A First-Time Buyer's Battle Plan
By Jeff Schnaufer
With tax credits, low interest rates and falling home prices, the number of first-time homebuyers in the market has increased to approximately 47 percent, up by more than 10 percent since 2006, according to the National Association of Realtors.
But even with these incentives, the process of buying a home for the first time hasn't gotten any easier. The following step-by-step guide will help you get an idea of the ride to come - plus a few tips for making the journey go smoothly.
If you want to buy a house, you need to know what you can afford - and what the bank will loan you. Down payments can range from 3.5 percent for an FHA loan to 20 percent or higher, if buyers are looking to avoid potential mortgage insurance. The remaining funds to purchase the house must come from a bank, credit union or other lender. A mortgage broker may also help compare lenders. Interest may be paid at either a fixed year rate - usually 30 years - where the interest remains the same over the life of the loan. Adjustable rates, which may start lower than the fixed rate but may rise over the fixed rate within a few years, can create problems for those who do not plan for higher rates or loss of income.
"This is one of the problems that led to the mortgage crisis," says Peter Richmond, author of "The Complete Idiot's Guide To Buying A Home" (Alpha, 2010). "I tell people to sit down and take a realistic look at your financial situation, including what your payment is on the loan and to look at the worst case scenario: if you lost your job and the adjustable rate hit the ceiling. If you can still afford the payment, fine.
"Also, when you are doing your financing, no matter how much you want the house, don't put yourself in a corner," Richmond says. "You should own the house, not the other way around."
FINDING AN AGENT
Real estate agents work on commission and are responsible for researching available homes, finding comps (comparable home sales in the area) to help you figure out an offer and presenting your offer to the seller.
"You want an agent with many years' experience in the areas you're searching, but you don't want an agent who may also be getting a commission from the home seller to get you to buy that home," says Bruce Hahn, president of the American Homeowners Foundation, Arlington, Va.
"What you really want to do is interview the agent," says Ron Phipps, president-elect of the National Association of Realtors. "Talk to the person and see if you relate to them. Go online and get evaluations, talk to people who have worked with the agent and look at their professional experience."
FINDING THE RIGHT HOME
While "location, location, location" is important, many people forget to look at the big picture.
"Get an aerial view," Phipps says. "Plug into Google search and see how close the home is to waterways, open spaces ... If you find there is a landfill a couple miles away, that may be something you want to know. In some areas you have a freeway behind your home that may not be visible."
Seek out sellers and neighbors may to answer questions about schools, property taxes, crime, parks and traffic.
When looking at townhomes and condos, Phipps suggests asking about condo fees and the history of special assessments for project such as replacing the roof, where unit owners share the costs. If the roof appears to need repair, find out what reserves are in the repair fund.
George R. Moskoff, a licensed contractor in Sebastopol, Calif., warns against the "shroud of joy" that accompanies buyers, preventing them from looking at the house critically.
"The buyer is thinking 'How can I fit my furniture in living room?', 'Where will the TV go?' and 'Where can we put our kitchen table?' instead of 'Why does it feel so drafty in here?' or 'How come there are brown stains on the ceiling over in that corner?'" Moskoff says.
Robert Irwin, author of "Tips and Traps When Buying A Home" (McGraw Hill, 2008), suggests buyers expand their horizons.
"The biggest mistake new buyers make is to limit themselves to one or two neighborhoods or home styles," Irwin says. "The bigger an area you cover and more varied the type of home you look for, the more likely you are to find something satisfactory."
The most important question, Moskoff says, is to ask yourself: Will the house work for us?
"It's not a bad idea to list your or your family's needs on paper," Moskoff says.
Buyers are often expected to pay for a professional inspection of the home, usually between $150 and $300. Some real estate experts suggest inspecting the home before making an offer (to see what you might be getting into), while others suggest inspecting it after the offer (to see what fixes you can get the seller to pay for under pressure of losing the sale). Either way, experts suggest hiring your own inspector (not the agent's) and accompanying them during the inspection, asking questions and making a list of your own concerns along the way.
"Because of liability concerns, the written inspection report is often bland and may leave out many important concerns," Irwin says. "But, speaking informally with you on the inspection tour, the inspector may reveal a host of potential problems that never get into the written report."
Once you've decided upon a home, you make the offer, which includes putting in "skin in the game" money according to Alethea Smock, a broker with ZAPA Realty in the Denver area. This shows the buyer you are serious about purchasing the home. This sum may be applied toward your down payment. The offer also includes other details - dates of inspection, closing and possession, and may include requiring the seller to make certain repairs on the property or asking for some other property to be part of the deal. You may have to bid against other offers from other buyers, as well. Most offers receive counter-offers from the seller, resulting in a back and forth until the deal is struck - or lost. Some tips:
"Don't fall in love with one property," Irwin warns. "Be willing to lowball the seller and possibly lose the property, in the hopes of getting a bargain."
Michael Schatzki, founder of Negotiation Dynamics in Far Hills, N.J., says, "First-time homebuyers tend to be younger and less experienced as negotiators. As a result, they often pay more than they should."
Don't be afraid to start low, given the oversupply of houses on the market, Schatzki says. If the house is priced at $300,000 and similar home have recently sold for $260,000, in a normal market you would probably offer $245,000.
Don't expect the seller to agree with your offer, Schatzki says.
"What you are looking for is a counter-offer," Schatzki explains. "If you don't get a counter-offer, you can increase your offer if you want to. If you do get a counter-offer, then the game is on. Concede slowly, be patient and take your time."
Richmond says he likes to have his clients write a cover letter, explaining to the seller why the buyer loves this house along with other positive comments that reinforce their interest in the property.
"This is especially important if there are multiple offers," Richmond says. You are essentially trying to make them feel like you are a member of the family."
Negotiating an offer may take weeks or months, but nothing sinks a sale quicker than a critical comment, Phipps warns.
"I had a house several years ago," Phipps recalls. "The woman who owned it painted the house the same color of the 1956 Valiant she had. She loved that car. One of the buyers I had said this was the worst color he had ever seen. Said it in front of the buyer. The buyer said she would not sell to this person."
"Don't give the seller a reason to be offended," Phipps says.
CLOSING THE DEAL
Your final step will be to close the deal. To get to this point, the seller must accept the offer. One of the most important tips is to humanize the deal whenever possible. Sellers take pride in their homes and want to see a buyer who appreciates the home they have created.
"The warmer and fuzzier you can make it feel, the more likely you are to make something work out with the seller," Richmond says.
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