Explainer: What is Earnest Money?
Earnest money is an important component in real estate transactions, serving as a tangible commitment from the buyer to the seller. Essentially, it's a deposit made by the buyer to demonstrate their seriousness about purchasing the property. This deposit is typically 1% of the purchase price (or rounded up to the nearest thousand dollars our nearest $5,000), is deposited within 48 hours of going under contract (in the state of Minnesota), and is held in an escrow account until the closing of the transaction. Earnest money performs two important functions 1) it helps protect the seller against disingenuous offers and 2) compensates the seller for time the property is suspended from active marketing. Earnest money acts as "skin in the game" that is put forth by buyers which shows the earnest intent of the buyer to follow through with their offer. After going under contract with a buyer, the seller will generally stop actively marketing the property to the public. If the buyer decides to back out of the deal without a valid reason as outlined in the purchase agreement (e.g., failing to meet contingencies like securing financing or satisfactory inspection results), the seller may be entitled to keep the earnest money as compensation for the time and opportunities lost while the property was off the market. Conversely, if the transaction proceeds smoothly and reaches closing, the earnest money is applied towards the buyer's down payment and closing costs. This process helps build trust between the buyer and seller and keeps the transaction moving forward by providing a financial incentive for both parties to adhere to the agreed terms.
Three Key Factors of Real Estate: The Pick 2 Rule
Finding your dream home is an exciting yet challenging adventure, filled with important decisions and the need to balance your priorities. Unless you've hit the jackpot or found a generous benefactor (we're all waiting for that Sugar Daddy/Momma moment, aren't we?), the reality is that choices must be made and priorities set. Essentially, the journey to the perfect home revolves around the Three Key Factors of Real Estate: Price, Quality, and Location. Using this framework can help you to better hone your house-hunting strategy, guiding you towards a home that you can really be proud of. This guide aims to delve into the art of balancing these key factors, helping you make an informed decision that aligns with your priorities. Remember, real estate is not just about finding a place to live; it's about discovering a space that resonates with your lifestyle. Understanding the Three Key Factors of Real Estate: Price, Quality, Location Price: The financial aspect of real estate cannot be overlooked. It determines not just what you can afford, but also influences future value. There may be many opportunities throughout your ownership to potentially improve the financial picture by refinancing or creating additional revenue from the property, but you can’t really go back and change the purchase price after closing. Quality: A simple concept with many facets, the “quality” of a property can describe the condition, architectural integrity, and even innate potential for enhancements that contribute to a properties value. For the most part, you can always change or improve the quality of the property. The catch is, anything is really possible, but at what cost? The price of labor and materials are always going up and you may or may not get your investment back when you sell if you do not invest wisely. Also consider that DIY projects can enhance appeal or detract when improperly applied. Location: As they always say, “Location, Location, Location.” For some, the most important factor in Real Estate, as it’s the thing you can never change. You can build a new house or replace all of the landscaping, you can even relocate a house, but you can’t move the land. It’s all about accessibility, neighborhood, and potential future growth. Make sure to carefully consider where you plant your flag. The Pick Two Rule Buying a home is a process defined by choices. While it's unlikely that you'll tick every box on your wishlist, the right strategy can bring you remarkably close to your ideal home. The 'Pick Two Rule' in real estate embodies this decision-making process: you can prioritize two out of the Three Key Factors of Real Estate. However, the third factor will likely require some compromise. This is essentially a balancing act. While the third factor remains important, it may not hold as much weight as the first two and is the one most likely to need adjustment in your list of priorities. Here is how some of those scenarios might play out: Price + Quality > Location A home with a great price and good quality probably isn’t located in your ideal location. When you are just starting out, price can be the overriding factor as it can be the highest barrier to entry for homeownership. Maybe this is a ‘5-year home’ allowing you to get the “equity” snowball rolling and be your training wheels before you own your dream home. If this is your “forever home” then you will definitely want to make this decision carefully. Location + Price > Quality A great price in a great location?! What could be wrong? Likely in this scenario the home was well-loved and well-worn, and now the next owner will need to repair and update the home. This is the ideal situation for someone looking for a fixer-upper or someone with particular taste. The next owner can decide how the home will look without tearing out the brand new granite countertops they don’t like or re-tiling the once-trendy bathroom that makes them nauseous. If you are less than handy or are less likely to afford the needed repairs and updates make sure that you are comfortable living in its current condition for a while. Quality + Location > Price A story as old as time: you are searching online for the perfect home and you see it, and it's exactly where you want to be. The only thing left is to look at what the seller’s are asking for the home… and then the sticker shock hits. These homes are undoubtedly ideal, but often lie outside a realistic budget. Homeownership isn’t about stretching yourself to (or beyond) your means and becoming “house-poor.” Be sure to evaluate your entire financial situation, career growth, and family plans before buying the “perfect” home that sucks up all your disposable income and leaves you eating ramen on chairs made from stacked milk crates. Navigating the complex world of real estate through the lens of the 'Pick Two Rule' offers a strategic approach to finding your dream home. It's a balancing act between Price, Quality, and Location – each holding its unique significance. While it's rare to find a property that perfectly aligns with every aspect of your wishlist, understanding and prioritizing these key factors can lead you to a home that not only meets your needs but also brings you joy and satisfaction. Remember, the journey to homeownership is not just about the destination but about making choices that resonate with your lifestyle and future aspirations. With careful consideration and a bit of compromise, you're well on your way to planting your flag in a place you'll be proud to call home.
From Looking to Closing and All the Steps In Between
For many, homeownership is a major milestone to accomplish during their lifetime. Having a roadmap to achieving this milestone can reduce the amount of time wanting a home and increase the the amount of time owning a home. But how do you make that first step from casually looking at websites like Zillow or Trulia and driving around noticing 'For Sale' signs to actually becoming a homeowner? It is a process that we have helped many homebuyers go through time and again and here we will lay out the major milestones and many considerations. 1) Casual Search The casual search phase is an important starting point in everyone's home search journey. Seeing what is on the market, what size, location, and condition go for what price is important to build realistic expectations. In addition to searching you can get a rough estimate of what you can afford by getting prequalified for a loan. This is an input-only calculation that relies on your honest answers to provide an estimate of how much house you can afford and what size loan you may be able to qualify for. Because no one is verifying the information you are providing a prequalification is only a starting tool to point you in the right direction rather than a sure-thing. 2) Serious Search The serious search is broken up into two phases, first is the educational phase and the second is the offer-making phase. Starting to get more serious in your search means connecting with a Realtor® who can get you direct access to the multiple listings service (MLS). Your local MLS is the direct source of all homes coming to or currently on the market in your area. Websites like Zillow and Trulia are second-hand users of information that comes from the MLS and can take them 24 - 96 hours to update from it. This is why in a hot market by the time you see a house on Zillow it has already been snagged by someone else - someone who had direct access to the MLS and saw it before it was even on those websites. Unless you have ample cash on hand you will also need to connect with a mortgage lender. A mortgage lender will be able to preapprove you for a loan and give you the sure-thing when it comes to knowing how much house you can afford. To preapprove you a mortgage lender will request financial information such as your current income (supported with documentation such as W-2s, tax returns, and recent pay stubs), assets, and other debts (and their monthly payment amounts). Mortgage lenders verify the information you provide them which is what gives weight to their preapproval. In the current market all offers that are being financed must be supported with a preapproval for that offer to be taken seriously. Educational Phase The educational phase is making the first leap from looking at pictures online to seeing homes in person. What our buyers often remark is that the pictures can obscure defects or focus away from issues so that once they step inside the house they see everything "warts and all". It is also important during this phase to really consider how you want to live in your future home and what aspects are most important to you. If you have three kids then you may need four bedrooms; if you work from home you may need a dedicated office space; if you love to cook the size and condition of the kitchen may be more important than the size of the bedroom closets, etc. There is no substitute for actually getting inside a home and seeing it for yourself to truly understand what you want and need in a home. Offer-Making Phase After seeing several homes in person you have started to form a good idea of what kind of home will suit you best. This is when you will feel confident when you walk into a home that, yes, this is the one. To make it your house you must make a formal offer, filling out a purchase agreement, and signing it saying these are the terms you are offering for the home. The most consequential terms are the offer price, downpayment/amount financed, type of financing, closing date, inspection contingency, and sale of buyer's property contingency. There are certainly other important terms but those above will often be what the seller is using to consider whether or not to accept your offer. 3) Under Contract Good news! Your offer was accepted and the seller signed your purchase agreement. You are now under contract to buy the house! The next steps here are to clear any and all contingencies. Consider contingencies little questionmarks that need to be resolved prior to closing on the house. The most frequent contingencies we see are the inspection contingency and the financing contingency. The inspection contingency is a period of time that the buyer may elect into which allows them to have an inspector inspect the property for any issues that weren't disclosed by the sellers or generally noticeable when you saw the property. If issues do arise you have the ability to renegotiate with the seller to account for prior unknown deficiencies of the property. The renegotiation must be agreed to by both parties before the inspection period closes for it to be legally recognized. The financing contingency generally runs until close, however, the buyer generally has greater assurance that financing will not fall through the further along they go. The financing contingency may be tripped if the buyer no longer qualifies for a large enough loan to purchase the home. This can happen for any number of reasons but the most common are the buyer losing their job (source of income) or they finance another expensive piece of property (ex. a boat or a car) that raises their debt payments too high. 4) Clear to Close This is when the mortgage lender has approved your file and assuming no major financial changes (i.e. loss of job or taking on a large debt) you will be able to close on the date specified in the purchase agreement. This usually occurs a week or a couple days prior to closing (depending on how long the period is between making your offer and closing). Around a week prior to close you will also want to start connecting with utility companies to schedule transfer of service into your name and provide payment information. This ensures a smooth transition for utility use and avoids potential disruption of utility service. 5) Closing The day has arrived: closing day. Everything you have worked hard for is finally here. Here are some things to expect on closing day: * A qualified closer from the title company will walk you through each of the documents to sign, initial, and date. * Expect the closing to last between 15 minutes and 45 minutes. If you are financing using down payment assistance it may be on the longer end. If you are paying cash you may be on the shorter end. * Bring a cashiers check or schedule a wire transfer in the amount indicated by the lender that will be needed for the close. * Bring your government-issued photo I.D. * Don't expect to see the seller(s) at the closing table. Since COVID-19 the close process has been altered so that the seller(s) often sign their documents prior to close or at a separate location. * Once you finish signing all the paperwork the keys will be handed over to you (unless the purchase agreement indicated a date of possession after the close). The home is now yours!
Categories
