Initial Expenses with Buying A Home

In our opinion when buying Houston real estate, there is some major confusion surrounding the term, "No Money Down", that I feel needs to be explained.  Using the services of one of our consultants to buy a Houston home is absolutely free for you, yet there are four sets of necessary expenses that one must consider before choosing to walk down the path to owning a home.

In regards to owning such a large Houston real estate investment, the necessary costs appear to be minimal.  However, I still have clients that are caught by surprise when I explain to them the necessary costs that are associated to submitting a contract on their chosen home.  Have you ever been confused by terms such as closing costs, prepaids, down payment, or earnest money?

If so, then I urge you to read on as I will unveil what this items have to do you your next real estate investment. 

Home Buying Expenses

There are four areas of expenses that need to be taken into consideration before you start thinking about buying a home.  We'll title these expenses as down payment, closing costs, prepaid expenses, and initial expenses.  We'll do our best to minimize these costs through seller contribution (seller pays for some of your costs), however there are some expenses that seller contribution cannot cover.  We'll call these - Initial Expenses.

Initial Expenses

Most of our clients first concerns are with the initial expenses to purchasing a home in Houston. These initial expenses is what we will concentrate this article on.

Earnest Money (Required)

When you submit a contract on a home, you must submit your contract with some amount of earnest money.  Earnest money is a check made out to the title company closing the transaction that offers reassurance to the seller that you are a serious buyer.  In our experience, I find that for offers on homes priced less than $100,000, the typical earnest money required is $500.  $100,000 - $200,000 would be $1000, and $200,000+ would be $2000 and above.  Therefore you can initially predict that you will have to have at least $500 to buy a home.  This earnest money check is made out to the title company and deposited immediately after your offer is accepted.  It is not deposited if the offer is not accepted.

Why is earnest money important, you ask?  Suppose you owned a home and needed the home to sell within three months.  In this example, there is no such thing as earnest money.  One day, you receive an offer to purchase your home that gave you exactly what you needed in the sale.  25 days from the date you accepted the offer, the buyer backs out of the deal.  What did he lose?  Nothing!  What did you lose as a seller?  Time!  You've wasted your time with a buyer who never purchased the home.

You see, if all buyers submitted contracts with no earnest money, there wouldn't be any major reason for a buyer to stay in a contract.  Sellers want some reassurance that you will follow through with your end of the bargain.

Option Money (Optional - But Recommended)

There is another tactic to minimize costs, and that is to submit your contract with an option.  An option is a certain amount of days paid for by the buyer that allows the buyer to exit out of the contract for any reason at all.  You will pay on a per day basis, and during that time will seek to verify that the home can be insured, perform a home inspection, and negotiate repairs with the seller.

In our experience, option periods cost $10/day.  We recommend our clients submit offer with a 10 day option period ($100).  This gives us ample time to get our home inspection and negotiate for repairs.

How do you benefit?  Let's say we get an inspection and find a major needed repair with the home.  You ask the seller to perform the repair at their cost and the seller refuses.  As long as you are in the option period, you can back out of the contract!  If you decide to exit during your option period, then you lose your $100 but gain your $500 earnest money in return!  If you did not have an option period, you would of lost your $500 earnest money.  Personally, I'd rather invest $100 on an home than $500.

Home Inspection (Optional - But Recommended)

I say a home inspection is optional, however, it comes as a HIGHLY SUGGESTED expense.  A typical inspection costs begins around $250 and increases as the size of the home increases.  A licensed home inspector will find all flaws (even cosmetic) in a home, and will aid you in making the most informed intelligent decision possible.  It's important to remember that you must not get petty over cosmetic issues.  It's major mechanical and structural issues that we are worried about.  Anything that could pose a danger to your family should be repaired before move-in at preferably the seller's expense.

This would cover a basic home inspection.  There are additional inspections that you could receive, such as a termite, stucco, a/c, etc. that are additional fees from your inspector.  These are optional and are solely your decision to perform.  If performed, they will surely help you make a more informed decision.

There are many home inspectors in Houston that perform these inspections.  If you do not have a preferred inspector, one may be recommended by one of our consultants.

Appraisal (Required)

This is a fee associated with your lender.  The home must appraise for at least the amount you are offering to pay for it.  Appraisals on a home typically cost $325 and the lender will usually require this fee to be paid initially.  There are circumstances where you may be reimbursed after the deal is closed.
 

Summary

When taking a summary of all expenses we have:

• Earnest Money - $500+ (depending on sales price)
• Option Money - $100 (optional but recommended)
• Home Inspection - $250+ (depending on size of home - also highly recommended)
• Appraisal - $325 (lender fee)

TOTAL - $1,175 (at least)

It Does Cost Money

As you can see, it does cost money to buy a home.  You will have to come up with the earnest money to even have a contract accepted.  You must be prepared for this before deciding to purchase your next home!

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Steven Castaneda, Realtor, is a real estate consultant with Keller Williams Realty in Houston, Texas. He has been consulting on Houston Real Estate transactions for 2.5 years, and focuses on coaching his clients to make the most informed and intelligent decision possible with their real estate investments.

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