What to Expect When You’re Expecting (to Buy Your First Property)

Photo by Tierra Mallorca on Unsplash

Written by Max Vishnev, licensed NJ Realtor

Buying real estate is hard; very hard.  My goal with this detailed post is to make the process a bit easier by explaining and demystifying the key steps along the way.

In this post, I want to break down the real estate purchase process step-by-step in the hopes of clarifying the flow of a typical transaction and removing some of the fear and anxiety surrounding the decision to buy real estate.

Before we get into the details, allow me to highlight two key hurdles for new investors and/or aspiring homeowners:

1. Psychological barrier -– Is this the right property for me? Is it overpriced? Is there anything wrong with it? Will I regret my decision later? Can I afford it?

2. Competitive barrier -– in this day and age, every interested buyer gets the same alerts when a new listing hits, so unless you are getting off-market deals sent to you left and right, you should expect competition from other potential buyers. Finally, even if you do make an offer and it’s accepted, there is still the transactional component of the purchase price, which comes with its own set of risks and challenges.

So let’s start from the top. 

Unless you are a cash buyer, the first thing you need to do before making a single offer is to get pre-approved by a mortgage professional (a.k.a. lender, mortgage loan originator, loan officer, loan consultant). That’s because any written offer you submit would have to be accompanied by a pre-qualification or pre-approval letter. Without one of these, the listing agent (the Realtor representing the seller) and the seller won’t even take your offer seriously. The reason for this is pretty self-explanatory, but since this post is geared toward first-time buyers, I will lay it out anyway.

If you make an offer without a pre-approval letter (or “proof of funds” if you don’t need to get a mortgage), the seller has no idea if you are actually qualified to make that offer. Anyone can make an offer, but if the person making the offer just lost his job and barely has enough cash in the bank to cover his next utility bills, that offer isn’t worth much.

Getting Pre-Approved:

Don’t have a lender? Ask your agent (if you’re working with one), since he or she will probably have good working relationships with one or more lenders they can vouch for. Ask your network of contacts. You’re likely to get multiple referrals just by posting the question on Facebook or LinkedIn. And, of course, you could browse lenders right here on BiggerPockets!

Be sure to choose a local lender familiar with the market you’re focused on, as that person will likely be well-versed with local rules, codes, and idiosyncrasies of the real estate market you’re targeting. For example, if you’re looking to buy in New Jersey, it makes a lot more sense to choose a lender who operates and specializes in originating loans in that state, as opposed to, say, a lender living and working in California.

It’s a good idea to talk to more than one lender and to compare their offers. Don’t just focus on the mortgage rate they offer you, since that is not a sure thing anyway until you go under contract and “lock in” a rate (that’s when a lender guarantees a specific mortgage interest rate, subject to an expiration date, e.g. 60 days).

Ask them to disclose the origination fees and whether they are charging any “points” upfront. Points are extra fees added to your mortgage origination costs at closing in exchange for a lower rate. 1 “point” is equivalent to 1% of your loan amount. For example, on a $400,000 loan, 1 point would be $4,000.

In short, be sure to compare lending terms overall, not just the rate itself. Also, make sure you talk to the lender on the phone, just to get a sense of their attitude, knowledge in the local market, and to gauge whether he or she will be a good fit for you.

OK, now that you’ve spoken to a lender and been pre-qualified (verbal income and asset verification, “soft” credit check) or pre-approved (“hard” credit check and documented income and asset verification), it’s time to make your initial offer.

Working with an Agent:

I may be biased as a licensed  NJ Realtor, but I believe strongly that every prospective buyer should work with an agent when looking to buy real estate and make offers. A great buyer’s agent could be the difference-maker in your success as a buyer. And the best part is, he or she is compensated by the seller not by the buyer! So essentially, you get a crucial ally on your side for one of the most important transactions in your life for free. It’s a no-brainer.

A great buyer’s agent should take the time to understand your real estate goals and needs, your risk tolerance level, your budget, and your timeline. He should be able to put you in touch with great local lenders, lawyers, inspectors, and contractors. He should be very familiar with the market you are looking in and be able to send you active listings, as well as sold and rented “comps” (comparable properties).

As importantly, a top-performing buyer’s agent will represent your best interests once you decide to make an offer, and should that offer be accepted, to expertly guide you from accepted offer to closing.

This is why it’s vital to have your own agent on your team and not contact a listing agent directly on a particular property. In the day and age of instant gratification and numerous online resources for buying real estate, including Zillow, Realtor.com, and Trulia, it’s very tempting to just contact the agent who listed a property that caught your eye. That agent, in most cases, can represent both sides of a transaction, in what would be considered a “dual agency” role.

However, do you think that agent would have your best interests in mind, even if he or she is of the highest moral character? Technically, in a dual agency scenario, the agent is supposed to be “neutral”. But as we know, human nature is rarely neutral, and at the end of the day, that agent was initially hired by the seller to sell his or her property in the shortest amount of time for the highest price.

A buyer’s agent, on the other hand, is there to negotiate ONLY on your behalf and to try to get you the best terms in the deal. And even if your offer is accepted, you typically still have another 45 days before you can close on the property. As I will outline in this article, a lot can go wrong in that time-frame, so you want a top-notch buyer’s agent on your side to be your advisor, representative, diplomat, negotiator, crisis manager, and sometimes, therapist (especially if a transaction falls through).

Making the Initial Offer:

Presumably, by now, your Realtor has sent you sold comps (comparable properties that have been sold recently in the area) and discussed an offer strategy with you. A lot of factors go into what the initial offer should be, including market conditions, the number of similar homes currently on the market, recent sale prices and time on market for comparable homes, the location of the property you are interested in, among others.  But regardless of how many data points you have at your disposal, it’s always an inherently subjective decision. There is no “right” initial offer, simply because there are too many unknowns.

As a prospective buyer, you’re almost flying blind, even if you’re working with an experienced professional real estate agent. You don’t know with 100% certainty (or in many cases, any certainty at all) if the seller has any other offers on the table, or what those offers are. You also don’t know the true level of motivation of the seller, in terms of her willingness to sell the property (she may decide to just hold onto it until she gets her asking price, for example).

A seller who doesn’t “need” to sell is going to behave very differently from a seller who needs to sell as quickly as possible – say, they are going through a bitter divorce, need to move across the country due to an imminent job relocation, or have a serious medical condition and need the funds to pay for treatment.

But even if the seller is highly motivated, it may not make a difference in terms of price if the property is priced right to begin with and has received multiple offers (more on that later).

Now, how do you actually submit your initial offer? Usually, your agent will draft an offer using a standard Offer of Sale contract form specific to the state in which the property is located. Note: each state has its own real estate laws and regulations, so the standard contracts vary from state to state.

That offer will include key terms like offer price, down payment amount, initial deposit (if any), target closing date, type of loan (FHA, VA, Conventional), and any additional provisions (special contingencies or contingency waivers).

You will then electronically sign, initial, and date the offer, before your agent sends it to the listing agent for the property in question, along with your pre-approval letter.

Then you wait for a response. Some common responses are:

• - “The seller has decided to accept your offer.” This is the best-case scenario.
• - “The seller has countered with [x].” You got a counteroffer, which is the most likely scenario.
• - “We have received multiple offers.” This is the one buyers and their agents hate to hear, because it usually implies a bidding war. Thankfully, the battle is usually brief and is handled using a blind auction, also known as “highest and best” (more on that below).

Multiple Offers:

It is not uncommon, especially in hot markets (aka “seller’s markets”) with limited inventory, for a property to receive multiple offers shortly after it is listed. In these instances, the seller has a lot of leverage and can essentially have the buyers compete against each other. The most commonly used tactic by listing agents in such instances is what’s called a “highest and best”.

Highest and Best is exactly what it sounds like. The agent for each bidder is told to submit his client’s “highest and best” offer by a certain date and time. It’s usually phrased as follows: “We have received multiple offers on 123 Main St and the seller has called for a highest and best. Please submit your client’s final bid on Tuesday by 3pm.”

At that point, the bidding process becomes a blind auction, whereby, each bidder has a final opportunity to make an offer, without knowing what the other bidders will do. This is often a nerve-wracking process, since you’re essentially trying to predict what others will bid and avoid overbidding yourself, while at the same time, giving yourself the best chance at being the highest and best offer. Some winners experience a sort of buyer’s remorse after this type of auction, because there is no way to know what the other bids were, since listing agents are ethically not allowed to disclose them.

In certain instances, especially with first-time buyers, emotions overwhelm logic and reason, causing some buyers to bid more than they were planning on bidding before the “highest and best” announcement. That’s why it’s important to decide ahead of time what your maximum bid is for any given property and to stick to it, even if it means losing out on it. Losing out on properties is part of the process, and you have to be aware of that going into your first purchase. It’s very unlikely that you will get an accepted offer and go under contract on the first property you make an offer on.

Accepted Offer and Attorney Review:

Now, let’s assume the seller has accepted your offer. Woohoo! Time to break out the Dom Perignon, right? Not exactly (unless you habitually like uncorking and drinking expensive champagne). A lot of things can go wrong between your offer being accepted and you closing on the house. In fact, you’re not even “under contract” until you complete the first stage of the purchase process, which is called “Attorney Review.” This is the critical first step during which lawyers from both sides of the transaction negotiate the legal terms of the agreement.

Of course, before you can begin attorney review, you need a lawyer! And not just any lawyer, but a real estate lawyer. You don’t want a divorce or criminal defense lawyer handling your real estate purchase – arguably one of the most important purchase decisions in your life.

Choosing a Real Estate Lawyer:

Choose your lawyer as carefully as you would choose your agent and your lender. A lawyer can make or break a real estate deal, and I’ve seen both scenarios play out. This is NOT where you should be penny-pinching or bargain-hunting. The price of a bad lawyer may be a few hundred dollars lower than the price of a great lawyer, but when you’re purchasing a property worth potentially hundreds of thousands of dollars, you should hire the best lawyer you can find.

In my experience, a great lawyer is not just one that is experienced and knowledgeable in the market you’re making the purchase in, but one that is professional and responsive, not just to you but to the other parties involved. Another important trait of a great lawyer is flexibility and creative thinking. Some lawyers are so rigidly set in their legal ways that they can’t see the bigger picture. They may put the entire transaction at risk over a minute legal matter, or send a brusque response throwing the “legal book” in the face of their counterparty instead of discussing a matter over the phone in a friendly manner.

These intangibles sometimes prove to be the difference between seamlessly going from attorney review to a successfully closing and seeing the transaction fall apart.

So choose your lawyer wisely! Ask your agent for recommendations.

I have some bad news, I'm afraid, before we move further along:

Until you’re out of attorney review and officially under contract, the seller is still allowed to entertain or accept other offers.  At least that’s true in New Jersey.  I’ve experienced this first-hand on multiple occasions. In some cases, higher offers may trigger a “highest and best” I described earlier. In other cases, the seller may just go with the other offer and simply instruct her lawyer to send a termination notice to your lawyer (essentially cancelling the accepted offer and ending attorney review).

As a buyer, you should be mentally prepared for both scenarios, because they are fairly common, especially in seller’s markets with limited inventory. If the seller asks for highest and best while you’re in attorney review, you can, of course, simply walk away from the transaction. Sometimes, though, that’s easier said than done, because at that point you may feel somewhat committed. This is another example of why it’s important to know your max price for any given property ahead of time, because in some cases, the best decision is to walk away.

OK, let’s stay positive and assume you don’t have any “better offer” surprises while you’re in attorney review. The first thing your lawyer will do is to draft a “Rider”, which is a legal document that supplements, and in some instances, overrides, the standard contract you used to submit your offer. The Rider clarifies certain terms, like dates and deadlines, and adds additional protections for you as the buyer, including the all-important appraisal contingency.

Appraisal contingency:

The standard contract already includes many legal protections and contingencies written into it for both buyer and seller. For example, the buyer is protected by the home inspection contingency and the loan contingency, among others. The former allows you to conduct an inspection and to request repairs, a price reduction, or to cancel the agreement if you cannot agree on a path forward, or if certain critical faults with the property are revealed. The latter allows the buyers to terminate the agreement if they are unable to obtain a loan (and have written proof of the rejection from a lender).

The standard contract may not offer an appraisal contingency (at least the one used in NJ does not, so it's worth checking whether the one in the state where you're looking to buy real estate does). That’s why it’s usually added in the Rider. This is a crucial contingency for any buyer looking to take out a mortgage for the purchase of a property.

This contingency basically states that if the appraisal (ordered by your lender and paid for by you, as part of your “closing costs”) comes in lower than the contract price, you – the buyer—can either ask the seller to lower the price to the appraised value, meet somewhere between contract price and appraised value, or, if you and the seller fail to agree on a new price, walk away from the deal.

We’ll discuss the appraisal process in more detail later in this article.

Moving on, let’s assume you’ve successfully gotten through this first crucial step in the purchase process. Congratulations --- you are now officially “Under Contract”!

What does that mean? It means that both parties are now legally bound by the terms of the contract. That means that the seller can no longer go with another offer. But it also means that the buyer can’t just walk away from the deal because another “more attractive” property just hit the market. If either party walks away from an executed agreement without a legitimate contractual reason, that party can face legal ramifications, including the potential loss of the initial deposit, if the buyer is the one that tries to walk away.

To be clear, both parties can still terminate the agreement, but the termination has to be allowed by one or more terms in the agreement. That is why it’s very important to read all legal documents before signing anything, including the contract and any riders and addendums that are produced during attorney review. If there is anything that is unclear or confusing, don’t be afraid to schedule a chat with your lawyer to discuss it. Only sign legal documents once you’re comfortable with the language and what the terms actually mean. You need to understand your legal risk, because at the end of the day, you are the one entering into the agreement as a counterparty (the buyer and the seller are considered counterparties).

Under Contract:

Now that you are officially under contract, a couple of things should happen:

First: If your lawyer is top-notch, he or she should send you a summary of key dates and deadlines, including the deposit due-date, the home inspection due-date, the mortgage commitment letter due-date (more on what this letter is later in this article), and the tentative closing date.

Second: You should now choose a lender and initiate the loan origination process. Most lenders need at least 30 days to underwrite a new loan, so the sooner you choose the lender and start the process, the sooner you can get the mortgage commitment letter and the more likely you are to be able to close on time. By the way, it’s worth noting that you do not have to choose the lender you pre-qualified with.

Home Inspection:

The home inspection is another critical step in the purchase process. This is where you hire a licensed home inspector of your choice to do a complete in-person inspection of the property you are under contract to purchase. The choice of the home inspector is arguably as important as your choice of agent, lawyer, and lender. That’s because the inspection period and the corresponding contingency in the contract is your only opportunity to identify issues and problems with the house and to present them to the seller in the form of requested repairs or a price reduction.

You’ll want to make sure you’re hiring an experienced inspector who has a reputation for being very detail-oriented, thorough, and communicative. Ask your agent, ask your lawyer, look at online reviews – in short, do your homework.

And just like with your choice of a real estate attorney, your home inspector selection should not be solely based on the rate they charge. Yes, you may find an inspector who charges $550 versus another who charges $750. But this is not a good place to price-shop. You’re not buying a flat-screen TV. A $200 price difference doesn’t necessarily mean that the more expensive inspector is a better inspector, but it could mean that he or she is more experienced and more in demand, which accounts for the slight premium. Would you rather save $200 or potentially save thousands of dollars (or even tens of thousands) if that inspector uncovers issues the other one doesn’t? Granted, it could very well be that the cheaper inspector ends up finding a serious issue, one that the more expensive inspector may have missed – you never know. My point is, don’t choose an inspector based on price alone. Do your due diligence.

What does the inspector do?

First, let me start by saying that you, as the prospective buyer, should be present during the inspection. It’s not required, but I strongly recommend it. A good inspector will communicate with his client during the inspection, verbally highlighting minor vs. major issues. By the end of the inspection, you will know what the “top items” are, before you even get the official inspection report.

That is extremely helpful, especially for first-time buyers, because the inspection report itself is often a scary-sounding, lengthy, and intimidating document to read, because the inspector’s job is to list everything (however minor or major) that is “wrong” with the house. Every outlet that doesn’t work will be listed; every window that doesn’t open or close properly or is missing a screen will be on there.

The inspector’s job is to go through the entire house, inside and out, and check every nook and cranny. The high-level categories they look at include exterior elements like the roof, siding, foundation walls, and gutters, among other elements; and interior elements, including plumbing, electrical, flooring, mechanicals, HVAC, and appliances (just to name the big ones).

But that’s not all. Inspectors will also look for signs of termite damage in the wood (usually in the basement), water/moisture accumulation in the basement and behind Sheetrock (using a hand-held moisture reading device), mold, and pests (mice, rats, etc.).

For an additional fee (usually), they will also conduct a radon test. Radon is a naturally occurring gas emanating from the soil that has been shown to cause lung cancer at elevated levels. Certain areas have higher levels of radon than others, so it’s wise to find out what the radon levels are in the property you are in the process of buying.

Testing for Radon:

A radon test is pretty simple, actually. The inspector leaves a small, circular metal canister filled with charcoal either in the basement or on the first floor of the house and removes the tape sealing the canister. The canister is allowed to remain in the same spot for at least a few days, before the inspector comes back to pick it up, seal it again, and mail it to a radon-testing lab.

The lab will then provide a report indicating what the radon level was in the house during the time of the test. If the radon level is below a certain level, there is no issue. If it’s above a certain level, it would be included on the inspection report. Luckily, higher-than-normal radon levels are actually fairly simple to remediate (for a price). It’s usually not a deal-breaker. But it’s good to test for it, so at least you have peace of mind ahead of time.

Underground Oil Tank:

Something else to test for, at least in states with a lot of older homes, like NY and NJ, is the presence of an underground oil tank. Before natural gas became the primary source of heating for residential homes in the United States, oil dominated. Most homes had underground oil tanks installed (either buried in the front yard, under the driveway, or in the backyard). These were fairly large steel tanks that were hooked up to the home furnace. An oil delivery truck would show up periodically to refill it.

What homeowners (and municipalities, presumably) didn’t know in the mid-20th century is that the steel tank usually corrodes over time if it’s constantly exposed to moisture in the soil. With enough corrosion, the steel exterior will eventually develop cracks causing oil to leak out. That oil seeps into the soil on the property. But that’s not the worst part. If the leak continues over a long-enough period of time, it may contaminate the soil of adjacent properties too.

Today, due to existing state and federal environmental laws, any underground oil tank that is removed must be tested by a DEP representative for signs of leaks. If cracks or leaks are detected, the soil must be tested for contamination, which, if found, could be fairly expensive to remediate, especially if the contamination is shown to have reached other properties. In the best case, remediation will cost you thousands of dollars, but in the worst case, it may cost tens of thousands or more, depending on the extent of the contamination.

I’m not trying to scare you, but that’s why it’s very important to ask the seller about the presence of an underground oil tank even before you make an offer. If they say, “we took it out 5 years ago”, ask them for a copy of a “No Further Action” letter from the state. If they can provide one, you can skip the oil tank “sweep” and save the money. If they don’t have a letter or are not sure about the presence of a buried tank, spend the money on the oil tank sweep (should be a couple hundred dollars) during the inspection period just to be sure.

If an underground oil tank is discovered, you will have a chance to ask the seller to remove it and remediate any soil contamination or terminate the agreement if they refuse. But this has to happen during the inspection period, not after.

Presenting the home inspection report:

You hired a professional inspector, attended the inspection, received the report a few days later, and are now trying to figure out your next steps. It could be that the inspection did not reveal any serious problems – only minor cosmetic stuff. In that case, you probably don’t have much leverage in terms of asking for repairs or a price reduction. You could try to ask the seller to make some minor repairs, but a lot of properties are marketed as “SOLD AS IS”, which means that the seller is not willing to make repairs.

Further, some contractual riders (as drafted by the seller’s attorney) will state that the buyer can only make inspection requests for “material defects”, which usually excludes cosmetic issues.

However, if the inspection revealed serious issues, like a leaky roof, mold in the basement, faulty plumbing, or very outdated electrical panels, you should be able to either request repairs by the seller or negotiate a price reduction. This is a good time to have a strategy session with your agent, then get your attorney involved, because whatever request you make will be sent by your attorney (along with a copy of the inspection report) to the seller’s attorney.

Once the inspection report and your corresponding request is submitted by your attorney, you might have to sit back and wait a couple of days for them to respond, especially if the report highlights serious issues and you are making substantial requests.

This is a tenuous moment in the transaction, because the seller may balk at your request(s) and decide to terminate the deal and try his luck again by putting the property back on the market (especially if the seller feels that the market has moved in his favor). That is why it’s important to strategize the post-inspection requests. If you are in a very competitive seller’s market with limited inventory and you’re competing with multiple buyers, you may even have to partially waive the inspection contingency by agreeing to absorb the cost of any repairs up to a certain amount.

Contingency Waivers:

What are contingency waivers?

For example, in a “highest and best” situation (discussed earlier), one way you can make your bid stand out (besides the price) is to add certain contingency waivers – partial or full. This includes waiving the appraisal contingency and/or the inspection contingency. Let’s say you really like a multi-family property, but you’re competing against 3 other potential buyers. To make your offer look more attractive to the seller, you can add the following provision to your offer: “Buyer agrees to waive the first $5,000 in estimated repairs under the inspection contingency.” That would give the seller peace of mind that you will not be able to nit-pick every single item post-inspection.

Appraisal:

Assuming you’ve received a positive response from the seller and both parties have agreed to move forward after the inspection report and request, it’s time for your lender to order the appraisal. Sometimes, that’s done earlier, but generally, it’s a good idea to wait until you get past the inspection hurdle before spending the non-refundable appraisal fee (which may cost you $600 to $750, depending on your area and the lender. I’m going by NJ prices, so this may be more or less expensive in other markets.

The lender will choose an independent appraiser – usually from a list of appraisers that lender has worked with in the past. That appraiser will then schedule a time to visit the property, take detailed photos and measurements, then analyze comparable sold properties (“comps”) to come up with an appraisal estimate. Once the appraiser completes the full appraisal report, your lender will receive a copy and forward it to you, the buyer.

In a healthy market, most properties should appraise at or even slightly above the contract price. However, in cases of significantly overpriced properties or a falling market, appraisals may come in below the contract price. That’s why the appraisal contingency discussed earlier is an important contractual protection for the buyer. You can now try to renegotiate the price, or, if you can’t agree on a lower price with the seller, terminate the agreement.

A Numerical Example:

Let’s look at some actual numbers to understand how this works. Let us assume that the contract price is $500,000 and you apply for a loan for 80% of that value, or $400,000 (putting down 20%, or $100,000). Your lender will want to make sure that the property appraises at $500,000 before they lend you $400,000. If it appraises at $450,000 instead, now you have a problem, because a $400,000 loan on a property worth $500,000 is 80% LTV (“Loan to Value”), while a loan of $400,000 on a property estimated to be worth $450,000 has an LTV of 88.89%. Those are two very different loans from a lending risk perspective.

Note: In the environment we are in today (as of April 2020), a lot of the large banks, including Chase, have tightened their lending standards to 80% LTV for conventional loans. In other words, a lot of buyers today not using an FHA or VA loan should expect to put down 20% for a primary residence. If you’re buying an investment property that you don’t plan to occupy, expect to put down at least 25%.

Of course, none of this is set in stone and lending conditions and requirements change all the time, which is another reason why it's important to establish a relationship with one or more great lenders.

Loan Underwriting and Mortgage Commitment Letter:

Assuming the appraisal came in at or above the contract price, or you were able to successfully negotiate a lower price after the appraisal came in low, your lender will now send the appraisal report and all of your personal documents (assets, income, credit score, etc.) to their underwriting department. This is the division at the lending institution that will actually decide if they will be committing to issuing you the loan you’ve applied for.

If everything checks out, they will send you a loan commitment letter (hopefully before the contractual deadline for it). Once that letter is received, you’re heading toward the finish line (closing!). 

If you do NOT receive the loan commitment letter by the contractual deadline, there is usually a bit of leeway built into the contract (10 calendar days, using the standard NJ contract as an example).  The lawyers for both sides can also negotiate a deadline extension.  However, at a certain point, if the commitment letter still has not been issued, either buyer or seller can terminate the agreement.

What is a loan commitment letter?

When your lender sends you a loan commitment letter, it means that your loan application has been reviewed by their underwriting department and conditionally approved pending closing.  The contract between you and the seller requires you to obtain a mortgage commitment letter by a certain date and to submit it to the seller's attorney as proof that you've obtained the commitment.  

But what does "conditionally" mean?  It could mean a lot of things.  Each lender may have a unique set of conditions that must be met before the loan is actually issued at closing.  However, these are the most common conditions:

- TItle search does not reveal any liens, defects, or encumbrances to which the lender may object.  In other words, if the title isn't "clear", the lender may withdraw their commitment.

- The house is insured.  Lenders typically require proof of a prepaid annual home insurance policy prior to the closing date.

- The borrower is still employed prior to closing.  This is a new condition a lot of lenders have added due to the COVID-19 pandemic and the devastating impact it's had on the US economy (with 22 million Americans filing for employment benefits in the just the last month -- a record number).  Lenders now want to make sure you still have income coming in before their wire the loan amount to the seller on closing day.  

Home Insurance:

One of the line items on your list of closing costs will be a home insurance policy prepaid for one year. This needs to happen before you can close. Once you’ve passed the inspection and appraisal hurdles, you should reach out to insurance agents to get home insurance quotes for the subject property. Be sure to review the proposed policies carefully – don’t just go by the quoted premium. You want to make sure you are properly covered for worst-case scenarios. That’s why it’s important to choose an insurance agent who is very familiar with the area you are buying the property in. They should know what coverage is needed and recommended, what add-ons you should consider, and what maximum coverage amounts would make sense for you.

Once you’ve paid for your insurance policy, your insurance agent will forward the relevant information to your lender. The lender needs to see proof of prepaid insurance before they can approve the loan. Otherwise, they would face the ridiculous risk of lending you a large sum of money on a home that burns down 6 months later for which you never took out a home insurance policy.

Title Search and Title Insurance:

As if we haven’t covered enough vital steps to the purchase process, there is another that needs to be highlighted: The title search.

Your attorney will typically choose a title company to handle this and to take out a title insurance policy (both of which are part of your closing costs). What does a title search actually mean? It means that the title company is going to do its research to ensure that the house will be delivered with a “clear” title, so that when you become the new owner, the title to the property has no other parties vying for a piece of it.

They will be checking for all kinds of liens (unpaid property taxes, unpaid contractor bills, etc.). They will also be checking for ownership rights besides the seller(s) listed on the contract. Does 95-yr-old great-aunt Suzie own 1/3 of the property and isn’t on the Sale Agreement? Is there a $10,000 lien on the property from a plumber who wasn’t paid for a job performed 5 years ago? Did the owner refuse to pay (or fall behind on paying) property taxes?

The title company’s job is to find all that out and report it.

Any issues discovered during the title search will be brought forth to the buyer’s attorney, who will then have to report them to the seller’s attorney. The seller will then be given the opportunity to resolve these issues and “clear” the title before closing. If that cannot happen prior to close, the closing date may have to be postponed. If the seller is unable to resolve the title issues and thus cannot “convey clear title”, the buyer can terminate the agreement.

Title insurance, meanwhile, protects both the buyer and lender from losses and damages associated with any liens, encumbrances, and title defects that were not uncovered during the title search process. The cost of such insurance is part of your closing costs (usually around $1,200, but that can vary). Unlike home or car insurance, title insurance protects against adverse events that have already happened (like a previously undiscovered property tax lien), rather than the risk of future hazards like a house fire or car accident.

City Inspections:

While you’re finalizing things on your end as the buyer, the seller will call City Hall (or Town Hall) and order the fire and certificate of occupancy inspections. The city will send one or more inspectors for this task. If there are any issues or violations, such as a missing fire or carbon monoxide alarm or a missing staircase railing, the seller would have to fix these issues before the city clears the property for the sale. In cases of distressed sales or REOs (“Real-estate Owned”, or foreclosed properties being sold by the bank that took ownership from the delinquent borrower), the buyer may be required to order the inspections. Usually, that is indicated under broker remarks in the MLS listing, so your agent should advise you of that ahead of time.

Closing Disclosure:

One of the final steps before closing is for your lender to send the Closing Disclosure document. This needs to happen at least 3 business days prior to closing, otherwise, the closing date has to be postponed. This document outlines all of the key terms of the loan, including the interest rate, monthly principal and interest payments, and a detailed breakdown of closing costs, among other things.

Once all your ducks are in a row, your lender will give you the "clear to close" and will coordinate with the title company on all the necessary paperwork.  That means that all conditions for the loan issuance have been met and all necessary documents have been signed.  

You are now ready to close!

Closing Date:

You’ve gone through the gauntlet and are finally ready to close! What happens now? Bring your favorite pen and get ready to sign A LOT of documents. Don’t have a favorite pen? No worries – there will probably be five to ten branded pens on the closing table for you to choose from.

The closing usually takes place at the office of your attorney. The only parties normally present are: Buyer(s), buyer’s attorney, and title company representative.

You may be wondering, “what about the seller?” The contract allows the seller to mail in all relevant documents, which their lawyer will mail to the title company before closing. This means that the seller doesn’t have to be physically present at the closing table at all.

This might sound anti-climactic after all the trials and tribulations outlined in this post, but most closings are fairly dull affairs. You show up, sit at a conference table, and your lawyer passes you one document after another and shows you where to sign and date each one.

At the end, you get to keep a pen as a souvenir and walk away with a large bundle of documents in a folder with the branding of the title company you used.

Hopefully, you get the keys too!

Conclusion:

I think the biggest thing holding us back in all aspects of life is fear, especially the fear of the unknown. It’s in our nature to be afraid of things we do not know or understand. Anxiety is often associated with fear and uncertainty.

With that in mind, my hope is that after reading this post you feel a bit more confident in actively pursuing your first real estate investment. Find a great agent, start analyzing properties, scheduling showings, attending open houses, and making offers. Don’t get into analysis-paralysis. Otherwise, you’ll be forever staring at spreadsheets and online calculators.

The only way to make progress is to act.

I will leave you with 3 practical things you can do right now:

1. Browse agent profiles on BiggerPockets and reach out to one or more in your area.
2. Do the same for lenders. Talk to them. See what you can get pre-qualified for.
3. Write down your real estate goals for the next week, month, and year. Be specific. Writing down goals makes it much more likely that you will follow through.

Thanks for reading! The next step is yours to take.