Updated: 8/26/2011 1:22 PM ET|
10 first-time homebuyer mistakes
A house is probably the biggest purchase you'll ever make. And, if you can avoid these missteps, chances are you'll be happy with the home you choose.
Are you gearing up to buy your first place? Shopping for a home is exciting, exhausting and a little scary, especially in this market. In the end, your aim is to end up with a home you love at a price you can afford. Sounds simple enough, right? Unfortunately, many people make mistakes that prevent them from achieving that simple dream. Arm yourself with these tips to get the most out of your purchase and avoid making 10 of the most costly mistakes that could put a hold on that sold sign.
1. Not knowing what you can afford
As we learned from the subprime mortgage mess, what the bank says you can afford and what you know you can afford or are comfortable with paying are not necessarily the same. If you don't already have a budget, make a list of all your monthly expenses (excluding rent), including vehicle costs, student loan payments, credit card payments, groceries, health insurance, retirement savings and so on. Don't forget major expenses that occur only once a year, like any insurance premiums you pay annually or annual vacations. Subtract this total from your take-home pay and you'll know how much you can spend on your new home each month.
If you end up looking at homes that are outside your price range, you'll end up lusting after something you can't afford, which can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can afford. You may even learn that you can't afford the type or size of home that you desire and that you need to work on reducing your monthly expenses and/or increasing your income before you even start looking.
2. Skipping mortgage qualification
What you think you can afford and what the bank is willing to lend you may not match up, especially if you have poor credit or unstable income, so make sure to get preapproved for a loan before placing an offer on a home. You'll be wasting the seller's time, the seller's agent's time and your agent's time if you sign a contract and discover later that the bank won't lend you what you need or that it won't give you a mortgage you find acceptable.
Be aware that even if you have been preapproved for a mortgage, your loan can fall through if you do something to alter your credit score, like finance a car purchase. If you cause the deal to fall through, you may have to forfeit the money that you put up when you went under contract.
3. Failing to consider additional expenses
Once you're a homeowner, you'll have additional expenses on top of your monthly payment. Unlike when you were a renter, you'll be responsible for paying property taxes, insuring your home against disasters and making any repairs the house needs (which will occasionally include expensive items like replacing the roof or furnace).
If you purchase a condo, you'll have to pay monthly maintenance costs regardless of whether anything needs fixing because you'll be part of a homeowners association, which collects monthly fees from the owners of each unit in the form of condominium fees.
4. Being too picky
Go ahead and put everything you can think of on your wish list, but don't be so inflexible that you end up continuing to rent for significantly longer than you really want to. First-time homebuyers often have to compromise on something because their funds are limited. You may have to live on a busy street, accept outdated decor, make some repairs to the home or forgo that extra bedroom. Of course, you can always choose to continue renting until you can afford everything on your list -- you'll just have to decide how important it is for you to become a homeowner now rather than in a couple of years.
5. Lacking vision
Even if you can't afford to replace the hideous wallpaper in the bathroom now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home meets your needs in terms of the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away. Besides, doing home upgrades yourself, even if you have to hire a contractor, is often cheaper than paying the increased home value to a seller who has already done the work for you.
6. Being swept away
Minor upgrades and cosmetic fixes are inexpensive tricks that play on your emotions and elicit a much higher price. Sellers may pay $2,000 for minimal upgrades or staging that you'll end up paying $40,000 for. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first-time homebuyers should always look for a house they can add value to; this ensures a bump in equity to help you up the property ladder.
7. Compromising on the important things
Don't get a two-bedroom home when you know you're planning to have kids and will want at least three bedrooms. By the same token, don't buy a condo just because it's cheaper when one of the main reasons you're over apartment life is because you hate sharing walls with neighbors. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't make a compromise that will be a major strain.
8. Neglecting to inspect
It's tempting to think that you're a homeowner the moment you go into escrow, but before you close on the sale, you need to know what kind of shape the house is in. You don't want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs. Keeping your feelings in check until you have a full picture of the house's physical condition and the soundness of your potential investment will help you avoid making a serious financial mistake.
9. Not hiring your own agent or using the seller's agent
Once you're seriously shopping for a home, don't walk into an open house without having an agent (or at least being prepared to throw out a name of someone you're supposedly working with). Agents are held to the ethical rule that they must act in the best interest of their clients, but if you're a buyer, you'll probably have a stronger advocate for your interests if you use your own agent and not the seller's.
10. Not thinking about the future
It's impossible to perfectly predict the future of your chosen neighborhood, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.
Some questions you should ask about your prospective property include:
- What kind of development plans are in the works for your neighborhood?
- Is your street likely to become a major street or a popular rush-hour shortcut?
- Will a highway be built in your backyard in five years?
- What are the zoning laws in your area?
- If there is a lot of undeveloped land? What is likely to get built there?
- Have home values in the neighborhood been declining?
If you're happy with the answers to these questions, your house's location can keep its luster.
Buying a first home can seem stressful and overwhelming, and it isn't without its share of potential pitfalls. If you're aware of those issues ahead of time, though, you can protect yourself from costly mistakes and shop with confidence.
For many people, a home is the largest purchase they will ever make, but that doesn't mean it has to be the most difficult.
This article was reported by Amy Fontinelle for Investopedia.
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So tired of people blaming ever one but themselves for the housing mess. You purchase what you can afford that goes for houses, cars, household items, furniture, vacations etc........ If you can't afford it on your income and come on you kn ow what you can afford. DO NOT BLAME OTHER PEOPLE OR THE GOVERNMENT IF YOU ARE GREEDY AND DECIDE TO BUY A HOME YOU ABSOLUTELY CAN NOT AFFORD. ITS CALLED ACCOUNTABILITY PEOPLE AND COMMON SENSE!!!!
Great article. I did everything you recommended and found the perfect home after driving my agent nutz since March. We saw 87 homes - rediculous I know, but I come from a family involved in the construction business so I know what to look for. There is so much junk out there, it's easy to spot when something has a face-lift to make it look good and what just needs too much work it's not worth what they're asking.
Bottom line, the majority of the homes on the market are overpriced junk. Especially the new homes. One of my brothers is a licensed building inspector and he said the new homes have a 30 year shelf life at most simply because of the way they are thrown up and the materials used. I purchased a 100 year old well maintained Victorian that's solid as a rock. The house was built when they used materitals that were meant to last centuries. The most important thing to look for is foundation and supports - beams, joists, rafters, etc. I got almost everything I wanted - I wanted 3 bds/1/12 bths - I got 5 bds/2 full baths. The downside - while 2 full baths are great the bedrooms are small. My brothers are going to eliminate 2 of the bedrooms by expanding the other 3 and making additional closets - which Victorians are notorious for never having enough of - something I don't understand since a dress from that time could fill a closet. LOL. I lucked out again because the home was owned by a elderly lady who was going to live with her daughter in another state. She priced her home to sell way below present day market value and I got it for 5K less than the asking price. The home could easily have sold for 90-100K more. My advice, don't let a surface facade fool you. Make sure the building is structually sound. Make sure the plumbing, electric, and heating systems have been maintained. Make sure the grounds outside are graded away from the house to help prevent basement flooding. Make sure there's a working sump pump in the basement or drainout. This is especially necessary if you buy a home on property with a high water table. I could go on and on but I think you get the idea - DO YOUR HOMEWORK!!! Good luck and happy house hunting!
You can never do enough "due diligence" when looking at a house. Don't just fall in love with the house, check out the neighborhood. Don't buy the only 2 story house in a subdivision that has all 1 level homes. In fact, check out the neighbors. Check out the way that they take care of their yards and homes. Come by when the neighbors get home from work and see if you still like the neighborhood. If you have an opportunity, look at the house you are thinking of buying while it is raining. Check the topography of adjoining lots. Check where the rainwater run off is flowing and make sure it is not at your property. When considering the value, you never want to be the biggest in the neighborhood or subdivision. You want to be the middle guy or the smallest. Remember one other thing, the person making a commission off of the sale of a home may not be looking in your best interest. Beware of a listing agent that is "double dipping" a commission. That means she is the listing agent but is also the selling agent because the buyer has not bothered to find their own agent.
I have been on a property inspection and heard the listing agent "out and out lie" to the buyer regarding a defect in a property when the buyer was asking a direct question about whether the property had flooded. The seller had excavated the soil back on one exterior wall and had applied black water proofing on the exterior concrete block and hadn't bothered to put the dirt back up to hide it. There was a water mark on the wall in the downstairs den of the tri-level home that was showing 2 feet off the floor. Don't trust the listing agent (seller's agent) to find you a qualified inspector.
I represented a property owner as an expert witness in court on a house that flooded. She was a first time home buyer. She trusted the listing agent to get a home inspection. She was getting the house at a $20,000 discount over other homes in the neighborhood. This was because everybody in the neighborhood knew that her home was built on a retention pond lot except her. The seller was a "turnip" who lied on his seller's disclosure statement. She sued and received a settlement from the listing agent and the appraiser but it still ruined her credit. Now she is renting again. Do your due diligence!
Now as far as agents go. You must be picky even some agents that you choose to go with aren't looking out for you . I know that first hand as we hired this agent and looked around with her. A home we liked but was to high in price came down in price and she never told us and she went and bought it !! I found out later she bought it to be used as a rental. We dropped her and went with a different agent that was great !! SO BEWARE !!
Not all realtors are greedy. We recently moved to the KC area and didn't know the market.
Our realtor actually saved us from paying too much for a house! He could've just said ok and and had us sign a contract. In a shrinking value market we now know the house was over-priced.
He invested another 2 weeks of effort in our house search and we ended up finding an almost perfect house that we LOVE! After 18 months we are happy with the price we paid, his guidance and the way we were treated.
I guess what I am saying is to not generalize about agents. Yes we could have bought a house without an agent ( my husband is a savy retired loan agent) but it's a little bit like a lawyer representing himself .
We were so pleased we actually pass out his business cards to friends we know who are searching for a house.
I thinks some realtors are in it for the long haul and understand the importance of a good reputation and good will. Perhaps, a lesson for all who are in business?
Some more tips for you: don't trust anyone. thoroughly research your real estate agent before you hire them: make sure they understand the paperwork and legal issues involved with mortgages and titles. Make sure your agent will be available to validate your loan is what you were expecting and make sure they will be with you backing you up every step of the way. Make them earn your commission. If they scoff at taking you out to see more houses or refuse to look at your paper work, it's time to find a new agent. Also NEVER use your agent's recommended loan officer without getting at least 3 more quotes first. Generally, get quotes from several people on everything you try to do. They need your business, you don't need them, make them earn it.
Don't trust the bank to have your papers correct throughout the mortgage and titling process, because they won't. Your agent should be up on your paperwork and be able to explain every word of everything that you sign. If they refuse to or act like it's "standard," put down the pen and walk away. They don't deserve their commission if they're not willing to act like an agent. The bank needs to have all of your information right, especially the terms of the loan. If they don't, don't sign anything. Know what you're supposed to get and get written confirmation of your beliefs every step of the way and keep them with you so they don't screw you over...because they will try to every step of the way.
Understand where everyone makes their money and use it to your advantage. A real estate agent makes commission by leading you to a sale. Make sure they lead you to what you want and not what they need. I could write a book on how loan officers make money on the loan, but it amounts to a commission as well. Don't let anyone take short cuts. You're signing away potentially a third of your life for this, it might not be important for them, it's important to you. Make sure you do your due diligence in selecting your agents because most of the people out there don't give a damn about you.
Our first rainstorm - we may as well have been outside. Water poured in through the roof! The inspection wasn't worth the paper it was written on!
For our second house, we skipped the realtors and used a local lawyer who does nothing but property law. For $500, he took care of all the closing documentation for both the seller and the buyer. If you know what you're looking for, I highly recommend using a lawyer. It's cheaper, and he has no incentive to encourage you to buy more than you can afford.
Last: Do not buy more than you can afford! My husband and I married in 1990. Before our wedding, we discussed finances. We decided that we would try to spend no more than $500 per month for rent or mortgage. To this day, our mortgage, home insurance, and property tax still add up to less than $500 per month. We don't have a large home, but it suits our needs, and we don't worry about not being able to pay the mortgage.
The most important things to consider when buying a house are its location, structural integrity, its size, and whether or not you can afford it, everything else can be taken care of over time. Paint is cheap if you do it yourself, some walls can be taken down, kitchens and bathroom can be remodeled, what can not be changed is the location of the house, its condition and price. In addition to making sure the house has the number of rooms and yard you need, consider things like access to good schools, parks, medical facilities and shopping malls/grocery stores. A house becomes our home, but it is also the most expensive long term investment for most people, and we should never forget the latter when we decide to buy.
The structure of Real Estates Agents' job is wrong and will end up hurting the buyer. A buyer agent is receiving 3% commission on the purchasing price. The higher the price the better for everyone involved but the buyer. Sure, they are held to ethical rules and we see on a daily basis how good people live up to those rules (politicians, law enforcement, judicial system, lawyers, etc.). When I wanted to purchase my current house for 9 months ago, I used 3 different agents. One was ranked nationally among the top five Real Estate Agents. I ended up getting rid of every one of them and do the job myself. Ended up purchasing a house $400,000 less than anything they had showed me and I got exactly what I wanted. So, what do you do? Follow the steps bellow:
1. Do your homework. Find out what is the average price in the area. Don’t ask around, look the prices up and calculate. Learn how much it may cost to repair stuff. As example, when you look at a house and the agent says; “it ok if you don’t like the paint. You can just repaint it”. You are looking to an additional cost between $1500 to $10000 depending on condition, size of the area, etc.
2. If you are buying a house for you primary living, NEVER listen to comments such as “It is a good investment”. Your primary resident is NOT an investment. It is cost of living. So buy what you really like.
3. If you have done all that, then you don’t need an agent. Just represent yourself. What do you think they do for you? Send you list of houses? You get that on line. Show you the property? Make arrangement with listing agent or seller agent. Give you an idea about how much you should pay? If you listen to them, you have already made a bad deal. Remember, ethical rules or a 3% of $400.000? Which one is your agent going to choose?
Finally, I know that there are ethical people that will do the right thing regardless conditions. Nevertheless, I am not going to put my money on trusting a broken and faulty system.
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