EXPERIENCED BUYER REFRESHER
With the dramatic rise and fall of housing prices over the last decade, consumers have new respect for homes as investments. But the flip side, is that your investment is still a home, one you’re likely to occupy for several years or more.
According to the annual Profile of Home Buyers and Sellers, compiled by the National Association of REALTORS®, the primary reason buyers cite for purchasing a home is simply the desire to own, followed closely by the desire for more space, and a change in the family situation.
For most people, buying a home is more about giving household members more comfortable living arrangements and putting them closer to jobs, favorite activities, other family and friends. What are your goals for buying a home? You might want a better home and neighborhood. You might want a different kind of living experience, such as moving from an apartment to a single-family home with a private garage and yard. Your family may be growing, so you have to think about school districts and proximity to parks and other recreation.
If you’re not certain, you might think about what would change about your situation if you became a homeowner. You’ll definitely be more established. If you’re like most home buyers, you expect to stay in your new home about 10 years.
You’ll also build equity for yourself, instead of for someone else. Every payment you make, plus the rules of inflation will eventually allow you to recoup most if not all of your investment, or make a profit when you sell.
When you buy, make your goals long-term. Choose the home you think will serve your household’s needs the best for the longest period of time, as it’s been proven that the longer you own a home, the more equity you’ll build. Today’s market conditions and affordability, make it more likely that you will reach your home buying goals, no matter what they are.
Having previously purchased a home it's always beneficial to review some home buying fundamentals prior to entering a new home search.
Please let us know if you have any questions.
WHAT ARE YOUR HOMEBUYING GOALS?
WHY BUYERS NEED THEIR OWN REAL ESTATE AGENT
Find an Experienced Real Estate Broker or Agent
Buying a first home is a complex process. An experienced real estate broker or agent will assist you all through the search, comparable homes sold, making an offer, inspection, repair, and appraisal processes, as well as help you find the best value, neighborhood, and quality for your budget and requirements.
The seller’s real estate broker pays your broker or agent out of the loan proceeds. If you don’t use your own agent, the seller’s broker keeps the commission, so you might as well avail yourself of professional advice. Your real estate broker or agent works in your best interest.
Don’t expect perfection
There’s no perfect home. You may want all the latest amenities of a new home, but even new homes come at a price, perhaps longer commutes and bigger price tags.
Many sellers don’t repaint or re-carpet prior to selling, so if you’re shopping for an older home, expect to do some cosmetic work.
Homes that need updating are priced below homes that are up to the minute and move-in ready. That could be to your financial advantage, so try to look beyond outdated fixtures and focus instead on the floorplan and dimensions. Ignore the seller’s tastes and imagine each room clean and clear of clutter and with your own things in them.
Most cosmetic changes are relatively inexpensive, and you can even pay for them with your mortgage loan, in some cases. Talk to your lender.
Think long-term investment
Buying a home can be a wise financial investment, if you buy right and hold your home for long-term gain. Because of closing and moving costs, it’s nearly impossible to buy a home and sell it immediately for a large gain, but it is possible to sell after a couple of years with no capital gains tax (in most situations), should you make a profit.
According to the National Association of REALTORS®, home equity growth beats inflation by about one to two percent annually, not to mention government subsidies for home ownership in the form of tax relief and other incentives.
However, if you look at owning a home strictly as an investment, you’ll miss many pleasures.
HOW TO DECIDE WHICH HOME TO BUY
Buying a home is a long-term commitment. The home you buy should be affordable, yet offer the size, features and amenities you and your family want.
Your monthly payments should be comfortable for you to handle, in relationship to your total obligations, about 28% of gross monthly income. Your house payment and your debts should not exceed 36% of your income, including revolving credit, student loans, and child support. You should also be in the correct loan for your needs.
A fixed rate is more expensive, but offers more protection than an adjustable rate mortgage that can reset to a higher amount, making your monthly payments higher.
Also, consider the monthly operating costs of the home including utilities, HOA fees, landscaping, commuting, and other costs.
Location is about convenience, and you’ll pay a premium to be closer to work centers, parks, shopping and transportation. You can buy a smaller home, or you can buy a home in need of updates to get closer to where you need to be. Think about your commutes to frequent destinations, including jobs, schools, family and friends.
To get “more house,” you may have to move further away from core city centers.
Make a list of must-have features so you can narrow your home search. A front porch, a two-car garage, hardwood floors, and eat-in kitchen can all add to the enjoyment of your home. Just as important is how your home is designed. The number of bedrooms and baths should suit your household members, and the layout should suit your lifestyle. If you like to entertain, you should have plenty of dining space and storage for dishes and cookware. If you frequently work at home, you’ll need a home office or at least a quiet designated workspace. Just make sure the home you choose allows room for your family to grow.
Talk to your lender and see what you can qualify to buy, then talk with your real estate professional about the home you have in mind. With professional guidance, you should be able to find and buy the home of your dreams, where you’ll be happy for a long time to come...
HOW LONG DO YOU PLAN TO STAY?
Home transactions are expensive, totaling as much as 14 percent of the purchase price, by the time you buy and sell your home.
That means the period you live there has a lot to do with how you can sell or lease your home at break-even or a profit, and buy another home. Adjustable rate loans are ideal for short occupancy, because they are often a point or two lower than fixed-rate loans, but make sure the reset period is far enough away that you can sell the home before your payments get larger. If you’re planning to occupy the home for years to come, or turn it into a rental after a few years, a fixed-rate loan is much better. It costs more but your payments will always stay the same (hazard insurance and property taxes can change.)
It may take living in the home two to four years or longer for you to break even at selling time. Your lender can help you run the numbers. What if you have to move before you can sell at break-even or a profit?
Strategies for a short stay
If this is your first home, you have three options once you own it – live in it, lease it as an investment, or sell it. The terms of your loan may dictate what you can do and how soon you can do it.
Mortgage interest rates, property taxes and capital gains taxes are more favorable to owner-occupants than non-occupying owners or investors:
Strategies for a long stay
Many investors acquire rental properties by occupying them first. They get a better loan rate, property tax rate, and they can sell them within five years paying no or minimal capital gains. You can buy as many homesteads as you wish, as long as you stay two years or more. The longer you occupy your home, the more equity you will build. You’ll pay down your mortgage, and over time, your home’s value should rise. Keep your home in top condition and it will hold its value longer.
LOWER PRICE OR LOWER INTEREST RATE?
Which is better?
In a buyer’s market, buyers wait for signs that prices are going lower.
In a seller’s market, buyers don’t wait because they’re afraid prices will go higher. Both markets move on the fear of paying too much.
Should you wait for lower prices or lower interest rates before you jump in?
Consider the following:
The price of a home is fixed. Buyers have figured out that interest rates can change, so they wait for prices to go lower, but what they don’t realize is that prices have to drop significantly to equal a minor fluctuation in mortgage interest rates.
A quick visit to a mortgage calculator will show you the following:
You’d save $50.67 per month than if you’d paid $200,000.
Your interest payments would total $177,185.99 over the life of the loan. The difference in payments is $20,613.24.
Mortgage interest rates are still excellent. Take advantage now before the move higher.
YOUR DOWN PAYMENT
Lately, it’s been in the news that credit is tight, but if you believe that you need 20% down and perfect credit to buy a home, you may have good news coming.
Loans are available with as little as zero down through the Veterans Administration, for veterans and active-duty military. FHA has programs as low as 3.5 percent down for qualifying borrowers who buy within maximum loan limits, up to $625,000.
Borrowers with less than perfect credit can get loans as well. Higher credit scores help qualify borrowers for better rates. For example, if you have a credit score of 620 or better, you can buy a home through FHA with 10% down.
The rule of thumb is simple – less money down requires a higher credit score and vice versa.
A down payment is simply your way of showing the lender that you are willing to risk your money to buy the home you want. The larger the down payment, the more likely the lender is to make the loan.
The credit score will tell you how much money you have to put down; it’s a factor in your interest rate. If you put 20 percent down, you can get a loan even if you have a low credit score of 580 or 620. If you have a 740 or 760, the lender will go with less money down.
First Time Buyers
It also matters where the down payment money is coming from. Lenders expect first-time buyers to get help from family to buy a home, so there may be limits to the size or percentage of the down payment gift that the lender will allow.
Down payment assistance can also come from grants. The FHA no longer allows seller-assisted down payments, but does provide a link to national organizations that may be of help. Also, check your local housing authority to see if there are grants available in your area.
Talk to your lender before you make an offer. Get preapproved, and be up front about the source of your down payment money. A good lender will explain the true costs of borrowing to you so you can comfortably afford the home you want as well as the monthly payments.
MAKING AN OFFER
Before you submit an offer, have your agent pull up the most recent sold comparables (CMA) within a reasonable radius of the home, so you can compare the home fairly in terms of location, size, features, and amenities. Next, ask your agent about market conditions, so you can choose a strategy.
In a buyer’s market, discounts are common because there are fewer buyers, more properties for sale, and home prices are soft or falling.
In a seller’s market, homes sell quickly for full price or higher because there are plenty of buyers and few homes for sale. Whether you are in a buyer’s market or a seller’s market, your goal is to buy the home at a fair price. If you were the seller, what is the lowest possible price you’d accept?
Low-balling the seller is risky. If the seller feels insulted by your offer, you’ve lost the opportunity to negotiate. On the other hand, some sellers are simply unrealistic about their home’s value. Maybe your offer will be their wake-up call. If the seller’s home is offered at a reasonable price, pay asking price or close to it. A home priced to sell will sell quickly.
Is there a way to sweeten your offer with a quick closing or an all-cash sale?
To show the seller you’re serious, include a copy of your lender’s pre-approval letter, along with a cover letter summarizing your strengths as a buyer in terms of creditworthiness, flexibility in closing, and why you love this home.
Include a copy of your comparables to show why you feel your offer is a fair price for the property. If your offer is conditional, such as your need to sell another home before closing on the seller’s, you’ll have to find a way to sweeten the deal, such as a full-price offer. Few sellers would accept a discount and a contingency at the same time.
Your real estate professional will help you draft the offer with a price, estimated closing date, and terms, including earnest money (a guarantee that you’ll perform as a buyer in good faith), final approval by your lender, and your right to have an inspection. Once your offer is negotiated and accepted, your earnest money will be sent to the escrow agent's office. Now the inspections occur, and this is where the contract negotiations can break down.
During the inspection process, the inspector will tell you about the condition of appliances, heat and cooling systems, roofs, electrical and plumbing systems, etc, and if your future home is up to current city codes. You should only renegotiate a repair when it wasn’t obvious before, or when a system is unsafe or not functioning.
Once the seller has agreed, your offer is now a binding contract, and you’ll proceed to closing.
THE HOME BUYING PROCESS
Follow these Steps
Get pre-approved! Your lender will look at your income, credit scores, revolving debts, obligations such as child support as well as the type of loan you choose. Other factors that impact how much home you can buy is the down payment; smaller down payments mean higher monthly payments. Last, the interest rate and terms (30-year, fixed or adjustable rate) will determine what you can afford in monthly payments.
Make your wish list - Decide where you want to live and how many bedrooms and baths you’ll need. Consider lifestyle - condominiums offer shared amenities, with little responsibility. Single-family homes offer more space and privacy, but much more exterior and yard maintenance.
Hire a real estate professional - Your real estate professional should be expert in the area where you want to live and familiar with the type of home you want to buy. Your agent has house-by-house experience in your neighborhood and can offer the best advice on homes in your range.
Select your home - No home is perfect, so don’t let minor flaws influence you. Think long-term. Which home best suits the activities and needs of your household now and in the years ahead? Don’t buy more than you need or can comfortably afford.
Make an offer - Your offer depends on the current market. If a home has been on the market a long time, you can ask the seller for a price reduction, but if it’s new on the market, the seller is unlikely to accept a low offer. Ask your real estate professional for advice.
Get an inspection - A home inspection is a professional third-party opinion of the home’s condition. The inspector will point out the age of systems, and large and small repairs that are needed, so you’ll know what you’re facing as the next owner.
Get an appraisal - The bank appraisal determines market value. If the home doesn’t appraise for the purchase price, the bank will refuse to make the loan unless you renegotiate with the seller. If it appraises, the lender will move toward closing.
Go to closing - Once final negotiations are complete, the parties to the transaction meet at the escrow office. All paperwork is signed by both parties. The lender pays the seller, minus any liens against the home such as the seller’s mortgage. Once all the disbursements have been made, you get the keys to your new home, according to your agreement.
Congratulations! You’re ready to move into your new home.
GET A HOME INSPECTION
A home inspection is designed to give buyers a better understanding of the systems and overall condition of the home they’re buying. Otherwise, you’d have to rely on your own knowledge and experience.
When you hire a home inspector, there are a few things you need to know.
No house is perfect.
A home inspection should point out questionable conditions and/or potential safety-related concerns in the home you want to buy. A home inspection should cover:
You should attend the inspection.
Walk through the home with the inspector so he or she can point out conditions to you that will go into the written report you will receive. Make your own notes so you can discuss the findings with your real estate agent.
A structural home inspection isn’t enough.
A structural inspection is what most buyers typically order, which may note such things as previous termite damage, but that’s no guarantee there’s not a new infestation. Depending on your lender’s requirements and your own need to know, you may order several types of inspections – structural, termite, and environmental.
Home inspectors may have differing qualifications.
Make sure your home inspector is an expert, with a background in plumbing, HVAC, electrical work or general contracting, or is a member of a professional organization such as the National Association of Home Inspectors, Inc. (NAHI). Ask your inspector for credentials and certifications.
Once the inspector gives you the written report, you have the information you and your lender need to make informed decisions about what needs repair, and whether you or the seller is responsible.
Mimi and Jon Torp
11601 Wilshire Blvd Suite, Suite 101
Los Angeles, CA 90025
Tel: 310 622 7496
Specializing in homes and condominiums in Beverly Hills, Bel Air, Beverlywood, Brentwood, Cheviot Hills, Holmby HIlls, Little Holmby, West Los Angeles, Sawtelle, Malibu, Pacific Palisades, Santa Monica, Westwood, West Hollywood.
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