The Common Sense Investor

Part 1: Preparing Yourself

Buying a new home, or at least a home that’s new to you, is probably the largest investment you’ll undertake in your entire life. The first critical step you must take is to prepare yourself to make that investment. You’ll need to have your finances in order; know what your credit report will say; understand how much cash you’ll need to buy your home; and finally, make preparations with the bank so your purchase can go through as quickly as possible.

Assessing and Preparing Your Finances

The first thing you need to do is check your finances. How much do you have to put on a down payment? How much house can you afford, realistically? If you have a 20% or better down payment, it may save you money; you won’t have to insure the home equity, as you often do with a lower down payment.

When assessing your finances, you should try very hard to underestimate, rather than overestimate, what you can afford for your home. Create a budget and try to get a good sense of what your monthly expenses will be. When all is said and done, what really matters is cash flow on a month to month basis. Make sure to take into consideration the fact that a new house often comes with unexpected costs. Not to mention the fact that most people are upgrading their standard of living when they buy a new house, and get a little sticker shock with the first utility bills. Speaking of which: you should budget in the fact that your monthly expenses will most likely increase over time. Do you feel confident that your salary will keep pace?

You can find some excellent home payment calculators online, which will let you calculate your payments with different prices, mortgage time periods, and interest rates. You’ll notice as you play with the calculators that a tiny difference in interest rate can make a huge difference in the amount you ultimately pay. Also figure in 1-2% of the home’s cost that you’ll need up-front for closing costs and/or points.

Your Credit Report

Before you go to the bank, get a copy of your credit report from each of the major credit reporting agencies. The better your credit score looks, the better your interest rate will be. Some simple steps you can take to improve your score include closing unused lines of credit, paying down your debt as much as you can, and not applying for any new credit for about six months before you apply for your mortgage. While you can’t fix bad credit quickly, you can do a few things over the short term that will improve it.

Pricing Homes and Home Accessories

While the total cost of your house is important, you should remember that other costs will figure in to the final cost. For instance, you’ll need to buy mortgage and homeowners insurance, title insurance, pay your closing costs, and pay for moving in, as well as taking care of any extras. Don’t bankrupt yourself to pay for your new home, but rather remember that you will have unanticipated costs.

Mortgage Pre-Approval

Before shopping seriously for a new home, go to the bank and apply for a mortgage pre-approval. If you have a pre-approved loan, you’ll know exactly what you can spend on a home (the bank will help you figure this out), and the homeowner knows you are a serious buyer. It also helps you to narrow down a price range for prospective houses. Also, with this information, you have some serious leverage when you start talking price.

Part 2: Investigating Your Investment

Once you’re ready for your home purchase, you need to be certain the home is ready, too. There are truth-in-advertising laws that govern real estate, but you still can’t be certain that what you’re being told about your new home is really true. You will have to ensure that for yourself.

Always Have The Home Assessed

Your first step when you’ve found the perfect home is to have it assessed. This doesn’t mean calling the tax assessor’s office, though you should do that too to determine how much property tax you’ll be paying annually. Instead, you need to hire an independent contractor or professional property assessor to look at the home and tell you what it’s worth and what needs to be fixed. Often, you can talk the home seller into fixing problems before the sale finalizes; if you do, get it in writing, and have it re-assessed before signing the sales papers.

Check Into Recent Community Trends

You may have a beautiful view of the river from the home today, but in two years a high-rise luxury condo may sprout between you and the water, leaving you with an average at best view. Your real estate agent can do this more easily than you can, but you should call the property assessor’s office and see what the chances are of something like this happening. Also, be aware of everything else in the neighborhood: crime, where schools are, traffic patterns, current community struggles. All these things can make a difference in your home’s future value.

Let Your Real Estate Agent Do Her Work

One of the nice things about having a real estate agent is that they can do most of the grunt work for you. In fact, that’s their job. They take care of all the details so that you can focus on the important things. Make sure that your real estate agent is a good communicator, because their main job is to keep things going on schedule; to make sure everything happens as it should and that there are no setbacks. If you’re real estate agent isn’t checking in with you at least once a week, then something is wrong.

Also, let your real estate agent do the bargaining! This is very simple; if you have retained an agent, don’t even consider bargaining yourself. Your agent knows all the tricks and all the right things to say. This is, of course, assuming you’ve been smart and retained your own real estate agent instead of sharing the homeowner’s. Chances are, if you use the same agent, you are better off handling the sale yourself because the agent’s commission is based on a percentage of what the property sells for, not what he or she saves you ““ a higher sale price, which is bad for you, equals a more robust commission for the owner’s agent.

Get Everything In Writing

This really should go without saying. A verbal agreement is worth about the same as the paper it’s printed on. You should agree to nothing without a signed, preferably notarized, piece of paper detailing it. Usually this issue crops up when the owner verbally agrees to make necessary repairs, and then reneges. A good real estate agent should ensure that all appropriate paperwork gets signed.

Close As Quickly As Possible

A fast close can often save you money, but more importantly, a fast close gets the sale over with. You should be suspicious of a sale in which the homeowner seems to delay a close; why would he or she do that? Are they still emotionally attached to the house, or is there a lien issue that has not been disclosed? After the second rescheduling, you should ask, or have your real estate agent look into it.