1. How Much Do I Pay My Real Estate Agent?
If you’re buying a home, you don’t pay your realtor. You should definitely have an expert guide you through the process and look out for your best interests. A real estate agent is held by law to owe specific duties to their client. When a seller lists a home, he/she makes an agreement that the agent will be paid (typically) 6% of the sales price of the home in commission. Half of this will go to the agent who brings a buyer. Most agents must then pay their brokerage a cut of their commission and put aside a percentage for taxes.
2. What is Earnest & Option Money?
Earnest Money: When reviewing the contract, one of the pages will discuss “option period” and “earnest money.” Earnest money is provided by the buyer so that the seller takes the offer seriously. You’re using these funds to show the seller you’re “earnest: about buying their house. Don’t confuse this with the down payment on the house. They are two separate things. The earnest money check is turned into the title company, who will hold it in an escrow account. You will lose the earnest money if you breach the contract. Otherwise, this is a deposit, and you will get it back, or it can be applied to your down payment amount at closing.
Option Money: The option period, along with the option check, buys you time to have home inspections done and negotiate any final terms or repairs with the seller. For example, if you have a six-day option period written in the contract, you’ll have six days to have your inspection completed, come up with repairs you want, and make negotiations with the seller. Unlike earnest money, you will not get this back, but this tends to be a lot less money — typically around $100-$300. I’ve seen option period lengths as long as 12 days or as little as two days. It will depend on many things and can be used as a negotiation tactic if there are multiple offers. For example, shortening your option period as a buyer will make your offer more appealing if there are multiple. You have 48 hours to turn in earnest and option money checks.
3. How Much Money Will I Need?
Although this is a job for your lender, I can tell you a few of the costs you will need to consider.
- Cash to close: Cash to close is the amount of money you bring to closing, which includes your down payment, closing costs, and escrows for property taxes and homeowners insurance.
The following costs will be due on the day you close. Your title company will help set up closing and money wiring.
- Down payment (3-20% of sale price)
- Example: If you bought a home for $250,000, your closing costs could be anywhere from $7,500 to $50,000.
- Your lender will help you decide what makes the most sense for you financially.
- Closing costs (2-5% of sale price)
- These are costs associated with your home that need to be paid in advance when getting a loan that will accrue between the closing date and month-end.
- Property Taxes
- Homeowner’s Insurance
- Mortgage Interest
Other Potential Costs that may be included in your closing costs:
- Appraisal Fee
- Credit Report Fee
- Loan Origination Charge
- Title Services & Lender’s Title Insurance Fees
- Owner’s Title Insurance
- Recording Charges
- Wire Transfer Fee
- Prepaid Mortgage Interest
- Property Taxes
- Prorated Taxes
- Homeowners Insurance Reserves
- County Property Tax Reserves
4. Why Do I Keep Hearing I Need a 20% Down Payment?
When purchasing a property, the majority of the population won’t pay 100% of the sales price in cash and must go through a local lender or bank to borrow money. Buyers then need to consider how much money should be used as a down payment. When I was growing up, my dad always told me it was best to have no less than a 20% down payment. His argument was he didn’t want to pay PMI (Private Mortgage Insurance). That cost is typically 0.5 to 1.0% of the loan amount and is charged to a buyer who puts less than 20% down on their home. So, if your loan amount were $100,000, meaning you’re borrowing $100,000, you would pay at most $1,000 a year extra, for PMI, if you put less than 20% for a down payment. Consider your own situation. Do you want to tie up that much money—a 20% down payment? Or, is that your rainy day fund? Think about how “liquid” you need your cash to be. Paying 3 to 15% down payment may not be so bad! Think of the risk vs. return. Your lender will be the best resource to figure out what’s right for you.
5. Should I Buy or Rent?
Many discuss rising home costs in Austin, but rent is also going up. So, what is rent? Money you are never going to see again. If you’re financially capable of buying and planning to live in Austin for at least a couple of years, more often than not, it makes sense for you to buy. If you want to lower your monthly payment, you may consider getting a roommate, utilizing Airbnb, or short-term rentals programs like Homads.
6. How Do I Make an Offer in Austin’s “Hot Market”?
In Austin’s competitive market, roughly 52% of offers face bidding wars among buyers. Make sure you’re prepared to make moves fairly quickly if you want a home in a popular neighborhood.
There can be multiple reasons a seller chooses another offer over yours, and you can never know exactly what the seller is thinking or know who your competition is. One of the tricks I tell my clients is to write a note to the seller, explaining why you will love and cherish their home and attach a picture of yourself. This could put you ahead of the competition! You must put in the effort to make this “business transaction” more personal. It isn’t just money and cement; it’s your future home. Maybe you will raise kids here! Maybe you will grow old here! The seller may not care, but it could tug their heartstrings. That said, no matter how much you play on the seller’s emotions, you won’t win a bidding war with a low-ball offer and a cute picture of your family. You need to be a strong buyer and also add a few personal touches to make yourself relatable and more than just a source of cash.
In Austin, while you need to be prepared to pay full price or over asking price, don’t assume you will always do this. A lot of sellers get caught up in the hype they hear about Austin’s hot market, and they may think they can list their home for over market value. These homes will not sell quickly, and these homes will not be sold for over the asking price, or even near the asking price! Properties that will go into multiple offer situations are priced according to market value and in high demand neighborhoods.
When you put an offer on a home, it may be a good idea for your loan officer (lender) to call the seller’s agent, not only as a friendly introduction but to also reassure the seller’s real estate agent that you’re a qualified buyer. There are a lot of “over promise, under deliver” situations that can often occur with banks and lenders. If a potential buyer’s lender is the type of person to call and communicate well with me—major brownie points in my book! Everybody wants a smooth and easy transaction, and this will happen with a team who communicates well and often.
Other tactics to consider if you are in a multiple offer situation are:
- Offering over list price.
- Shortening your option period.
- Using conventional loan instead of FHA loan (Federal Housing Administration).
- This will be discussed in more detail further along.
- A quicker close. Make sure to clear this with your lender first.
- Getting “conditionally approved” and waiving your financing contingency in your offer. Discuss this with your lender first.
- Don’t ask the seller to pay for closing costs.
7. How Do You Avoid Losing Your Earnest Money?
To avoid losing your earnest money, you should not breach the contract. The following examples are ways that you may breach a contract.
If you waive your contingencies but then still try to back out of the contract.
- By waiving your financing contingency, when submitting an offer, you are stating that you do not need or expect a refund if your lender does not approve funding.
If you ignored crucial dates in the contract.
- Items to look over in your contract that have dates attached to them include: option period, financing, title, survey, and seller’s disclosure.
If you randomly decide, nah, this home isn’t for me.
- If there’s nothing wrong with the property or your financing, and you are past your option period, chances are you’re NOT getting that earnest money back.
8. Why Would a Seller Be Hesitant with FHA Buyers?
An FHA loan is government-backed and allows people to buy a home with a down payment as low as 3.5%. Unlike a conventional loan, with FHA you need to meet two sets of qualification criteria: the lender’s criteria AND the government’s. By insuring the mortgage, the government is guaranteeing that the lender will be repaid even if the borrower defaults on the loan. This program can be great for people whom otherwise may not be able to afford to buy a home. If you are an FHA buyer making an offer on a home in a popular area, it will be crucial for your lender to call the sellers agent to reassure them that you’re qualified. A seller and their realtor may be concerned that an FHA deal may fall through because of finances.
When a seller and an agent review multiple offers, a buyer’s financing is considered up front. A better loan is a better offer, if all the other contingencies are equal, a better loan has the best chance of closing. All FHA concerns mainly stem from these questions: Will this person be approved? Will we close on time, or at all?
9. Will the Seller Pay My Closing Costs in Austin?
In Austin’s hot market, it may be harder to get the seller to pay your closing costs, but it depends on the area and the situation. I would recommend looking at property that’s been on the market for over 30 days and checking the surrounding homes in the neighborhood. What’s the average amount of time they spend on the market? What’s the average sales price? Below asking? You may have a shot. The worst that can happen is the seller says, “No.” Also, remember you always have to come up with your down payment. This means, your agent, lender, or seller cannot help you—your family, on the other hand, may gift you the down payment money. Anyone can gift up to $14,000 tax-free a year.
10. Do All Austin HOAs Have the Same Rules?
No. In Texas, the condo contracts require that the seller discloses Homeowners Association Information to a prospective buyer after they go under contract. A buyer has the right to terminate within six days after the condominium documents and resale certificate are delivered. Your real estate agent can help answer some of the questions about the HOA before you go under contract. Remember, your option period is a way to pull out of the contract no matter what. The only penalty is losing your option money check.
11. What are Deed Restrictions?
When you buy a home, there may be certain conditions that prohibit you from doing certain things. These stipulations are known as deed restrictions. Properties that don’t have an HOA still have deed restrictions, but the enforcement may not be as strict as it would be with an HOA. In short, your neighbor would have to hire a lawyer to enforce something. Common deed restrictions include:
- How or if you can rent out your home.
- The number of rooms you can add on.
- Landscaping: what you can plant or how you maintain your lawn.
- The style of homes allowed.
- If you can run a business from home.
- Rules about pets.
- Exterior paint colors.
- Fees for road maintenance or amenities.
12. Building a Custom Home
When it comes to building a home, finding the right lot may seem like a chore. What many people don’t realize is that sometimes builders own multiple lots in many different neighborhoods. They may even have access to “unlisted” lots through their neighborhood relationships. It’s very important to find reputable builders. A few important things to know about your builder:
- How many homes is the builder working on at once? How are the projects managed?
- How many homes does the builder complete in a year? Include start and completion times.
- Does the builder use the same sub-contractors?
- How does the builder bid your homes? Fixed cost? Cost plus?
- How is client communication handled through the process?
And many more! Your real estate agent will help you pick the right builder for your wants and needs. It’s very important to have them by your side to make sure timelines are being met, and somebody is looking out for your best interests.
13. Does Austin Have High Property Taxes?
Yes, we do…HOWEVER, Austin doesn’t have state income tax. Most find that with the higher property taxes it comes out to be about the same. The 2.1 to 2.4% range is apretty average tax rate for Austin, but it can be anywhere between 1.8 to 3.3%. You often see 3% or more in new developments; usually this is tacked on toward the infrastructure of the development. You can find out how much you will pay in yearly taxes by multiplying the tax rate by the sale price. If you use my home search, there is a mortgage calculator built in that will show you what your mortgage payment is, including the tax rate. Remember, your monthly mortgage payment includes principal, interest, homeowners insurance, and property taxes.
14. What Are The “First Time Buyer Benefits”?
You can take up to $10,000 from your IRA without a penalty for early withdrawal, and a couple can use $20,000 combined.
The city of Austin’s has a few first-time buyer programs that you may be eligible for. They can assist with your down payment and possibly closing costs. You can check AustinTexas.gov for more information.
Even if you have owned a home before, you may still be eligible for first-time buyer benefits. For example, the federal government’s definition of a first-time homebuyer is someone who hasn’t owned a personal residence in the past three years.
15. Common Homestead Exemptions?
You can lower your taxes each year if you file an exemption on your primary residence. The only thing you need is a photo ID and proof of residence, and an application from your county of residence. It’s free to apply, and the deadline is April 30th, but you must’ve lived in your home as of January 1st of the tax year for which you’re applying, to be eligible.
Another common tax exemption is a home sale exclusion. To qualify, you need to live in your primary residence for at least two years out of the five years leading up to the sale. Up to $250,000 of profit from the sale of your home can be tax-free; $500,000 if you are married.
Some people avoid paying capital gains tax on their home by doing a 1031 exchange. This is when you use the proceeds from your house to buy another house that is of equal or greater value of the home you’re selling.