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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 didn’t 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. “Do you want to finance the closing costs?” 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 we’d have a smaller initial outlay of cash.
We told the realtor yes, and she proceeded to explain how it worked. Basically we’d 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 didn’t explain it great, but after a few follow-up questions, we understood.
Okay, so that’s 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 didn’t 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 I’m about to explain here is going to be woefully unclear. Mostly because I’m still woefully unclear about what happened. So, explaining something that I’m STILL woefully unclear about certainly doesn’t make for clear storytelling. But, I’ll try.
The realtor calls and says something like this:
Realtor: “Well, you’ve already asked for your cap of 3% seller concessions, so, there’s not much we can do about the home-inspection related concessions.”
Me: Uh, what?
Realtor: Financing those closing costs counts as a concession, so you’re already at your cap.
Me: Wait, so you can’t finance the max in closing costs AND ask for inspection-related concessions? Why didn’t you mention that?
Realtor: Because you can’t ask for more than 3% in seller concessions.
Me: Umm, that didn’t 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 that’s 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, I’m looking over your loan paperwork, which has down that you’re financing closing costs at 3% of the purchase price. Unfortunately on investment properties, you’re only allowed to finance 2% of the purchase price. The max you’ll be able to get back as a rebate from the seller is 2%.
Me: [Panicking]: Wait, I’ve 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 “purchase price” of the home by 3% to then get a 3% rebate from the seller. But now I’m 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 it’s an investment property.
Me: Ugh.
So, granted, I should have been more informed on these “buying a house” topics. I guess I focused too much on actually RENTING out houses instead of BUYING them. But frankly, I think that’s why we use realtors, right? Because it’s a complicated process and they’re supposed to be our guide. So, I don’t feel too badly about putting a lot of the blame on the realtor.
Granted, “accidentally” 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 can’t 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 she’d 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 didn’t end up “accidentally” 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, we’ll 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 wasn’t part of that process!