Some people are born shoppers. The buying process makes their blood rush and nostrils flare in anticipation of combing through fields of merchandise looking for that perfect item at the perfect price. Once found, the transaction is simple. Throw down the cash or credit card and revel in the acquisition of your trophy.
When the trophy is real estate, the emotions are amplified. The excitement is heightened by the size and magnitude of the purchase. Often the gravity and scope of the real-estate buying process can frighten or even paralyze the smartest buyer. Of course, this may be due also to the fact that in many states, buying real estate involves an insurmountable number of lawyers seated around a single table.
Whether you are looking to buy a finished log home or that perfect tract of land, it is best to step back, put things in proper perspective and approach the purchase process with a sound mind and cool head. Here are some suggestions for making buying real estate a fun and profitable process:
1. Educate yourself. Confidence is the key to buying any good investment, and the best way to build confidence is by gaining a solid understanding of how the process works. Ignorance in a real-estate transaction can cost you thousands of dollars. You need to educate yourself about the following items:
Location. Location is generally the most important aspect of any real-estate purchase. It will determine both price and investment quality for a property. Learn about the general neighborhood and the people living in it. Find out about the economics and the schools, as well as any detriments to your particular prospect, such as noise and traffic.
Amenities. Every piece of property has features that are unique. A view or proximity to the water can add value to a property. Features such as common areas and gated communities can be attractive for some people. Even the house itself may have certain features that stand out. Often upgraded finishes and fixtures can make a house hold its value.
Process. The real-estate purchase process varies from state to state and sometimes county to county. Many states, such as New York, require table closings where all parties and their attorneys have to show up on a single day at the closing table. Others, like California, close escrow without anyone ever meeting each other. Ask your real-estate agent to explain exactly what you should expect. Find out your responsibilities and time frames so you are prepared to do your part.
Financing strategies. These days, there are almost as many loan programs available as cans of soup on a grocer’s shelf. Not all loan programs that sound good are right for you. Have your loan officer do the math so you can com-pare programs to see which one fits best with your financial plans. Just because the loan has no points and fees doesn’t mean it’s inexpensive. Make sure you examine all the details, and don’t forget to check with your accountant.
Maintenance. Some tracts of land and types of homes require special ongoing maintenance, which can be costly. Log homes can require restoration and re-chinking. Stick-built homes may suffer from dry rot and need paint, roof repair, etc. Erosion can be a factor in some areas and mold a factor in others. Read up on the specific type of house that interests you so you aren’t faced with financial surprises after you move in.
Good educational resources can be found in many books and on the Internet. It’s best to get your information from a variety of sources and compare. If all the sources agree, then you know that what you are reading is likely fact. If there are differences of opinion, then you can identify good questions to ask of the professionals that are supporting you.
2. Pick the right professionals. Each real-estate transaction will involve a small army of experts and professionals to help you through the transaction. It is important for you to surround yourself with the best you can find. The two most important players in your transaction will be your real-estate agent and your loan officer. These two players not only will take on big roles in the purchase process, but also will refer others in the process, such as the escrow agent and inspectors. Remember that referrals are usually only as good as the source.
Everyone has heard horror stories about dishonest service providers, but thankfully the crooks are relatively few and far between. The bigger problem for most people is working with mediocre professionals that don’t have the knowledge or experience to help you get the most from a transaction. A real-estate agent may be nice but not a good researcher or, worse, may be a poor negotiator, resulting in your loss of thousands of dollars. As a consequence of the refinance boom of the last 10 years, there are many loan officers out there who don’t have the experience and expertise to guide you into the right loan programs.
You could be overpaying on a mortgage or putting yourself in financial risk due to simple ignorance. Make sure the service professionals you choose have extensive experience and references. Ask the hard questions. Don’t worry about being kind. Be loyal to those who are bringing you the best knowledge and service. You will be paying good money for their expertise.
3. Keep the emotional level low. Buying a home can be an emotional experience. Even if your purchase is an investment, there is a certain attachment that goes to a house or piece of land. It still represents somebody’s dream and, therefore, has a feeling of magnitude. The same goes for financial issues associated with purchasing the property. You are dealing with big numbers, where mistakes can add up to thousands of dollars. No wonder some people are intimidated.
Don’t fall into the emotional trap. While there can be emotional issues in buying property, it will serve you well to keep a cool head. It’s easy to become emotionally attached to the wrong property and lull yourself into overpaying, only to suffer from serious buyer’s remorse when the smoke clears.
From a financial angle, you can avoid emotional pitfalls by simply trusting the numbers. Don’t be frightened by lots of zeros and complex calculations. Work with the professionals to chunk down the numbers to the important details like payment and cost, and let them help compare choices. A $10,000 concern may translate to pennies a day when examining long-term financing. Study all the figures, like tax deduction, and be calm and realistic about what you can afford.
4. Get your financial ducks in a row. Before you embark on the home-buying adventure, it would be good to know what to pack. Take stock of your current financial situation and make the necessary adjustments to your financial picture so you go into negotiations as a suitable buyer. If you get approved by a lender subject to a property appraisal, you will be in a stronger position to bargain for more favorable terms from a seller. Here are the three areas of importance:
Cash. The down payment used to be the most critical component in financing a real-estate purchase. Today, there are programs that will allow you to finance more than 100 percent of the purchase price. Often the lenders will still want to see cash reserves in the bank to demonstrate your ability to save money. Make sure money is verified for more than a few months in your account. Borrowed money and gifts can be problematic when qualifying.
Credit. The score is the thing in today’s computer-modeled financing market. A score of 700-plus should get you into almost any decent loan program. There are programs for lower scores, but they will cost you more money. Keep your payments on time and credit-card balances low to get the best scores.
Income. Most lenders have no income-qualifying programs of some kind as long as you have good credit and decent liquidity. You may have to state an income and have some sort of flexible income situation, such as your own business or bonuses and commissions, to be believable. If you can show good income on your tax returns, you may save some money on your loan program.
5. Strategize for the right market. As the housing boom slows to a soft landing, market dynamics will change and may vary even from neighborhood to neighborhood. Work with your real-estate agent to understand the market in which you are buying. Buying strategy differs in a seller’s market from a buyer’s market.
A seller’s market has been the order of the day for the past several years. A house would hit the market, and immediately several people would make offers. This often creates an all-out bidding war. In this market, you need to do all your research on the property up front. You may not have the opportunity for contingencies and inspections if there is high demand for the house. Keep your cool. Make a strong offer if you really believe the house is a good value, but don’t get caught up in the thrill of the bidding and overpay for the home.
A buyer’s market is already happening in certain parts of the country where speculation has slowed. Properties may sit for 60 to 90 days on the market looking for the right buyer. Depending on the seller’s urgency to sell, there may be flexibility with the asking price. Look to the trend in the market. How have the sales prices compared with the original asking prices in the area? You may find that the seller’s expectations will match these trends. Expect to negotiate a couple of times to get to a final price.
Buying real estate can be very rewarding both emotionally and financially. In addition, the process can be intellectually stimulating and downright fun. Approach your transaction with enthusiasm and vigor. Your real-estate agent, loan officer and even your attorney prefer working with people who like to engage fully in the process and are relaxed when doing it. The entire process may not run perfectly smooth, but then overcoming obstacles for that perfect trophy makes you appreciate it all the more.
Kevin Daum is the author of the custom-home manual Building Your Own Home for Dummies and What the Banks Won’t Tell You: How to Get the Most Out of Your Mortgage.