I have almost no idea how I ended up owning a home. Like marriage, responsibility and death, homeownership had always seemed like a distant blip on my horizon too far off to even acknowledge. But it happened – and here I am with a wedding band, my own health insurance and a mortgage.
I have to say that I'm quite impressed with myself for pulling it off. However, I could have pulled it off a lot more smoothly if I would've done a bit of homework first. Mistakes were made – costly ones, both in the short and long term. At the end of the day, I'm happy with the roof that's over my head, but if I could do it all again, there are a couple things I would have done differently.
1. Don't Take Any Advice as Gospel
As soon as you announce to your friends and family that you are thinking about buying a home, you are immediately going to be barraged by advice. The best and worst advice is going to come from current homeowners as they have likely made as many mistakes as you are about to make. One of those mistakes being: taking the advice of well-meaning friends and family to heart.
Why is this such a bad idea? Chances are, the advice they give you is going to be either very general or very personal. If they got burned on a certain aspect of a deal, they are going to be obsessed with it. They are merely going to tell you what they wished someone would have told them before they bought their home. For example, I had a buddy who recently bought a home and the one piece of advice that his dad gave him was to “buy the most expensive toilet you can afford.” As such, my buddy passed that bit of wisdom along to me when I told him I was buying a home. Granted, this probably would have been good advice for his dad's situation – whatever nightmarish scenario that could've been (dragons in the sewer?) – but this tidbit is better off itemized and kept in consideration, rather than basing your entire game plan around it.
On the other hand, you'll encounter friends who seem to get all of their wisdom straight from the ether – they don't know where they heard these real estate rules of thumb but they hear them so much that they've been indoctrinated into the core of their soul. Stuff like “Now's a terrible time to buy a home!” or “Refinance as soon as rates drop!” “Don't get this type of mortgage!” or “Never call a seller's agent directly!” seem like no-brainers, but the fact of the matter is that every market is going to be a bit different and it's the quirks that will snag you. For example, while the mainstream media has been awash with alarmist stories about the sad state of real estate, many areas were virtually unaffected by the subprime crisis (Pittsburgh, for example).
So what should you do? Should you focus on the minutiae or consider the big picture? Should you think outside the box or inside the box? Well, that's up to you.
The best thing you can do is do your own research. Ask lots of questions – especially from professionals from within the industry – and take everything with a grain of salt. There are some bits of wisdom that never stop being true while other tips turn stale and irrelevant within a couple of years – what may have been true when your grandpa bought his first home may not be true for you or your neck of the woods. Utilize the Internet, but take two grains of salt while doing so and pay close attention to the date and any user comments (trust the herd when trying to spot a blowhard). Ideally, when it comes time to make big decisions, you will be the expert on your own situation.
2. Weigh Out Rent vs. Buy
For me, the decision to buy a home seemingly made itself. It was simply something you did if you were married and could afford it. But believe it or not, owning a home isn't always the right move, depending on your emotional, financial and professional situation.
A part of me misses the old days of being a tenant. It's easy to gripe about being oppressed by the totalitarian regime of the landlord – you can't hang pictures, paint the walls, play the stereo too loud, upgrade appliances or have a dog if your landlord won't let you. But you also had someone whose job it was to mow the lawn, fix the toilet, deal with the utilities companies, pay property taxes and chide unruly neighbors. In your home, when a pipe bursts in the basement it's you that has to either pick up the phone or a wrench (and possibly a hefty repair bill). For me, the added responsibility is worth the independence of ownership, but if you'd rather not be the one to foot the bill or roll up your sleeves when something breaks, you're better off letting a landlord do it.
Renting also gives you a lot more flexibility when it comes to picking up and leaving, especially after the first year. Even if you sign a contract, you still have the option of subleasing or simply walking away without your security deposit if another opportunity comes knocking. True, breaking a contract early may be bad for your credit, but not nearly as bad as defaulting on a mortgage or as arduous as putting your home on the market. If you own a home and you get a job offer on the other side of town that you can't refuse, your only choice is a long commute.
Making the right move financially is a bit more cut and dry. Although the conventional wisdom is that paying rent is essentially “throwing money away,” that could be building equity, that's simply not true.
Before you assume that buying is better for you financially, make sure you know:
- How much money you will be putting down.
- How much you will be borrowing.
- What your interest rate will be.
- How long you will keep your home.
The fact of the matter is that you are putting a significant sum of money down upfront that you won't see a return on for at least five years, in most circumstances. In addition, there are closing costs and interest to consider. This is money that doesn't go towards owning more of your home. This is money that goes directly into the pockets of the people who are in the business of getting you to buy a home and never see them again.
Given the recent shakiness of the mortgage market, you might actually be better off taking that money you would have invested in real estate (which is essentially what you are doing when you buy a home) and putting it in a more stable investment, such as a mutual fund, an index fund or, depending on how dire the economy is, a CD or government bond.
To get a bit of perspective on the actual costs of renting vs. buying, try plugging your numbers into a rent calculator (here's one provided by the New York Times). This won't make the decision for you, but it will show you how long it will take for you to break even from paying closing costs and interest.
But the real bottom line is that you shouldn't buy a home for financial reasons. You should buy a home because you want to buy a home. There are better options for making your money grow that don't require you to make a five or ten or more years commitment to staying in the same home, in the same community, with the same neighbors.
3. Keep a Timeline
When I bought my first home, there was a moment a week before closing when I thought the deal would fall through. Not because we had found something terribly wrong with the home, or I had lost my job or gambled away my down payment or anything. My wife and I had the money we needed but we didn't have access to it. For some reason, the thought that we might need to set the wheels in motion towards making our money liquid weeks in advance never crossed our minds. So, here we were, in tears in the car outside the bank, with our real estate agent, our lender and our settling agent on the phone and none of them knew what to do. Luckily, our financial adviser pulled some strings and it all went through, but we very well could've botched the whole deal by not staying on top of things. Lesson: Get your ducks in a row and keep them that way.
Before you even begin looking for homes, you need to get pre-approved. This does a couple of things that will make the overall process much smoother. On your end, it lets you know exactly how much of a home you can afford. Once you know this, you can immediately cross out all the homes on your list that are out of your price range before you get your heart set on it. Too many people fall in love with a particular home that is too expensive for them and instead of living in the home of their dreams, they end up with an upside down mortgage nightmare. Or worse, the bank ends up with the home of your dreams.
This also streamlines the lending process. By opening up a file with your lender and running the preliminary checks on your credit, income and assets, you will be halfway done already when it comes to closing the loan.
On the buyer's end, being pre-approved shows that you are serious and prepared to make an offer. In a hot buyer's market, you'll want to act quickly and resolutely. Otherwise, you'll risk having your dream home snapped out from in front of your face.
As I illustrated before, once you've arranged your financial ducks in a tidy row, it's equally as important to make sure you keep them in said tidy row. If your financial situation changes or something else falls through, you'll want to let your lender know sooner than later. As the closing date approaches, you'll want to have your money liquid and cleared well in advance. Chances are you've had your money locked up in an investment – be it a CD, securities, mutual funds, other real estate, gold bullion underneath your floorboards – whatever it is, it's useless to you until it's in cash. Large sums can take upwards of four weeks to clear, so call your financial adviser as soon as your offer is accepted and let them know the date when you'll need to write a check.
You'll also want to keep track of important deadlines, such as the last day you can make changes to your mortgage, contingency periods and when you'll need to have insurance lined up. Ask your agent to help you with this – he or she should know, and if not, they should be able to find out all the important dates. I made the mistake of missing the deadline for asking the seller to make repairs pursuant to the inspection and it potentially cost me thousands of dollars.
Stay on top of things. If you haven't heard from your agent or lender in awhile, drop them a line or an email just to see if anything needs to be done. They have lots of clients and they may not have the time to keep tabs on your file.
4. Be Resolute, But Don't Bluff
There is a difference between showing you mean business and sticking your neck out. When you make an offer, you're going to want to put down some “hand money” or “earnest money” to show that you are serious. This is money that is held in escrow until closing, the fate of which is somewhat murky if the deal doesn't go through.
When we made the offer on our home, we put a hefty chunk of change down. We wanted the home and we had the money, so we wanted to be taken seriously before someone else made a better offer. But once we had that hand money on the table, we had essentially forfeited our power to threaten to pull out if we found something that we didn't like about the home.
As it turned out, there were a couple things wrong with the home that we would've liked to negotiate. But when it came to leaning on the seller, we had no leverage. He basically said, “Don't like what you see? Fine, walk away. I'll happily keep your hand money.”
On the other hand, we would've been served well with such an assertive move when deciding on how much money to put down with our lender. Although your lender or mortgage broker is going to pretend to be your friend – offering you coffee and fancy chocolates and little bags of potpourri and rigging up makeshift welcome displays on the receptionist's Windows screen saver, for example – all they really want to do is make sure you borrow as much money from them as possible. We didn't have a definitive answer when our broker asked how much money we wanted to put down, so she went ahead and signed us up for the biggest mortgage we could take. Later, when we told her we had changed our minds, she charged us $500 to make the change. Ouch.
5. Avoid Cronyism
Imagine you go into business with a bunch of your buddies and a customer asks you to refer them to someone. Better yet, imagine that you are in the industry with your friends and they've agreed to pay you a nice kickback for every sucker you send their way. Who are you going to recommend?
That's how it works in real estate. Never take a referral from your agent, your broker, your banker, your lender or any interested party. They are all in cahoots and chances are, they don't even have the best rates.
Instead, get a couple recommendations from friends or family who had positive experiences, or even look someone up in the phone book and see what they have to offer. Shop around for everything: mortgage, home insurance, inspection and other agents. Don't sign a contract with your real estate agent (many states don't require this) and don't sign on with anyone before you've appraised the competition.
Don't ever mistake the allegiances of someone who is “helping you” buy a home, whether it's an agent, a lender or an insurance provider. This is simply how they make their living and if a dispute arises between you and a lender or you and an insurance provider, don't expect any help from their buddy, your real estate agent. At the end of the deal, you may never see these people again, but they'll see each other every Thursday, at the bar, after selling rubes like you up the river. The only person you can trust to have your best interests in mind is you.
6. Don't Be Swayed By Staging or Minor Renovations
Yes, that new countertop looks nice. And the way they removed half their furniture from the living room and painted the walls sure does make the place look spacious. But these aren't the things that matter.
First of all, a fresh coat of paint costs about $50 and an afternoon's worth of labor. But it can make a room look like a million bucks. What you should really be looking for is beneath the surface. Actually, your inspector should be looking for these things. The big ticket repairs such as roofing, furnace, air conditioning unit, retaining walls, plumbing and other structural items won't catch your eye as much as a well-staged room.
It's better to look at the house as a blank canvas, preferably with all of the seller's junk out of there. We were surprised to discover that the carpets in our house were a little raggedy underneath the posh sofa that the seller had on display. If we would've noticed this earlier, we may have asked them to knock a couple bucks off the price tag.
7. Research the Community
This actually goes for renting or buying, but seeing as owning a home is a significantly longer commitment, it is especially important in that case. I'm happy with where my wife and I ended up with our home, but I wish I would've scrutinized my community a bit more before moving into our previous abode.
I had only lived in the city for a year and wasn't quite up to speed on the disparate neighborhoods. So when we heard that the community that we were thinking about moving to was “eclectic,” “affordable,” and, worst of all, “up-and-coming,” we figured that these were good things. Little did we know, eclectic merely meant that there were beautiful, restored homes a block down from the dilapidated, bullet-ridden row houses where we lived. And the term “up-and-coming” simply meant that it wasn't up to snuff yet, and they had no idea when it would be, but by golly, one day that place was going to be great (not the days we lived there, though).
It only took one night sleeping there to discover what we were in for. The night we moved in, a teenager was gunned down with an AK-47 in front of our house. As we would learn later, our neighborhood was one of several in the midst of a turf war between two (apparently) heavily armed gangs. This is information we could have easily gleaned beforehand. A Google search revealed numerous news stories of violence in the area, not to mention the televised news reports on ongoing incidents.
Obviously, this won't be the case with all neighborhoods, but you may want to look into issues that you may not have encountered by driving past in broad daylight or spending 30 minutes browsing the interior of the home. I recommend spending significant time in the neighborhood before you buy. Do a “dry run” on your commute, either driving from your prospective home to your workplace during rush hour or attempting to take the bus. Visit in the morning, afternoon and evening. Park your car near the main drag and grab a bite or a drink from the local pub. While you're there, talk to people.
Websites like city-data.com can give you statistics on income level, crime rate and age level in the area, but ultimately, this is merely a bird's eye view of the neighborhood. You're better off investigating at ground level.
8. Bonus: Take a Breath!
I know I promised only seven things, but on top of everything you are doing in preparation, you should always remember to step back and chill out. When we were house hunting, we were also in the midst of planning a wedding, a honeymoon and starting new jobs. It was a lot on our plates and it eventually became a breathless chore, just something we desperately needed to check off our list.
There was a point when we needed to take a deep breath and reevaluate our feelings and exactly what was happening. Too much advice and stress had warped our worldview throughout the process and we had become bitter and suspicious and most of all, tired. Take a break from worrying occasionally and take time to think of how happy you will be in your home and how you are actually looking forward to this.
Buying a home is a long, drawn out, stressful process. Going from circling ads in the paper to toasting in the foyer doesn't happen within 30 minutes like it does on HG TV, with a cheery host to usher you through the hoops. You will make mistakes when you buy your first home – it is inevitable. But with some preparation and a healthy outlook, you can mitigate most of the regret.