As Housing Market Heats Up, First-Time Home Buyers Taking More Risks
‘Waiving Mortgage Contingency or Home Inspection, Making an Offer Before You Know How Much a Property is Worth Could be Costly, Says Massachusetts Association of Buyer Agents
Boston, MA – June 4, 2012 – First-time buyers hoping to take advantage of continued low interest rates and purchase a new home or condominium this spring are starting to take more risks – some of them potentially costly – when competing for "hot" properties in and around Boston, according to the Massachusetts Association of Buyer Agents (MABA).
Across the state, but even more so in the Boston area, MABA agents say they are seeing first-time buyers in competitive situations abandoning the kind of standard practices that protect buyers both during and after a real estate transaction. "The sort of risks that these buyers are taking in so-called multiple offer situations is alarming," says Sam Schneiderman, president of MABA. "I'm not sure whether they have agents or attorneys or are going it alone, but they can get themselves into a world of trouble."
According to Schneiderman, here are the most common risks MABA agents are seeing first-time buyers take in this market – risks that he says should be avoided no matter how attractive a deal otherwise appears.
1. Waiving the Mortgage Contingency
As a buyer, the mortgage contingency protects your deposit in the event that you cannot get a mortgage to purchase the home for any reason (unless exceptions are specifically noted). In a market like this, the chief danger in waiving the mortgage contingency is that the property won't appraise for the price agreed to by you and the seller. In this case, the bank is unlikely to loan the full amount needed to purchase the property, forcing you to opt out of the deal and lose the right to your deposit or go through with the transaction and pay the difference between the appraised value and the agreed upon purchase price – assuming you have the funds to do so. Either way, having waived the mortgage contingency can be costly in the end.
2. Waiving the Home Inspection
Waiving the home inspection is also becoming more common in this market. "Our agents are seeing a lot of this – especially when new construction is involved," says Schneiderman. "The thinking is that if it's 'new' everything will be fine so I can waive the home inspection, but this is often not the case." You need to know that the overall workmanship is good and that the home's electrical and plumbing are up to code. Heating and electrical problems, in particular, can create safety issues down the road. Waiving the home inspection when buying a rehabbed property can be even more perilous – anything could be covered over. A home inspection is critical to protecting yourself, your home, and your family – don't waive it!
3. Making an OFfer Before You Know How Much a Property is Worth
Before making an offer, it's important to have a clear sense of what the property is worth. The guiding principle is this, says Schneiderman: if you're financing your home purchase, your loan will be based on what the bank will appraise it for. Deals are falling apart here in Massachusetts and across the country as banks refuse to make loans on properties because appraisers maintain the purchase price exceeds market value. So, what's the solution? In most cases, working hand-in-hand with a good buyer's agent, you can determine the current value of a home or condominium beforehand by looking at comparable sales or "comps" and other market data. You make your offer – or offers, accordingly. A good buyer's agent will also help you determine when to walk away from a deal so you don't get yourself in a bind with the bank and/or overpay for the home.
Schneiderman's advice to first-time buyers: "In a market like the one we're in now it's important that you have a relationship with an agent – a good buyer's agent – who is committed to understanding you and your needs and who will advocate for you and you alone. The risk of doing otherwise – going it alone or working with an agent whose interests are not aligned with yours – is just too great."