This is part three in a series (here are parts one and two) for the Appeal on a first-time home buying experience in San Francisco.
Once you separate your “must haves” from the “kinda wants” in searching for your new home, your next three steps–selecting your real estate agent, solidifying your budget, and getting pre-approved for a mortgage–should happen fairly simultaneously.
First, it’s important to find a buyer’s agent. Your agent will be your confidant, sheep wrangler, personal shopper, reality check, Mr. Miyagi, and property expert all rolled into one. Finding an agent is akin to finding that perfect pair of jeans. For everything to work out just right, you need a great fit.
You might come across someone with whom you click at an open house, or you might snag a stellar recommendation from a friend or neighbor. Whatever your process, make sure that this person is knowledgeable, on board with your vision, and has your best interests at heart.
How you do this is up to you. With a paper and pen handy, I set up phone interviews and questioned the hell out of my potential agents. I also hung out with a few at their listings’ open houses and when the foot traffic died down, asked a few key questions, like what their working style was like, did they have expertise in my ideal neighborhoods, and how would they help me prepare a competitive yet-not-outrageous offer.
Some people try to avoid hiring an agent; they want the DIY experience, much like they might when installing a kitchen backsplash or re-surfacing the back deck.
But when it comes to the skillful art of negotiation mixed with real estate law, do yourself a favor and hire an agent. It costs you nothing (the seller pays your agent’s commission, not you!) and will ensure a much smoother buying process.
During your agent search, you can check online reviews and ask the agents for references. Feel free to contact those references and ask more questions. You may feel primed for a job with the FBI by the end (ah, a resume booster!). Google them. Confirm their licenses are up to date. Just don’t Facebook stalk them. At least not too often.
Your agent will want to know what your timeline is, and what your expectations are. He or she will probably also want to know what kind of property you’re looking for. For instance, we told our agent that we were serious about buying a two bedroom unit here in the city, but that we didn’t have a specific timeframe in mind–our purchase could be a few months in the making or it could take a year. Some agents ran from the room screaming when they heard such a long, undetermined timeframe; fortunately the agent we chose to work with proved to be both patient and gung-ho.
After the initial introduction, your agent will ask you what your budget is and if you have been pre-approved for a loan. Pre-approval means that your lender has said that it would, if everything checks out OK later on, probably (nothing’s ever definite in the wonderful world of real estate!) approve you for a loan of x dollars.
To issue a pre-approval letter, the lender may ask for proof of employment, past rental history, income and debt documentation, proof of assets, and run a credit check. The lender may ask how much you want to borrow (for example, your offer price minus 20% as your downpayment). The lender will tell you if you qualify and if so, what the loan terms would be.
Shop around among potential lenders: Contact your bank, another bank, a real estate broker, etc. And just like with your agent, do research online and through friends to help you in the vetting process. Don’t get pre-approved by all of them, but understand the loan terms and interest rates they offer before selecting you lender.
Your budget may differ from your pre-approval, and may encompass a target price range and max limit. And by max, I don’t mean “Let’s rob a bank to make this happen” max. If you’re one of the lucky higher ups at a tech start-up, then you may be prepped to plunk down a giant chunk of change and forgo a mortgage. Kudos to you. For the rest of us “regular folk,” we’ve got to do our homework.
Several websites offer mortgage calculators, and these should provide you with a good idea of your basic monthly payment, depending on your potential mortgage terms. When figuring out your total monthly payment, consider monthly principal and interest, property taxes, homeowners insurance, and other private insurance (like condo insurance). Here in the city, most 2+ unit buildings have homeowners associations, so you may also have monthly HOA dues and annual assessments on top of your mortgage payment.
For many people, a calculator and phone calls with lenders’ sale agents can be overwhelming. Thankfully, the Mayor’s Office of Housing and the local, non-profit HomeownershipSF offer assistance on the process. HomeownershipSF’s programming includes free workshops, one-on-one counseling, and other local resources on buying a home. This program provides a bevy of resources, including helping you determine what kinds of loans you qualify for and how much you can afford, and if you qualify for a special loan or affordable housing programs for first-time homebuyers. The program also supports homeowners who are facing foreclosure. The Mayor’s Office of Housing provides various credit, loan, and downpayment programs for those who qualify.
Your loan may also depend on the type of property you’re interested in purchasing. If you’re looking at an apartment here in San Francisco, your options are a condominium or a tenancy-in-common (TIC) loan. Most lenders offer loans for condos, but TICs are a different story. Owning a condo means that you own a designated unit, and this space is designated on a map filed with the city. Sounds simple, right? In contrast, owning a TIC equates to co-ownership of a building. It means that you own a percentage of an undivided property and have exclusive rights to one of the units. Your deed designates your ownership percentage and not your unit itself.
In most TIC financing situations, all of the building’s owners share one group loan. In some instances, banks may offer individual loans to separate TIC owners (fractional financing). But as TICs are fairly unique to San Francisco, most commercial banks don’t offer TIC loans.
As my husband and I were looking into TICs, we found only three banks (now there are only two! Sterling Bank & Trust and National Cooperative Bank that were offering TIC loans. These TIC loans’ interest rates were significantly higher (on average, 6.5% vs. 4%) than those for condos. The minimum downpayment, too, was larger (25%+) than for that of most condo loans (15-20%).
We found some upsides to TICs. Primarily, they’re cheaper than traditional condos, sometimes 20% less than a comparable condo. Some people purchase TICs with the intent of converting them into condos. There are significant costs to this conversion process, and the time involved from beginning to end can take years, especially if it’s a building with more than 2 units or if there has been an eviction within the past ten years (and that’s when years spills over into decades). Yet converting from a TIC to a condo allows the owner to refinance to a regular condo loan or sell the unit for a potentially larger return.
After some discussion around initial purchase price, the conversion process, and what it would mean to our finances, we decided not to pursue this route. But for some, a TIC provides an opportunity to purchase a city home at a reduced rate.
After selecting an agent, determining our budget, gathering mortgage quotes, and getting pre-approved, our next step proved way more challenging: making an offer. In my next installment, I’ll detail the nitty gritty of how to work with your agent to make an offer when you find THE perfect place.
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