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So, you’ve decided to buy a home in Chicago! The charm of the old mixed with the thrill of the modern, the smell of way-too-thick pizza, Italian beef, popcorn, and (if you live by Blommer’s) chocolate in the air. World class baseball (finally) being played almost everyday in the summer. Cruises up and down Lake Shore. The best and most diverse architecture the world has to offer. Summer street festivals every weekend no matter where you live. Just a few of the reasons I’m confident you’ll love your decision to make this city your, at least somewhat, long-term home.

No matter what your “why” is for moving here, now comes the “how” part. What does buying a home in Chicago entail? What does buying a home entail in general? What’s happening during the commercial breaks of House Hunters and Curb Appeal? The place I want costs $300,000 but I don’t have nearly that much in the bank, how can anyone afford this? Are there stipulations as to what kind of briefcase I’m supposed to put all of this cash into at closing? What’s the preferred dollar denomination?

Fear not, the answer to these questions and more are coming… right now.

(Hint: the first step is NOT going onto Zillow, Trulia, or Craigslist and fantasizing about which homes you want, so close those tabs!)

Step 1

FIND A BUYER’S AGENT YOU TRUST

Full disclosure guys and gals, I myself am a real estate agent. If your next thought is “wow, a real estate agent telling me I should hire a real estate agent, hmm, shocker…” that is totally fair. I would be thinking the exact same thing. Truth is you don’t “need” an agent to buy a house, much the same way you don’t “need” to have an attorney with you in court and you don’t “need” a doctor to perform your own knee surgery.

Okay maybe those examples are a little extreme.

At the end of the day though you want someone in your corner whose job it is to represent your best interests and yours alone. A good agent is going to be able to line up all of the participants and moving parts that it takes to close a successful transaction, communicate and coach you through each step of the way, and generally save you loads of time, stress, energy, and money (depending on their negotiation skills and what the situation is). The best part is that it costs you nothing to hire a buyer’s agent. Traditionally the seller’s agent splits their commission with the agent that brings them the buyer, meaning the seller is ultimately responsible for paying both agents.

It is easy to think of this as something you don’t really need to do, after all you can always just contact the listing agent, buy it straight from him/her, have them lead you through the process, and be done with it. Only problem is that agent is already legally obligated to do what is best for the seller, not for you. This situation makes them a “dual agent”, which due to its inherent conflict of interest is actually illegal in many parts of the country.

It is also a good idea to get an exclusive buyer agency agreement in place to ensure both you and the agent are fully invested, but only if you're sure that is the agent you want to work with. The terms of these contracts are fully negotiable so it’s really not as intense as it sounds.

Step 2

GET A PRE-APPROVAL LETTER FROM A REPUTABLE LENDER

This is a big one. It is so easy to want to skip this step, and I completely understand why. It sucks having to get out all of your sensitive documents, send them to some stranger in some office somewhere to analyze your whole life and be all Judgy McJudgeFace on what kind of place you’ll ultimately be able to afford, not to mention having that hard inquiry on your credit report (more on that later). It would be better to just know how much you make, pound away on google until you find a calculation that tells you what you should be able to get in a mortgage, and start shopping from there, right?

I wish.

There are two things going on here.

1. What you know you could afford.

2. What the lender thinks you can afford

Unfortunately, in terms of buying that dream home, the only one that really matters is #2.

Therefore, it behooves you to just grind it out, get those tax documents, w-2’s, employment records and contact info, and whatever else they require and let the process run its course. It’s really not that bad, and with modern technology you can get an answer almost instantly more often than not.

While yes, it does count as a hard inquiry and may dock your credit score a couple points, you normally have up to 30 days from the time you make your first inquiry to apply to multiple lenders and get several opinions and even create some competition for your business. You can and should do this, because while there are federal standards for many types of loans that are set in stone, no two lenders are exactly alike, and some may have better terms than others.

 

Your agent (see: step 1) should have a roster of lenders to recommend depending on what your situation is.

This is also important because, especially in today’s market where demand is often outpacing supply, if you find the right place you really need your offer to be as appealing and ready-to-go as possible. This can mean sending a nice note with some flowers to the seller, but more importantly it means being able to prove on the spot that you can afford the price you’re offering.

By now you’ll also probably have a good idea of what kind of mortgage makes the most sense for you. The “conventional” mortgage is most typically an 80/20 split where you put a down payment of 20% of the purchase price in cash and the other 80% is the loan. For first time homebuyers there is also the “FHA” option where you can put as little as 3.5% down. The potential downside is that your monthly payments will be higher and you’ll have to pay private mortgage insurance (PMI), which, exactly as it sounds, is essentially an insurance policy to protect the lender from the added risk they’re taking on by accepting less collateral.

If you have a military background you could also qualify for a VA loan.

Depending on the lender and situation there are infinite possibilities for funding, including but not limited to hard money lenders, portfolio lenders, personal network (friends and family), loans against retirements accounts and life insurance policies, etc, but since most people will fall into one of these main types of mortgages we’ll leave it here and tackle those other types another day.

In Part 2 we'll tackle finding the place you want to live and how to make and negotiate the offer!

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...

Step 3

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?

Seriously, guess.

Don’t peek!

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44!

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.

Step 4

MAKE AN OFFER AND PREPARE TO NEGOTIATE

Oh man.

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.

Heart.

Pounding.

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!

In Part 1 and Part 2 we started working with a real estate agent we vibed well with, we got a pre-approval letter so that we know exactly what we can actually afford in a house, we searched for and found the place we wanted, and we reached a deal with the seller to buy it.. Whew!

We are coming down the "home" stretch now, and the good news is much of the heavy lifting on your part is already done. Moving right along...

Step 5

LET YOUR TEAM WORK FOR YOU

You’ve reached a deal. Yay! Now what?

At a certain point in the transaction, your job becomes significantly more hands off. You should still be in touch with your agent and aware of what is going on in general, but most of the heavy lifting is going to be handled by other people, namely attorneys, title companies, inspectors, and appraisers. Some of this will be a step at a time while other things will be happening simultaneously. A few of the key people who will be playing a role in the transaction are:

• Attorney

The attorney’s job will be to make sure all the t’s are dotted and the I’s are crossed, or, however that saying goes. They will evaluate the contracts and paperwork, make sure everything is in good order, and ensure your best interests are taken care as far as those things go. The attorney review period is another one of those common contingencies we talked about last time. 

• Inspector

Assuming you have an inspection contingency in your contract (which in most cases you probably should), this is where the inspector would come in and, well, you know... inspect. The importance of this really can’t be overstated, as you want to know what all your hard-earned money is actually buying. The inspector will evaluate and report on the quality and useful life of things like structural integrity, plumbing, mechanicals, roofing, exterior/interior, electrical systems, and about anything else you can think of. It will cost you a few hundred bucks (budget somewhere between $300-$600), but that’s a drop in the bucket compared to what it could save you. This is especially true in Chicago where very old buildings are commonplace.

If the inspector finds anything significant, you can activate the contingency and back out of the deal or you can bring the issues up to the seller. They may either fix the issues themselves or give you a credit off the purchase price. The latter is more common since a. the seller is already selling this place and probably doesn’t want to deal with repairing it, and b. it is in the seller’s best interest in case the cost of repairs goes above the expected amount. Just something to be aware of.

Be aware that this only applies to "big" issues that were previously unknown or undisclosed. This contingency is not meant to be abused as an opportunity to renegotiate the agreed upon sales price. New paint, burnt out lightbulbs, and stains on the carpet or not typically grounds for raising a fuss. Issues with the electrical system, the foundation, or underground plumbing, however, might be.

• Lenders/Appraisers

If you followed step 1 you already have your pre-approval letter, which is cool and all, but unfortunately that is not where it ends as far as actually getting the loan. You still need to submit a full mortgage application, which shouldn’t be too dissimilar from the process of getting pre-approved.

Additionally, you’ll need to have an appraisal done on the property. The job of the appraiser is to make sure the property you’re buying is worth what you’re buying it for. The phrase “something is only worth what someone else is willing to pay for it” only goes so far. That line gets crossed when you’re using someone else’s money. If you agree to pay $200,000 for a house, and it is found to only be worth $100,000, no reputable lender should give you that loan in case you default on it and leave them with such a liability. In this case you would need to either negotiate a different sale price, pay the difference in cash, or move on to a different property.

Assuming your credit is still good (don't make any big purchases on credit until after closing day!), the appraisal is right, and the underwriters like what they see, you’re onto the title portion of the show.

• Title Company

As the name might imply, the title company will be going to work on making sure you have a “clean title.” This may sound weird, but, buying the deed on a piece of property does not actually “guarantee” you have the legal right to own it. The person you bought it from may never have actually had the legal right to own it. The person they bought it from may not have either. The person before them... well, you get the idea. Title companies and attorneys can only go off what is found in historical public records of the ownership of the property, known as the “chain of title.” There may be a chance that the chain is broken somewhere along the way and somehow a transfer wasn’t properly recorded, or somebody got skipped. This would result in a “cloud” on the title and that would have to get resolved before the transaction could continue.

Another reason there really is no such thing as iron clad proof of ownership is that somewhere along the way there could have been things like forged documents, sellers (“grantors” if you want to be fancy) who did not have the legal capacity to sell, incorrect marital statements, and many other issues that would be impossible to know from a simple search of the public records.

You might be saying “my place is new construction, I’ll be the first owner, I’m good on this part for sure!” To that I would say, yes, the walls, floors, and ceilings you’re buying may be new, but the land it’s built on has been around since the beginning of time and has likely had more owners than just you or the developer.

In addition to potential issues with ownership, the other big issue to be aware of during the title search phase is that of “liens."

Liens are like debt obligations attached to a piece of property. If you are making car payments, you have a lien on your car to secure the loan your paying on it. Same thing goes for real estate, there is just a bit more to it. There could be mechanic's liens (debt owed to a contractor who did work on the property previously), mortgage lien (debt owed to a lender on the property), and tax liens (debt owed to the government for taxes) just to name a few.

The kicker when it comes to liens is that they go with the property, not the owner. So, if the previous owner racked up a fortune in unpaid taxes and sells you the house, that is you stuck paying the bill. This is why knowing if there are any “recorded” liens on a property is so essential. (Why the quotation marks around “recorded” you ask? You’re so observant! That’s because, like clouds in the chain of title, there is always the possibility that a lien wasn’t recorded that could still pop up and attempt to be enforced.)

This may all sound pretty scary, and if you don’t treat this step with the respect it deserves, it can be. Luckily, you hopefully have a solid attorney or title company turning over every stone they can to find potential issues. When they are finished with their opinion of title status, the next step is often to purchase “title insurance.”

Mmm, title insurance... Doesn’t that sound sexy?

Probably not. But it should, because it will protect you from all that potential B.S. that I mentioned before. Plus, most lenders require it, so there’s that. The premium for title insurance is typically paid in one installment at closing.

Hey speaking of closing…

Step 6

CLOSING!

Here it is! The moment you’ve been waiting for! You wake up the morning of the day of closing, the sun is a little brighter, the birds a little chirpier, the coffee tastes a little better. In fact, you don’t even need coffee today, you’re so excited to close on this property that caffeine has become optional!

So, what is going to happen today? What do you need to do and be aware of to ensure this goes smoothly?

Essentially at this point all you really need is a sound mind, a working hand, and a full bank account because you will be signing lots of documents and spending some money.

The closing can take place anywhere, most commonly at the title company, an attorney’s office, or one of the agencies involved. Present parties typically include the buyer and seller (or their legally appointed representatives), the agents, the attorneys, representatives from the lending institutions involved (it is likely that this sale will result in the seller paying off the rest of their mortgage, so that lender wants to be present as well), and someone from the title insurance company.

By this point most of the heavy lifting has already been done, so it’s just a formality to put pen to paper and make everything official (though even most of that has likely been done electronically).

This is where the rubber meets the road in terms of financing. You’ll need to bring the rest of the down payment (the earnest money you’ve already supplied will be applied to this) and take care of the closing costs.

 

Ahh, yes. The closing costs. Everybody’s favorite part. Some things to expect as far as closing costs (many just depend on the purchase price, the vendor, and the situation):

· Chicago Transfer Tax

o $7.50 per $1,000 of purchase price

· Title fees

o ~$500-$1,200

· Inspection

o ~$300-$600 (actually taken care of prior to closing, but still a cost)

· Attorney

o ~$400-$800

· Lender fees

o Fees to originate the loan. This is the appraisal, documentation prep, title insurance, prepaid interest, etc.

 

Your lender will give a Good Faith Estimate of what your closing costs will be with them and anything else your loan might entail, such as private mortgage insurance (if you are putting less than 20% down), and other loan origination fees.

Pay some people, sign some papers, get the keys, and congratulations! You are now the owner of your new home.

 

Enjoy owning a part of Chicago!