Sign Here, And Here, And Here... : Lesson Nine

Each Doc in the Homebuying Process

Welcome back to the Theopetra Testament. Subscribe now so you don’t miss our educational posts bridging the gap between cryptocurrency and real estate.

This post, composed by our Self-Repaying Home team, will give you a brief update of financial markets in relation to housing before diving into the ninth part of our series on purchasing a home—understanding what each document is in the home buying/selling process and its value to you.

Market Update:

Current Mortgage Rate: 5.52%, and that’s down 5 basis points over the last week (Bankrate).

Markets continue see-saw action in 2022, with the roller coaster of equities enjoying less turbulent times in recent weeks and bouncing 10% off the lows while US Rates markets digest polarizing Fed speech in anticipation of future rate hikes. In commodities, oil (and in particular, gasoline) has fallen for roughly a month straight, with the national average gas price nearing $4.10/gallon. The strong Dollar has gold and silver near YTD lows and the Euro trades at near parity with the Dollar- should we make it official and make the Europeans call it ‘soccer’? Let’s dive in (and plan a European vacation)!

Broad based inflation remains robust in the American economy and continues to be the catalyst for all markets; the most recent CPI report showed headline inflation growing at 9.1% YoY – the highest inflation print since (last month? nope) 1981. With inflation at ~40 year highs, the Fed used July’s FOMC meeting to hike an additional 75 basis points, representing the second consecutive 75 bp hike (first time since the 90s), and bringing the Fed Funds rate to 2.50%. While 2.50% may seem like a large overnight (read: risk free) rate for the QE FoReVeR; PrInTeR GO BRRR; RaTeS tO ZeRo crowd, it’s still nearly a full TEN PERCENTAGE POINTS LESS THAN WHEN INFLATION WAS THIS HIGH LAST TIME IN AMERICA. I mean, can you imagine an overnight rate north of 10%?

Even with the upward inflation trajectory, Jay Powell saved our 401Ks and provided commentary that the market interpreted as dovish; he claimed a 75 basis point was ‘unusually large’ and that ‘prior hikes have not yet flowed through the economy yet’, while acknowledging that ‘the economy and demand have slowed.’ And that’s the kicker - Q1 and Q2 GDP have both come in negative, illustrating an American economy that is in a textbook recession. Yes, the Fed is hiking at its most aggressive pace in 30 years while the economy is in a recession. Just don’t tell that to the White House, who is already altering the definition of ‘recession.’

OK, so where do we stand? Equities are near/at 3 month highs, rebounding off the dovish tone from Powell and theory that rates will have to be cut a year from now. The Dollar remains King of the world, with an American monetary policy that is ~250 bps more restrictive than its European counterpart (Europe literally hiked 50 basis points in July, its first hike in 11 years, but unfortunately this still places the overnight European rate at...zero. Yes, until last month, rates were still negative in Europe). And depending on who you ask, this is either A) a recession, B) not a recession, C) the shortest recession ever with rate cuts just < 12 months away, or D) all the above.

Meanwhile, the housing market is showing signs of cooling (median single family home prices greatest two-month drop in history of data, at -11.9%), the consumer is maxed out with total credit card debt up 13% over the last year (largest increase in 20 years), and we still have Russia, Ukraine, and now as a bonus – Taiwan – lurking in the background!

Has risk bottomed? Too soon to tell. What is abundantly clear is that we probably couldn’t fall ~30% every 6 months; the decline seen in 1H 2022 was truly historic. Markets will continue to digest new inflation data, while earnings season is closely scrutinized to see if American companies can avoid hardships from potential recession. And as the Fed stays ‘data dependent’, if markets are correct, one can expect another 4 hikes by year end before cuts by 2023 year end.

Interesting Housing Headlines

Increase in home prices and higher mortgage rates has pushed affordability to 2006-2007 levels Housing industry showing early signs of faltering, Redfin and Compass announce layoffs
Home builder sentiment has plummeted (NAHB)
Supply still limited and lock-in effect will further reduce supply

Higher rents will appear in inflation prints with a lag which will make it challenging for the Fed to pause rate hikes

Lesson Nine: Sign Here, And Here, And Here...

Paperwork sucks. There is no way around it. Unlike the latest iTunes user agreement update where you scroll to the bottom and check “I Agree,” you are going to want to make sure you know what you are signing here as it may be the largest purchase you ever make.

Whether you choose to work with a realtor (based on the previous posts) and regardless of where you fall on the buyer/seller side of the transaction, there is plenty of paperwork that needs your signature. This post will take a closer look at each document in the bid submission process. If you haven’t been through making a bid before, there are quite a few forms that require your attention. (These forms may vary by name/content based on your state).

• Consumer Notice

  This document is to provide the fiduciary duties between agent and client. This is signed by the acting agent and the client (whether buying or selling). The information here explains, in detail, what the rights of the client are and the responsibilities of the acting agent. It is not a contract but a disclosure in regards to the duties provided by your agent once under contract.

• Buyer Agency Contract
  If you want the representation of a realtor in your real estate transaction, you must sign a written Buyer Agency Agreement with that Realtor. This is the exclusive agency contract for buyers' and tenants' agents. You will be legally bound to work with this agent until the expiration date agreed upon on your contract so make sure the realtor is your ride or die before signing (or have a short expiration date if unsure).

• Mortgage Pre-Approval

  A letter from a lender indicating the type and amount of loan you can qualify for. The preapproval letter is issued after the lender has evaluated your financial history — including pulling your credit report and score. Remember, you don’t have to buy the maximum amount of house that the bank has qualified you for- you don’t want to be house poor. I’d recommend not going above 20-30% of take home pay if possible. When actually submitting a bid** you may want the mortgage company to change your pre-approval to the exact amount you’d need—showing the seller that you qualify for a $1mm mortgage and trying to low-ball them 100k below their 500k ask price isn’t a good look.

  • **typically referred to as an “offer” by real estate dummies even though to “offer” something means to set a price you are willing to sell. The home seller is making an offer when they list their home at a sale price. When trying to buy something it is called a “bid” hence the term “bidding war” when multiple bidders are trying to buy something and increase their bid prices. This is also seen in financial markets in bid/offer spreads. Yes, I am willing to die on this hill. /rant

• Buyer Financial Information (BFI)
  The Buyer's Financial Information is used by Buyer's Agent to get an overview of Buyer's financial situation. While not required in every state, this can be in place of “proof of funds” for cash offers and an item of interest from sellers in a popular market. The BFI shows the likelihood of a bid qualifying for its mortgage and not falling out of contract.

• Deposit Money Notice
  This form is for cooperative sales when the Broker for Seller is holding deposit money. This money is held in escrow until the consummation or termination of the Agreement of Sale.

• Agreement of Sales
  A contract for the sale of residential real estate containing commonly used clauses and the legal requirements for sales contracts in transactions involving real estate licensees.

• Seller’s Disclosures
  A seller must disclose to a buyer all known material defects about property being sold that are not readily observable. This disclosure statement is designed to assist the seller in complying with disclosure requirements and to assist the buyer in evaluating the property being considered.

• Appraisal Contingency (Optional)
  Used when the parties wish to make the agreement contingent upon the property appraising at a certain value. This form works with the mortgage contingency in the Agreement of Sale. A sale that is contingent upon the lender providing financing may not reach closing if the lender is not satisfied with the appraised value.

• Escalation Clause (Optional)
  An escalation clause states that you are willing to outbid any others on the home by a predetermined amount, up to a ceiling price.

• Estimated Closing Costs
  Buyer's Estimated Costs (Form BEC) is used to provide a good faith estimate of Buyer's costs at closing. This means how much cash will the Buyer have to bring to the table at settlement.

**HOT TIP** Many in the current market have waived their inspection contingency which in theory means they don’t get an inspection and therefore can’t ask the seller to fix anything found in the inspection. I understand waiving the inspection contingency if you need to in a hot market, but you can still get an inspection and if anything serious is found you can threaten to back out for other reasons.

My favorite reason to back out is HOA documents- if the home is part of an HOA the seller must provide those documents and the buyer has a few days to review them and can back out of the purchase without any specific reason. You won’t be able to nickel and dime every little thing found in the inspection using this method (plus it violates rule #1 of life- ‘don’t be a dick’), but this is a great trick to use in case anything major or structural is found.

Most agents, if not all, use electronic signature platforms for your convenience. While this may speed up the process and require less travel, oftentimes documents are glanced over as clients fly through the “click here” signatures. It is important to understand each aspect of the documents requiring your signature and their legal clauses.

No two transactions are the same and each Brokerage may have different requirements depending on the type of sale, location of sale, and other extenuating circumstances. For the most part, the client’s main concern is the Agreement of Sale and the details included on that contract (offer price, down deposits, closing dates, contingencies, etc).

Summing It Up

This post gives you an understanding of most of the legal documents required when initiating a real estate transaction. While it isn’t fun by any means, make sure you stay on top of deadlines and read carefully what you are signing.