Whether you are buying or selling a home, these are some of the major components you will encounter. Hopefully, these resources will better prepare you.
- Just yesterday, someone asked me, “Remind me again what escrow is? I haven’t bought a home in over twenty years.” A simple answer is that escrow provides the exchange between the buyer and the seller, whereby the money for the purchase is exchanged for the deed to the home, once the entire contract has been fulfilled. Escrow is the overseer. For the full story, visit the California Department of Real Estate site at Surviving the Real Estate “Escrow” Process in California.
- How about title insurance, what’s that all about? When you buy a home, you need to be certain that the person selling it to you has the full right to sell it. That is, there is not an ex-spouse, parent, sibling who bought or inherited the property, even the government, in the background. Or, that the person who transferred title somewhere along the way, was not incapacitated in some way. Title insurance not only researches the entire Chain of Ownership for the home since it was dirt as part of some other mound but insures you against someone showing up with a long lost deed found in the attic. Who pays for the title search and insurance policy is negotiated in the contract.
- Appraisals (PDF) are done for all sorts of reasons. If you are buying a home and making a 20 percent down payment, you may borrow the balance of the purchase price from a bank—80 percent of the sale price. This type of loan is called a mortgage. The bank must be assured that the property is worth the value that you are borrowing to purchase it. The house primarily belongs to the bank, and as you pay off the mortgage month by month, you begin to take ownership—called equity, unless you have an interest-only loan. In that case, the bank continues to have total equity in the home.
It’s important to remember that the bank is not necessarily doing a full appraisal, as it would in the case of a probate sale where the owner has died. In that case, they will need to determine the actual value of the home to value the estate. In your scenario, the bank wants to determine if the house is worth what they are lending you, say 80 percent of the purchase price. That is why you sometimes hear that a loan came in higher or lower than the price you are paying—it depends on the type of appraisal that is being done.
- Having inspections done on a home you are buying is very important. The first two are home inspections and termite inspection. A home inspection may take two to six hours or more, depending on the size and complexity of the home. Your inspector should be CREA certified. He or she will poke and prod and peek everywhere possible: crawl spaces, attic, electric sockets, behind the water heater, everywhere reachable. The inspector will be your eyes. Typically, buyers wants to select the inspector, and feel confident that the person is looking out for their best interest, but who pays for the inspection may be negotiable with the seller. This is not a place to skimp.
Inspectors, upon completion, will identify in a report everything they found, usually with photos. It will be classified by Safety Issues such as exposed wires, Concerns such as a truss that has been cut in the attic to install a pull-down staircase. Separately, inspectors will identify items that may not be required but are a good idea, like a GFI fault on the outlets in the kitchen.
From the report, the buyer and agent will construct a Request for Repair. While providing repairs other than those required by law, including operating smoke detectors and a double strapped water heater, this is a very delicate item. You’ve already negotiated price, made concessions, now you may be asked to spend money for repairs. A good tactic as seller is to negotiate upfront a maximum you will contribute for any repairs, not to exceed some amount, and consider that as part of the purchase price.
The Pest Control (PDF) or commonly called Termite Report is the other inspection that you are often involved in. It does not just seek out termites but all wood-destroying pests, and dry rot in the wood such as on the fascia board and door frames. The technician will recommend that the house be tented when there are termites in the attic or eaves, where he cannot reach otherwise. But most of the time, they can exterminate without tenting. The wood rot will have to be repaired, as well. All of this is work that must be done to receive a Termite Clearance, usually required by the lender.
There are other inspections that are done by third-party providers because neither the buyer, seller, or home inspector are able to provide. These include Environmental Reports such as the soil and geological conditions around the home. Also, if there is a crack in the foundation, you may want a structural engineer to inspect and certify that it is not critical. Another is a mold inspection, if that is indicated in the home inspector’s report. It is very important to get started on these inspections as soon as possible after escrow begins, so there is plenty of time for negotiations, if necessary, and the work to be completed.
To all of this, add the mountain of paperwork! Let’s leave that for the next article, as there is a lot to be said on that subject in order to help you feel prepared. In the end, you will be better protected having thoroughly checked out this, probably the biggest purchase of your life!