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Tips for first time home buyers
It’s easy for someone who works in the real estate industry to minimize the stress involved in the home buying process. After all, we do this for a living. We work in a world of legalese; of purchase and sale contracts, building inspections and contingencies. The language and processes are genuinely second nature. And for real estate professionals who work in tourist economies such as the Valley I work in, the purchaser’s can be just as experienced as their professional counterparts, buying and selling real estate on a regular basis, which can make those professionals poorly adapted to working with beginners.
But for the homebuyer who is doing this for the first time, the process can be fraught with obstacles big and small, real and imagined. Because in most cases a home is the largest investment a person will ever make, it is not something to be taken lightly – but armed with the proper information, it can be a truly enjoyable and equally edifying process.
Be the most informed person in the room – This may sound stupid, but many home buyers start the process without any real understanding of what they’re looking for. They don’t know what mortgages cost, they don’t know how to figure out principal and interest, they don’t know what closing costs are, they don’t know how much cash they need to put down. They just know that they are sick of paying $1200/month in rent when they can be paying towards ownership. But ignorance is not the path to success and educating yourself before starting the process will help leverage surprises, and remove a great deal of the stress typically associated with a home purchase.
Start with a simple balance sheet to figure out your monthly expenses – credit cards, car payments, groceries, rent, etc and balance them against all of your sources of stable income. There is a terrific guide to this process in Mortgages for Dummies which helps walk you through the process. This book will also provide the basics about different types of loan packages so that you can compare apples to apples.
Get pre qualified before you start shopping – Once you know what you can reasonably afford for a monthly payment, you should get pre-qualified for a loan. This is actually one of the most common missteps among first-time buyers, and the number one cause of failed transactions. Most sellers will not accept an offer without a pre-qualification letter, and they will shop your offer around to other prospective buyers while you wait for your letter to come through. If you are already pre-qualified, you know what the bank is likely to loan you, which further informs you while you search. If you skip this step, you face potential disappointment down the road when you find that dream house, but find that the bank won’t qualify you for said loan. You can shop around on the internet, but you should also stop in a chat with your local banks, credit unions and mortgage brokers. If you are using a realtor, they can provide you with advice on who has worked out for their clients in the past and who has not. All lenders are not created equally, and some are simply nightmares to work with because of the cumbersome nature of their underwriting process. Ask around, ask your parents, ask your friends who already own homes. Even though everyone will have a different loan profile (and thus a different set of challenges), the advice of those you trust is the best starting point. The pre-qualification process will inform you of any challenges you may face with financing, and mitigate disappointment once you find the right house. The mortgage broker can tell you if there are any flags on your credit report, and maybe even the best course of action towards fixing them before you get too deep into your search. It will inform you as to what your monthly payments might look like, and help prevent you from entering into a financially risky investment.
Engage a local real estate attorney. This always sounds expensive. Every one hates the idea of speaking with an attorney. You imagine little green dollar signs falling through an hourglass into a pile of legal bills before the process even begins. But here’s the thing; you will need them eventually, and talking with them early will generally not cost you anything extra. In turn they will provide you with sage council on all manner of legal issues and tax ramifications. They can provide perspective on matters that are frankly illegal for Realtors to provide advice on. At the end of the day this could be the best phone call you ever make.
Hire a Buyer Broker – I know, this sounds rich coming from a real estate broker, but there is a reason that fewer than 7% of homes are sold on the private market. Generally in every market there is tangible data that supports the asking price for a property. So when you find a house on Craigslist or Picket Fence there is probably a good reason they are available, and the reason almost always begins and ends with value. Your broker possesses a real-time understanding and familiarity of the local market dynamics as they relate to specific properties of interest and in specific price ranges. They also have a fiduciary obligation to look after your best interests from the start of the process all the way through closing. This includes using their expertise in helping you find properties with good value in your price range; identifying your specific needs and parameters, and using that info to inform their search on your behalf; advising on value and price throughout the search process and into the negotiating process; developing a purchase strategy for negotiations and instituting that strategy once a property has been identified; negotiating on your behalf and developing a contract that is fair, legal, and protects you, the buyer, from default and loss of your deposit money; providing advice on legal council, mortgage brokers, building inspectors and septic engineers; and not insignificant, they provide local wherewithal and knowledge of the area and the market you are shopping in. Best of all, in most cases the Seller pays their fee at closing. They might as well come to you with a giant bow on their head.
Don’t over-think it – You will know when you find the right property. You will know because it feels and looks right. You will know because you have done the work, you’ve looked at everything in your price range and it will stand out above and beyond the rest. You will know because the prospect of paying that monthly nut for this property feels right, not wrong. There are frequently compromises on your first home purchase. Paint and carpet are easy to change. The stone quarry next door is not. Just remember that you have to be ok with the things you can not easily (or inexpensively) change, and everything else is simply striking a good balance between what you want and what you can realistically afford.
Don’t overreach – if it doesn’t feel right, it probably isn’t. Living within your means is key to making wise investments. Somewhere between 1995 and 2005 Americans lost sight of that for some reason, and people got so deeply into debt that they could not find a clear way out. The government finally came to their rescue at the expense of you, the Taxpayer. Don’t get distracted by the shiny thing and remember that this is your first house. You can always add on (or move on) when the time is right. Keeping your payments within reason will allow you flexibility to make repairs, renovate the 70’s kitchen and remove the awful paneling. It will also allow you financial flexibility in the event that something changes in your life that adversely affects your income.
Don’t be emotional – this is often the hardest part, because buying a home is a very personal thing, and emotions do play a roll. But buying and selling real estate is also a business. When you find the right property, work with your broker to establish a negotiating strategy for getting to a price that makes sense. Run the numbers and figure out where your drop-dead point is in negotiations. Allow yourself flexibility while negotiating and figure out the number you won’t surpass. If you behave rationally and are always willing to walk away from the negotiation, usually you will get what you want.
Think of this as an investment – The money you invest in the form of a down payment and monthly principal and interest needs to make sense. If the property needs a lot of work, make sure that you factor that work into your asking price AND be sure that you have the cash reserves to make the required repairs. Budget money for annual upkeep. There is nothing sadder than watching properties fall apart and depreciate. Well cared for homes increase in value in a healthy real estate market. Allowing that investment to fall into disrepair will defeat the purpose of making the investment in the first place. It’s called sweat-equity for a reason. Get ready to sweat.
Finally, have fun! It doesn’t have to be stressful, it doesn’t even have to be all that much work. In the end, it just needs to make sense. So do your homework, make your phone calls, meet with your broker and schedule a few showings. That’s when the fun begins.