Six home buyer mistakes to avoid

Why are buyer's agents, contingencies so important?
By: Robert J. Bruss: Inman News
Late October and early November are the tail end of the second-best home sales season (the most active selling season is spring when the largest numbers of buyers are in the market). Smart home buyers are realizing this may be the best time to buy before mortgage interest rates go higher.

At this season of the year, these savvy home buyers understand they can negotiate hard because home sellers and their realty agents know after Thanksgiving is the worst time of year to sell a home (but that is also the absolute best time to buy a home if you can avoid the distractions of holiday events and purchase from a highly motivated seller).

However, in the quest to purchase a house or condo, many home buyers get caught up in the thrill of acquiring a new home and they make potentially costly mistakes. Here are the top home buyer mistakes to avoid during any time of the year:

1. SHOP FOR A HOME BEFORE YOU SHOP FOR A MORTGAGE. It's normal for prospective home buyers to get excited about buying a home. According to the National Association of Realtors, more than 70 percent of today's home buyers start their quest on the Internet, usually at www.realtor.com.

But that's the wrong place to start buying a home. The first step to a successful home purchase is for buyers to check their FICO (Fair, Isaac Corp.) credit scores to be certain a mortgage can be obtained.

The best spot I've found on the Internet to check my credit is www.myfico.com. It costs about $45 to review all three credit reports there from the three national credit bureaus, Equifax, Trans Union and Experian. The last time I checked, to my surprise, my FICO scores varied about 40 points among each of the three credit bureaus.

By checking credit reports at all three bureaus, there is time to correct any errors (reportedly, about 33 percent of credit reports contain mistakes) before applying for a mortgage.

Although you can now obtain your free credit reports from all three major companies at www.AnnualCreditReport.com, or 877-322-8228, those reports are virtually worthless because they don't include FICO scores, which all major mortgage lenders now use.

Armed with your credit reports and FICO scores (anything above 700 practically assures you will get the lowest mortgage interest rate), it's time to shop for written mortgage pre-approval.

Although mortgage brokers can arrange such pre-approvals, be sure your pre-approval letter or certificate comes from a bank or mortgage broker. Disregard any "pre-qualification letter," which is worthless because it isn't a lender's written promise to grant you a home mortgage, subject to an appraisal.

2. RUSH TO BUY A HOUSE OR CONDO WITHOUT CAREFULLY RESEARCHING THE LOCAL MARKET. After you have your written mortgage pre-approval 30-day or 60-day letter or certificate from an actual lender, it's time to get serious about researching the local home market in your price range.

Although you might buy the first home you spot on the Internet, or at a weekend open house, that rarely happens. Most home buyers take several months before their purchase offer is accepted by a seller.

3. BUY A HOME WITHOUT YOUR OWN BUYER'S AGENT. Too many home buyers purchase with only the help of the seller's listing agent (called a "dual agent" when that person also represents the home buyer).

It costs home buyers no more to have their own "buyer's agent" representing the buyer's best interests.

Buyer's agents, in addition to showing listings of other agents from the local MLS (multiple listing service), can show prospective buyers the local "for sale by owner" (FSBO) homes. Smart FSBO sellers are only too happy to pay buyer's agents half of a normal sales commission, typically around 3 percent. This is a major advantage of working with a buyer's agent.

Any licensed real estate agent can be your buyer's agent to look out for your best interests (unless that agent works for the same brokerage, which also listed the property for sale; then dual agency or designated agent rules apply).

However, most home buyers find it wise not to sign an exclusive buyer's agent contract, just in case the agent turns out to be a dunce.

4. BUY A HOME WITH AN INCURABLE DEFECT. No house or condo is perfect. Each one has some defect. Even brand-new houses have problems (hopefully not significant).

After I became friends with a local building inspector a few years ago, he revealed to me some of the defects he routinely discovered in new homes. Unless the problem was dangerous or in violation of building codes, he explained he had to ignore the defects, which he knew would result in problems several years later.

Fortunately, most houses and condos don't have defects that are not tolerable. Serious problems, called "economic obsolescence" by appraisers, might include a bad floor plan, poor location (such as near high-voltage power lines or adjacent to the city dump), heavy street traffic, and lack of convenient parking.

5. DON'T INSIST ON A COMPARATIVE MARKET ANALYSIS (CMA) BEFORE MAKING A PURCHASE OFFER. This is a major mistake too many home buyers make, often resulting in overpaying for a home.

The CMA is the same document that the listing agent should have presented to the home seller before the asking price was determined. It includes recent sales prices of similar nearby homes, asking prices of comparable neighborhood homes now listed for sale, and asking prices of similar homes that didn't sell (usually because they were overpriced).

Only after reviewing the CMA, and discussing it with the buyer's agent, can a reasonable purchase price be offered.

6. FORGET TO INCLUDE THE TWO KEY CONTINGENCY CLAUSES. Especially in very competitive local home sales markets, some home buyers let their buyer's agents talk them out of protecting themselves with the two key contingency clauses.

"All cash, no contingency" is what every home seller wants to hear. But it isn't realistic or very smart for most home buyers.

Instead, smart home buyers include contingency clauses for (a) a satisfactory professional appraisal of the home for at least the purchase price, and (b) the buyer's approval of a professional inspector's report.

Additional customary local inspection contingencies might include termite (pest control) inspection, building code compliance, energy efficiency, and radon test.

SUMMARY: These six home buyer mistakes to avoid help protect buyers from making major, costly errors. Home buyers who protect themselves can feel confident of making a sound purchase, which they will enjoy for many years.