In Part 1 we covered finding a real estate agent you trust and getting a letter of pre-approval from your friendly neighborhood lender (or the big bank, whoever wants to give you money really). From there we move into some more nitty gritties of the buying process. Moving right along...
FIGURE OUT WHERE YOU WANT TO LIVE
At last, this is where the real fun begins! Thanks to your friendly neighborhood lender you know exactly what you can afford so now you are free to dream away within those parameters.
Talk with your realtor and tell him/her every detail you can think of. Then arrange those details in order of most to least important, your “must haves” from your “nice to haves.”
Basic example: It would be “nice” to have 3 bedrooms, a two-car garage, laundry in the unit and a dog park nearby. It “must” at least have 2 bedrooms, parking on the street, laundry facilities in the building and be pet friendly.
Along with your own optional searching, your agent should be playing an active, crucial role during this step of searching the multiple listing service (MLS, the master database that only real estate agents have the keys to) and other resources to find you the homes that best meet your criteria.
That being said, the role your agent plays in deciding where you want to live can be a tricky one. Due to Equal Opportunity Housing rules, we cannot recommend places you should live based on any kind of demographic information. Once you tell us the area you want to live, we can supply all kinds of data and give objective opinions, but you must first let us know what those areas are based on whatever factors you find to be appropriate. To help you in that process, I’ve provided a guide with some resources for navigating those decisions.
Along with the area, you also want to decide what type of property you want. Do you want an “attached” home (realtor speak for “condo”) or a “detached” home (realtor speak for “house”)? Then within those categories do you want to live in a townhome, a highrise, or a low rise? A one-story or two-story house? Etcetera or etc.?
In the downtown and north/northwest sides of Chicago where I mostly operate, attached homes FAR outnumber detached.
To illustrate, as of the writing of this (March 2018), in the past 12 months, in the areas ranging from the south loop, northwest to about Logan Square, north to West Ridge and Rogers Park, and east to the lake, there were 4,716 2-bedroom, 2-bathroom attached homes that closed (sold).
Same exact criteria for detached, guess how many closed?
Not a typo. That is fourty-four 2 bed, 2 bath single family houses vs. four-thousand, seven-hundred and sixteen 2 bed, 2 bath condos and townhomes.
If you bought such a home last year in the areas specified, there is a 107 to 1 chance that it was a condo or townhome. If your heart is set on your own space with a yard and driveway, that is not to say you shouldn’t go for it or that you won’t find better luck in other parts of the city or especially the suburbs, however that is simply the reality in the more densely populated areas I mentioned.
Given these factors, lets assume you decide the condo life is the life for you. What factors should be considered now?
Perhaps the biggest factor separating a regular home purchase from that of most condominiums is the Home Owners Association (HOA) fees. Without running the risk of this guide sounding too much like my real estate school textbook (shoutout to CRES!), HOA’s are essentially put in place so that everyone who lives in a certain building are equally responsible for the resources that building provides. HOAs also set guidelines and rules on what its residents can and cannot do (such as ability to rent out your unit or to paint your door a certain color).
Just as there is a huge variation in prices for different condos, as you can imagine there is also a large variation in the amenities and accompanying fees from building to building. In some buildings it may just be basic things like gas, water, and upkeep like trash/snow removal and the occasional guy with a broom dusting off the sidewalks. These fees may only be $100 or less per month.
In other buildings you might have amenities that would make Buckingham Palace blush. Doorman, pools, work spaces, community spaces, flocks of doves to fly out of your window every morning when you open it, workout facilities, basketball/tennis courts, spas, daily fresh rose pedals lining the hallway to the elevator, storage space, etc. The highest HOA fee I found from condos sold last year was over $24,000 (and again, that’s “per month”).
In addition to HOA fees, there may also be what’s called a special assessment. This is when the HOA votes on a certain upgrade or project that falls outside the realm of what the regular fee covers. This could be a new elevator, a renovated lobby, or really just about anything you can think of. Once such an assessment is approved, that cost gets distributed to the residents and there is really not much you can do about it.
HOA costs are in addition to the price of the condo itself. This makes factoring in those costs very important, as a less expensive property with a higher HOA fee may have a higher overall cost of living there than a more expensive property with a lower HOA fee. This could lead to the question of do you buy more house and leave certain amenities off the table? Or do you like the amenities offered and willing to accept less house? No wrong answer, but a question that should be asked.
Speaking of asking questions…
QUESTIONS TO ASK WHEN BUYING A CONDO
-What do HOA fees cover?
-Are there any special assessments?
-How large is the HOA’s reserve fund? (The fund that is used when issues come up and need to be paid for) and what percentage is going towards the operating fund (part of budget used for regular operating costs) vs the reserve fund?
-Find out what your lender requires out of the HOA’s situation. Sometimes lenders may have different guidelines for what they’ll lend to as far as a building’s reserves, owner occupancy rate (how many units are being rented out vs. the owner living in them), and other criteria.
-How often are HOA fees raised and what is the process for doing so?
-What are the covenants, conditions, and restrictions (CC&Rs) of the HOA? Aka, what are the general rules you must follow to be considered a resident of good standing in this community?
You won’t necessarily have easy access to all of this information up front. Sometimes you must already be under contract and going through the motions of getting to closing before the HOA will cooperate with private documents. Really just depends on the HOA, the person you talk to, and what kind of day they’re having.
Another huge variable in this equation is you, and your individual tolerance for what you can live with and what you can’t as far as HOAs go.
There is nothing inherently good or bad about HOAs in general. In fact, a well ran HOA that you jive well with is a beautiful thing, and if you don’t you can join the board and initiate the change you want to see. It is just important to know what you are getting into because once you’ve moved in, few things about your property can have a bigger impact on your quality of life there than how the HOA is ran.
MAKE AN OFFER AND PREPARE TO NEGOTIATE
Things are starting to get real.
After touring so many places they all started becoming a blur, you’ve decided this is the one. The price is right. It meets all of your “must haves” and many of your “nice to haves.” Your dog is already making new friends. It feels right, so you call up your agent and tell them to put an offer in.
What happens now? Are we about to enter a pressure cooker of a situation? A zero-sum game where either we win and the seller loses or the seller wins and we lose and to the victor goes the spoils?
Well, preferably no. Nobody needs that kind of negative energy in their life.
A successful negotiation is one where both sides can walk away with their heads held high. Some back and forth and concessions are to be expected, but not every real estate transaction plays out like a season finale of Shark Tank.
The first step your agent should do, if they have not done so already, is to make a comparative market analysis (CMA) of properties similar to your hopeful future home that have sold or been on the market recently. The factors that comprise a useful CMA differ per region, but in Chicago generally you want to be looking at similar properties within a mile and within 6-12 months back from the current date (though, obviously, the closer on both of those the better).
For example, let’s say the 2 bedroom condo you want is on the 20th floor of a building downtown and selling for $400,000. The CMA may show that two months ago a unit identical to that one on the 22nd floor sold for $370,000. Another similar unit on the 41st floor sold for $425,000 seven months ago, but it had a better view and more updated appliances.
You can use this information to have a better understanding of where you should start your negotiation and what you ultimately feel the property is really worth.
While this is a very solid first step in determining your offer strategy, there are a ton of variables at play such as:
-Number of days on the market. If it has been on sale for a long time the seller may be anxious to get rid of it and be more willing to come down in price.
-Market factors. Is it a buyers’ market or seller’s market? Economics 101, if there is more demand than supply the price goes up, if there is more supply than demand the price goes down. If there are 3 identical homes on the market with 10 interested buyers, those sellers have the leverage. If there are 10 identical homes on the market and 3 interested buyers, leverage of course goes to the buyers. Markets are changing every hour of every day, and this is where it really pays to employ an agent who knows things. The difference between “this property won’t last long, we should put an offer in right now for $10,000 over asking price” and “this property isn’t going anywhere, let’s give them a lowball offer and see where it goes” is the difference between you getting your home of choice, and not.
-Your situation. Are you coming to the table with cash? Do you have to sell your house or do some other big thing before you can buy this one? Do you have a lender who can close faster than anyone else’s? All factors to consider when making your offers.
-The seller’s situation. This can be difficult since often times the seller and their agents are playing their cards close to the chest. However, any information that becomes known or is disclosed can be a tool in the negotiation, included but not limited to divorce, job change, upcoming relocation, if it’s an estate sale, and anything else you can think of.
-Contingencies. Contingencies are essentially stipulations you can put in the offer/contract that give you an “out” if a certain condition isn’t met. This can be literally anything you want. If you put a contingency that you won’t buy that property unless the seller renovates it to look like Arendelle Castle, you won’t buy that property unless Anna and Elsa make it to your specifications. The most common contingencies are:
Finance contingency. This says if you can’t get funding, you won’t buy the property. This is why a. having a pre-qualification letter, and b. knowing what your lender will and will not lend on, are such important things.
Inspection contingency. Upon agreement of the purchase price, there is an agreed upon number of days (5-7 is pretty standard) where you can hire an inspector to go to the property and check for any issues, big or small, that may be associated with the structure of it. If there are any major issues that come to light, you may have the right to cancel the contract or renegotiate a credit and/or ask the seller to fix it.
An offer doesn’t necessarily have to have any contingencies. In a very competitive situation you may have the offer that stands out if yours is the only one that does not have a certain contingency and may be a nice road to a lower purchase price offer. Just depends on the situation and how comfortable you are with the property.
-Earnest money. This is the good faith deposit you include with the offer. This is held by a third party, often the title company or attorney, and theoretically will be applied to the closing costs when you get to that point. If you back out of the deal prior to that, the seller has the right to keep that earnest money. The amount of earnest money you submit depends on the situation and the price of the property (1% is very general guideline many people like to go by).
These are really just the beginning. In a real estate transaction your ability to negotiate is limited only by your creativity.
Part 3 will focus on the professionals you'll need to have on your team and getting to closing!