First Time Homebuyer Frequently Asked Questions
BUYER FAQS
This post is titled “First Time Homebuyer” frequently asked questions, but truthfully whether you are a first timer or have bought or sold before, you most likely will find useful information here. Not only is the process different in different states, there can also be different practices between northern and southern California. The comments here are most relevant to real estate transactions in southern California.
Over the years I’ve helped hundreds of people buy homes in all kinds of market conditions and every price range from entry level to luxury. In no particular order, here’s some of the most common questions I’m asked.
WHY ARE THEY SELLING?
While there are many things Sellers have to disclose, why they are selling is not one of them (in most instances).
Sometimes we have an indication based on the type of sale: foreclosure, short sale, probate or trust sale, relocation, new construction, etc. Other very common reasons might be downsizing, divorce, illness, or other changes in the seller's personal or financial circumstances such as the birth of a new child (need a larger home) or an increase in their income affording them the opportunity to buy a larger move up home.
What might be a better question to focus on is what terms are the sellers looking for, i.e. long or short escrow, leaseback after the close of escrow, seller contingency on finding a replacement property. Often by pursuing those questions, I can get a better understanding of what's going on behind the scenes. Sometimes that insight is useful, other times, not so much
But, truthfully, in most situations it doesn't really matter. If the seller has gone through the trouble of listing their home for sale in the MLS, they want to sell and that's all you really need to know (at least at the beginning).
HOW MUCH ARE THE PROPERTY TAXES?
In 1978, California adopted Proposition 13 which sets a property tax rate of 1% (plus “local assessments”). The additional property taxes may be approved for schools or local projects, which can vary amongst communities and bring the tax rate higher than one percent. These additional property taxes change annually and are determined by voters in each tax rate area. Lenders usually calculate the amount to be 20 to 25 basis points although in your specific situation they could be higher or lower because some of the additional taxes are fixed rates. So for higher priced properties, as a percentage of the purchase price, they are lower.
Additionally, the assessed value of a property is limited to an increase no greater than 2% each year unless a change in ownership or new construction occurs. The 2% increase is originally applied to the base year value, and is thus referred to as the factored base year value. In the case of real property, the factored base year value is the upper limit for property tax purposes. The maximum 2% increase per year continues to be applied until a change in ownership or new construction occurs.
As a result of this system, you might be paying substantially more in property taxes than your neighbor is for a house that is substantially the same but purchased at a lower price.
The reason CA has had this system since 1978 is because response rising property taxes were placing a significant burden on homeowners. The primary goal of Proposition 13 was to provide property tax relief by limiting the amount of property tax that could be assessed on a property. The measure aimed to protect homeowners, especially those on fixed incomes, from being forced to sell their homes due to escalating property taxes. Additionally, Proposition 13 ensured that property tax assessments were based on the property's purchase price rather than its current market value. Despite its critics, Proposition 13 remains in effect today.
“If you are buying a home in CA, do not rely on the taxes shown on public facing websites. Those typically display the taxes the current owner is paying which is almost always lower than the new owner will pay.”
WILL THE SELLER TAKE LESS?
That's going to depend on whether we are in a Buyer's or Seller's Market, how long the property has been on the market, and how much equity the seller has.
A Buyer's Market is generally defined as more than 6 months of inventory on hand and a Seller's market by less than 3. If there is between 3-6 month's of housing inventory listed, the market is considered "balanced".
The second determining factor will be how long has the home been on the market. As a general rule of thumb, don’t expect to pay less than the list price the first 10 days the property is on the market.
Lastly, you will need to know if the seller can afford to accept less and we also have to factor in what kind of sale it is and who are the decision makers.
Better questions to focus on are whether the Seller has multiple offers and when the offers are being reviewed. If it is a new listing and they already have offers in the first week to 10 days or so, it pretty much will sell above the asking price unless someone has some extraordinary terms they can offer (such as all cash and closing in 7 days with no contingencies).
If the listing has been on the market for a while, is not moving, has not had any price reductions, and activity is low, then yes the seller may very well accept an offer below the MLS list price.
As mentioned above, whether the property will sell for less or not is often also a function of who the decision maker is. In a short sale or REO, the loss mitigator or asset manager may only have authority up to a certain limit to discount the home. On the other hand, if the seller is someone who inherited a property owned free and clear they very well might accept less than the asking price if the property has been on the market for a while.
HOW DO I “WRITE” AN OFFER?
In most instances your agent is going to use what we refer to as the “RPA” or more formally the Residential Purchase Agreement.
To the pre-formatted boilerplate, the agent adds the specific price and terms. That’s it. Put it into DocuSign for electronic signature or wet sign it in person and we’re ready to go. (Most people e-sign.)
In some instances, probate sales or if you are buying a property from a large builder like KB homes, a different form may be used.
Your offer may be accepted as written (unusual), counter offered (more typical), or out and out rejected (not commonly done).
“When you submit an offer, typically you will also submit your proof of funds to close (POF) and if you are getting a loan, a pre-approval letter from your lender.”
WHAT IS A “COUNTER OFFER”?
A seller can accept, reject or counter your offer. Over the last few years many listings have received multiple offers at once and sellers can respond to all of them, what we call SMCO, Seller Multiple Counter Offer. With a multiple counter, a seller is allowed to accept whichever offer they deem to be the most attractive based on price and terms. When only responding to one offer at a time, the seller has to accept if the buyer agrees to the terms and conditions.
Sometimes buyers ask how we know if the seller really has multiple offers. Short of seeing the other offers there is no way to verify this and there is probably some misrepresentation going on by if the listing agent is working for a reputable brokerage, chances are they are playing it straight.
HOW MUCH SHOULD I OFFER?
How much you should offer depends on a number of factors
Do you expect to be in a multiple offer situation?
How much do you want this particular home?
What outcome do you expect?
What terms are you willing to offer?
Other factors also go into the equation. If your down payment is not strong, i.e. 5% down or less, you might have to offer more than an all cash buyer.
Some people may have been advised by their friends or family to offer 5-10% lower than the listed price. That’s ok if the property is 10-15% overpriced. If a home is “worth” $100K less than it is listed for based on recent comps, that’s not a low-ball offer. It’s a market based offer. But if the listing reflects the recent sales of similar properties (as well as what’s in escrow), then offering less is not likely to get the outcome you want.
“Don’t make a “low-ball” offer just to see if the seller will take it.”
WHAT HAPPENS AFTER AN OFFER IS ACCEPTED?
After an offer is accepted, the buyer has 3 business days to get their earnest money deposit (EMD) to escrow. The EMD is most often 3% of the final purchase price. Usually this is done by wire but some escrow companies accept checks.
The next step is typically to do buyer inspections and investigations. These can include a general home inspection, a termite inspection and a sewer line video. Depending on what is discovered during these inspections there may be further inspections.
After the inspections are completed, the buyer can make a request for repair which can include actually doing the repairs, giving the buyer a credit for the repairs or lowering the price.
Part Two of the Seller FAQ series is in “coming soon” status. Check back for updates.
DO YOU HAVE QUESTIONS ABOUT BUYING A HOME?
use the form below