Buying a Home 101: How It Works and What Happens During Escrow

Recently, friends of mine moved from NYC to San Francisco and, given the insane state of rent prices in the city right now, they briefly entertained the option of buying a place. But then they realized they had no idea how you go from showing up at Open Houses to being a homeowner. And the problem with most information on the internet is, googling what’s involved in a home purchase is basically like going to WebMD to find out why your foot hurts (your body is shutting down). So I will try to help demystify some parts of the process, sharing the plain + simple things I wish I knew before getting into the home-buying process myself in 2010!

BUT FIRST: I will assume if you’re thinking of buying a home, you’ve already done some legwork to figure out your budget – what your down payment / monthly mortgage payment / local property tax liability will be. If not, there are lots of useful mortgage calculators online, as well as budget calculators (google “home purchase budget calculator”).

I’ll also assume you know the basics on how to start looking for homes – your local MLS, Zillow, RedFin, and a host of other websites will help you hunt. You can also contact a real estate agent to help you get access to homes before their listings are published (if you’re super serious).

WHY GET A REAL ESTATE AGENT? DOES IT COST ANYTHING?

The short answer is, definitely get an agent. It doesn’t cost the buying party anything to have an agent (it only costs the selling party money via the agents’ commission), and your agent is going to be helpful for a lot of things, including:

  1. Helping set up viewings of homes that are “by appointment only”
  2. Negotiating with the seller’s agent to get your offer accepted instead of another potential buyer’s
  3. Setting up the inspections + title paperwork with a title company (more on this later)
  4. Usually as a “thank you” for getting them a nice little commission, they’ll buy you a “home warrantee” as a housewarming gift, which is basically a blanket warrantee policy that covers fixing anything that breaks during your first year in your home.

As far as selecting a real estate agent, I always recommend working with an agent whom a friend had a previous great experience with – real estate isn’t rocket science, so you can assume any agent has the knowledge and skills to get things done (I mean, you’d HOPE…). Then it comes down to trust and dependability.

One advantage of going with a more experienced agent is that agents with more years + homes under their belts have stronger networks with other real estate agents in the area, and may have more leverage with a selling agent in helping your offer get extra-special consideration. That said, sometimes newer or earlier-in-their-career agents will be more likely to spend more time per client, and will really make you a VIP priority.

WHAT TO PREPARE BEFORE YOU MAKE AN OFFER:

If you’ve ever hunted for a rental apartment in a competitive city, you know that you’ve got to get your documentation ready to be taken seriously by a landlord – credit history, rental history, pay stubs, references, bank statements showing you can afford the deposit and 1st/last months’ rent, etc. Well, preparation for buying a home is very similar, just a little more involved. The most important thing to arrange in advance:

GET PRE-APPROVED FOR A MORTGAGE. If you aren’t planning to buy a home in 100% cash, you’ll need a mortgage to finance the purchase. And when you make an offer on a home, the offer will indicate exactly how much money you’ll put into your down payment, and how much you’ll need to finance through a mortgage. Unsurprisingly, offers that show a higher down payment and lower mortgage are more attractive, on a purely numbers basis, than offers requiring more financing. The reason is, sellers know that if they accept an offer with a mortgage, there is a chance that a couple weeks into escrow (more on escrow later) the buyer ends up not ultimately getting the mortgage, and then the whole deal falls through, which wastes everyone’s time and money.

So here’s what you do: find a bank you think you’ll want to set your mortgage up with. It could be the bank where you already have a bank account, a bank/lender where a friend or colleague has been really happy with their mortgage broker (having a great mortgage broker that you get along with is a really nice bonus, by the way), or just simply whoever offers you the lowest rate. Then, set up a meeting with a mortgage broker to get pre-approved for a mortgage that is significantly more money than you actually plan to borrow. Your mortgage broker will want to see several months of pay stubs / income statements, your bank account balances, and will also run your credit report, before agreeing to pre-approve you. Once you’ve been pre-approved, get a letter from the mortgage broker on bank letterhead stating what size mortgage you’ve been pre-approved for. This letter will be vital for when you make an offer.

WHILE HOME SHOPPING, READ THE DISCLOSURES:

When you’re shopping for a home, you will ultimately have spent very little time in the home before making an offer – versus a car, where you might test-drive the same model even TWICE before pulling the trigger. Recently, a client of mine bought a house in Oakland and joked that our on-site meeting was only the third time she’d ever even seen the place! So, before you make an official offer, get as much info as you can. All sellers are required to share disclosures on the home, which can include: damages or previous structural / plumbing issues, whether a violent crime or death happened on the property, and a host of other things they’re obligated to tell prospective buyers so that you don’t get bamboozled.

HOW DO YOU MAKE AN OFFER ON A HOME?

So you’ve found your dream home, you can afford it, and you’re ready to make an offer! This is another place where having a real estate agent (buyer’s agent) is useful. They help package up the offer and deliver it to the seller’s agent. Your offer is basically a packet of documentation (bank statements, income statements, pre-approval letter, etc.), the offer terms, a signed contractual offer (tech-savvy agents will let you sign the offer via DocuSign) demonstrating that if it’s accepted, you’re officially the buyer and will enter escrow, and potentially a heartfelt letter from you to the buyer, telling them why you love their home and how much it would mean to you (and your family) if your offer was accepted. Sometimes these letters sway a seller toward accepting your offer, and sometimes they just further demonstrate how motivated you are.

OFFER TERMS? In addition to the amount you’re offering to pay for the home (could be under or over the asking / list price, depending on your local economy), you can also ask for other terms as part of your offer. For example, if you’ll need a mortgage to buy the home, you can ask the seller to pay down interest rate points in your loan, in exchange for a higher purchase price. What?? Some sellers and their agents want their home to sell at as high a price as possible – because the sale price gets published and influences future list prices on similar homes. But if the real estate market is such that there’s room for negotiation, you could either offer less than the asking price, or you could offer closer to the asking price and get your discount behind the scenes.

Here is an example scenario: your dream house is listed at $100,000. But you want to offer more like $90,000 – or overall, save $10K. You can offer $90,000 and hope the seller + seller’s agent accept, or you can offer $95,000, and ask the seller to pay down like 0.25%-0.5% of your interest rate (saving you thousands over the course of your mortgage), which would cost the seller like $5,000 for a total discount to you of $10,000. So you still get $10,000 off, but the final sale price gets published at the higher $95,000.

OTHER TERMS could include conditions you’re asking the seller to abide by if the offer is accepted – things like, you want them to include the washer/dryer with the house sale. Or the patio furniture. Assets like window treatments and kitchen appliances are usually considered part of the house already, and not necessary to have in the offer terms. But ask your real estate agent if you aren’t sure.

COUNTER-OFFERS: If the seller is seriously considering your offer, they might send you a counter-offer with revised terms. The counter-offer, and your subsequent counter or acceptance of their counter-offer, are all contractual signed documents, just like the initial offer.

WHAT HAPPENS AFTER MY OFFER IS ACCEPTED?

Congrats! Your offer has been accepted and now you are in escrow. You’ve probably heard that word a billion times associated with home purchases, but if you’re anything like me when I first entered this process, you know the word but not what it is.

The escrow period (or “being in escrow” or “opening escrow”) means you and the seller are contractually trying to make the sale happen! Typically, escrow is 30 days long, and in that time, everything happens that makes the purchase go through. The details of the process are nuanced depending on whether you’re getting a condo or house, where in the country are you, etc., but just so you know what to expect, activities that happen in escrow include:

  • HOME INSPECTIONS: All home sales are subject to inspections. This reassures you as the buyer that, if the home you fell in love with is actually crumbling apart or has serious issues (or even little issues, like an outlet not working), you don’t have to go through with the purchase unless/until the seller takes care of fixing the problems, or you re-negotiate the deal. Your agent will have their go-to certified inspectors visit the home during the escrow period, and different home types / different areas will have more or fewer inspection criteria. You should plan to be there during the inspections.
  • DOWN PAYMENT TRANSFER: Your offer probably included an amount you’d put down, along with the amount you’d mortgage. Your accepted offer might have even come with a “good faith deposit” that goes toward your down payment. Well, the rest of that down payment is due during escrow, so at some point you’ll go the bank to make a (very emotionally painful / exciting) wire transfer of the rest of your down payment to the seller’s bank.
  • OFFICIALLY GETTING A MORTGAGE: If you’re financing with a mortgage, you’ll go back to the bank from which you got your pre-approval letter, or a different bank if you want to start from scratch, and actually get a mortgage. Getting a mortgage is similar to getting any other kind of loan, except more things to sign and a bigger commitment.
  • CHANGE OF TITLE: On the last day of your escrow period, if everything with inspections is fine and cash / financing payments for the home go through, you’ll officially change title! You’ll go to a title company (your agent will set this up for you with their go-to title company / title signer), you’ll be walked through and told to sign / initial a million pages, a notary will take your finger prints, and when that process is over, title of the property has transferred officially from the seller to YOU!!! OMG!!!!

The title company will then submit all the paperwork to the County, and within a day or two after that, your agent will call you to schedule a time for you to GET THE KEYS!!!!!!

Of course there are so many other versions of this very simplified 101-level home buying explanation – and much of the above gets complicated if you’re buying a foreclosure or if there are competing offers or if your seller wants to rent the home back from you for a couple months, or whatever. But, hopefully if you have been thinking about buying a home for the first time, this was at least a little more helpful than the scary overly technical articles I relied on a few years ago!