- Personal Finance»
- Mortgages & Loans
Home Buying Strategies | Making a good investment | Know what you can afford | Buy Smart | Make money when you sell
Our life long tips in buying a home that will increase in value
Purchasing a home is probably one of the most important and largest financial decisions you may ever make.
With over thirteen moves in 34 years, we have used the following strategies and have made some very good home investments along the way.
As we learned on our first home buying experience, we needed to first determine our true income that we could comfortably devote to maintaining a home, find a lender to prequalify us for a loan, as well as find the best interest rate available. We will also verify the loan will not have any early payoff penalty as one of our savings strategies is to make additional principal payments to reduce our interest expense over the term of our mortgage.
We make our application and become tentative approved for a loan up to our top price level based on our available down payment. Maintaining a spotless payment history on everything including car payments and credit cards, provides a high credit rating, making the approval process much quicker on all your future home loans. A good solid down payment above 20% always speeds things up as well.
This does not guarantee the lender will loan us the funds on just any home until they have verified the value and potential conflicts in loaning on the property. These are the same issues that could create issues for us, so we are glad to have someone help do the homework. Such things as a property line disputes, a judgment or lien placed on the property will need to be cleared up before the property can be sold.
We are not able to lock into an exact interest rate until we actually have a contract on a property, but generally the lending institution with the best rates continues to maintain their position over a 90 day period.
Always be sure your contract to purchase is contingent on the financing being approved, funded, completing a home inspection, survey and title search before closing. This is all very standard in real estate contracts, but when dealing with any legal binding contracts read the fine print closely and never assume anything. We have found more than once the actual property we thought we were buying was much different on the actual survey. Don’t rely on fences and where the current owner has been maintaining the property lines.
Being pre-qualified saves time, and gives you serious credibility in the eyes of the real estate agents and home owners.
On paper you may qualify for a higher loan, so just because the lender says you should be able to afford X, look at what you can really afford. Lenders encouraged people to take loans out way beyond their means, this is what brought down the housing and lending markets.
look at your own finances closely, that monthly $1200 payment you just think you can afford will likely be another $700 when the taxes and escrow payments are pulled out. Consider your available income for monthly payments, monthly utilities and upkeep as well as potential repairs. Within the down payment consider the closing cost and potential upgrades, painting, new floor coverings and appliances you will want to purchase before you move in.
Most couples think they have enough but quickly find out after paying the down payment, closing cost, purchasing window coverings a new washer/dryer, refrigeration etc. they are quickly over extending themselves. Suddenly that sofa and set of chairs just won’t work in the new living room and so forth. Having an extra $5,000- $10,000 above the down payment is probably a good idea. Even with that don’t zero out the savings account in case of a job layoff or other factors cuts off part of your income, or other surprises occur as you are moving in.
After you complete this analysis you may realize the home you had dreamed of owning may be just beyond your reach. This means you will probably need to scale back, or look even deeper for some real bargains that you can over time make into your dream home.
It may be a good time to find a diamond in the rough to build equity making this a stepping stone to the next home.
Don’t fall into the trap of thinking you can cut back on eating out, or cutting other expense elsewhere to just squeak by. Like losing weight that stuff never seems to really materialize or is quickly replaced by a car repair, or some other surprise expense.
Our strategy allows us to maintain a cushion in the monthly amount available for payments that we can afford. This cushion is what we set aside to automatically apply to our principal payment each month. If we hit hard times we can always drop the extra principal payment and continue paying our obligated monthly payment. We do set it up on automatic withdrawal to decrease the temptation of spending the extra on something else.
Making an extra payment on the loan principal over a 30 year period of time quickly shaves off the years left on the mortgage. In simple terms if you have a $200,000 mortgage, on a 30 year note at 6% interest, you will start off paying $12,000 just in interest for the first year. If your monthly payment is $1200 the extra $200 will likely be going to escrow for taxes insurance etc. as explained below..
This is why you won’t see your principal amount dropping in the first few years of the mortgage. However, when you are able to apply let’s say an additional $200 per month to the principal you will directly reduced the loan balance $2400 just in one year,multiply this over the term of the loan you will decrease the actual principal by $72,000. At the 15 year level you will have reduced the overall principal amount by $36,000; this means you will not have to pay the 6% interest on this amount over the next 15 years of the note, saving $32,400 just in interest.
At least consider making one additional payment a year, and make sure the lending institution clearly understands in writing they are to apply it to the principal amount, and not to the interest. You can make it in one lump sum or make it monthly. Just remember every dollar you apply today is one more dollar you do not have to pay interest on tomorrow.
If you don’t have a good established payment history on utilities expect to also pay deposits. On your monthly payments consider taxes, association dues, insurance and other expenses. Most couples feel they can maybe make a $1000 monthly payment but don’t actually realize the true payment may be $1200-$1400 to escrow the additional annual expenses.
If you are only able to pay a low down payment, expect to pay PMI insurance.This will be a requirement of the lender in case you default on the loan. Most lenders will require this if you are not able to pay at least a 20% down payment, this may vary with the new more restricted lending requirements.
Once you have exceeded paying in 20% of the value of the home in equity, ask the lender to review the PMI requirement. This could save you close to $100 per month going to nothing that will benefit you, money that could be applied to the principal pay down.
As you look at potential properties look closely at the taxes paid on the property, this will be an indicator of how much you will being paying each year on taxes, to also consider in your monthly payment.
Realize as schools and municipalities are struggling with funding, you can pretty well expect property taxes to increase going forward over the term of your mortgage.
With the continual catastrophic disasters occurring, you can also expect to see sharp increased in property insurance maybe as much as 10% in one year.
If you do find and purchase a bargain home undervalued of the tax assessment, file a protest with the county property tax authority as the true market value of the home should be what you actually paid for it.
Be sure to claim all homestead exemptions available to you. If not you may miss the opportunity to save on property taxes. Some states such as Texas provide another homestead exemption for those over 65 .You may have a tight window after making the purchase to file for a homestead exemption.
Now with everything set in place we are ready to utilize our home search strategies.
Determine how long you plan to live in the home- If you are young and planning a family the number of bedrooms, extra game rooms, a large backyard and the school district will be important factors.
If you are becoming empty nesters like us and looking at making your next home possibly even your retirement home, you may not want four bedrooms, extra rooms to clean, a large yard to maintain.
Instead of the school district, you will probably want to be closer to quality hospitals and healthcare services.
If you plan on living in your next home for around five years, then resale value needs to be considered, a fourth bedroom and a well rated school district will be easier to sell the home, regardless if they are important to you or not.
Determine your absolute needs- It is clear energy conservation and maintaining a home is going to increase. Secondly it is very easy to confuse living the American dream with living beyond your means. As the economy issues continue people are looking more for nice comfortable and easy on the utilities and not as much living the extravagant on borrowed money. Becoming debt free should be more important than keeping up with high society.
Before we ever start looking at homes we make our absolute list based on how long we plan to live in the home and what our basic day to day routines will require. For example; if you or your spouse like us are starting to deal with arthritis issues you will probably make a whirlpool garden tub in the master suite an absolute, and rule out any home that has only a shower in the master suite. In addition stairs will be an issue, so a second story or laundry in a basement will need to be excluded as potentials. Don’t be too quick to rule out aesthetics and decor as I will explain these are potential opportunities for increased value further down.
We will determine our general desired area location- this has many variables and will also be determined by neighborhood types, how long we plan to live in the home, future growth of the community and use of surrounding land space. Obliviously work and commute time plays a large part in this decision. Also consider your leisure time, if you prefer to be close to restaurants and shopping, or you want to be close to parks, hiking and bike trails these will need to be high on your absolute list.
Scope out future growth- once we have determined our general geographical area for our potential new home, we will stop by the economic development office for the area and ask about the future infrastructure and business development plans for this area. These maybe city based or county based offices, but most will have a futuristic template maps showing all the planned freeways, airports and industrial development zones for the county or city.
Most economic development maps are pipe dreams on paper to try and solicit federal grants, but it is good to know if our potential location may just be the spot for the next airport or freeway expansion. We don’t depend on our real estate agent or others to know as they may be new to the area and generally we have learned in our fast paced environment, people just are not current on new development even after construction has begun.
Scope out existing infrastructure- tire buzz from freeways and train whistles can carry up to a 1/2 mile away if the wind is coming from that direction. Many people like us have bought homes on a calm day or when the wind was blowing in the opposite direction only to discover the level of noise pollution after they have moved into a new home.
Scope out the area and the current development and trends- try to imagine how the area will look 10 years down the road. If the area is quickly springing up with new subdivisions and strip malls, that quiet little street and four way stop may become your worst nightmare in trying to get in and out of your property.
OK, now we have our financing and have a good idea of the area we want and have our absolute list in front of us. Do we go with a real estate agent or try to fly for sale by owner (F.S.B.O)? The Internet has dramatically improved the exposure of the individual who has a home on the market. If the home owner is able to save on commissions, then obviously good deals are available.
If you are not seasoned in purchasing homes like us, know how to find the area home prices, then finding a good reputable real estate agent and sticking with them is going to be your best bet. We may do some quick searches on the F.S.B.O. networks, but will probably still find a good agent who knows the area. Just realize they make a living on commissions, so obviously the higher the price the higher their commission will be.
We have never dealt our max price card we are actually willing to pay to a real estate agent. As soon as we give them our upper price they will only pull everything right at or above that price, where as there maybe some good homes that can be found for much lower. If a home has been on the market for an extended time, there may be room to make an offer in our price range.
The best agent to work with will take time to sit down with you and go over your absolutes, and then tailor the search for that selection in different price ranges. We just won’t let a pushy sales person try and influence or insult us on this level of decision. There are plenty of good agents, so we will quickly move on if we are not comfortable with the first one, but we will always stick with one, as they are really going to earn that commission with us.
The way we handle this question is to say we are willing to go up to X as our top price. Now if we find the perfect place that already has a workshop, our garden space, and everything we want we could maybe able to go to XX, but we really prefer to look at things we can grow our own equity in. Our X and XX maybe as much a $10,000 less than what we are really willing to pay.
One of our absolutes has always been to have at least an acre lot, even with that I don’t know how many times the agent will pull us into a subdivision and try to show us homes that are stacked on top of each other. At that point we just frankly say sorry this is not what we are looking for; perhaps we need to go back to the selection process and start over fresh tomorrow.
Some agents won’t want to spend a lot of time looking up listings, or more important looking up the potential bargains such as those in foreclosure. So you do have to pull up area homes on the internet and ask what about this one, this looks like it may be what we are looking for, and look it is priced on the lower end of our search.
You do have to be realistic, as you are probably not going to find a $150,000 house in an area where the going price is $300,000-$400,000, but you may very likely to find a $255,000 home with some good upside opportunity.
A lot of people just don’t have the vision to look at the potential upside in a home purchase thus, many will pass on a home just because they don’t like the paint colors, the kitchen counter tops, or the weird front entry. Those homes with a few changes can become real bargains, as the owners are probably frustrated and ready to get out from under them.
If you are looking at foreclosures expect to potentially find the kitchen cabinets, sinks, removable hardware and copper stripped from the home. As some people realize they are going to lose their home anyway they will take out and either sale the items as scrap, or damage the inside to get back at the lender for foreclosure. Some homes in foreclosure will also be targeted by scrap metal thieves looking for easy targets.
Many lenders will try and sell the home as is, not willing to put any more money in it. The upside is you can get a real bargain and choose your own cabinets and decor. The downside is the utilities will likely be turned off so you won’t know what works or doesn’t work. This is probably the best time to purchase a home warranty and repair policy. Spend extra for a good home inspection by a reputable contractor. Even consider having two separate inspections completed by different contractors, even then still anticipate unforeseen surprises.
If the home inspection turns up hidden costly items that you present to the lender for repair, they become subjected to the knowledge the issue exists and either have to repair it or disclose it to future home buyers. So, even if the home is listed as is, you still have opportunity to negotiate the repairs or have the price lowered even more.
Probably the most serious issue to be on the lookout for in a home where the utilities have been shut off for months will be mold, especially in the Southern humid states. Once mold sets into the walls of a house, it will probably need to be completed gutted and started over, it may be even beyond repair.
If you have a hard time breathing or you see a black mold around the windows, and along the base boards, it’s probably time to move on to another house. You can also remove some of the electrical plug and switch covers to take a quick look see if mold is present. If the house has notable roof leaks or other water damage, just better pass on it.
Regardless having the house tested for mold is always a good investment anyway if you decide to purchase it. Anything you find wrong with the house also has to be disclosed to a potential home buyer, so mold found later on is just not something you want to deal with.
Stay clear of the scams to sell you list of foreclosed properties; they are easy enough to spot as you are driving through the neighborhoods.
We will continue to do our own extensive internet searches and drive around the areas we potentially want to locate in. We also will continue to select our own list to give to our agent; it just helps narrow the playing field.
This also gives us the opportunity to really look over the area at different times to see if there are any hidden issues that we may have missed. Things like a stinking pulp mill or pig farm may just overwhelm the area when the wind blows from that direction.
In almost all of our home searches our agents, who are working for us (you) have tried over and over to convince us that our expectations were way too high for the market, and we should just except what they were showing us. They have tried to convince us it may not be as perfect as we wanted.
You know what, despite those talks, we have always found the ideal homes in the price ranges we wanted and the location we wanted to be in. Now, it may take looking at as many as 200 homes before we find it and most agents just don’t enjoy that level of workout. Sorry guys, here today gone tomorrow we are the ones stuck with 15-30 years of house payments, so we will look out for ourselves on this one.
Don’t expect to do some quick Internet searches fly in for the weekend like they do on the TV shows and find your ideal home. Agents, love quick impulse deals, but those are probably not going to be in your best long term interest or investment.
It is very easy to get worn out and discouraged in doing house searches, just remember you are making a 15-30 year commitment, so one more house and another day of house hunting is always worth looking at. You may need to broaden your area out; we have found an additional 3-5 miles can have a dramatic impact on the prices of homes, thus our original area may change slightly.
With this number of homes organizing our search is important, you will find trying to write and concentrate in a moving car can become very overwhelming, bring on confusion on which home had what and even making you dizzy and car sick. It is also a test of a good marriage.
We utilize a notebook system with a quick check off list of our absolutes, and checklist of what we liked about the home and what we didn’t like about the home. We then take the camera along snap the pictures, and correlate them with the list to make our final determination of potentials. Some agents now have computerized programs to help you with the home shopping comparison.
After the home selection is narrowed down we will schedule additional visits to look the homes over again. The first visit may really catch your interest just by the different designs and how the owner has it decorated. On the second and even a third visit you start noticing the structural issues that maybe hidden by a rug or furniture item.
Be very Leary of a home with cats, and homes where the owner leaves odor cover up deodorizers to potential mask undesirable odor issues. Cat urine spray is almost impossible to get out of carpet and wood sub-flooring. It may not be as noticeable until you move in and hit some high humidity days.
Some homes will just get a drive by, while others we will rule in or out during the walk through.It is amazing how they can mask out the next door dog kennel, or power plant when you look at photos on line.
Our strategy is to find the lowest priced house we can afford in the highest priced neighborhood. Depending on your handyman skills or ability to subcontract you can always bring a home up to increase the value, but in a home already priced at the top of the market you will have little room to grow in value, especially in this economy.
Generally our houses always require upgrades; this is how we build our equity. You just can’t seem to acquire equity on an already fully maximized home value, especially on borrowed money. Perhaps if you are just in an accelerated valued area, but not sure where those even exists in our current economy today.
With a fresh coat of paint new carpet we are ready to move in. Over a five year time frame we are able to bring the home’s value up substantially to where we have been able to make a good clear investment to move up to a higher priced home. There are actually people who use this strategy to upgrade every five years to a newer and better home just using the equity they build in each home along the way. Soon they have their dream home at either near or debt free.
Our best investments have been in the kitchen upgrades, bathrooms, landscapes and outdoor living spaces. But crown moldings, built in shelves and pantry spaces are a plus as well. Anything we can do to make the home look and feel more custom built has helped us immensely in value.
My husband enjoys his workshop, so we always build that additional space outside; it also helps our home values, and makes our property unique, everyone is always looking for more garage space. Plus with the workshop he is not opposed to tearing out a section of kitchen cabinets and replacing them with some custom upgrades, adding trim, pull out drawers, etc
Look more at the structure soundness rather than the decor, paint and carpet can always be changed, structural problems are harder to fix. One of our absolutes is that we won’t buy a home to where we can’t see the elevation and foundation up at least 12”up off the ground.
Many homes are built on slab foundations with only 4”-6” of concrete separates the ground from the siding on the house. This leaves too much risk for flooding from heavy rains, mold and insect infestations, especially when mulch and landscapes are added. We want to be able to fully walk the house and see a solid foundation all the way around the perimeter.
We look for as much maintenance free exterior as possible. We prefer brick, with cement based siding and trim work. A New roof can get expensive, so we look at the shingles to see they are lying flat, and look in good condition. Shingles that are curling up are an indication of poor attic ventilation. We also look for unusual hips in the roof where a rafter is pushing up, indicating possible poor framing construction. We look for cracks in the walls, ceilings, and floor tiles, and indication of foundation and settling issues. Small surface cracks can always be expected in a house but large jagged cracks, sticking doors, or gaps in the door trim are indications some serious foundation movement is occurring.
These are just visual inspections to see if the house should be considered as a potential. When we do place a contract we will have a complete home inspection by a professional home inspector.
Homes that we will just pass on;
- Builder subdivisions where homes are priced by economic classes, these are very popular growing subdivisions, where all the homes are priced in let’s say the $140s on one side and as you move to the other side of the neighborhood the prices go up based on the street.They are very appealing with beautiful decorated model homes, but ever third home is cookie cutter, generally built so close you can handshake with your neighbor out the window. Just drive through one that is three or more years old, not our cup of tea, and not much room for upside potential.
- Stay clear where the builder is offering their own financing with low to nothing down. It might make sense to get you into a new home but it also attracts low income, just take a drive through one that is just a year old and look at where the neighborhood has gone to.
- While we hate dealing with home owner associations (H.O.A.) we won’t buy a home that is not in a subdivision or area bound by reasonable building restrictions. We will review the restrictions closely and pass on those that are so ridiculous where we have to have permission to place a bird house. Generally areas with no restrictions, especially outside the city limits are wide open for your neighbor to build whatever they want, or do whatever they want. Leaving the other homeowners helpless and watch their values plummet. We will also check to see if our extra garage and outside improvements will fall within the H.O.A requirements.
- We will not purchase a home if we are unsure of what could be built beside us or behind us. We learned that lesson just by luck after we sold a home in Kentucky and returned a few years later just to see how the neighborhood had changed. The great view of the valley we had enjoyed now was looking at the back yards of new homes built right up next to our old back yard. We prefer to purchase where the development has pretty well been completed around the property, or is next to dedicated green spaces that was required when the subdivision was plotted. Green space is not the community park, but a barrier most cities will require to buffer the subdivision. Be very Leary of commercial front property backing up to the home, this likely will have a fast food restaurant, or convenience store built with bright lights glaring at you all night long as well as trash constantly blowing into your yard. Just try to resale this home.
- Homes that adjoin a creek or low lying land that looks like it has a potential of flooding. Check with the local city or county office that has jurisdiction over flood zones. You will want to find the 100 year flood zone maps and see if they include your potential property.
- Homes that are on busy corners or streets, these likely will be widened and will take property by eminent domain to do so.
We never let our hopes and emotions take control of our home search,in other words we don’t say we just have to have that house no matter what it cost us. We narrow down to our top search make an offer and see what comes back. Depending on how long the home has been on the market, and the situation of the owners, such as they have relocated and the house has been on the market for over 6 months sitting empty, we will likely come in low, to test the level of willingness to negotiate.
Sometimes the real estate agent by this point has become worn out with us. They are however, obligated to take any reasonable offer to the listing agent. This doesn’t mean we will be ridiculous and insult the owners with a fire sale offer. We will list out the upgrades we feel will be needed to make the home comparable to the market, based on actual contractor estimates, such as new granite counter tops, new carpet, new appliances, etc. Then have our agent explain our reasons for our offer, surprisingly many have just accepted our first offer. So, it never hurts to ask. If a house has sat unoccupied for that time frame the owners are getting pretty concerned and are likely ready to get out from under it.
In this economy it may be a short sell meaning they have the home priced lower than what they owe on it. If this is the case, the lender will have to approve the sale.The listing should show how much is owed on the property and note if it is a short sell.
We generally can find much cheaper ways of doing the upgrades, either ourselves or buy having several contractors bid on the jobs. We have been amazed at how wide of a variance in prices some contractors will give you. We do check references and look for complaints before selecting a contractor.
We never enjoy the packing or the move, that is a whole blog in itself, but after we have made the move we have always bettered our home and ourselves.