Well this has to be the farthest I have strayed from technical topics on this blog so far. The usual culprits–an especially busy time at both my day job and side business, as well as an especially busy personal life–have kept me away from the blog.
The biggest drain on my personal time lately has been my attempt to buy a home. Because I usually write about what I am doing at the moment, I decided I might as well write about my thoughts on buying a home. And because this is my second time through this process in my life, I think I am a little smarter about it now, and maybe I can impart some advice to those who have yet to buy a home.
I was originally going to start seriously looking for a home next year, thinking that the housing slump hasn’t hit bottom just yet, but since I live in a college town, in which housing prices have simply slowed in growth instead of going down as they have elsewhere, I decided that if I found the right house at a bargain, I would jump on it. As luck would have it, I found a home that fit my criteria.
I’m finding that buying a home is only slightly less terrifying the second time around, but if you want to be more financially secure, buying a home is one of the most important things you can do.
I am not a financial advisor or personal finance expert, and you should speak to one before making important financial decisions such as this. However, if you think that you can’t afford to buy a home, ask your financial advisor if the following are misconceptions for your circumstances.
Saving for a down payment, closing costs. Although lending is tightening up somewhat, if your credit history is good, you may be able to get a mortgage for a minimal down payment, and you may be able to finance closing costs as well.
Saving for you “dream home” or setting expectations too high for your first home. Often, the way that people afford their “dream home” is by building equity in a “starter home” first, not by trying to save money while renting.
When looking for a home, there are other misconceptions to watch out for. Be realistic about living downtown vs. the suburbs vs. the country and what fits your personality.
Also, be realistic about how much money and work you can invest in a new home, especially in the first few years. Especially if this is your first home, it may be a financial challenge for you to buy your first starter home; you are probably buying as much house as you can possibly afford. In that case, you just aren’t going to have the time and money to spend on a “fixer upper”. And if you have kids too, forget about it. They’re taking all your time and money.
At least, these are the misconceptions I had when I started looking for my first home, and I ended up buying a home that just wasn’t right for me. It was out in the country, as I thought I needed privacy when what I really needed was convenience. It was on six acres of land, which sounded great until I had to spend several hours a week in the summer mowing it (and that was when the mower worked well). It was heated primarily by two wood stoves, which sounded cozy and romantic until I spent several hours a week chopping and stacking wood for the majority of the year, and spent a significant portion of each day tending the fires.
Several times I almost accidentally burned down the house, but that’s another story. Only once or twice did this even have anything to do with the wood fires.
I was so stupid when I bought this house, that I went to home improvement stores and bought books on how to make sheds, create ponds and waterfalls, and stone gardens. I actually thought I was going to build a shed! What an idiot I was.
But I digress. If you’re a geek and you want to start looking for a home, the first thing you need to do is get embarrassingly organized. I came up with a simple spreadsheet to track the vital statistics on the homes I was looking at. Not all of these facts about a home will be meaningful for you, but I suspect many will. Here are the rows I created in the first column, then assigned each home to a subsequent column.
- mls #
- shown by
- agent name
- agent phone
- when listed
- why selling?
- list price
- market value
- assessed at
- when assessed
- yearly prop taxes
- anticipated offer price
- approx mortgage
- siding type
- type of heat
- # bedrooms
- # bathrooms
- sq feet
- lot size
- year built
- age of roof
- age of furnace
- age of water heater
- approx mthly utils in winter
- high speed internet access?
- good cell phone reception?
- previous owner smoked?
- dist to town
- bus route to town?
- dist to job
- bus route to job?
- dist to bus stop
Now, its important to note that this can’t tell you what home you should buy, but it might tell you which homes you shouldn’t. Its a good way to rule out some homes that have too many strikes against them and prioritize those that you want to actually look at. But ultimately, knowing what you want ahead of time and actually viewing the homes is the only way to decide if a house is right for you.
And ultimately, you may just have to make your own mistakes with your first home, like I did, to really know what’s right for you. That’s another reason not to wait for your “dream home” and buy a starter home. What you think is your dream home may end up not being right for you.
Another interesting use for the spreadsheet is to estimate your mortgage payment, which you can see is integrated into my list above. As an example, using OpenOffice Calc, put the price of the home in cell A1, then in cell B1, write this formula:
This is assuming a 30 year fixed 6.5% interest rate. Generally speaking, a 30 year fixed mortgage is probably what you want, and you can consult the Web for competitive rates. Also keep in mind that if your down payment is below a certain amount, you will also have to pay private mortgage insurance (PMI) which tacks on roughly $70-$100 a month. Also, if your school/property taxes are in escrow, then you will pay a certain amount every month to contribute to that also. Finally, remember that you will also have to have homeowner’s insurance.
And you will invariably need to pump at least some money into the home periodically for maintenance. But don’t let all of this scare you. Although it may not seem like it at first, home ownership will benefit you financially.
The only other major piece of advice I can give is don’t trust your “buyer’s agent”, the real estate agent “representing” you in the transaction. This is a relatively new concept, and although these agents can help you through the process of buying a home once your purchase offer has been accepted, up to that point, they are really working for themselves. Once your purchase offer has been accepted, their interests will be more closely aligned with yours.
Buyer’s agents get a cut of the commission on the sale, so they will try to convince you to offer a high price on a home. Somewhat ironically, the sellers agent is also not working in the best interests of the seller, as they want to make more sales and will sacrifice a little on the price of a given sale to insure it goes through. Often buyers and sellers agents conspire quite openly in these deals, so that for example, a buyer’s agent will steer you toward homes listed by others in their own agency, knowing the favor will be reciprocated. Remember, you need to take charge of finding the home that’s right for you.
The other important time that the buyer’s agent will work against your interests is during the structural inspection of the home. Some structural inspectors will gloss over potential problems with a home to help the sale go through. Realtors recommend inspectors they know will accommodate the agents in this way, so its in the best interest of the inspector to have a reputation of doing superficial work and reassuring the buyer. Basically, think of structural inspectors as you do auto mechanics; you have to do your homework to find someone thorough and honest.
Fortunately, in the Internet age, real estate agents are becoming less necessary all the time, and its conceivable that a time will come when real estate agents are atypical in the consumer market. For now, treat them like you would used car salespeople and human resources personnel–untrustworthy people you just have to deal with.