In visiting with a young man the other day, he told me he would love to find a home to buy, but he was sure he couldn’t afford it. He and his wife had spent the first few years of marital bliss trying to pay off massive student loans. I discovered in this conversation that he was lacking some pertinent information that could help him on his long and arduous journey to possible home buying and make this journey more easily achievable and enjoyable.
We agents are of course knowledgeable about real estate, but we sometimes miss the basic information that will make us better able to understand our client needs and educate them in the realities of home ownership. Basically, we don’t know what they don’t know, and sometimes we make assumptions about what they do know and make them feel bad because they don’t live and breathe real estate like we do. For instance, I’ve never painted a picture, and wouldn’t know the first thing about how to start, so why would we assume that our clients already know the basics about how to buy a house? The purpose of this blog is to provide some basic understanding and knowledge for our first time home buyers. Here are 7 key things everyone should know before purchasing property.
1. Buyer’s Agency
What the heck is that? Many people when they start to search for a home, they discover Zillow or some other home search site, find a house they want to look at and contact the agent listed there. Stop there. Searching the web to get an idea about what you are looking for is a fabulous way to see what is out there, prices, and a great place to start, but if you are beginning to look seriously for a home, you need someone working for you the buyer — not someone working for the seller. “But I can’t afford to hire an agent.” This young man told me that. In most (not all, but most) home buying, the seller pays the commission for both the buyer’s and seller’s agents. It comes out of the proceeds of the sale of the home. Agents do not collect any commission until you close on the home. What this means is, you can hire an agent to represent you as a buyer, and it costs you nothing. This is called Buyer’s Agency. You sign a short agreement with terms outlined, and now this agent is working for you and on your behalf to help you find the perfect home that will meet your needs. There is a key to this, though. You should find someone who is knowledgeable and trustworthy, but most importantly ethical. You most certainly do not want some high-pressure sales person who is constantly pushing you towards something that is not right for you and your family. You want someone who will listen to your needs and offer assistance without being pushy. You want someone who will work for you in a way that meets your needs. For instance, if you’re in a hurry, they should be working hard and checking new listings constantly, but if you’re mildly starting to look and just getting a feel for where the market is but you may not wish to move immediately, they can send you periodic updates as they become available until you’re ready to buy. To find a professional real estate agent, visit Realtor.com, a website owned and operated by the prestigious National Association of Realtors®. Most of these agents are found by visiting with people you know and trust. Almost everyone knows a real estate agent. Talk to friends and family members, especially people who have recently moved. Be careful, though to form your own opinions. Lots of people have all kinds of advice when you ask, but until you talk with an agent you will have limited knowledge. Your friends can tell you who not to use, too. They will share horror stories, but they will also give you names to call. I can help with this as well. Email me at karen.rothermich@exprealty.com
2. Financing Options and Affordability
“I don’t have 20% saved to put down on a house, and it seems I may never be able to buy a house.” In today’s market, there are numerous financing options. You don’t have to have 20% saved. In many cases, 5% down will get you into a new home. Mortgage rates are down right now. This means you can probably get a home loan for well under 4% interest. I encourage my clients to first look at homes in their budget that they can pay off in 15 years if at all possible. You’ll immediately start to see equity within the first few years of purchase. You’d be surprised how much equity you will have in the first 5 years, and you’ll be able to upgrade quicker. Most people start out with a 30-year mortgage. Except for an increase in housing values, you won’t see much equity until you’ve been in your home 5-10 years. But, if a 30-year mortgage is all you can afford right now, then by all means, go for it. Speaking of price, what do you think you can afford? Use this handy calculator to help you decide on an amount: Home Affordability Calculator. Scroll down and enter prices and play with the calculator until you get to the price you want. Next, leave a little wiggle room in the price you are willing to pay and can afford for a home and for negotiation in finding the right home. For instance, if you believe you can afford a $200,000 home, tell you agent you prefer to find a home under $180,000. In this way you can ensure you stay within your budget and allows you a chance to be able to negotiate for the home of your dreams.
Doing a cost analysis of home ownership versus the rent you are currently paying is important. I think you’ll find that in most cases, home ownership is much cheaper than rent and your money goes to yourself instead of the owner of the property you are leasing. As an example here in the Midwest in the Kansas City metropolitan area, a 1,300 s.f. home payment with taxes and insurance can run you in the neighborhood of $1,000-$1,300 per month with a yard, garage and other amenities. While, a 1,300 s.f. (or less) apartment or house rental costs around $1,500-$1,650 per month. You could potentially save $200-400 per month buying a house over rental. There are upkeep costs associated with the purchase of a house, but if you’re smart when you buy, those can be minimal.
Finally, when you are ready to start looking for a home, get a pre-approval letter from a qualified, professional mortgage company. I prefer local companies that I can walk into their office and talk directly with a loan officer instead of filling out an application online with a huge company. Many of these agencies have online applications, but they have local loan officers that can dramatically reduce the stress in getting pre-approved. This way, if you have any issues or they need a document fast, you’re just a short drive away. Shop the internet for possible local lenders, and talk with your friends and family or real estate agent to see if they can recommend someone they trust who will be honest, trustworthy and professional. Or, email me at karen.rothermich@exprealty, and I can give you some names of lenders who have been very good to work with. In the end, though the choice of a lender is completely up to you.
3. Check Out the Neighborhood
There is truth to the old adage about “nosy neighbors.” But also important is safety. You want to be both happy and healthy where you live. Of course you are going to look in an area that is close to work or family or wherever you choose. This is usually within a 5-mile radius. A lot can happen within this radius. I heard a comedian one night talking about how he was driving through Kansas City in a very nice area and found himself in a not-so-nice area all within a couple of miles. He joked about how this happened to him. It really hit home with me because locals know where they can and really don’t want to go within their home town. Before you decide on that perfect home, drive around a bit. Is there good access to schools, grocery stores and other important places? Do the neighbors keep their place neat and clean or does there seem to be a lot of outside storage and tall yards? How about the Homeowner’s Association Dues? Are they pricey or affordable or non-existent? Is it a good investment in an area that consistently sees increases in property values? Your buyer’s agent can help you with this by running an RPR or Realtor Property Resource presented by the National Association of Realtors. This includes comprehensive market data for the property you are looking at. It has things from demographics to local market trends. It can help you understand your neighborhood better.
4. Make a Short List of Your Must-haves
Do you love barbecuing? Do you entertain a lot? How about sitting by the fire on a cold evening? These are all amenities that are important to many first time buyers and rightly so. If you are very clear on everything you want in a home, it will make the search much easier. Of course, you’ll want to start the list with a price you can afford.
If you do your homework well ahead of the time that you actually start to look for a home to purchase, your experience will be much more pleasant More importantly, you’ll know what you want before you get started. It will save you time and buyer’s remorse if you’re clear and well-prepared ahead of time. Here’s an example of what could be on your short-list:
*Outdoor living space — covered patio
*Fireplace
*2-car garage
*2+ bathrooms
*3+ bedrooms
*Large living room
*Master bathroom
*5-mile radius of (put your location here)
*Off-street parking
*Updated kitchen
You may actually want a lot longer list and of course a much different list as this is just an example, but it’s important to start with your must-haves. You can always add to the list, but taking away from a list like this becomes much harder.
Many people want open-concept living, but this can be hard to find unless you can afford a newer home, or you are willing to put some money into renovation. Be thinking about how much work you will want to put into your new home or if you want everything perfect when you move in. To caution you, move-in ready, perfect space is a lot pricier, and if this is your first home, you might consider lowering the cost you are willing to pay for a home, giving yourself extra time and money to do some minimal renovations, and do some work before you move. Finding a local contractor can be tough, but again, ask around. There are a lot of qualified construction companies who will meet your needs.
5. Initial Cash On Hand
You’ve done your homework, and you’re ready to start looking for a home. Be prepared, you might find exactly what you are looking for and can afford on your first homes tour or early in the process. If this is the case, you’ll want to have your Buyer’s Agent write up a contract immediately so that you don’t lose it. In order to do that, you will need earnest money. Earnest money is the money that tells the seller you’re serious. This amount varies. I’ve seen earnest money as low as $500 or as high as $10,000 depending on the home. Mostly, though, I see about $1,000 as a good earnest money deposit. This is only a deposit, and if the seller does not accept your offer, you immediately get the check back uncashed. But, if your offer is accepted, even after negotiations and you go under contract, this check will be cashed and the money goes into an escrow account at the title company. The title company (or some other agency that holds the escrow) will keep the money for you, and it will be used as part of your down payment on the home. If for some reason you don’t close on the house through no fault of your own, you will get this money back. It is usually considered “refundable.” Other funds you’ll need up front could be for a title commitment and appraisal depending on your lender, both of these together add up to usually $1,000-1,500.
Overwhelming? Yes, it can be, but it doesn’t have to be if you educate yourself and do a little pre-planning. It can be worth it, though. Home ownership is part of the American dream. Most people say, “if I win the lottery, the first thing I will do is buy a house.” You can control your own destiny by buying that house without waiting to win the lottery. With a few ins and outs, that beautiful home down the street that just got a for sale sign in the yard can be yours.
Karen Rothermich is a broker salesperson at eXp Realty. She has more than 14 years of experience in the real estate industry with land, homes, and property management. You may contact her anytime at karen.rothermich@exprealty.com
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