16 Frequently Asked Questions About the Buying Process (cta)

  1. How much are property taxes?
  2. What about Home Owner’s Insurance?
  3. Is mortgage financing available for Canadians and other foreigners?
  4. What is the difference between pre-qualification and pre-approval for a mortgage?
  5. How much do I need for a down payment and closing costs?
  6. What is the impact of FICO scores on interest rates?
  7. What are Buyer’s closing costs?
  8. What are Seller closing costs?
  9. Do I need a home inspection?
  10. Do I need a termite or mold inspection?
  11. What are some of the differences between an “As Is” real estate purchase contract and a standard purchase real estate contract?
  12. If a property is offered “As Is”, does that mean it has problems?
  13. Is square footage in a home a good way to estimate its market value?
  14. What is a CMA?
  15. What is an appraisal?
  16. Why Should a Buyer sign an exclusive Buyer Representation Agreement?

Q 1:  How much are property taxes?

Property taxes vary somewhat from one community to another.  However, as a rule of thumb multiply the property value aby 1.7% and you will be in the ballpark.

Property taxes in Florida are paid in arrears.  The current year tax bill is mailed November 1 st and taxes can be paid any time before becoming delinquent April 1st.  Taxpayers receive a 4% discount for paying in November, 3% in December, 2% in January and 1% if paid in February.

Homestead exemption is available to owners who make the property their primary residence and it reduces the taxable value by $25,000.  This translates into a saving of about $500 annually. On January 29, 2008, voter approved an additional $25,000 exemption excluding the mil levy portion that goes to schools. A property that qualified for A Homestead Exemption on January 1st will be taxed as such when the bill comes out in November even if the property is sold during the current year.

Florida’s Save Our Homes cap limits annual tax increases to no more than 3% for homesteaded property.  An owner who has homesteaded the property for more than a few years stands to have a much lower property tax bill than his neighbor who bought their home recently.  The cap on annual increases is removed upon sale and the new owner is taxed on the current taxable value that is maintained in the tax records.

Tax and property information can be found by searching the Pinellas County Property Appraiser’s website.  The site contains lots of information about property taxes in general, homestead exemptions, the Save Our Homes cap and more.

Q2:  How much does homeowner’s insurance cost?

Homeowner’s insurance premiums have risen in Florida over the last several years.  The cost of insurance in St. Petersburg is dependent upon many variables such as age, type of structure, wiring, roof garage and location

Citizens, created in 2002 as a safety net for homeowners, is now the second-largest insurer in the state, carrying 70 percent of Miami-Dade County policies alone. This summer it anticipates becoming the largest homeowners’ insurer in Florida, with 1.2 million policies.

Insure for 100% of rebuilding costs. The amount of insurance you buy should be based on the cost of rebuilding, and not on the price of your home.  Most policies cover replacement cost for structural damage, but check with your insurance agent to make sure your policy does this.  A replacement cost policy will pay for the repair or replacement of damaged property with materials of similar kind and quality.  The insurance company won’t deduct for depreciation, decrease in value due to age, wear and tear and other factors.

Q3:  Is mortgage financing available for Canadians and other foreigners?

One of the common misconceptions regarding the purchase of property in the United States by a non-US citizen is that can only purchase real estate with cash.  Also note that foreign banks including Canadian lenders cannot offer a traditional mortgage on Canadian-owned US property since they have no legal means to take possession if the US mortgage is in default.

Q4:  What is the difference between Pre-Qualification and Pre-Approval for a mortgage? 

Many buyers get lulled into the mistaken notion that if a lender pre-qualifies them for a mortgage this means that they have been pre-approved for a home loan.  Unfortunately, there’s a world of difference between these two terms.

Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home. Your pre-qualified amount is not a sure thing; it’s just the amount for which you might expect to be approved.  For this reason, a pre-qualified buyer doesn’t carry the same weight as a pre-approved buyer who has been more thoroughly investigated.  This misunderstanding can mean disaster for borrowers.

Pre-approval usually means that the lender is ready to make you a mortgage loan based on the information and documentation you provide at the time you requested a preapproval.  You will complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating.  (Typically at this stage, you will not have found a house yet, so any reference to “property” on the application will be left blank.)  From this, the lender can tell you the specific mortgage amount for which you are approved.  You’ll also have a better ideal of the interest rate you will be charged on the loan and, in some cases you might be able to lock-in a specific rate.

With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level.  Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.

The final step in the process is what’s called a “loan commitment”, which is only issued by a bank when it has approved you, the borrower, and the house in question.  This means the home should be appraised at or above the sales price.  The bank may also require more information if the appraiser brings up anything he or she feels should be investigated (i.e. structural problems, accessibility issues, outstanding liens or litigation in progress).  Your income and credit profile will be checked once again to ensure nothing has changed since the initial approval.

A loan commitment letter is issued only when the bank is certain it will lend, so the commitment date on your purchase contract should be closer to closing than to the date of your offer.  (The seller can ask to see that letter as soon as the date has passed, so beware of anyone who tries to put an early commitment date into your contract).

One last word, be forewarned, Pre-approved and pre-qualified are not the same thing, so don’t assume that the bank will provide your loan until you have the former.  The mistake could cost you your new home!

Q5:  How much do I need for a down payment and closing costs?

A down payment is the difference between the purchase loan and the price of the house.  An earnest money deposit is the amount of money paid to secure a purchase contract.  It is part of your down payment.  The earnest deposit can vary from a small amount to a sizeable percentage of the purchase price.  It is money that can be at risk if a buyer defaults on the contract and is known as liquidated damages.  It shows the buyer has good faith intentions to buy the home.

The amount of minimum down payment required will depend on the type of loan that the buyer chooses.  The minimum down payment champion is the VA loan.  A VA loan, created by the government in 1944, offers competitive rates and no down payment to past and present military members of our armed services.

Another government program, the FHA loan, has been around even longer than the VA loan program.  FHA loans have been part of the American mortgage system since 1934.  The minimum down payment requirement for an FHA loan is 3.5%.  For a $100,000 sales price, the minimum down payment is $3,500.  There is also a mortgage insurance (MI) premium that can be folded into the loan.

Most conventional loans are fixed-rate mortgages.  These types of loans have offered flexible down payment plans in the past but the push for the future is to increase the down payment minimums.  While 100% loans are not available, typically you can find, with a high enough FICO score (Excellent 720-850, Good 660-719, Fair 620-659, Bad <620), a loan for a 5% down payment.  There are also 10% down payment and 25 % down payment loans.  All 3 of these types of loans involve Private Mortgage Insurance (PMI).  With 20% down, there is no PMI.

Buyers often overlook the impact of closing costs until they reach the end of their purchase transaction.  Closing costs for buyers are tied to processing paperwork and range from 2% to 7% of the sale price.  Some costs stem from the loan application while others, such as the appraisal, relate to the dwelling.

Q6:  What is the impact of FICO scores on interest rates?

The following example shows the estimated FICO score effect on your mortgage rate in Florida:

FICO Score            30Yr Fixed Mortgage           Differential    

  • 760 – 850                       3.780%                           .22%
  • 700 – 759                        4.003                             .18
  • 660 – 679                        4.180                              .22
  • 640 – 659                        4.395                              .98
  • 620 – 639                        5.375

Q7: What are buyer closing costs?

People often overlook the impact of closing costs until they reach the end of their purchase transaction.  Closing costs for buyers are tied to processing paperwork and range from 2% to 7% of the sale price.  Some costs stem from the loan application while others, such as the appraisal, relate to the dwelling.  Closing costs for buyer may include:

Title Closing Costs:

  • Title Insurance
  • Closing, Examination and other miscellaneous fees
  • Taxes Proration

Loan Closing Costs:

  • Endorsements
  • Loan Origination fee
  • Appraisal
  • Survey
  • Credit Report
  • Flood Certificate
  • Termite Inspection
  • Loan Discount Points
  • Documentation Stamps (Note)
  • Intangible Tax on Note
  • Mortgage recording fee
  • Fees charge for obtaining a mortgage
  • The cost of home inspections
  • Homeowner’s insurance

Buyer Pre-pays:

  • Property Taxes
  • Homeowner insurance escrow
  • Private Mortgage Insurance Escrow
  • Title insurance and settlement fees
  • Transfer taxes, which sometimes are shared with sellers

Q8:  What are Seller Closing Costs?

Sellers also have closing cost and can be as expensive as those facing buyers.  Sellers typically Aare expected to pay:

  • Owner’s Title Insurance Policy
  • Title Search
  • Closing Fee
  • Documentary Stamp Tax on Deed
  • Recording Fees
  • Loan payoff costs, including possible prepayment penalty fees
  • Tax proration
  • Commission

Q9:  Do I need a home inspection?

A home inspection is not required but is advisable.  It is the buyer’s option and expense which is normally paid at the time of the inspection rather than at closing like most other costs.

The sale and purchase contract used and provided by the Florida Association of Realtors specifies that the seller warrants that everything will be in working condition.  The standard home inspector’s report will cover the home’s heating system; central air conditioning system (temperature permitting); interior plumbing and electrical systems; the roof, attic and visible insulation; walls; ceilings; floors; windows and doors and structural components.

If the home inspector finds anything not functioning as it was designed to function, the seller pays to have it repaired.  The seller’s liability for repairs is limited to 1.5% of the purchase price, by default, which can be negotiated.  If you don’t have a home inspection, there’s nothing to require the seller to make repairs.

The American Society of Home Inspectors (ASHI) publishes a Standards of Practice and Code of Ethics that outlines what you should expect to be cover in your home inspection report.

Buying a home could be the largest single investment you will ever make.  To minimize unpleasant surprises and unexpected difficulties, you’ll want to learn as much as you can about the newly constructed or existing house before you buy it.  After the inspection, you will know more about the house, which will allow you to make decisions with confidence.

If you already are a homeowner, a home inspection can identify problems in the making and suggest preventive measures that might help you avoid costly future repairs.  If you are planning to sell your home, a home inspection can give you the opportunity to make repairs that will put the house in better selling condition.

Q10:  Do I need a termite inspection?

Termite inspections are a good idea, especially for houses, if you are getting a mortgage, the lender will normally require a termite inspection for a house.  Lenders normally do not require a termite inspection if you are buying a condo.  If termites are found, the seller is typically required to exterminate you are buying “As Is”

Q11: What are some of the differences between an “As Is” real estate purchase contract and a standard purchase real estate contract? 

There are actually two main categories of standard contracts:  Florida Association of Realtors (FAR) and the Bar Association and Florida Association of Realtors (FAR/BAR).  The FAR/BAR “AS Is” contract gives the buyer the absolute right to cancel for any reason up until the expiration period ends.  The FAR/BAR contract usually has inserted an inspection period of 7 days.  The FAR/BAR also allows you to bring a lawsuit versus the FAR that has an arbitration clause.  The FAR/BAR contract uses “calendar days” to compute time periods versus “business days” on the FAR contract.  FAR contract will make it more difficult for a buyer to cancel because they will have to jump over a lot of hoops.

On a standard Florida contract the seller is obligated to repair or credit the buyer for repairs up to a certain amount.  The default is 1.5% of the purchase price for any item in need of repairs.  There are three sections which the seller is obligated for.  The first one is your standard inspection including mold.  This covers anything in the home which is not in working order at the time of inspection, and anything structural which is found.  The 2nd section covers wood destroying organisms and wood rot.  The 3 rd section which was recently added and cleverly so is in regards to outstanding permits, anything built without proper permitting.  Buyer and seller are locked in with a standard contract as opposed to an “As Is” contract.  If the amount of repairs needed are estimated to cost less than 1.5% (or otherwise agreed) the seller must address the issues and the buyer is obligated to move forward.  Should the amount of repairs exceed the 1.5% in cost for any of the sections mentioned above then buyer and seller have the option to negotiate or cancel the contract and buyer will receive a full refund of deposit.

On an “As Is” contract the buyer normally has a shorter time period for inspections.  During this time period the buyer can essentially back out for almost any reason whatsoever.  The seller is not obligated to repair anything found during the inspections, however, this doesn’t take away the right to negotiate should something major come up.  REO’s foreclosures, short sales and most any other type of distress sales in today’s market are always “As Is” with right to inspect.  The banks normally are not willing to do any repairs needed, which may have been found on an inspection.  You rare taking the property as you see it period, however your inspection period is your safety cushion to make sure you are comfortable moving forward before your money turn non-refundable

In summary there are basically two standard contracts in use for the sale and purchase of real estate in Florida. One is recommended by Florida Realtors and referred to as the Florida Realtors Contract and the second is recommended jointly by Florida Realtors and the Florida Bar and is referred to as the Florida Realtors/Florida Bar Contract. Of the two, the Florida Realtors/Florida Bar tends to be more neutral or equally fair to both parties. I also recommend it because the Florida BAR Association has a standing committee dedicated to reviewing the form and recommending changes as needed to be consistent with statute updates and case law.

Q12:  If a property is offered “As Is”, does that mean it has problems?

No, most often when a property is offered “As Is” , it’s so the seller doesn’t have to be bothered fixing a loose doorknob, a door that doesn’t latch, an air conditioner that needs service, stuff like that.  Usually, a home inspection will turn up small things that would need to be repaired under the strict terms of the seller’s warranty.  If major issues are found, you have the right to cancel the contract without losing your earnest deposit.  The FAR/BAR “AS Is” contract gives the buyer the absolute right to cancel for any reason up until the inspection expiration period ends. In other words the buyer has more latitude to cancel under this type of contract than the regular Florida FARBAR contract.

For those sellers who desire to sell real estate “As Is” have no obligation to make any repairs to the property either before or after the closing.  “As Is” transactions tend to be prevalent in a resale of foreclosed properties, auction, sales of commercial and industrial , sales of residential landlord properties and many senior selling their residence who do not have the liquid funds to make repairs.

Even though an “As Is” contract may give some protection to the seller from unknown defect, the clause is inoperative when the seller actively misrepresents the condition of the property.  The idea is that the buyer takes the visible condition into account when making an offer and setting the purchase price.  Sellers can protect themselves by being specific in the contract, for example, about recurring plumbing problems, a cracked foundation , leaky roof, den built without a building permit, all in “As Is” condition.  If for example, the roof defect was not obvious and the buyer did not know of this material defect, but the seller did know, then a general “As Is” clause is probably worthless.

Q13:  Is Square Footage a Good Way to Estimate Market Value?

The amount of square footage is undoubtedly the most frequently asked question about residential real estate after number of bedrooms and baths.  Wanting to know or calculating the value per square foot is probably the most misunderstood and misused number in estimating a property’s value.

Using price per square foot might be a way of generalizing home values in defined areas, but this method is not very useful when trying to determine the value of a specific home.  This is because there are too many ways that a property can differ to use it accurately to estimate a home’s value.  Here are just a few examples of differences that are not included in the cost per square foot:

  • Lot size
  • Landscaping
  • Waterfront lot and amenities i.e. dock, lifts
  • Number of bedrooms
  • Number of baths
  • Kitchen type
  • Room size hierarchy
  • Number of garages
  • Floor plan
  • Swimming pools
  • Type of construction
  • Type of roof

This list doesn’t even consider the condition, age, age of improvements and the grade of interior materials used!  Other questions arise when looking at square footage total

  • Heated vs Under roof
  • Exterior wall vs interior wall measurement
  • Tax Appraiser vs recent dated Licensed Appraiser source

So I think we can all agree that a home’s value is affected more by the features that it contains than by it is by the size.

So here is a Square Footage Warning – Beware of:

  • Real estate agents who quote value based upon square footage, they obviously are very in-experienced or not knowledgeable.
  • Websites that declare value based on recent sales and square footage.Real estate agents who use the Tax or Public Record’s market value assessment numbers to estimate a home’s value
  • In summary, square footage is “rule of thumb”, a rough shortcut to estimating value, and in most cases a poor one at that.  It falls into the same problematic realm that includes the automated valuation models that have become so popular, such as those used by the listing aggregators  Zillow, Trulia and a number of others.  But that is another story that I cover elsewhere.

Q14:  What is a CMA?

A Comparative Market Analysis (CMA) is typically created by a Realtor using data from the local AMLS to show a seller or buyer similar properties that have recently sold, actively for sale or under contract to be sold as a means of establishing the market value of the property in question.

According to an article in the Wall Street Journal, Zillow and Trulia have made millions of Americans familiar with computer-generated estimates of home values, created a new online addiction and become a staple of dinner-party chatter.

The popular new fad is to rely on national portal and statistic gathers such as Zillow and Trulia to determine home market values. Essentially a statistical method for spitting out a price based on public record factors oversimplifies the valuation process.  In fact a case could be made that these estimates of value are not even as reliable as the notoriously maligned “drive-by appraisal” conducted in the past b real estate agents and loan processors.

Knowing average prices in a neighborhood might be interesting for some reason but it frequently doesn’t even give a rough guide to what a property is worth.  In fast moving markets this methodology becomes eve less reliable.

When you find a property that you are interested in and are trying to determine what price to offer, don’t trust an algorithm, work with a competent real estate agent who knows how to do a real CMA that adjusts for specific property differences in the properties being compared.

Yes this is self-serving, but it’s true.  As your agent you will always be provided a CMA using the same generally accepted principles and techniques used by professional appraisers.  The focus will be to obtain the best possible price that the market will bear.  This methodology will adjust the comparable properties for the existence or lack of features and upgrade, condition of the properties as well as market trends.

With this in-depth market valuation, a pricing strategy taking in your own specific needs and motivation will be used to obtain the most optimum results whether buying or selling.

Q15:  What is an Appraisal?

Don’t confuse a comparative market analysis (CMA) with an appraisal.  Real estate agents use CMAs to help home sellers determine a realistic asking price.  Experienced and competent agents can often come very close to an appraisal price with their CMAs, but an appraiser’s report is more detailed – and is the only valuation report a bank will consider when deciding whether or not to lend the money.

There are two common appraisal methods used for residential properties: the sales comparison approach and the cost approach.  In the sales comparison approach the appraiser estimates a subject property’s market value by comparing it to similar properties that have sold in the area.  The properties used in the analysis are called comparables or comps.

No two properties are exactly alike, so the appraiser must compare the comps to the subject property, making paperwork adjustments to the comps in order to make their features more in-line with the subject property’s.  The result is a figure that shows what each comp would have sod for if it had the same components as the subject.

The cost approach is most useful for new properties, where the costs to build are known.  The appraiser estimates how much it would cost to replace the structure if it were destroyed.

When you a contract to buy a property and you have a clause making the purchase contingent on getting a mortgage to buy at a certain percent of the purchase price and the appraisal comes in lower than the contract sale price, the buyer may cancel the contract or re-negotiate the price with the seller.

Q16:  Why Should a Buyer sign an exclusive Buyer Representation Agreement?

The buyer’s agent is describes an agent working with a buyer under a written contract just as a listing agent is working for a seller under an exclusive listing agreement.  The buyer’s representation agreement is the most common contract between homebuyer and real estate agents.  The agreement outlines the obligations of the broker and the responsibilities of the buyer.  What distinguishes this contract is the buyer may not retain more than one agent to assist them.  It set forth the commission amount to be paid to the agent, that is owed even if the buyer finds the house themselves or another agent does so.  But if another party pays the agent the commission, the buyer is not responsible for doing so.  Buyer representation agreements might run for several months to a year.

Surprisingly as it may seem, until recently the only person not represented in a real estate closing table has been the buyer!  Buyers absolutely should have a dedicated buyer agent, representing them the way the listing agent was hired to represent the seller. A buyer agent has a fiduciary responsibility to their client and should be focused exclusively on helping the client locate.

There are a number of states that require a buyer representation agreement be signed before a real estate agent can show, write contracts or otherwise act as a real estate agent on the buyer’s behalf.  Surveys have shown that one of the biggest sources of problems is lack of communication agent and their client.  By putting the duties and obligations in writing, buyers will be more informed about the agent’s responsibilities in the buying transaction.

Buyers’ can’t have it both ways.  You can’t expect an agent to work their tail off for you, offer unbiased data analysis, and offer aggressive negotiations while the agent know you hold an “out” card.  What, is the agent expected to cross his fingers that his time invested will work out favorably?  As a buyer, put yourself in the shoes of the agent.  How likely is that agent going to be to try and fight for an extra $5,000 or $10,000 off the price?  Human nature would kick in and the agent might say, “Why should I be aggressive on this offer if the buyer might just go elsewhere if this deal doesn’t happen?

If an agent knows that a buyer is committed to them then they will invest the appropriate amount of time to their market education and search.  The buy side in real estate entails much more risk than the sell side because it has been traditional that a seller signs an exclusive agency agreement with a real estate broker to sell their house.  If an agent is going to devote a significant amount of time to a buyer, they will want to make sure that they don’t disappear and do a deal with a different agent or by themselves after spending many hours with the buyer.  If there’s a benefit to the buyer, it’s that you know that your broker will have more reason to work hard on your behalf because you both have it in writing that you have both made a commitment to each other.

As a home buyer, you are about to make probably the biggest purchase of your life.  It only makes sense to have an expert in your corner to help you negotiate the best terms and avoid as many pitfalls as possible.  It doesn’t make sense for you to have an as your agent one who is also helping the seller get the best price possible for their property.

To better understand the Buyer’s Representatives role for the buyer consider the following:

During the search process the Buyer’s Representative:

  • Arranges property showing that meet the buyer’s needs.
  • Provides information that the buyer requests about the home or property, community, taxes, utilities, and zoning, or refer the buyer to appropriate information sources.
  • Discloses any material fact about the property of which the agent has knowledge.

During the offering process the Buyer’s Representative:

  • Prepare a comparative market analysis of the property for the buyer.
  • Counsels the buyer on what price to offer to the seller
  • Shows what other buyers are paying for property in the area.
  • Discloses any material fact regarding the property that might affect its value.
  • Assists in writing an offer with the buyer’s best interest in mind.
  • Negotiates the best price and terms for the buyer.
  • Keeps the price capabilities and objective of the buyer confidential, and maintains anonymity if desired.

During the offering process, the Buyer’s Representative:

  • Prepares a competitive market analysis of the property for the buyer
  • Counsels the buyer on what price to offer to the seller
  • Shows what other buyers are paying for property in the area.
  • Assists in writing an offer with the buyer’s interest in mind
  • Negotiates the best price and terms for the buyer
  • Keeps the price capabilities and objectives of the buyer confidential, and maintains anonymity if desired.

During the closing process, the Buyer’s Representative:

  • Assists with the loan application process.
  • Monitors all dates, events and requirements under the purchase contract for the buyer.
  • Will attend the purchase closing with the buyer.

To top this off, the Buyer Representative’s time, professional advice, experience and assistance is FREE, because his fee is paid by the Seller!  Overwhelmingly smart experienced buyers will always use a Buyer’s Representative because they are aware of all the hurdles and potential costly mistakes that can happen on the way to closing

In short, Buyer’s Representatives are advocates for their clients.  They have the responsibility to negotiate in the buyers best interests, over and above their own interests.  Buyer’s Representatives know the terms and conditions of the Purchase and Sale Agreement backwards and forwards.  Shockingly, there are over a dozen potential hurdles the seller and his representative have to navigate to get to the closing table.  Coordinating and making sure that the many deadlines agreed to in the contract are met is of utmost importance to insure that the sale is closed and does not incur additional Buyer costs or mental anguish.  Buyer Representatives know reputable mortgage lender, inspectors and their various expertise’s, as well as, contractors to help the Buyer navigate to the closing table.