HGTV makes buying a house look way easier and happen way faster than it does in real life. If only your Realtor showed you only three amazing houses before you found the one you loved and the negotiation happened at a snap of the fingers and the seller paid all of the closing costs.
I’m going to write this article in steps including tips, tricks, things I wish I knew before buying my first house and I’ll include little stories in regards to my own personal experience buying my first home and my first investment home, just so you can see what types of things you might run into.
STEP 1: MARKET RESEARCH - WHAT IS YOUR GOAL?
Research what areas you might want to move to or live full-time.
What’s important to you? Do you want to live in the city, the country, the suburbs? Do you need to live near a good school or a hospital? Do you want to live next to work? Do you want to live next to bars and breweries? What kind of lifestyle do you want to live?
TIP: Check crime statistics on neighborhoodscout or on blogs and neighborhood Ring apps before committing to a particular area.
TIP #2: Go to the local grocery stores to see what kind of people are in the area. Are there a lot of homeless or weird people in or around the store? Drive around the area at night and see how lit up the area is - do you like the vibes as much at night as during the day? My wife and I spent a lot of time driving around neighborhoods and going in random grocery stores before buying.
What is the goal for your home ownership and how long do you want to live there?
Are you buying a home because it’s cheaper than renting? Are you buying a home to raise a family in? Are you buying a home as either a current or future investment? Do you plan to househack by renting out rooms in your house - if so, remember location and amenities like a pool, parking, close access to popular places all matters. This is all going to factor into the location and neighborhood you want to live in.
TIP: If you aren’t married, one of the best long-term investments you can make is to buy a house or multi-family house with a lot of rooms and househack.
What kind of home do you want to live in?Do you definitely want a single family home? Do you need a big yard or a pool? How many SF do you need for you and/or your family to live comfortably? Would you mind an HOA? What about living in a condo or townhouse?
These questions are the things you have to answer before you can take the next step in your research. My wife (fiance at the time) and I bought our first house in the city. It’s a waterfront townhouse with a fairly expensive HOA, but we are both working / busy people and didn’t have time for yard maintenance. We also wanted to be waterfront, because we didn’t want to share our backyard with a neighbor. We wanted to live in the city, because we bought in our late 20s and wanted to be close to bars, restaurants, breweries and other fun stuff. We also bought in a predominately gay neighborhood, because property values in the neighborhood are increasing at a higher rate than other adjacent neighborhoods, the streets and upkeep of the neighborhood are immaculate and it’s an easily rentable area due to the popularity of the neighborhood.
We even bought our first investment property in the same neighborhood for the same reasons. However the investment property is a luxury single-family home with a huge private pool, waterfront with ocean access and a dock. We purchased this home knowing we wanted to get into the luxury Airbnb business, knowing we needed a unique home, not a bland home that wouldn’t stand out.
STEP 2: WHAT IS YOUR BUDGET?
Most lenders will max you out based on a debt-to-income ratio, but just because a lender tells you that you can afford a half-million dollar house doesn’t mean you should buy one. Choose a comfortable monthly goal for your mortgage payment where you won’t be stressed that you may or may not hit it.
Wait - what the hell is a mortgage payment?
We call it PITI in the real estate world. Standing for (Principal of loan / Interest on loan / property Taxes / property Insurance).
When you buy a house, your lender will be giving you an interest rate on your home loan - the lower the rate the better.
Principal and Interest are paid on an amortized schedule. This means if you get a 30 year loan (we will get more into the different types of loans later), the first month of the loan will have a super high interest rate whereas barely any of your mortgage payment will be going to the principal of the loan. If you have student loans, you will be familiar with this. By the end of the loan you will primarily be paying principal, rather than interest. You can play around with amortizations here.
Property taxes will be based on the appraised value of your home - so don’t necessarily trust the property taxes the last owner was paying, because if they bought the house decades ago, the property taxes are likely way lower than what you will be paying, especially if they homesteaded the property.
Lenders require property insurance, so unless you are buying the house in cash (unlikely if it’s your first home unless you are a baller), then you will need to get property insurance. If you don’t know anyone who can help you with this (you can ask me, insurance guys are a dime a dozen), ask your lender or Realtor.
Also, don’t forget you will still need to pay water, sewage, electric/power, internet, etc. - all of the things that may or may not have been included in your rent.
Your budget goes hand-in-hand with your market research, as you will need to find particular markets or areas that have homes falling within your budget range. Know that your future Realtor would love for you to buy a more expensive home at the top of your budget (they are paid commission - usually 2-3% based on the total sale value of the home, even if you are buying - but when you are buying, usually the seller pays all real estate agent commissions).
To get a general range of how much house you can afford before pre-approval (or how much house you want to afford), you can try a few different mortgage calculators online. Just know the zillow calculator is out of whack and will always say you can afford about 25% more house than you actually can. Zillow told me I could afford a $420,000 when I was looking at my first house, my lender told me I could get a loan for $345,000 and I ended up closing for $305,000 when I had an initial budget of $275,000 - $300,000. Please know these calculators might be way off, just use it as a ballpark to help you find the general area you want to and can afford to live that matches with your lifestyle.
STEP 3: GET PRE-APPROVED
You don’t necessarily need to find the ultimate lender you will use for your home loan, but you will need to find a lender who will pre-qualify you for your home loan up to a certain amount determined primarily by your debt-to-income ratio.
Most Realtors and Real Estate agents won’t want to show you home until you have been pre-qualified. If you don’t know any lenders, your agent will likely know a good lender. When it comes to lenders, try to stay away from big banks and big lending institutions. Generally, you can get better deals from mom and pop venders.
What do you need to know when choosing your lender?
There are three important things. The first is to find the lender with the best interest rate they can offer you. The second thing is to find someone who will close fast and who won’t delay the closing, you can find this out by checking out reviews online. The third thing is to make sure you get along with them, because you will have a lot of communication with them (usually even more than your Realtor) during the home buying process.
TIP: Don’t let every lender you meet pre-qualify you, since each time you are pre-qualified they are doing a credit check on you. Too many credit checks simultaneously will bring your credit score down, which affects the interest rate on your loan.
How can I get a better interest rate?
Interest rate is primarily based on your credit score (and the credit score of anyone else who will be on the loan - usually the lender uses the lowest credit score) and whether or not you will be living in the home. If the home is to be your primary residence, even if you house hack, you will get a better rate than if the loan is for an investment only property.
What are points?
You may be asked if you want to buy down some points on the loan. This basically means you can lower your monthly payments with a lower rate, but paying more money upfront to buy points. Generally, I don’t recommend this, because in most cases money now is more valuable than money in the future. Money in your pocket now can be invested for better than inflation returns and compound to larger sums. You can read more in an introduction to investing here.
STEP 4: FIND A REALTOR / REAL ESTATE AGENT
Go ahead and conduct interviews, you are hiring someone after all. Find an agent who understands what you are looking for, understands the market you are shopping in, who understands your negotiation skills and most importantly as a first time home buyer, someone who will be very patient with you,
TIP: A lot of real estate agents are in it just for the commission and won’t have the patience for a first time home buyer. Before choosing an agent (some, but not all will have you sign a contract), make sure they are okay with walking you through the process and understanding you might need to see quite a few homes before you finally know what you want.
The agent my wife and I chose to help us find our first house was a young guy who went to the same college as us and we got along with his personality. He understood what it was like to be young looking for a home and was very good at catering to our needs when we first contacted him - which was a breath of fresh air, because many of the agents we interviewed told us it was impossible to find a home in our price range in our market. Most completely ignored us when we contacted them.
He had a great knowledge of the market, but when it came to negotiation skills, he did not match our desire to get a good deal. Multiple times he wanted us to send offers above the asking price, whereas I wanted to come in under and our negotiation styles clashed big time. He felt I was too focused on getting a good deal, whereas I felt like he was just trying to close any deal so he could get his commission. Lesson learned here, make sure you discuss negotiation tactics and give your Realtor a true good barometer of what is important to you. Is it more important to get your dream house turnkey, or more important to get a great deal. You won’t get both.
When I chose our Realtor for our first investment property (our second property purchase), I found a no B.S. Realtor who specialized in upscale investment properties. He wasn’t the most pleasant person and didn’t have the greatest knowledge of the area (he specialized in a different area), but he did what we asked with no questions asked and was a great advisor when negotiating for the investment property.
Talking about Reatlors… what the hell is the difference between a Realtor and a real estate agent?
Realtors are real estate agents who have to taken a special ethics class and hence get the Realtor rating. It’s not a requirement for a good real estate agent to be a Realtor, but it’s an easy designation almost all serious real estate agents acquire, designating who is doing this full-time and who is doing this part-time. You want the full-time Realtor.
TIP: If you have Redfin in your area, you can use one of their designated Reatlors and book all of your appointments very easily online. I did this for a while when hunting for an investment property. In addition their Realtors have a lower commission, which might make it easier for a seller to negotiate with you when they are paying 1-2% less in commissions.
STEP 5: START SEEING SOME HOMES
When you start touring homes, some Reatlors will want you to ride in the car with them (so they can hear your thoughts on the home) and some will just meet you at each property. When you find your Realtor, let them know a good day of the week with some good times that you can regularly see homes. I don’t recommend buying one of the first three homes you see like on HGTV, try to see at least ten homes to get a good feel for the market before making any offers.
TIP: Don’t see more than three homes in any given day. If you see five plus homes in a day, you will forget the differences between one house and another.
TIP: Make sure you take notes and photos for every home you see. Take a photo of the street number first, so you don’t get photos of each house confused. Most Realtors will print out the MLS sheet of each house you are seeing for you, but keep your own notes and thoughts on a piece of paper as you go through the home. If you are shopping with a spouse or partner, assign one of you to take photos and one to take notes.
TIP: When going through homes (especially older homes) look at the condition of how things are working. Are the appliances new or old - ask the selling Realtor how old these appliances are. Most appliances only last about 10 years. Same thing with the A/C and electrical sockets. Replacing A/C’s can be expensive, so can any electrical work if the wiring in the house is old.
Make sure windows and doors work in the home. Check closet and pantry shelving conditions. Check the water pressure and the water heater. All of this will be done again before closing if you do choose to buy the home; but it’s better to check some of these things now, before offering. Check all major capital expenditures (big ticket items) like the roof age / condition, the windows & doors or any major remodeling before closing on the home.
STEP 6: MAKE SOME OFFERS (AND DON’T BE AFRAID!)
Notice I say make SOME offers, not make ONE offer. Offers are contingent upon mutual acceptance and in most cases you have an out if you decide to back out. When making offers, always add a contingency that the offer is good as long as your partner or spouse approves of the purchase. If you don’t have a partner, your dog can be your partner - nobody has to know, but you do want to leave an opening in case you change your mind or in case one of your other offers was accepted.
You don’t need to worry about making five offers and all of them are accepted, your offer can be contingent on it being accepted prior to any other offers you made.
Once your Realtor has all of your information, it isn’t difficult to make residential offers. Commercial offers are a different story, but residential offers are pretty straight forward.
TIP: Practice negotiating by playing some fantasy baseball or fantasy football. Generally those with sales backgrounds will have an easier time making offers and negotiating.
When searching for our first home, we ended up offering on three different properties before finally offering on the home we would close on.
Investment properties are a little different. We offered on about five properties (some might be considered low ball), but this was the way the numbers worked out - since in investing, don’t offer unless the numbers work out and it’s all about the numbers.
When searching for a commercial property for the my construction company, we have bid on multiple properties, in addition to multiple month long negotiations that have yet to result in a deal. Commercial deals develop a little slower than residential deals, as oft-times commercial investments are still bringing in cash flow to the seller, whereas many residentials need to be flipped quick so the seller can move to their next home. Remember, motivated sellers will bring better deals.
TIP: The numbers rarely work out as you project, build in some margin for error in your numbers.
STEP 7: NEGOTIATION AND ACCEPTANCE
Most initial offers won’t be accepted - more often than not, the sellers (unless super motivated) will make a counter offer to you, or if you are really unlucky, then someone else has also made an offer on the home. Something to keep in mind is most sellers won’t cover your closing costs or any other major repairs or maintenance of the home prior to selling; unless the home has been on the block for a while, you are the only current offer they have received and you are offering close to their asking price.
Most negotiations either end with no deal or end with the two parties meeting in the middle. Generally neither party is entirely happy with the deal they made and there is a bit of a bitter sweetness to finally coming to a deal. Once a deal is accepted, you generally have three days to back out of the deal for any reason. After the three days are up and an initial escrow deposit is made to the title company you have a deal - but that doesn’t mean the deal is 100% guaranteed still at this time.
When shopping for our first house, as noted above we submitted offers on three different properties before offering on the home we would finally come to live in. The first property we offered on was a townhouse listed for $300,000. After seeing the property, the selling agent told our Realtor we need to offer on it quick, because they already had a good offer above asking price. Now, my first thought was that this could be a ploy to get an above asking price offer. How much above asking price was the other offer? Was there really another offer? I asked my Realtor his thoughts and he said to offer $305,000 if we loved the place. I instead opted to offer $302,000 just to feel out the other agent and see how she would come back - she didn’t. The home owner took the other offer of $305,000 in cash. Motivated sellers prefer cash offers, because with no bank involved, closing happens much quicker.
The second home we made an offer on was a townhouse that had recently been purchased for $278,000 only two months before we saw it on the market. The seller was now trying to sell it for $295,000, so it seemed he was out to flip for a quick buck. When we went to see the property, the selling agent told us the owner was selling the townhouse because he is a Candian who wanted to move to Florida full-time, but developed skin cancer just after he moved down and was then going to head back up to Canada after selling the townhouse. I studied comps in the area and the other townhouses in the community were all being sold from $270,000 - $285,000. We offered him $275,000 on the first offer, knowing he was a motivated seller and he countered with $295,000 - has asking price. Immediately, we knew this was a guy who didn’t want to budge from his price and his agent told us he wanted to make his money back, plus the closing costs he incurred on his original purchase (which were likely around $10,000 or so). We liked the place and it had been a while since our first offer on the hunt, so we countered to him at $283,000. I figured he would get his original money back, plus $5,000 - not bad. He countered at $288,000. At this point, I knew the highest end of the market in the community was a townhouse that sold for $285,000 and that townhouse was slightly nicer than the one we were offering on. I countered one last time at $285,000, but he would not move off his $288,000 number. My Realtor was furious with me that I wouldn’t meet him at his $288,000 demand, but I don’t play like that and I didn’t want to be the one to set a new bar for the highest price paid for a home in the community, so we moved on.
The third house we looked at was one priced at $335,000 in the middle of a neighborhood of $400,000 plus houses. The problem was this house was super old and needed at least $50,000 in remodeling - it didn’t even have kitchen appliances, had insanely old windows, unfinished floor, etc. $335,000 was already at the top of our budget and the bank was in control of this house, not an owner - so it must have been a foreclosure. We ended up offering $285,000 and cited the amount of work needed on the house. The bank responded saying the lowest they could sell the house for was $325,000. I would have loved to own the home at this price, but at its current condition and the lack of cash I would have had, I couldn’t do it.
The starter home we finally settled on was literally nextdoor to the first townhouse we made an offer on and were beat out by the cash offer. It was listed for $335,000, but that included an external garage and upgraded bathrooms from the first home. I found this home myself on Redfin (the Realtor didn’t help, because it wasn’t on the MLS “multiple listing service” - used by real estate agents to list and find properties, and was listed FSBO “For Sale By Owner”). This time we didn’t hesitate (we had been searching every weekend for 3 months at this point) and offered the asking price of $335,000. It had only been on the market one day and we wanted to get in before anyone else could. The plan was to rent out the external garage for $200 per month (which was normal in the neighborhood). The offer was quickly accepted and we moved toward the next step.
STEP 8: HOME INSPECTION
If you know a trustworthy home inspector or anyone involved in construction, now is the time to pull out the favor card. The home inspection is your last chance to find any issues. Turn on all of the water faucets, check the A/C, turn on all of the appliances, check the breaker - now it the time to do all due diligence. If anything is not in working order or is not up to snuff, ask the seller to fix it prior to closing - just remember, is the home worth losing over a leaky toilet? Small issues are usually no big deal, but a large capital expenditure like asking for a new roof or impact windows might lose you the deal.
Know that a home inspection will not uncover every defect in the house. Our townhouse ended up having undetected termite issues. The seller also did not do the things he was supposed to per the contract prior to closing, like fixing a garage door issue. When we purchased our investment property we found out after the home inspection that the new A/C was done without a permit and had to pay $700 for permit inspection fees, but we didn’t know this until way after closing.
The home inspection did save us on multiple fronts with the investment property however, we discovered the seawall and dock had issues and the house had active rodents in the attic. Therefore we discussed with the seller and he had the house tented and fixed, but we had to split the cost of the seawall repairs.
STEP 9: LOAN SELECTION
The first thing to know is that there are many different types of loans and you need to know the differences and risks in each.
Conventional Fixed-Rate Loans:
The standard type of home loan that you have likely heard and read most about is the conventional fixed-rate loan. Conventional fixed-rate loans can be taken in 15-year and 30-year periods. The obvious benefit of a 30 year period is that the monthly payments will be lower, but the drawback is that you will be spending a lot more money during the life of the loan on interest payments.
Generally, the minimum down payment on conventional fixed-rate loans is 5% with a recommended down payment of 20% (much more difficult to hit on your first home). If you don’t have at least 20% for a down payment, most lenders will charge you PMI (Private Mortgage Insurance) until you reach 20% equity - PMI is an additional monthly fee to help insure the lender in case you default on your loan when you don’t have much equity into the home.
These loans are traditionally used on primary homes, secondary homes or a first or second investment property. To avoid paying PMI, you can ask your lender for LPMI (Lender Paid Mortgage Insurance), in which you pay a higher rate rather than a monthly fee - this can save money long-term and if rates go down, you can refinance your home once you have more equity.
I recommend these loans for most properties, especially when investing or planned ownership will be for a long period of time.
FHA Loans:
FHA (Federal Housing Administration) loans are more popular for those who are having a difficult time raising the cash necessary for a down payment. The minimum FHA down payment is 3.5% and help those with lower credit scores, however the drawback is with an FHA loan, you are paying PMI for the life of the loan, but you can always refinance later down the road.
VA Loans:
VA (Veterans Affair) loans are an amazing option for military veterans where the vet can get a loan with no down payment. Now, don’t think you can grab your military buddy and start a real estate monopoly buying every house on the block for no money down. The VA loan can only be used on a primary residence (which still does leave room for house hacking).
Adjustable Rate Mortgage (ARM) Loans:
ARM loans allow for lower rates than long-term fixed loans do, however the loan period is for only 3, 5, 7 or 10 years. This does not mean the loan is not amortized over 30 years, it is - you just have to reapply for a loan after the loan period is over and it might be for a higher rate if the rate is higher 3, 5, 7 or 10 years down the road.
You might be able to save a good amount of money on ARM loans, but they are also much more risky - you could very well go from a 4.25% interest rate to a 7% interest rate 5 years down the road. Run the numbers to see if the risk is worth it for you, but when rates are lower, you are much better off sticking with the long-term conventional fixed loans.
TIP: There are plenty of tricks to paying off your home loan early, like paying your loan bi-weekly instead of monthly. If you pay your loan bi-weekly, you pay half of your monthly loan 26 times instead of paying your entire monthly loan 12 times. This leads to an extra month of payments. You could very well pay your loan off seven years early (23 years) with this strategy, saving yourself a ton of money in extra interest payments, because the 13th month will go directly to the principal. I used this strategy with my student loans.
The difference however is if you have a good, low rate your money might be better off in an index fund than paying your loan off early. In the end it’s your decision, you need to make based on risk - but I don’t see a reason to pay down home loans early until I get closer to retirement age.
STEP 10: CLOSING PROCESS, APPRAISAL & TITLE COMPANY
Most home closings can take between 30 - 60 days and be ready to supply information about your entire life, including letters from employers, all of your bank records, social security numbers and cards - the lender will request so many forms from you over the closing period your head will swim.
The title company will also collect your down payment during this closing period to hold in an escrow account until the transaction can be completed. Basically, they are the middle man holding the money to make sure the buyer or seller can’t screw each other over.
During the closing period, there are a few things that can screw up the deal from getting done. The first is the home appraisal. On my first home, you might remember we offered and the seller accepted a purchase price of $335,000. The appraisal of the home and garage was $315,000 ($305,000 for the home - thanks to the sale price of the townhouse nextdoor and the garage for $10,000, which we thought was worth much more, closer to $25,000). Due to the low appraisal, the lender would only provide a loan for the appraised value of $315,000 - therefore the seller either had to agree to lower the final sales price by $20,000 or to cancel the deal and find a new buyer. Luckily, he agreed to lower the sales price - but he was very bitter about this later on in the process.
The second is if the title company finds a cloud on the deed of the home or if there is an ongoing undisclosed lawsuit in regards to the property. On this same first house, it was discovered one of the other townhouse owners was suing the HOA of the townhouse community and in turn the HOA was counter-suing the homeowner. Due to the lawsuit (and since I was purchasing in a community with an HOA), we found out on the day we were supposed to close that we could not close with an ongoing lawsuit and had to wait for the lawsuit to be settled before closing (this was in May of 2016). We were literally supposed to move out of our apartment the next day - that’s how we lined up the closing so we wouldn’t be paying rent and mortgage simultaneously.
Luckily the seller understood the predicament and had moved out from the house entirely before the closing, as he was supposed to. He then rented us the townhouse from May until September when the lawsuit was finally settled. Not the worst issue to come across, right? Wrong. Due to the four month delay, the lender literally had to re-process the loan and paperwork and our original contract was deemed void, meaning we had to re-sign a contract with the seller. This time the seller would not include the garage and decided he would only sell us the home for $305,000 and keep the garage himself to rent out for $200 per month, which really upset me, because it was easy cash flow, but we were painted into a corner and still took the deal.
When purchasing the investment property, I gave our loan contract to my brother (who is a mortgage loan originator himself) and he inspected to find out they were killing us on loan processing fees. Lesson learned, make sure your lender is giving you the best possible deal - make sure to shop lenders and keep them honest.
STEP 11: CLOSE ON THE HOME
This is the easy part. Double check the paperwork to make sure the numbers are the same as they showed you during negotiation and at closing. Sign all of the papers, smile, take your keys and go home - now you’re a homeowner. Make sure to read some books on all the stuff homeowners are supposed to do to upkeep their property, including clearing A/C lines, pest control, landscaping, caulking and other fun stuff that you never knew your parents had to deal with now that you have a house. Congrats!
SOURCES:
https://www.neighborhoodscout.com/