providing an opportunity for the seller to lease the property back while they secure a new home are just some of the factors that can make an offer more attractive to the home seller. Limiting the contingencies and lessening the risk for sellers can be key to winning the deal in a multiple offer situation.
Other than treating all parties fairly (in essence – what an agent says to one, they must say to all), there are no rules on how multiple offer situations are handled. Some sellers negotiate the first offer that comes in, while others ask for the highest and best offer by a certain date. We’ve developed our own thoughtful process when working with sellers where we inform all potential buyers if the home has entered into a multiple offer situation. We inform all buyers of our preferred terms and invite them to bring their “highest and best” offer by a particular date. This allows us to be transparent with all parties, while also allowing the potential buyers to improve their position before the seller makes a final decision.
In a bidding war, there is often an emotional desire to “win” that may overpower a buyer’s pre-determined spending limits. Use caution and talk through the options with your REALTOR®.
A solid pre-approval is an absolute must to be competitive, and is step 1 in starting the home buying process. In short, your pre-approval is the lender saying you can afford “x” after taking a quick glance at your financial situation. In order to be best prepared for getting pre-approved, begin compiling the following items:
- Tax returns for the past two years.
- Pay stubs for at least three months if you have an employer or tax returns and profit and loss statements if you are self-employed. If you are changing jobs or relocating, a copy of your employment offer letter. Talk to your lender about any potential change in your employment prior to seeking pre-approval, as it may impact your ability to obtain a loan.
- Bank statements for the past three months.
- Other asset/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property.
- If obtaining money from a third-party like a friend or family member, you will need a “gift letter,” which your lender can help you with.
- An idea of your credit score and monthly debts – student loans, car loans, etc. will be used to calculate your debt-to-income ratio, an important factor in mortgage lending.
- If you have a mortgage already, a couple of months of mortgage statements.
- If you are divorced, a copy of your divorce decree and documentation of any child support payments.
Getting these items together in advance will help you and your lender be prepared. Many lenders, if given all information up front and are authorized to pull your credit, will be able to pre-underwrite your loan. This means you’ll be approved as a buyer and they will simply need to “approve the home” based on title work, survey, and the appraisal, and sometimes, the inspection. This can be a huge bonus to help you stand out in a multiple offer situation.
Obtaining a pre-approval letter from a local lender is critical in our market and will help you to be more competitive in a multiple offer situation.
From the perspective of a Buyer, “Highest and Best” means you’ve got one shot, so make it your best shot. As a buyer, the best rule of thumb is to put your best foot forward so that if you don’t win, you’re not regretful or heartbroken due to a term you really would have agreed to. It does not mean that you should be offering terms that you are unable to follow through with or are too risky for your personal situation.
It should be noted for both buyers and sellers, that sellers do not have to choose the “best” offer. We often see Sellers choose to work with offers that appear very strong and one that they feel will get to the finish line (closing), even if it wasn’t the “best” offer or highest price. In this case, at the direction of the seller, the listing agent will go back to one buyer to see if they can make changes to their offer to make it the “best” offer. If that buyer declines, the seller can move on to the next offer they wish to work with. This process is often the reason that there are delays in hearing back from a seller to know if you have won the offer.
Sellers should not be going back to more than one offer at a time to negotiate terms and asking for each one to do “just a little bit better”, then, “just a little bit better”, and so on. This can create an Auction in which REALTORS® are not authorized to engage. If you see this practice happening, it should be reported to the Texas Real Estate Commission (TREC) and each brokerage involved in the transaction.
A common myth is that if you purchase as an unrepresented buyer, you save the buyer agent commission. The truth is that the total commission is negotiated between the Seller and the Listing Agent long before the home has even hit the market in their listing agreement. In that agreement, the Seller and Listing Agent decide how much total commission will be paid, and then how of that commission will be shared with a cooperating broker, if one exists. There are several other terms negotiated in this document privy to the actual seller and listing brokerage, and vary depending on the brokerage and the sellers. Further, A listing agent works for the seller, and they are obligated to work in their client’s best interest only. The listing agent has a fiduciary responsibility to the seller which means that anything the agent working for the seller learns about you, they are required to disclose to the seller.
Simply put, if you work with the listing agent directly, you have no representation or advocate in your corner, and you’re not saving any money. In fact, if we are listing the property, we’d prefer you have your own representation. It reduces the listing brokers’ liability and helps the process go much more smoothly for everyone involved.