3: Real Estate Basics

Needs and Wants

Before you start looking for a home, figure out what you can realistically afford to pay per month. Check out the market in the area you want to buy. Find out what price houses are going for and what the payments are per month. Remember that you may end up paying a little more per month than someone with a conventional bank loan, so keep that in mind as you figure out what you can afford.

You are going to have to work harder to find a home you can get without a loan. You will have to shop around more. So, concentrate on your needs in housing before your wants. Make a list of the minimum that you will accept in a house. Only write down your essential needs. Do you have to have three bedrooms or can you make do with less? Do you have to have a two-car garage or will a carport do? Do you have to have a single story home for health reasons? How close do you have to be to a school?

Make a separate list of the things you want. Wants might include things like a pool or hot tub, a walk-in closet, wooden floors, a deck, or a certain type of architecture. It would be nice if you can find a home with some of your wants, but to begin with, concentrate on finding a home that meets your needs. Often many of these things can be added to a home later.

Also make a third list of things you absolutely do not want in a home, such as: too many stairs to climb, a fixer-upper, certain areas of town you dislike, a location too close to a freeway, or a location too far from the center of town.

You may not be in a position to be too picky. Perhaps you can make do with a smaller home for now, while you establish your credit and get equity in the smaller home. Then you will be in a position to trade that home in for a bigger home.

Re-establishing your financial footing is not as difficult as it used to be, but it is impossible if you attempt to buy more house than makes sense. Be conservative!


Arm Yourself With Knowledge

It is important to learn the business of real estate. The more you know, the better off you will be. I am including a dictionary of common real estate terms and sample contracts in the Appendix of this book. But don’t stop there. Read books on buying houses. Your local bookstore will probably have many books available on the subject, but if they don’t, your local library should. Follow what is going on in the Real Estate section of your local paper. The Internet has a wealth of free information on the subject as well.

And most importantly, know where you can go to get advice and help.


Location and Condition

It is possible to get a great deal for a fixer-upper home, but this kind of home is not for everyone. If you don’t have money or skills to put into repairs that might end up being costly, it is best to look for a home that doesn’t need so much work.

You might also consider homes that just need “cosmetic” work. These homes don’t need major repairs. They may look ugly to potential buyers, but a little paint, new carpets or some yard work will fix the place right up.

If you would rather not put any work into a home to start, nice homes in upper-class neighborhoods can be found just as easily, and sometimes easier than fixer-uppers. Investors often leave these alone because they can’t make enough money right away with them to make it worth their while.


A Real Estate Agent or Not?

A Real estate agent would normally be your first stop. Usually they are worth more than the fee they get paid from the sale. The problem is that if you have bad credit and need to do some creative financing, more often than not the real estate agent is not trained to handle that situation. They are trained in methods that make it easy for them to make a commission. A real estate agent is often the first to tell someone with bad credit to wait five years or more until their credit is better before buying.

If you can find a real estate agent who will work with you and is willing to get creative, great! More than likely, though, you won’t find that person. This is why you need to understand the real estate business. You will probably find yourself dealing directly with owners.


For Sale By Owners

The term for an owner who is selling the house on their own without listing it with a real estate agent is: FSBO (For Sale By Owner). As you talk to these owners, learn to be a good listener. Right now it is not about you, it is about them. Keep your mouth shut about what you want and try to find out everything you can about the seller. Why are they selling without a real estate agent? What is their motivation for selling? Often money is not their motivation. Perhaps they are selling for health reasons or because they have to relocate.

Some FSBO’s are not very motivated to sell. Perhaps a real estate agent told them their house is worth less than they want to sell it for, so they are patiently waiting to get more money. They may keep the “For Sale” sign up for years before selling. It would probably be best to avoid these people. They are not likely to work with you. Then again, it doesn’t hurt to ask.

Sometimes the seller just doesn’t want to pay the commission to the real estate agent. Maybe they are, or were at one time, a real estate agent. Maybe they don’t have enough equity in a house to pay an agent. Whatever the reason, ask why they are selling on their own.

What you want to look for is someone who is very motivated to sell and who has a problem you can help with. For instance, Josh and Karen are motivated sellers. Josh has been transferred to another city and Karen is staying in the old house until it sells. Unfortunately, they don’t have enough equity built up in the house to pay a real estate agent, since they only bought it two years ago. Josh has found a new house, but they can’t afford to pay two mortgage payments for very long. These are good motivated sellers. We will get into how you can help them, and yourself, later.)


Contracts and Lawyers

If you are not working through a real estate agent, you will need to know where to go for help. One of the first people to look for is a good real estate lawyer. I have included some sample contracts at the end of this book, but I recommend that you always have your lawyer look over any contracts you use. Depending on the state, real estate sales contracts found in books or office supply stores may not be sufficient for what you need. An in complete or misunderstood form can get you into a lot of trouble. A competent attorney can be well worth the price paid.

Often a settlement lawyer will hire a title insurance firm to make sure a title search is done. If not, you will need to do this.


Escrow Agents, Title Searching and Insurance

You will want to have a good full service title insurance and escrow company helping you with the closing settlement. It is important that the title of the property you are buying be checked for any problems such as liens, past due taxes, or other surprises such as co-owners.

An escrow agent will conduct the title search for you, as well as offer title insurance. Owner’s title insurance is a one-time fee that protects you against any surprises that may show up down the road after the initial title search has been done.


Appraisers

Often FSBO’s selling a home do not use a real estate agent because they want to get more money out of their home than the real estate agent thought they should list it for. The real estate agent is probably right. Agents are skilled at setting a good price a house will sell for in that market. Called a “comp” or comparative value, it is a price based on what other houses are selling for in that area. Many FSBO’s are selling on their own because they didn’t like the real estate agent’s “comp” price.

Some real estate agents will list a home anyway, for the price that the owner wants, even though it is too high. Then, six months later, when the house didn’t sell, the owner goes off on their own as a FSBO, thinking that the agent did not do anything for them.

If you are serious about buying a FSBO home and you want to find out how much the house is worth, consider having an appraisal done by a certified real estate appraisal firm. If the owner won’t pay for it, you may have to pay for it yourself. Then you will know exactly what the house is worth and if the owner wants too much for it. It will give you more bargaining power. And you can make an offer on the house contingent to what happens with the appraisal.

Remember, it might be worth paying a little bit extra for a home if you can get the terms you want from the owner, such as having the owner finance the house or using sweat equity for a down payment. Maybe this is one way you can give the owner what they want or need and help yourself too.


Home Inspectors

A home inspector can give you a comprehensive analysis of the house’s major systems and components. They are independent third parties so they are neutral in the buying process. If you have any questions about the condition of the home or what the seller is telling you about the house, it might be very well worth the cost to get the house inspected-- if nothing else, for your peace of mind.

When hiring home inspectors, look for licensed professionals. In many states home inspectors don’t have to be licensed. A Licensed Professional Engineer (PE) is an engineer, not just an inspector. If you uncover a problem and you don’t have a PE, you will just have to go out and hire one anyway. It might be a wise decision to start with a Professional Engineer if you suspect problems with the house.

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