What You Need to Know Before Buying Your First Property

Written by: Max Vishnev, NJ Realtor and house-hacker

Photo by Jason Briscoe on Unsplash

Buying real estate is more like a marathon than a sprint. It’s going to take a while. In fact, it may take months to get from the initial search process to the closing table.

So as a busy Realtor (NJ) and real estate investor, I wanted to share a few things with you to make the process a bit easier and less stressful.

First, you should assemble your team before you start making offers

- Agent

- Lender

- Lawyer

Those are the top 3 people any aspiring real estate owner/investor should have on their team. A top-performing agent usually has a great team already, so ask them for recommendations. You’ll want to at least have the initial conversations with one or more reputable lenders and lawyers before you start making offers, so that you’re not scrambling to find them if you find a property you’d like to make an offer on (for example, in most cases, sellers will not take an offer seriously without a pre-approval letter).

As far as lenders go, it’s best to choose one that’s experienced in your market. Don’t use a lender from Florida or California if you’re buying in NJ. I know it sounds so basic, but you’d be surprised. Every state has its own quirks when it comes to buying and selling real estate, so you really want to make sure the team you choose has experience in the market you’re focusing on.

Another reason to reach out to a great local lender before you start your search in earnest is to get pre-approved. That will help you narrow down your search and save you time and potential headaches down the road. It could be that before speaking with a lender, you thought your target price point was $500,000, but after getting pre-approved, it turned out that you would only qualify for a $450,000 price point, based on a combination of your income, debt, credit score, cash on hand, and other factors. Or maybe, the opposite will turn out to be true – maybe you can actually qualify for a home priced at $550,000, or even higher. Either way, it’s good to know that ahead of time, before you start making offers.

With lawyers, it’s a bit more straight-forward. They have to be licensed in each state, and most attorneys who specialize in real estate law practice it on a very local level. So as part of your due diligence, make sure they are experienced in the specific market you are targeting. For example, let’s say you’re looking for a condo to buy in Hoboken or Jersey City. It’s probably best to go with a lawyer that does a lot of condo deals in Hudson County, as opposed to a suburban lawyer that mostly works in, say, Central NJ. The more experienced the lawyer is in your specific market, the higher the likelihood that (a) the transaction will go smoothly and (b) that you’ll be best protected.

Last but not least, it’s imperative that you establish a strong relationship with a great buyer’s agent before beginning your active search. Otherwise, you’ll be tossed around in the wind, reaching out to a slew of agents that Zillow or Realtor.com display for various properties. It’s important to find an agent that will understand your needs and have your best interests in mind. You really want an agent that will guide you through every step of the process – from the initial search and making offers to negotiating deals and getting you to the closing table.

Start with the right mindset and set the right expectations

In a competitive market, with historically low mortgage rates coupled with extremely low home inventory, expect to make lots of offers before you get a deal under contract. Expect to lose out on homes you really liked. Expect to find out that some homes you bid on went WAY over asking.

Buying real estate, especially if you’re a first-time buyer, is an inherently emotional journey. You’ll probably ride the rollercoaster of human emotions – frustration, fear, doubt, anger, anxiety, and hopefully, joy.

But if you have the right expectations upfront, you’ll minimize those rollercoaster swings. First of all, if you’re in a seller’s market, where the number of buyers is greater than the number of sellers, don’t expect to find a “great deal”, because everyone else (and their grandma) is looking for one too. On the flip side, don’t get so sucked into the bidding process that you bid more than you can afford or are comfortable with. Know your “max” and stay within your limits, even if that means losing out on some homes. It’s better to lose out on homes than to get under contract on a home you can’t really afford.

Remain grounded and try not to let emotions cloud your judgement.

Now for some transactional nitty-gritty:

Don’t Get Too Excited About an Accepted Offer

Your offer was accepted! That’s always exciting. But curb your enthusiasm, because a lot can happen between your offer being accepted and you closing on your first property. In fact, a lot can happen between your offer being accepted and you getting under contract.

For example, in NJ, a seller can accept a better offer while you’re in attorney review, since the buyer and seller are not legally bound to each other until attorney review is concluded. I’ve seen this happen many times, working with buyers. It happened to al client of mine a couple weeks ago in Hoboken. We saw a nicely renovated one-bedroom condo in Hoboken that he really liked, which was listed at $449,000. He initially offered $438,000. The seller’s agent countered $447,000 a couple of days later. My client came back with $442,000, which the seller accepted. But a day later, as we began attorney review, the seller’s agent informed me that they received a higher offer and were asking for “highest and best” offer by 5pm that same day. My client was understandably frustrated but decided to come up to $445,000. The seller went with the other offer – presumably higher and maybe with better terms too (i.e. higher down payment). To my client’s credit, he dusted himself off, we saw other properties a few days later, and he is now in attorney review on another condo.

Other things may come up during attorney review that may lead you to change your mind about buying the property. Maybe you find out about a large pending assessment from the condo HOA, or maybe it comes to light that the home you were so excited about has an abandoned oil tank that the seller is not willing to remove. You never know what will come up in attorney review. But if you've armed yourself for the possibility of negative surprises, you'll be a lot less disappointed if a deal falls through during this stage.

Things to Keep in Mind About the Home Inspection

OK, so you were able to get under contract. Congrats! Now, you and the seller are legally bound to abide by the terms of your contract, which means that at this point, it’s too late for either party to walk away willy-nilly. Now, the first major hurdle to get through is the home inspection period. That’s when you, the buyer, can bring in a professional home inspector and any other specialists you choose to make sure that you are armed with the best info about the condition of the property you’re now legally bound to purchase. The inspection period typically ends 14 calendar days from the date attorney review was concluded (also known as the “contract date”).

Here are a few things you should keep in mind:

First, you should always try to attend the inspection in person.

You’ll glean valuable info about the home you’re planning to purchase by simply following the inspector around and listening to his commentary during or at the end of the inspection. Afterwards, you will know if there are any red flags or “big ticket” items to be concerned about, or if it’s mostly minor things that should not be deal breakers. If you skip the inspection, you’ll still get the written report, but that usually includes every fault – large and small – and you don’t get the “behind the scenes” commentary you would get in person.

Second, that in-person experience should help you strategize your home inspection requests, if any, with your agent and lawyer.

Keep in mind that after you make your requests, the seller can either grant them or reject them. So the inspection period is a tenuous point in the transaction, because the deal can still fall apart if the two parties can’t come to an agreement. That’s an important point to remember as you plan your requests, especially in a competitive seller’s market. You don’t want to put the deal at risk by being too aggressive with your requests. Remember, the seller has feelings too, and human emotions are a big part of any real estate deal. You want to make sure your requests are reasonable and well-supported and are unlikely to be perceived as you trying to “nickel and dime” the seller, especially in a seller’s market. My advice is focus on the biggest issues, if there are any, and not to bother with the small things, which might just rile up negative emotions and cast a dark cloud over the escrow process.

For example, if the inspector determined that the roof is at the end of its useful life, get one or more quotes from professional roofers and include their estimates in your inspection request. This way, the seller knows you’re not just asking for a $10,000 credit but that it’s based on an actual quote from a licensed roofing company.

If the furnace is not functioning properly, you can do the same with an HVAC contractor. And if the inspector finds serious faults with the plumbing, electrical, or structural elements of the house, you should definitely bring those up.

But if the same inspector found a loose faucet, a tub that needs to be re-caulked, and a cabinet drawer that doesn’t close properly, perhaps those minor things are best left off the inspection request – that is if you still like the property and want to increase the odds of you actually closing on it.

In short, focus on the “big ticket” items that would be expensive to fix and consider overlooking the minor things that a good handyman can fix in a jiffy at minimal cost.

Key Steps in the Lending Process

The lending process is arguably the most important piece of the home-buying puzzle. That’s because unless you’re a cash buyer, you won’t be able to close on a property if a bank doesn’t give you a mortgage. The mortgage underwriting process typically takes at least 30 days. And it can either go very smoothly or can cause serious problems in your ability to get to the closing table. So don’t delay. Get your lender whatever they need as quickly as possible. You don’t want the loan process to be the reason why your closing date gets pushed back.

Your contract should include two contingencies related to your ability to get a mortgage.

The first is the loan contingency:

This is exactly what it sounds like. If you lose your job after your offer gets accepted, your lender will find out (they call to verify employment status before closing) and you probably won’t be able to get a mortgage. At that point, you’ll have no choice but to terminate the agreement, which the aforementioned contingency would allow you to do. The loan contingency is there to protect you, the buyer, if a situation arises that causes you to be unable to secure a loan. It allows you to terminate the transaction without penalties (subject to the specific terms of your contract and the exact reason you were unable to secure a loan).

A second loan-related contractual contingency is the appraisal contingency:

The appraisal is actually ordered by your lender for the lender’s benefit, even though you’re paying for it. That’s because before they issue you a loan on a home, they want to make sure it’s worth what you’re paying for it. The job of the licensed appraiser is to provide an independent professional opinion on the market value of the property you’re under contract to purchase. If the appraisal comes in at or above the contract price, the lender can issue you the loan knowing that it’s worth at least what you’re soon to pay for it. However, if the home under-appraises, then the lender will only lend based on the appraised value, not the contract price. That’s to protect themselves. A numerical example might help.

How the Appraisal Contingency Works:

Say you're buying a $500,000 home with 20% down. Your lender is planning on lending you $400,000 and you would come up with $100,000 in cash as the total down payment. But what if the home appraises for $480,000? Now, the bank would only lend you 80% of $480,000, not $500,000. That's because you applied for a loan with an 80% LTV ("Loan to value"). And if they were to lend you the same $400,000 on a home worth $480,000, the LTV would no longer be 80% -- it would be 83.33%.

What does it matter? Well, for one that would put you below the 20% equity threshold, below which buyers typically have to pay for principal mortgage insurance (better known by its acronym, "PMI"). Secondly, it reduces the cushion the lender has in a worst-case scenario: You, the buyer, lose your job, stop paying your mortgage, and the bank has to take the property from you then try to sell it. This is better known as the foreclosure process. Having a 20% equity cushion is a less riskier proposition for the lender that having a 16.67% cushion.

OK, so let’s say your home does appraise for $480,000 instead of $500,000. What happens then? This is where the appraisal contingency kicks in. It allows you to ask the seller to reduce the contract price to the appraised value. Of course, the contingency is two-sided --- the seller can either accept or reject your request. If you’re in a hot seller’s market and the seller received multiple offers before choosing yours, they might be tempted to turn down your request to lower the price and take their chances by putting their property back on the market. In a rising market with limited inventory, they may actually end up getting more money.

“But wouldn’t they end up in the same place a few weeks later with the next buyer,” you may wonder. Not necessarily. Appraisals are more art than science. Two different appraisers may come up with two different appraisal values on the same property. Further, because deals close all the time, even a two-week time difference between appraisals might offer new comparable sales (“comps”) for the appraiser to use, which, in a rising market, should only bolster the appraised value.

An appraisal is inherently a lagging indicator of market pricing, because appraisers use sold “comps”. In other words, they only use comparable homes for their analysis that have been sold recently, so by definition, the process is backward-looking. Not pending, not active, but closed. So in a rising market, the comps will usually “lag” current market values.

Keep that in the back of your mind as you go through this crucial step in the purchase process. In the best-case scenario for you, the seller agrees to lower the contract price to $480,000. In the worst-case, they may reject your request (and walk away from the deal). But in other cases, they may agree to “meet in the middle” or somewhere else between the appraised value and the contract price. The outcome will be largely determined by how eager the seller is to close and be done with it and what the local market environment is like for similar homes.

If you're serious about buying a home and you find yourself in a competitive market with rising prices, you may want to plan for an under-appraisal scenario and have extra cash on hand to fill the lending gap. What do I mean by that? Let's go back to my earlier example. If the seller rejects your request to lower the price to $480,000 from $500,000 and you would rather not terminate the deal, you would have to increase your down payment to maintain the 80% LTV you got pre-approved for. So you'd be getting a mortgage for $384,000 (instead of $400,000) and your down payment would have to go from $100,000 to $116,000, or $16,000 more than you had budgeted before the appraisal.

One last thought about the appraisal: In some super-hot areas (like many suburbs in metro areas during the COVID pandemic), where many properties get multiple offers, prospective buyers may have to partially or fully waive the appraisal contingency just to have a shot at an accepted offer.

Now that we’ve covered attorney review, the home inspection, the loan and appraisal process, let’s zoom out once again for two final points:

Be Patient but Informed

There are many steps between an accepted offer and a successful closing, with many different people involved, including two agents, two lawyers, lender, underwriter, loan processor, appraiser, home inspector, title company coordinator and closing representative, and sometimes others, including surveyors, oil tank specialists, radon measurement technicians, and structural engineers. Sometimes, things get delayed or go wrong. You must remain patient to keep your sanity, but don’t be aloof either. Make sure your team (agent, lawyer, lender) is keeping you informed and do whatever you can as the buyer to move things along.

Don’t Expect Perfection

Right before the closing, you and your agent will do what’s called a final walk-through. This gives you an opportunity to ensure that the property is in the same condition as when you last saw it. You’ll want to make sure the roof hasn’t developed leaks, the basement isn’t flooded, and that the lights turn on, the appliances work, and the HVAC and plumbing systems are functional. You’ll also want to ensure there are no cosmetic surprises, like holes in the wall that weren’t there before or loose/damaged kitchen cabinets. If you do find issues at the final walk-through, let your attorney know right away. He or she may request that some funds be left in escrow after closing, so that the seller has an incentive to fix the problem during a negotiated time period (usually a month).

But assuming the final walk-through goes well, that does not mean that you won’t encounter any surprises after you close. That’s because it’s impossible to inspect everything during the home inspection and to check every little nook and cranny during the final walk-through. Inevitably, you’ll discover things after you get the keys and move in (or as you prepare the property for renters) that you didn’t notice before. Usually, it’s small things that are insignificant in the grand scheme of things but could prove to be annoying. However, if you prepare for this inevitability ahead of time, you’ll be far less likely to get really frustrated. No property, even newly built, will be 100% perfect.

I hope all this info didn’t scare you into remaining on your couch or stuck in analysis paralysis. Yes, the process can be a bit intimidating, but you’ll get through it if you follow my advice. Nothing worthwhile in life is easy, and neither is home ownership and real estate investing.