Explanation of the Real Estate Purchase Process
Buying a property is an extensive process that entails many steps, from your first visit to getting the keys. To help you along the way, you need to understand what the purchasing process involves and how it applies to your individual situation. Once you have that information, you can smoothly proceed to closing on your purchase.
Getting Approved for a Loan
Before you start working with a real estate agent or Realtor, be sure to get pre-approved by a mortgage broker or banker. The pre-approval will help you confirm your targeted price range, proactively address any potential lender concerns, and help give you an edge when submitting offers on properties.
While a mortgage banker usually works for a direct lender, a mortgage broker works with multiple banks to bring you the best available option for your circumstances. Direct lenders sometimes can offer the advantage of slightly lower closing costs, but usually don’t offer rates as low as mortgage brokers, such as Westpark Loans. While mortgage brokers may cost a little more upfront, they usually will save you thousands over the lifetime of the loan by offering lower rates, more loan programs, and personalized customer service. In any case, you will want to work with your mortgage broker or banker to obtain your pre-approval.
The pre-approval process entails filling out a loan application, sending in income and asset documentation and allowing the broker or lender to run your credit as applicable. The lender will often request verification that you have sufficient funds available to cover closing costs and the down payment, such as bank statements.
Getting pre-approved as early in the process as possible is important because properties with lower prices or other great opportunities may not last long on the market. It can take several days for you to get a full pre-approval. If you wait until after you find a property to work on getting pre-approved, the seller may select a buyer who is already pre-approved and you may miss out on that purchase opportunity.
There are a number of different types of loans. Not all documentation will apply to your situation. Your mortgage broker or banker will go over your documentation, present the programs that are available to you, and help you find the one that best suits your needs. He or she will also go over your maximum purchase price so you don’t spend time looking at properties that are out of your budget.
Another key item that will come from your mortgage broker or banker is the length of time needed to close escrow. This can vary widely depending on the type of loan you will be getting. Don’t let your real estate agent dictate this term – it should come from your lender. Many private money loans can close in as little as 48 hours, which can give you the opportunity to negotiate a substantial discount on the purchase price as it is basically the equivalent of paying with cash. Traditional loans typically close in about 30 days. Alternative documentation loans can take 45-60 days to close. So it is important to know how much time you will need to close before writing any offer.
Once you are pre-approved, your mortgage broker or banker will send your pre-approval letter to your real estate agent and work alongside them throughout the buying process. If you don’t already have a licensed real estate agent representing you, your mortgage broker or banker can recommend an experienced local professional to help you.
Who Best Represents Your Interests?
Having the right representation is crucial when performing one of the most expensive transactions of your life. Select the best real estate professional for your needs, and understand the qualifications of the person who will represent you and your needs.
Avoid using the listing agent when buying a property. Even though this is ethical and legal when fully disclosed, it doesn’t generally give you the best representation possible. You will want to hire your own buyer’s agent when purchasing a property. You want an agent that is local to the chosen purchase area. Choose someone who knows the neighborhoods and has connections in the area. Find someone with a proven track record of working with other real estate investors and who knows the intricacies of what real estate investors need to know. For example, if you find yourself having to explain what gross multiplier is, you probably need to choose a different agent.
The following list describes the different types of real estate professionals:
- Real Estate Agent – has an agent license from the California Department of Real Estate and works for a licensed Broker.
- Real Estate Broker – has a broker’s license from the California Department of Real Estate, usually has more experience than an agent, and usually has multiple agents working for him/her.
- Realtor – In California, this is a licensed real estate agent or broker who also belongs to the National Association of Realtors, California Association of Realtors, and the local Association of Realtors, such as Orange County Association of Realtors. They are held to a higher standard than agents.
While everyone who represents you is called your “agent,” it is important to identify if they just are an agent, or if they have additional qualifications such as being a broker or Realtor or have other certifications.
Be sure to check with Yelp, Zillow, LinkedIn, Facebook, and the Better Business Bureau to read reviews from past clients. Finally, be sure to check references before making the final decision of which professional to hire to represent you.
Finding Your New Property
Once you have selected your agent, he or she will start sending you potential properties to consider. You will want to evaluate properties using your preferred methodology or strategy. Your agent will help you with comps to determine which properties might be a profitable investment and which ones to avoid.
Some Real Estate companies, like Westpark Equity Group, also operate a wholesale division specifically for real estate investors looking to purchase properties below market. You can see the available listings from Westpark, and sign up to be notified as new properties are acquired at socaldiscounthomes.com.
Making an Offer on the Property
Once you have selected the property you wish to purchase, your agent will prepare the offer for your signature. Almost every aspect of the purchase is negotiable, not just the purchase price. Escrow closing period, loan terms, and contingencies are other items that you will want to use to your advantage when writing an offer. For every offer, experts agree that enclosing a comprehensive package along with the offer will increase your odds of having it accepted. Your offer package should include, among other potential items, the following: lender pre-approval letter, proof of funds, credit report, and letter of intent to describe your level of interest and highlight relevant aspects of your offer. The seller might respond with a counteroffer, so be prepared to recalculate your investments based on their response.
Once the negotiations have concluded and the seller accepts your offer, an escrow account is opened. You will need to wire your deposit to the escrow company, which is a neutral third party. The escrow agent will ensure that the contract is fulfilled before releasing the money to the seller and advising the listing agent to give keys to the buyer. The escrow agent has no pre-set agenda – they simply follow what is written into the escrow instructions.
Ordering a Title Report
Your mortgage broker or banker will order a title report for the subject property. The title report will let both you and your lender know if you will be getting a clean, unencumbered title, and Title Insurance will guarantee it. Title Insurance will protect against loss should the condition of title to land be other than as insured. You will be given a copy of the title report and will be requested to sign an acknowledgment that you received it.
Appraising the Property
The lender schedules the appraisal. Neither the buyer nor the seller can select the appraiser. The appraiser, using their expertise in the field, will give their valuation based on other comparable properties in the market. If the appraisal comes in for less than the agreed upon purchase price, you might need to increase your down payment or ask the seller to accept a lower price. Based on the appraisal, all parties will know if the final price is fair based on market conditions.
Physical Inspections Are a Must
While inspections are not required by law, they are strongly encouraged for all purchases if possible. The outcome could dramatically affect your investment decision of whether to proceed with the purchase. The inspector will check major systems and all areas of the property for problems. Some of the suggested specialty inspections depending on the property include mold, fireplace, sewer system, geotechnical and pest control. If your inspector finds “material damage,” you will have the opportunity to renegotiate your offer or withdraw completely from purchasing the property, as long as you allowed for an inspection contingency in the purchase offer.
Action Items Prior to Closing
As you approach closing, you will be asked for multiple items and signatures from the seller, the lender, and the escrow agent. You will receive more than a few requests, and this is all completely normal.
Sellers may ask you to sign off on any contingencies that were in the agreement, along with any disclosures about the property. If you are purchasing a property in a Home Owners Association (HOA), you will need to review the HOA documents as well.
Lenders may ask for additional income or asset documentation, letters of explanation, and proof of property insurance before they release the funds, so you want to make sure you are prepared for these types of requests.
The escrow agent will ask you to sign any documents that were specified in the purchase agreement or escrow instructions, including various disclosures about the property, neighborhood, and community. The escrow agent will usually help arrange the signing of the loan documents as well. The escrow agent will also ask that you wire any remaining funds needed into their account before closing.
Finally, on closing day, the title company will record the documents at the courthouse and confirm that you are listed on the county records as the new property owner. Once confirmed, escrow funds will be released to the seller and you will receive the keys. All in all, the process doesn’t have to be as complicated or complex as you might think. Before you know it, you will have closed on your property and the process will be complete.
Scott Clift is a licensed real estate broker with Westpark Equity Group and the private lending division of Westpark Loans. He has been in the real estate industry since 1994. His team of seasoned professionals specializes in providing real estate loans for real estate investors and other self-employed individuals. When you are ready to invest in real estate, call Westpark Loans to secure your financing at 844-574-LOAN (5626) or by visiting westparkloans.com.