Home Buying Tips for First Timers
Today, I have an awesome guest post from PreRetired Nick. Pretired Nick left a six figure salary in the corporate world to stay home with his new baby. He blogs about financial independence and pretirement at Pretired.org.
As a semi-pretired new father with vast real estate experience, it’s been fun for me to watch the young, energetic Savvy Financial Latina begin her methodical approach to buying her first home. She is much smarter than most (some would say savvy) and has been making some smart decisions as she gets ready to make her move.
But the whole experience brought me back to my early days of buying real estate and I thought it might be helpful to share a few things I’ve learned – especially things I wish I’d known all those years ago. So here goes!
I looked at several houses before I finally sprung on my first purchase. I stood in the living room with my realtor and noticed the new vinyl windows and new roof and said, “This is the one.” She was a little shocked that I was decisive, but it had so many good upgrades that it made obvious sense to me. Unfortunately there were a few surprises as well.
That was in the year 2000 and I ended up buying my first investment property (with my brother) just a year later in 2001. My brother and I had also inherited the farm we grew up on a few years earlier so we already had quite a bit of experience being landlords. In 2003 I bought two more fourplexes (at the same time). I sold one several years ago and I’m working on selling the other one now. I even wound up doing a sort-of flip with my wife in 2007 when we bought a house planning to move into it, changed our minds and barely got out before the market collapsed.
So while I still have a lot to learn, I have learned a lot. It’s been a lot of fun, very challenging at times and I’m sure it’s taken a few years off my life. And that’s the first lesson, don’t buy real estate thinking it’s easy money – it’s not.
Don’t buy too much house
This is the biggest lesson I can share. I wrote a whole post about it a few months ago and even though interest rates have risen, it’s still relevant. My basic rule on the cost side is that if you can’t afford the 10-year loan payment, you’re buying too much house. Ignore all the online calculators and other nonsense. Focus on what you actually need. How many bedrooms? How close to work? One bathroom or two? And remember a bigger house will just trick you into buying a bunch of stuff to fill it up. Smaller is smarter!
Don’t buy too cheap
If you’ve ever watched House Hunters on HGTV, you know it’s easy to guess which house the prospective buyers will choose because they always choose the one with the cheapest price tag. But lowest cost isn’t always least expensive when it comes to real estate. In fact, paying a slightly higher mortgage will usually be MUCH smarter than choosing a money pit.
This advice often gets interpreted as buying more volume. The same way Americans think a plateful of fake food is a good value, real estate buyers often mistake the size of the home for the real value. Certainly an extra bedroom or especially an extra bathroom means greater value for the same price. But there are some reliable drivers of value that are often overlooked. Being near park space or green space always seems to make property appreciate faster. Even if you have no kids, school quality is often a big driver of home value. Choosing a home that is walkable distance to a commercial district with pubs, restaurants and shops can mean an enormous increase in appreciation.
Don’t lose a great house over a few thousand dollars
It’s always very interesting watching first time home buyers negotiate on price. Sometimes deals fall apart when the two parties are only a few hundred dollars apart. If the house is a good value, this is silly. The real estate market is in constant fluctuation. The list price of the seller is nothing more than a guess of where they think the market is at. Even If you were technically “overpaying,” you will still come out way ahead on the appreciation side if you are truly buying a good value. Put all your energy into shopping around on interest rates instead.
If it’s a fixer, make sure it’s a cosmetic fixer only
Unless you or your spouse is a contractor, leave the project houses for some other sucker. The scariest thing about spending money on real estate is that once you start, you cannot stop. You just keep shoveling money until you’re done.
Understand how to know if it’s cosmetic only
Here’s how I determine if a home only needs cosmetic work. Break the home into systems and sections.
- First the shell of the building: How is the roof and siding? Are the windows new or old? All of those items are super expensive to fix. My first home had brand new vinyl siding, which looked OK, but it failed quickly and I grew to hate it. Then I found out it had asbestos siding, which was placed over the original cedar siding. It wasn’t cheap to replace all of that. The good thing about my first home is it already had new vinyl windows installed. It made energy costs much cheaper and was a big expense I didn’t need to worry about.
- After the shell, check out the layout. A building’s layout cannot be changed easily so skip anything that’s awkward or weird. Avoid anything with half-assed additions.
- Next are systems: heating and cooling, plumbing and electricity. Are these systems new or old? Is the plumbing about to fail? Does the building have the dreaded aluminum wiring?
- Finally check out the rooms. Carpets and paint definitely count as cosmetic. Sometimes even kitchen and bathroom cabinets. But if you’re looking at complete guts of these rooms, just move on. As a friend of mine once said, money flows where water flows.
Consider not remodeling
A common type of starter home for first-time buyers is what I call the “grandma house.” The smallish home where old folks have been living for decades. There might be some deferred maintenance, but the bones are there. Young home buyers often view these homes after getting all hopped up on too much HGTV and home design magazines. They stroll from room to room imagining how they can make it theirs. Remodel the kitchen? No problem! Gut the bathroom? We’ll have it done in a weekend! What they don’t think about is the cash disappearing from their grasp. It’s very much worth considering just living with those old 1950s cabinets and antiquated bathroom tile. Instead, opt for the 10-year mortgage, keep the building well-maintained but don’t do any large remodel projects. Then, when you’re ready to sell, it’ll be sold as a clean “grandma house” to someone else – except you’ll have enjoyed all the appreciation without having done a bunch of expensive work. Keep in mind a starter house will usually always be a starter house so making it too fancy may not make any sense.
Big yards = bye bye weekends!
Yards can be nice features for entertaining and for kids. Make sure anything you buy is already fixed up and easy to maintain. A yard that is crying out for professional landscaping could mean tens of thousands of dollars. And unless you love mowing the lawn, remember to keep the size of a yard in check. Dollars aside, you could be spending endless hours maintaining a space to look nice for your neighbors.
Don’t buy anything built in the 1970s
Seriously. Just don’t do it. Are there great properties built in the ‘70s? Sure, of course. But finding those few gems is not the worth the risk of buying a lemon. Building practices of the time were absolutely terrible and a lot of very shoddy housing was constructed very quickly. These houses tend to be poorly insulated, often use very suspect siding, have poor layouts and, frankly, terrible style. The worst part is that the market for homes built during this time is very limited since so many people know to stay away from them now. You could be stuck with this lemon for a very long time.
Hire your own inspector
Hopefully you’ve already received this advice if you’re looking for a home. But just in case, here it is again: Do not let your realtor recommend your home inspector. Find the best home inspector you can find and make sure they’re working for you. Home inspectors recommended by your realtor aren’t going to purposely miss things to help the deal close. However they may be subtly incented to shade the importance of things that are noted. More importantly, I think realtors know to look for less picky inspectors when they give recommendations. That’s because they’re motivated to speed the deals to close not to protect you from expensive problems.
Your realtor is NOT working for you
I like realtors. I use realtors most of the time. My mom was a realtor. That said, don’t kid yourself that your realtor is working in your interest. The opposing realtors are really working with each other to get a deal done and that could mean you get pressure to increase the amount you pay or to not negotiate as aggressively. The good news is that the seller’s agent isn’t working for them, either so they are hopefully trying to convince the seller to take your deal.
Consider buying a rental for your first home
Finally, I know every first time buyer has a vision of settling into their lovely new home, inviting friends and family over and decorating this space just the way you like it because it’s finally, finally your OWN space. I get it. I did the same thing. There is another option to think about, however. Perhaps you could find a duplex or even a fourplex to move into. You can live in one unit and rent out the remainder. A strategy like that, plus a 10-year loan, could mean you own a rental property free and clear in as little as seven years! It’s not for everyone, but it’s worth thinking about!
I guess that’s enough advice for one day! Good luck to the happy home buyers!