Buying your first home is a huge milestone. Purchasing real estate properties is a heavily involved process and most go into it without much prior preparation or experience. Most people delegate the paperwork and legal work to their lenders and agents. With all the daunting work involved in buying a home, many develop apprehension toward buying, opting to continue renting. However, investing in a home can actually be an incredibly rewarding thing if done properly. Even a home purchased in bad condition can still turn out to be a great investment. If you’re looking to invest in a home, consider these factors.
The Condition of the Home
Before you even make a down payment, always be sure to get a full home inspection. An inspection will provide details on the condition of the home’s appliances, roofing, gutters, foundation and any other material facts regarding the home’s physical condition. A buyer wants to know what they’re purchasing. Knowing this information allows them to know what exactly they need to invest in long term. An inspection gives you insights into how to best improve the value of the house.
Once you purchase a house, you can begin upgrading it to increase its resale value. Owning a home means having to invest time and money into maintaining that home. Keeping up a property’s condition is crucial in order to make money on a flip.Typically most lenders will require an appraisal along with the inspection. That will give you a clear picture of what the property is worth in its current state. Thus, with any upgrades you make you’ll know how much you put into the house and what you can expect to get for it post-upgrades.
Should there be anything immediate that needs replacing before the final transaction, the buyer can negotiate. The full inspection report will include everything down to missing light fixture covers. Typically the buyer should only ask for major things to be covered by the seller. The more a buyer asks to see, the less a seller is likely to cover. The trick is to negotiate well and get the best deal possible.
Consider All Associated Costs
Buying a house is not an easy purchase. It takes a lot of time and there are all sorts of costs that go with the process. When you invest in a home, you’re not just paying the final closing price, you’re also paying other various fees along the way. From agent fees to expenses tacked onto the final price, many people are unaware of the various cost expenditures associated with buying a house.
Earnest Money vs Down Payments
One cost that not everyone is aware of is what is called ‘earnest money.’ In simplest terms, think of earnest money as a deposit paid to the seller. This is not the same as a down payment. Down payments, typically 20% of the total cost of the house, are payments made to the lender to approve the loan. Earnest money is a payment made to the seller placed in an escrow account after the seller accepts the buyer’s offer. This payment is made to indicate that the buyer is purchasing the home in good faith. Not everyone is aware of the difference. If you’re buying your first home, make sure you’re aware of these costs and are prepared to make them. This is part of budgeting for buying a home and why having a detailed budget with money set aside for various payments is an important part of the home buying process.
Inspection and Agent Fees
Home inspections are another cost buyers will need to be prepared for. A home inspection is a necessary step but does not come for free. Buyers will need to hire an inspector. The fees are not expensive but it is something to factor in. The average cost for a home inspection is $315. Smaller homes under 1,000 square feet can be as little as $200, with larger homes over 2,000 square feet veering closer to $400 and up.
Other hidden fees not readily understood by prospective buyers include fees charged by buyer’s agents and brokers. Agents usually tell buyers that the seller pays the fees, that however is not completely true. Typically these fees are around 5-6% of the final closing price. However, often times sellers factor this into the equation and set their pricing to account for that. In essence, buyers end up footing the bill for these fees in some instances by paying a higher closing price for the home.
Prepare for the Negotiation Process
Buying your first home is not the same as buying a cup of coffee. It’s not as simple as just looking at the menu price and pulling out exact change. Once a buyer submits and offer, their agent writes up a contract that is then presented to the seller. The seller then has the option to accept the offer or make a counter offer, presenting a contract of their own back to the buyer. Once both the buyer and seller have agreed to terms, each party signs the contract and the property is then considered “under contract.” At that point, no other party may purchase the house unless the deal falls through.
One other component involved during the negotiation process include determining who pays for repairs identified during the inspection.
The Buyer’s Loan
In order to buy a home you will need to first be approved for a loan. Assembling the paperwork for a loan application is the most tiresome task in the process and a reason why many people put off buying. Lenders are mainly looking for two main factors when assessing an application; credit history and income history. They want to make sure that you are financially stable so they can provide a loan with confidence that the buyer will pay it back. In your application you’ll need to provide tax returns, a couple months of recent pay stubs, debt to income ratio, bank statements and statements regarding any other assets, and a full credit report. For those without any homeowners experience, lenders will likely ask to see some rent history. Making sure all your finances are in order is important so that lenders can approve your loan.
Due to the amount of work involved in this process, buyers should get approved first before they look at a single home. One of the driving factors behind deals falling through is the buyer’s loan situation. Always get approved first so that something doesn’t come up your loan application review that prevents the deal from going through. In some cases you may not even be able to make an offer without being pre-approved.
Invest Wisely When Buying your First Home
Buying a home is an investment. When you invest in a property you control your own destiny. It’s important to maintain the home you buy and take cost effective measures to ensure your property remains in good condition, even if that means improving the condition. This will directly benefit you later on when you sell your home. Like any big investment, buying a home is a long and complicated process that involves lots of paperwork. Being prepared for the associated costs is crucial as many often overlook various fees and hidden costs. Invest wisely and you will set yourself up for success.