Important Considerations for First Time Home BuyersMarch 22, 2016
For most people, their home will be their biggest investment, yet many do not treat their home as an investment when they are going through the buying process. With over 30 years of real estate sales background, I have observed that most people are making an emotional purchase, not an intellectual one. Buyers place improper emphasis on certain characteristics, features or aesthetics, over that of location. Purchase of a well-located property will offer greater quality of life, a great investment, and a more liquid/marketable asset when it is time to sell.
Well-meaning buyers have “the list” of how many bedrooms and bathrooms they want, the size of the garage or kitchen, a private backyard, a place for a man-cave, etc. but most of these are wants, not needs. It is often said in real estate sales that “buyers are liars.” What this means is that initially a well-defined list of needs and wants may be quite different than the property eventually purchased. Many buyers place a lot of emphasis on “the list,” when the single most important factor should be location.
It is often said that the single most important thing about any piece of real estate is its location, location, location. Yet buyers often times specify a wide geographic range thinking the search for the perfect house requires such a large expanse. What is location? It includes many factors, such as distance to major transportation routes, employment centers, and the urban core; convenient availability of goods and services; perceived quality of schools; proximity to recreational amenities; etc. A more specific consideration relates to the proximity of your job. If your job may have you change locations within the city, it is best to remain central to avoid the expense and hassle of moving.
As a home is typically the biggest investment, over time, a well-located house will out-pace average appreciation rates of the larger market. Even if it is more than 1-2% more per year, compounded over an average-holding time of 7 years, is significant. For example, and assuming a $250,000 house:
@ 3% = $307,468
@4% = $328,983
@5% = $351,775
The difference between 3% to 5% is $44,000 more in equity.
One of the disadvantages of real estate is that it is not a liquid asset, and takes preparation and time to bring to market and eventually sell (liquidate). A well-located home will sell sooner than a poorer-located home. It is even important for buyers to consider location factors that they may not necessarily be interested in, such as proximity to schools, parks, trails or other amenities. But why, you might ask? The answer is simple: because it will be important to a future buyer. Schools may not be important to a buyer with no plans for children, but because a wide amount of the population desiring to live in the area do think it is important, there is significant supporting demand in this significant market segment.
Once you figure out location and neighborhoods, it is time to find an agent to represent you. It is relatively easy to figure out who are the few agents that specialize and know the specific sub-market you are interested in. Not only are they a wealth of information about the general location, they are often aware of listings before they become public. Additionally, agents that are well-known or specialize in the area are also the most time-tested experienced agents.
An agent will want you to sign a contract that they represent you exclusively, no matter what house you buy and when (typical period is 6 months to 1 year), and whether you buy the house through them or not. This is a very big “buyer beware”. Although most buyer-representation contracts are standardized through the association of Realtors, many buyers do not know they are signing on that long, and many times buyers end up paying a commission to the agent they first signed a contract with, after they made a purchase with some other agent. Sale and transfer records are easily accessible online, and they are routinely viewed by agents armed with a signed buyer-representation contract. Before you sign any buyer-representation contract, make sure you are confident the agent is experienced not only in the area you are looking, buy also has years of experience behind them to make sure the purchase and paperwork process are properly and efficiently exercised. A contract is entering into a legal relationship, and getting out of it can be as expensive as getting out of a marriage. Typically a buyer-representation fee is up to half of the gross commission rate, typically ranging from 2.4% to 3.5%.
After all location factors have been considered, and you are working with a knowledgeable and experienced, there are still many things to consider and be aware. Such as:
Should I be concerned about free concessions or $0 down?
Is new construction a good “value”?
Are there physical characteristics I should be aware of?
Can I know with any certainty that this house is defect-free?
I have a house, now what about maintenance?
These questions and more will be answered in subsequent articles.