Answers to Commonly-Asked Real Estate Questions, Part 1
Below are the most common questions people ask about real estate. These questions come up more often than others. Whether a person is a first-time buyer or a seasoned real estate investor, these questions almost always come up. And it’s a real estate agent’s job to provide guidance in the often intimidating process of home buying and home selling. Therefore, here are the answers to questions that come up frequently.
1. What is the first step of buying a house?
The first step is getting pre-approved for a mortgage loan. Not simply getting pre-qualified, but “pre-approved.” Getting a pre-approval letter from a lender gets the ball rolling in the right direction, and is an effective tool to get the house seller’s attention.
It tells you how much you can borrow. Knowing how much house you can afford narrows down your online home search to properties in your price range, and no time is wasted considering homes that are not within your budget. Pre-approval letters not only prevent disappointment caused by falling in love unaffordable homes, it also tells all parties involved (the seller and their agent, and your agent) that you are serious.
Second, the loan estimate from your lender will show how much money is required for the down payment and closing costs. This information tells you is you need more time to save up money, liquidate your other assets, or find additional funding from other resources. In any case, you will have a much clearer picture of what is financially required.
Most real estate agents will require a pre-approval letter before working with you and show homes. This is especially true at the higher end of the real estate market – sellers of million-dollar luxury houses will only allow pre-screened and verified buyers to come and check out their homes. This is meant to keep out the “Looky Lous” as well as protect the seller’s privacy. By limiting who enters their mansions, sellers are given extra security from potential thieves trying to case the home, such as identifying security systems, possible ways to break-in, locating expensive artwork or other high-value personal property.
2. How long does it take to buy a house?
Photo: Client Insight
From start (searching online) to finish (closing escrow), buying a house takes about 10 to 12 weeks. Once a house is selected and the offer is accepted, the average time to complete the escrow period on a property is 30 to 45 days under normal market conditions. Though, well-prepared home buyers who pay cash have been known to purchase properties way quicker.
Market conditions affect how fast homes are sold as well. In hot markets with a lot of sales activity, buying a house may take a little longer than normal because several parties involved in the transaction get behind when business suddenly picks up. For example, an increase in house sales increases the demand for property appraisals and home inspections, yet there will be no increase in the number of appraisers and inspectors available to do the work so one would have to wait for the professional services to have a openings in their schedules. Lender turn-around times for loan underwriting can also slow down the process. If each party involved in a deal takes a day or two longer to get their work done, the entire process also gets affected.
3. What is a ‘seller’s market’?
Photo: Nested Homes
The market is a sellers’ market when there is an increase of demand for homes, which drives up prices. Here are some things that increase the demand for houses:
- Economic factors – there’s an influx of new residents moving into the area and pushing up home prices before more new development can be built.
- Interest rates trending downward – when this happens, more people can afford homes, creating more buyer interest, particularly for first-time home buyers who can afford bigger homes as interest rates on mortgage loans are lower.
- A short-term spike in interest rates – this may compel “on the fence” buyers to make a purchase if they believe the upward trend of interest rates will continue. Buyers want to act before their purchasing power or the amount they can borrow gets eroded.
- Low inventory – when there are fewer homes for sale on the market because of a lack of new development, the prices of already-built homes may increase because there are fewer units available.
4. What is a ‘buyer’s market’?
A buyer’s market is when there are more people selling houses than people buying them. The sellers are sometimes compelled to lower their prices because the power is on the buyers. Some factors that affect buyer demand are: Economic disruption, which is when a big company shuts down operations, laying off tons of locals in the area. Other factors include:
- Interest rates trending higher – the amount of money the people can borrow to buy a home is reduced because the interest rates of mortgage loans are higher, therefore reducing the total number of potential buyers in the market. The home prices drop to meet the decreased demand, and this is typically when buyers find great deals.
- Short-term drop in interest rates – can give borrowers a temporary edge because they have more ‘purchasing power’. When it’s short-term, the interest rates doesn’t stay low for long.
- High inventory – This is when there are too many properties for sale, such as what happens when a new subdivision is built. It can create a downward pressure on prices of older homes for sale nearby, particularly if the older homes lack highly desirable features, like a nice curb appeal, modern appliances, features, etc.
- Natural disasters – a recent earthquake, flooding or fire can really tank property values in the neighborhood where those disasters occurred because no one wants to buy a house in such areas.
5. What is a ‘stratified market’?
A stratified market happens where supply and demand characteristics differ by price point, in the same area (typically by city).
For example, house sales for properties above $1.5 million may be a seller’s market, while homes for sale under $750,000 may be sluggish (a buyer’s market). This scenario comes along every so often in West Coast cities like San Francisco where international investors – looking to invest their money in the United States – buy expensive real estate properties. At the same time, house sales activity in mid-priced homes could be entirely different.
6. How much do I have to pay a real estate agent to help me buy a house?
Home shoppers pay little or no fees to a real estate agent to buy a house. Shocker, I know.
For most home sales, there are two real estate agents involved in the deal: one that represents the seller and another who represents the buyer.
Listing brokers are the ones who represent sellers. They charge a fee to represent them and market the property. Marketing may include advertising expenses such as print ads, social media ads, Google ad words, and internet ads. The property will also be placed in the local multiple listing service (MLS), where other agents in the area (and nationally) will be able to search and find the house for sale.
Agents who represent buyers (called the ‘buyer’s agent’) are paid by the listing broker for bringing buyers to the table. When the house is sold, the listing broker splits the listing fee with the buyer’s agent. Therefore, buyers don’t pay their agents.
7. What kind of credit score do I need to buy a house?
Photo: Advia Credit Union
Most loan programs require a FICO score of 620 or better. Borrowers with higher credit scores are seen by lenders as less risky, often resulting in a lower the down payment requirement and great interest rate on the mortgage loan.
In contrast, home buyers with lower credit scores may need to come up with more downpayment, or accept a higher interest rate on their mortgage loan, to offset the lender’s risk.
Stay tuned for more questions people typically ask regarding buying and selling a house. Coming soon is Part 2 of the series.