I guess you could call this “part II” in the Ndolger.com series of “how to tackle serious life events”! See my first post on how to buy a car!
Today I’m going to talk about how to go about buying a house. I can offer some tips on how to get a “deal” on your house, things to know, and things to avoid. I’m in the middle of doing this right now, so to be honest, this is also to help me “collect my thoughts”.
Step 0 – Are you ready for this?
Before you start even seriously considering looking for a permanent place to call “home” (which doesn’t involve landlords), it’s highly advisable to go through a simple checklist first:
1) Are you financially ready to take on the burdens of being a homeowner? There are repair costs, taxes, insurance, appliance maintenance, yard maintenance, mortgage payments, mortgage insurance, HOA fees…*gasp*! Don’t take this planning step lightly! If you’re not making a decent living, feel like you’re not in a “career”, have huge outstanding debt, don’t want to be a grownup and worry about all the things that come with home ownership, or don’t have a “safety net” (be it parents, spouse, rich uncle) stop reading now!
When all of these things change (maybe they won’t!), come back and continue! A huge reason for the Great Recession of 2008 was due to too many people not being ready! You aren’t entitled to own a house. It’s a lot of work, but there’s obviously huge benefits of owning a house too, otherwise it wouldn’t be such a big staple of the American Dream.
2) Are you even the type of person who wants a house? Some people just don’t like being “tied down”. Of course, it’s not impossible to sell a home and start over, but don’t think it’s going to be easy or cheap. You can potentially lose thousands of dollars by “resetting” your situation. If you aren’t at a point in your life where you don’t think you’ll be at a specific location for at least 5-10 years, maybe it’s not your best option.
3) Hey, did I mention you have some pretty hefty financial considerations to weigh before going any further? You’d better have at least 10-20% available to put down for a down payment on a house if you’re wise. This can take many years to accumulate! I’ll go into specifics why this is important later, but it’s extremely risky / expensive to purchase a house with a 100% loan.
Step 1 – What are you looking for?
All right, looks like you’re serious…! Sounds pretty obvious, but first you’re going to have to find what you want. If you’re the type who needs their hand held the entire way, now’s the time you should consider looking into finding a good “buyer’s agent”. As the name implies, a buyer’s agent is someone who will work on your behalf through the entire home buying procedure. They work “free” for you until you actually buy something. They work solely on commission, and you don’t pay anything up front. In fact, as a buyer, you could argue you never pay them anything, but in the end…never forget, the buyer is the one that ends up paying everything indirectly.
Anyway…now’s not the time I would recommend bringing in an agent. I would recommend you do some research yourself. There’s ton of information on the internet. My favorite websites are:
Zillow.com: Great website that you can find out homes for sale, home value estimates, can get email alerts when new properties on the market, use it to sell / rent your own house.
Trulia.com: Another website in the same vein as Zillow. They have their own home value estimates as well, always helps to get a second or third opinion.
Motovo.com: Another home tracking website.
Eppraisal.com: Yet another website similar to those above, as the name suggest, I’ve used it more to figure out how much homes are worth according to the website.
For what it’s worth, I personally consider Trulia to be the closest in being accurate to what *my* home is worth. But maybe that’s just because it’s the highest…
Anyway, with whatever you choose, you’re going to have to start somewhere. What are you looking for? Try to figure out a price range, how many bedrooms you want, how many square feet. Do you want a backyard? Garage? Two story? The websites I mentioned, Zillow is my favorite for this, allow you to find houses that meet another number of criteria My personal selections are: 3 bedrooms +, >3000 sq ft, < $250k (cough, bargain hunting…).
You could theoretically be in this “step” for years. I just recently advanced to “step 2” after…three years of looking? Once you’ve found *something*, it’s time for the next step.
Step 2 – Go see the house(s)
To do this, you’re going to have to have a buyer’s agent at this point (unless you’re going the whole “for sale by owner” route; which I’m not covering). If you did not already obtain contacts for a buyer’s agent in Step 1), I would suggest looking at Redfin.com (if they’re in your area).
Redfin.com: Redfin is like Remax + Zillow. They have real estate tracking services, but are most useful for their agent services; specifically their buyer’s agent services. So, what makes them unique? Well, let me hijack this step to go over how the real estate industry works. For decades, agents have taken a cut based on what the home sells for. Traditionally this is 6%. This is normally split between the buyer’s agent and the seller’s agent. Do you see why people have a huge incentive to sell “for sale by owner”? Thousands of dollars are at stake here!
Anyway, what makes Redfin special is they PAY YOU BACK a portion of their agent cut. They will “rebate” you .5-1% of the purchase price; essentially giving you back 1/3 of their fee. Can you say awesome?? If you’re following my advice, you’re doing most of the work anyway, why shouldn’t you get a rebate back? I highly, highly recommend using services that provide you with rebates at closing. There are more companies out there, but Redfin is by far the most popular / far-reaching. Stay far, far, FAR AWAY from “popular” services like REMAX. They will try to sneak hidden fees on you every chance they get (trust me, I first tried using them!). Avoid the “name brand” agents like the plague. They are not your friends.
So where were we again? Oh yeah…going to see the house. Now that you have an agent assisting you, speak to them about setting up things to go see your possible future residence. Depending on the listing, the house may either be vacant or the current occupants are still living there! You may not be able to schedule a visit the “same day”; try and be flexible here.
What should you do when you’re at the house? I advise bringing a notebook to note damage, condition, appliances, sq feet, extras, etc. If you’re seeing multiple houses, it’s very handy to cross-reference later. I see no reason why you couldn’t make a video from your phone if you so desire. If you’re checking out multiple houses this is very convenient to compare notes later on.
If you absolutely find one particular house that you adore, for the love of you…don’t say anything!! Your agent is representing you, but he’s not your friend, he really doesn’t have your best interest at the top of his mind. He has incentive to get you to pay the most you can! Don’t gush about something in front of agents, because they can talk with the seller / seller’s agent to try and get more out of you. Never underestimate real estate agents. They will do anything to get more money out of you. Keep quiet and remain professional.
Hopefully you’ll “know” when you’ve found your house, but if that doesn’t happen right away, I would highly recommend taking a “second” visit to the property (especially if it’s vacant) to further look at details. The next step is making an offer, so you’d better take note of everything now. You’ll still have “outs” later on in the process, but in the effort of not wasting your time, do this now. Things like, “oh, I had no idea the 2nd floor ceiling was rotting…”, or, “oh, wow…the siding is completely damaged, I never saw that!”.
Step 3 – Prepare an offer
So you’ve got a buyer’s agent, and you’ve found your house. Think you’re done?? The fun is just beginning! This is the most artful and creative step of the entire process…what to offer. Ignore anything your agent tells you about this; it means nothing. They will tell you not to low-ball…and this is true to an extent (you can’t offer $50k for something that costs $300k), but if you’ve got multiple options in mind and aren’t dead set on a specific property, there’s no reason why you can’t offer 10-20% less than listing price. You just never know with some sellers, some simply want out, some really need the money “now”, others have no desire to budge on their price. It really depends.
Here are some tips to give you a good idea what to offer though:
– Use the aforementioned “appraisal” tools to figure out what a house is worth.
– Look at the “tax value” of the property; you’re normally trying to bid under this amount.
– Look at recent comparable sales in the area; again, using the websites I mentioned. This will give you an idea of what others have paid. Most important thing here is to look for the neighborhood or close to it, and be close to square footage / lot area of what you’re trying to buy.
– How is the state of the economy at present? If the market is booming, well, umm…why are you trying to buy a house right now again? 🙂 If it’s not, obviously you have some flexibility regarding your offer.
– How much did the current owner pay for their property? This information is available on the websites I mentioned or in your local county tax database. Normally owners try not to “lose” money on their purchases…but if they bought something for $100k 15 years ago, and are trying to sell it for $300k today, they may reasonably take $250-275…you never know!
– Condition matters a whole lot. Are there significant structural issues? Is the seller not planning on fixing these? Normally if a seller doesn’t fix repairs, you can offer much, much less. This is normally pretty rare though because the seller is aware of this, and their goal (usually) is to make money here.
– Short sales / foreclosures are a whole different animal and deserves it’s own blog topic, I’d imagine.
So what’s the best combination? You have a lot of money, the economy is crap, there’s a lot of inventory on the market, home values are declining, the owner either wants to sell immediately / it’s been sitting on the market forever, it has damage that they don’t want to repair and want to sell as-is. Ideally, you’d want some combination of the above. Granted, the goal of this post is to try to get you to “save” money. This is probably the most expensive thing you’ll buy in your entire life. Don’t screw this up!
Talk with your agent about negociating “closing costs” with the seller. A decent seller will offer to pay “some” of your closing costs, at the very least. What are “closing costs”? All the little nickel and dime things that build up during this process: inspection, appraisal, title, lawyer, origination, points, and all the other service fees around buying a house. I talk about this a little more in the financing step. Anyway, the seller will normally “pay” some of these; obviously how much they pay will influence what you offer.
One final note: you normally have to put a small “downpayment” on the house so the seller/seller’s agent takes your bid seriously. This is normally somewhere around $500-1000. You would get this “earnest money” back if things fall through for one reason or another.
Step 4 – Inspection and Appraisal
Wow, you did it! The seller agreed to your bid! Hopefully you nailed ’em! You’re on your way to getting your dream house for a good price. All right!
Only thing standing in your way now is passing inspection and appraisal. What does this involve? Well, the inspection is something that must be done to gauge the exact condition of the property. Technically, I guess this doesn’t have to be done…but, I think you’d have to be pretty insane to buy a house as-is. An inspection is done by a 3rd party (normally $400 or so) and they go over every inch of the house and report everything that’s wrong with it.
If the inspection comes back “bad”, you are normally able to “walk away” at this point (and get your earnest money back). You may be out the inspection fee though. Never been in this situation though, so it’s hard for me to comment. This is why it’s very important to do your own due diligence in step 2) to make sure there’s no surprises here! You should have a decent idea of the condition of the house based on your own inspection. Hopefully, you don’t get any major surprises!
After that, an “appraisal” is done on the house. This is another 3rd party assessment that is done that allows an impartial observer to tell all parties how much “they” think the property is worth. If the appraisal comes in waaay higher than what the offer was, the seller would normally (and wisely) back out or counter-offer you here. Similarly, if it comes in waaay lower than your offer, you’d be a fool to not renegotiate. Just because you offered something in step 3) doesn’t necessarily mean it’s final, unfortunately. The appraisal step is really the last chance all parties have before “really continuing” the process. If the appraisal is “close” to the offer, the seller would probably move forward.
Step 5 – Financing
If you’re a lucky ducky and you have lots of cash, this step isn’t even pertinent, just buy your house straight up. Go you! For everyone else, keep reading.
This can actually occur much earlier depending on the type of sale. Some sellers need to see you have good financing options before even allowing you to bid. Some don’t require this. I mention this in step 5), but you probably should at least have this in the back of your mind in step 0), or ideally, completely finished after your offer is accepted. Having financing done as soon as possible will simply expedite the process of buying your house.
It’s not exactly wise to do this *too* early though. When you apply for financing, you’re dinging your credit score. I wouldn’t try to get “preapproval” letters or get quotes that rely on you credit being pulled until you are *really serious* about moving forward.
This is such a complex topic, it’s really hard to say much, but I can offer the following advice:
– Stay far, far away from “name-brand” banks /lenders. You will get *terrible* rates. Atrociously terrible. Robbing you blind terrible. Stay away.
– What should you go for? Try to find local lenders. Honestly, I would highly recommend no-closing cost loans, especially in a downward trending economy. There is *no* reason to *lock in* a rate when it is likely to be lower later. If you think the bottom is in, pay more in closing costs and you’ll probably get a better overall rate. I just find this very risky to do…keep as much of your cash as you can, is my mantra.
– Use services that give you real-time quotes. Do not give out personal information such as your SSN (because they’ll pull your credit). Go to every website / service you can. Don’t speak to people on the phone, use email for everything. Compare apples to apples rates from every service you can find and pick the best one. This can be a lot of work!
-A reputable website should be able to just need your: credit score range, how much the loan is for, what type of loan you’re getting, and give you an “estimate” of what kind of rates you can get. The rate they offer should not change that much when you move forward.
Let’s talk more about that. You really, really, REALLY need to have a good credit score. If you don’t, honestly, you shouldn’t be buying a house. This is going to drastically affect your loan terms if you don’t. Over the lifetime of a loan this is going to cost tens, if not hundreds of thousands of dollars more in interest fees. If you don’t have good credit, I’m sorry you got this far. Go fix that first!
For an advanced / risky play, I would recommended pursuing an adjustable rate mortgage (ARM) with no early payment penalties; especially in a bad / downward trending economy. Why? ARMs give you really, really low interest rates for small periods of time. If the economy is crap and getting worse, this lets you hedge against further downward action. If rates continue to go down, you can simply refinance later and make a new ARM. This is pretty complex stuff…probably worth another topic. This can be really dangerous if you’re not careful though; ARMs probably contributed significantly to the housing bubble because the wrong people were allowed to use them. ARMs are great for 3/5/7 years…but once the “grace period” is up, your rates skyrocket! This is akin to what cable companies do for their “promo rates”. Same logic applies, once the promo rate is up, go find a new company.
But I digress…whatever it is you need to do to secure financing do it. But don’t downplay this step, this is probably the *most* important step of the whole process. Make sure you obtain good financing…or seriously consider whether buying a house makes sense for you. If you’re going to pay less mortgage than it would to rent, then…go for it! I think that’s a wise decision, owning a house lets you write off all your interest payments, so it’s a good tax shelter play.
Step 6 – Closing
You can see the finish line. If you have a good buyer’s agent, they have protected you thus far and if you have good financing, you have no surprises left. If you have a no-closing cost option, even better, there’s really nothing left to scare you. This step simply involves signing all pertinent documents and transferring ownership of the house to you.
If you did everything right above, this step should be easy!
Congratulations, you did it! You just bought a house…hope my advice helped!