If you’re thinking about making the big move to home ownership now, with home prices down in most markets, ask yourself the following questions first.
- Am I looking for a home or an investment?
- What’s my budget?
- Where will I get a loan?
- How long do I intend to live in this house?
- Am I ready for the maintenance and upkeep of a house?
- What will I give up to be a homeowner?
Home or Investment?
Answer this question before considering anything else. We are assuming you have a down payment, no home to sell, and income to support a mortgage. If these items are not in place, you’re not ready to buy yet.
So let’s say you’re ready to start the process.
Whether looking for a home or investment you have to know what your limits are. There are several sites on the web to plug in income and expenditures that will tell you what you can afford and the estimated payments. (Remember these sites do not include the escrow taxes and insurance costs in the payments and that can be significant.)
If it’s an investment home you’re looking for it should have at least 3 bedrooms and 2 baths to give you the best chance at resale. Your market will put a minimum dollar amount on how much you’ll need to get this type of house. There are exceptions in certain markets and your research should show you if there are.
In addition, an investment property will be greatly affected by location and condition. Here you must research the local norm for houses in square footage, beds and baths, location and (more and more) school districts.
Sound like a lot? It is and if you miss one of these it will cost you big bucks when you sell, regardless of the market conditions at that time. Because a house (home to the buyer) with curb appeal, good layout, enough beds and baths, in good condition and in a prime location will sell for top dollar in any market. The only thing that changes is the price and time to get it sold!
OK, you’ve done the research and decided you can buy a house and live in it for 2 years and make some money. Why? Yea, you heard me, Why? What will be different in two years that will increase the value (actual sales price) of the house from what you paid for it, put into repairs or remodeling and paid monthly on it? If you don’t know, it’s not an investment; it’s a saving account or a gamble.
All right, have I scared you yet about investing? I hope not, if you do your homework and invest wisely you should be able to show some profit, just how much depends on all the factors mentioned above plus the unknowable one which is how much will the property appreciate during the time you own it.
On the other hand if you’re looking for a home, a long term residence to raise a family, there are other things to consider:
- You be the Judge. While location, condition, square footage, and price are all things to concern you, now you can be the judge of how much house you need.
- How much house is Enough? Will a bath and a half work, or do you need three bathrooms? How about bedrooms, how many are needed for kids, guests and perhaps a home office?
- Can you buy Small and Remodel? Can you buy something smaller and add-on cost effectively? Are you handy or knowledgeable enough to do remodeling?
- Take a chance on the Neighborhood? How about the neighborhood, is it a little bit rundown but you can see it’s turning around?
- Distance from work? Is it too far out of town or too close in to town now but may be OK in the future with infrastructure and neighborhood improvements.
With a home purchase as opposed to an investment purchase you can take a much longer view, even if it turns out you have to sell and move due to work or some other event. The key here is to find a house that you believe can be your home.
So you know what you are right? You’re either a home buyer or an investor. You can try to be both but then you end up compromising and your home is the last place you want to do that.
Where Will I Get a Loan?
The most important factors here are who will lend you money, the kind of mortgage you can qualify for and the terms. While looking on-line for rates you probably noticed a lot of sites that will take your info and get back to you. BE CAREFUL which of these you use.
Country Wide mortgage is still advertising, but their rates are higher than most and you won’t know who’ll actually own your mortgage if they go bankrupt. Your own bank may offer competitive rates and there are many mortgage companies still doing business. The key factors in a loan are:
Type (fixed or variable rate) I recommend fixed if you intend to stay in the house for several years. The ARMs are what got people in trouble.
Rate This is the %interest charged on your loan. Shop these carefully and look at points and origination fees they all add up to the end APR the true interest rate you pay on your mortgage
Term (how long, 30, 20, 15 or 10 years) the lower the number of years the less interest. Do the math here, sometimes a 20 year mortgage will just be a hundred or two hundred more a month, but will save you over a $100,000 in interest payments over the life of the loan.
Fees This includes points, loan origination fees and a list of other fees which are just basically charging you for doing business with them. WATCH the fees. They can be substantial and they make your real interest rate higher.
If you’ve been paying attention you know the current mess in real estate was brought on by sub prime and ARM mortgages. This deadly duo has crushed marginal home buyers and is eating into the middle of the home buying crowd because they got greedy. Many homes that had fixed mortgages were refinanced to ARMs (Adjustable Rate Mortgages) and excess equity pulled out.
Of course this equity was on paper till they made the loan, then it became a liability added on to the new loan. When these homeowners have attempted to refinance again to avoid the change in mortgage payments they find themselves thousands to tens of thousands of dollars upside down on their mortgages.
And they are being told they must put down more than they pulled out to make a loan happen. Just like the nefarious car industry loans, where you buy a car for more than it’s ever worth, they figured out how to do it with houses.
How Long Do I Intend to Live in the House?
This becomes important because you can accept some deficiencies in a home if you won’t be there that long, on the other hand if this is your home for many years, the neighborhood, space and layout need to be acceptable. In addition the type of loan and term you arrange may be dependent on this as well.
How Much Maintenance?
How much time and money does this type of home require? Do a little homework here, if it has cedar siding that takes more regular staining or painting than vinyl siding or brick.
What Am I Giving Up?
If you don’t know, ask friends, relatives or whoever you can. Owning a home is different from renting in both good and bad ways, find out what sacrifices you will need to make. If your hobbies take you out of town most weekends when will you get the lawn mowed and other regular maintenance items done?
If you answered all the questions to the best of your ability NOW you can start looking at houses.
Location, Location, Location
Any Realtor will tell you it’s all about location. Well it is for them, but only for you if you have specific neighborhoods in mind. If you are looking for a “Feel” in a neighborhood then you can be much more flexible and find yourself a better deal, more house for the money or maybe both.
Make up your mind what’s important because in a house deal you pay for everything whether you know it or not. The cute 1500 Sq ft bungalow in a premium neighborhood will likely cost what a 2000 sq ft ranch runs in a less demanded one.
Realtor or No Realtor
As a buyer you can contact an agent and they’ll help you for free right? The seller pays the commission don’t they?
In actuality the agent’s commission is added to the price of the home. It’s in there by what ever percentage the Realtor charges.
With the market like it is you can take the opportunity to look on your own at FSBO houses. These For Sale By Owner homes usually come in two categories, Overpriced or in Poor Condition.
The overpriced will be a challenge, these sellers usually go through a process till they get lucky and sell, reduce their price significantly, list with a Realtor, or take the house off the market.
If you find a house that suits you, do the research and make an offer, but offer just under the real value, that’s the reason you’re looking right, to get a deal? The Poor condition ones will require you to have the ability to accurately estimate the cost of repairs and see if it’s worth the price after that.
Another option is to look at listed houses and tell the Realtor you want a discount for not bringing another Realtor into the deal. Unfortunately most Realtors will just want to get both commissions, so a lot of times this won’t work. Still it doesn’t hurt to ask and 3% of a house price is real money.
Let’s say you’ve found a house, know its real value from looking at home sales sites and Realtor.com and asking around in the neighborhood. This “feels” like the right house either as a home or as an investment. So you just get with a Realtor, or if it’s a FSBO a lawyer and make an offer, right? No, no you don’t.
This is a down market; homes are sitting for months aren’t they? Right now if you don’t have to move and you’ve found a house you like, think on it. More than that go out and find another one.
REALLY! Because to get the best deal you cannot be emotionally involved with the new home, you have to be willing to see it get sold to someone else if you can’t take the time you need to consider it, get the deal you want and be happy with your decision.
NOW after doing all that you can make an offer! Make it contingent on a home Inspection and make sure you get a GOOD HOME INSPECTOR! Also make it contingent upon financing. Because you’re going to want to negotiate the best possible rate, terms and type of mortgage you can get.
I tell you this from personal experience that a Home Inspector can cost you thousands of dollars and you will never get back more from him than his fee. So avoid using the one recommended by the Realtor and get your own.
In addition, be there with him and if you don’t like the way he does it FIRE HIM ON THE SPOT! Even if you have to pay his fee, you’re better off without a bad inspection. Get someone to check the house thoroughly so you know what you’re getting yourself into.
In addition you will need a termite inspection. The same rules apply, but if they miss something here they will attempt to make good. If you’re like me you won’t want them doing the work so you’ll still have to hire another company and pay for some of that.
With two good inspections under your belt, your mortgage in escrow (assuming you’ve received a statement telling you estimated costs and detailing the mortgage) you can chill a little; yet not totally.
Keep your eye on the neighborhood and the house. You want to make sure things are still OK with the property when your closing date rolls around.
Now there are a lot of other things to think about. But if you ask the questions at the start of this article and pay attention to the advice here and what you learn along the way the other things will fall into place.
Good luck, and good hunting.