Los Angeles Living

If you plan to live in your home, now is the perfect time to buy.

Real estate economist, Ken Rosen, tells you why!

If you are a first time buyer here are some tips to avoid the disappointment you feel when you don't get the house you want..

As I discussed in a previous post, you must get pre-approved so you know absolutely what you can afford.

Fresh inventory of homes is low, and if a new listing comes on the market, if priced right, it is going to go into multiples and over asking. If you like it, then you can be sure there will be other buyers who feel the same. This is where you need to strategize.  If you are putting down 20% then you have as much chance as the next buyer (except the all-cash buyer) to submit the successful offer.  You also have to offer just the right amount below your top price in order to receive a counter-offer and to give yourself flexibility to increase your offer.  Putting down a minimum amount (FHA loan with 3.5%) will put you at a disadvantage in this situation, so be prepared to not get the house.

Short sales are tough for the first-time buyer unless it is a pre-approved short sale.  A short sale means that the house is being sold for less than the seller owes and the bank has to approve the sale.  This process can take several months and you may never receive an answer.  It is a nerve-wracking experience and it will delay your home ownership experience or result in you having to start the search process from the beginning again.  Short sales are not for the weak of heart.

Foreclosures are also difficult to handle for the first-time buyer.  It the foreclosure is really "a deal" you will be getting into the multiple offer situation and the price will go way over the asking price.  Case in point.  I had first-time buyers watching a foreclosure that had been put on hold a day after being put on the market. They wanted me to watch out for it coming back on the market.  I somehow missed its relisting and when I checked it was already in escrow after 13 days on the market.  I checked with the lender who had pre-approved all the buyers and found out that it had gone for $1,010,000, $110,000 over asking.  I am so glad that I did not put them through the offer process as their affordability is $900,000 maximum, which was actually the original price.

The trick is to concentrate on houses that have been on the market for a while and probably need some work.  Look for homes that you can move into and work on over time.  It is rare that you are going to find your ideal house within your price range.  Not impossible, but rare.  It is always better to be the only buyer making an offer as your negotiation position will be much stronger.  It is not fun to we waiting on tenterhooks to find out if you are going to get the house.

If you take a realistic view of your buying power, and are willing to use your imagination, you will be much closer to getting into a great first home.

First time home buyers, this is what you need to know about the home purchase process:

The very first thing you need to do is find out how much home you can afford.  Find a lender, or ask your realtor to recommend one and get pre-approved.  The reason for this is twofold:  Firstly, in Los Angeles you are not going to be able to make an offer without a letter from a lender verifying that you are able to afford the house and make the payments.  Secondly, you will find out how much house you can buy.  There is no point looking at homes above your price range, but you also may be surprised at how much house you can afford.

When talking to your lender, make sure you understand what it will cost you to buy the house.  There are closing costs involved over and above the lender's fee. 

When you are motivated and ready to look at homes you need to make yourself available to view them.  Your realtor will send you lists of homes within your criteria, but you should also look yourself as sometimes the realtor may not consider a home that you would for certain reasons.  If you like a home chances are several other people will also. Missing the first open houses or showings will put you at a disadvantage when it comes to making an offer before someone else.  A good house (in a great area and well-priced) is not going to sit around and wait for you.

Your realtor will give you the comps (prices of similar homes that are on the market or sold in the area) and then you can decide what your offer should be.  Putting in an unreasonably low offer on a house fresh on the market will probably not get you a counter offer, and remember you will be competing on the house.  The idea is to encourage a dialog with the seller until you can both agree on the right price.  Ultimately the house is worth what a buyer is prepared to pay for it, so you need to decide how much is too much for you.

Once the offer is written you will be waiting to hear from the Seller.  If it is a reasonable offer and there are no other buyers, the Seller may accept, but in most cases you will receive a counter offer.  You will know if there are other buyers since the counter offer will show that you are not the only one being countered. 

Now the ball is in your court.  You can accept the counter or present your own counter.  In a multiple offer situation most probably the counter's main goal will be to get the highest price.  Sometimes they will state the price they want, or they will ask for "best and final".  That is tough because you are in competition.  This is where you decide what the house is worth to you.

Here also where you financial strength will play a part based on the type of loan you are presenting.  If another buyer is putting down 20% and you are only putting down 3.5% (FHA) they will probably be looked at as a stronger buyer.  They may not be, but that is the perception.  Also, if an all cash buyer comes along, then all bets are off.

But, let's say your offer is accepted, you are now on your way to purchasing the home and the work starts!

There are contingencies that must be met within a certain time-period, namely the inspection, loan and appraisal.  Your realtor will probably have lowered the inspection period to 7 days from 17 as a good faith gesture.  A general home inspector can be out within a day or two, as can specialized inspectors whom may be recommended by the general inspector. It is usual that the buyer be present during these inspections and he or she is responsible for paying the inspector on site, around $300 or so.   After you have reviewed the inspections you can remove the contingency or submit a Request for Repairs.  The clock stops at this time.  The Seller can agree to do the repairs, offer money through escrow for you to take care of the repairs, or refuse to do any.  If the Seller refuses to negotiate you can choose to go ahead and waive the repairs or back out of the deal.

Hopefully your lender is speedy in getting an appraiser out to the property as this can be a slow process.  And, hopefully, the house appraises at the price offered.  If it doesn't you can back out of the deal, negotiate with the seller to lower the price, or agree to pay the difference out of pocket.  Depending on how long you are going to live in the house, the latter is not an advisable tactic, since you will have overpaid for the house.

In Los Angeles the loan and appraisal contingency period is 17 days.  In today's market this is a little tight, but there are lenders that are able to meet the deadline.  If for some reason they can't your realtor can usually get an extension on the time.  Once your have removed these last contingencies then you have effectively "bought" the house. 

The Seller also has his or her own contingencies, some of it paperwork to be provided to the buyer within a certain timeframe.  But the main one is the termite inspection and clearance if needed.  The buyer requests a termite inspection and clearance of any infestation found.  This is paid for by the seller.  Anything found by the termite company that could be a future problem is paid for by the buyer if they wish.  It is not a requirement for the escrow to close. The Seller also has to comply with the City requirements.  In Los Angeles there needs to be retrofitting of toilets to low-flow, working fire alarms and water heater bracing.

Your realtor will also have asked for a home warranty paid for by the seller to cover the first year for appliances, air conditioning, etc. depending on what has been agreed.

The only thing to be paid for by the buyer as part of the contract is their portion of escrow costs, usually less than the seller's portion.

Generally the escrow period is 30 days, but the contract can request a reasonable time longer and sometimes, through no fault of anyone it can be extended beyond the agree period. 

The last contractual duty of the buyer is the walk-through which is usually done up to 5 days before close of escrow.  This is to ensure that all the work that the seller agreed to do has been done, or that nothing has significantly changed since you put in the offer.

The next step is the signing of the loan document, after which the funding of the loan takes place.  The next day the title rep goes down to the County Recorder's office and title is recorded. 

You will have made arrangements for the gas, electric, phone, etc. to be turned on the day of close of escrow and provided your change of address to the post office.

Congratulations!  You are now a home-owner.  See it wasn't so bad.

Since I poured water on my poor laptop and it is in intensive care in hospital, I am typing on my Dell Mini Inspiron netbook, so I have to type small.

Oops, that's better, I stretched it a bit.

And now for something completely different.

I thought I would encourage first-time buyers to always make a back-up offer on the house they love.

Don't be afraid to make that first offer.  It is an excellent opportunity to get your feet wet.  And is something like learning to ride a bicyle.  As you go along you feel more and more comfortable, and you never forget! And don't be disheartened if you are not accepted.  Make that backup offer!

Case in point:

My first-time buyers just made an offer on the first house that I, their new agent, showed them.  It is extremely inexpensive by Los Angeles standards, $319,000.  I  told the story in a previous post.

They love the house, but an excellent example of always putting in a backup offer raised its, in this case, ugly head.  

The house had previously been on the market with another Listing Agent who mismanaged the process.  It had fallen through because the house did not appraise. The agent was fired.  However, unbeknownst to the new Listing Agent, there had been a backup offer submitted and accepted. Of course, when the backup buyer/agent saw the new listing they pointed out in no uncertain terms that they were now entitled to buy the house.  This is corrrect.

The buyer still needs to go through inspection, appraisal, etc. and there is no guarantee that this escrow will close either.  But because they had their offer in they have an excellent chance of buying the home they want.

In this new round there were also multiple offers, my buyers' being the lowest with the worst loan. However, the Seller has a soft spot for my buyers for certain lifestyle reasons and would love to sell it to them.

So, guess who is pushing for first backup position.  And imagine if "three's a charm" works here. My buyers are going to be happy campers!

And, they are free to continue looking for another home while they wait. There is nothing to lose!

First-time home buyers, don't be afraid to make an offer.  If nothing else you are getting practice.

I was referred two buyers about ten days ago from clients with whom I just closed a purchase about three months ago.  Their budget is around $325,000 which is nothing for the Los Angeles area, certainly in terms of a house, and a condo is not going to be in the most desirable area at anywhere near that price.

I sent a bunch of listings, in various more affordable areas, most of which were condos. Then, suprise  surprise, a house came on the market at $318,000, in a slowly up and coming area, Mt. Washington.  It is tiny. Probably around 600 and something square feet (additions were not included) and they said they would like to see it.

I met them today, for the first time, at the house.  It is absolutely adorable.  Tiny but adorable.  The grounds are what make it.  The owner is an avid gardener and has done a lovely job.  The house seems to be in great condition and there is potential.

This is the first house my buyers have seen and they are ready to make an offer.  

That is the way to do it.  You see something you like you make an offer.  It just came on the market and there are already a couple of offers.  No wonder at that price!

These are the perfect buyers.  They love it and they want to buy it. 

Let's see what happens.  But whatever does, they know how it feels to put together an offer.

We all know what a definition of assume is don't we!

Well I fell in the trap.

I have been talking to couple for a while now who have been slowly working towards buying a house in Los Angeles, and have been sending them listings slowly in two of the more expensive areas, Brentwood and Beverly Hills.

What they have in mind in those areas is unattainable within their price range, around $1.5M and they have finally come around to opening their search to a neighboring area, Westwood, where they may be able to get the kind of home they want.

Finally, I have moved them towards thinking of making an offer on a house that they saw last week in Westwood.  It is not exactly what they want but close enough that they are motivated to see how much they can get it for.  The price was just dropped to $1.6M. 

My feeling is they need to get used to actually making offers instead of waiting for the perfect home to fall in their lap.  It won't.

Well, long story short, being comfortable with these people, and knowing that they have bought and sold property before, I "assumed" that they knew what to do.  

Imagine my surprise when I mentioned the pre-approval letter, and they said "do we need a pre-approval letter to make an offer". And, they don't have any lender contacts.  

So, now we have to take a huge step backwards.  I referred them to a broker who told me he is not sure they are going to qualify in the $1.5M price range!  I will know more tomorrow.

So, their buying power is anything less than $1.5M or $1.6M because the type of house they want in the areas they want it, at anything less, does not exist.

What happens when the house appraises lower than the accepted Purchase Offer?

Courtesy of my broker, here's an idea to add to the contract for those that don't already include it.

The California form makes the Loan contingent upon the house appraising and allows they Buyer to cancel.

However, there is no provision for the Seller to reduce the price in case the appraisal comes in lower, which is happening a lot.

Of course the Buyer can walk, but why not move the deal along rather than cancel it!

Putting the following wording into your offer may save the deal:

This sale is contingent upon property appraising at equal or greater value. In event property appraises lower than purchase price, the seller agrees to sell and buyer to buy at the lender's appraised value". Should seller cancel purchase contract, Seller shall refund to buyer all buyer's costs to date, including building inspection and appraisal costs.