Rich Kids Buying Guide 101

Rich Kid’s Guide to Buying a Home

There comes a point in every rich kid’s life when they decide they are done paying rent and are ready to invest in the purchase of their first home. Many of my friends come to me with basic questions as to what the home buying process involves, how they get started, and what are the potential hidden costs involved. Here’s a step by step guide on purchasing your first home.

Still trying to decide if you should buy or rent?

 

1 – Speak to a Lender

The absolute first step in purchasing a home is to speak with a lender (please refer to our list of trusted lenders if you need help getting the ball rolling). Consulting with a lender is free of charge and a relatively pain free process. Typically you will speak with your lender on the phone for about 15 minutes and he will ask you a series of questions to pre qualify you. You will want to have the following handy before you speak: last years tax returns, social security number, driver’s license number, credit references (credit cards, auto loans, etc), and bank account information. Once he gathers all of your information, he will then run your credit to determine your FICO score. Your FICO score is the number that reflects your credit worthiness. Typically a FICO of 720+ will make you a prime candidate for a loan. The lender will use a combination of your FICO, job history, and financial information to determine how much of a home loan you qualify for. He can also advise you on property taxes (about 1.25% of the purchase price) and whether or not you want those taxes rolled into your monthly mortgage. Once you know how much you can spend, you are ready to start your house hunt! Not quite ready to be pre approved by a lender, but are curious to know what your FICO score is? Check it out for free: www.myfreecreditreport.com

2 – Be Realistic About What You Can Afford

One common theme we see amongst many of our younger clients and friends is that they are not always the most realistic about what they can afford. Sometimes it can be discouraging when you don’t find the perfect place right off the bat. Remember, becoming a Rich Kid through real estate is a jog, not a sprint! Just because you can’t afford the perfect loft in the most fabulous building today, doesn’t mean it can’t happen in a few years. Start by looking at places that you can comfortably afford and that are not a stretch. In the heat of the moment it can be easy to say that you’ll only eat ramen for the next 6 years and make every night a Blockbuster night; in reality it’s not worth the sacrifice! As your agents, we’ll make sure to only show you properties that fit your budget so there isn’t the temptation to overspend!

3 – Decide on Location

The next step in your home buying process is to decide where you would like to live. We firmly believe that where you live in LA is one of the keys to finding happiness in this city. Ideally you want to be in a neighborhood that is safe, close proximity to work, near your favorite activities, consistently appreciating in home value, and most importantly in your price range. We always advise our clients to purchase the worst house on the best street vs. the biggest house in a less desirable neighborhood. If you stick to prime areas, you can pretty much guarantee (I say pretty much, not definitely) that your home will always appreciate in value!

4 – Daily MLS Updates

Now that you’ve been pre qualified by a lender, decided on a great location, and have carefully evaluated what you can comfortably afford, it’s time to start looking at properties! The MLS (multiple listing service) is the tool we use to help find you the perfect home. After we’ve met and determined your “must haves”, we plug that criteria into the MLS and it sends us daily updates. From there we scan through the listings, personally preview each property, and then send them your way for review. You let us know which homes you’d like to see and then we set up a time to take a look together. You might be wondering at this point who pays for our services in helping you purchase a home. When we represent you as a buyer, the seller pays our commission and the seller also pays the commission to their agent.

5 – Previewing Property

This is my favorite part of the buying process. After we’ve decided what homes work best for your needs and budget, we meet to take a look at them. A day of looking at property can be get confusing and tiring after you’ve seen a bunch of listings. We recommend the following in preparation to preview:

Get a good night’s sleep – Keep the partying to a minimum the night before. I took a client of mine out with her parents to look at pricey condos. She was so hung over that she would vomit at each place we stopped to take a look at. I had to give her a breath mint and a Red Bull to get her through the day without her conservative parents knowing why she was so ill!

Bring a digital camera with you and take lots of photos of each property – After property three, things can get confusing. This will help immensely in the decision making process.

Bring a note pad to jot down notes on each property.

Bring a snack like a granola bar and a bottle of water.

 

6 – Making the Offer

You’ve found the perfect home and you are ready to make an offer – now what? The first thing I do is pull the most recent comparable sales in the neighborhood. I present these “comps” to help guide you in what to offer. We also want to look at how long the home has been on the market, any recent upgrades on the property, interest level of other buyers, and overall condition (is it a fixer, move in ready, etc). Once we’ve determined the offer price, I prepare the Residential Purchase Agreement for your signature. Once the agreement is signed, I present the offer to the listing agent along with:

3% deposit of the purchase price. The balance of your deposit is due at the close of escrow (escrow -neutral party between the buyer and seller who makes sure all documents are signed, funds are delivered to the appropriate parties, etc). Just to reiterate, let’s say you are putting 10% down – 3% is due with the offer and if the offer is accepted, the other 7% would be due at the close of escrow.

I write a letter to the seller on your behalf stating why you are the perfect person to buy their home. It’s these little things than can make a difference sometimes!

Pre approval letter – When you have been pre approved (see section #1) the lender will provide you with a letter stating the amount you are qualified to purchase. The seller will demand that this letter be included with your offer.

7 – Counter Offers & Multiples

It’s rare that the seller is going to accept your first offer. Typically they are going to counter back to us with another price and it is up you as to whether to accept it or not. This process can go back and forth, but ultimately you need to decide what your best and final offer is. We can strategize together as to how to maximize that final bid and have the seller accept (I’ve got some tricks up my sleeve). Sometimes an agent will price an amazing property on the low side to spark multiple offers. The benefit to the selling agent is that they have a bunch of offers to choose from with the buyers outbidding each other for the same place. I learned from the master of multiples (thank you – AE), so should we find ourselves in this situation I know how to win them without necessarily having to pay more!

8 – We Have a Deal – It’s Contingency and Disclosure Time

Your offer has finally been accepted, but now the clock really starts ticking! In the purchase agreement we have what’s called “contingencies” and “disclosures”. When you enter into a deal, you are given a contingency period and disclosures which are basically items that you can use to cancel the agreement if need be. The two main contingencies are the loan and the inspection. The default period is 14 days on the purchase agreement to conduct inspections and finalize your loan, but sellers don’t like these periods to be that long. Once the contingency period is up and you’ve signed off on it, the seller can keep your 3% deposit if you back out of the deal (technical term – “liquidated damages”. The seller likes this because they know you have incentive not to cancel the agreement. I usually write a 10 day contingency period in the offer, so that this whole process isn’t dragged out and the seller feels more secure with you as a buyer. While we are working towards signing off on the contingencies, the sellers have to provide us with their disclosures. The disclosures are basically items that the seller has to tell us about the house (any deaths on the property within the last three years, water damage, floods, earthquake damage, improvements, permits, liens – anything and everything they know, they need to disclose). Your new potential neighbor likes to dance in the nude every night at 5pm sharp to Lady GaGa – the seller has to tell us this if they know it. During the contingency period, we have a lot to accomplish together to make sure you are not stuck in a bad deal. Here’s what we’ve got to do:

We need to make sure that everything is good to go with your loan. Once the offer is accepted, we will contact your lender immediately with the final purchase price, length of escrow, etc.

Inspections – this is where those extra costs of buying a home come into play. We are going to have to conduct a number of inspections as quickly as possible. These can vary, but for a single family home I would advise a: general inspection, termite inspection, chimney inspection, mold inspection, sewer inspection, pool inspection (if applicable), and geological inspection (if the property is in the hills or hillside). These inspectors demand payment in full at the time of the inspection. For an average size house I would put around $1500 aside for these inspections and for a condo roughly $300 (these numbers can really vary and the examples provided are just a guide). The seller is responsible for a Termite Inspection, fumigation, and repair of all Section 1 (active/current) termite damage. If these inspections produce deal breakers and we cancel the contract, you will be out of this inspection money. If we do go through with the purchase, we can go back to the sellers for credits on some of the repairs (credits – money seller gives back to buyer at the close of escrow to compensate for above average repairs needed or any other reason negotiated in the process). Either way, at least we know without a doubt the condition of the property. In the long run, $1500 is worth preventing the heartache and costs involved in buying a “money pit”.

Agent Visual Inspection – I will conduct a visual inspection personally noting any cracks in the walls, damage to the house, and overall condition of the property. This is a very general once over on our end and is by no means a substitute for a proper, licensed inspection. I won’t let you buy conducting them!

 

9 – Closing

You’ve done your inspections, signed off on all your contingencies, and the deal has seemed to be on autopilot for the last two weeks. A few years back, a closing or escrow period was 30 days from acceptance with a conventional loan. In today’s market, 40-45 days seems to be the more realistic standard.

Now it’s time to close! Closing is when your deed has been recorded with the county, your loan documents have been signed, the balance of your deposit has been wired into escrow, and you are given the keys to move in. Hidden fee alert – typically the buyer and the seller will split the closing costs 50/50 with the seller choosing the escrow officer. This is all agreed to when we draft our initial offer in the purchase agreement. Closing costs can very quite a bit, but figure that you could be paying in the neighborhood of 1% of the purchase price. This is a very basic estimate and is to give you a general idea of what to expect. The escrow officer can provide you with a more exact estimate when we enter into the deal. OK, back to the actual closing. About a week before we close, we will do the following:

 

A final walk through on the property to make sure the condition is as we purchased it.

You will sign your loan documents and remaining closing paperwork.

Your loan will officially fund and a check will be cut to the seller.

Your deed will record with the county. When this happens, you are officially the owner and can move in!!! People who have never purchased in LA often are boggled at how anticlimactic the close is. There are no round table meetings in a lawyer’s office on closing day. We get our paperwork out of the way in the beginning making the process fairly quiet after the first 2 weeks with us as the agents doing the back end work.