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Buying a home is a very rewarding experience. Having a place to call your own and decorating it in any way you like is great. The joy of not having a landlord who can tell you what or what not to do with your property is a big plus. Moving up to your "dream home" after owning a number of lesser residences over the years is a very big deal.
However, buying a home can also cause anxiety. Buying a home is certainly an emotional purchase. Your home may be where you will get married, or raise your children, or celebrate important moments with your family and friends. Most Americans spend much of their free time at home, and that home offers a haven from the stress and worry of the outside world. Considered a vital part of the "American Dream", homeownership and its advantages have been instilled in most of us since we were children. Immense emotional gratification and a deep sense of pride accompany homeownership. Each of us wants to provide a safe, stable and comfortable place for our family to live. Owning real estate also acts as a powerful investment, offering tax benefits and an appreciation in value that can play a central role in your achieving long-range financial and lifestyle goals.
These feelings can easily affect how people make decisions during the complicated procedure of getting approved for a loan, finding a home and bidding on a property (and the potential disappointment of not getting approved for your loan or not getting the property you want). I can´t emphasize the following point enough: Home buying needs to be driven more by common sense and logic than by emotion. A purchase based largely on emotion can lead to financial and personal problems. Be practical as you assess homes. Some are completely updated; others will need extensive modifications. Only you can determine your individual needs when it comes to home buying. If you have the time, skills or money to do major home improvement projects and you are getting a good deal, then go for it. Similarly, you should ensure that you are not overpaying for a house just because it has new carpet, appliances or various "cosmetic" changes. Compare the interiors of the homes on your "short list" and make notes on how much you think improvements may cost. That way, you will know what you are really getting for the price.
Don´t forget to consider all of the pros and cons of each home. How much home do you get in one neighborhood versus another? Keep in mind what really is included with each home by maintaining a list of all the factors. Seeing multiple residences before making up your mind is essential. A good agent can show you several properties in different areas and in different price ranges so you can really make the best decision. This is true even if you only have a limited time to look. You can take digital photographs of each property and then review them on your computer later in the day. Now let´s discuss some of the key factors in bidding on a home.
Determining Square Footage
At first glance, trying to determine the value of a residence based on square footage is a simple, straightforward calculation. The Federal National Mortgage Association (commonly referred to as Fannie Mae or FNMA) has set forth guidelines used by appraisers and lenders. Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation´s largest source of financing for home mortgages. Fannie Mae´s square footage guidelines basically calculate the living area in the so-called above-grade space -- i.e., the above-basement levels.
In reality, using square footage to help determine the right price to offer for a home is complicated. For example, many of the newer homes in suburban Virginia have 10-foot ceilings throughout the first floor and vaulted ceilings in some rooms. If you compared the price of one of these newer homes on a square foot basis to an older home with a similar floor plan (but with the traditional eight-foot ceilings), the square footage might be identical. The higher ceilings are an important upgrade, however, adding a lot to the home´s "livability" and its appeal to most potential purchasers. Those higher ceilings, of course, are not reflected in the square footage numbers. Basements are also an important factor in the square footage calculations. My home, for example, has a walkout basement with lots of sunlight flowing through the sliding-glass doors and windows. It has a fireplace, heating, air conditioning, is wired for broadband and has a television and stereo. There are no musty basement-like odors. To me, my basement "feels" like any other floor of the house. The nearest home behind me is about a fifth of a mile away because of a floodplain on the edge of my property where there is a small creek. "Mother Nature" has taken care of the landscaping, with a hundred or so trees visible from the basement. In many ways, then, the basement level is one of the most appealing selling points and attractive features of my home. Yet, technically, in calculating the value of my home, the basement is not an above-grade floor and thus receives a different valuation per square foot.
Square footage calculations can vary, too, depending on the person doing them. There have been occasional articles about complaints made to state real estate commissions over the issue of how square footage of a residence is measured. These controversies usually involve a home being advertised for sale as having more square footage than the appraiser calculates.
Taking the square footage into your decision-making process when buying a home is a good way to include facts in your purchase and to ensure you don´t rely too much on emotion. Let us say, for example, that you have narrowed down your search to two properties. One of them is newly carpeted, has great appliances, and is freshly painted. The other is in a similar price range but has worn carpet, too much wallpaper in many rooms, and dated appliances -- but considerably more square footage. While your emotions may tell you to buy the smaller home because of its ready-to-move-in condition, factoring square footage into your decision may point you in the other direction -- and that would likely be a much wiser decision in the long run. If the cosmetic changes of new carpeting, stripping wallpaper, painting and buying a refrigerator bring the larger home up to the appeal of the smaller property, you probably should strongly consider buying the larger property, all other things being equal.
You should feel comfortable with your understanding of what "formula" is used to calculate the square footage of the largest purchase of your life. In fact, it would be prudent to get a floor plan with the dimensions of each room of the home, if it is newer.
How Motivated Is the Seller?
Another crucial step in determining your offering price is to try to discern how motivated the seller is and how many other offers (or interested parties) are out there. Knowing your bargaining position is essential. For instance, you may be interested in a home that is priced at $400,000. The comps-that is, the comparable prices of similar homes recently sold in the neighborhood- confirm that it is worth $400,000. You find out during the showing that the owner is relocating to another city; their company is paying the moving costs and real estate commissions, so they may be very motivated to sell. In this case, unless there are other offers on the table, a quick closing period and fair pricing may get you the home.
The more you know about the seller´s motivation, the stronger your bargaining position will be. The issue is not always price! The seller may not want to sell the home to an investor but would prefer an owner occupant as a purchaser. They may need a longer period to close on their property to help with their two-year capital-gains time line, or they may want the security offered by a larger down payment. The key is to address the seller´s larger concerns. I´ve had clients who were prepared to move quickly and were able to get a home that was underpriced solely because the sellers were really ready to move. The seller wanted a quick sale, a quick closing and a prepared buyer. We came in "fitting the bill", and everyone walked away happy.
If your agent can reach the listing agent by phone before seeing a home, if time warrants, ask these helpful questions.
Is the home still available? If the seller has just accepted an offer, it may take a day or two for it to be updated on the MLS.
If there is an accepted offer, are there any contingencies. If so, is the seller taking backup offers?
If the house is available, are there any pending offers? If so, try to see if the agent is willing to discuss for how long the sellers have been receiving these offers. If an offer has not been accepted for a few days, then it may not have met the asking price or it may have contained unattractive terms or contingencies. Possibly, a clean, full-price offer may stand out.
If the seller had accepted an offer but the house is now back on the market, ask why this happened?
When does the seller prefer to close on the property?
How much time does the seller need to respond? This may give you an idea of how motivated the seller is to get the deal closed.
What Price Do I Offer?
There are many factors involved in deciding what price you should offer. Your agent will look at comparable sales in the neighborhood to determine the fair market value of the house. This approach enables one to ascertain whether the asking price is below or above realistic market prices. Comps are extremely useful, though they should never be the sole factor used to determine your offering price. The best way to analyze comps is to look at the prices of similar homes in the neighborhood or similar neighborhoods. Have these other homes experienced similar price increases? Will the house appraise for the asking price? Has the house had any special features added that would differentiate it from other houses in the neighborhood? Specifically, what value was added to the home by these improvements or additions? Do not be afraid of making a lower bid on an overpriced home. Overpriced homes generally sit for long periods of time, strengthening a buyer´s bargaining position. When a home is getting a great deal of traffic but no offers, sellers realize that the price may need to be adjusted. And you can often negotiate a good price with the sellers of homes that do not show well for whatever combination of factors -- tasteless wallpaper, outdated carpet, old appliances and the like. If you have the vision to see past minor aesthetic issues, you may find yourself in a position to buy a home with great potential at a reasonable price.
If you are interested in making an offer on a home, particularly in a seller´s market where homes are appreciating rapidly in value, time is an important factor. This may mean that even if the house just came on the market, you and your agent should try to make sure that the seller sees your contract offer as quickly as possible. If time is of the essence and you are serious about a house, your primary goal should be to write a contract offer as soon as possible and make sure the seller sees your offer quickly. Attempting to get special considerations while you are negotiating on the home against several other potential buyers is an easy way to lose out on a house that you may really desire.
The Terms of Your Offer
The terms that you offer will, of course, vary depending on your particular situation. The major specific components of the contract will include:
Date, name and address of the buyer and seller, and a legal description of the property.
The amount of "earnest money" . . . money that shows you are serious about wanting to purchase the home-that will be held in an escrow account.
Price you are offering.
Size of the down payment as well as how the remainder of the purchase price is to be financed.
Proposed settlement and occupancy date - and daily rent provision for "post-settlement occupancy" if the seller becomes the temporary tenant of the buyer.
Contingencies, if any, such as home inspection, appraisal, or final closing on the sale of the buyer´s present home.
Other important provisions, including a list of items that convey with the property a stipulation that the title must be insurable, and a determination of who is to pay various settlement costs.
If you are offering a price that you are comfortable with and you have no special circumstances, you will find that the less you ask for, the better. But this does not mean that the sellers will not listen if you need certain concessions. The offer is about much more than price. Again, terms -- good or bad -- often make or break the deal. Sellers generally look for the cleanest offers (those with the fewest contingencies and special terms) possible. Unless you are facing a very competitive seller´s market, you can ask for the terms that you need to make the offer "fit" your requirements.
You should choose your terms based on both your needs and the information you have about the seller´s needs. If you need a quick closing but know that the seller wants to close later, you could consider renting a corporate apartment for a short period of time. Or if you are only offering a small down payment, you may want to ask for nothing other than a home inspection. The bottom line is that you and your agent should fully assess your position and then use the knowledge you have obtained about the seller´s needs to structure the strongest offer possible.
Consider, for example, the following before deciding on terms.
Does the seller plan to leave the washer, dryer, refrigerator, window treatments or any other personal property? If so, you want to make sure that you request that these items stay in the offer. Unless it is in writing, any item that is not considered a "fixture" does not have to convey to the new owner.
Likewise, are there any exclusions to the offer? For example, a permanent fixture, such as a dining room chandelier, typically conveys. However the seller may want to take it and thus present it as an exclusion from items that convey. If you are competing with other buyers, you may not want to ask for such items since that may help you succeed in the contract negotiations.
Negotiating a Purchase
Everything is negotiable, so don´t be upset if the seller counters your offer. Counteroffers are quite common and remember that all counter offers must be in writing to be valid. Likewise, you can always counter a counter offer. The bottom line is that you should make an offer that you are comfortable with. If at any point during the negotiations you are unhappy with the situation, you have the absolute right to back out. Until both parties have a meeting of the minds through an offer in writing, there is no valid contract.
With your offer, you will be required to submit an "earnest money" deposit. Earnest money shows that you are serious about wanting to purchase the home and gives the seller confidence that they can take the home off the market. This money will be credited toward the purchase price at the time of closing. If you do not honor the sales contract and do not follow through with the sale, the seller may be able to keep your earnest money as well as damages. If you default on the contract, the seller has the right to sue for any damages incurred.
The actual purchase process for a home is quite detailed but very straightforward. You and your agent fill out a contract offer form, deliver it to the seller and then wait to hear if your offer has been accepted, rejected or countered with a different price, different terms or both. The complicated part is strategizing with your agent to determine the price and terms of your offer and presenting that offer clearly and efficiently.
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Pat Paulas, Dew Paulas and Associates, Realtors Loudoun County Real Estate and West Fairfax County Real Estate
Prudential PenFed's TeamWorks 11864 Sunrise Valley Drive, Suite 101 • Reston, Virginia 20191 703.909.6333 e-mailtheTeam@eLoudounHomes.com
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