A Piece of the Pie

Thanks Mom and Dad!!

Before the housing bust, saving wasn’t a major priority for Bay Area young professionals.  Not only, to the chagrin of Suze Orman, were we in a society and era that promoted mass consumption, buying a home was so much more expensive than renting that there wasn’t a huge incentive to save.

Enter the housing bust beginning in 2007 and the rapid decline in home prices and interest rates.  Suddenly, especially in many East Bay cities, buying a home became much more affordable.  Deals were all over the place but the Bay’s young professionals were at varying levels of preparedness.  Most simply hadn’t lived a lifestyle that prioritized saving for a down payment and closing costs.  Others hadn’t had enough time working (or enough raises) to save while managing school debt and the Bay’s cost of living. Still others hadn’t fully overcome the credit issues from their youthful transgressions.

No matter what, there was little doubt that with the ability to buy a home with monthly payments that would be equal to or less than what they were paying in rent, now was the time to buy a home. At first, the market was slow and sellers (especially bank owners) were willing to give credits to buyers for their closing costs. Also, the law was allowing sellers to provide buyers with a gift for their down payment.  This was all great; buyers were able to buy a home without having had to save for years. 

That changed as competition on homes increased and it became a seller’s market.  Buyers asking for credits were easily beat by cash buyers or buyers who could buy without asking for concessions.  To make it even harder for buyers, the government banned down payment gifts from sellers and reduced the amount of money that sellers could credit to buyers for their closing costs.  Lenders also became much more conservative, requiring evidence of reserves or evidence that the buyer had money over and above the amount required for the down payment and closing costs.  Enter Mom and Dad.

Not everyone will have parents who are willing or able to help them. Even if they are able, some parents have more to give than others while other parents will be reluctant (even they offered the help in the first place) or will require repayment.   No matter how much or little they give or what stipulations come with the offers, many first time buyers would not have been able to buy without their parents help.  It doesn’t have to be Mother’s Day, Father’s Day or a birthday to express appreciation to all of the parents, friends and relatives who have helped us buy when we would not have otherwise been able. 

Buying a home is stressful, how to cope

First time home buyers can easily find information on loan options, closing costs, and the process of buying real estate. However, books and websites often overlook a crucial part of the home-buying process – the stress and emotional aspects of buying a home.  Buying a first home has always been stressful but now, foreclosures, short sales and tighter lending standards have made the process even more difficult. There are stressful aspects to every part of the transaction.  Anticipating this stress and using healthy, practical means of managing it can help minimize potential negative ramifications.

Getting started

Some buyers can be intimidated about getting started because they don’t feel knowledgeable about the process and they worry about making the wrong lifestyle or financial decision. The best way to ease fears is to do research and ask your Realtor and lender questions. If you familiarize yourself with the purchase agreement, you might feel better knowing how the contingency periods (those periods during which your deposit is refundable) work. 

Finding the house

This is often the fun part, especially for people who like shopping.  In a competitive market, the fun may go away after you’ve made several offers that were not accepted.  You might feel depressed or sad thinking that you won’t be able to compete or anxious that you can’t afford or make attractive offers on the homes that you’re really interested in.  The high of looking for a home and getting an offer accepted might also be a set up for a big mood change when the stresses of the escrow process set in. 

It might help if you think of the transaction in a more business-like manner (although, of course, you’ll have to be happy ultimately living in the home) and resist the urge to “fall in love” with the home.  Make sure that you’re working with a Realtor with the expertise and sense of urgency to help you make attractive offers and to submit them promptly when necessary.   Also, remember that persistence pays off; it might be months before a seller accepts your offer.

Inspection contingency

As Dan Marzilli of Gen-Tech always says: “an inspector’s job is to tell you that your baby’s ugly.”  As you can imagine, hearing all of the things that are wrong with your baby…and the resulting running tab of repairs going in your head, can be very scary.  Most of the time, you’ll simply find out about a lot of smaller issues that can be repaired over time. Even if you find out that some repairs must be done now, some sellers are willing to take care of some of the small issues or give a credit to the buyer so that you can make the repairs.  Many minor problems can be solved with a trip to Home Depot…caulk and a decent drill will take you very far.

The worst case scenario is that you find out that there are tens of thousands of dollars of imminent work (ie the house could explode or collapse or you won’t be able to shower or cook if the work isn’t completed) that must be done.  Finding out that the house needs $50,000 in foundation repairs to keep it from tilting sideways when the big one hits or $30,000 in termite work to keep the walls from disintegrating can be devastating.  Understanding the very real possibility that, even on a renovated home, the inspector might find this kind of damage is helpful.  You’ll sleep better knowing that the $800 you spent on an appraisal and to help you determine that you don’t want to buy that money pit is $800 well spent.  You might not want to back out even when you find out about a big issue because, as the real estate market slows down again, you may find more sellers who are willing to take on a major repair rather than put a home back on the market with a $30,000 foundation problem to disclose. 

Loan/appraisal contingency

Lenders are taking longer to process loans. The standard loan and appraisal contingency period is 17 days and you don’t want to remove that contingency, especially in this skittish lending market, unless the lender approves the loan to go to docs (meaning that the lender has fully approved the loan and given permission to move toward closing).  Lenders often need more than 17 days so buyers often have to ask for this period to be extended.  The seller could say no, although they usually don’t.  If the seller refuses to give more time or, in the case of a bank-owned property, the bank just doesn’t respond, the buyer may have to choose between cancelling or removing the contingency and jeopardizing their deposit.

When a house doesn’t appraise for the price that the buyer offered, as happens pretty often, the buyer often has no choice but to ask for a price reduction. The seller could say no or might only agree to do so by eliminating credits offered to the buyer for closing costs or if some other cost is transferred to the buyer. 

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To help minimize stress, keep in mind that when your offer is accepted, there is no guarantee that the sale will close. You will spend non-refundable money for inspections and appraisals to investigate the home and to determine if the home is worth what you offered to pay for it.  There may be a back-and-forth negotiation period after the property is appraised or inspected when you might need to ask for a price reduction, credit or repair – this can be scary or stressful. This stress can be compounded by what can seem like an unsympathetic listing agent or seller. If you can come to an agreement, you’ll be the happy owner of your first home and this stress will become a distant memory. 

If you find yourself feeling stressed out, depressed, losing sleep, anxious, or in any other kind of emotional distress; try to find inexpensive, healthy ways to cope.  Many people shop or spend money on trips or expensive spa treatments when stressed; spending money could harm your ability to qualify for a loan.  Better options are getting outside for exercise, spending time with friends, and trying to get enough sleep.  Be prepared to make many offers before one is accepted and for the possibility that the home will need expensive repairs or will not appraise for the price that you offered.   And by all means, please be nice to your Realtor!