Peter Economy - Building Your Custom Home For Dummies

You or your real-estate agent has to complete an offer form accompanied with some sort of good faith deposit check from you. The deposit amount can be anywhere from 1 percent to 3 percent of the purchase price. The check is deposited in an escrow account upon acceptance of the offer and held in escrow until you close the transaction. The offer and copy of the check are then presented to the seller and negotiations begin.

You and the seller can negotiate the deal through subsequent documents called counteroffers. The seller’s willingness to negotiate is relative to how hot the real-estate market is at the time. A hot market usually translates to less willingness to negotiate. The seller isn’t obligated to accept any of your terms and can always choose to say no. Of course, you can always choose to walk away. Ideally, you’ll each give in a little and come up with a workable compromise. As Kevin’s mom, a 30-year real-estate-agent veteran, said, “An offer is an opening of a conversation.” The fewer emotions in the conversation, the more easily the negotiations proceed.

If the property is listed with a real-estate agent, that agent doesn’t represent your interests. Make sure you bring your own agent to represent you as the buyer. Doing so doesn’t cost you any more because the seller pays the commission. If no real-estate agent is involved, consult one for guidance. They may help you with the paperwork for a small fee. You can always check with an attorney as well, but attorneys generally charge more and sometimes make the transaction more complicated than it needs to be.

We explain various financing options in the next section. After you’ve determined which lending approach is right for you, you’ll fill out a loan application with the lender of your choice. The lender orders an appraisal from a certified appraiser. You’ll probably have to pay for this appraisal up front. The cost can vary depending upon location and the lot’s value, but usually it’ll cost between $300 and $600. You’re entitled to a copy of this appraisal, which will be based upon comparable lots in the area that have sold in the last six months to a year. The original appraisal goes to the lender along with the application and any credit documentation you provide, such as bank statements, W-2s, and tax returns.

At this time (or likely within three days), your lender will give you the loan estimate, a document outlining all the fees and closing costs associated with your loan and the purchase transaction. The costs vary based upon the loan amount and type of loan, but you can anticipate a range of 3 percent to 6 percent of the purchase price as an estimate of all the costs involved.

You can save the upfront cash for closing costs by offering to increase the price of the lot by 3 percent and then asking the seller to credit you 3 percent of the purchase price for nonrecurring closing costs. Most lenders accept this agreement as long as the appraiser mentions that it has no effect on the value. Financing the closing costs in this way leaves your cash available for other important costs along the way.

The term escrow means depositing money and property with a neutral third party to be disbursed upon completion of all terms of a related agreement. Each state has its own process for escrow. Some states use attorneys to act as the escrow agent while others use title insurance companies. If you’re in a wet funding state, you, the seller, and the escrow agent all pick a day to meet and sign the paperwork at one time. In a dry funding state, such as California, you each execute the paperwork on your own or with a notary public over several days before the actual closing date.

The escrow period can be anywhere from 30 days to 6 months depending upon the needs and negotiations of you and your seller. Your real-estate agent helps guide you through the closing process. If you don’t have a real-estate agent, then the escrow agent will be your best guide. You can find good escrow agents through referrals from real-estate agents, loan officers, and friends. Most are well trained, so unless your transaction is extremely complicated, you should be able to go with someone you simply find personable.

While you’re in escrow, you have a chance to complete any research on the property that can’t be done before the offer. In a hot market, you may not have had much time to research the property before putting in an offer. As soon as you have a chance, make sure the property meets your needs relative to size and value as outlined in this chapter. If you have concerns about the land, such as building restrictions or guidelines, you may want to add contingencies to the offer that allow you to pull out of the transaction if your research results are unfavorable.

As soon as your loan is approved, you need to bring your cash to escrow and sign the loan documents. You can wire money into escrow or bring it in the form of a cashier’s check. Bring your pen because you’ll have as many as 100 documents to sign for the escrow and the loan.

The title insurance company provides you with a deed to the land and a policy insuring that it’s yours. The title company pays the seller the money due and records any documents and deeds related to the transfer and new loan.

Most people finance their lot purchase through a local bank or private lender. A good mortgage broker can help you determine who has the best programs to meet your needs. Local banks generally have more conservative criteria for loaning on land because they’re heavily regulated. Large, publicly held lenders have the ability to offer creative and flexible loan programs because they mix the risk with other loans in their portfolio.

Some people wonder if you can purchase your lot with a construction loan. The problem is that your house plans must be ready and approved at the time of closing, and the seller must be willing to delay closing if your plans aren’t approved yet. If you find yourself in this unlikely scenario, talk to your loan officer to see if it’s possible.

Not all mortgage brokers have experience with land and construction loans, so be picky. Don’t trust a random online pick for this one; ask around to find the experts. Try to find a loan officer who has 100 or more loans of these types under their belt. The best way to test loan officers is to see if they ask you more questions than you ask them. If they simply try to sell you on one type of loan without inquiring about your needs, then look for someone else to help with your loan needs.

The first thing a lender will ask is whether you intend to buy the land for your own personal use. The lot-financing rates and terms for owner-occupied properties are much better than for investment properties. The lender looks to see if it makes sense for you to move to this property. If you’re claiming it to be a second home, the lender will expect it to be in a resort type area or a city other than your primary residence. Buying the lot in a cheaper neighborhood on the other side of town from where you currently live will raise eyebrows.