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Buying a New House
Are you buying a home, investment or headache?
Financial Planning
July 2005
Buying a New House
Are you buying a home, investment or headache?
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 peopleâs lists of mistakes, but letâs 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.
Howâs that for a change in direction? First youâre told that the home is not an investment, and then youâre told to keep in mind future value. What a contradiction that is! Well...itâs not exactly a contradiction; itâs a reality. You donât 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. Thatâs 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 lenderâs 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 donât tell the seller you will get the loan.
Mistake # 4 - Failing to choose a buyerâs representative.
A buyerâs 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. Thatâs like having the policeman issuing a ticket also be the judge. Thereâs no way you can win!
Mistake # 5 - Buying a home with an incurable problem.
Itâs 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)? Letâs 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. Itâs 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 donât 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 buyerâs 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.
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!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.
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