This might actually be a GQ, but I’ve got to start somewhere…
It’s time. I need to move into a more livable abode.
I’ve never bought real estate before, and I know there’s a lot I don’t know. There’s jargon I’ve heard my home-owning compadres toss around for years, to which I’ve paid too little attention to understand. Interest rates I understand, but “points,” “inspections” and “closing costs” I have only a vague surmise of.
I’ve cruised the neighborhoods I’m interested in and run checks on the Internet. After getting over (sorta) the sticker shock in my areas of interest, I’d like to move ahead.
I.
I have little doubt that I’ll qualify for a decent loan - no debt, good income, good credit history - but I wonder about my financial strategy. There’s part of me that says to put the most I can into it upfront, to borrow the least and have to most equity possible, while another part of me hears the argument that I perhaps should stick to the 20% down payment needed for a good loan (or so I’ve, heh, surmised) and put anything else I could muster into investments likely to give an annual ROI better than the loan rate. Thoughts?
II.
While I’m often enough a DIY type, I’ve also over the years seen fit to go with a pro at times. I have a CPA and an attorney. And, I’ve watched various friends over the years become educated in the process and save themselves some bucks by handling their own real estate transactions. My inclination here is to, first time out at least, use a friend’s realtor wife to both be my advocate and educate me along the way. Thoughts on that?
III.
What other things should I watch out for? What did you realize only after the fact was a greater consideration than was apparent going in?
I’ve already had several revelations just cruising a few places - lots of new construction is on tiny little streets that are a pain to navigate, some locations involve major pains to get to a freeway or major traffic thoroughfare, schools are to be avoided, grocery stores are very different and should be located in advance, some of these homes don’t appear very secure, what are the neighbors like?, etc.
I’m in need of upgrading my environment now, so the current effort does not need to be where I’ll live the rest of my life, although it could be. Perhaps in a few more years I’ll move once again to my home forever.
1.) Well kept homes usually increase in value; if you borrow the money to buy the house, and the value increases at a rate greater than your interest rate, you are making money on someone else money. Your home is not a liquid asset; and it can be remortgaged if necessary. And the tax advantages are not to be sneezed at. Put down just enough to avoid PMI, and keep the rest you could have put down in a (relatively) liquid interest/dividend producing saving vehicle.
If you’re comfortable with that. Remember that you should have enough liquid assests to run your home for 3 to 6 months.
3.) Cruise the neighborhoods regularly at the times you would be home; get up early enough to drive to work from those neighborhoods a couple of times. Drive by at 2 am on a saturday night; check for both noise and police.
Get an inspection (it’s usually required) and follow the inspector around when they do it. You can use the results to bargain the price down or get money back to repair any problems.
Hi. I’ve done this twice in the last five years, so while I’m not a pro, I hope I have some worthwhile thoughts to offer.
As far as the down payment, my feeling is that you should put as much as you can into it without liquidating any long-term savings. So, for example, if you have a money market and a stock fund from which to draw to make your down payment, drain the money market but leave the stock fund where it is.
The exception is if you need more $$ to cross the 20% threshold. The 20% threshold is significant for a number of reasons. Many lenders prefer that you pony up 20% of the purchase price to get a decent rate, and 20% or thereabouts (in some places, it’s 28% including Chicago, if memory serves) is the threshold above which you don’t have to pay PMI. PMI is basically money down the toilet, and if you can avoid paying it, you should. The whole point of home ownership is that you are owning an asset that appreciates in value (hopefully!), and minimizing expenses that are not deductible (as PMI is not IIRC) is important.
As far as putting in more than 20%, if you have it, you might want to consider it. The smaller your mortgage, the more money you’ll net out when you do sell, since your profit is equal to the sale price less the payoff of the old mortgage and closing costs. If you do this and kick in a little extra towards principal with each monthly payment, you can net yourself out a nice little profit at the end.
**
Well, aside from the old saw about the attorney representing him/herself having a fool for a client, the fact is that in active real estate markets, the cost for legal fees for a residential closing is pretty small relative to the other costs you’re paying. In Chicago, for example, it’s about $500.
Some people have horror stories about their realtor, whereas others think they’re wonderful. Neither is a sufficient basis to condemn realtors as a profession or to pooh-pooh their use. I used the same realtor for the purchase of my first home, its sale about five years later, and the purchase of my current home. She is wonderful, and I will use her again in a heartbeat. Representing me as a buyer, she understood what I was looking for, and even told me after visiting some properties that she “couldn’t let me buy it,” not because they weren’t expensive enough, but because they just weren’t right. Contrast this with the realtor who handled the sale of my wife’s home (who worked for the same company), who made up brochures advertising the property that showed the outside of the building, and not the inside of the unit with its newly painted walls, new floors, fireplace, etc. The point is, realtors vary greatly, and many of those who eschew their use probably had a bad experience themselves or talks to someone or several someones who did.
The best thing about realtors from the buyer’s perspective, as far as I’m concerned, is that they scour the real estate listings so you don’t have to. They have access to the most comprehensive database, and often find out about available properties before they make it onto newspaper websites, etc.
As an attorney, you are probably more acutely aware than most of the fact that time is money because you assign or are assigned a dollar value to your time in the form of your hourly rate. (I’m an attorney too, so I understand). In this situation, I think that time that I spend combing through all the different places that list properties, doing the research re: schools, neighborhoods, etc., and arranging appointments to see places is time that I could be spending doing something else, either chargeable work for my clients, playing with my dog, going to the gym, or spending quality time with my wife. All of which reward me more than slogging through the listings. So that’s why I would use a realtor.
Ditto with handling the legal aspects of the closing. It’s pretty document intensive, so while you could learn how to do it, why would you? The $500 I paid my lawyer for my closing, for example, is less than 2 hours of my chargeable time. It would easily take me more than 2 hours to figure it all out and get the forms in order.
So, I’m a big advocate for using the pros here over doing it yourself.
**
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III.
What other things should I watch out for? What did you realize only after the fact was a greater consideration than was apparent going in?
I’ve already had several revelations just cruising a few places - lots of new construction is on tiny little streets that are a pain to navigate, some locations involve major pains to get to a freeway or major traffic thoroughfare, schools are to be avoided, grocery stores are very different and should be located in advance, some of these homes don’t appear very secure, what are the neighbors like?, etc.
I’m in need of upgrading my environment now, so the current effort does not need to be where I’ll live the rest of my life, although it could be. Perhaps in a few more years I’ll move once again to my home forever.
Y’all’s input will be greatly appreciated. **
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Well, there’s always all kinds of things. For example, I did not fully appreciate that living on a block with several restaurants meant that garbage trucks would be there every single morning to empty them out. Early in the morning.
You’ve noted a lot of the stuff to watch for. Proximity to grocery stores, particularly in urban environments, is important. One nice thing about my current place is that I’m an easy drive from two supermarkets, but also have a couple of Kwik-E-Mart type stores nearby that I can run to for quick supplies. So if I’m out of milk, I don’t have to drive to get a half gallon to tide me over. I didn’t fully appreciate when I bought my first home that I might fall in love with a woman who had a dog, which made the fact that my building was dog-free a great inconvenience. If you’re athletic, is there a gym nearby? What about mass transit, if you live in a city? I’m sure these are all things you’re looking for, but they’re always good to keep in mind.
As far as it being the home where you want to live forever, it probably won’t be (the average life of the American mortgage is about 7 years, IIRC, and a goodly chunk of those terminations are surely sales), but I definitely am of the school that says that you should buy a place that you wouldn’t mind living in indefinitely. That is, if your lifestyle doesn’t change meaningfully in five years, ten years, or whatever, do you see yourself still wanting to live here. That’s why I’m always a fan of fixed rate 30 yr mortgages over shorter term mortgages with balloon payments. The balloon payment in five years could stick you with the choice of having to move or refinance at a less desirable rate. And maybe your life hasn’t changed enough for you to want to move. I moved because I fell in love and wanted to get married, and the woman in question had a dog who couldn’t live in my current place (plus we needed more space). Had none of those things happened, I’d probably still be living in my old home.
I agree with the neighbor assessment, although a bad one can always move in after the fact. Some neighborhoods seem more grared towards kids and some more towards retired couples. The noise level will likely vary greatly between the two.
New areas will of course take longer to finally obtain all the convenience ammenities. Ours is 8 or 9 years old and is just getting everything we need without having to drive a fair piece.
We used a realtor to help us find our place and point out the good and bad features of prospects along the way, then she and the seller’s realtor split the 6%. Worked very well for us.
And yes, get a QUALITY inspector! You don’t want to discover after the fact that your missed some key, potentially expensive components of the house’s construction (or lack thereof).
Good luck buddy. If you’ll move in next door to us and get rid of the jerk I’ll kick in 5k cause I know you’re one of the good guys.
Dude, on your first question, you need to get an education about how money works if you haven’t already. Everyone else’s answers on this question are based on (i) their own perceptions about how things (i.e., housing market, stock market, etc.) work, which may or may not be right, (ii) their own feelings about how much risk to take and what kinds of risks to take, and (iii) stuff they’ve read from “gooroos” and taken to heart without any critical reflection. You need to learn enough to be able to make up your own mind about these things. I started to go through some of the above posts point by point, but I won’t; suffice it to say that there’s some bullshit up there on this point.
Also, I do not believe it’s the case that “you need to put 20% down to get a good loan.” I got a loan for zero down at 6% and no PMI.
If you’re looking at a pier and beam place inside the loop, then George Szontagh at www.housecheck.com is the absolute best inspector in the world. He’s been certified by a million different organizations, he really cares about his job, and he’s a hell of a nice guy.
If your not looking inside the loop and you work inside the loop, then I suggest you learn to fly a helicopter and build one yourself (see www.rotorway.com).
Disclaimers: I don’t know what building codes exist in your location, nor do I know the regulations for sale, e.g. Use & Occupancy inspection by the local municipality. For that matter, are home inspectors certified or professionally licensed in your locale?
When performing a home inspection, I look at code related issues and improvements that should be made to bring the dwelling up to current levels from safety and liability standpoint.
Beyond that, I look at things that can save you money, and the cost of upgrading, e.g. an older furnace, non-energy efficient windows, etc.
Structural issues should always be checked, and you may want to see if your home inspector is certified regarding verification for wood destroying insects. I am not certified-I look for damage and if observed, contact someone who is for a thorough evaluation.
Are you concerned about mold and/or radon? Many insurance companies have issued policy disclaimers regarding mold, and my general contractors policy will not protect me if my workmanship results in a mold situation for which I am sued. Some municipalities allow self-testing for radon with charcoal cannisters, others do not.
One disagreement with a prior post-do NOT follow the inspector around asking a gazillion questions. I’d like to maintain my train of thought while looking for anything and everything, and chat will tend to distract me. Let me do my job, and that way I can render a complete and thorough report on your potential home investment. When I’m done with the inspection, ask all of the questions you’d like.
Before DanielWithrow (excuse me, Left Hand of Dorkness and I bought our house (all of 2 weeks ago), we took a first-time homebuyers class. It was very helpful and geared toward lower- to moderate-income buyers.
Other posters have given good advice. My only other suggestion is don’t blithely trust the sellers or their agent. We made the mistake of assuming that the previous owners of our house were honorable people who would deal squarely with us–and we got stuck with lots of expensive repairs we weren’t expecting. Get everything in writing and play hardball.
Things might work differently where you are but here in Mass. the realtor does NOT represent your interests unless they are specifically acting as a buyer’s broker. Lacking this, the realtor is representing the seller, no matter how much they might seem to be working for you.
If you value your friendship with the real estate agent’s husband, consider using the services of another agent. One you can get peeved with completely and feel OK about it. Mixing friendship and business, and the dynamics of working with a friend’s spouse–along with the general distasteful process of buying real estate sounds like it may cost you in many ways.
Ask other friends for agent referrals. Also check to see whether your state specifically allows buyer agents–if that is not specifically called out then chances are that the agent ultimately represents the seller–and that should influence your purchase/negotiation strategy.
Actually, I would suggest getting pre-approved. Pre-qualified means they’ve agreed to consider your loan application based on a quck review. Pre-approved means they’ve done the paperwork and background checks, and the money is ready and waiting for you when you are ready to buy.
Since the pre-approval process can take up to a month, that can be very helpful when you’re looking for a house.
Person A has been pre-qualified and they make an offer, but now the bank has to check to make sure he can actually pay back the loan.
Person B has been pre-approved, the bank already knows he can pay back the loan, and is ready to cut the check. No waiting around to see if he is going to get the financing…he already has it.
Pull a couple copies of your credit report, and don’t be afraid to shop around for the best rates. You may not have to put 20% down…we got an FHA loan on our second house, and only had to come up with 3%.
Don’t ever buy a house from someone you know, much less a friend. It is flatly impossible to do this and remain friendly. Even if everything goes smoothly and the house is in excellent condition, the purchase process places such a stress on the relationship that you are doing well if you can be civil to one another afterwards.
Thanks for the replies. Inspection warnings have been taken to heart…
So what’s the down payment philosophy? I’ll confess to being confused on this. If I don’t happen to have some rocket ride investment opportunity at hand, is there some other reason that making a 25-30% down payment is not a good idea? My own inclination is to purchase as much equity as reasonably possible,
Thanks, but I won’t be needing the chopper, TaxGuy. I intend to buy in my present area, the Montrose (inside the Loop) and I work in Greenway (also inside the Loop).
There are two main schools of thought on mortgages.
Have as big a mortgage as you need and can afford. The interest rate tends to be low, its tax deductible, and you can often make more money investing somewhere other than your home (the stock market, for instance). If someone is going to give you money at 6%, let you right off the interest on your taxes, and you think you can make 8 or 10% a year on it, you come out ahead.
Have as little mortgage as possible. Equity brings security and a small monthly payment means increased monthly cash flow. And while you may make more money in other investments, you have a guarenteed rate of return on paying off money you owe someone else.
I’m of the second school. I’m very conservative with my own money, and the first is way to risky - what if I’d bought Enron instead of paying down the house? Financial security in terms of owning my home outright is a huge deal to me, I love the flexibility of having a relatively low mortgage payment. Especially as we have a cushion of savings in addition to the equity in our home. But I don’t believe there is a right or wrong way to do this. Someone with a higher inclination to risk than I do (pretty much everybody when it comes to money - I don’t bury it in the back yard, but I’m not too far off) can come out ahead with a large mortgage and investing the difference - it isn’t worth sleepless nights to me. Learn the facts, crunch some numbers, find the best deal you can on a loan (less than 20% generally means PMI - which may add $100 a month to your payment - but if you can find TaxGuy’s deal it may be worth a much smaller downpayment), and make the decision for yourself.
One thing to bear in mind when you’re deciding how much money to put into your down payment is all the “little things” you don’t have as an apartment dweller which you’ll suddenly need when you’re a homeowner. Such as a lawnmower and other garden equipment, a snowblower, garbage cans, ladders, etc. Plus you’ll probably be moving into a house that has more square feet than your current apartment, so you might need to buy more furniture in order to furnish the house completely. And you’ll need window treatments. And if it’s a newer place, landscaping. Keep a few thousand dollars available for these sorts of “new homeowner start-up costs” instead of sinking every free nickle into your down payment; you’ll be glad you did. (I’m speaking from experience, as I was in your situation last April.)
I also highly recommend reading The 100 Common Mistakes Homebuyers Make (and How to Avoid Them) by Gary W. Eldred, and 100 Questions Every First Time Home Buyer Should Ask by Ilyce R. Glink. I found both books very helpful in learning about the whole homebuying process, and especially in learning how to evaluate potential properties and thinking through what features I really needed in my home. You can probably find both books at your local library.
I think I fall in the same school as you on the equity front, Dangerosa.
I have thought about “new homeowner start-up costs,” artemis, and I’ve budgeted for that. As well, I’m not planning on stretching the nickels out to make the down payment. I am inclined, though, to make the largest equity purchase I comfortably can. Thanks for the book tips; I’ll look for them tomorrow.