Home buyers: 5 costly mistakes to avoid

Fall 2006 is proving to be a great time to be a home buyer(but not such a great time to sell your house or condo). In most cities, it’s avery strong “buyer’s market” for homes.

A buyer’s market means there are more houses andcondominiums listed for sale than there are prospective home buyers in themarketplace. “The buyer is king” is another way of saying home buyerscan negotiate hard for price and terms in today’s market.

Purchase Bob Bruss reports online.

The number of brand-new and resale homes available for salenationally is at an all-time high. However, because home sales depend on localconditions, the situation in the town where you want to buy might be different.

But savvy home buyers still need to be cautious to avoidmaking home buyer pitfalls. Here are the five most costly mistakes home buyersmake unless they plan carefully:

1. FAILURE TO GET PRE-APPROVED IN WRITING FOR A HOME MORTGAGE. Mosthome buyers need to obtain a home loan to purchase their house or condo. Smartbuyers shop for a mortgage before searching for a home.

Although it’s fun to “shop” for a house or condoon the Internet — where more than 70 percent of today’s home buyers begintheir quest (according to the National Association of Realtors) — the smartesthome buyers get pre-approved in writing by an actual lender so they know themaximum mortgage amount available.

The first step to obtain a home mortgage is to check yourcredit reports from the three major credit bureaus, Equifax, Trans Union andExperian. You can get free copies of your credit report once a year at www.AnnualCreditReport.com or byphone at 877-322-8228.

However, those free credit reports are virtually worthlesswhen shopping for a mortgage because they don’t include your all-important FICO(Fair Isaac Corp.) credit score, which most lenders use to qualify borrowers.

The best place I’ve found to check all three credit reportsis on the Internet at www.myfico.com. Forabout $45 I obtained copies of all three credit reports, plus my FICO score.With a FICO score of 700 or above, you should have no problem obtaining a homeloan at the best interest rate and terms.

If you find credit-report errors (reportedly, over one-thirdof credit reports contain wrong information), be sure to follow the procedurestated to correct those mistakes.

For example, several years ago one of my credit reports saidI owed unpaid property taxes. That was incorrect. However, it hurt my FICOscore. I followed the procedure to “verify” the error. Credit bureausthen have 30 days to do so. Because the mistake couldn’t be verified, my creditreport was corrected and my FICO score improved.

Armed with your corrected credit reports from all threecredit bureaus and your FICO score, the second step to obtain a home mortgageis to shop among mortgage lenders for a written pre-approval. Most lendersdon’t charge for pre-approvals (because they know you probably won’t shopfurther after you are pre-approved).

Be sure the lender gives you a pre-approval letter, not justa pre-qualification statement, which means only “We think you can probablyget a mortgage based on your submitted information but we haven’t reallychecked.”

2. FORGET TO WORK WITH YOUR OWN BUYER’S AGENT. Thesecond major mistake some home buyers make is they forget they need their ownbuyer’s agent. It’s very easy for prospective buyers visiting weekend openhouses to let the listing agent they meet prepare the purchase offer.

Whether that listing agent acts as a “dual agent”representing both the home seller and buyer (an inherent conflict of interest)or the listing agent represents only the seller (and nobody represents thebuyer), such a situation is not in the home buyer’s best interest.

To find a reputable buyer’s agent, home buyers should askfriends, relatives and business associates for recommendations of local agents.

It costs home buyers nothing extra to have their own buyer’sagent. If the home is listed for sale, the listing agent will split the salescommission with the buyer’s agent. In the rare situation of a “for sale byowner” home, most FSBO (fizz-bo) sellers are only too happy to pay thebuyer’s agent half of a customary sales commission, usually 3 percent.

However, home buyers should be careful not to sign anexclusive buyer’s agent contract for longer than 30 days, just in case therecommended buyer’s agent turns out to be ineffective.

3. BUY A HOME WITH AN INCURABLE DEFECT. In thecurrent buyer’s market in most communities, where there are more home sellersthan qualified buyers, house and condo buyers can afford to take their time andbe “picky.”

No home is perfect. Even brand-new houses and condos havetheir defects. Thankfully, most homes don’t have major defects, such as beinglocated next to a noisy railroad track or a freeway. Smart buyers think intothe future and ask, “Will I have any trouble selling this home because ofits problems?”

Serious incurable defects are called “economicobsolescence” by appraisers. Examples include a bad floor plan, poorlocation (such as adjacent to high-voltage power lines or the city dump), noisystreet traffic, or lack of onsite parking.

4. FAIL TO INSIST ON A COMPARATIVE MARKET ANALYSIS (CMA)BEFORE MAKING A PURCHASE OFFER. Amazingly, many home buyersstill follow the old rule: “Offer 5 percent below the asking price.”That makes no sense.

Instead, smart home buyers ask their buyer’s agent toprepare a written comparative market analysis (CMA) before making a purchaseoffer. This CMA is the same form the listing agent prepared for the homeseller.

It shows recent sales prices of comparable nearby homes,asking prices of similar neighborhood listed residences, and the asking pricesof recently expired competitive listings (usually overpriced).

With the help of the buyer’s agent, smart buyers thendiscuss the pros and cons of the homes on the CMA before arriving at areasonable purchase offer price.

5. NEGLECT TO INCLUDE TWO KEY CONTINGENCY CLAUSES. Way backin the hot home seller’s markets of 2005 and 2004, it was common for homebuyers to make “all cash, no contingency” purchase offers. Thecurrent buyer’s market in most cities has changed that foolishness.

Today’s smart home buyers include at least twopurchase-offer contingencies: (a) a satisfactory lender’s professionalappraisal of the home for at least the purchase price, and (b) the buyer’sapproval of a professional inspection report to be obtained at the buyer’sexpense.

Depending on local custom, additional inspectioncontingencies might include termite or pest control, building-code compliance,energy efficiency, and radon.

A controversial contingency makes the home purchasecontingent on the buyer’s sale of his/her current residence. Many home sellersrefuse to accept such a contingency. Others will accept it but with a 48-hourrelease clause if a better purchase offer from another buyer materializes.

SUMMARY: Although home buyers are in control of today’sresidential sales market, they still need to be careful to avoid costlymistakes. Smart home buyers, with the help of their buyer’s agents, can protectthemselves when buying a house or condo to be enjoyed for many years.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

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