Property Purchase Process | Property Purchase Costs | Mortgage Finance
Introduction:
A person interested in making the purchase of any kind of real estate in the United States needs to give serious consideration to engaging the assistance of a qualified and licensed broker or of an equally qualified real estate service that has been established to service the needs of those people seeking to purchase investment, residential or vacation property within the U.S.
When shopping for real estate in the
Finding your property:
Once you've settled on a couple of neighborhoods for your search, it's time to pick out a few homes to view. Your wish list can remind you which features are absolute requirements and which amenities you'd like to have if possible. When narrowing down your home search, consider:
- Types of homes
- Home purchase considerations
- Home comparison chart
- What to do when you’ve found the right home for you
Types of homes
In addition to single family homes (one home per lot), there are other forms of home ownership:
Multifamily homes: Some buyers, particularly first-timers, start with multiple family dwellings, so they'll have rental income to help with their costs. Many mortgage plans, including VA and FHA loans, can be used for buildings with up to four units, if the buyer intends to occupy one of them.
Condominiums: With a condo, you own "from the plaster in" just as you would a single house. You also own a certain percentage of the "common elements" -- staircases, sidewalks, roofs and the like. Monthly charges pay your share of taxes and insurance on those elements, as well as repairs and maintenance. A homeowners association administers the development.
Co-ops: In a few cities, cooperative apartments are common. With those, you purchase shares in a corporation that owns the whole building, and you receive a lease to your own apartment. A board of directors supervises management. Monthly charges include your share of an overall mortgage on the building.
Home purchase considerations
Most buyers' first consideration, after neighborhoods are chosen, is the number of bedrooms. As you begin to view homes, keep the following purchase and resale considerations in mind:
- Weigh your needs, budget and personal tastes in deciding whether you want a home that’s a newly constructed home, an older home or a home that requires some work -- a "fixer-upper."
- One-bedroom condos are more difficult to resell than two-bedroom ones.
- Two-bedroom/one-bath single houses generally have less appeal than houses with three or more bedrooms, and therefore less appreciation potential.
- Homes with "curb appeal" (a well-maintained, attractive, and charming view-from-the-street appearance) are the easiest to resell.
- When resale is a possibility, don't buy the most expensive house on the street, or anything that is unusual or unique. The best investment potential is traditionally found in a less expensive, more moderately sized home on the street.
The Offer:
Making an offer
When you make an offer you are in no way legally bound to it. This is part of the negotiation. If you make an offer and it is rejected, that’s that. It’s dead. In some cases they may send back a counter offer. You may then choose to accept it or reject it. But unless the seller agrees in the contract, the counter-offer is merely a means of communication; not a binding document.
Make an offer orally through your agent, who will convey it either to the seller's agent or to the seller directly. The seller may counter your offer, beginning a negotiation process that, hopefully, will lead to an agreement on price, terms, and closing date.
Withdrawing an Offer
You will need to contact your lawyer about this one. Roughly the answer is yes. You can withdraw your offer. For instance, if send a counter offer and that is accepted by the seller you can change your mind at the last minute, even if the offer has been accepted.
The only thing that does matter is that you do not know that they have accepted the offer. The minute you know the other party has sign the agreement you are now legally bound to that offer. You can still appeal to the good nature of the seller but this is no guarantee.
The Contract:
Once you have made you proposal the seller must accept it. If it is accepted and the contract is signed, you are both legally bound to comply with every aspect of the contract, even if situations change.
The contract will also provide the blueprint for the final sale. This should contain:
- Address and legal description of the property and home
- Agreed sale price
- Terms of sale, all down payments and mortgage condition.
- Seller’s promise to legally hand over the title of the land
- A target date for the finalization of the sale
- Amount of down payment. This may also be known as earnest money or deposit.
Contingencies
Contingencies are commonly known as ‘deal breakers’. Essentially they are things that if not fixed or dealt with before the sale of the home, the contract becomes null and void. While a contingency can be anything the two most common contingencies are as follows:
The buyer must obtain a specific lending agreement from a bank or other institution. If a suitable loan can’t be found, there is no way to pay for the home, therefore it is unreasonable to expect a purchase. An independent contractor completes an inspection. If he determined that portion of the contract was not met (e.g. fixing a roof) then the contract again becomes null and void.
It is contingencies that make writing all of this down so important. If it s not in writing, you could find yourself in an extended legal battle that could be so expensive it’ll leave you homeless in more ways than one.
Contract process
The seller's attorney begins preparation of the contract of sale. He or she obtains and reviews the following documents: the deed, survey, title insurance policy, promissory notes or mortgages on the property, certificates of occupancy, tax bills, fuel and utility bills, leases, permits for elevator, pools, etc.
Meanwhile your attorney (a real estate attorney is required in all property transactions in
The buyer’s attorney reviews and negotiates the contract deed, title search and title insurance policy, as well as the documents referred to in the title policy, such as survey, certificate of occupancy, real property tax bill, heating, cooling and electric bills.
After your attorney concludes that the condominium’s financial condition is satisfactory, that the by-laws of the building are acceptable to you, and that the contract of sale is also acceptable, he will allow you to sign the contract. You will then usually be required to present a deposit of 10% of the purchase price.
The contract plus the deposit will then be forwarded to the seller for signature. This money will be held in the seller's attorney's escrow account until closing. It is important to note that until all parties have signed the contract, and it has been delivered, the seller can still entertain and accept other offers.
Negotiating
You are going to want to be in best bargaining position possible when you make an offer in a home. This will most likely be the largest investment of your life and poor negotiating can mean the difference between thousands of dollars. If you can hit the negotiating table armed with the following you are bound to get a good deal:
· You are willing to pay all cash
· You are pre-approved for a mortgage
· Your purchase of the property is not contingent on the sale of your existing home.
If you have any of these criteria you are instantly the seller’s best friend and they are likely to reward you for it. Especially in a buyer’s market. If you happen to be in a sellers market having all three criteria could also get you the property versus someone who may only have two; providing your bids are close.
If you know you are going to be negotiating it is a good idea to know what is motivating the seller. If they are desperate, or even just highly motivated this can also work in your advantage. How can you tell if a seller is motivated? Try the following.
Is the home for sale currently vacant? If it is they are probably paying two mortgages. They’ll be eager to ditch one of them. Was there a recent divorce? Nobody wants to prolong the painful ordeal of a divorce; this could work in your favor. Estate sales. If the family of a recently deceased individual wants to settle the estate, they too will be eager to unload the property.
Earnest Money
This is not a down payment - it is instead a smaller sum which, if written in the agreement, can give you sole bargaining rights for a specified period of time. The money is usually help by the realtor and is added to the down payment if the sale goes through.
As a buyer, never underestimate the desire of your seller to sell. They may be a master negotiator, but still desperately want to get the property of their hands. Naturally, one of the biggest problems you’ll face is getting the down payment, earnest money, moving fees and inspection costs all together before you move.
If you think that maybe you are at an impasse with the seller because the market price for the house is well above the appraised price (thus requiring a larger than though down payment) you should mention the option of having the seller pay some of the up front costs.
For instance: Ask them if they will pay the initial costs of the following: Termite and infestation inspection Home protection policy Buyer’s broker Buyer’s closing costs Survey Points to the buyer’s lender Repairs mandated by the lender
Home inspections:
After you have found a property that meets your budget and needs, the next step is to determine whether the physical condition of the property will be acceptable. All Real Estate is definitely not created equal--there is a great variance in the way individual homeowners maintain their properties.
In addition, you need to be aware of any hidden defects that could substantially affect the value of the home. The only way to safely determine the condition of a property is to take advantage of every opportunity you have to inspect it.
Depending on the type of financing you choose, there should be either 2 or 3 separate inspections on the home you want to purchase. The first should be your own basic inspection (see the link at the bottom of this page for what to look for), the second should be a professional whole-house inspection by a reputable person.
Should you select a government loan (FHA or VA), the third inspection should come at the time of the appraisal, which to some degree amounts to a "mini-inspection." You should not, however, depend on the appraisal to disclose potential defects in the property.
Don't wait until you have placed an offer on a house before you begin the search for a home inspector. There will be a time limit in the contract designating when the inspection must be completed (typically between 7 and 14 days).
If you start trying to find an inspector at that point, and cannot find an acceptable one to schedule the inspection in that time frame, you will only have two choices: go with an inspector that is not your first choice, or run the risk of running past the deadline for the inspection. Neither is an acceptable alternative!
Settlement:
Closing (or settlement as it known in some parts of the
The closing date is set during the negotiation phase, and is usually several weeks after the offer is formally accepted. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred to the buyer. In most jurisdictions ownership is officially transferred when the contract is registered at the cadastre, or, in most
Several things happen during closing:
- The buyer (or his bank) delivers a cheque (generally in the
- The seller signs the deed over to the buyer, and gives him the keys.
- A title company, lawyer or civil law notary registers the new deed with the local land registry office.
- The seller receives a cheque for the proceeds of the sale, less closing costs and mortgage payouts.
Closing in escrow usually occurs in the western half of the
On the Eastern side of the US, settlement (as closing is called) takes place on a specified date and time during which all parties (usually including the agents involved) meet at a settlement company presided over or supervised by a lawyer. The transfer of money (in form of certified or wired funds) and the property takes place, and the deed is then recorded by the company.
Although there may be additional documents involved, the primary items which are dealt with at the Closing are:
- The Settlement Statement
- The Contract
- The Loan Papers
- Title Insurance
- Homeowners Insurance
- The Title or Deed
- The Down Payment and Closing Costs
Closing is your final opportunity to make certain that everything related to the purchase of your home is correct. It is important, therefore, that you do adequate preparation prior to the day of Closing. Although your Agent will most likely review all of the items needed with you, it is a good idea to have the right information in case you need to handle it on your own.
Financing options:
Financing a property investment in the The wide availability of mortgage products available to foreigners in the
Mortgages
Terms such as ‘points’ need to be understood as well as the implications of repayment and application costs and as most agents and brokers agree that it is advantageous to consult a mortgage broker and pre-qualify before looking for your property. Pre-qualification will enhance your credibility in the eyes of agents and sellers as well as assisting in speeding up the purchase process.
The majority of
The right type of mortgage for you depends on your existing financial circumstances, the length of time you wish to extend your investment and your choice in mortgage rate option. A fixed rate mortgage over a period of say 15 to 20 years could save many thousands of dollars over the period of the loan, but repayments will be higher. However, an adjustable rate mortgage may start with lower monthly payments, but these will fluctuate in accordance with prevailing interest rates.
Mortgage lenders often set up escrow accounts to cover payments of costs such as property taxes, local taxes and property insurance premiums. These will ensure that bills are paid without bother to the investor.
Off-Plan Financing
Off-plan developments in the
As always, before making a commitment, we recommend you discuss your investment strategy with a lawyer, a reputable property agent with experience in the area and even a financial advisor.
Bridging Loans
Taking out a loan based on the value of a property that is either on the market or in the process of being sold is a popular strategy for many investors who do not want to let an unbeatable opportunity pass them by.
You should consult your mortgage advisor or speak to an IPIN advisor who has experience in mortgages and re-mortgaging in both your home country and the
Equity Release
If you are in your mid-50s or older and own your own home, you may be able to get a cash lump sum, a regular income, or both, by using an equity release scheme based on the value of your property. These schemes can be helpful in certain circumstances to raise funds for a mortgage to finance your American property investment.
Equity release allows investors to release cash from an existing property without having to sell up. If you have property in your own country and would like to borrow against this in an equity release plan, we can introduce you to independent financial advisors who will help you raise the necessary finance for your investment in the
Alternative Finance
Not everybody falls into a category and some investors will need to raise finance in an alternative fashion to equity release or mortgage options. There are other borrowing facilities available to investors of
Property purchase timeline
:Generally it will take 2-4 weeks to buy a property. This is dependent on a number of factors, not all of which are in your control. Once you have decided on a property, contact will be made with the seller or his estate agent.
The terms and conditions of the sale can be negotiated very quickly, therefore it is important to have an accurate picture of the condition of the property, likely repairs that will be needed and its consequent value.
Tax-Related Information
:
When purchasing property in the
Sales Tax
This tax is not always imposed on the purchase of property. However in 36 US states a property transfer tax of between 1% and 5 % is charged on the assessed value of your property.
Stamp Duty
This tax is a charge made when a mortgage has been obtained for the purchase of the property and consists of documentary stamps calculated on the total of the loan. In states such as
Therefore, if you obtain a $100,000 mortgage, $350 in Documentary Stamps and $200 in Intangible Tax will need to be paid. It is important to note that neither of these taxes will be charged if you cash is used to finance the property purchase.
Capital Gains Tax
Capital Gains Tax also varies according to state, but if the property is owned for more than a year, the rate can amount to anything between 8% and 15%.
Inheritance Tax
These relate to gifts or transfer of ownership while you are alive or upon your death. Both federal and state inheritance taxes will apply while there are great differences between the states relating to how your estate is taxed upon your death, so it pays to find out what your liabilities might be before committing to an investment.
Local Taxes
The local tax amount is on the assessed value of the property but is likely to be about 75% of the market value, depending on your state. The good news is that in 2006 ten
Tax on Rental Income - all rental income is subject to
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