Buying a house is the biggest financial transaction most people ever make. And because you may only buy one house in your lifetime, there's a risk that you'll make a lot of mistakes.
And most of the people you'll be dealing with in the home-buying process will be more experienced than you. There's a danger that they'll take advantage of your ignorance.
So here are 6 ways to be a savvy home-buyer. These tips will help you find a home that's right for you, avoid common pitfalls, and could save you thousands of dollars in the process.
1) Only buy a home if you plan to live there for a long time
(Ed Suominen)
Many people want to buy a house as quickly as possible because they think paying rent is "throwing money away." But buying a home too quickly can be an even bigger financial mistake than not buying at all.
For starters, the idea that renting is throwing away money is a little misguided. Almost everyone needs to take out a mortgage to cover the cost of their first house. And in the first few years of a 30-year mortgage, only a small portion of each payment goes toward paying off principal. The majority of the money goes to interest payments, which is essentially "rent" you're paying the bank to use their money. Paying "rent" to a bank isn't any less wasteful than paying rent to a landlord.
More importantly, selling a house and buying another one is an expensive process, typically costing between 6 and 10 percent of the value of the house. So if you buy a house and then need to sell it a couple of years later, these transaction costs will wipe out any equity you might have accumulated.
So you should only buy if you plan to stay in the same house for five years or longer. If you expect you'll need a different house in the next few years — because you might move to a different city for work, you'll need a bigger house to accommodate a growing family, or you simply aren't sure what kind of house you'll want in a few years — it's better to continue renting until you're ready to settle down.
2) Take your time shopping for a house
When it comes to home-buying, haste makes waste. (Guy Sie)
Once you've decided to buy, it's important not to rush the house-hunting process. "When I've had clients make real estate deals they've regretted, they've almost always coincided with time pressure," said Zach Teutsch, a personal finance coach in the Washington, DC area, in a 2014 interview. "You almost always overpay relative to what you would have paid if you were on a more cautious timeline."
That means that when moving to a new city, you should consider renting for a few months while you search for a permanent home. While it might seem like a waste to pay rent when you could be building equity, the amount you overpay due to a hasty purchase — or the cost of having to move again after buying a house that doesn't meet your needs — could dwarf the cost of a few months' rent.
3) Choose your realtor carefully
In theory, you can buy a home without a real estate agent, but for most first-time buyers it makes sense to hire a professional to guide you through the process. Many buyers find realtors by asking friends and family for recommendations. You can also find a realtor through an online directory.
No matter how you find potential realtors, it's important to ask for references. The best sign of whether a realtor will serve you well is whether his past clients were satisfied with their service.
When evaluating real estate agents, it's important to keep in mind that their incentives aren't aligned with your own priorities as the buyer. You want the best home at the lowest price — and you may be willing to wait quite a while for the right deal to come along. In contrast, agents make more money when they can close deals as quickly as possible — and they make more money when their clients spend more.
The National Association of Realtors has an ethics code that obligates its members to promote the interests of their members, so in theory this kind of conflict of interest shouldn't matter. But of course, some agents are more ethical and conscientious than others.
"One indication that a person is dealing with a good realtor is if they're ready to make an offer and the realtor encourages them to think about whether that property is in poor condition or overpriced," Teutsch told me. "It's a good indication if your realtor is willing to tap the brakes instead of the gas."
Agents get paid whether or not their clients get a good deal. Indeed, if a buyer overpays, his agent actually gets a slightly larger commission. But a good real estate agent will still advise caution if he feels a buyer is bidding more for a house than it's worth, or overlooking serious flaws.
So when you're choosing a realtor, it's good to ask prior clients how often he warned them away from making offers on properties. If a prospective realtor regularly encouraged customers to keep looking for a better deal, that's a good sign. On the other hand, if buyers say they felt pressure to make an offer on every property they saw, that's a sign that the agent may not have clients' best interests at heart.
4) Set a budget and stick to it
You probably don't need this much house. (Kay Gaensler)
Buying a house is an exciting experience, and there's a natural temptation to buy the biggest house you can — barely — afford. But Teutsch told me that most people will be happier in the long run if they buy a house that's cheaper than the maximum amount a bank will lend them.
Few things are more stressful than owning a house you can barely afford. It can put you one layoff or medical emergency away from financial disaster. It can also limit your freedom to take a more rewarding but less lucrative job, start your own business, or cut back your hours to spend more time with loved ones.
So it's important to decide how much you're willing to spend and then refuse to go over that amount. One way to do this, Teutsch says, is to set a limit for yourself during the mortgage pre-approval process. Rather than getting pre-approved for the maximum amount the bank is willing to lend, he says, you can ask to be pre-approved only for the amount you're planning to spend.
Once you have this document in hand, show it to your realtor — and don't mention that you could have gotten pre-approved for a larger sum. If you're trying to buy a house for less than $400,000 but your realtor knows the bank is willing to lend you $600,000, he might encourage you to consider homes above your price limit. On the other hand, if your realtor knows you're only pre-approved for $400,000, then he'll only show you homes below that limit.
This might also give you a bit more leverage in negotiations between your agent and the seller. Obviously it would be unethical for your realtor to tell the agent on the other side of the table that you can afford to pay more. Still, your realtor may not be a great bluffer. When he tells the seller's agent you can't afford to pay any more, he's going to be more convincing if he actually believes it.
You can always go back to the bank and request pre-approval for a higher amount if you find the lower ceiling to constraining. But the need to take that extra step will help prevent you from making an impulsive purchase that you might regret later.
5) Pick your own inspector
(thom)
After you've made an offer on a house and it's been accepted by the seller, the next step is to get the house inspected for problems such as leaks, termites, or mold problems. Most real estate agents will offer to put a buyer in touch with an inspector. But it's generally a good idea to choose an inspector independently.
An inspection comes near the end of the home-hunting process. If the inspector doesn't find any problems, the deal will go through and the agent will get his commission. On the other hand, if the inspector does find problems, it will mean more work for the agent. At a minimum, it will mean an additional round of negotiations to get he seller to compensate the buyer for the problems. If particularly severe problems are discovered, the entire deal could fall through, which means the house-hunting process will have to start all over again.
So while it's in the buyer's interest to choose an experienced and aggressive inspector, it's better for the real estate agent to have an inspector who isn't so picky. While few real estate agents will deliberately recommend an incompetent inspector, you might get a more thorough inspection if you decline your agent's recommendation and choose an inspector based on your own independent research.
6) Consider using Redfin instead of a conventional agent
(Timothy B. Lee)
Real estate agents perform a variety of useful services, including advising the client on the state of the market, helping the client view homes for sale, writing offers, negotiating with sellers, and guiding the buyer through the purchase paperwork.
Traditional real estate services are highly personalized. An agent will often drive a buyer around town, showing her neighborhoods that meet her criteria and explaining the finer points of the local market. A traditional realtor will serve as a single point of contact for every step of the home-buying process, from initial comparison-shopping to signing on the dotted line.
This approach works well for many buyers. But others prefer a more self-directed approach. And for them, the online realtor Redfin can be a good option.
Redfin performs the same essential steps as a conventional buyer's agent. A salaried Redfin agent will show you houses, write offers, and negotiate with sellers on your behalf. But Redfin uses a team-based approach where different functions are performed by different agents. And the Redfin model depends on customers to take more initiative.
"Redfin was perfect for a type-A person like me because it made it really easy to stay organized and on track," said Adrienne Aldredge in 2014 — a few months after she bought a house in the Portland area. "Their agents are very knowledgeable and responsive, but they are not going to hand-hold you through finding houses to view."
One of Redfin's traditional selling points was that the company offered big rebates to customers. Traditionally, the buyer's agent gets a 3 percent cut of the sale price — meaning your agent gets about $12,000 if you buy a $4,000 house. In the past, Redfin has rebated as much as half of that commission back to customers.
But in recent years, Redfin has become more like a conventional realtor. They now offer a more extensive, and personalized service. That has meant smaller rebates.
For example, back in 2014, Redfin was offering a $3,300 rebate to buyers buying a $400,000 house in Washington DC. Today, the rebate has shrunk to just $1,800. On an $800,000 house, Redfin's rebate has shrunk from $8,600 in 2014 to $4,800 today.
So if you're intimidated by the idea of searching for properties online, or you want a single point of contact to take you through the home-buying process step by step, a traditional realtor might be worth the extra money. A traditional realtor is also a good choice if you're buying on a tight schedule or you have your heart set on buying in a specific, high-demand neighborhood.
But if you're willing to be patient and are comfortable searching for stuff on the internet, Redfin can save you some money.