I have a really special guest on the blog this week, and I am PUMPED to share all of her knowledge with all of you! Almost a year ago, I bought my first home (at 24 years old). It wasn’t easy by any means, but our incredible real estate agent took some time to teach me all the important terminology, what to look for in a first home, and what to absolutely NEVER do. I’m here to share the knowledge with you.
Kate is certified as both a Seller Representative Specialist and an Accredited Buyer Representative. Working with both buyers and sellers is key to her keen understanding of how to help her buyer clients come out on top in competitive multiple-offer scenarios, and to helping her seller clients get the best price and most solid terms possible. She’s known to her clients for her communication skills, problem-solving prowess, patience, and candor.
Kate brings a highly-specialized skill set to her real estate clients that builds upon her background as an attorney and journalist. She is a skilled negotiator, able to navigate and explain complex transactions, knows how to ask the right questions and obtain information quickly, and understands what it means to be a true advocate for her clients. Before moving to her beloved “forever home” of San Francisco, she lived in New York City, Seattle, Nashville, and Sydney, Australia, where she was born.
HG: Thanks so much for chatting with us and sharing all of your knowledge and expertise!
Kate: Thanks for having me!
HG: As a first-time home buyer, it was difficult to navigate the complicated world of real estate. We felt SO lucky to have you around to help us! Not everyone will be as lucky as we were finding such an incredible real estate agent, and we at Harper Grey thought it might be helpful to bring this information to our followers. Let’s get started!
Kate: Let’s do it!
HG: Let’s start with some important terminology. Can you walk us through some terms we should know?
Kate: That’s a great starting point. Let’s begin with Loan Pre-Qualification vs. Pre-Approval. If you are not one of those lucky all-cash buyers, pre-qualification is commonly the first step in the mortgage process, in which a buyer provides a lender with an overview of his or her financial history. Pre-approval generally is a step further, where the lender has reviewed underlying financial documents, and checked the buyer’s credit. Pre-approval letters often have an expiration date and because they usually indicate a more robust financial check, are often considered to be more reliable than pre-qualification.
The Consumer Financial protection Bureau has a great discussion of the differences here.
In some markets, pre-qualification may be sufficient as a first step to having your offer accepted. As an agent in the very competitive San Francisco real estate market, I encourage my clients who are actively looking to buy a home to skip go into any offer already fully pre-approved. When I’m working for a seller who receives multiple offers, generally I advise my client to give more weight to offers with pre-approval letters where income, assets and credit have been verified and a credit check has been run recently. The strength of your lender’s letter (included with your offer) can be critical.
Going through the fuller pre-approval process also helps you, the buyer, get a fuller picture of what your budget really is (as the more your lender has dug in to your financing paperwork, the less likely it is for a surprise problem when they actually are working on full loan approval after your offer is accepted).
HG: Great to know. So going through a pre-qualification process online wouldn’t work?
Kate: In more competitive markets, your offer will generally be declined if what you’re using doesn’t look at your financials and other important paperwork. Some of these online institutions are Rocket Mortgage or Quicken Loans. They’re just a little too good to be true.
HG: Talk to us about the Down Payment.
Kate: If you are fortunate enough to buy a property with all cash, then this is not a concern. You’ll have 100% equity in your new home the day you close! The majority of Americans, however, buy with a loan, called a mortgage. A 20% down payment (meaning the lender funds 80% at close and buyers brings 20% to the table) is perhaps the most typical loan. A down payment of under 20% usually involves an extra monthly payment for private mortgage insurance (PMI). That’s why people often save until they can get to that 20% number. That said, check with your lender about down payment assistance, FHA Loans, and if you’ve been a member of the armed services, a VA loan, which all have lower down payment requirements.
Your down payment affects what you pay monthly, whether you pay PMI, and what your equity in the home is the day you become the owner. You will want to talk with your lender about what down payment is best for you and your finances. In very competitive markets such as San Francisco, where I work, a higher than 20% down payment can help a buyer be more competitive especially where all-cash offers are common.
HG: So you do need to come up with some cash before buying a home. Good to know!
Kate: Yes, you’ll need to do some saving before purchasing a home, which is why many wait until they have been in the workforce for a while.
HG: When do you have to come up with the full down payment?
Kate: If you place an offer on a home, and the offer is accepted, then you will first need to pay something called an Earnest Money Deposit. It is essentially a part of your down payment and closing costs paid up front to show the seller you are committed to closing the deal. Make sure you understand what amount you will need to pay (in an escrow state, the money will be held by the escrow company, in non-escrow states, usually by the seller’s broker or in an attorney’s trust account).
Earnest money deposits are negotiable between buyer and seller and in many areas amount to 1-2% of the accepted purchase price. But they can go higher. In San Francisco where I work, by convention the minimum earnest money deposit to be competitive is 3%. In competitive markets like mine, sometimes buyers put down more to stand out among offers.
Your agent can give you guidance for what you’ll want to offer in your particular market, but remember that if your offer is accepted, this money needs to be liquid and available when your offer is accepted. Don’t start the process of selling stock after your offer is accepted! The earnest deposit needs to be readily available to transfer, usually within a day or two of the acceptance of your offer. You’ll also need to understand what happens to the earnest money if you are under contract but the deal falls through. Depending on the circumstances, the earnest money may be lost in full or in part to the seller.
The rest of the down payment is due at the close of the sale, which is normally around 30 days, but can be shorter to be competitive.
HG: What is an escrow state vs. non-escrow state?
Kate: Especially if you live in the Western United States like me here in California, you are sure to hear the word “escrow” thrown around a lot when you get serious about buying real estate. The word has several meanings but the concept in general relates to a neutral third party holding items of value in the transaction (cash, deeds, bonds, anything of value that is part of the deal) until certain conditions are met. Take for instance, your earnest money deposit. In escrow states, your earnest money deposit doesn’t go directly to the seller or an attorney or the seller’s broker, but instead it goes to an escrow company, which will hold it until all the other conditions of the transaction are met (specified in the escrow instructions).
The escrow company will only transfer the money to the seller once all other conditions are met to close. The seller and buyer can sign documentation at different times, even a few days before closing. “Going into escrow” is what many of us say when a buyer’s offer has been accepted.
But not every state uses the escrow process to close. Many states use a more traditional non-escrow method for the period between acceptance of your offer and closing. In these states, the buyers and sellers all sign together at a specified time and funds are transferred directly between the parties. This transfer of funds and signing of documents is referred to as the closing in these states.
Your agent will explain to you how your state handles closings. Some states will require escrow, others will require a traditional transfer of funds between parties at the closing table. And some of the non–escrow states, like New York, require an attorney to oversee and consummate the transaction.
HG: Can you walk us through the full process of buying a home?
Kate: Absolutely! First, find either an agent or a lender. Most of my clients find me at open houses or through referrals. Finding an agent first opens you up to all of their referrals on which lender to use.
HG: Yeah, I met you at an open house!
Kate: Yep, that’s how most of them come to me! Finding an agent who you trust and like is crucial. This is such an emotional process, that you will need to feel confident in your agent and be sure they have the knowledge required to win you your dream home! I wouldn’t recommend just picking an agent off an an ad – find an agent and ask them questions, then, make sure you’re happy with their answers.
Also, use a full-service agent! Agents not only help with looking at houses with you and making an offer, but also getting you through escrow and closing the deal. As a buyer, you don’t pay any commission. So why not use someone who will work full time for you?
HG: Such great advice!
Kate: Once you have an agent, they will often have recommendations on lenders to work with. The next step is to get the pre-approval process started with a trusted lender. Do this before seeing a ton of houses. You don’t want to see houses outside of your budget and have to scale back. That’s a painful reality!
HG: Pre-approval can be a lengthy process, so when should you begin looking?
Kate: If you are comfortable with knowing your price range, then feel free to get started. If not, wait until your lender makes a decision on purchase price and hit the road.
HG: How can you determine what your monthly payment will look like? What other factors should one consider when finalizing their budget?
Kate: When starting your search for a home, remember that what you can pay is not just about the purchase price! An online mortgage payment calculator can be initially helpful, but only if you understand that it doesn’t take into account other items that you’ll have to pay to buy your new home. You’ll also have to pay property taxes and homeowner’s insurance, and possibly other monthly expenses like a homeowner’s association fee.
HG: Can you go over those costs?
Kate: Property taxes, for instance, vary from state to state, county to county, and city to city. You can visit your county’s and city’s tax assessor’s website to learn more. Where I live and work, here in San Francisco, California, a buyer’s property taxes are based upon what you pay for the property—In other words, what the prior owner paid doesn’t matter. The city reassesses based on what you pay. Often in other locations, instead of automatically reassessing based on your purchase price, the tax assessor may reassess your home value every one to five years (or more). Property taxes are an important source of revenue for city, county, and state governments. You’ll want to explore how much you’ll be paying for any given property (ad valorem taxes and also special assessments in some cases), because it will affect your ultimate purchasing power.
Another important cost you should factor in when determining your budget is insurance. If you are buying a single-family residence, you’ll need homeowner’s insurance to protect your property. You need it no matter what, because it’s a small price to pay for what is likely your largest investment, but if you are getting a loan, the lender will not fund the loan to close until you have proof that you have a policy in place. If you buy a unit in a multi-unit building, say, a condo or a coop (or a tenancy in common here in San Francisco), the master building insurance is usually one of the items included in your HOA dues. You’ll still want your own additional “walls-in” policy as well, to protect your unit itself and your belongings within it, so make sure to factor that in as well.
Homeowner’s associations (HOAs) are a part of buying in a multi-unit building (condo, coops, and the like with shared common space). In most cases, HOA dues are charged to each owner, usually on a monthly basis. Look carefully at all HOA documents provided in the seller’s disclosures before you buy to understand what those dues are paying for, and also to understand the financial health of the property (for instance, does the HOA have an account with significant reserve funds). Sometimes HOAs are self-run and casual in smaller 2-4 unit buildings. Larger buildings more often are professionally run (with part of your HOA dues going to pay for property management). Here in San Francisco, typically HOA does pay for building insurance (the master policy on the building. Buyers may need their own” walls-in” insurance for their specific unit); garbage/recycling/maintenance costs, management if the building uses a property manager, and funding a reserve fund.
Also look at the HOA rules carefully. This is where you’ll find out what you can and can’t do. How many pets are allowed? May you rent your unit out and under what terms? How may you use common spaces? These are just a few of the many rules of each multi-unit building you’ll need to be familiar with to decide if a multi-unit building, condo complex, or development is right for you.
HG: Once you determine your budget, can you go look at places?
Kate: This is the fun part! Go and see many homes to get a sense of how much house you can buy while still staying within your budget. Be very clear with your agent on what you’re looking for – often times, an agent specializing in your area may have access to homes not yet on the market, and can get you in before anyone else!
HG: Red carpet, baby!
Kate: Ha ha! Once you find your dream home, and you’re ready to make an offer, it’s time to hand over the reigns to your agent. He or she will first obtain the disclosures from the selling agent. The Disclosures are basically the underlying text that goes into detail on the house. The seller is, by law, required to disclose certain information to anyone buying the house. If they know of structural damage, for example, this is where you would read about it. The disclosure packet can be quite lengthy, but your agent will read through it looking for any red flags.
Once you have determined that everything looks good, your agent will prepare an offer. Congrats, this is the most exciting (and stressful) part! Since you chose an agent who knows the market well, they will advise you on how much to offer. In most areas in the US, you can put in an offer at or below asking. However, if you’re in an extra-competitive area, such as San Francisco, you can sometimes go hundreds of thousands of dollars over asking and still not win the offer. This is why it is crucial that you trust your agent!
HG: I still can’t believe you told us to go $100,000 over asking… and we were still one of the lowest offers!
Kate: San Francisco is an intense market! In the offer you will list out your contingencies. There are many types of contingencies that can be included in a buyer’s offer, but at base, a contingency is a condition that must be met for the buyer to go through with the transaction. Usually, a time period is given for the contingency to be removed. If the contingency is not removed, either party may walk away from the deal. Perhaps the most common types of contingencies are financing contingencies and inspection contingencies.
In very competitive seller’s markets in which most properties see multiple offers, it is not uncommon for a buyer to make an offer with NO contingencies. That means they are very confident they will get their loan (or are buying all cash), have the cash to make up the difference in case the property doesn’t appraise for the purchase price, and are comfortable with the house as-is, meaning that they will take the house regardless of condition and needed repairs. If you make a non-contingent offer, you’ll want to understand exactly what your risks are and make sure you know enough about the condition of the home (in many cases, sellers include inspection reports in the disclosures) to be aware of what you may or may not need to do after you become the new owner.
HG: Let’s say your offer is accepted. Then what?
Kate: Once an offer is accepted, you will send your earnest money deposit to the escrow account/ seller. Then you have a certain amount of time to get the loan completely set up. On the closing date, you get the keys!
HG: Wow, what an intense process. I’m so glad we had you here to help us through it! What is some advice you would give first-time homebuyers?
Kate: It’s important for people to understand that there is a lot to learn! Buying a home is not a small endeavor by any means. It’s emotional and comes with a large learning curve. Be patient and don’t be afraid to ask all your questions. Be sure to reach out to people when you don’t understand a part of the process. This can be an emotional rollercoaster, but still fun and satisfying in many ways. This isn’t something you learn in school! The home buying process requires a lot of work, and you want to ensure you are doing it right and to making the right decision.
Even though it’s overwhelming, you will learn! It’s ultimately a big decision, so ask all the questions that come to mind so that you’re sure and confident. It’s okay to take your time- don’t let anyone pressure you. My job isn’t to push you into buying, it’s to support your timeline, and your life decision, whenever that may be.
HG: Why is buying a house such a good decision?
Kate: There are many financial and emotional benefits of owning a home! There are tax write-offs, which is always fun. However, there’s also a sense of security that comes with owning your own home. Nobody is going to kick you out, or raise your rent. The home is yours and you can do what you want with it. So paint that wall, tear down your ugly bathroom! This is now your main source of equity, and it’s going to be a great investment. Plus, what many first-time homebuyers don’t realize is that you’re now paying yourself instead of paying someone else.
HG: What do you mean by that?
Kate: When you pay rent, you’re never going to see that money again. Poof, it’s gone. However, when you make a mortgage payment, that money goes back into your pool of funds that you get back when you sell the house. Just like you’ll get your down payment back, you will increase that amount by just owning the home!
HG: What a great financial decision!
Kate: Exactly. It can be an expensive process, but it’s going to really benefit you in the future!
HG: If our readers take anything away from this interview, what would you want that to be?
Kate: Work with an agent!! So many people think they can do this themselves by doing research on Google. There is absolutely no upside to trying to do this yourself. You’re not paying anything extra to work with an agent as a buyer, so just do it. They will handle the hard parts and teach you a thing or two along the way!
HG: Such great advice! Thanks so much for taking the time to chat with us. Readers, if you have any questions for Kate or want to work with her directly, please check out her website and get in touch! Thanks for sharing your knowledge with us, Kate!
Kate: My pleasure!
Thanks for tuning in to another Friday Interview! New interviews will be released on the first Friday of every month. This interview was really special to me, because buying this house with the help of Kate truly changed our lives. I bought this house along with my long-term partner, John, and our dog, Rylee. Since we moved in almost a year ago, we have already experienced so many changes and wonderful new things. We have explored a new city and fell in love with the Bay Area all over again. We adopted a second dog and learned how to potty train a puppy on our (now ruined) carpet. We had game nights, and dinner parties, and went through so much in this short amount of time that we have owned this home. But one thing hasn’t changed since then, and that’s coming home every night to the most beautiful little house in Oakland. We take so much pride and joy in our home, and I hope you will use these lessons to help you feel ready to start this process for yourself.
With love always,