What to Consider When Buying Your First Home

Are you ready to buy your first home? First off — in case no one has told you already — I’m so proud of you! Purchasing a home is a sign that you’ve reached a level of financial stability that some people never do, so give yourself a quick pat on the back. Then sit down and get ready to take some notes, because this is serious business and the more you know…well, you get the idea.

Buyers today have their fair share of struggles — rents are high, but so are home prices. Salaries aren’t growing at the same rate as inflation, interest rates have risen a lot over the past few years, and many are having to wait longer to purchase their first home than their parents did. But if you’re confident that you’ll be living in the same area for the next 2-5 years, owning a home is the most common and effective way to build wealth. I’m not just saying that because it’s my business: the gap in wealth between homeowners and renters has always been significant, but has been growing steadily over the past 30 years.

Step one should always be evaluating your financial position: How is your credit? How much of a mortgage can you qualify for? What kind of monthly payment are you comfortable with? How much money do you have saved for a down payment? What types of loan options are available to you? Do you qualify for any down payment assistance or grants to help with closing costs? A good real estate agent can put you in touch with local lenders who will be happy to discuss all of the options available to you, so you can determine your desired budget and get a better idea of how much money you’ll need to have on hand. They can even help you if you’re not ready: many lenders offer advice on debt reduction and improving your credit score to make sure you’re as qualified as possible when the time comes.

Next up, interview some buyer agents if you don’t already know one that you trust. Have an honest conversation about what to expect in the current market in terms of competition, pricing, and seller concessions. Find out if they only work in specific areas or price ranges, if they have scheduling conflicts that will make it difficult to meet up for showings, and if they understand your needs and wants. How much do they expect you to pay in commission, and will they negotiate to have that and/or other costs paid by the seller? Are they knowledgable enough to help identify red flags during showings, and make sure you don’t overpay?

Finally, decide whether you’re going to have anyone else help you in this process, such as an attorney, an aunt who’s a broker in another state, your bestie who bought a home last year, or your parents who have offered to gift you money to move out of their basement (or just because they love you). Whose advice do you value? Let your agent know that they’ll be helping you make smart decisions and they should be welcomed with open arms; after all, we like meeting new people! Getting opinions from someone who’s not making money from your purchase isn’t a bad idea, and it should give your agent more peace of mind that you’re going to be happy about your decision for years to come.

Everything You Need to Know About Appraisals

Despite real estate appraisal being part of nearly every real estate transaction, I’ve noticed that many clients (and even some agents) have a lot of questions about the process and purpose of property valuation. Below, you’ll find some of the most common questions with answers that will hopefully clear up any misunderstandings!

• Is the appraisal the same as a home inspection? No. The buyer hires their own inspector(s) to do a thorough investigation of the property’s condition and ensure that it meets their expectations. An appraiser is usually hired by the mortgage lender, paid for by the buyer, to ensure that the property value is worth at least what the buyer has agreed to pay. If a lender has agreed to provide a mortgage equal to 90% of the property value, they have to verify that the value is actually there in case someone defaults on the mortgage and they have to sell the property.

  • Some types of loans (e.g. FHA, VA, USDA) require appraisers to visually inspect the attic and verify that the utilities are functioning. Assume that you should have all utilities active unless your purchase contract specifies otherwise.

• My lender told me I don’t need an appraisal. Why not, and should I get one anyway? Many lenders have automated valuation software that can provide a general idea of a property’s value; if you are making a substantial down payment or purchasing a property below market value, your lender may decide to waive the appraisal. It saves the buyer money and saves the lender time. If you’re worried about the value, don’t be — there’s hardly any chance that a traditional lender today would assume a property’s value without plenty of evidence. If they’re agreeing to lend you the money you need to buy it, just roll with it.

• I just had my home appraised a few months ago for a refinance. Can’t we just use that report instead? Nope. Because property values can change over time, each appraisal is technically only valid for the date the property was evaluated. Also, appraisers must take the purpose of the appraisal into account when preparing the report, so it is not uncommon to see different values for refinances, purchases, divorces, etc. That might seem strange, but if you consider the lower risk of refinancing an existing mortgage for a homeowner who has already been making regular payments, it does actually make sense.

• I want to make sure the appraiser gets the “right” value — what information can I give them? This depends on who you are, but first, please remember: it takes a shocking amount of time and work to become an appraiser, so they might not look kindly upon someone else telling them how to do their job. Also, there are very strict appraisal guidelines that detail exactly what information can and can’t be considered.

  • The lender is not allowed to instruct the appraiser and will usually avoid personal contact with them; this is to avoid the appearance of undue influence (which was definitely something that used to happen a lot before the mortgage crisis and subsequent new laws).

  • I encourage sellers to provide a list of any substantial improvements made during their ownership, especially during the previous 5 years. Knowing the age of the roof, doors, windows, siding, etc. is always helpful. Any additions or major remodeling would also affect value. If you want to share the cost of those improvements, feel free…but it doesn’t matter. What you paid doesn’t impact the value from an appraisal perspective.

  • Agents, please know that the appraiser has access to the same data you do in the MLS and public records! So while it may be tempting to leave comparable sale information for every appraiser, please don’t waste your time or theirs unless the property is especially unique or you’re aware of a reasonably similar home that might be missed during a standard comp search. One exception that might be made during very competitive markets is providing information on the number of offers that were received and the relevant details of those offers (all over list price, etc.). This might help justify, for example, a picture-perfect mid-century modern home selling for $100k over list price and at least $125k more than any other nearby home with the same number bedrooms and bathrooms.

• Who can be present during the appraisal? The seller is always allowed to be present at their property, and the seller may require their agent (or the buyer’s agent) to be on the premises when any 3rd party is at the home. However, if you are present during the appraisal, let the appraiser do their thing — be available to answer any questions, but don’t follow them around. Pretend it’s a buyer tour and turn on all the lights, make sure doors are unlocked, and make it easy to access the major mechanics and the attic if necessary.

• Can I get a copy of the appraisal? If you’re the buyer who paid for the report, absolutely. If you’re the seller, no. When the lender has approved the appraisal report, you’ll be notified whether it is “good” or not (in other words, did it meet the value in the purchase contract?) and whether there are any conditions — these are repairs that could be required by an appraiser to ensure the property meets the minimum standard for that type of loan.

• The appraisal says the value is good, but subject to some repairs. Does the seller have to make the repairs or can they refuse? If they want to sell the property to this buyer, they need to make the repairs — and if they are unclear about any part of the conditions, definitely get clarification from the appraiser as soon as possible. However, a seller might decide that it’s too much work or expense. The buyer is usually prohibited from making any repairs to a property they are purchasing (unless they are already a tenant of the property, which is a fair exclusion in my opinion), but there’s technically nothing to prevent an agent helping out.

• Can I appeal the appraisal if I don’t like the value? While there is a process to appeal an appraisal, there are many factors involved and the success rate varies greatly (based on a quick Facebook survey of Cincinnati-area agents I did last night). Some agents recommend changing lenders instead, which would usually prompt a new appraisal. Others have had luck by using the right language: “please help me understand” rather than “what on earth are you looking at”. From my experience, it’s always worth a try, but don’t get your hopes up — discuss backup plans to be sure you know what your best options are.

Crash Course in Closing Costs

Chances are you have heard the term “closing costs” even if you’ve never purchased a home before, but if you have paid them in the past, did you really understand what they are and how to know if you’re getting a good deal? Thanks to laws passed over the last decade or so, mortgage lenders are required to provide you with a Good Faith Estimate (GFE) detailing all of the potential costs of a mortgage, so it’s easier than ever to compare estimates from multiple lenders. But let’s start with understanding what they are in the first place: closing costs are everything you need to pay, above and beyond your down payment, in order to purchase a home.

• Loan Charges: Lenders charge certain fees to process your loan. These services often include pulling your credit report, getting a flood certification for the property, processing your application, underwriting the loan, paying the appraiser (sometimes you pay for the appraisal when it’s ordered rather than at closing), and recording the mortgage. Other loan charges that are more common now are “points,” essentially pre-paid interest to lower the interest rate for the overall term of the mortgage.

• Impounds: These costs are directly related to setting up your escrow account — that’s the portion of your mortgage payment that goes toward taxes and insurance. I usually see my clients pay at closing three months of their annual homeowner’s insurance, one to six months of property taxes depending on the time of year the closing takes place, and about three months of mortgage insurance if applicable. These amounts may be adjusted if the total impound amount is above the lender’s threshold, noted as an “aggregate adjustment” on the GFE, closing disclosure (CD) and/or settlement statement.

• Title & Settlement Charges: In Ohio and Kentucky, most real estate closings are handled via third party companies called title agencies. They charge fees to both buyers and sellers for guaranteeing the property is transferred with a clean title and that the monies are disbursed appropriately. Buyers usually pay for a portion of the settlement fee, closing protection coverage for the lender, a lender’s policy of title insurance or a title commitment, sometimes an attorney fee, certain endorsements that your lender requests, and an owner’s policy of title insurance if you choose to purchase one. Also, if you can’t be present for the closing, the title company may send you a mobile notary and there will usually be a fee for that service.

• Commission: Depending on your buyer agency agreement and the terms of your purchase contract, you might pay commission to the broker who represented you. Some brokers also charge administration fees that are separate from commission, and if you purchase homes from certain corporate sellers you might have to pay a “buyer premium” or “technology fee”. You should always verify that the amount of commission paid, whether by you or by the seller, matches the buyer agency agreement you have signed: if it’s higher, that is prohibited by law, and if it’s lower, you might be responsible for paying the balance outside of closing.

• Government Recording and Transfer Charges: In Ohio and Kentucky, the buyer is traditionally responsible for the cost of recording the mortgage and the new deed with the county in which the property is located. This fee varies by county but is usually dependent on the number of pages recorded. Some lenders have a standard mortgage on file in some counties to minimize the number of pages that need to be recorded for individual transactions.

• Homeowner’s Insurance Premium: If you didn’t already pay your first year of homeowner’s insurance when you ordered the policy, this will be included in your closing costs.

Depending on the lender, local and state regulations and customs, and your specific situation, your closing costs can vary quite a bit which is why it’s so important to ask about them when you are evaluating which lender to use. You can offset these costs in a few ways: gift funds from a family member or friend, local grants, or contributions from the seller. Knowing your financial needs and limitations up front will help you and your real estate agent negotiate the best terms possible, and help you avoid an unpleasant surprise when it comes time to close the deal.

What To Know When You're Relocating

Over the years, I have worked with several clients who are moving to (or out of) the greater Cincinnati area from another state. Some of them also have homes to sell, and are worried about how to manage the process of buying and selling at the same time. Another concern is how to act fast on a home in the current market when, in most cases, they won’t be available to see it in person. Luckily, today’s technology offers many potential solutions to these problems! Here are some things you should remember when moving long distance:

• Get to know your agents, and introduce them to each other. You’ll need everyone to be comfortable communicating throughout the process of listing your home and purchasing a new one, and your honesty and openness with both agents will ensure that they truly understand your needs. Plus, with your agents already in communication, any last minute hiccups or changes can be quickly communicated without you having to be the go-between.

• Ask ALL the questions. Real estate terms, customs and laws vary greatly between states and even regions within states. If you aren’t sure you understand something your agent said, don’t be afraid to ask for clarification. Let your agents know about any and all concerns you have about a property. Find out what areas of town your agent knows best, what they like to do in their spare time, where their kids go to school or what sports they play, and share as much information about yourself and your family as you can! Agents can be great resources for you beyond real estate, and you’re going to be depending on yours a lot in the near future.

• Do your own research. The internet is a wonderful place, full of free information on property records, individual sellers, historical photos, and more. If you see a home that meets your needs, look at the location on a map, use the street view to take a walk down the street, check out crime statistics and local schools (even if you don’t have children in school, the quality of schools available can directly affect home values). Find the closest grocery store, gas station, gym, park, bourbon bar or cat cafe (whatever you’re into!). Join a Facebook group or two and connect with people in your desired neighborhoods for perspectives that your agent might not be legally or ethically able to provide.

• If you don’t mesh well with your buyer agent, find a better one. Viewing properties over a video call, or with videos created by your agent, can be a little intimidating. You’re about to make a huge decision, and you need to feel comfortable that your agent has your best interests at heart, knows enough about potential issues with a property to gather additional information for you, can give you a clear picture of the local market and the value of any homes you view, and helps you find the right home no matter how many offers it might take. (Note: As of August 17, 2024, agents in Ohio are required to have a signed buyer brokerage agreement before showing any property listed in the MLS. These agreements can be for one property or for a predetermined amount of time. If you desire to cancel that contract, ask the agent directly. If you can’t agree, it’s a good idea to seek legal advice before working with a new agent.)

• Ask if you can send a friend. If you already have a connection in your destination city, ask if they would walk through a property with your agent. Most people love touring homes even when they’re not in the market, and it can be helpful to have a second set of eyes on the home who isn’t a professional — they might ask questions your agent wouldn’t anticipate. Agents love meeting new people, and should understand that having another opinion on the property should make you feel more comfortable whether you make an offer or keep looking. (Note: As of August 17, 2024, you may need to give advance written permission for this person to represent your interests during the showing. Ask your agent for clarification.)

• Don’t waive inspections — do more of them. Your agent probably knows to look out for many signs that a home has some underlying conditions, but they are not usually inspectors. If you can’t tour a home in person, get a professional opinion about every major system in the home. Don’t skimp on separate inspections for the pool, septic, chimney, sewer lines, etc. While you might have had to give up your right to request repairs from the seller to secure a contract, you still have the right to renegotiate the price in most cases, and you definitely will be better off losing $1,000 in inspections than buying a home with serious underlying issues that could cost much more.

• Your listing agent can be the caretaker of your home. If you have to move out of the area before your home is sold, chances are you will need someone to check your mail, take out your trash, make sure the lawn gets mowed, return your internet equipment, and relate information to the new owners at closing (keypad codes, security system information, smart home apps, etc). Your agent can help with a lot of these things, so make sure they have a key, the code for your garage, and the contact information for a neighbor or relative that you can trust to assist as well.

I’m sure there are more factors to consider depending on your situation, but these tips should apply to nearly everyone. Let me know if I’ve missed something in the comments! (Rev. 8-30-2024)