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Before Ken and I ever seriously considered buying an investment property, we did a LOT of homework. Reading books and blogs, and talking to realtors, property managers, and lawyers. In fact, during our meeting with the lawyer, he even told us that we sounded like we had done our homework (I think I had just finished mentioning 1031 exchanges).
But, I suppose I didnβt do much homework on what the actual process was for BUYING A HOUSE.
Financing Closing Costs?
It all started with one innocuous question from our realtor as she was preparing our offer paperwork. βDo you want to finance the closing costs?β I had not known previously that this was an option when buying a house. She explained that we could roll a portion of our closing costs, up to 3% of the purchase price, into the mortgage. That would cover about $2500 of the ~$6000 in closing costs.
Ken and I discussed it and did some math. Financing the closing costs would add only a few dollars a month to our mortgage payment. And, it would improve our cash-on-cash ROI, since weβd have a smaller initial outlay of cash.
We told the realtor yes, and she proceeded to explain how it worked. Basically weβd add $2500 to our offer price (and therefore our mortgage amount), and then the seller would give us a concession (basically a rebate) of $2500. She didnβt explain it great, but after a few follow-up questions, we understood.
Okay, so thatβs the first new thing we learned in the process – that we can roll a portion of our closing costs into our mortgage. No big deal.
So, here comes a big misconception I had about buying a house. I thought that, after a home inspection was complete, you could ask for concessions, right? Well, everybody knows that. And, I was right about that.
But, what I didnβt know was that there is a cap on the amount of concessions you can ask for. We were going to ask for about $750 in concessions, plus we stated that we wanted to have a contractor come out for an estimate on a more major issue with the house (some rotting soffit and fascia in the back of the house) before deciding on any additional concessions.
But then we get a flurry of phone calls from both our lender and our realtor.
Explaining it the Best I Can
To be honest, what Iβm about to explain here is going to be woefully unclear. Mostly because Iβm still woefully unclear about what happened. So, explaining something that Iβm STILL woefully unclear about certainly doesnβt make for clear storytelling. But, Iβll try.
The realtor calls and says something like this:
Realtor: βWell, youβve already asked for your cap of 3% seller concessions, so, thereβs not much we can do about the home-inspection related concessions.β
Me: Uh, what?
Realtor: Financing those closing costs counts as a concession, so youβre already at your cap.
Me: Wait, so you canβt finance the max in closing costs AND ask for inspection-related concessions? Why didnβt you mention that?
Realtor: Because you canβt ask for more than 3% in seller concessions.
Me: Umm, that didnβt really answer my question. This is my first time buying a house*, I wish you would have explained the limitations associated with financing closing costs.
Realtor: Yes, well thatβs how it works.
Me: [Frustrated]. Okay, let me do some math and get back to you.
Literally less than an hour later, I get a phone call from the Loan Officer.
Loan Officer: So, Iβm looking over your loan paperwork, which has down that youβre financing closing costs at 3% of the purchase price. Unfortunately on investment properties, youβre only allowed to finance 2% of the purchase price. The max youβll be able to get back as a rebate from the seller is 2%.
Me: [Panicking]: Wait, Iβve already submitted the official offer paperwork at 3%. And the seller accepted the offer! So, does that basically mean I put in an offer on the house 1% higher than what I actually wanted? [Remember, I had to increase the βpurchase priceβ of the home by 3% to then get a 3% rebate from the seller. But now Iβm learning I can only get back 2% from the seller.]
Loan Officer: Well, perhaps your realtor can file an amended offer. She really should have known that you can only finance 2% when itβs an investment property.
Me: Ugh.
So, granted, I should have been more informed on these βbuying a houseβ topics. I guess I focused too much on actually RENTING out houses instead of BUYING them. But frankly, I think thatβs why we use realtors, right? Because itβs a complicated process and theyβre supposed to be our guide. So, I donβt feel too badly about putting a lot of the blame on the realtor.
Granted, βaccidentallyβ offering an additional 1% on the offer price of the house (3% instead of the max 2%) was less than $1000 since it was an inexpensive home. But still, I was fuming.
So now, I have an offer in on a house where I offered 1% more than I intended and canβt ask for ANY home inspection-related concessions.
I was feeling disappointed in myself for not learning about this process earlier, mad about the extra money it would cost, and really REALLY mad at our realtor.
On my next phone call with the realtor, she offered zero apologies for not knowing that investment properties have a different maximum for closing costs and concessions. She said that sheβd re-submit an offer, but that the seller could always reject the revised offer.
[I proceed to bang my head on my desk, hopefully loud enough for her to hear over the phone].
Ken and I have some discussions about how to proceed. We decided to not finance ANY of our closing costs. It had become too much of a headache.
Luckily the seller accepted our revised offer, so we didnβt end up βaccidentallyβ paying the 1% more than we intended to offer on the house!
So, I consider these all important lessons learned in the investment property purchasing process. One of the biggest lessons though: If we buy subsequent rental properties, weβll find a different realtor. Have you hit any unexpected speedbumps when making offers on investment properties?
*This was MY first time buying a house. Ken had bought the house we live in now before we got married, so I wasnβt part of that process!
