Introduction: Beginning the Home Hunt and Choosing a REALTOR®

Buying a home is one of life's most exciting experiences - and one of the most challenging, so buyers should plan to start at the beginning.

Initially, you should prepare a list of your housing 'needs' and 'wants'. In addition, identify communities that fit the criteria for where you want to live. Be sure to consider access to public transportation, shopping and health care facilities, the importance of quality schools and other community services, like recreational or cultural venues that might be important to your family. Once you identify the area (s) you will be searching for your new home, it is advisable to find a REALTOR® who is familiar with those areas.

I. Why choose a REALTOR®?

The purchase of a home is the largest investment most Americans will ever make in their lifetime. Today, however, disclosure laws, environmental regulations and a proliferation of financing options also make it the most complex investment most people will ever negotiate. A local REALTOR® will be the most familiar with the housing market and best prepared to answer your questions in a most detailed way.

Soon, you will discover that the Commonwealth of Massachusetts has enacted some of the strictest environmental laws in the nation; and myriad legal stipulations regarding zoning, fair housing, property disclosure, consumer protection, and building codes require buyers to be more knowledgeable than ever before. Today's buyers need the professional assistance and advice that only a REALTOR® can provide.

Significantly, you should be aware that not all real estate brokers and agents are REALTORS®. Only those licensed real estate professionals who have joined the National Association of REALTORS®, and are members of their respective state and local REALTOR® associations, may use the registered trademark term 'REALTOR®'. REALTORS® must adhere to a strict national code of ethics and currently account for the most active 25 percent of the more than 65,000 brokers and agents licensed to practice real estate in the Commonwealth.

REALTORS® also are committed to higher standards of education and business practice, and many REALTORS® have earned professional designations or have become certified in specialty areas of real estate brokerage. For example, agents who hold the Certified Residential Specialist (CRS) and Certified Buyer Representative (CBR) designations have received intensive training as residential specialists and as buyer agents respectively. For a full list of professional real estate designations and the specialization they demonstrate, see the summary of real estate designations detailed in the REALTOR® search section of this web site.

For 75-years, the Massachusetts Association of REALTORS® has dedicated itself to promoting professional standards within the real estate industry. Why not put that experience to work for you to safeguard the biggest investment you may ever make.

Here are some tips on choosing a REALTOR®

Make a thorough search, as you would before hiring a contractor or attorney. Use directories and the Internet, or visit the Massachusetts Association of REALTORS® web site at www.marealtor.com to locate area REALTORS®. Don't be afraid to ask a prospective agent or broker how long they have been licensed, how long they have been working in the local market, or how many sales they have closed in recent months? Always ask if they are a REALTOR® member. And, as with any important hiring decision, check references, asking friends and family about their experiences with a REALTOR® you are considering.

II. Selecting a REALTOR®: Buyers & Sellers Agents Defined

Whether you are the buyer or the seller, you can choose to have the advice, assistance and representation of your own agent.

Regulations of the Massachusetts Board of Registration of Real Estate Brokers & Salespersons require that written notice of the agency of a real estate agent be provided to buyers (and sellers) at the first personal meeting to discuss a specific property and that the broker ask the buyer (and seller) to acknowledge receipt of the notice.

a. Today, consumers have a choice when selecting an agent to work with during the property transaction. You may use a seller's agent, buyer's agent, or disclosed dual agent.

As a buyer, you have the option of working with a seller's agent or buyer's agent. The decision will depend upon the types of services you desire and the method of compensating the agent. In addition, a broker who is representing the buyer and shows that buyer a property listed with the broker's office is said to be a "dual agent." Dual agency is permissible provided that both buyer and seller have given informed consent.

Any one of the professionals identified above can help buyers understand housing costs, research properties available on the market within their stated price range, and provide important disclosures about the property being shown. They also can assist prospective buyers in obtaining legal forms and presenting the offer. They can provide information about schools and taxes, as well as provide general information to both buyer and seller concerning issues such as financing and required inspections.

In addition, any of these agents may accompany buyers to the home inspections, however, only the buyer's agent can assist in formal price negotiations on behalf of prospective home buyers.

b. All real estate licensees must act fairly with all parties, including those to whom they are not contractually obliged.

For example, both seller's and buyer's agents must disclose all known material defects in the property to buyers, although he or she is not required to conduct his/her own search to determine such problems.

In addition, a buyer's agent may assist buyers in determining what price and terms to include in an offer or a home and represent the buyer's interests in price negotiation. Brokers who act as a buyer's agent owe the buyer undivided loyalty, utmost care, disclosure, obedience to lawful instruction, confidentiality and accountability. The broker must put the buyer's interest first and negotiate for the best price and terms for his or her client.

Notably, the Massachusetts Association of REALTORS® offers a seller's statement of property condition for use by real estate professionals and completion of this form by the current homeowner may assist buyers in learning about the property's history and condition from the seller before an offer to purchase is made.

c. Buyers should understand some important distinctions between these agents, however, and how those distinctions may affect their relationship with their agent.

For example, buyers should be aware that speaking to the seller's agent is no different than speaking to the seller. In other words, buyers should not tell the seller's agent anything they would not want the seller to know, since the seller's agent is obliged to disclose all relevant information to the seller.

A broker acting as a disclosed dual agent works for both the buyer and the seller on the same property, and may only do so after giving full disclosure and receiving the informed consent of both parties. Disclosed dual agents owe the buyer and the seller a duty to deal with them fairly and honestly. However, in this type of agency relationship the broker does not represent either the seller or buyer exclusively. The dual agent will not disclose confidential information received from one party to the other.

Furthermore, a buyer's agent can negotiate on behalf of the buyer and provide advice on how much to offer; a disclosed dual agent cannot. A buyer's agent can discuss with the buyer their objective opinion of a home's value, a dual agent cannot.

III. Financing the Purchase of a Home

a. Pre-qualification and shopping for a lender

Although housing affordability is becoming increasingly difficult for many, it is important for buyers to carefully study their total net worth vs. their fixed expenses before determining the size and type of home they can afford. You may be surprised to discover you have more disposable income than you at first thought.

Buyers should complete the mortgage pre-qualification process as soon as possible to learn how expensive a home they may purchase.

Typically, the amount you will be able to afford for housing costs (principal, interest, taxes, and insurance) per moth is equal to about 28% of your gross monthly income. In addition, when estimating your actual purchasing power, most mortgage lenders will require that approximately 36 percent of your gross monthly income be greater than the total of your monthly debt payment. These ratios are the guidelines used by many banks and mortgage companies, but not all. Your REALTOR® can help you find a lender that may have higher qualifying ratios.

Many sellers prefer to know that a buyer has been pre-qualified, since failure to obtain the necessary financing is a great disappointment to both parties. In a hot real estate market with limited inventory, you may want to go even further and receive pre-approval for a mortgage from a lender. In a competitive market where multiple offers may occur on a single property, a pre-approved letter from a lender may make you a more attractive buyer to the current property owner.

Buyers also are encouraged to comparison shop for lenders, and will discover the process enables them to recognize the best set of options for their needs. Besides, interest rates and loan availability can vary widely from market to market, and from year to year.

If you are a first-time buyer, be aware that many lenders and government agencies, like MassHousing, offer below-market interest rates for qualified buyers who are purchasing their first home.

Real estate professionals are familiar with most local lenders, as well as special government sponsored programs for qualified buyers, and they may be able to provide about lenders to provide necessary financing. Their intimate knowledge of a wide variety of loan types and programs can be invaluable to buyers, particularly those who are relocating, or who are shopping for their first home.

b. Mortgages and loans

There is a wide range of mortgages and loans available in today's world of sophisticated financing. Buyers may ask their local REALTOR® to provide information about the various insured mortgage programs available such as Fannie Mae, Freddie Mac, private and commercial loans. In addition, Fannie Mae and Freddie Mac have information available directly from their respective web sites at www. And www.

There also is a wide range of loan types. For example, adjustable rates, fixed rates, graduated payment adjustable rates, growing equity mortgages, balloon loans, assumable mortgages, bridge loans, buy-down loans, FHA/VA loans etc.

c. Consumer Protection Laws in Financing

Consumer protection laws in the Commonwealth require that lenders not discriminate in providing loans and other financing, and that real estate agents disclose referral relationships. These are called Truth in Lending Laws.

For example, it is required that an agent make full disclosure of Controlled Business Arrangements (CBA), in which a person has an affiliate relationship or ownership interest of over one percent in another business which provides settlement services, and directly or indirectly refers business to that provider.

The Real Estate Settlement Procedures Act (RESPA) was enacted in 1974 to provide consumers with disclosure about closing costs and to prohibit unearned fees (kickbacks/referral fees). This law prevents real estate agents from unlawfully earning income for such referrals.

Additional information about Truth in Lending laws, can be obtained through your local REALTOR®. (For specific details about closing costs, see section III of this report: The Transaction Explained.)

d. Tax breaks for buyers

There are significant tax advantages to home ownership, most prominently that interest payments on mortgages and property taxes are, in most cases, tax deductible. In addition, some home equity loans also are tax deductible, and many people use their home equity loans to consolidate their debt, thereby making all the debt interest tax deductible. To get more information on the tax benefits of being a homeowner, ask you accountant or tax preparer or view the IRS.

IV. The Transaction Explained

a. Making an offer to purchase

Once you have found the house you want to buy, there are a number of procedures that must be followed to secure a binding legal agreement. The first step most buyers take is making an offer to purchase. Your real estate agent may assist you in this process by transmitting your offer to the seller.

The offer to purchase also may contain stipulations to the sale, as well as the buyer's financial offer. For example, the offer to purchase may be contingent upon the seller finding suitable housing within a given period of time; or it may be contingent upon the buyer's ability to secure financing.

Massachusetts law requires that the listing agent present all offers to the seller forthwith, and when the listing is exclusive, offers are presented to the seller through the exclusive listing agent.

It is not uncommon for an offer to purchase to be followed by a counter offer by the seller, and can even be countered again by the buyer. Depending upon how it is written, an offer to purchase can be viewed as a legal contract that binds both the seller and buyer.

There are many additional questions regarding the offer to purchase, such as whether the seller will agree to a home inspection, or whether the buyer can present an anonymous offer. Check with your REALTOR® to make sure all such questions are answered, and that offers to purchase are made within the requirements of the law.

b. Purchase and sale agreements

The offer to purchase outlines the initial agreement between the buyer and seller regarding the purchase price and any provisions to be included in the subsequent purchase and sale agreement. Depending upon the intentions of the buyer and seller and the language contained in the agreement, acceptance of an offer may be sufficient to create a binding contract between the parties.

The purchase and sale agreement contains a list of inspections, services and fees agreed upon by both buyer and seller. There may be as many as 30 clauses in a purchase and sale agreement, so buyers should be intimately aware of their responsibilities prior to signing. Because most sellers typically require a larger deposit when the Purchase and Sale Agreement is signed, buyers should make sure they understand their rights and obligations before signing. Buyers with specific legal questions or concerns should consult an attorney who is familiar with real estate law.

Although brokers are not attorneys, they may complete a standard offer to purchase form and are aware of its content and importance in the home buying process. In most cases, the purchase and sale agreement is the final written and binding agreement for all terms and conditions of the transaction.

c. The up-front money

Buyers may be expected to put down a deposit, sometimes called earnest money, at the time of the purchase and sale agreement to secure the property is presented. This money will be credited to the buyer at closing.

Buyers are typically expected to pay for any and all inspections performed on the building prior to closing. If, however, the seller agrees to pay for such inspections, such an agreement should be spelled out in the purchase and sale agreement. The cost of these and other inspections varies, but buyers should be clear about what inspections they will require, and what the cumulative costs will be. (see Section IV. Inspections Required & Recommended).

Aside from inspections, buyers will need to calculate the amount of down payment money needed to secure financing, and tax escrow expenses. Tax escrow in Massachusetts varies depending upon the month of closing. The following is a chart of what buyers can expect to put into escrow. For specific property tax rates, check with your REALTOR®.

For the purpose of demonstration, the following list has been prepared based upon a purchase price of $200,000, with a 20 percent down payment ($40,000), and the remainder of the purchase price to be financed. (Please remember that down payment figures may range from 5-25 percent, depending upon the source of financing.) Other charges also may vary, but this chart should demonstrate what buyers can expect. Check with your lender for the exact expenses your closing will cost.

Points are the pre-paid interest charged by many lenders and often vary from 0-4 points depending on the loan type selected by the buyer.

Some other important notes regarding financing costs: PMI premium - private mortgage insurance is required if you finance more than 80 percent of the purchase price. Personal attorney is at the buyer's option and may cost between $500-$750. Buyers also will be expected to pay for any fuel oil remaining in the tank at time of closing.

V. Inspections

Inspections can include, but are not limited to, a building (home) inspection, well water inspection, pest inspection, radon and lead paint inspections, as well as a UREA formaldehyde foam insulation inspection. Additionally, the Commonwealth of Massachusetts now requires all homes with septic systems or cesspools to undergo a Title 5 inspection to insure compliance with local health ordinances.

a. Building inspections, though not required, are commonly used by buyers in order to get an unbiased professional review the condition of the property. Home inspections give you, the buyer, detailed information on potential problems and a means to evaluate the physical condition, structure and mechanical systems of the house.

In some cases, the cost of the home inspection, which often costs between $200-$500, can be applied as part of your down payment, as with a HUD insured mortgage.

Buyers should consider making a successful home inspection a contingency of their purchase and sale agreement in the event serious structural problems cause them to rethink their commitment.

b. Title 5 is the common name for a Massachusetts environmental code governing septic and cesspool use. Inspections are mandatory before any home serviced by a septic system can be sold or enlarged.

An inspection is required within 24 months prior to a sale or transfer. If weather prevents an inspection within this time period, one must occur as soon as weather permits, but not later than six months after the sale or transfer.

In most instances, systems that fail inspection must be repaired within two years. In addition, applications to install new systems require a soil evaluation test performed by an evaluator approved by the Massachusetts Department of Environmental protection (DEP).

The owner of the property is responsible for compliance with Title 5. The price of inspection is not regulated. On average one can expect to pay $300-$500 for a Title 5 inspection. However, the seller and the buyer may decide who will pay for the costs of the repair or upgrade, which can be negotiated as part of the sales agreement. Some mortgage lenders may require any repair or upgrade to be completed before closing or that the funds for the cost of the repair be placed in escrow before closing.

Financial assistance is available to aid property owners faced with Title 5 upgrades and repairs. Ask your REALTOR® what assistance programs, if any, are available in your area.

Additionally, in 1997, the Massachusetts Legislature authorized an income tax credit to ease the financial burden placed on homeowners. Eligible property owners can qualify for a tax credit of up to $6,000, or 40 percent of the cost of a septic system upgrade, whichever is less, over a five-year period. The credit applies to primary residences only.

c. Radon is a naturally occurring ground gas. Short-term tests include charcoal canisters, alpha track detectors, electrician chambers, continuous monitors and charcoal liquid scintillation. In most cases, an elevated radon level can be corrected simply and economically. Buyers who are interested in conducting a radon test should read the directions carefully and make sure they are followed.

d. Termites and pests also can be detected during the inspection process. This inspection can cost approximately $150, but may be well worth the money, particularly for older homes and/or if termite damage is detected at the home inspection. Termites and pests can be exterminated and prevented from returning.

e. Lead Paint. If you are purchasing a home built before 1978, the seller or REALTOR® will give you a state-approved Lead Paint notification form that explains this issue in more detail. You have the right to test the property for lead paint if you want. Massachusetts law requires that all homes where children under the age of six live must be lead-safe.

VI. Closing the Deal

The process of closing the sale can take between 30-60 days (or longer), a length of time necessary for a number of critical legal requirements to be met, including clearing the title, recording the deed, approving loan applications, allowing the lender to make a property appraisal, and to have the plot plan surveyed.

A closing date will be set, at which time all the parties to the transaction must have completed their requirements to consummate the sale. The bank's attorney is responsible for conducting the closing, and will calculate and compute a number of financial requirements including at least some of the following:

1) Bank attorney's fees, check with your lender to find out what these will be
2) Recording fees for new deed and mortgage (approximately $60)
3) Appraisal fee, which is approximately $250, and which is required by Massachusetts state law
4) Credit report (approximately $50 each)
5) Private Mortgage Insurance (required for purchases with less than 20% down payment
6) Title search (often included in bank's attorney fees), and title insurance (approximately $1.50 per $1,000 of the mortgage amount)
7) Survey/plot plan (approximately $150)
8) Municipal Lien Certificate (approximately $25)
9) Real estate tax adjustments and interim interest (depending upon the number of days/months left in the year)

Buyers are not required to hire an attorney to represent them in the closing transaction, but may choose to as a precaution against any potential problems. The bank's attorney has an obligation to ensure all legal requirements are met, but represents the bank only and not the buyer. A buyer's attorney can review all the documents to ensure your needs, as a buyer, have been fully met.

Finally, the buyer should bring a number of items to the closing.

The buyer must present an insurance binder at the closing, covering the property for one full year.

The buyer should bring a certified check or bank check payable to him/herself for the closing costs and purchase price, less the amount of deposits and mortgage amount. The bank's attorney will give you an exact figure.

The buyer also should bring a checkbook in case there are any last minute adjustments, such as for fuel.

* Home Buyer Information is from the Massachusetts Association of REALTORS^®