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Who Pays for What in Real Estate Deals?

New to Real Estate? Not sure who pays for what in the deal? Here’s a simple guide to help you understand the basics. Buying or selling property in today’s litigious world is a daunting task.  With so much real estate jargon, buyers and sellers can be confused when trying to complete a transaction.  I had an old Jewish diamond broker once tell me with a wink, “Everything’s negotiable.”  That’s certainly true in real estate.  So here’s a simple breakdown of some of the costs involved and who pays for what.

Your agent will provide you with a buyer’s sheet that lays out the closing costs, and by federal law you must receive what’s called a “good-faith” estimate of your closing costs from any lender you use.

As for who pays the closing costs, that’s where your negotiating skills (or your Realtor’s) come into play. There is no cut-and-dried rule about who—the seller or the buyer—pays the closing costs, but buyers usually cover the brunt of the costs (3% to 4% of the home’s price) compared with sellers (1% to 3%).

http://www.realtor.com/advice/finance/realtor-fees-closing-costs/

Real Estate Commission

By far the biggest expense in a real estate deal is the realtor’s commission. While there is not a set percentage in any market–and indeed is illegal for brokerages to try to fix these fees in their market–most agents charge between 5%-7%.  Most of the time, this cost is paid by the seller, so buyer’s are off the hook for this one. All the more reason for buyers to sign a buyer’s rep agreement with a reputable real estate agent; they get all their expertise and negotiating skills for free.    http://myfavoritebeachproperty.com/whychooseme/

The realtor fees are split between the buyer’s agent and the listing agent, with the brokers taking a percentage of each agent’s commission. In large franchises like Keller Williams and Coldwell Banker, a portion of the commission is paid to the franchise. If the deal was procured by another agent or referral company, then part of the commission is paid to them–as much as 25-35% as a referral fee.

So while the seller may chaff at the idea of lopping off a chunk of their net proceeds, they need to realize that their agent doesn’t normally walk off with a small fortune.

Title Policy

The title policy is a type of insurance that is normally paid by the seller to the title company to make sure that the property they are selling has a “clean title.” This is an important step to make sure no lawsuits are forthcoming. This usually costs about 1% and can be paid by either party.  Always close deals with a reputable title company like Security Title  http://www.ccsecuritytitle.com/?page_id=2  Courtney Hayden is who I normally close with–so professional and thorough! Another good one in this area is Bay Area Title Company  http://www.bayareatitleservices.net/locations.php    Heidi Martinez is so helpful and always answers my “dumb questions.”

Property Taxes

Like death, TAXES are inevitable and you can be sure Uncle Sam will be at the title company with his hand out. The property taxes are prorated–that means the seller pays for the portion of the taxes incurred while they owned the property and the buyer pays for what portion of the year’s taxes that they will be owning the house.  If they are financing the property, this prorated tax will be rolled into the mortgage.  If the seller owes back taxes, they will have to get current, and their taxes, current and late, will be taken out of their proceeds at closing.

Survey

Unless the seller has a relatively current survey, a mortgage company will usually require a new survey to be done. Depending on the complexity of the property, existence of a pool and/or out buildings, the price is usually less than $500. Usually the prospective buyer will ask the seller to pay for this.  Even if the buyer is paying cash, and there’s no lender involved, I recommend that buyers either get a recent existing survey from the seller or pay to have a new one done.

Origination Fees

This a cost that the mortgage company charges for setting up the loan and usually runs between 0.5% – 1.0% Since the buyer is the one securing the mortgage, they pay this and any other fees required by their lender.

Appraisals

This one can be a sticky wicket!  A licensed appraiser evaluates the house or land according to the condition, size, location and market condition.  I have been pleased with the services of Mona Singleterry https://singleterryappraisalreconsultingllc.appraiserxsites.com/ContactUs

If the appraisal comes in less than the selling price, there’s a dilemma.  Either the seller can lower the price to the appraised value or the buyer can fork over the difference in cash or the deal falls apart.  If the real estate agent or the seller disagrees with the appraised value, they can pay for another one to be done. If they want, they can write a letter of appeal and hope to have the amount adjusted in their favor. The appraisal is done and paid for well before closing.

Home Warranty

This is a special type of insurance policy that covers the major home systems like plumbing and air-conditioning and even appliances. This is sometimes offered by the seller as a concession to the buyer and costs about $400-$500+ depending on the coverage and deductibles.  This is optional but recommended.

Some good ones are Chase McRoberts at  First American    https://homewarranty.firstam.com/ and  Bethany Fawkes at Fidelity National  http://reach150.com/fidelity-national-home-warranty/review/46331/bethany-fawkes but there are lots of other good ones to choose from.

Insurance

In areas near the ocean like the South Texas Coastal Bend, lenders usually require windstorm and flood insurance in addition to a regular homeowner’s policy. These can cost about 3-4% of the total cost of the home and are rolled into the mortgage.  If a buyer is paying cash, they can choose not get these additional policies and hope that Mother Nature shows mercy. Good luck with that!

PMI

Private Mortgage Insurance is charged when a buyer pays less than 20% down on the property when using a conventional loan.  It can cost between .3-1.5% of the loan’s value.  It can and should be cancelled when the buyer’s outstanding loan value drops below 78%.

For more information click here:  http://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx

Inspections

Even though most real estate agents check the “as is” box on the condition of the property, all buyers–even cash buyers—should do their due diligence when it comes to property condition.  This means hiring a professional licensed home inspector to go over that place with a fine-toothed comb–even if it’s brand new. Depending on the size and age of the property, this can run $350-500+.  Do not skip this step! 

After checking the roof, the foundation, electrical, plumbing and a myriad of other items, some inspectors will recommend getting additional inspections.  These might require the services of an HVAC technician, a foundation expert, a plumber (for hydrostatic test)  or a structural engineer.  These inspections are not cheap but could save a buyer thousands of dollars in the long run or prevent them from buying a bad property that’s not even fixable.

In addition to a basic home inspection, a buyer should hire a qualified pest inspector to check for the presence of or damage by wood-destroying insects like termites.  This usually costs less than $100 and well worth the peace of mind.

In the event that major defects are discovered during the Option Period (time between the offer is accepted and the closing), the buyer can request that the seller pay for some of the needed repairs.  Or they can reduce the price to cover the cost which I recommend because it is simpler to do and lenders usually prefer this option.

Sometimes the lender will require some repairs to be done as a stipulation for making the loan.  This is especially true when buyers are financing through the Veteran’s Administration as their standards are more stringent than other types of loans.  They will usually send their own inspectors and appraisers to evaluate the property.

If the buyer can not be satisfied with the solution offered by the seller, they have the right to kill the deal during the option period.

Other Fees

There are other charges incurred in a real estate transaction: recording fees, couriers, notary, document preparation fees and others.  These vary and usually can be negotiated.

Other Lingo Defined

This is by no means an exhaustive list of terms related to a real estate transaction.  Here’s a link to some other potentially confusing jargon:  http://www.realestateabc.com/glossary/

Be Aware of the Costs

Even the Bible warns of the danger of failing to count the cost before embarking on a building project. https://www.biblegateway.com/passage/?search=Luke+14%3A28-30&version=ESV

There are lots of costs associated with buying or selling property and as in any situation, consumers need to educate themselves in advance, so that there’s no surprises at the closing table. 

Who Can Help?

Always direct your question to the expert in their particular field.  For example, when you have title or closing questions, ask your escrow agent.  If you have mortgage issues or concerns, consult your lender.  Your real estate agent can and will answer questions about the contract and related documents. If you are still unclear about the explanation, hire a qualified attorney to explain it further.

For most people, a real estate transaction is the biggest financial undertaking of their lives.  It’s paramount to make sure you understand the language and terms of the deal before you sign anything.

FAQ’s Port Aransas Real Estate

  1. Will the rental income from my second home cover my mortgage?

Probably not —but it probably will cover some of the other costs like Property Taxes, Home Owner’s Association dues (HOA) and Management Fees for homes used for rental income.

Like Dave Ramsey   https://www.daveramsey.com/  says “Cash is king!” so if you have the wherewithal to pay cash, it’s better.

 https://www.thebalance.com/what-are-the-benefits-to-paying-cash-for-a-home-1798721

Other mortgage tips from Dave Ramsey :  https://www.daveramsey.com/blog/the-truth-about-mortgages

There are some great deals occasionally when the entry price is low enough for the buyer to have a positive cash flow after all expenses are covered.

  1. What kind of financing is allowed for second homes?

Usually conventional loans are the way to go.  To qualify for a conventional loan on a second home, you will typically need to meet higher credit score standards of 725 or even 750, depending on the lender. Your monthly debt-to-income ratio needs to be strong, particularly if you are attempting to limit your down payment to 20%. All borrowers need to fully document their income and assets for a second home loan, because lenders will need to see significant cash reserves to make sure you have the resources to handle payments on two homes. (ref: http://www.investopedia.com/  )
Some lenders will finance properties at big condo/hotels with special loans.

  1. Is a house or condo better for a second home at the beach?

Both have their advantages.  Condos don’t require grounds or exterior maintenance. They usually offer on-site amenities such as pools, hot tubs, some recreational facilities and some have easy beach access.  They also have HOA’s and management fees and there’s always the possibility of an assessment being levied. http://www.nolo.com/legal-encyclopedia/what-are-hoa-assessments.html

Houses (called detached) don’t have HOA’s unless they are in a community (gated or otherwise) or unless they are in a condo regime.  You are responsible for your own exterior maintenance and insurance.  They are sometimes easier and cheaper to finance than condos.

  1. What is an HOA and what do they cost/cover?

Home Owner’s Associations vary widely in what they cost and what all they cover.  The higher priced monthly dues usually cover flood/windstorm/exterior in addition to the maintenance of the pool and grounds.  Larger units in the same complex may have higher dues.  They mandate the size and type of house, the exterior color and types of roofs and trim.   Basic home owner association info here: http://www.investopedia.com/articles/mortgages-real-estate/08/homeowners-associations-tips.asp

  1. What do management companies charge and what do they do?

In addition to booking, management companies arrange for the housekeeping and repairs on the property.  Fees can range from 20-25% for third-party management companies, to 40-50% on the big condo-hotels or condo-tels Generally, if a property has a front office, they do on-site management or contract it out and do not allow third-party management.   https://www.biggerpockets.com/renewsblog/2006/08/03/what-are-condo-hotels-or-condotels-an-interview-with-joel-greene-part-i/

A small local management team is sometimes the best fit because they limit the number of properties they take care of.  http://www.visitporta.net/

  1. What about self-managing?

That’s an option, but it involves the owner being on-call all the time to book the unit and tend to repairs and maintenance when guests are in and check on the property condition each time guests check out.  But if owners are willing to do this and have some experience in property management, it can greatly enhance their bottom line.

  1. What is an assessment?

Condos levy assessments on property owners for big expenses such as roof repairs, repaving, resurfacing the pool and exterior painting.  They can cost home owners tens of thousands of dollars but improve the value of the property.  Usually, owners are given notice of a planned assessment several months in advance. Sometimes, motivated sellers will offer to pay the planned assessment for potential buyers.  See link above.

  1. What’s the occupancy rate?

Generally, a vacation home is rented during the high season from Memorial Day to Labor Day and a few other weekends before and after.  You can count on renting about 100 days per year.  Monthly rentals are done during the off season to “winter Texans.”  They pay a lower rate per day but are usually reliable tenants.  Some areas do not allow short term or “nightly” rentals, instead only permitting long term rentals–two week or one month minimums.

  1. Should I update or upgrade my unit to help it rent better?

Yes and no.  Vacation homes that are prettier and more updated will rent sooner than the others, but during the high season, most all of them get rented, regardless of how they look.  During the off-peak season, the cuter ones rent more because people can go online and view individual units.  When it’s time to sell, a little updating and redecorating usually help it sell more, as long as you don’t go overboard with spending.  Your place still needs to be in line with similar units especially in the same complex.  https://blog.evolvevacationrental.com/5-vacation-rental-upgrades-that-convince-travelers-to-book/

  1. What is the property tax rate in Port Aransas?

It is 1.82%.  Some condos and houses located further south on State Highway 361 are taxed in the Corpus Christi district at somewhat higher rate.  The cut off is the La Mirage Condominiums.  Properties south of this are in the Port Aransas zip code but in the Corpus taxing district.

  1. How much is windstorm and flood insurance?

On a 1500 square foot home, flood is about 900-1200, windstorm is around 2500.  Contents coverage is additional and varies with dollar amount covered.  Call a reputable agent to get specifics on the property you’re considering buying.  The local expert around here is Stephanie Waterman  https://agents.farmers.com/tx/corpus-christi/stephanie-waterman?SourceID=AMPL001L002&utm_source=GMB&utm_medium=Local

  1. How long does it take to close on a home?

With new government regulations, gone are the 30 day closings.  Most of the time, you should allow at least 45 days.

For fast reliable mortgage lending, I recommend Jennifer Perrin  or Juan Garcia at Starkey Mortgage.

jgarcia@starkeymtg.com

 https://www.starkeymtg.com/lo/JenniferPerrin

  1. What do I need to get started?

First, go speak with a lender, someone you trust.  I recommend going with a company that assigns a specific person to you, so you always talk to the same one to check the status of your loan.  They will need to pre-qualify for the loan.  They are mostly looking at how much you earn vs. how much you owe—to figure the debt to income ratio.

To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.  For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6000, then your debt-to-income ratio is 33 percent. ($2000 is 33% of $6000.) https://www.consumerfinance.gov/

The lender will give you a letter stating that you qualify for a certain amount, which is different than a pre-approval letter stating that they’d be willing to lend you that amount. They will also check your credit score, how reliable you are able paying your bills on a timely basis and if you have outstanding debt that you aren’t paying on.  Once you get pre-approved, it’s time to start saving money.  Don’t buy a new car, boat or other large purchase before you close on your house.

Contact a reliable realtor.  You will be spending lots of time with that person, so find someone you like, someone who’s honest and won’t just try to “sell you something.”  Tell them what you’re looking for and how much you want to spend so they can begin the search.  http://myfavoritebeachproperty.com/index.php/2016/11/22/whychooseme/

Once you identify that person, you should sign a buyer’s rep agreement with them, which is basically an employment contract.  Usually the sellers pay the real estate commission, so there’s no need to avoid this step.   http://www.realtor.com/advice/buy/what-is-a-buyers-agent-used-for/

  1. What is a buyer’s rep agreement and is this necessary?

A buyer’s rep agreement is basically an employment contract between a buyer and a realtor.  It states the time and the location in which a search will occur.  The realtor agrees to market the home in various ways and the buyer agrees to facilitate the sale.  If, at any time, the buyer feels the realtor is not doing an adequate job, they can break the agreement.  But since the seller usually pays the real estate commission in the transaction, there is no cost to the buyer.  The buyer then becomes a “client” as opposed to a “customer” and the realtor is able to negotiate the terms of a deal and be the buyer’s advocate.

  1. How important is online research when shopping for a home?

The National Association of Realtors found that 94% of millennials and 84% of baby boomers start their home search online.  Even home buyers over 65 start there first, as many as 65% of them do as well.  Keep in mind that real estate sites are only a place to start and that sometimes their information is incorrect or hasn’t been recently updated.  But it helps buyers sort through potential properties so that they can be more prepared when they meet with a realtor.

  1. How long will it take to find the right property?

The average time to find a property is as high as 11 weeks, according to the National Association of Realtors.  But like all bargains, the good ones get snapped up early.  When a buyer finds a good deal and they are ready, they should make an offer, particularly if it hasn’t been on the market long.  “Days on market” can tell a lot about a property. Sometimes, properties are overpriced and will languish on the market.  If that happens, the seller might be more motivated to take an offer, or they also might be the kind to put it on the market at an inflated price “just to see what happens.”

  1. What do I need to do before I list my home?

First, you need to “de-clutter.”  Since that can carry a negative connotation, I prefer the word “packing.”  Sellers need to realize that they are getting ready to close a chapter and move on to another, and this is an important first step.  Any personal items such as photos, memorabilia and calendars with the family’s schedule should be removed.  Before a showing is scheduled, be sure to store valuables in a secure location.

Any repairs, large or small that the seller can afford to do should be done prior to listing.  Some lenders will not loan money on a house that has big repairs needed.  Many times, the seller will end up paying for those, so they should go ahead and fix whatever they can before listing.

Then they should select a realtor that they feel comfortable with, someone they trust who has a proven track record and positive online reviews.

https://www.zillow.com/profile/lisahood25/#reviews

  1. What is “staging” and is it necessary?

Staging is a way to show the home in the best light to potential buyers.  It means to furnish and decorate a home with no personal touches.  Sellers should take out some of the furniture and accessories to make the rooms seem larger and uncluttered.  They should make sure the drive-up appeal is top notch with a manicured lawn and appealing entry.  The home should be well lit and spotlessly clean.  Buyers need to be able to visualize themselves living in that home, and having too much “stuff” detracts from that mental picture. Studies have shown that buyers are more attracted to homes that are staged and therefore more inclined to buy them.  Sellers can stage their homes themselves or hire a professional, which usually costs under $1000, a small price to pay when compared with their house staying on the market longer than necessary.  https://www.houzz.com/ideabooks/2661221/list/sell-your-home-fast-21-staging-tips

  1. How long will it take to sell my home?

According to a study publish in the Corpus Christi Caller Times, the average days on the market in this area is less than 90 days.  Of course that number varies widely depending on the zip codes.  Southside and Flour Bluff are booming areas because of their good schools and properties take less time to sell there.  Port Aransas, since it is a resort town, has a more seasonal market. Most of the homes are higher priced and are sold as second homes or investment properties.

20.  What’s the bottom line?

While you might make a decent return on investment by owning a second home in Port Aransas, there are other advantages to consider.  Port Aransas is a relatively short drive from Houston, Austin and San Antonio with thousands of  visitors flocking here for the hot times in the summer as well as the influx of Winter Texans during the off season. So there’s always a steady supply of vacationers ready to rent properties.  And the beach is always a great place to make memories with family and friends.  It’s convenient to have your own place to stay when you come and a guarantee that you’ll come more often.  There are some tax benefits and write-offs you can take advantage of.  And when you are ready to sell, it is highly possible that your beach house will have appreciated in value.  After the historic real estate market crash of 2009, properties have rebounded in price and continue to appreciate.   With all the industry moving to the Corpus Christi area, the current building boom is sure to continue for the foreseeable future.