Why
Buying a Home is a Good Idea
The Best Investment
As a fairly general rule, homes appreciate about four or five percent
a year. Some years will be more, some less. The figure will vary from
neighborhood to neighborhood, and region to region.
Five percent may not seem like that much at first. Stocks (at times) appreciate
much more, and you could easily earn over the same return with a very
safe investment in treasury bills or bonds.
But take a second look
Presumably, if you bought a $200,000 house, you did not pay cash for the
home. You got a mortgage, too. Suppose you put as much as twenty percent
down that would be an investment of $40,000.
At an appreciation rate of 5% annually, a $200,000 home would increase
in value $10,000 during the first year. That means you earned $10,000
with an investment of $40,000. Your annual "return on investment"
would be a whopping twenty-five percent.
Of course, you are making mortgage payments and paying property taxes,
along with a couple of other costs. However, since the interest on your
mortgage and your property taxes are both tax deductible, the government
is essentially subsidizing your home purchase.
Your rate of return when buying a home is higher than most any other investment
you could make.
Income Tax Savings
Because of income tax deductions, the government is subsidizing your purchase
of a home. All of the interest and property taxes you pay in a given year
can be deducted from your gross income to reduce your taxable income.
For example, assume your initial loan balance is $150,000 with an interest
rate of eight percent. During the first year you would pay $9969.27 in
interest. If your first payment is January 1st, your taxable income would
be almost $10,000 less due to the IRS interest rate deduction.
Property taxes are deductible, too. Whatever property taxes you pay in
a given year may also be deducted from your gross income, lowering your
tax obligation.
Stable Monthly Housing Costs
When you rent a place to live, you can certainly expect your rent to increase
each year or even more often. If you get a fixed rate mortgage when you
buy a home, you have the same monthly payment amount for thirty years.
Even if you get an adjustable rate mortgage, your payment will stay within
a certain range for the entire life of the mortgage and interest rates
arent as volatile now as they were in the late seventies and early eighties.
Imagine how much rent might be ten, fifteen, or even thirty years from
now? Which makes more sense?
Forced Savings
Some people are just lousy at saving money, and a house is an automatic
savings account. You accumulate savings in two ways. Every month, a portion
of your payment goes toward the principal. Admittedly, in the early years
of the mortgage, this is not much. Over time, however, it accelerates.
Second, your home appreciates. Average appreciation on a home is approximately
five percent, though it will vary from year to year, and in some years
may even depreciate. Over time, history has shown that owning a home is
one of the very best financial investments.
Freedom & Individualism
When you rent, you are normally limited on what you can do to improve
your home. You have to get permission to make certain types of improvements.
Nor does it make sense to spend thousand of dollars painting, putting
in carpet, tile or window coverings when the main person who benefits
is the landlord and not you.
Since your landlord wants to keep his expenses to a minimum, he or she
will probably not be spending much to improve the place, either.
When you own a home, however, you can do pretty much whatever you want.
You get the benefits of any improvements you make, plus you get to live
in an environment you have created, not some faceless landlord.
More Space
Both indoors and outdoors, you will probably have more space if you own
your own home. Even moving to a condominium from an apartment, you are
likely to find you have much more room available your own laundry and
storage area, and bigger rooms. Apartment complexes are more interested
in creating the maximum number of income-producing units than they are
in creating space for each of the tenants.
If you are moving to a home for the first time, you are going to be very
pleased with all the new space you have available. You may have to even
buy more "stuff."
Why You Should Not Wait to Purchase a Home
Even if you could "time the market," that strategy would most
benefit first-time buyers. You see, people who already have a home usually
need to sell it in order to come up with the down payment for their next
home. Even if they don't, they would have to carry the debt and obligations
on two homes at the same time. This can create financial hardship, even
when you rent out the previous home. There are maintenance costs, renters
don't always make their payments on time, the rent may not cover the mortgage
and other costs, and sometimes the property may be vacant. So if you are
a move-up buyer and want to purchase your next home during a depressed
market, you generally have to sell your current home during that same
depressed market. If you want to sell during a boom, then you also have
to purchase during the same boom.
It tends to equal out.
Finally, suppose you are a first-time buyer and wait thinking the end
of a boom is near? If you guess wrong, are you going to wait...and wait...and
wait...till the next depressed market? If so, you could miss out on loads
of depreciation...
...and that is assuming you guess right about your market timing. In 1996,
when the home market was struggling, who would have predicted what the
next seven years would bring.
Are You Buying a House or a Home?
As you read and study about buying real estate, you will often find the
words "house" and "home" used interchangeably. There
is a huge difference between a house and a home.
A house can be a place to eat, sleep, park your car, and put all your
"stuff" (including other family members). It is a material possession
and an investment. A home is where you feel comfortable, warm, safe, and
protected.
A home is where you live.
A house is something you buy logically. A home is an emotional purchase.
When buying real estate you have to balance your emotional wants and your
logical needs because there will almost certainly be a time when the two
conflict.
Example
For example, you may want a house with a view, but the payment is higher
than you feel comfortable with on a thirty-year fixed rate mortgage.
What do you do?
Purchase the house anyway and budget more carefully for the next few years?
Buy the same house without the view and get it cheaper? Make a larger
down payment by borrowing from your 401K or family members, so you get
a lower payment? Get an adjustable rate mortgage with a smaller payment
instead of a fixed rate loan? Or buy a smaller house and still get the
view?
When viewing the house, most people look at it emotionally and envision
it as a safe, happy, comfortable home. Later, when making the offer or
filling out a mortgage application, your logic may begin to kick in, instead.
That's when "buyer's remorse" may come up, but...that's a different
article.
Balancing Act
The trick in buying real estate is to view all decisions with both a logical
perspective and an emotional perspective. If a situation presents itself
that requires a trade-off, decide on whether there is a huge conflict
or a small one. Logic should win the big conflicts, but emotion should
always be a factor, even winning the small ones.
You will find yourself owning a warm, happy, safe home and an investment
for the future at a price you are willing to pay.
Finding Your Realtor
by "Accident"
When someone decides it is time to sell their home, they interview several
Realtors from different companies to determine which one is best for them.
They want someone who will represent them and someone they feel will do
an effective job at marketing their home.
However, when someone decides to buy a home, they usually end up with
their Realtor through sheer accident. Why dont homebuyers search for a
Realtor the same way that homesellers do?
Instead, homebuyers usually end up with a Realtor as a result of answering
an advertisement. The advertisement will give a brief summary of a home
available for sale along with the price, but it says nothing at all about
the Realtor.
So...
...does it really make a difference?
Listing Agents
and Selling Agents
You see, there are two "sides" to every sale. The listing side
and the selling side. Most deals have an agent representing each side,
so there are generally two agents involved The seller's side is represented
by the listing agent. The buyer's side is represented by the selling agent
(also known as the buyer's agent).
Agents can deal with both buyers and sellers, but the majority tend to
focus their efforts on one or the other. Some even exclusively handle
either buyers or sellers.
So what should you do?
We simply recommend that you take as much care to hire a real estate agent
as you would for any other professional. Ask questions.
.
After all, buying your next house is probably the biggest purchase you've
ever made in your life. Does it make more sense to find your agent by
accident...or by design?
Do You Make an Offer With the Listing Agent?
For argument's sake, suppose you see a property that is "just perfect"
and you don't have an agent yet? Do you make an offer with the listing
agent?
Well, most deals have two agents involved. The listing agent markets the
house and represents the seller. The selling agent represents the buyer.
The seller pays the real estate commissions to both agents. Benefit: You
get full representation without it costing you a penny!
When you make an offer directly to the listing agent, there is only one
agent involved instead of two - so things work a little differently.
Agency and Disclosure
When you make an offer directly with the listing agent, the agent will
disclose the possible working relationships that exist - whether they
are going to represent both you and the seller, or just represent the
seller. There will be a document you sign called an "agency disclosure"
that spells out the relationship.
When representing both sides, an agent becomes more of a transaction facilitator
or perhaps a "dual" agent, depending on what state you are in.
In effect, they are not an actual advocate of either party but mostly
an information provider and communication conduit.
The agent will convey offers and counter-offers back and forth, but won't
provide opinions to one party or the other on how "negotiable"
the other party might be. In addition, they will answer questions, explain
things as the transaction progresses, make suggestions about whether getting
inspections is a good idea - and so on - but they won't be your advocate
or the advocate of the seller.
If the agent discloses that they are acting just for the seller, then
they are the advocate of the seller -- and you are on your own.
Road Bumps & Conclusion
Most real estate transactions go fine, but almost every one has a challenge
or two. These challenges are often routine, but sometimes not. One party
may come out on top in a dispute and the other may feel that they did
not.
When there is only one agent, the buyer may sometimes feel that the agent
took the seller's side in a dispute. Often the criticism is not merited,
but human nature being what it is - it happens.
In the end, make an informed decision. If you are considering making an
offer directly to the listing agent, ask questions. What are you giving
up by not having your own agent?
REPRESENTATION!
What will you gain by presenting an offer via the listing agent? When
you get your answers, make your decision on what you want to do
Why Listing Agents Advertise - Is it What You
Think?
Listing agents place ads for several reasons. First, they need to show
the seller that they are doing something to sell their home. Second, by
showing how much they advertise, they can also attract other individuals
who are thinking of selling their homes.
They point to their ads to show their clients that they are aggressively
marketing the property. When other home sellers constantly see ads from
a particular Realtor, they are inclined to want to list with that Realtor,
too. So even though the ads look like they are directed toward home buyers,
they often have another purpose. To attract home sellers.
What sellers dont normally realize is that a listing agents true marketing
emphasis is directed toward other Realtors, not the general public. Their
main goal is to convince the selling agents (buyer's agents) to find buyers
and make offers. This is a good thing because if you are selling a home,
you want as many Realtors as possible bringing buyers around to take a
look. Most of a listing agent's marketing efforts toward other Realtors
are invisible to the general public, but it is where an effective listing
agent does a home seller the most good.
Additionally, many listing agents now have "teams." One member
of the team will probably be a licensed agent who acts in the way described
just below:
Selling agents (buyer's agents) do advertise homes for sale in order to
attract buyers.
What happens when you call on a real estate ad is that you often schedule
an appointment to go look at the advertised home. While you are out looking
at that home, you will probably want to look at others -- so the agent
will show you a few other homes, too. Eventually, you and the Realtor
will zero in on what you need and like in the proper price range and you
will make an offer.
That is how most buyers find their Realtor -- by "accident.
Shopping for an Agent
Your first step should be to shop for a Realtor, not to shop for property.
Shop for a Realtor the way you would shop for a good attorney, accountant,
mechanic, plumber, doctor, financial advisor, or other professional.
Now that we have the Internet, you have more information at your fingertips
than buyers from the past. The web is a good place to start. There are
lots of directories that list agents, plus search engines, too. Peruse
the sites. If an agent has lots of information on their site and seems
genuinely concerned about informing homebuyers, that's probably a better
choice than someone whose web site only talks about how good they are.
The client should be the focus, not the agent. At the same time, agents
have to market themselves aggressively -- or else you won't notice them
How to Conduct the Search for a Good Realtor
A new alternative to finding a Realtor is the internet. Look for Realtors
who advertise themselves, not property. That way you have a pretty good
idea you are getting a "buyers" agent instead of a listing agent.
Look to see if their web page offers something to you in the way of information
or other services instead of just telling you they are "number one."
You want someone of value to represent you, not someone who is full of
"puff."
Interviewing a Good Realtor
In addition to wanting someone of value to represent you, you want someone
sharp enough to ask you questions as well, including your financial and
debt information. By asking these questions, a good Realtor will be able
to determine the proper price range you should be looking in. By asking
about your family, an agent will be able to tell if what you need in a
home is something available in your price range. You want a Realtor who
is bold enough to talk straight with you instead of always telling you
what you want to hear.
When a Realtor Asks to Meet With You
Finally, any decent agent will always ask for an appointment to meet with
you, too. It is only natural, since they earn their living by commissions.
However, Realtors are also supposed to act as your agent, looking out
for your interests before their own. You want a Realtor who takes that
responsibility very seriously. If someone seems too much like simply a
salesman, then maybe you should look a little further.
Thinking Ahead About "Buyers Remorse"
If you are thinking of buying your first home, you should take out a pen
and paper right now and draw a line down the center of the paper. Calmly
and logically, think of all possible advantages to buying a home and write
them down on one side of the page. Afterwards, you should list all the
disadvantages on the other side of the line.
Then save the list in a place you will be certain to remember.
Sound silly?
Of course it sounds silly. Who needs to write down their reasons for buying
a home? After all, home ownership is the central theme to living the "American
Dream."
Naturally, while in hot pursuit of this dream you are going to be excited
about the future -- researching neighborhoods, searching MLS sites on
the internet, viewing homebuyers magazines full of appealing homes that
are just "minutes from the beach" with "fantastic views"
and "cozy family rooms."
Next comes the really good stuff looking at houses. Full of imagination
and optimism for the future, you wander about each home envisioning a
happy and contented life for you and your family. The first house may
be "too big," and another may be "too small," but
you are certain to find one that seems "just right." So you
make an offer and wait anxiously and excitedly for the counter-offer.
Finally, you and the seller agree on terms and you have bought yourself
a brand new home!
Congratulations! Break out the champagne and celebrate!
However
Later that night or perhaps the next day, you start to worry about whether
you made the right decision. Doubtful thoughts will intrude. Can you afford
it? Is it the right time? Should you have waited? What if you lose your
job? What if this happens? What if that happens? Anxiety and stress set
in. Sleep may be hours in coming.
This is a normal response to buying a home and is called "Buyers
Remorse." You have just made the single biggest purchase you have
ever made in your life and it can be downright scary. Logic deserts you.
Worry takes over.
Remember your list?
Back when you were thinking semi-logically, you were fairly rational about
home ownership. You catalogued the good and the bad, weighed them against
each other, and decided that buying a home was the smart thing to do.
Reviewing the list will help resolve your buyers remorse.
You will not be totally stress-free, but it will help.
Of course, in spite of this advice you will probably not take the time
to make that list now before you buy a home. Hardly anyone ever does.
So when buyers remorse sets in and you remember reading this column, here
is what you do...
...get a piece of paper and draw a line down the center. Then
You know the rest
|
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
TOP
|
