10 Costly Home Purchase Traps to Avoid

With 30 years combined experience in sales and lending I’d like to touch on the most common traps or trip ups when buying a home.

1. The Wrong House.  So what does the wrong house look like? It could be one that is either too large or too small for your family.  It could be that it needs too many repairs and you’re not handy or don’t have the assets to pay for the work.  The location may be to far from work or in an area that isn’t safe after dark or has issues with the school.  You need to take time to research what and where you are buying.  The internet has been a boon for home buyers.  School data is readily available and  you can check Megan’s Law data even before looking at a listed property.  Of course, before you finish all your inspections you need to take time to drive through the area on a Saturday and after dark to be sure that you’ll be comfortable living there.
2. Bidding Blind.  Before writing an offer to purchase, ask your sales agent to prepare a comparable sales report for similar properties in that geographic area.  This way you’ll avoid over paying or loosing the house due to underbidding…. Or perhaps not bidding at all on a great value.
3. Trouble Traps in Escrow.  Here in Northern California title & escrow or the “closing” is handled by the same company.  It may be different in you location, but one thing remains the same; be sure to get a copy of the preliminary title report for your purchase and read it.  In most cases, there are no issues.  However, there are times when problems arise due to liens, or transactions where the owner of record and your seller are not one and the same.  If you have a lender or real estate agent on top of their game, then they will address these issues and have them resolved for closing.  However, not all lenders or agents are true professionals.
4. Appraisal Surprises. It could be that there have been “un-permitted” additions to the property.  If you aren’t buying from the original owners – say a Bank REO there would be no disclosure.  Often, unpermitted additions limit lender choices and some loans may not be available.  Other complications and costs would also arise.  Additionally, the available comparables sales may not support the sales price for your home.  The days of “a willing buyer/willing seller” having the most value on appraisal are long gone.  If the value is lower than the sales price, the lenders final “loan-to-value” will be based upon the lower value not the sales price.  This could push you into mortgage insurance IF your original down payment was 20% or it would require you to pay the difference if you still wish and can proceed.  This is a key reason to have an appraisal “contingency” as part of your purchase agreement, allowing you, the buyer, to renegotiate the sales price if the appraisal comes in lower than contract price.
5. Property Issues. If you are buying an REO it is even more important to have an inspection from a licensed home inspection company.  Additionally, even if the house is sold “as is” it is prudent to have a termite inspection.  Knowing early on, during your discovery time can save you money or allow you to cancel this transaction with a refund of your earnest money deposit.  Even if you loose your deposit, it could be much less expensive than proceeding with the sale.
6. Closing Shockers.  Items that can surprise a buyer are pre-paid costs of closing.  These consist property tax proration’s, homeowners insurance, home owners dues and transfer fees as well as Condo disclosures including budgets and minutes from the last meeting.  Be sure to ask your lender to have the closing company provide an updated settlement statement provided for you to review or for your lender to use in calculating your cash to close.
7. Wrong Loan Program.  The varied loan programs over the last few years have been overwhelming.  The good and bad news is that the industry has consolidated to more conservative lending instruments.  However, there are certain differences for both first time buyers and seasoned professionals.  First timers could benefit from  various State or local jurisdiction down payment  assistance programs. Seasoned buyers or Jumbo buyers have a limited number of the more traditional programs to work with.  What ever your situation, be sure to ask the questions to understand the loan product.
8. Hurried Closing.  When writing your contract, allow enough time for the financing. Don’t give notice to you’re landlord until you loan has final approval.  By this I mean, everything has been received and underwritten – title report, appraisal, any inspections… all your documentation…  At that, then give yourself an extra two weeks.  It is much better to have two weeks to move, when your closing is on time then to be stressed out about a double move or no place to stay if your closing is delayed.
9. Flips.  Flips have become the bane of the lending industry.  Banks and investors are loath to loan on properties that are being “flipped”.  Many investors have detailed rules and others will not lend until a 90 day timeframe has passed. Much depends on who will fund or buy your loan.  FHA has changed their rules somewhat to allow foreclosures to move through the market more quickly to provide homes for new buyers and stabilize ravaged neighborhoods.  However, if the increase from one sale to the next exceeds 20% additional documentation will be required from the seller.  Most significant will be the seller’s actual rehabilitation or improvement costs for the property.  In most cases a 2^nd appraisal to support value is a requirement and as well as a thorough home inspection by a licensed company or general contractor.  This is, of course, if the seller is not a non profit institution, a Bank, or HUD which are all exempted.
10. Cash to Close. If your closing funds are coming from a source other than your checking or savings accounts, be sure to inquire how much advance notice is needed for the funds to be available.  This also applies to gifts from your family.  When the cash to close comes from money market, stock or retirement accounts it may take a day to liquefy the funds and another day to get a wire to escrow.  If your company does not wire, and only sends funds via a certified check, then you will need to allow more time.  It is wise to check in advance as to your institution’s policy

As always, I welcome your comments or questions.