Wednesday, September 12, 2007

How Not to Buy a House

Following up my wildly popular post on how to buy a house I give you how *not* to buy a house. This advice pertains to the average potential home buyer, not the super-rich or gambling addict.

5. Take everyone's advice at face value. It may seem shocking to learn but there is quite a bit of money to be made in real estate. Most of these riches will be financed by you. In every step in the process, from the real estate agent to the lender, someone has a vested interest in you spending as much of your money as possible. So, it's probably best if you take their advice with at least a grain of salt. The object of the game is to save as much of your money as possible while still moving into the house that meets your current and future needs.

4. Begin looking at homes before you've determined how much you can afford. When you do this you become emotionally invested in expensive properties and neighborhoods out of your price range. This is a rule I learned when selling cars. It's very hard for a buyer to backwards once he has put himself into a top quality product. At that point the human brain puts all its energy into acquiring the product, monthly payments and prudent planning be damned

3. Take out an adjustable rate mortgage with no idea how it works. Adjustable rate mortgages (ARMs) are loans which start off with a low rate and then adjust at some point in the future according to the market. How much they can adjust to and when they adjust is a matter of negotiation. It stands to reason that if interest rates are very low an ARM will probably only adjust upwards, thus increasing the monthly payments. As I've said before an ARM can be a decent vehicle. You can use it to your advantage by building up equity in your home faster and then selling it before the rates adjust upwards. This approach was much more feasible five years ago when interest rates were low, housing prices were trending upwards much too quickly, and everyone was high on life.

2. Buy more house than you can afford. I've heard this one go both ways. Some people want you to stretch as far as you can when buying a house because it is assumed that your income will increase over time and then you'll be sitting pretty in a really nice home. Well, you know what they say happens when you assume? You make yourself and others look like a damned fool (or something like that). I say it's better to be a little conservative. A house is not typically a great investment and the money you save each month can be used for upgrading and saving for a rainy day. It's much better to have a smaller, nicely kept house than a large, sparsely furnished one. The only reason to justify spending a little more is to get into a slightly better neighborhood.

1. Don't consider taxes, homeowners insurance, maintenance, utilities, or future uncertainty when buying a house. Your property taxes will greatly affect your monthly payments. Taxes of $2400 a year equals an extra $200 per month. Homeowners insurance can easily run $100 a month. Heating and cooling a large house can add up, another good reason to opt for a smaller home. And there will always be upkeep and maintenance. Plan on spending at least 1% of the price of your home per year on annual maintenance. Even if you don't spend it one year it will add up in time as you replace the furnace, the air conditioner, the roof, etc.

There is a lot of housing market anxiety out there, which the smart buyer can use as an advantage. Housing prices are dropping and many sellers are all but desperate to get out of those large housing boom homesteads. Buy low, sell high!*

*This article was written by a complete amateur, whose work will never appear on cnnmoney or the economist.

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