There are a lot of shallow resources on the internet about how to buy a house.
But the reality is that the nuances of one of the biggest purchases you’ll ever make simply can’t be summed up in a quick 5-minute read. It’s a complicated, confusing process, and you should know what’s going on every step of the way.
The process differs state to state, but if you’re buying in Texas, this is how the process goes and what you can expect along the way.
Step 1: Find a Real Estate Agent
Did you know your real estate agent is free?
It’s something that most people don’t know. And I didn’t even know it until I bought my first home...
But it’s true!
As a buyer, your real estate agent is completely free. The onus to pay up is on the seller, and the percentage is negotiated between the seller and the seller’s agent ahead of time.
Some buyers may think that they’re making a smart money-saving move by not using a realtor, but they’re being foolish.
By not working with a professional agent, especially as a buyer, you’re only doing yourself a disservice. Agents spend their days and nights analyzing the market and negotiating dozens of transactions per year. A good agent knows the market and the process of buying a home better than you do, so let them guide you in the right direction. And again, their guidance is completely free to you.
But first you need to find one.
You want an agent that knows the market like the back of their hand, is patient with you and all your questions, can understand your goals and criteria, is fun to work with, and can negotiate like no other.
While it’s okay to interview multiple agents in the beginning, make sure that you’re transparent about being in the interviewing stage. However, you’ll want to decide on one to work with pretty quickly. You shouldn’t have several realtors working for you at once (sending you homes from their MLS, spending their time hand-picking off-market deals, touring you, etc). Remember that realtors are commission-based (not hourly) and only get compensated if/when you close on something with them.
Some agents will require you to agree to a buyer representation agreement from the get go, while others won't ask you to until you submit an offer on a home. A buyer representation agreement is a promise that you will exclusively work with them. But even more importantly, it's a promise that your agent will prioritize you (i.e step out of dinner, move weekend plans, etc).
Step 2: Figure Out What You Can Afford
Your agent should have a list of preferred local lenders that they can connect you with. Financing is the leading reason homes don’t close on time or at all, so it’s really important that you choose a lender that is organized and at the top of their game.
It’s almost always better to get a local lender compared to a large, generic one (Chase, UWM, Rocket, etc). With a local lender you’re more than just a set of numbers that they run an algorithm on. They will also be more likely to have competitive rates and more likely to go to bat for you if your financial standing is in question at any point.
Feel free to get quotes from a few lenders before deciding on one. You can use those quotes to negotiate for lower costs among the different lenders. Once you choose your lender, ask them for a pre-approval letter, stating that you’re pre-approved for the amount you’re hoping to buy a house for.
At a high level, you’ll essentially give them all the juicy details of your financial standing and they’ll give you a number of your top line. If you have a good lender, they’ll be honest with you and give you a maximum price as well as a “responsible” price.
Side note: Please don’t waste several lenders’ time to get several pre-approval letters. You should only get a pre-approval letter from the lender of your choosing, as it takes a lot of time, resources, and work to issue one. Be considerate of peoples’ time!
Step 3: Figure Out What You Want
While I can (and will!) help you find your ideal home, I or whoever you work with as your agent will need some help from you first.
Start thinking about what you want from your home, factoring in your realistic budget per your lender.
I often start my initial strategy calls with high-level questions. These are fun to answer because this may be the first time you start to realistically imagine your next home!
This part is also one of the most important steps to getting a tailored buying experience.
During our initial call, we'll go over your real estate goals so I can whip up a customized strategy to help you find your perfect home.
Here are good questions to ask yourself:
What type of buyer are you? For example, are you an investor, a first-time home buyer, a seasoned home buyer who’s looking for their ultimate dream home? If you’re an investor, what are your goals with this property?
What’s your timeline? Are you more in the exploratory phase or is your lease about to be up next month and you need to find a home yesterday?
What kind of home do you want? A single-family home, condo, townhouse, or multi-family unit (i.e. duplex, triplex, etc)?
Are you working with a lender yet? If you’re not paying all-cash, a lender is the entity that lends you money to pay for part of your house. If you’re not working with one yet, see step 2. An easy and quick action item for you is to connect with a few lenders (I or your agent can help you there), receive a few quotes, and pick one to work with. (Pro tip: It’s best to get pre-approved sooner rather than later for your desired and/or realistic budget. We’ll talk more about this in a bit).
What’s your budget? You’ll get a number from your lender of how much house you can afford. However, that doesn’t mean you have to go that high. Of course, you can, but if you want to be conservative, take some time to target a number that you’re comfortable with.
How much liquid cash do you have and how much do you want put towards your down payment? If you’re a first-time home buyer and you plan to live in the house, you can put down as little as 3% of the purchase price with a conventional loan. If this is your second or third home, you’ll typically need to put 10%-20% down. Once your offer is accepted, you’ll need at least 1% of the purchase price liquid for your earnest money and around $250 for your option money. And by closing (approximately 30 days later), you’ll also need your down payment and closing costs (2%-5% of your purchase price) liquid as well. I'll go over what this all means in more detail in later steps. But this is definitely a good conversation to have with your lender, who will take care of the financing side of the transaction.
What about location? Do you have any neighborhoods you’d like to be in? Or any geographical requirements? For example, do you have to be walking distance to a coffee shop, less than ten minutes from your office, or on the water?
What are your deal-breakers? What can’t you stand? Maybe you loathe electric stovetops or you don’t want to be in an HOA.
What are your must-haves? What do you have to have? Maybe it’s a yard for your dog or at least 2 bedrooms because you want an office space that can serve as a guest room.
What else should I know? Any other preferences you have? For example, that you prefer a bigger living area compared to bigger bedrooms.
From the answers to these questions, I or your agent will set you up with a custom search that’s specifically tailored to you and your goals.
By gaining this special access to the Multiple Listing Service (MLS), you’ll receive daily or even on-the-minute updates of new homes that hit the market, as well as any updates like price decreases for homes that fit your criteria.
The MLS is the platform that licensed professionals use. It’s way more accurate than Zillow, Redfin, Trulia, and the likes. Those sites are basically the WebMD of real estate. Don’t use them when you’re looking seriously. Similar to how you end up doom scrolling on WebMD and think you’re going to die tomorrow from a common cold, Zillow will also give you a false sense of reality.
Step 4: Learn Your Preferences & Identify a Few Properties
From your MLS updates, you’ll start getting a feel for the market.
I highly encourage you to start favoriting things so that I can learn your preferences, too.
We can then narrow your search to focus on certain factors and elements that you prefer. For example, maybe you realize that you don’t actually want a condo and that you’d rather purchase a single-family home. Or that you really want a new build. Or that you really want to be near your office and commuting 15 minutes seemed realistic, but it’s going to be a nuisance.
At any point during this process, especially as you’re favoriting things in the MLS and getting serious, we can go see them in person.
Step 4: Touring
This is when things get really fun and you’ll feel like you’re the star of an HGTV episode.
When I bought my first home, this was easily my favorite part. It was so fun and I was really excited to see how things would look in real life. This is also my favorite part of my job.
Oftentimes, pictures just don’t do the home justice and you need to feel its vibe and see it in real life. Other times, the house is so well-staged and photographed that it can be anticlimactic and disappointing to see it in person. Either way, it’s useful information to have.
This is why it’s so important to tour a few homes before making an offer. If you’re an investor or someone who’s comfortable making offers sight unseen, definitely ask your agent to preview it for you and take a few videos.
If you’re in-person, then we’ll spend a few hours together going around to see the homes we’ve selected together. These should be homes that you’re excited about and could genuinely see yourself in, so long as the pictures live up to the hype.
For my investor clients or clients out of town, I schedule the tour for myself and send them the times I’ll be at each home. When I arrive, I take a video or two of the entire property, including the surrounding neighborhood. I send it to them immediately and they watch the video(s) while I’m still at the property. If they have any questions that require another video or a second look, then I can go right back into the property to FaceTime them or take another video to answer their questions.
Some buyers like to do a few rounds of tours, which is totally fine. Others like to bang it out in one day and submit an offer that same day to maximize their chances of the seller accepting their offer, which is also totally fine.
Step 5: Make an Offer
Once you find a home that you’d be excited and proud to call yours, we’ll write up an offer together.
This step should be strategic and analytical, which is why it’s so important to have a realtor on your side who really knows what they’re doing. This is where adept negotiation skills, effective communication, and strong knowledge of the market come into play.
Based on the findings from my market analysis and depending on how much you love the home, we’ll find the best terms for your offer.
In Texas, contracts are promulgated, which means they’re mandatory to use per the state of Texas.
They’re also “fill in the blank,” plug and chug, standardized, whatever you want to call it. This is good because they’re straight forward and don’t require lawyers. Of course, if you want an attorney to write up a custom offer, you certainly can. In Texas, getting an attorney is not customary for a standard transaction, though.
The main contract is called the “One to Four Family Residential Contract”. This is what I’ll use 90% of the time, and all the other contracts are based off of this parent one. I’m currently working on another article that reviews this contract in its entirety.
Option Period & Option Money
One of the unique things in Texas that’s negotiated in our offers is the option period.
The option period is a negotiated amount of time for a negotiated sum of money (the money is called the option fee or option money, they both refer to the same thing) during which the buyer can back out of the contract.
The option fee is a non-refundable amount that goes straight to the escrow agent with the title company within 3 days of the seller accepting your offer.
A typical option period is 7 days for $200-$300. For example, you’ll wire title a non-refundable sum of $250, which buys you 7 days to back out for any reason. If you back out during those 7 days, all you’d lose is that $250 and the home would return to the market. If you want to go through with the transaction, that $250 will go towards the price of your home at closing.
An easy way to write a stronger offer is to shorten the number of days and increase the amount of money. For example, we’re in a heavy seller’s market in Austin. For many of my contracts, especially when there are multiple offers on the table, I will do 5 days for $500.
Edit on April 5, 2021: In this climate, we are seeing option periods for 5 days for at least $1,000. Aggressive offers are even doing 1 day for $5,000, but this is extreme in my opinion. But it's a way to show your commitment, especially since your option money goes towards closing at the end of the day.
Another thing that’s negotiated is called earnest money. This is money the buyer offers to show the seller how serious they are about the home. And this is the money that’s on the line if you back out after your option period is up.
This isn’t a mandatory part of the contract, but it’s customary to put 1% of the purchase offer as your earnest money. You’ll wire this to the title company within 3 days of the seller accepting your offer. It’ll be held in escrow with title and put towards your purchase when you close. So if your home is $500,000, then you would wire $5,000 to the title company. An easy way to write a stronger offer is to increase this earnest money amount.
Edit on April 5, 2021: In this climate, we are seeing earnest money amounts of 5%+. Upping the earnest money amount is a good way to show your commitment, especially since your earnest money goes towards the purchase price at the end of the day.
How the Option Period, Option Money, & Earnest Money Work Together
Now back to that option period and our example. You can back out of the contract for any reason during your 7-day option period and you’ll get your $5,000 in earnest money back, but lose the non-refundable $250 that you Venmo’d to the seller.
However, if you want to back out after the option period is over, you’ll lose your $250 in option money AND your $5,000 in earnest money, too.
I wanted to outline the option period, option fee, and earnest money here because it makes submitting an offer a LOT less scary.
People often get worried that they’ll get cold feet, but not be able to back out. This is exactly why the option period is so great. It gives you time to sleep on your decision for at least a few nights before you’re really financially committed.
If you change your mind within those 7 days, the worst thing that can happen is you lose that $250. Then the home will go back on the market.
TLDR of this whole section is that making an offer on a home isn’t as binding or as expensive as you think.
Step 6: You're Under Contract
Congratulations, your offer was accepted! Let the fun begin!
Once everyone signs all the necessary papers, the next day is Day 1 of your option period, and also Day 1 of 3 that you have to get your earnest money and option money to the right places, so make sure you have this liquid. Your closing date was negotiated in the original contract and was likely marked at 30ish days if you're getting a mortgage.
This is also best explained continuing that example from above.
Option Period & Option Money in Practice
Let’s say you submitted your offer on Monday 1/4/21, your agent marked the closing date as Thursday 2/4/21, and the sellers accepted and signed your offer on Tuesday 1/5/2021.
The effective date (Day 1) of the contract would be the following day, Wednesday 1/6/21. On Wednesday, you will wire $5,000 in earnest money to the title company and Venmo $250 in option money to the seller.
You technically have 72 hours to get the option money to the seller and 3 business days to get the earnest money to title, but just get this done on Day 1 so you don’t have to worry about it.
If you miss those deadlines, you’re in breach of the contract and the seller can back out and accept another offer. And then you’ll be sad!
Day 1 is also a great day to get your inspection scheduled if you haven't scheduled it already. It will cost you around $400. You want this scheduled a few days before your option period is up (in our example, it’s up on Tuesday 1/12/21 at 5PM) . I or your agent can give you a list of great inspectors in the area that will have availability within that window.
When I submit offers, I typically reach out to my clients' or my inspector to pencil in an appointment ahead of time. I let the inspector know that my clients submitted an offer and when the sellers are making their decision. From that, I schedule a tentative appointment with the inspector on the effective date (Day 1, which is Wednesday 1/6/21 in our case) or their soonest-available time slot so we don't waste time if/when our offer is accepted.
The inspector will locate any physical faults that may affect the safety the home. Within 12-24 hours, they’ll write up a report that summarizes all the things they looked at and all of the deficiencies in the house.
We’ll go over the report in-depth and work together to renegotiate the initial contract to your satisfaction (while also being realistic). The negotiations must be done through a promulgated amendment (I’ve got that covered!) and must be agreed upon by all parties before the option period is up. Examples of renegotiations could be a punch list of things that the seller must fix before closing (Ex: Treat the termites) or a credit to you at closing to pay for a repair (Ex: Credit you $500 to treat the termites yourself post-closing).
While the seller may not agree to all our requests, they’ll likely agree to some, which is better than nothing. Again, this is where having a strong negotiator as your realtor is a huge advantage. Once everyone is in agreement, the seller has until closing to fix whatever they agreed to do, which is on Thursday 2/4/21.
Here's a calendar view of everything discussed:
Day 1 is also a great day to tell your lender to order the appraisal. In an ideal world, you’ll be able to get the appraisal done within your option period. But in this crazy seller’s market and in the whirlwind of COVID, it’s difficult to lock down an appraiser on such short notice. Realistically, you’ll have to wait anywhere from 14-21 days to get your appraisal done.
Before we get too far into the weeds here, let’s pause and go over financing.
Financing Logistics: Buyer Approval
When you take out a mortgage, your lender needs to verify and gain comfort on two things: who they're lending money to (you!) and what they’re lending the money to you for (the house!).
To verify you, they’ll ask for your financial information (W2, other sources of income, outstanding debt, etc). Section 2A of the Third Party Financing Addendum is about your approval. Typically, the first box is checked and it's set at 14 days. This means that your lender has 14 days to grant your approval to buy the home. Otherwise, you must provide written notice to the seller before then in order to get out of the contract and get your earnest money back.
Financing Logistics: The Appraisal
The appraisal is the second part, where the lender makes sure the house is worth at least what the purchase price is. They’ll get an appraiser, a third-party professional, who will give their professional opinion of what they believe the house is worth. They’ll have access to the MLS listing, as well as the offer price.
Going back to our example, if you purchased a $500K home and put 5% down ($25K), then your mortgage will be $475K. This means your lender will lend you $475K, which certainly isn’t a small chunk of change.
The lender wants to make sure they do their research to ensure that the house is actually worth $500K. Because if you default on your mortgage (stop paying it), they will likely foreclose on your home. This means that the lender will take the home from you and try to sell it to recover their losses.
Prior to the appraisal, it's good for your agent and the listing agent to work together to provide comps to the appraiser, especially if the purchase price is above the asking price. And if the home received multiple offers, it's good practice for the listing agent to mention that in the remarks on their listing MLS.
In an ideal world, the appraisal will come back higher than the purchase price. This means they believe that the home is worth more than you’re paying, so you got a good deal. You’re in the clear here!
Oftentimes, they’ll come in at the purchase price. You're also in the clear here!
But what if the appraisal comes in lower than the purchase price? Let’s go back to our example. If you need the appraisal to come in at $500K or higher, but it comes in at $480K, you will have to come up with the $20K difference in cash at closing. This is another reason to have a good realtor and negotiator on your side. If you’re a buyer, ideally the seller will agree to come down in purchase price by $20K. If you’re a seller, ideally the buyer will just make up the difference by paying the $20K difference up front in cash. Or you can meet in the middle or at a negotiated price point.
If the buyer and seller are unwilling to budge and the buyer wants to terminate the contract, that’s where their financing contingency kicks in. Section 2B of the Third Party Financing Addendum is about the property approval.
At this point, the lender would write a letter saying that they cannot issue the loan because it doesn’t meet underwriting requirements, as the appraisal came in below the purchase price. The buyer has up to 72 hours before closing to terminate the contract by giving the seller the letter from their lender, as well as a notice of termination. If the buyer does this, then they are entitled to their earnest money and are free to walk away.
However, assuming all goes according to plan, most of the major hurdles are cleared.
Step 7: Complete the Remaining Paperwork & Final Walkthrough
At this point, it’s mostly up to your lender and the title company to get everything buttoned up, but here are what the following weeks will generally look like.
The Title Commitment
The title company will perform a complete title search and send you your title commitment. This is a pre-closing document that lists all of the terms, conditions, and exclusions of the title policy. Think of it as a “preview” to the final title policy that shows the buyer what the title insurance company is and is NOT going to insure on the property. I’ll do a breakdown of this in another article, but here’s an overview:
Schedule A: This is where actual facts like your name, the legal description of the property, the purchase price, and your lender are spelled out.
Action Item for You: Double check that everything is right, including the spelling of your name.
Schedule B: This is what your title policy WON’T cover. Items 1-9 are standard exceptions that are promulgated by the Texas Department of Insurance. These items are good to review for your own sake. Item 10 are exceptions specific to your property and are things that will be reflected on your survey, such as access easements or an oil and gas lease.
Action Item for You: At least review Item 10.
Schedule C: This is the important part because they’re concerns that must be resolved prior to closing. Lines 1 through 4 are standard. Start critically reading this section at line 5 and keep reading until you hit, “Company requires the marital status of record owner, from [date] to the date of closing”. All things listed here must be fixed in order to issue a title policy. Your trusted realtor should walk you through this and work closely with title and whoever else is needed to resolve this before closing.
Action Item for You: At least review line 5 and discuss it with your realtor.
Schedule D: Disclosures of all parties involved in the title commitment. This section discloses the premiums that will be charged for the policies. This part is specific to you and will vary, so read this through so you’re aware.
Action Item for You: Skim this.
The Closing Disclosure & Associated Paperwork
Your lender should get all closing disclosures and all other necessary paperwork completed and over to the selected title company. The title company will balance the closing documents and clear the documents for audit and attorney review. A closing disclosure tells you how much money you’ll need to bring to the table at closing. Closing costs typically range from 2%-5% of the purchase price of the home, plus your downpayment.
This is all the behind-the-scenes work that you as a buyer shouldn’t have to worry too much about, though. Your job is to stay informed, but the leg work will be handled by your realtor. This is where having a great lender, an organized and responsive title company, and a solid project manager as your realtor comes in handy. At this point, you should be able to sit back and relax and let the professionals take care of the backend work.
During this process, your realtor should also schedule a final walkthrough at least a few days before closing. This is your chance to make sure all the agreed-upon repairs have been made and to make sure the house is in its expected condition. I like to schedule this about 5 days prior to closing to ensure there’s enough time for the seller to make any last-minute repairs/fixes.
Now is also a good time to schedule movers and transfer the home’s utilities (water, electricity, and gas) to your name.
Step 8: Closing
It’s the day you’ve been waiting for!
Be sure to set up your wire transfer or cashier's check based on the amount from your closing disclosure. If you’re writing a check, be sure that the bank is open for you to get a cashier’s check. And, of course, don’t forget to bring it to closing. Don’t forget your ID, either.
If you’re doing it in person, you will likely meet at the title company’s office, where you’ll sit in a room with them and sign all the paperwork. If you have questions, they’re there to explain whatever you’re signing. This process usually takes about 45 minutes.
If you’re out-of-state or wanting to do a more COVID-19 friendly closing, your title company can also send a notary to your home or a neutral location like a coffee shop. The notary will meet you there and you’ll sign everything with them.
Once you’re finished signing everything, it’s time to get the keys and celebrate! Welcome to the joys of home ownership!
If you have any questions about what to do now that you’ve closed, be sure to stay in touch with your agent.
And that’s the meat and potatoes of buying a house in Texas! Of course, there may be edge-case issues that are specific to your transaction. But this guide will likely get you 90% of the way there.
I’ll also continue updating this article so it becomes more and more nuanced, but for now, I hope this relatively high-level outline provides some comfort and clarity about the elusive home buying process.
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