Tuesday, September 11, 2007

How to Buy a House

Buying a home is a complex but incredibly rewarding process. It is the single largest investment most people will ever make and as such a methodical approach is advised.

10. Determine how much house you can afford. Do this before you even begin looking at houses so you immediately eliminate those which you just can't afford. There's no sense in looking at that giant home with a pool if it is way out of your price range. Don't even tempt yourself or do any foolish justification. There are various on-line calculators, like this one at bankrate.com, to help you determine how much house you can afford. There are also many articles with advice on this subject. Don't forget to factor in taxes and home owners insurance.

9. Determine how long you will be living in the house. The average length of home ownership in the United States is seven years but maybe you plan on living in your next home for the rest of your life. Having a long-term plan will help you determine whether to use an adjustable rate mortgage (ARM) or a fixed rate mortgage. ARMs are generally good if you plan on selling the house a few years after buying it since the interest rate starts off very low and you can build equity in your house faster. However, as the name states, the rate "adjusts" after a period of time. Five years ago, when housing prices were spiking and interest rates were low, an ARM was a feasible choice for a short-term home owner. Today it is less desirable but still helpful in some situations. A good, reputable mortgage lender can walk you through all of the options.

8. Determine what you want in a house. This ties in with how long you plan on living in the house. Maybe a fenced in yard is not important to you today but do you plan on having children running around outside down the line? Since you are spending a considerable sum of money on your house you might as well figure out what you'll want in it, today, and years from now. It's helpful to rank what you want in your home by desirability and complexity. Certain things are easier to add than others. For example, if you want a master bathroom you are probably better off finding a house with one in-place since putting one in can be very expensive.

7. Determine what type of neighborhood you want to live in. Again, this should line up with your long-term goals. Maybe the trendy inner city neighborhood is fun now, but is that where you want to be in five or ten years? Will quality of schools play a factor in the future? What about crime rate and commute time?

6. Should you use a buyer's agent? A buyer's agent is a real estate professional who works on your behalf during the purchase of a home. They can do everything from finding potential homes to setting up times to see the home to suggesting mortgage companies to work with. In my experience the most important function of the buyer's agent is negotiation and sage advice. So, consider your agent carefully. Will your agent be able to go to bat for you during the crucial negotiating process when you've found a house you like? I remember when I sold a condo in St. Louis and ran up against a buyer's agent who was extremely tenacious on behalf of the buyer. That person definitely got their money's worth out of their agent.

5. Begin looking at houses. If you've figured out how much house you can afford, what you really want in that house, and what type of neighborhood you want to live in, you have helped yourself out considerably when weeding through all the possible homes for sale. Now is the time to begin looking at houses. Of course you don't need your own agent to look at houses. Potential homes are easily found on the internet through any number of on-line listings like realtor.com. If you've found one that meets your criteria you can contact the listing agent and set up a time to view the house. Of course then you are dealing with the listing agent directly, rather than having a representative of your own, and for many people this is too stressful.

4. Consider which features of a house are unchangeable. The golden rule of real estate is this: location, location, location. It has been said that it is better to own the worst house on a nice block than the other way around. Of course some of this is a matter of taste. Along those lines consider carefully those things about the house and neighborhood which will be extremely difficult, if not impossible, to change. Consider the surrounding area: Are there high tension lines running over the back yard? Is the home in the shadow of a power plant? Is there a strip-club across the street? Then consider the house itself: will you need to do any major remodeling or repair? Is the siding falling off? Generally you want to work your way from the most expensive, complicated repairs down to the things which are easily fixed and see if there are any deal breakers.

3. Do not be afraid to look at a lot of houses to get a better idea of what you really want. When I bought my first home I started off looking at single family homes in St. Louis but eventually decided I wanted a condo instead. Putting in the time to look at extra homes is taxing but considering the huge financial investment you're about to make it is well worth it. Again, this is where a buyer's agent can complicate the process because it is *not* in their best interest to look at 100 houses while you decide. But, if you've done your homework (the initial steps) hopefully you'll have a good idea of exactly what you want.

3. If everything seems to line up according your criteria, congratulations! You've found a potential home. Now comes the stressful part: making an offer. Again, this is where an experienced buyer's agent can really pay off. I've seen some who have negotiated like sharks, saving their clients thousands of dollars. And others offer almost no advice or guidance and seem worried about losing a sale. Hopefully your agent will run some comparisons (comps) on recent home sales in the area to determine what offer you should make on the house. Always have your offer contingent on an inspection.

2. Have the home inspected! This may be the most important step of all and if at all possible use someone recommended by a friend. Don't use someone your agent has recommended. Try to find someone reputable who will do a comprehensive inspection, including, hopefully, a check for mold. It's of little value if all the inspector can tell you is that your water pressure is good. You could figure that out easily enough but what you can't determine, and hopefully the inspection will, is what serious flaws the house has. A good home inspection can save you thousands of dollars in the long run. You do not want to buy a home with foundation problems, termites, or mold issues. The inspection will be able to determine what repairs will be needed and you can factor those in to your negotiations.

1. Hopefully you've made a fair offer, had the home inspected, and negotiated any necessary repairs into that offer. Hopefully everyone is reasonable and it is accepted. It is definitely a buyer's market these days so a buyer can push a little harder than in the past. Try to close six to eight weeks out and lock your rates in through the bank unless there is a good chance they will go down before closing. I made the mistake of agreeing to close four months out and failed to negotiate the price of locking in rates that far out. Consequentially I did not lock my rates until two months later, and they had gone up. Remember, through the whole process, this is business. Every step requires careful planning and consideration and others may be there to give you advice but you are the one who will be signing the deal and responsible for the payoff month after month, and repairs and upkeep.

No comments: