We hope this discussion will help first time buyers.  Please email additional questions, so we can make this website better.  Thank you. Where do I begin?  Should I buy?  What can I afford?  When should I buy?  How do I pick a real estate agent?  How do I decide what to buy, where to buy, and how to buy?  How does the buying process work?

Where do I begin?

If you are wondering "Where do I begin?"  You just did.  You began on the internet, an increasingly popular choice.  There is a lot to read on this site, and you can find other sites with a different slant by using Google.Com and searching for "santa cruz realtor" or a similar phrase. If you want to buy a home and can afford to buy a home, the rest is just a matter of effort.  Get yourself a real estate agent who will guide you through the rest of the process. A good thing to keep in mind as you begin, is that the Buyer (you) and the Seller are the principals in a real estate transaction, and the real estate agents work for you and serve as your guides and your support group.  Your agent should always keep your interests uppermost in his/her mind, and should always patiently and with understanding, explain your options and help you achieve your goal of home ownership.  You and your agent should have a relationship of mutual trust and loyalty.

Should I buy?

The benefits of home ownership are lower income taxes, a real estate investment, predictable future costs, and the freedom to make decisions about your home. If you pay income taxes now, buying a home will lower your income taxes.  Rather than paying rent, you as an owner, will pay a mortgage, real estate taxes, insurance, and maintenance.  If that sounds like a lot, realize that your rent not only pays for all these items right now, but provides a profit to the owner as well.  And while you cannot deduct rent on your taxes, you can deduct mortgage interest and real estate taxes. To roughly compute your annual tax savings, figure the real estate taxes at 1.2% of your purchase price.  Example: $500,000 x 1.2% = $6,000.  Then compute your first year's interest by multiplying your loan rate by the loan amount.  Example: 6% x $400,000 = $24,000 (assuming $100,000 down).  Add these two ($6,000 + $24,000 = $30,000).  Lower your last year's adjusted gross income by this amount, and use the tax tables to find your new lower tax! Real estate serves as a long term investment and can provide balance to a stock and bond portfolio. And since most real estate purchases are leveraged (you borrow most of the purchase price), your returns can be much greater than the property appreciation would lead you to believe. How leveraging works:  Five percent is a reasonable number to use for annual appreciation in northern California. Real estate prices ebb and flow, but inexorably they move higher.  Assuming a $500,000 house with $100,000 down, the first year's appreciation is 5% of $500,000, or $25,000.  So at the end of the first year, your home could be worth $525,000.  For year 2, add 5% of $525,000 to reach $551,250.  Continue for year 3 ($578,813), year 4 ($607,753), and year 5 ($638,141).  So what kind of percentage are you making on your investment?  Assuming you sell your house at the end of five years for the appreciated $638,141 and pay off the $400,000 loan balance and deduct the selling fees of roughly 7% of your sale price, you will net $193,471.  So your original $100,000 has turned into $193,471.  You have nearly doubled your money in 5 years!  That's the power of leveraging!  As an exercise, compute your return if you put only $50,000 down, or $25,000.  And don't forget, this is in addition to your tax savings! Your future costs are predictable.  With a fixed rate loan, your mortgage payments stay the same, and at the end of your loan term (15 or 30 years) they cease.  If you buy when interest rates are high, you can use an adjustable rate loan, so your payments will decrease as interest rates subside.  If you stay a renter, what do you think your rent will be 30 years from now?  Ask the owner what the rent was 30 years ago and do the math.  Under Prop 13, your real estate taxes can only increase 2% per year.  And while insurance and maintenance costs will go up, they are a small percentage of your total monthly outlay.

What can I afford?

You need to know what price home you can afford.  Your realtor can help you compute this, but early on you need to have a lender or mortgage broker determine this accurately.  There is no point in looking for a home you can't afford.  And your upper limit may indicate that you should consider condos or mobile homes. The price you can afford is determined by your down payment and your monthly payment.  If you can afford a $400,000 loan and you have $100,000 to put down, you can afford a $500,000 home.  If you have nothing to put down, you can only afford a $400,000 home. Your down payment is what you have saved and can afford to put into the house.  You get this back when you sell the house, but in the mean time, it is your equity.  Equity is the market value of your home minus your outstanding loan balance, or in short, the amount you get to keep when you sell your house.  As an example if you put $100,000 down on a $500,000 house and took out a $400,000 loan to cover the difference, you would have $100,000 in equity.  To be fair, there are expenses in selling your home which would reduce this amount, but equity is usually computed without regard to selling costs.  After some number of years, you may have paid your loan principal down from $400,000 to $370,000 and in the mean time your home may have appreciated to a market value of $600,000.  At this point your equity is $600,000 minus your loan balance of $370,000 or $210,000.  So your original equity of $100,000 has increased by $110,000, of which $30,000 is the principal you have paid off and $80,000 is your increased valuation due to market appreciation. Your monthly payment needs to cover your PITI or principal, interest, taxes, and insurance.  PITI (pronounced letter by letter as P-I-T-I) is often used by those in the real estate biz as a short hand for all these expenses.  Principal and interest together are your mortgage payment.  Usually a loan is amortized over the loan term (e.g. 30 years) so that you pay the same amount each month, but early in the process your payment goes almost entirely toward interest, and later on goes more and more toward paying off the principal.  Taxes are your real estate taxes.  In the example in the preceding section, the real estate taxes were computed as $6,000 per year, which would be $500 per month.  Insurance is your home owners insurance, which will be required by the lender before you can get a loan. You may be required or may opt to have an impound account.  This means that you will pay your PITI on a monthly basis into the impound account, and the lender will deduct the mortgage, and pay the taxes and insurance as they come due.  Without an impound account, you usually pay real estate taxes and insurance on a yearly or twice-a-year basis.  Taxes are due by December 10th and April 10th of each year.  Insurance is due upon the purchase of your home and each year after that.  Some insurance companies bill you in two installments, six months apart. So where are we?  Let's continue with the example used so far: you put $100,000 down on a $500,000 home and get a loan of $400,000.  If you get a 5% loan, amortized over 30 years, your monthly mortgage payment would be $2,147.  Add to that $500 per month for real estate taxes and $50 per month for insurance ($600 per year) your total monthly payment would be $2,697 or roughly $2,700 per month.  This is your PITI.  And don't forget your tax savings; if you are in the 28% tax bracket, that $2,700 is only $1,944 to you.  In addition to your PITI, you will have utilities and maintenance costs, which together could add $200 to $300 per month.  If you buy a condominium, your maintenance costs are built into the Association dues and you will know that number in advance.  By talking to the Seller and neighbors you can estimate your likely utility costs. Your mortgage payment is highly variable depending on your credit rating, your income and length of employment, your down payment, and current interest rates and available loan packages.  This is why it is so important to contact a lender or mortgage broker early on, and to work with them throughout the buying process.  Generally you will pay a higher interest rate when you have a low credit rating, are self-employed, or show an erratic income history.  Lenders consider these risk factors, and the more risk, the higher the rate they charge.

When Should I buy?

A real estate purchase must not be taken lightly.  It costs money to get into a home and it costs money to get out, so you should expect to be in your home for at least two years, and preferably five years.  You should be confident that your current income level will continue or improve.  If you are buying the home with someone else, it should be a long term committed adventure, or you had better agree ahead of time and in writing, how the home will be handled if and when you part. Trying to time the real estate market is like trying to time the stock market.  You can't.  If you are financially secure and have a five year horizon you should be fine.  Your property should appreciate over time, but it may not go up evenly each year. Ever since the Stock Market "bubble burst" of March, 2000, people have been concerned with a similar "bubble" in the real estate market.  We recommend you read as much about this as possible, if this is a concern of yours.  Real estate in the Bay Area has had it's fluctuations over the years, but overall prices keep moving up.  Keep in mind that real estate is a stratified market, with different activity levels in different price ranges (strata).  Usually there is strong activity in the lower priced homes and condos because that is where first time buyers start.  While interest rates are at 40-year lows, people are clamoring to get into their first home.  Short of a major recession, there is little reason to suspect that entry-level home prices will erode any time soon.  However, if you happen to be jumping into your first home at the million dollar level, you can get amazingly wonderful values right now!

Select a Real Estate Agent

Once you have decided to buy, the next step is to select a competent real estate agent with whom you want to work. Everything else will fall into place, as the agent will guide you through all the other steps. There are two ways to select an agent: (1) get a recommendation from someone you know, or (2) interview agents on your own.  You can find agents at open houses, in real estate offices, in newspaper or magazine ads, or as you have just done, on the internet. To judge competence, ask the agent to explain the buying process. Their response should tell you a great deal about their sense of organization, their communication skills, their willingness to work with a first time buyer, and their knowledge of real estate. Tell them about the kind of property you are looking for. Their response should show how they listen to your needs and how they will match you up with your dream home. To match personalities, consider how the agent will complement you.  If you need motivating, choose a motivator.  If you are anxious, choose an agent who is patient and calm.  If you have difficulty expressing yourself, choose an agent that draws you out.  Explain your needs so the agent can size you up as well.  If you want to take a year to find the right property, make sure the agent is okay with that.  If you want a horse property, make sure the agent knows the zoning requirements and trail access points.

Commit to your Real Estate Agent

If after your best efforts to choose an agent, your relationship does not go well, decide quickly and explain to your agent why you need to move on.  Understand that agents work really hard, and only get paid if they conclude the sale.  Only if an agent has your loyalty can they work their best for you.  If you move from agent to agent, you will be poorly represented. Once you choose an agent, commit to working with them and only them.  If asked at an open house, give the name of your agent.  If you have a question about a property, call your agent, not the number on the property sign.  Your agent is now working for you, and the more they know about what interests you, the quicker they can find your home.

What to buy?

Your choices are to buy a single family residence, a condominium, or a mobile home.  Usually buying land and building a home is outside the realm of possibility for a first time buyer. Most properties in the county and indeed in the country are single family residences.  You own the land and the home and can do pretty much what you want.  You are responsible for all costs and all maintenance.  You can paint your house any color, you can tear it down and rebuild, you can add a room, or replace your roof.  Most single family residences are built from wood frames on the site, but some percentage are modular homes, also known as manufactured homes.  You may not be able to tell the difference, and both stick-built and modular homes are built on foundations and go through the standard permitting process with the city or county. Condominiums come as condos, town homes, PUDs, and some other names, all of which have slightly different ownership rights.  What they have in common is that you own part of the property and share ownership of other parts.  For example you may own your unit and the land below it, but have a common interest in the grounds and gardens that surround all of the units.  You normally pay monthly Association dues to maintain the common areas.  Depending on the complex, these dues pay for on- going expenses such as gardening and structure insurance, and are used to maintain reserves for planned future expenses such as exterior painting and roof replacement.  Over and above the association dues, you are responsible for maintenance of your living space and your personal property insurance.  Often what you can do with your unit is limited by association rules. Mobile homes are usually found in mobile home parks.  In most parks, you own the "coach" or mobile home, but pay a monthly lease on the land.  In some parks, you buy the land under your coach, and in other parks you may own a common interest in all the land of the park.  Interest rates are noticeably higher for buying mobile homes, and interest rates on older coaches are higher than on newer coaches.  Some of the newest coaches appear to be indistinguishable from modular homes, and have gotten away from the RV look altogether.  You should be aware that there are lawsuits pending by some park owners to raise space rents to reflect the appreciated value of the land.  Discuss rent controlled versus non-rent controlled parks with your agent.  Also note that parks may limit owners and residents by age; specifically there are senior parks for 55 and older. Whatever type of property you buy, there are likely to be CC&Rs or Conditions, Covenants, and Restrictions.  These place restrictions on what you can do with your property.  Even single family homes have CC&Rs and they are usually created when a subdivision is built.  A common restriction is to disallow horses or livestock in a subdivision.  You get to review the CC&Rs during the buying process, and it is your right to cancel the transaction if you find them unacceptable.

Where to buy?

Well, the obvious applies here.  If you work, you probably care about your commute time.  If you don't work, it is simply a matter of where you want to be. If you have settled on Santa Cruz County, your agent can help you choose a community.  If you are new to Santa Cruz, we recommend you take the Area Picture Tour.  Do you want to live downtown, near the university, on the ocean, by a lake, along a river, in the mountains?  Do you want ocean views, beach access, horse property, riding trails?  Santa Cruz County has it all, so ask your agent.

How to buy?

When you buy a property, you "take title" as some entity.  This is meant to be a brief overview, but you should check with your attorney to decide what is proper for you.  You make this choice during the escrow process, so you don't have to make any decision prior to writing an offer. You can take title as a single man, a single woman, or as man and wife. You can take title as a trust, if you have a living trust and want the home to be part of it. If two or more non-related people are buying the home, you can take title as tenants in common or joint tenants.  As tenants in common you can own different proportions of the property, such as 60% and 40%. You can also pass your portion as part of your estate via your will or living trust.  As joint tenants all involved have an undivided interest with "rights of survivorship".  "Undivided" means you all have the same rights and cannot own the property proportionally as you can as tenants in common.  "Rights of survivorship" means that when you die, your portion is divided among the remaining owners; and does not go to your heirs unless you are the last owner. You can take title as a corporation, limited liability company, or some other legal entity. Please discuss your options with your lawyer, as real estate agents are not trained or licensed to give legal advice.

How does the buying process work?

When you have found your dream home, your agent will have you sign an Agency Disclosure and then guide you through writing up the offer.  Most agents use the standard forms as designed by the California Association of Realtors. The Agency Disclosure will come up a number of times, so let's discuss that first.  This two page form explains what type of agency relationship or representation you have with the agent in the transaction.  This is an understanding between you, the principal or Buyer, and the real estate agent.  The duties of a Seller's agent, a Buyer's agent, and an agent representing both the Seller and Buyer are outlined. Of particular note is dual-agency where both the Buyer and Seller are represented by agents of the same brokerage.  Dual-agency arises when both principals are represented by the same person or when they are represented by two different agents who work for the same real estate company.  Read this form carefully and understand it. The current offer form is 8 pages long plus a 2 page Buyer's Advisory.  A good agent will explain all the clauses of this form, what they mean in this transaction, what your options are, and how you can write a clean strong offer that will get you the property.  The offer identifies the property, the Buyer(s), the offer price, the down payment, the earnest money, the amount to be financed, who will pay for which inspections, and the time frames for transferring the property. The offer can be presented in a number of ways.  The simplest is for the Buyer's agent to fax the offer to the Seller's agent.  The other end of the spectrum is for the Buyer's agent to introduce the Buyers to the Sellers and the Seller's agent and present the offer with all in attendance.  No matter how the offer is presented, your agent should present a cover letter describing the Buyers and their financial strengths.  The cover letter helps the Seller connect to the Buyer and often determines which Buyer gets chosen in a multiple offer situation. Now is also when your work with a mortgage broker pays off.  Your agent will ask your lender or mortgage broker to generate a letter of pre-qualification or pre-approval.  When this letter is presented along with the offer, the Seller will see you as a strong buyer; another reason to choose you over a non-qualified buyer. The Seller can accept your offer, or more likely generate a Counter Offer.  You may then accept their counter offer, or counter their counter.  The process ends when one principal either accepts the most recent counter, or refuses to respond to the counter.  If accepted, everyone yells "Hooray!" and you are considered in contract or in escrow.  Traditionally in Santa Cruz County, the Buyer's agent determines the escrow officer to use and opens the escrow. The Escrow company and Escrow officer act as intermediaries between the principals (Buyer and Seller) to carry out their instructions, and act as a clearing house until all conditions of the escrow are satisfied and title can transfer from the Seller to the Buyer.  The escrow closes when the Grant Deed is recorded at the county, transferring title to you, the Buyer.  At this point you own the house!  The initial escrow instructions are the purchase agreement (offer) and the counter offers.  During escrow, other issues may be resolved in writing by both principals as Addendums to the escrow instructions. When escrow is opened, you as the Buyer begin the physical inspections and loan approval.  Your agent will help you decide which inspections to perform and who will do them.  Loan approval is where you get serious with your lender or mortgage broker.  Your goal is to get the loan funded for the amount agreed to in your offer. The Seller's job at this point is to fill out all sorts of disclosures so the Buyer can make an informed decision at to the condition and suitability of the property.  The offer spells out the time period for the Seller to provide the disclosures and the time period for the Buyer to accept or reject them. The Escrow officer will order the Preliminary Title Report which determines the condition of the title, i.e. whether the Seller can actually transfer title, or if there are liens on the title that must be resolved. Physical inspections, loan approval, the Seller's disclosures, and the title report are all contingencies of the transaction.  If you as Buyer are dissatisfied with the inspection results, if you cannot obtain a loan, if you do not like something about the disclosures or title report, you can get your earnest money back and terminate the transaction.  At this point you are only out the money you have spent on inspections and loan processing. If you continue with the purchase, at some point you will sign a form to remove your contingencies.  Usually you remove your physical inspection contingencies first, and then your loan contingencies.  Once you remove all of your contingencies, your earnest money is at risk if you back out of the offer.  You often increase your deposit upon removing your contingencies.  Note that your increased deposit is also at risk. This is now the quiet time of the escrow for the Buyer and Seller.  You are essentially waiting for the lender to fund the loan.  Normally within five days of the close of escrow, you as Buyer will have your sign-off where you will sign and initial all sorts of paperwork, mostly dealing with the Promissory Note and Deed of Trust that will obligate you to repay your loan to the lender.  You will also conduct a Buyer's Walkthrough for final approval of the condition of the property. At the very end, the escrow officer calls for funds, the lender transfers the funds, and the documents are recorded at the county.  You are now on record.  Your agent hands you the keys to your new house.  Your friends move your furniture.  You all eat Pizza and drink beer, and go to bed happy in your new home.

End of Story