Three Reasonable (Yet Radical) Steps One Can Before Buying a Home

Note:  This is the latest post in the series of the ABCs of Buying, Selling and Investing in Real Estate.  Each post, I select a letter (R this post) and write up a fictional advice column with the letter in mind.  The story is fiction, but the advice is real(ty). 

This post continues the story started in Three Really Good Reasons for Investing in Real Estate Right Now

Rachel had come to me the previous Fall asking me about what I thought about real estate investing and whether now was a good time to jump into the fray.   I was getting my coffee to go from my local coffee shop when I ran into her waiting for her coffee.  She gave me a hug and told me that she had decided to wait on the real estate investing for the time being, waving her hand in front of her face.  I saw a nice looking engagement ring.  I hugged her again and told her congratulations.   She said the wedding plans was taking up way too much of her time to even think about investing right now.   Being the realtor I am, I didn’t let the opportunity pass without asking what her and her fiancee, Ross was his name, planned to do for living arrangements.  She said they planned to live in his condo for a year or so and then start looking for a house.  After all, she told me, they would need more room eventually.  I smiled back and told her that waiting was always a good idea because you didn’t want the stress of find a home when you are trying to plan a wedding.  She nodded and said she would be calling me when the time was better.  In the meantime, what did she and Ross need to be doing to get ready to buy that house in a year or two.   She wanted some radical ideas!  

This is what I told Rachel….

After sitting down with our coffees, I told Rachel that she was being really smart asking what she could do now to get ready to buy a home in a year or two.  There are lot of first time home buyers who do not realize that buying a home is not the same as renting an apartment, taking only a few days to complete.   You have to be prepared and ready to buy a house.   I get so many phone calls from customers who are ready to go see a house right away with no idea if they can afford it.  I ask politely if they have a preapproval letter for a mortgage.  When I am told no, I ask them to call one my lender friends and get that approval before I will go show them a house.   It saves so much time and heartache for the buyer if they know what they can afford before going house hunting.   It takes most lenders very little time to get a prequalification letter together for a buyer who is a well-qualified buyer   If the buyer is really smart, they will work with a lender, like Movement Mortgage, that will do most of approval work before the buyer even sees their first home.  In this way, buyers know that will definitely be able to afford a particular home and listing agents know that offers coming from Movement mortgage (and comparable lenders) are solid gold so the house generally closes faster.   Monica said that made sense but still wanted some radical ideas for her to take on for the next year or so.  I told her that these ideas were reasonable to me, but might seem radical to others.

1.  Get Finances Under Control – If you have the luxury of having some time before buying a home, it is a great idea to look carefully at your finances and how you might improve them while waiting to get a home.   Doesn’t seem radical, but many of us do not have a good, or even decent, idea of our own financial picture.   Buying a house is not a good idea if your finances are out of whack.   First and foremost, you need to get some debt paid off.   Debt to income ratios play a huge role in getting mortgage approval and can even influence the interest rate you get on a loan.   If you have a lot of credit card debt, get as much as possible paid off.   Not only will this help with that debt to income ration, it will free funds for my next financial tip.  You have to save some money to buy a house.  I realize that there are a lot of mortgage providers out there with programs to help with down payment amounts and closing cost assistance.   However, if you want a lower monthly mortgage payment and a better interest rate, then a larger down payment is essential.   By paying off some credit cards, you can save more money on a monthly basis and have a much better chance of getting mortgage terms that work for you.   Finally, you should create a budget for yourself and abide by it.  In fact, if you make a $1000 a month in net salary.  Live like you make $750.  It will help you tremendously in your effort to save money.

2.  Take House Living for a Test Run – This radical idea does not sound so radical if you think about it.  You test drive cars before you buy them.  The next highest finaincial obligation you will make beyond a car is a house.   Why rent a house for a year before buying a home?   Of course, it is usually more expensive rent to live in a house, so you will be able to save less so you need to weigh if saving money is more important than experience living in a house by renting it.  By renting a house, you can get a feel for it and have a better idea of what to expect when buying a home.   You do some have some additional costs that show up after buying a home.  You have to keep up with the property including doing the lawn work yourself and any handyman tasks fall to you as a homeowner.   Property taxes is also something you have to take on as a house owner (and it does come to play when renting a house as well since the landlord charges more rent to recoup some of the property tax bill).   A house is generally larger than an apartment so you have more to clean.  Utility bills are required when owning a house (and most renters have to pay for them) and appliances(everything except the stove and the dishwasher) are not provided when you are buying a home (most landlords won’t  provide them either).   As you can see, there is some merit to renting a house before buying one.

3.  Talk to Some Experts –  Before you start the process of buying a home, talk to some realtors.   Sure, you can call some realtors and set up times to interview them to see if they are good fit for you when it comes time to start house hunting.  However, for this idea, I recommend talking to a realtor about the current market and do it with a realtor who is not the one you plan to eventually hire.   The easiest way to accomplish this task is to go open houses at least twice a month.   Realtors love open houses because buyers will come into their listings to look it over without having to worry about scheduling a showing.  They also love open houses because some of these buyers do not have agents when they tour the house so there is a chance for them to gain some new business.   By you going to these open houses, you gain the attention of realtors who are constantly looking at the market and being a part of it.  They could tell you better than anyone else what the market is like where you want to buy a home.  They will also give you some information on the macro aspects of the real estate market overall.  You have to be direct and ask explicit questions, but almost every realtor I know will enjoy talking to potential customers about the market.   It is a great way for you to start to narrow down the places where you will likely buy a home and what you can expect in terms of sales price.  Not to mention, open houses can give you some wonderful decorating ideas.

 

Monica took a last sip of her coffee and got up from her seat. She said that she would keep my radical ideas in mind.  She figured Ross would take care of most their finances, but she promised to keep him honest about it.   She liked the idea of living in a house before buying one.  It would mean they would go from owning a condo to renting again, but it might give them the extra time they need to scope out the market through the open houses.   She bolted for door said she was already late to try on wedding dresses.  She promised me an invite to the wedding and a call when it came time to get serious about buying a home.