Home buyers: 5 costly mistakes to avoid

Satisfaction ensured with own agent, key contingencies

Friday, October 13, 2006

By Robert J. Bruss
Inman News

Fall 2006 is proving to be a great time to be a home buyer (but not such a great time to sell your house or condo). In most cities, it's a very strong "buyer's market" for homes.

A buyer's market means there are more houses and condominiums listed for sale than there are prospective home buyers in the marketplace. "The buyer is king" is another way of saying home buyers can negotiate hard for price and terms in today's market.

Purchase Bob Bruss reports online.

The number of brand-new and resale homes available for sale nationally is at an all-time high. However, because home sales depend on local conditions, the situation in the town where you want to buy might be different.

But savvy home buyers still need to be cautious to avoid making home buyer pitfalls. Here are the five most costly mistakes home buyers make unless they plan carefully:

1. FAILURE TO GET PRE-APPROVED IN WRITING FOR A HOME MORTGAGE. Most home buyers need to obtain a home loan to purchase their house or condo. Smart buyers shop for a mortgage before searching for a home.

Although it's fun to "shop" for a house or condo on the Internet -- where more than 70 percent of today's home buyers begin their quest (according to the National Association of Realtors) -- the smartest home buyers get pre-approved in writing by an actual lender so they know the maximum mortgage amount available.

The first step to obtain a home mortgage is to check your credit reports from the three major credit bureaus, Equifax, Trans Union and Experian. You can get free copies of your credit report once a year at www.AnnualCreditReport.com or by phone at 877-322-8228.

However, those free credit reports are virtually worthless when shopping for a mortgage because they don't include your all-important FICO (Fair Isaac Corp.) credit score, which most lenders use to qualify borrowers.

The best place I've found to check all three credit reports is on the Internet at www.myfico.com. For about $45 I obtained copies of all three credit reports, plus my FICO score. With a FICO score of 700 or above, you should have no problem obtaining a home loan at the best interest rate and terms.

If you find credit-report errors (reportedly, over one-third of credit reports contain wrong information), be sure to follow the procedure stated to correct those mistakes.

For example, several years ago one of my credit reports said I owed unpaid property taxes. That was incorrect. However, it hurt my FICO score. I followed the procedure to "verify" the error. Credit bureaus then have 30 days to do so. Because the mistake couldn't be verified, my credit report was corrected and my FICO score improved.

Armed with your corrected credit reports from all three credit bureaus and your FICO score, the second step to obtain a home mortgage is to shop among mortgage lenders for a written pre-approval. Most lenders don't charge for pre-approvals (because they know you probably won't shop further after you are pre-approved).

Be sure the lender gives you a pre-approval letter, not just a pre-qualification statement, which means only "We think you can probably get a mortgage based on your submitted information but we haven't really checked."

2. FORGET TO WORK WITH YOUR OWN BUYER'S AGENT. The second major mistake some home buyers make is they forget they need their own buyer's agent. It's very easy for prospective buyers visiting weekend open houses to let the listing agent they meet prepare the purchase offer.

Whether that listing agent acts as a "dual agent" representing both the home seller and buyer (an inherent conflict of interest) or the listing agent represents only the seller (and nobody represents the buyer), such a situation is not in the home buyer's best interest.

To find a reputable buyer's agent, home buyers should ask friends, relatives and business associates for recommendations of local agents.

It costs home buyers nothing extra to have their own buyer's agent. If the home is listed for sale, the listing agent will split the sales commission with the buyer's agent. In the rare situation of a "for sale by owner" home, most FSBO (fizz-bo) sellers are only too happy to pay the buyer's agent half of a customary sales commission, usually 3 percent.

However, home buyers should be careful not to sign an exclusive buyer's agent contract for longer than 30 days, just in case the recommended buyer's agent turns out to be ineffective.

3. BUY A HOME WITH AN INCURABLE DEFECT. In the current buyer's market in most communities, where there are more home sellers than qualified buyers, house and condo buyers can afford to take their time and be "picky."

No home is perfect. Even brand-new houses and condos have their defects. Thankfully, most homes don't have major defects, such as being located next to a noisy railroad track or a freeway. Smart buyers think into the future and ask, "Will I have any trouble selling this home because of its problems?"

Serious incurable defects are called "economic obsolescence" by appraisers. Examples include a bad floor plan, poor location (such as adjacent to high-voltage power lines or the city dump), noisy street traffic, or lack of onsite parking.

4. FAIL TO INSIST ON A COMPARATIVE MARKET ANALYSIS (CMA) BEFORE MAKING A PURCHASE OFFER. Amazingly, many home buyers still follow the old rule: "Offer 5 percent below the asking price." That makes no sense.

Instead, smart home buyers ask their buyer's agent to prepare a written comparative market analysis (CMA) before making a purchase offer. This CMA is the same form the listing agent prepared for the home seller.

It shows recent sales prices of comparable nearby homes, asking prices of similar neighborhood listed residences, and the asking prices of recently expired competitive listings (usually overpriced).

With the help of the buyer's agent, smart buyers then discuss the pros and cons of the homes on the CMA before arriving at a reasonable purchase offer price.

5. NEGLECT TO INCLUDE TWO KEY CONTINGENCY CLAUSES. Way back in the hot home seller's markets of 2005 and 2004, it was common for home buyers to make "all cash, no contingency" purchase offers. The current buyer's market in most cities has changed that foolishness.

Today's smart home buyers include at least two purchase-offer contingencies: (a) a satisfactory lender's professional appraisal of the home for at least the purchase price, and (b) the buyer's approval of a professional inspection report to be obtained at the buyer's expense.

Depending on local custom, additional inspection contingencies might include termite or pest control, building-code compliance, energy efficiency, and radon.

A controversial contingency makes the home purchase contingent on the buyer's sale of his/her current residence. Many home sellers refuse to accept such a contingency. Others will accept it but with a 48-hour release clause if a better purchase offer from another buyer materializes.

SUMMARY: Although home buyers are in control of today's residential sales market, they still need to be careful to avoid costly mistakes. Smart home buyers, with the help of their buyer's agents, can protect themselves when buying a house or condo to be enjoyed for many years.

(For more information on Bob Bruss publications, visit his
Real Estate Center).

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