NEWS AND RESOURCES

Financial Planning for July 2005

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Buying a New House
Are you buying a home, investment or headache?
This month is property tax month. Unfortunately, when it comes to financial planning, property taxes are not the biggest financial planning consideration. So, we have to veer from the subject a little bit. Donít get the idea taxes are unimportant. Anyone who has ever looked at a mortgage payment and seen the difference in the principal and interest payment versus the total payment knows the property tax share of the payment can be a huge number. Itís just that there are other, more pressing concerns when purchasing a house in which to live. Remember, this is a piece of property that will literally be somewhere on your mind 24/7.

This month, because of the pervasive effect a house can have on your life, we wanted to help you avoid a few pitfalls in buying your first or next home.

Mistake #1 - Shopping for a home as if it is only an investment.

Okay, this may not be at the top of most peopleís lists of mistakes, but letís face the facts - you are looking for a home, not an investment. If you are looking purely for investment property, find some stock you like or perhaps some good rental units. Investments are for building wealth; homes are for building a life. Your life, your children, your spouse and everything that is the most dear to you will live in this great big box you call a home. Remember that when you are looking.

Mistake #2 - Shopping for a home without considering future appreciation.

Howís that for a change in direction? First youíre told that the home is not an investment, and then youíre told to keep in mind future value. What a contradiction that is! Well...itís not exactly a contradiction; itís a reality. You donít want to make the payments on a house that cost you $250,000 for 30 years and find out the value has decreased to $125,000. Thatís crazy, so even if you find your dream home in a neighborhood that is declining maybe you should take a hard look at your dreams and see if they can fit another house in an area where real estate is appreciating.

Mistake #3 - Shopping for a home before you have a pre-approval letter from a mortgage lender.

Many buyers look first, find a dream home and make an offer only to find out they lose the home to someone the seller knows will get the necessary financing. Pre-approval letters are what they sound like - a mortgage lenderís firm offer to loan you up to a specified amount to purchase a home. If you were a buyer, to whom would you sell - someone who already has financing, or someone who might get financing? Pre-approval letters are different from pre-qualification letters. Pre-approval means the prospective lender has done the necessary investigation to make you a loan when you find the property you want. Pre-qualification letters just tell you that you qualify for a loan, but donít tell the seller you will get the loan.

Mistake # 4 - Failing to choose a buyerís representative.

A buyerís representative works for you and has your best interests at heart. Ask your representative to run a comparative market analysis (CMA) so you will know what the actual sales price is for comparable homes in the area. This will allow you and your representative to make the right decision on the real worth of a house and help you to make a reasonable offer.

Many times, people will rely on the listing agent to handle all the paperwork with respect to a transaction. Thatís like having the policeman issuing a ticket also be the judge. Thereís no way you can win!

Mistake # 5 - Buying a home with an incurable problem.

Itís time for a show of hands, or cursors. How many of us want to live next to the freeway or in a home with a bad floor plan (say from the 1970s)? Letís hope there were no raised hands...errrr...cursors. An incurable problem is also known as economic obsolescence, and that spells trouble for you when you try to sell later on. Some other examples are homes next to the city dump, high traffic streets, no parking space for guests when you throw the Super Bowl party, etc.

Mistake # 6 - Failing to shop for the best mortgage rates.

Unless otherwise stipulated, just because you have a pre-approval letter does not mean you have to use the mortgage lender who issued it. If market conditions cause another lender to offer a better deal, you should know that. So, do a little shopping to make sure you are getting the best deal.

Mistake # 7 - Failure to inspect the house.

Even new structures can have a serious problem. Foundation problems, central weather units, internal equipment and other problems are likely to turn up when you send your own inspector for a complete inspection of your prospective home. Itís best to go with the inspector so you can discuss whether any problems found are major or minor. Major problems are those that the seller must fix, while minor problems donít harm the use of the home and, thus, can be negotiated if you really want the house.

Mistake # 8 - Failure to draft a good sales contract.

If you have a good buyerís agent, the agent will probably guide you in drafting a good sales offer with all the appropriate limitations. Still, you need to know a few conditions upon which to insist:
  • A satisfactory appraisal supporting the selling price of the house must be included in the contract.

  • Requirement that conditions identified by an inspector be corrected.

  • Requirement that other items such as termite inspections, code compliance and other customary inspections and certifications be obtained prior to closing the sale.
While your area may have other customary provisions, the foregoing should be considered minimum requirements. The purpose of the limitations is to provide you with an exit from the contract, and repayment of any deposits, if the seller fails to follow the contract.

Conclusion

The reality of purchasing a home is that you will be committing to a very expensive long-term commitment. Keep in mind that you want to make sure you move into a home that you will love and that will love you back. Avoiding the mistakes mentioned in this article will help you find such a home and not a headache.

Happy July 4th!

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