Wednesday, September 9, 2015

9 Mistakes to Avoid When Buying Your Starter Home

Thanks for being here!  Today's financial literacy piece deals with your first home purchase.  Looking at the residential real estate market, I think we are at a good point in time where it is safe (or at least safer) to expect some appreciation in value.  Of course, like any potential asset you buy, getting in as low as possible improves your odds at a profit.  I turn 39 today...happy bday to me!  I bought my first home at 26 and my fifth home at 37.  I've only sold one...guess which one?

Why you shouldn't buy a starter home - Business Insider

My first one, of course!  That seems to be the trend among homebuyers.  They buy a home with the idea of using the 1031 exchange as a means to trade up to a second, and usually, final, home to live in.  For example, a couple may buy a condo, keep it for some time, paying down the mortgage, and sell after some considerable appreciation and equity in the home.  Why would they sell?  Maybe they're expecting an addition to the family and they've grown out of the condo.  Or perhaps they've procured more pay from job promotions and the idea of having a typical, 3 bedroom, two bath home is more appealing.

Although I've stated multiple times on this blog that a home is not an asset, you can make it less of a liability by not committing the following mistakes:

1.  Falling in love with a property you were shown that is highly coveted by other buyers.  Don't make buying your first home an emotional ordeal.  My ex-wife wanted to badly buy a particular home in San Jose back in 2002.  We entered into a bidding war.  Fortunately, a few losing rounds of bids gave me enough time to finally put some sense into her and we quit bidding.

2.  Only hit the top end of your budget if there is an extra bedroom possibility.  Say your budget is between $125K and $150K.  Your realtor will try to sway you into buying at the top end, giving you as much luxury (2 baths, 3 bedrooms plus granite counter-tops, big yard, etc.) as you asked for.  The extra bedroom is far more valuable.  With an extra bedroom, you can make your home into an income producing machine, renting that solo room out.  An extra $450-$600 a month to invest with will put you on the fast track to your next home purchase.

3.  You don't put enough of a down payment.  As great as it may seem to get 90-95% financing with first time homebuyer programs, these are for suckers.  Putting down so little will make your mortgage payment too high for you to handle should something change, e.g., loss of your job.  You will also have to get Private Mortgage Insurance, or PMI...yet another monthly chunk to pay on top of your principal, interest, taxes, and insurance!

4.  You don't ask questions about the loan origination and underwriting fees.  An agent must present you with a Good Faith Estimate (GFE) and a loan disclosure package.  Don't let them email it to you.  Have them mail it instead.  You can better scrutinize a hard copy, and won't tire yourself out staring at a computer.  Make sure you know every line item and the services you are paying for in the form of closing costs.  Typical closing costs are 2-5% of the home's purchase price.  Anything more and you're being taken to the cleaners.

5.  Buying an older home.  Your first home is a stepping stone to your next home.  So it should be plain, practical, and sturdy.  Buying an older home "with character" will place you in danger of having to spend more on upkeep and maintenance.  Maintenance and improvements are not tax deductible on a personal residence so basically they suck your monthly income dry with no benefit.  Similarly, be sure you get a proper home inspection even on a newer property.  New homes can have major issues as well!  

6.  You buy a home, townhome or condo, with high HOA dues compared to other similar properties.  Amenities and services that may be provided by a HOA are not worth a premium above what other HOAs around the city offer.  Skip the pool!

7.  You plan on moving, and therefore, selling, in less than 5 years.  You will lose money if you stay in your first home less than five years.  How?  You'll have to pay to sell and pay to buy (again) in a very short time period.  Since the first few years of any mortgage is essentially dead money going solely to interest (very little principal), you'll have nothing in equity unless there was a major boom in appreciation in your area.  I suggest you commit to seven years in your starter home.

8.  You lock in a crappy interest rate.  You won't have control over this as rates change daily, albeit in tiny increments, is always a small victory when your agent locks you into a better interest rate.  Talk to your agent about this.

9.  You don't interview several realtors.  In your excitement to get on Zillow and go home shopping, you settle for the first realtor that answers your inquiry.  You are about to make one of the biggest decisions you've ever made in your life.  Wouldn't you want to have the best person you can find representing you?  I suggest you interview at least three realtors before going with one.  Here are questions I came up with for interviewing realtors: Kick-ass questions to ask...

The name of the game when buying your starter home is minimizing your purchasing expenses and making your home less of a liability each month.  Avoiding these nine mistakes will open more doors for your future self!

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