Fundamentals of the Real Estate Transaction
The home buying process involves many steps for both the seller and the buyer from the home listing to the closing on the mortgage loan and transfer of ownership. The fundamental steps involved in a real estate transaction are; the home listing, marketing of the property, the offer and acceptance, real estate sales contract, the mortgage loan financing and settlement.
Listing
The real estate transaction begins when an owner decides to sell a property. The owner may sell the house on their own or more frequently, will enlist the services of a real estate professional through a listing agreement. The listing is a contract wherein a property owner employs a real estate firm to market a property for an agreed period of time at a given price and terms. Under this contract, the real estate firm becomes the agent of the seller. Real estate professionals are generally trained to prepare a competitive market analyses (CMA) and to analyze the prices of recent property sales, current home listings, and properties that have been pulled off the market without being sold. This information is used by the real estate agent to help the seller set an asking price for the property on the listing.
Real estate professionals continue to play a central role in real estate transactions. The most recent statistics show that over 75% of all home purchases involved the use of a Realtor.
Marketing the Property
The real estate broker’s expertise essentially lies in the marketing of the property for the seller. The broker will employ a marketing plan, which often includes the property to be entered on the MLS or multiple listing service with the listing agent, conducting open houses as well as advertising the home in various advertising media. While the listing agent implements the marketing plan, other real estate professionals may assist buyers in locating properties that meet their requirements. Whether a broker is the designated agent of the seller or of the buyer is defined both in common law and in the real estate license law of many states.
Offer and Acceptance
Once the property is made available for sale and marketed, prospective buyers will review and evaluate the property to comparable housing opportunities within the region. Prospective buyers will then narrow down their search and inspect the seller’s property. If the property appeals to one of the buyers looking at houses in the region, one or more of the prospective buyers will make an offer to purchase the property. The buyer’s agent or attorney will prepare an offer to purchase. The offer to purchase will state the buyers offer for the property and the contingencies or conditions upon which the buyer is making the offer including any mortgage or financing contingencies.
Financing
After the acceptance of the offer, the buyer applies for a home loan or financing. The mortgage lender underwrites the loan which entails a detailed risk evaluation of the mortgage applicant and the property. The mortgage lender verifies the borrower’s employment, income assets and completes a credit check to determine the creditworthiness of the borrower. The mortgage lender is also concerned with the property to be used as collateral and whether it will warrant the amount of home loan the borrowers are seeking. An appraiser will provide the mortgage lender with information about the property’s features, condition and value.
Title Examination
While the mortgage lender is underwriting the home loan request, the attorneys in the transaction or sometimes the mortgage lender, will hire a professional called an abstractor or a title insurance company to search the public records on the property. The title search process or search of documents recorded in the public record will reveal how the seller came to be vested in the property and what liens on the property need to be paid at the settlement or closing.
Settlement
After the mortgage lender has underwritten the home loan and the attorneys or title company representative have reviewed the title search, the buyers and sellers are ready for the closing. At the closing , the closing agent will make sure the funds for taxes and other costs have been properly prorated between the buyer and seller and the proper escrows set up for the payment of future real estate taxes. The seller’s attorney will have the seller execute the deed and deliver it to the buyer. The buyer’s attorney will make sure the deed is recorded. Many legal documents are exchanged among the seller, buyer, and mortgage lender including the mortgage and note that details the terms of the home loan.
Tips for Avoiding Mortgage Fraud
Mortgage fraud continues to be a major problem for banks, mortgage lenders and consumers. Mortgage fraud is action that is not only investigated by local law enforcement but will be investigated by the Federal Bureau of Investigation as well. In fact, engaging in mortgage fraud can be punishable by up to 30 years in federal prison or $1,000,000 fine, or both. Mortgage fraud scams impact banks and mortgage lenders with loans that default as well the real estate profession, the economy and a significant number of individual homeowners.
Robert D. Grant, Special Agent-in-Charge of the Chicago Office of the FBI recently commented in a press release that, “We will not stand by while real estate professionals and others exploit the financial system for their personal gain. Mortgage fraud – and the foreclosures and boarded up houses that often follow from it – has a real and significant effect on neighborhoods and property values. The FBI is working tirelessly in every part of the country to protect communities and financial institutions from the effects of mortgage fraud.”
For those consumers that are buying a new home, refinancing an existing mortgage, or searching for help to reduce their home loan debt and other debts, they could be a target of mortgage fraud by individuals and mortgage professionals.
Mortgage fraud is defined as a material misstatement, misrepresentation, or omissions relied upon by an underwriter or lender to fund, purchase, or insure a loan. The FBI puts out notices that remind individuals that it is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.
There are two general types of mortgage fraud, fraud used to acquire property and fraud used purely for profit. Mortgage fraud that is used to purchase a home or acquire property usually involves a borrower who is committing fraud on a single home loan transaction. Often, the individual committing fraud is buying the property to occupy it and fully intends to repay the home loan. Though the intentions may not sound bad, the borrower makes misrepresentations about their income or their debts, the value of the home or falsifies data about the down payment. At times mortgage and real estate professionals are involved in assisting the home loan borrower so that they qualify for the mortgage and can purchase or refinance the home.
Fraud that is committed for the motive of turning a profit will involve mortgage or real estate industry professionals. These cases of mortgage fraud generally involve several home loans and can often be for millions of dollars. Mortgage fraud cases with professionals can be much more complex and involve issues as wide spread and complicated as having straw buyers which involves a borrower that assumes the identity of another person, property value that are fraudulently inflated, scam down payments that do not exist or are borrowed and disguised as the borrowers own funds, as well as flagrant misrepresentations including: overstating income, overstating assets, overstating collateral, fictitious employment and other related untrue facts and figures.
Some tips for recognizing and avoiding being part of a mortgage fraud transaction include:
Make sure to read and understand everything you are signing. Speak to another mortgage professional or an attorney if you need something explained. Don’t sign anything you don’t understand at anytime in the purchase, mortgage application or closing process.
Do not sign any home loan documents that contain inaccurate information, such as inflated or inaccurate income, sources of the down payment, incorrect sales price, type and length of your employment, your intent to occupy the property as your primary residence, existing debts, etc.
Don’t sign any mortgage loan documents with information left blank. Blank spaces can be filled in later by other parties to the transaction yet still has your original signature.
Know and understand the terms of the home mortgage. Check your information against the information in the home loan documents to ensure they are accurate and complete.
Do not agree to a price above your asking price. If there are any unusual circumstances regarding the purchase price, take a second look at the transaction and ask for assistance if the arrangement seems unusual. This may be particularly important if you are asked to refund the difference after the closing or if the extra money is to be used for repairs or improvements that you know are unnecessary.
Do not let someone else use your name or social security number to buy a property, especially if he or she offers to pay you for using it.
Deal directly with the mortgage lender or the mortgage broker. Do not let a third party arrange your mortgage loan.
Make sure to get a complete set of the mortgage loan and related closing documents at the time of settlement.
Review the title history to determine if the property has been sold multiple times within a short period. It could mean that this property has been flipped or bought and sold recently and the value can possibly be falsely inflated.
It is always sound advice to get referrals for real estate and mortgage professionals before filling out the mortgage loan application or signing a contract. Check the licenses of the real estate professionals and mortgage lenders involved in the transaction with the local licensing authorities.
Shopping and comparing mortgage loans and mortgage rates involves some work, don’t skimp on the process since the long term costs of a mistake can be significant.
Buying a New Home at a Discount
New home builders are starting to struggle a bit. As the housing market continues to slow, new home sales are dropping. Prospective buyers wind up stuck in their current homes as they struggle to sell, leaving builders with an ever increasing inventory of new homes.
To move those properties, builders are starting to offer substantial incentives and discounts. Some homes have been slashed in price by as much as twenty percent. Other builders pay closing costs on the mortgage loan or offer gift certificates for free furniture to help seal the deal. Home loan related offers also include builders paying points on the mortgage which can help to reduce the mortgage rate. Still others are offering perks such as free rooms or upgrades.
While this situation is getting sticky for some builders, it is a wonderful opportunity for those in a position to buy a new home and take advantage of lower home prices and reduced cost mortgages. For the first time in years, you are now able to negotiate with builders to secure your brand new home at a sizeable discount. Or at the very least take advantage of standard rebates and other incentives builders are throwing at buyers.
Spec Homes
The best deals to be had are on existing inventory. When builders start a home without a buyer lined up, it is called a spec home. These are the “quick move-in” homes advertised by builders for those who don’t want to wait for months to start new construction. These spec homes are also what are weighing heavily on many builders.
When a spec home doesn’t sell quickly, it is costly to builders. An undeveloped lot or even a home in progress is appraised far less than a completed home. As a home nears completion, the taxes are higher and builders feel greater motivation to sell. This motivation is the key to your future great deal.
Builders complete a specific number of spec homes every month depending on market conditions. Of course, new homes can take four to six months to complete, so it can be challenging to judge the market conditions that far in advance which is one reason there are so many spec homes to be found.
Another reason is that many potential buyers start building a new home only to find they are unable to sell their existing home. If they started their new home on a contingency, the builder assumes responsibility of the started home and it becomes yet another spec home for the builder to try to sell through rebates and substantial discounts.
The internet provides an excellent way to begin your research and even complete many of the home buying steps to secure a great deal on a new home with a builder.
Builder Websites
If you know of builders in your area, start by searching their websites for existing inventory. There may be advertised specials on the website, but even so, send an email to the builder requesting additional information on spec homes in the neighborhood and asking if any additional discounts or promotions are available. You’ll likely see a rapid response if the builder is able to move on his price at all or make other incentives to move the house. If the builder isn’t offering to pay mortgage points or mortgage closing costs they may offer upgrades to the property for free or even male the first mortgage payments on yourun new home loan.
Aggregate Sites
Even if you have no idea what companies are building in a certain area, you can still find new homes online along with discounts on those homes. Sites such as inest.com and move.com allow you to search for all new homes in a certain area. These sites may have incentives listed as part of the description on the new home. If not, you can still contact the builder through the company website or possibly through contact information provided by the aggregate site to see if additional discounts exist.
Web Searches
Finally, a web search may help you find additional discount opportunities. In a major search engine, such as Google, type in “Your City New Home Discounts” and see what results you find. Many may be repeats from other research methods, but you may find a hidden jewel or two from custom builders or real estate companies.
Yahoo, among other websites, offers a real estate service that plots new neighborhoods and builders in the area. On Yahoo’s site, a pull down menu in the real estate section allows you to locate new homes in any city you request in the search box.
Local newspaper websites will not only display real estate listings including new homes, but you may also be able to find banner ads displaying the various incentives builders are offering. Search for newspapers in your desired city and then comb through the online real estate section to see what you can find in the way of new homes and possible incentives.
Remember that you are looking for “Available” or “Fast Move-in” or “Move-in Ready” homes from these builders, so vary your keywords when you search to be sure you catch all possible opportunities. Seek out additional discounts and negotiate as much as possible. Even if the builder is not offering financial incentives you can ask if they will negotiate to get your mortgage rate lower. You may just land yourself your dream home and low cost mortgage loan for far less than you ever imagined.
What Real Estate Agents Don’t Share
Information is the key element to finding the right mortgage and mortgage rate as well as the right home. Don’t skimp on acquiring the proper information when searching for a home loan or a home. The starting point for obtaining information on the right home is usually with the real estate agent.
As much information as a real estate agent shares with you, sometimes they can be guilty of holding critical information back. Ask your realtor about crime, zoning and property developments, demographics or the local school system and you’ll most likely get a tight lipped stare. Real estate agents are not allowed to “steer” you toward one property over another. They may simply show you properties that meet your criteria. By offering you information about the crime rate or demographics, they may be playing with fire.
Several pieces of information that may be helpful to a prospective home buyer to assess the value of the house and the neighborhood, the real estate agent simply may not be able to speak about due to fair housing laws. Sharing socioeconomic information along with race and cultural statistics in a neighborhood is taboo. Likewise an agent can’t chat with you about how good the schools are in a particular area. Instead the agent will likely direct you toward an internet website or other source to discover this information on your own. This isn’t the real estate agent holding out on you; it’s the agent protecting her own interests from a lawsuit or smear on her professional reputation by breaking the rules.
Crime
There are many ways to gain knowledge on the crime in an area. Start by simply reviewing the crime statistics for the area that are published in the local papers. Additional data on more troubling issues can be found by tracking the registered sex offenders living in the neighborhood or zip code. Websites such as Roddel’s Family Watchdog Website let you see exactly who is living in each neighborhood. You can see the house and a picture of each offender. You can even use information such as this as a basis of comparison when shopping for a house. Your real estate agent can show you properties in neighborhoods with less than a certain number of offenders, for example.
Other websites may offer additional crime statistics. The local police station is another excellent source of information about crimes in the area. Visit the station and get statistics. You might also visit the department of public safety for statistics as well.
Schools
The quality of school districts is the basis of many family moves. Your real esatte agent can’t tell you if your potential neighborhood feeds into good schools, but many websites can. The National Center for Education Statistics Website has information about ethnicity, socioeconomic status and student teacher ratios for individual schools. Standard & Poor’s runs an educational snapshot website, School Matters Web site, which can help you compare two different schools.
Take a tour of the neighborhood school and visit the school district’s website to read more about individual campuses. Review information online for the individual school’s website or school district website. You may also find community groups that speak out about the local schools and school district. These community groups will often have information online with forums for residents to discuss what they do and don’t like about their schools. Speak with other families in the area if possible to gain a full understanding of how the district works.
Demographics
The demographics of a neighborhood are one of the messiest areas for a realtor to discuss. Real estate agents will most likely direct you to the Census Website to see who lives in the surrounding area. Large cities and towns will generally also have website that post demographic information for instance New York holds a wealth of information on its site at www.nyc.gov under the residents tab. Driving through the neighborhood at various times of day may also lend clues as to who your future neighbors would be.
The Environment and Zoning Regulations
If you plan on doing improvements to the property in the future and are contemplating pouring a lot of money into your home you should know in advance before you acquire a large home loan on what exactly are the requirements and restrictions. Information on local zoning laws can also be vital for you to make an important decision about future improvements to the property or to know what improvements or changes can be done to nearby property. Open land may very well be in private hands and then turned into a shopping mall shortly after your move in to your new home. See what information is available online from the planning or zoning commission to avoid surprises.
The environment in neighborhoods is evaluated by the U.S. Environmental Protection Agency Website. Type in the zip code of the area you’re interested in to see pollution statistics, hazardous waste information and the quality of local air.
The Personal Feel
Visit the community. Walk through the neighborhood or at least drive through at various times of the day. Make sure to visit nearby areas as well. Come by during the day and in the evening to get a feel for traffic and parking. Breeze through on a weekend to see what the neighbors are up to. Get out and take a walk. Do you feel safe? More importantly, do you feel at home? This is not a pair of shoes you are buying this a large investment with a large mortgage loan, there is no such thing as too much information or too much research. Investigating the neighborhood and the local stores will help to get a feel for all the little things that will decide whether this house will be pleasant to live in.
When it comes to your home and your home loan there are some things a real estate agent can’t tell you and there are some things real estate agents just know very little about. Real estate agents are salespeople. Some real estate agents are very knowledgeable about all aspects of housing but many are not. Fortunately, there is a wealth of information on the internet about schools, crime, zoning laws and more. Do your research on the neighborhood just as thoroughly as you would or should research the mortgage. You have to scout around and do a lot of homework to make sure you get the home you want without unwanted surprises.