Top Tips for Birmingham Area Home Buyers
Get Your Financing Figured Out
Before knowing what homes to consider, you need to know how much you can afford, and that comes down to the monthly payment amount. Between loan products and constantly changing lending guidelines, confusing or insufficient online mortgage calculators, variable interest rates and credit score surprises, most buyers are looking in the wrong price range (too high or too low), and every buyer can really benefit from the information and guidance of an exceptional loan officer. Ask your REALTOR® for a referral to a mortgage lending specialist with at least five years’ experience. Based on your preferred monthly payment, income, and credit scores, the mortgage specialist will review all your loan and downpayment options and write you a “Pre-Qualification letter” stating what purchase price you can afford. In most cases, the seller’s agent will require this letter in order to consider your offer. A “Pre-Approval letter” (as opposed to a Pre-Qualification letter) requires more labor on your part to provide the lender with additional paperwork and verification. In the Birmingham market, submitting the PRE-APPROVAL letter positions you as a much stronger, more serious buyer in the eyes of the seller because it shows that financing issues will be far less likely to arise.
At one time, using mortgage brokers specializing in residential loans was a great option to capitalize on obtaining some of the most competitive rates because of access to large quantities of wholesale lines of loan products; however, this has dramatically changed in recent times as the lending climate continues to trend towards more and more regulation. This, in turn, has forced many lending sources to abandon wholesale products once made available to third party brokers, and consequently, the brokers are now far and few because access to large varieties of competitively priced loan products is now very limited. While direct, national lenders (i.e. Wells Fargo and Bank of America) tend to focus exclusively on their own products, many have become competitive in recent times depending on the type of loan product. Even some local and regional retail bank operations are now focusing more energy in the mortgage arena and can provide decent loan products and rates despite once being too busy with other facets of the business and once offering very limited mortgage options. One other possible avenue that is sometimes worth checking into is your local credit union (if you have an affiliation with one of course).
When shopping for the best rate for your family, be sure you are comparing ‘apples to apples’ as rates can change daily from lender to lender. Also, think twice about switching away from a lender who invests precious time to give you advice and guidance. These people are usually far more valuable than saving an eighth of a point on your rate. They’re also the ones who will be upfront with their fees. Anyone can quote you a lower rate, but the fact is that some lenders drop the ball and can cost you money or delay your closing, and in Alabama this could potentially put a buyer in default of the sales contract (Speak to an attorney for further information regarding the dangers of being in default of contract). Because poor lenders can prove to be quite costly (no matter what great rate was quoted), the rule of thumb is to always go with someone with whom you feel comfortable, who has your best interests in mind, who is a good trusted advisor, who takes the time to explain your options, who will see the loan all the way through, and whose rates are reasonable. Take note that ‘Reasonable’ rate always trumps ‘Best’ rate when there is a certain level of service provided. When it comes down to choosing your lender, it is no time to mess around with someone who might make it work. It’s critical to have someone who will get the job done.
DO NOT USE INTERNET LENDERS, out-of-region lenders, or any lender who was not referred to you unless you like last-minute surprises. Typical surprises used to be unexpected rate hikes the day before your closing when it is too late to react. Anyone can talk, but not everyone can deliver; furthermore, if there are issues with the loan, you want to have peace of mind knowing you or your REALTOR® can get face to face with the lender to fix the problem. There’s nothing worse for a buyer or seller than getting to the settlement table with no sign of the funds and no sign of the lender (or a lender who is asleep in California during the 9 a.m. settlement in Alabama).
Be sure your loan officer explains how loan locks work, as this may vary from lender to lender. Some lenders may have special incentives such as a float-down option whereby your locked rate can actually be adjusted should a major reduction in interest rates occur after your lock and before the closing.
Finally, when your loan officer asks for additional paperwork, be sure to provide it immediately. Your lender cannot control what the underwriter requests and when it is requested. The bottom line is that no matter who the loan officer is, if you are late to submit documents to the lender, your settlement might also be late. Keep all monthly statements updated as they come in because the lender will probably need to have the latest statements on hand. The following checklist will help you to gather most information lenders will require:
Loan Application Checklist
- Borrower’s Information
- Social Security Number
- Driver’s License or other photo ID
- Home address(es) for the past two years (plus landlords’ addresses if renting)
- Insurance- Name and phone number of your agent. Include member number if issued
- W-2’s for the last two years
- Employment information for the past two years, including employer, job title, tenure and employer’s address
- Paycheck stubs for the last 30 days
- If self-employed or commissioned: Tax returns with schedules for the last two years, year-to-date profit and loss statement and balance sheets
- Veterans: Certificate of Eligibility- If you are a veteran or active duty
- Copy of divorce decree and proof of child support income if it is to be considered as part of income for credit purposes
- Assets/Bank Statements
- Most recent statements from banks or other financial institutions. Include bank name, address and account number, plus the balance for each checking, savings, retirement and asset accounts. Include all pages
- List of assets and their values, including cars, stocks and real estate
- Addresses of other real estate owned and the applicable loan information including the name and address of the lender
- Refinance Information
- Copy of Deed
- Copy of homeowner’s insurance
- Copy of your last mortgage statements (1st and 2nd)
Note: The above information is usually required by your lender for each borrower listed on the loan application. This is a general checklist and is meant to be a guide, not a definitive list. Additional information may be required by your lender.
Use a REALTOR®
Most, if not all, of the buyer agent commissions are paid by the seller on the buyer’s behalf, so for a buyer, the help of a real estate professional is extremely inexpensive and in many cases free. A good buyer agent will help you find the right home in the right area, guide you away from big mistakes, point out red flags in a house or in a deal, navigate you through complicated contracts and paperwork, negotiate a better deal for you, and help you with assembling your team of professionals (inspectors, lawyers, lenders, etc.). Some buyers think they will save money by not having an agent. Think again. The seller has agreed to pay a certain commission rate to the listing agent (seller’s agent), regardless of whether or not the buyer is represented. If the buyer has no agent, the listing agent will keep the entire amount, and you, the buyer will miss out on the benefit of professional advice and representation.
When selecting an agent, ask for a referral. People generally only refer their friends to someone who will do a great job…it’s their name on the line. Chances are the agent will want to do an excellent job so that same friend will continue to refer other friends. It’s brilliant, yet not rocket science. It’s called working by referral, and smart buyers should take advantage of that. Be sure your agent really knows more than just one specialized geographic area and that you feel comfortable together because this really is a partnership situation. .
Many buyers and sellers are unclear of the differences between agents, REALTOR®s, and brokers when referring to an individual person. Simply put, real estate agents are licensed sales people. Brokers are also licensed to sell but are held to a higher standard of knowledge and education when it comes to licensing. All can help people buy and sell real estate. Brokers can also manage other real estate agents or start their own brokerage. Most practicing agents and brokers opt to follow certain ethical standards and join the National Association of REALTOR® s.
So to clarify, both sales agents and brokers can be a REALTOR®. For the purpose of this book, I may use some of these titles synonymously but will most frequently use REALTOR®.
Most buyers purchase a home that does not match their original criteria 100%. If you start looking too late, you might buy the wrong home. It makes sense to start looking and exploring long before you are ready to buy to give yourself time to learn and think about what you see. The criteria for your next home will likely evolve and change as you look at homes. Meet with a good REALTOR®, and discuss your criteria. Then spread out a map and ask which areas have historically held value and which have not.
Your REALTOR® should immediately start sending properties matching your criteria; these days, it is almost exclusively done via email/internet. Sort through the listings, and pick the ones you like the most. When you have time, drive by these homes and see what you think about the neighborhood, the shopping, the work commute and the overall appearance of the home as compared to the listing photo as pictures can be very deceiving. You will find neighborhoods you never knew existed. At this juncture, exploring the geographic areas in which you may have interest is a productive and even fun part of the process, and you can do it whenever spare time unexpectedly presents itself. If, while driving around, you see a “for sale” sign in front of a property that piques your interest, tell your REALTOR® about it, and see if he can obtain further information. If it is listed, your REALTOR® can cross-reference to determine why it didn’t make your established search list. If it is a ‘For Sale By Owner’ (FSBO), be sure to let your REALTOR® know immediately. Despite having to do twice the work, many good REALTOR®S will be happy to interact with FSBOs and most FSBOs will agree to cover the cost of the buyer broker fee. Interestingly, over 86% of FSBOs eventually list with an agent; however, until that time, it is critical your REALTOR® makes the initial contact to eliminate any confusion or misunderstanding over obligation to pay the buyer broker fee.
Feel free to continue the home search online if you wish, especially if supply is low and there are few choices. ‘Out of the Box’ searches can sometimes pay off. REALTOR® .com, or the search page on your broker’s web site are all great places to look. You may find homes of interest that do not meet your original criteria and even decide to alter your original parameters…No problem. Inform your REALTOR® of these criteria changes if you wish, and he will send you more homes to consider.
If you see a home you absolutely love, call your REALTOR® and tell him you want to see it ASAP. No harm in looking, and if it is the perfect home, maybe it makes sense to move a little earlier than you planned.
Move Up in the Down Market
This is the most profitable time in the history of the Birmingham area to sell your current home and purchase a more expensive home. Here is a very simplified example: Let’s assume the average price of a home in the Ogden area has dropped 10% over the past 18 months. So if you own a home that would have been worth $400,000 in the previous market, you may only get $360,000 for it now, or $40,000 less than you hoped. However, you should be able to purchase your next home at a 10% discount also, so you get a $600,000 home for $480,000, which is a $120,000 savings. In total, you took a $40,000 loss and a $120,000 gain which gives a net result of being $80,000 ahead.
It gets better though. In some areas, the lower-priced homes depreciated less than the higher-priced homes. So if your $400,000 home only depreciated 5%, but the $600,000 home depreciated 15%, then you would lose $20,000 on your current home and gain $90,000 on your next home, for a $70,000 positive net! Compare this to moving up in a rapidly appreciating market, when any appreciation on your lower-priced home is wiped out by the price increase of your next home. You are actually taking a loss on the transaction. Keep in mind that getting a bargain on the higher-priced home does not necessarily mean negotiating a big reduction off the list (or “asking”) price, because the list price most likely has already been adjusted downward to the right price.
Know Your Criteria
Here is a list of criteria for you to think about:
- Price range
- Number of bedrooms
- Living area square footage
- Master down (Y/N)
- Number of bathrooms
- Geographic area
- School district(s)
- Age of home
- Number of Levels (Y/N)
- Lot type (corner/cul-de-sac)
- Flat lot (Y/N)
- Basement (Y/N)
- Number of garage bays
- Commute time to work
- Screened porch (Y/N)
- Fireplace (wood/gas)
- Fenced yard (Y/N)
- Exterior (brick/vinyl/etc)
- Community pool (Y/N)
- Golf course community (Y/N)
- Direction house faces
- REO/Foreclosure (Y/N)
- “Fixer-upper” (Y/N)
- Deck (Y/N)
- Pool (Y/N)
- Storage shed (Y/N)
- Private lot (Y/N)
- Storage space
- Water supply
- Waste services
- Extra parking (Y/N)
- HOA Dues
Tell your REALTOR® everything you want in your next home. If your search results in too many homes to choose from, you can add to your criteria. If not enough homes match your criteria, you can make your criteria less specific. Generally, it’s best to start your search as broad as possible.
Understand DOM and Price/SF
DOM is “Days On Market”. This number is important because the longer the home has been on the market, the more likely the seller’s mindset or position has shifted. Sometimes this can translate into opportunity for buyers because it can be an indicator of how motivated the seller might be. Reports printed by your REALTOR’S® Greater Alabama’s Multiple Listing Service (MLS) have two kinds of DOM. The first, DOM, means “Days On Market”. Listing agreements between broker and seller can be terminated and new agreements signed or agents can be fired and hired, and this number will reset to zero each time one of these scenarios occurs, so this number is somewhat meaningless.
CDOM, “Continuous Days On Market” is more helpful because it is the total number of days the property has been on the market regardless of short breaks in listing agreements. However, it is good to note that this number will be reset to zero if the property is taken off the market for at least 90 days. In this case, you can ask your REALTOR® to run a report on the property address to see the complete MLS history, including all price reductions.
Once you identify a home you like, how do you determine if it is priced correctly? Look up the homes that have sold recently in the same subdivision and find those of comparable quality to the home you like, considering overall condition, upgrades, lot size, etc. Your REALTOR® may be able to assemble a “Sales Price per Square Foot” ($/SF) analysis for each of these, to get an idea what the home you like should sell for.
Ask your REALTOR® to print out and help you analyze a detailed “CMA” report for the properties in which you are interested. This report will automatically summarize critical information for you. Pay little attention to SP/LP% (percentage of list price that a property sold for) on this report. This calculation is only helpful when understanding trends and relationships to original sales price and CDOM. There can be a lot of timing strategy involved in what to offer based on the timing and amount of seller price reductions. A good REALTOR® will help you interpret anything of significance with this figure.
Understand Short Sales and Foreclosures
A “short sale” is a situation in which the seller owes more on the home than it is worth, and does not have the funds to come up with the difference at closing. It really does not make sense for a seller to hide the fact that it is a short sale because buyers will need to be much more patient than in traditional sales. The seller may lose his only opportunity for a successful short sale if the buyer feels deceived and walks away from the deal (See Seller Tips section for more details on Seller preparation of short sales).
When an offer is made, both buyer and seller typically sign a “Short Sale Addendum” which outlines the terms/timelines of receiving approval, doing inspections, etc. Once an offer is accepted by the seller, the listing agent submits it to the seller’s lender for approval (along with a laundry list of other items). In rare circumstances does this approval happen quickly; in fact, most often it takes several months, and even then, the answer might be “no”.
So it is possible to get a good deal on a short sale, but the lower the offer or the lower the agreed upon price in relation to true market value, the less chance that the lender will approve it. This is because the bank wants to recover as much of their money as possible. Buyers may get a good deal, but they rarely get the ‘deal of the century’ that some buyers think they’re getting with short sales. If you want certainty or have strict timelines about when (or if) you will be able to actually occupy the property, setting your heart on a short sale can be extremely frustrating and a risky proposition. If you have a flexible timeline, perhaps you wish to enter into a short sale situation.
If you decide to consider short sales, be sure to set a deadline for receiving bank approval and/or be sure you have another exit strategy if needed. A good REALTOR® can help you understand these complexities and some of the pitfalls involved. But also keep in mind that because of the lengthy process, the seller often times only has one shot at a short sale and wants a buyer who is willing to ride it out with them. The truth of the matter is that as the buyer, you are at the mercy of the bank(s) and the person negotiating with the bank on the seller’s behalf. This is often the listing agent or an attorney. As a buyer, you really want to know who is negotiating, how many banks and loans are involved, which banks are involved, and whether or not the seller has the rest of the package prepared for the bank. The listing agent will try to keep you waiting by giving you hopeful updates, but often the process drags on indefinitely. Should you find another home while you are waiting for bank approval, be absolutely sure you can get out of the short sale contract before purchasing another home—do not make this mistake as it could prove to be costly. You should have a “Mutual Release” signed by both parties. Consult your REALTOR® and legal counsel there are any doubts whatsoever.
Short sale buyers should consider structuring the deal in such a way that the appraisal and home inspection occur only after title examination and/or the creditor’s approval is complete in order to reduce financial risk if the deal falls apart. Because delays are likely, buyers should not to lock in their mortgage interest rates until bank(s) approval is received; otherwise, it can be costly to get that rate lock extended. On the other hand, buyers who do not lock in an interest rate may experience a higher one once the bank approval is finally received. There are no guarantees with short sales; however, there is a saying that tends to hold true: “There is nothing short about short sales.” Finally, keep in mind that it is difficult, and perhaps impossible in most cases, to get money for repairs. Most short sales are offered in “As-Is” condition.
If a homeowner stops making mortgage payments, the bank will eventually foreclose on the property. In Alabama, the foreclosure process involves auctioning the property on the courthouse steps, just as it was written back in the olden days. The bank holding the 1st Mortgage (the biggest stakeholder in the property) sets the minimum bid. Often that minimum price is higher than any bidder is willing to pay. In other words, the minimum bid is higher than market value. When this occurs, the bank essentially takes ownership of the property and lists it for sale with a real estate agent. In a sense, it is as if the bank is the winner of the foreclosure auction and now actually owns the property.
You may have heard the terms “REO” or “Foreclosure”. Despite meaning two different things, most agents and buyers use these terms synonymously. But technically speaking, a foreclosure is the process viewed from the courthouse steps, and an REO is a bank owned house that was acquired through the foreclosure process. REO stands for “Real Estate Owned”.
Banks approach pricing in several ways. Some purposefully price under market to create quick interest and bidding wars—they let the market dictate the price. Others will price the property a little on the high side, hoping to recover the amount owed. The strategy is to understand the value of the property (see below) and make offers at or below that value regardless of the current list price. In some cases, knowing this value will tell the buyer to hurry with the offer before another buyer beats them to the punch, and in these cases, it’s not unheard of to pay more than list (asking) price to secure a desirable REO.
Asset managers are usually assigned these properties to make decisions on behalf of the seller (the seller may be the asset manager’s bank or another bank). In a stable market such as Alabama, bank asset managers tend to enjoy countering the offer at or near the original asking price no matter how low the offer; however, if the offer is within 3-5% of the asking price, they are more likely to accept rather than counter. Banks do have special formulas that determine how low they will go (their ‘floor’). Like with most sellers, that bottom line tends to change as the days on market increase. Most listing agents are not privy to how low the bank will go. If a property sits for an extended period of time, buyers can sometimes luck out on presenting low offers, but you have to make the offer at the right time, usually just prior to the property coming off the REO market and into the hands of an auction house like REDC or Kennedy Wilson. Since agents and buyers do not know when that will take place, don’t hesitate to re-offer if you have already been turned down.
Understand how to determine
the true value of a property
A home is worth whatever a buyer is willing to pay and a seller is willing to accept in a non-distressed situation. The best source to estimate the true market value of a property is an experienced, busy REALTOR®, because he is working with buyers and sellers in the current real estate market and has access to the best data (from the MLS and local real estate association). He will also correctly adjust for quality and feature differences.
The second best valuation sources are experienced, busy appraisers. They have access to the same data, but they work for banks, not buyers and sellers. In addition, they are constrained by inflexible appraisal rules which do not allow them to consider some relevant information and comparable properties.
Inexperienced REALTOR®S and appraisers can be wildly inaccurate. Web sites like Zillow.com and Trulia.com calculate market values without the input from human experience or judgment and they use incomplete data from county tax records. The “value” found in the county tax records is only useful in certain jurisdictions and with professional interpretation. While based on recent sales data, taxed assessed value is calculated for the purposes of property tax assessment. A sales to taxed assessed value analysis can be extremely useful with proper interpretation and statistical integrity; however, it is only one ‘piece of the puzzle’ when determining value. These methods can be virtually useless depending on the jurisdiction’s method for determining the tax assessed value.
Allow me to illustrate a simple example. Seven houses sold in the same neighborhood in the past 90 days. We would want to determine the median net sold price and divide it by the median tax assessed value. This would give us a ratio. So let’s say that ratio is 1.045 (the median townhome sold for 4.5% above its tax assessed value). We would take the subject property’s tax assessed value and multiply it by 1.045; theoretically, we would capture a price that buyers are most likely to pay. Again, this methodology is only one tool and relies on many assumptions: geography, consistent assessment measures, sufficient sampling and more.
BE SURE TO HAVE A GOOD REALTOR® WORKING FOR YOU!
Ask Two Key Questions in a Competitive Situation
Even in a challenging market it’s possible to find yourself competing against another buyer for a low-priced property (see also “Understanding Short Sales and Foreclosures” above). Sometimes competing against others to buy homes is what makes the market challenging. The listing agent is prohibited from disclosing details of any offers received but may disclose the existence of other offers depending on the listing agreement. In a multiple offer situation, the listing agent will usually ask both/all buyers to return with their “best and highest offer”. Once these best/final offers are received, a good REALTOR® will review the offers and discuss the pros and cons of each with his seller client so the seller can select one buyer with whom to negotiate a final agreement with acceptable terms.
When considering your offer price, ask yourself, “If we lose this property at this price, will I regret not offering more?” If so, you might want to increase your offer. Conversely ask yourself, “If we get the property at this price, will we regret paying that much?” If so, consider decreasing your offer. If you really want a property and are in a multiple offer situation, it is no time to play games. The winner will be the buyer who goes in goes in with a loaded gun—the offer must be merciless. Aside from the offer price, there are many strategies buyers can take to strengthen the offer. Some of these strategies include but are certainly not limited to the following: minimizing the number of buyer contingencies (protective clauses), proposing quicker timelines (or timelines that mirror the seller’s needs), purchasing the home “as-is”, making a larger down payment or earnest money deposit.
Discuss these strategies with your REALTOR®.
Walk the Neighborhood Before Making an Offer
Before committing to purchase a home, take a few slow walks through the neighborhood at different times of day. Listen for barking dogs. Look for children playing if that is important to you (the law prohibits your REALTOR® from discussing “familial status”). Introduce yourself to a few neighbors, tell them which home you are thinking about, and ask them what they know. Neighbors love to talk and you might be glad you listened—they are usually a phenomenal source of information with a perspective that no REALTOR® can give unless he lives in that particular neighborhood.