Preparing to Buy

Benefits of Ownership

For many, owning a home is like having piece of the American dream. Some of the financial benefits may include:

1. Appreciation - Real estate values generally rise over a period of years.
2. Tax advantages - Homeowners may deduct mortgage interest and property taxes as an expense against income, while residential investors may write off cost recovery or depreciation. Of course, to understand the full extent of possible tax benefits, it is strongly suggested that you contact the IRS or speak with an accountant about your particular situation.
3. Low risk - Being a tangible asset, real estate is seen by lenders as a low risk, durable and marketable investment. Therefore, lenders are more willing to loan a high percentage of value. This allows homeowners to benefit by having control over an entire high-value asset with a low initial investment or down payment.
4. Marketability - Real estate can be sold at a predictable price to a dependable group of available buyers, provided enough time is allowed to expose the property to those buyers. Real estate provides its owner with valuable control and management of its value.

The personal benefits are less easy to articulate into a specific list, but are in many cases equally compelling as the financial aspects of homeownership. The following is a list of common motivators that inspire people to own their own homes. Some of these comments may apply to your situation:

1. Appreciation - Real estate values generally rise over a period of years.
2. Owning my own home provides me with a deep sense of security. I need to own in order to feel that I have roots and really belong to my community.
3. I can make my own decisions about design and decor. Unless you have a landlord who says otherwise, most renters are limited in what they can do to enhance their living spaces.
4. I can invest in upgrades that will not only bring me pleasure but can also add to the value of the property over time.
5. I have control over the piece of property; I am not answering to a landlord.

Rent vs. Buy

Many people face a decision of whether to rent or buy. There are many factors that influence this decision, such as how long a person intends to stay at one certain address. If there is a possibility that occupancy will last only a year or two, then it is probably advisable to rent. The only time it makes sense to buy with the intention of a quick turnaround is if the property purchased was undervalued at the time of purchase, or if the real estate market is appreciating so rapidly that the increase in equity will exceed the cost of selling the property.

Another approach is to buy a property and lease it to tenants when it comes time for you to move on. This makes sense only if you can rent the property at a level that will cover your mortgage payment. You must also be certain that you will have the time and patience to act as a landlord. And finally, be sure to assess what impact holding onto the property will have on your financial statement. It is possible that by holding onto the first property to rent, you will not qualify to take a mortgage on a second property.

The decision to buy has as much to do with your personal needs as it has to do with the financial reasons that can motivate a buyer. Do the math to understand the monetary ramifications. Take time to understand your own motivations before you rush into this decision. Homeownership has its definite rewards. Pursue them with wisdom!

Needs and Wants

The most important step you can take before actually going out to look at properties is to establish a clear understanding between yourself (and your partner) and your real estate agent as to what you will need in a home and what you want in a home. With some luck and dedicated searching, you could find a property to fulfill both.

The following guidelines are designed to help you think through the critical features that could be important to you in looking for the right home. If you anticipate looking at several houses, rate each category as to its importance relative to others. This will help you create a rating sheet that can be filled out as you inspect potential properties. Keeping track of each property by assigning ratings to the features that matter most will help you to organize each property in your mind. This becomes very useful as your list of properties grows!

1. Location: Need - Want - Neighborhood type - Neighborhood size - Type of community (family, retirement, mixed)
2. Proximity: To schools - To shopping - To Public services (libraries, parks, police, hospitals, etc.) - To Workplace (via roads and/or public transportation)
3. Number of levels (single, split, double) - Detached or townhome - Traditional vs. contemporary style - Exterior (brick, wood, other) - New vs. re-sale
4. Condition (anywhere from immaculate to needs renovation)
5. Layout/size Necessary square footage, inside
   • Number of bedrooms
   • Number of bathrooms
   • Kitchen size, functionality
   • Formal dining room
   • Formal living room
   • Family room
   • Office or study
   • Other rooms
   • Basement
   • Attic or extra storage
   • Garage size (attached? how many cars?)
6. Features
• Kitchen - (appliances, layout, eat-in area)
• Bath amenities - (Jacuzzi? separate shower? double sinks?)
• Master Bedroom amenities - (walk in closet, sitting area, etc.)
• Additional bedrooms - (required space, closets)
• Laundry room - (on what floor of house? which appliances come with?)
• Fireplaces - (where and how many?)
7. Décor - (must it fit your taste, or are you willing/intending to re-decorate?)
8. Wiring, phone connections - (what are your energy and phone system needs)
9. Utilities - (do you prefer gas, electric, oil? air conditioning?)
10. Land and Lot - Size of lot
• Type of land (flat, contoured)
• Perimeter (fenced? screened from neighbors?)
• Vegetation (mature plants? lots of trees? undeveloped?)
• Landscaping (designer touch? jungle look?)
• Orientation (comes with a view? private and hidden from street?)
• Outdoor areas (pool? patio? deck? play areas?)

Buy or Sell First?

You have decided to begin looking for a new home and are faced with the decision of when you should put your existing home on the market. Some people think locating their future home and putting it securely under contract is the first step.

By finding a new home first, you will need to know:

- How much equity you will need to take out of your existing house in order to afford the new one
- When you will need to finalize the sale of your existing house in order to move into the new home
- Whether or not you will have a place to live when you move out of your existing home

Most people, however, tend to list their home first, and then begin the house hunting process.

If you find yourself in the position of having your current home still on the market at the time you are closing on a new home, you may need to consider a bridge loan. For most people this is not a desirable choice, but one that needs to be made in desperation.

Some things you should know about bridge loans:

1. To qualify for a bridge loan, you must be able to show that you have enough income and net worth to carry both your existing home and the new property. In other words, the lender views this as two complete mortgages, which is exactly what it is.
2. The rates on a bridge loan are usually not competitive, which can threaten to further strain your financial situation.

As a home seller and buyer, your decision about when you put your home on the market is very important. Be informed about your options and make sure you assess your financial picture honestly, as well as your ability to handle the stress that may accompany any decision you make.

Common Home Buying Mistakes

1. Not looking at enough houses for sale It's almost impossible to look at too many houses. The more you see, the more you'll learn about what you want and what each house is worth. Make the most of your time by defining your broad needs and wants as much as possible beforehand. This will help your agent identify the most suitable houses to show you.
2. Not making a low offer Make an offer for what you think the house is worth, even if it is below the asking price. If the seller declines your offer, you have lost nothing. He or she can always make a counter-offer and you can counter-offer again until both parties agree on an amount.
3. Not making the correct price comparisons Few houses actually sell for the asking price, so be careful not to assess the value of a house just on the asking price. Your agent can compile reports that reflect and compare the selling price of similar houses recently sold in the same area. (These reports are commonly referred to in the industry as Comparative Market Analysis or "CMA"). Agents can also tell you which houses did not sell and were withdrawn or expired. This will allow you to make a more accurate decision as to whether the asking price for the property is fair market value.
4. Forgetting to calculate all the costs Remember when calculating the maximum price you can afford to include all of the costs of purchasing a home, which can easily be as much as 10% of the purchase price and should be deducted from the total to leave you a safety net.
   
   Any lender should be willing and able to calculate your price range. They will do this for you at no charge, as they need this information to provide a mortgage pre-approval and hope to get your mortgage business as well. Many agents can also assist with this calculation.
5. Fear of losing a specific house Houses come onto the market all the time. Take your time to find the one that suits your needs and wants best. Chances are you'll know it when you find it.
6. Not looking past the interior decorating or cosmetic improvements Don't choose a house just because you like the interior decorating. That is not what you are buying and usually will all go with the seller when he or she moves. Look past any cosmetic improvements such as recent paint and wallpaper, landscaping, etc. Remember to check out the actual structure of the house itself.

You should also investigate the plumbing, furnace, roofing, electrical, and other infrastructure items. A good home inspector can help you identify any potential problems.

Avoiding The Pitfalls

Unfortunately, even the best planning can fail to protect you from the potential surprises and obstacles that can materialize in the course of buying a home.

Many times, the most difficult problems originate from the people involved in the actual sale of the house because home buying and selling is so often an emotional experience. Sometimes tension can arise between the buyer and seller, prompted in part because each enters the negotiations fearing that the other side will get the better part of the deal. At any time in the home buying process, it is a good idea to look out for some of the following:

1. Emotional Sellers: Unless you are dealing with a third party seller, meaning the party has been hired to act on the seller's behalf, expect that the seller will have some level of attachment to the property, probably at an emotional and very personal level. Be sensitive when you walk through the property with the seller in tow.
   
   Option: Insist that you be allowed to preview the property without the seller in attendance. That should give you room to be a critical buyer without offending the seller.
2. Emotional Buyers: No matter how logical and analytical you try to be in purchasing a home, it is likely that by the time you make your first offer, you and your partner will have begun to make an emotional investment in the property. As the dates for the closing are finalized, so is your commitment to making this work no matter what. In this weakened condition, you are vulnerable to making mistakes that could cost you dearly in the long run.
   
   Option: Try to remember that you can walk away if the terms are not right for you. There are plenty of homes out there, even if none seem so special at the moment as this one.
3. Shop for Bargains: It is easy to become something of an expert on accurate home pricing if you look at enough properties. Once you have developed a feel for your market, you will be able to spot a bargain (and an overpriced listing). If you find a bargain, the seller has usually priced the property to sell quickly. Some sellers know as much about pricing as you do and will only accept an offer that is within a narrow range.
   
   Option: If you find a "bargain" property, respond with a worthy offer unless you can afford to lose the property to another bidder.
4. Dealing With Over-Priced Listings: That same expertise that enables you to jump on bargains will also help you identify properties that are grossly overpriced. If you do locate such a property, be prepared to negotiate artfully and aggressively to bring the price into line. This is a situation where an accomplished buying agent can be of great value. Even with the aid of a third party negotiator, it is likely that there will be several rounds of negotiations encompassing many days (even weeks) of offers, discussions, and counter offers. Over-priced listings require patience and perseverance.
   
   Option: If you must present an offer on an over-priced listing, do so through a third party, or be willing to wait patiently while the seller slowly adjusts to a more reasonable price level.
5. Buying With Urgency: Having time on your side is one of the best methods for assuring that you will be satisfied with your eventual home purchase. Unfortunately, many buyers find themselves forced into deciding to buy a property primarily because they are out of time. The most common urgency situation is created when the buyer is relocating and plans the single trip to the new area to locate the property. The buyer has to act aggressively in order to secure a property, which ultimately means that the buyer is likely to pay too much.
   
   Option: If price is important to you, try to arrange your circumstances so that you are not buying with urgency. You will find that you are in a far better negotiating situation when you do find the perfect house.