1. Why do I need to be pre-approved before I view homes? Why can’t I wait until I find something I like?
Pre-approvals are the first step in the buying process. More than anything, it is extremely important that you know your exact financial situation. Along with knowing what maximum monthly assessments and taxes you can afford, it’s important you know what your monthly payments will look like and you should definitely know your credit score.
Having a pre-approval will avoid a situation where you find a place you love but after going the mortgage application and approval process, we find out it's priced above your budget. We hate those kinds of situations. We can help you find the dream home that matches your budget, but we need to know what your budget is before we start looking.
Finally, in a seller's market, having a pre-approval tells the seller that you are a serious buyer and are ready to go. A seller may not wait for you to go through the pre-approval when they have other offers already in hand. That’s why it’s imperative that you get pre-approved before searching. When we find "the one", the stronger our offer is, the better our chances of being accepted.
2. Why do I need a realtor? Does it cost me money?
As a buyer, having a realtor represent you doesn’t cost you a thing. We help you figure out the type of home you want to buy and the neighborhood that is most suited to your lifestyle and needs. We schedule showings, negotiate the contract with your best interests at heart, and assist you in every step of the home buying process.
At the closing, we get paid by the seller, but we represent you. All we ask in return is that you allow us to provide you with the best possible buying experience, and then write us a great recommendation when it's over. Even better, if you refer us to your friends and family after we close on your dream home, we will know that we were successful in making YOU the #1 most important part of the home-buying process!
3. How much are closing costs?
The amount of closing costs depends on the purchase price of the home and the type of mortgage you use to purchase. Chicago charges city, county, and state transfer tax based on the purchase price. There are title fees, legal costs, and inspection costs. We generally estimate that your closing costs will be about 2% of the purchase price.
However, there are many types of mortgage loans, including loans that provide assistance toward closing costs, and loans that have higher fees but lower rates. Your agent has no control over your choice of loan or the associated fees.
Generally, we don't know your exact financial situation - our expertise is in the real estate itself. We leave mortgage loans to licensed mortgage lenders. Because we have a fiduciary relationship to you as our client, we will refer you to lenders we have worked with successfully, who we know and trust to provide the best possible advice and service.
4. How long does the process of buying a home take?
If you’re getting a mortgage, the average time it takes to purchase a home in Illinois, from having your offer accepted until the time you close, is an average of 30 to 45 days.
If you are a cash buyer you can close within a week (less, if need be), but you will still want to complete an inspection/appraisal, as well as, continue through attorney review of the contract and title insurance policy.
5. What is a foreclosure? How long do they take to close?
A foreclosure is the purchase of a home owned by a bank or other investor who purchased the property as a foreclosure. There is no homeowner involved and almost always the home is vacant. A foreclosure owner will most likely have an appraisal and the property will be priced at market value.
While a foreclosure MAY be a bargain, more than likely it will be a market-price transaction with fewer issues than one with an emotionally-invested homeowner selling their primary asset. A foreclosure transaction can often close very quickly once the terms are agreed upon, as there is only one corporate (bank) owner whose sole interest is making money.
6. What is a short sale, and why do they take so long?
A short sale is similar to a foreclosure, as bank approval of an offer is required. That's where the similarities end. In a short sale scenario, the owner, who owes more on the house than he can sell it for, puts it on the market to sell. Offers are made to the seller directly, and then the seller is required to get the offer approved by their bank.
How long a short sale will take to close depends on several factors. If the owner has more than one mortgage on the property, then more than one lender will have to approve the "short" payout. That can involve a lot of negotiation, or even a lot of refusing to negotiate.
If the property is part of an association they may have unpaid fees, dues, penalties, and there may be attorney fees to be paid as well. Those also have to be negotiated because, when we close, the buyer will INSIST on receiving title to the property free and clear of any of the problems that the seller had. Getting that done usually involves a lot of bureaucracy, negotiating, and red tape.
A short sale can usually be done in about 90 days. BUT, the most important thing to know about purchasing a short sale property is that the buyer must be prepared for a situation where they have NO CONTROL over the process. And while we will line you up with an experienced short sale attorney, and we've successfully completed many short sales for both buyers and sellers, the fact is the bank/s and anyone else who is owed money must ALL be satisfied before a closing can happen. That said, if you're patient, a short sale is the best opportunity we know of to purchase a property below market value.
7. Do I need to use a home inspector?
While a home inspection is not required, we highly recommend you have an inspection before you close on your home. We want you to find out from a licensed professional in a written report if there are any problems with the property that should be addressed immediately before or after closing.
That said, a great deal of the value of a home inspection is in providing you with a "honey do" list of little things to be aware of. When you read over your purchase offer you'll see that Paragraph 15 (of the CAR contract) or Paragraph 12 (of the 6.1 contract) specifically addresses what the inspection covers.
"Major Systems" and/or a repair cost in excess of $2000 are the guidelines. In other words, we're not going to ask the seller to replace a leaking sprayer hose in the kitchen sink. BUT if the sink doesn't drain properly we will definitely ask that they repair or replace it, so that it is in proper working order prior to closing. If it's a simple clog that can be cleared, great. If there's a tree root through the drain line in the yard that's causing the backup - we're not buying that until it's fixed, or we get a credit to have it fixed after closing.
8. What are special assessments?
There are two types of special assessments. The first refers to a cost that a Homeowners' Associations will charge to individual unit owners to cover the costs of an expensive building repair for which there are not sufficient reserve funds to cover. Upcoming, confirmed special assessments are required to be included in the association’s disclosure (referred to as a "22.1 disclosure" after the section of the statute that requires it) for a condo building.
If repairs are being discussed but are not yet confirmed (voted on) they do not have to be disclosed. However, you may find out about them by reading meeting minutes which your attorney will request as part of the attorney review process. We highly suggest that you read EVERYTHING carefully to make sure you understand what you could be required to pay for if you decide to buy a particular unit.
The second type of special assessments refers to dues (user taxes) that a local government may charges to homeowners for road maintenance and other services such as fire protection and street lighting. These are not particularly common. They're usually referred to as Special Service Areas and are disclosed in the listing.
In Chicago proper, the neighborhood called Lakeshore East is the best-known special service area. In the suburbs, some subdivisions are special service areas for various reasons.
In Evanston, neighbors can join together and ask to have their common alley paved at their expense. While these are usually one-time payments by all user-owners, it could happen that the work is more expensive and spread out across more than one payment.
9. What are reserves?
Most Condominium Associations maintain two separate bank accounts. One is the Operating Account. Monthly assessments go into this account, and monthly payments come out of it.
A "healthy" condo association will have assessments high enough to deposit 10% of their annual budget into a second account, called a Reserve Account, at the end of each fiscal year. Reserve Accounts are held with the intention of using them for maintenance projects and updates each year that are above and beyond the regular gas, electric, lawn care, window washing etc. Examples of maintenance projects would be for a smaller building: replacing a drain in a drive, and for a larger high rise: replacing the pool liner and re-doing the pool deck. These are projects that aren't done every year, but they do need to be done and shouldn't be a surprise to a well-run association.
It is always good to know how much the condo association has in reserves prior to placing an offer. The unit’s listing agent should be able to provide us with that information, but it's not unusual to encounter a management company who won't provide financial information until we have made an offer. Fortunately, we have at least the 7 days of attorney review to decide to cancel our offer if we learn things while reading through documents that make us uncomfortable.
Typically, the higher the reserves the healthier the condo's financials are, and the less likely a special assessment will be needed. However, there are two theories of condominium assessments.
In a high rise with several hundred units and an annual budget of $100,000 or more, we generally see significantly higher assessments and a much larger reserve account. In these buildings, if an elevator goes out, or an AC compressor needs to be replaced, they don't have time to put it to the homeowners vote to approve a special assessment. While it may be an obvious and much-needed emergency repair, the voting process is far too cumbersome to go through while everyone suffers through only 1 working elevator or half the inhabitants sweltering without AC.
Smaller buildings, on the other hand, generally with fewer than 25 units, are often self-managed and far more frugal with homeowners' funds. They often don't have elevators and individual units have their own HVAC and water heaters. In those buildings, you will see the lowest assessments - generally between $150-200. Those assessments cover only common area insurance, exterior maintenance and lighting, and water. In a building like that the reserve balance may be relatively small as homeowners are much more involved in the day-to-day operations of their building and are more likely to plan ahead for upcoming repairs. As an example, buildings with split-face brick must be resealed about every 7 years. A 3 flat on a 7-year schedule could EITHER increase the assessment so that there is enough money in the reserve to do the project every 7 years, or they could remind one another that they're all going to have to pay as of day X, don't forget.
In conclusion, it will depend on the type of property you're looking at how much you will expect to find in the Reserve Account. It's important to look at ALL of the documents before making a judgment as to whether the building is financially secure and well-run or not.
10. What is an escrow when we have a contract, and why do we have it? How is that different from a mortgage escrow?
Generally speaking, an escrow account is an account held by a neutral/disinterested party for the benefit of others for a specific purpose.
When we make an offer and you give a check for initial earnest money, that money is deposited into an escrow account. The escrow may be held by a variety of different escrowees, all of whom are registered with and monitored by the State of Illinois Licensing Bureau. Most commonly the money is held by the listing agent's brokerage in their escrow account.
In the event the listing agent's brokerage doesn't hold earnest money (Redfin and Kale are 2 Real Estate Brokerages that don't have Escrow Accounts) then EXIT Strategy Realty will hold it in our escrow account. Other alternatives are to have a title company or an attorney hold the funds.
As buyers, we deposit this money as consideration - what we "give" to induce the seller to enter into a contract with us. On their side of the bargain, the seller then takes the property off the market and foregoes opportunities to sell to someone else while we do our due diligence (inspection and attorney review). Once we're done with due diligence and have negotiated any repairs deemed necessary as a result of the inspection, we deposit the Balance of Earnest Money into the same account. These funds are earmarked as part of your down payment on the property and are applied to the purchase price.
The only exception is if you decide not to purchase even though you are approved to do so. That willful breaking of the contract will result in yet another round of negotiations regarding the disbursement of the escrowed funds. The escrowee cannot disburse funds without the express, written approval of both parties, so it will sit in the bank until everyone agrees who gets what amount. That is an extremely uncommon scenario (the last time I dealt with it was after 9/11) and most commonly everyone agrees to have the escrow sent to the title company and credited to the buyer at closing.
AFTER CLOSING - there's a different escrow, which is very much the same. This escrow is held by your lender in order to pay your property taxes and (possibly) your homeowner's insurance or your special service area payment. You will pay one-twelfth of the annual amount of each bill each month along with your regular mortgage payment. When the bills are due, the lender pays them from the escrow account.
Funds will be deposited at closing to establish the account with a sufficient cushion that the lender can make 6 months of payments from the account even if you don't make the payments yourself. You will receive a disclosure every year in January wherein the lender shows you how much they're holding, how much the bills they plan to pay will be in aggregate and, if the amount they're holding exceeds 150%, your future escrow deposits will decrease. Or, more likely, if they're not sufficient, your payments will increase.
11. What is a housing co-op, and how do I buy one?
Unlike a condo, co-ops are owned by a corporation. This means, when you buy an apartment that is in a co-op building, you are not actually buying real property (like you would in a condo). There usually is one mortgage on the entire building, and each owner holds shares in that corporation based on the size of their unit. The (often high) monthly assessment covers all the items that a condo assessment covers, but it also includes the real estate taxes on a per share basis. There is only one tax bill for the entire building, and all tenants of the building pay their share.
Historically, Co-ops used to be the only way of owning attached housing before the Great Depression. This form of ownership was created in the early 1900's as a way to get around newly created Federal Anti-Discrimination laws. Still today, members of a co-op association can arbitrarily refuse to allow a prospective buyer to buy throughout the application process. No reason needs to be given. The board members typically request an application and cover letter, financial statements, reference letters, a background check, and an interview.
This form of ownership prevents 90% of all banks from lending to clients interested in co-ops because banks must follow Federal Law. Cash buyers may be able to get a good deal on a co-op due to low demand. Bottom line, co-ops may not be for everyone, but Team McMurray has successfully helped multiple clients maneuver the interview process.
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