Twenty tips when buying your first home
Extract from ‘Don’t Say I Never Told You’ Series 2 www.PatStormBooks.com
-A guide to life from a loving father to his millennial daughters
When your mother and I bought our first home together in New Zealand we had to borrow the deposit through the solicitor’s loan account. The interest rate was 18%. For your whole working career, so far, you have only seen very low interest rates, but I can assure you, as night follows day, mortgage rates of 8% will be a reality and possibly 12% in unusual situations. In these higher interest rate periods, the property market compensates with falling prices and providing you're prepared to suffer the hardship of the first few years you will have opportunity to buy a long term growing asset.
These 20 Tips will help you make the right decision.
Know your credit score
Your credit score is one of the biggest factors in what your house loan terms will be. Know your score before you ever try to get a loan and take the time to repair it as there will be errors (four out of five credit scores contain errors). Noticed a small mistake? No problem, go ahead and dispute it. Seen a ‘bad blemish’ on the report? Time to start repairing it now before it’s time for the mortgage application.
Shopping for new refrigerators, washing machines, dryers, garden equipment etc. on your credit card whilst the mortgage application process is underway will impact your credit rating. It is stupid for two reasons:
You cannot afford these new items
Buying a top quality second-hand one is often better than a cheap new one
Reduce all existing debt
If there is one lesson to be learnt when applying for a mortgage, try to pay off as much of your credit card debts, student loans and other types of debt before you start with the mortgage application.
Most lenders will check your so-called debt-to-income ratio, as well as the timeliness of your payments, types of accounts and overall payment history. Having too much debt when going into a mortgage application process is simply asking to be declined for a loan. There’s only so much credit a lender is willing to extend to you, which is why the consumer debt accounts for such a large portion of the credit score.
Have a lender pre-approve mortgage amount
Get a pre-approved mortgage amount from your bank or from the banks contacted by your mortgage broker. In fact, it is one of the most important parts of the home buying process. Pre-approval means you should be able to get the loan as long as nothing changes with your financial situation or your credit score.
A pre-approval letter also helps when you want to compete with another buyer for a home you love. One of the first things most sellers are going to ask their agent when receiving an offer is, how qualified the buyer is to purchase. Sellers want to feel comfortable knowing the buyer is not going to get turned down for the loan.
Make sure the bank has verified your employment, income, and credit. If they have not done this the pre-approval maybe worthless.
Remember that interest rates go up. Only borrow an amount that you can afford to repay if the interest rate goes up 2%. Do not worry if things are tight the first couple of years as the situation changes rapidly as salaries rise.
For your first mortgage shop around for the best mortgage deal
This is one of the biggest mortgage mistakes many first-time home buyers make! The bank you are with may not be flush with a mortgage fund, they may also appraise your risk slightly differently than another bank who wants to have more mortgages on their books. Thus, you will get different offers.
Obviously, the interest rate charged, and terms and conditions will vary across the different parties. A little time spent shopping around will more than likely result in thousands saved over the period of the loan.
When buying your next house staying with the existing mortgage provider has many benefits such as transfer of mortgage, waiving fees, maintaining the relationship.
Negotiate a reduction or waiving of the bank’s lawyer charges. I have always had my bank’s lawyer costs waived because I asked.
Know what you want from your first home – a property with land
As I have already mentioned in ‘Have a treasure map with your balanced goals for the year’ and ‘Use the law of attraction to turbo charge your life’ visualization and NLP are powerful tools. So, when looking for your first home, or your next one, set out a list of ten must haves and ten would like to haves. Find pictures in magazines of houses you like and put them on your treasure map.
If you want to live in an apartment, no problem, rent it. Always, I mean always, buy a property with land.
The ‘know what you want checklist’ will need your input. It covers a wide range of needs such as proximity to schooling, number of bedrooms to ratio of front to back garden (best to have the back garden bigger than front garden as you never use your front garden).
Know what you want from your property checklist is available from PatStormBooks.com
Select the neighborhoods you are interested in
Understand you are not just buying a home but a location as well. One of the key considerations that many buyers miss when purchasing a home is knowing how to pick a neighborhood they will love. Often first-time buyers focus too much on the house and not enough on the neighborhood.
Every neighborhood has its unique qualities that you want to be aware of before you buy. An agent that has a lot of listings in the targeted neighborhood will know about property that will be coming up for listing. Contact a real estate agent that has the most listings in your targeted neighborhoods. However, do remember that it is the seller who pays the agent, so you are not the agent’s customer.
Do not change jobs mid-application process
Even if you dislike your current job do not change jobs until you’ve closed on the home loan. Financial institutions prefer to see a career history, which shows consistency. Unfortunately, changing jobs mid-way through the process will delay the application process. If you move from a salaried position to self-employed you will end up in trouble as they will want to see your first year’s earnings, as submitted to the tax authorities, before engaging in a mortgage conversation.
Understand the property cycle before you invest
If everybody wants in, houses are frequently auctioned for over 120% of the reserve and during viewing it is crowded, you are at the peak of a property cycle. Buying now could take seven years before the house value comes back to what you paid. Always better to buy when there is doom and gloom around.
The signs of the top of the market are:
Even grimy homes, in undesirable areas go to auction and sell for eye watering sums
Estate agents all have high-end cars
The property section in the local paper is bulging
Everybody is talking about how much their property made in the last twelve months
You feel desperate to get in – the hype has got to you.
The property crash happens in cycles. Go back to the last two property crashes and study the signs, that way you will have more confidence in your convictions.
Because estate agents and banks don’t like property crashes, they will do their utmost to delay the inevitable which typically takes six months after the stock market goes south.
The bottom of the cycle is when: there are a record number of mortgage sales; everybody says property is the last thing to buy; estate agents cannot make a living and their flash car has been sold!
Verify all information in the listing
You need to verify that all the information given about the home is right. Sometimes real estate agents put things in the listing that they may not have verified or may just not be aware of the facts. Some of the more common issues that can crop up in a real estate transaction are understanding what stays with a home and what doesn’t. Many buyers, sellers, and even some real estate agents do not know what is considered a fixture (stays with the house) and what is personal property.
The general rule is: if plumbed in or nailed down it is a fixture that stays with the house.
Try to see yourself in the home
Sometimes when you view a home, it will be filled to the brim with the current owner’s possessions. Learning to see past the clutter to the potential of the home will open the doors to better deals.
This is why real estate agents often recommend to selling clients to clear all the clutter before listing their home for sale. Cluttered homes can sell for less money when those with a lack of vision can’t see past it.
However also be careful about a staged home, where the agent has hired an interior decorator to furnish the home with hired furniture and fittings. You can bet that unimaginative buyers will offer ‘top dollar’.
Get the house checked by a reputable builder
Select a builder from recommendations from your friends. The builder maybe be needed to do some alterations if you purchase so you have ‘killed two birds with one stone’.
The ‘builder review checklist’ covers such issues as:
State of the wiring
Check for asbestos
Check for poor drainage around the house.
Builder review checklist is available from PatStormBooks.com
Even a brand-new home can produce lengthy inspection reports. Your job is to find the important issues with significant monetary value and determine whether or not you would like to ask for repairs on these items or a deduction.
If the work done is going to improve the property you should aim to pay half.
For major flaws it is better to agree a sum deducted than get the current owner to fix as they are not motivated to get a good job done. In any case you will have a plumber, electrician, and builder on site soon so they can do the remedial work as well as the improvements you have in mind.
Get a methamphetamine test done on the property
The surge in P-contaminated (methamphetamine) homes means that you cannot chance it unless the house has been a family home for the last few years.
Here are a few checks you can do:
Be sensitive to chemical odors
Look for dead vegetation around a section
Is the house outfitted with elaborate CCTV systems?
Are there visible stains on curtains, walls, and ceilings?
Is the waste bin showing any evidence of empty medicine packaging, paint thinner containers and coffee filters with white or red powdery substances?
Methamphetamine has been a scourge in many countries since 2003. A company that P-tests about 2080 homes a year for traces of meth finds about 20 per cent coming back positive.
Personal use of P is less of a problem and can be washed out with vinegar, so don’t worry about a positive P result showing personal use only. Just take off $3,000 from your offer for the P-cleaning and do it yourself.
Review of all property records at the local council
In New Zealand you can get a document called a ‘Land Information Memorandum’ which identifies any issues with the land the house is built on, such as drainage and landslip risks and includes copies of all plans filed with the council.
There are reasons why property owners do not get a permit for work done on their home:
By obtaining a permit for an addition, you will pay more rates because your assessed property improvements value will go up with a larger home.
It costs money to get permits. Many owners just don’t want to bother paying the fees.
Pure laziness as it takes time to get permits.
Buying a home without necessary building permits will become your issue in the future when you go to sell. It is advisable that you ask the seller to get the permits issued on all structural improvements before you buy the home.
Talk to the neighbors
If you are keen, come back to the neighborhood without the agent and knock on two or three neighbors’ doors and indicate your interest in the property and ask:
What is the neighborhood like to live in?
Have there been any boundary disputes?
Is there anything about the house we should know about before we buy?
Understand all the Body Corporate (Homeowner Association) regulations
Apartments have shared assets (grounds, entrance ways, roof, lifts, staircases etc.) and the maintenance is managed through a Body Corporate (Homeowner Association). Some developments have other regulations are attached to the property such as no pets, no long-term renting, no guest parking overnight.
These organizations are mandatory so you will have to pay dues and rely on the association to take care of certain things, like maintenance of common areas. Some homeowners’ associations are well run, some are not. Know what you are getting yourself into before purchasing into Body Corporate (Homeowner Association). One of the best ways to find out is by asking a few of the people who already live there.
Schedule your final pre-purchase walkthrough
A final walkthrough is a standard practice to make sure that the seller has taken everything they should have and left all items listed on the sales agreement.
It is best to schedule the final walkthrough at least 24 hours before signing, to allow time for any issues that need to be worked out. If you schedule your walkthrough just an hour before your appointment with your lawyer, you may not be able to work these issues out in time.
Know every cost associated with ownership
There are a lot of fees that come with a home purchase above and beyond the mortgage. The ‘know every cost checklist’ covers:
Ongoing costs of ownership
Full template available from PatStormBooks.com
Never buy your first house in an auction
The reason why agents love auctions is that you, the buyer, cannot put any conditions of sale in the deal. You have to pay a lot of costs (builders report etc.) and have a small chance of being successful at a good price.
Because you know that you may not be successful at the auction you might skimp on your due diligence.
When I first wanted to move to our current location, I went to an auction to buy what I thought was the perfect house. We thought it was worth $450,000 but bid up to $500,000 and lost out to a final bid of $580,000. As it turned out the purchasers put it out for rent the next week and we moved in as renters. Within weeks we discovered that the wind was horrific and the kitchen so badly designed that we were relieved not to be the owners.
You will also be invariably forced to pay more than your wanted. Stand back and let others buy.
Negotiate a deal
Once you have processed through all of the homes that you are interested in and have found the home that you like the most, which may be the first one you see.
It’s time to move on to the next step putting in an offer. This is where all of the details of the transaction are documented and signed by both parties through written contracts. You should seek advice from your lawyer as they might suggest a caveat or two.
A common first-time homebuyer mistake is to try and submit a low-ball offer on their first deal. As a new buyer in the real estate market, you may feel as though you are entitled to a good deal. This is possible, but great deals do not usually happen unless you are buying a distressed mortgagee sale. No one gives anything away in real estate.
That means that a lowball offer of less than 90% of current offer price may be off track if the home is priced at market value and in good condition.
If the property has some key furniture that fits the room e.g., large dining table consider including a price for that item.
Consider sharing your first home
Consider buying a house with a friend
Due to the surge in house prices, it is becoming more common for friends to get together to buy a house. This can be a very sensible idea for the following reasons:
You often can get much more house for that extra $100,000-200,000, such as a better area, better garaging, that fourth bedroom etc. These houses will hold their value better over time. The first entry house can be in an inferior suburb and on a small section.
The interesting point is that if the agreement breaks down after three years one party will probably have enough equity and a higher income to be able to buy the other party out.
The key requirements are that you need to be sure they have a stable job and career (to pay their share of the mortgage payments), you trust them not to take any risks that could force a sale of the house and they have a lifestyle that fits with yours.
Don’t be romantic, get a flat mate
There are two reasons why this is a good idea. Often you are very stretched for the first couple of years owning your first home. You just need a buffer until your salary rises. Renting a room or two may enable you to afford a bigger and better house. I have rented out rooms in my house twice in my life. Once when I bought my first house, when I rented out three bedrooms for a couple of years. The other time was after a separation when I geared myself up to buy my ex-partner’s share. Both situations added, rather than subtracted from my life.
Extract from ‘Don’t Say I Never Told You’ Series 2 www.PatStormBooks.com
-A guide to life from a loving father to his millennial daughters