Purchasing a home is a very important investment that requires careful
consideration. In fact, the Colorado Supreme Court has acknowledged that
purchasing a home is one of the most important investments an individual
can make in their lifetime, and more often than not, it is done on a limited budget.
See Cosmopolitan Homes, Inc. v. Weller, 663 P.2d 1041, 1045 (Colo. 1983). Perhaps the most important reason someone
chooses to purchase a house is for security.
When you rent, you are not building any equity. In
real estate terms, equity is generally described as the difference between what you
owe on your mortgage and the value of your property. Equity brings a sense
of security because lenders are more likely to help you refinance at a
lower rate, at lower monthly payments, or if you sell it means more cash
in your pocket. Therefore, the more equity you have, the more secure you
feel in your investment.
The decision to purchase a home is also oftentimes the first step in building
wealth. However, in order to purchase a home, one must be financially
secure enough to obtain financing. Even when people are approved for a
certain loan amount or when they have the cash up front to make a purchase,
unforeseen problems can arise. In this article, you will learn about some
of the pitfalls to be wary of when buying a house.
Selling a house? Don’t worry, you may still find this article helpful,
but hang in there—a follow up discussing common pitfalls to be wary
of when selling a house will be forthcoming.
Failing to secure financing:
Before you start looking for a house to buy, you need to know how you are
going to pay for it. Most people do not have hundreds of thousands of
dollars sitting in a bank account. The most important part in securing
financing is keeping track of your credit score. The higher your credit
score, the lower your interest rate will be. Even half of a percent difference
in your interest rate can mean thousands of dollars that you will either
pay or save on your mortgage. This means that if you are thinking about
buying a house, you should be working hard to pay off your credit cards
and other reported debts. For most people, a credit score of 650 will
be enough to secure financing.
Once you have your credit score under control, you need to get pre-approved
by a lender. Do not be tricked into thinking that pre-qualified is the
same as pre-approved! When you are pre-qualified, the lender is guessing
that you could borrow up to a certain amount. When you are pre-approved,
the lender has prepared itself to loan you the money and almost always will.
When you are pre-approved, the Seller is more likely to treat you as a
serious Buyer because there is less risk that the transaction will hit
a financial road bump. Being pre-approved also lets you know what you
can afford. You do not want to have your heart set on your dream home,
only to find out that it is out of your budget.
You will also want to look into home buyers’ programs. The Colorado
Housing and Finance Authority offers a grant of up to 3% of your first
mortgage loan to help cover down payment and closing costs for qualified
individuals. The United States Department of Agriculture offers Section
502 loans to low-income individuals with benefits such as rolling closing
costs and lender fees into the loan. These are just a couple examples
of programs that may help you finance your home purchase.
People who fail to secure their financing prior to shopping for a house
set themselves up for failure. Many times they will not be able to purchase
the house that they want because they cannot afford it, or even worse,
they cannot get any financing. Other times they are rushed to get financing
and end up paying thousands of dollars more in interest. Do not make the
mistake of failing to secure financing prior to house shopping.
Failing to consider additional costs:
There are many additional costs of purchasing a house. Some of these costs
occur during the purchase process and others occur after you have closed.
For instance, you may be paying for an appraisal and survey or improvement
location certificate prior to or at closing. Closing costs will include
origination fees charged by lenders and title services. More than likely,
you will have to pay your prorated share of taxes for the purchase year.
These expenses add up quickly and can cost a few thousand dollars. Usually,
your financing does not cover these costs of the transaction.
After you have bought the house, you will have to pay annual property taxes.
In Colorado, the county assessor classifies and values your property and
the various taxing authorities, such as county commissioners, city councils,
school boards and governing boards of special districts determine the
You will also have to pay your normal monthly bills. If you have always
rented in the past, you may have never had to pay utilities before, or
you may have been paying the utilities for a smaller space. Sometimes
people moving from a smaller apartment into a house learn a hard lesson
when they realize that it costs more to heat and cool their home. Many
times people who buy a house are excited about the prospect of landscaping,
but do not consider the price of a green lawn and a healthy flower bed.
If you bought a house in a homeowner’s association you may not have
the choice to let the grass and flowers die.
Another huge difference between renting and owning is that owners are responsible
for home repairs and maintenance. When you rent and a pipe bursts or the
roof leaks, you call your landlord. When you own, you are the landlord.
If you cannot pay the contractor that fixes the burst pipe or leaky roof,
the contractor can file mechanic’s lien with the clerk and recorder
and, if the debt goes unpaid, the contractor can eventually foreclose
on your home. One of the biggest mistakes people make when purchasing
a house is buying a home at the top of their budget, without considering
the additional costs relating to home ownership.
Failing to inspect:
When you enter into a contract to buy a house, you will have a deadline
to complete an inspection of the property and to submit inspection objections.
Inspection objections are items that you want the owner to fix as a prerequisite
to your purchase of the house. You will also receive a document entitled
Seller’s Property Disclosures. The purpose of the disclosures form
is to put prospective purchasers on notice of defects in the property
that the seller knows about. The seller is only required to fill out the
disclosures to their current actual knowledge, not what they should know
or what they could have found out if they investigated. The seller is
not required to perform his or her own inspection to find any defects—that
is the buyer’s responsibility. While our firm is experienced in
prosecuting sellers that blatantly lie on the Seller’s Property
Disclosures, it is usually difficult to prove what a seller actually knew
at the time of filling out the disclosure form.
To avoid surprise problems after purchasing a property, it is essential
that you hire a home inspector with a strong reputation. Over half of
the states in the country require home inspectors to be licensed, certified
or registered with a governmental entity in some fashion. Unfortunately,
Colorado is not one of those states. Anyone can hold themselves out to
be a home inspector. This means it is very important that you carefully
vet your home inspector.
You want an inspector that is accredited. There are different organizations
that certify home inspectors. Two of the most reputable organizations
are the International Association of Certified Home Inspectors (Inter-NACHI)
and the American Society of Home Inspectors (ASHI). If a home inspector
is current on his or her Inter-NACHI or ASHI certifications, that inspector
has passed technical exams and has the requisite training to be a member
of those organizations.
You also want an inspector that will give you a detailed report. If your
inspection report is only a handful of pictures stapled together, that
is not detailed enough. Your inspection report should contain a detailed
list purporting the state of the property and specifically identify what
needs to be done to bring problem areas up to par. Without a detailed
inspection report from a reputable inspector, you have not thoroughly
inspected the property. Unless you thoroughly inspect a property prior
to purchasing it, you will be losing an opportunity to get the problem
fixed or sale price lowered.
Failing to negotiate:
Northern Colorado is certainly a seller’s market right now. In fact,
most residential transactions the firm has seen in recent months involve
a seller that has asked for a sale price above the appraised value or
the contracted sale price has been above the asking price. Most transactions
have involved bidding wars between potential buyers. Given the current
real estate market, a buyer may feel like if they negotiate contract terms
they may seem too needy to the seller and lose out on the deal. Do not
let your fears box you into making a deal you are uncomfortable with.
Buying a house is a big deal and the purchase terms should make you feel
secure, not insecure.
From dates to defects, the real estate contract is meant to be negotiated.
Some people make the mistake of believing that because the real estate
contract is on a standard form, it cannot be negotiated. This is completely
wrong. Just as the contract is a standard form, so is the counterproposal.
The counterproposal form gives you the opportunity to negotiate dates
and deadlines, as well as purchase price and terms. It also has a section
entitled Other Changes where you can negotiate less standard terms of
the contract, like requiring the seller to take the ugly blinds with them
when they vacate.
You should also use your inspection report to your advantage. If the water
heater has reached its lifespan, ask for a new one. If there is hail damage
to the siding, ask for it to be fixed. If you submit an inspection objection
and the owner rejects your request to fix defects, you can ask for a price
reduction. You can also get creative. Maybe the house is not worth losing
over a water heater and you really love the vintage soda vending machine
in the garage, go ahead and ask for it. Negotiating is a normal part of
the buying process, so do not be afraid to ask for what you want.
Jorgensen, Brownell & Pepin, P.C. is Here to Help
These are only a few of the pitfalls that buyers find themselves in when
looking for a house to purchase. Hopefully, this article has given you
some ideas and helpful hints to take with you in your search. The information
provided is not legal advice. Every potential buyer’s situation
is different, and each real estate transaction is unique. This blog is
simply meant to help you think about things that may not have crossed
your mind before.
If you are a buyer and have questions about a real estate transaction,
the Longmont attorneys at Jorgensen, Brownell & Pepin, P.C. are here to help.