New homebuyers have made every mistake in the book -- I even made a few myself when I bought my first home. They've overpaid, overspent, and bought homes they just could not afford. And most of the time, these critical missteps happen simply because buyers aren't informed or don't ask the right questions. It's painful to watch, especially when a huge percentage of buying blunders can been avoided.
Here are 6 of the most common missteps I wish I knew to avoid the first time around:
1. I wish I hadn't borrowed the full amount the bank told me I could afford.
Just because you're approved for it doesn't mean you should buy the most expensive house you can. As a general rule, it's wise to take 20 percent less than what the bank will lend you. Let's say you go to a bank or a mortgage broker, and after evaluating your finances, income, and savings, you qualify for a $400,000 mortgage. Though it may be tempting to take the full amount, knocking a fifth off the loan amount -- which comes to $320,000 instead -- will automatically get you into a house that's more affordable, safeguarding your family and your financial security.
2. I wish I hadn't been suckered in the by the extra-low short-term adjustable rate mortgage.
Always go with a traditional 30- or 15-year fixed loan and skip adjustable, creative financing, balloon payments, and teaser loans. You never know what life may bring, so having consistent mortgage payments for the entire length of the loan allows you to better predict your ability to pay each month. A fixed mortgage offers confidence that the payment you have today will be the same ten or fifteen years from now, no matter how the market, interest rate, or the economy changes over time.
3. I wish I hadn't used up all my cash to buy the house.
Your home purchasing costs don't stop with the down payment. You have to factor in closing costs, appraisal fees, buyer's broker fees, loan application fees, loan broker fees, structural inspection fees, and so on. The down payment and the closing are what I call the "up-front costs." After that, you've got "ongoing costs," which primarily consist of property taxes, homeowners insurance, hazard insurance, condo, co-op, or HOA fees, and moving expenses. Don't be left with a zero balance in your checking account by the time you get the keys; factor in these additional costs ahead of time.
4. I wish I hadn't wasted my time hunting down those foreclosures and short sales, only to miss some really good deals.
Just because it's a distressed property doesn't mean it's a good deal; foreclosures aren't a guaranteed bargain. If you looking to get a steal (and you want it in a timely manner), avoid short sales, and even some foreclosures. These deals can drag on for months and generally have higher interest rates. And even if the distressed home you're looking at is well-priced, the hoops you'll have to jump through may just have an opportunity cost high enough to offset your monetary cost savings.
5. I wish I knew the one essential question to ask before I had bought my condo.
There's one question that can save you thousands of dollars and help you avoid a condo building (or community with a homeowners association) that will become a money pit: Has there been any discussion of possible future improvements, changes, renovations, or maintenance or any financial difficulties that would result in an assessment or charges to be leveraged against all condo/home owners? Make sure to get the answer in writing. This question is critical because the condo association board must answer honestly or it could be held liable. All condo meetings must provide notes that can be subpoenaed, so any discussion of assessments, current or future, could be proven.
6. I really wish I had talked to the neighbors before I bought the house.
A few years back, I bought a wonderful home in the Hollywood Hills. Unfortunately for me, I did not follow my own advice and mingle with the neighbors to learn about potential problems ahead of time. And it caused me many sleepless nights -- literally. My first night in the house, I woke to the sounds of two barking, yelping dogs that howled and bellowed until morning. I couldn't believe it. The next night the same thing happened. I later found out that the seller had been fighting with the neighbor over the barking dogs for six months. The surrounding neighbors had also been complaining, but the awful, miserable owners of the dogs just didn't care. It took me more than a year of working with L.A. Animal Control before the owners agreed to take responsibility for the problem. I was unable to put the house on the market for an entire year, because I would have had to disclose the problem, and I would have had to take a steep discount prior to resolving the issue. Otherwise, I would have been liable for not disclosing, just as the man who sold the house to me without disclosing it was. Had I chatted up neighbors, I would have been much less tired all year long!
We all make missteps when we do something for the first time. It happens, it's life, but buying a home is one of those things that's just too important to flub. Keep in mind these common mistakes to ensure that you buy safe, sane, and secure when it comes time to close on that home.
ALL: What's the one thing you wish you knew before you bought or rented your last home?
Avg. listing price: $1,230,880 Median household income: $110,929 Pct. households $200,000+ income: 30.3% As of 2010, the median income of households in San Carlos was more than double the U.S. median of $51,914. Over 30% of households in San Carlos earned more than $200,000 per year, more than five times the national rate of 5.4%. San Carlos is one of the most expensive housing markets in the San Francisco metropolitan area. Over a twelve month period, ending in October, it had the nation’s highest median home price per square foot at $473 among all homes listed, according to Trulia. In San Francisco, the median age of home inventory was just 45 days as of the third quarter of 2012, according to Realtor.com, lower than in all but seven markets. Read more at 24/7 Wall St.
Avg. listing price: $1,232,167 Median household income: $74,489 Pct. households $200,000+ income: 18.7% Carmel-by-the-Sea, a small coastal city in California, is well-known for its former mayor, actor Clint Eastwood. Currently, the average four-bedroom, two-bathroom home in the city lists for more than four times the nationwide average listing price of $292,152. With nearly 19% of households earning more than $200,000 in 2010, many families and individuals in the small town can afford expensive properties. One house, despite being not much larger than 2,000 square feet, is currently listed for nearly $4.5 million. Read more at 24/7 Wall St.
Avg. listing price: $1,238,208 Median household income: $91,082 Pct. households $200,000+ income: 14.7% Kailua is one of just two cities on this list not located in California. The O’ahu Island city is 12 miles northeast of Honolulu, which had a vacancy rate of 2.7% — better than most areas but considerably worse than the other areas on the list. As of October, the median price per square foot for a home in the Honolulu area was $398, more than in any other metro except for San Francisco. According to Trulia, a 0.75 acres plot of land, which includes 128 feet of beachfront, is currently for sale for $16 million in Kailua. Read more at 24/7 Wall St.
Avg. listing price: $1,312,250 Median household income: $146,069 Pct. households $200,000+ income: 53.0% The average listing price for a four-bedroom home in Rye is more than $1,300,000, or more-than $1 million above the U.S. average. Employees in the often high-paying finance and insurance industries accounted for a 27.8% of employed population in Rye in 2010, well above the 7% average rate nationwide. As of 2010, 53% of households earned more than $200,000 annually, more than any other expensive city, and nearly 10 times the national rate of 5.4%. Additionally, just 1.3% of households lived below the poverty line versus 13.8% nationwide. Among the properties available for sale are a five-bedroom, 7,446 square feet waterfront home for $12.9 million and a 34.2 acre plot of land for $19 million. Read more at 24/7 Wall St.
Avg. listing price: $1,444,214 Median household income: $120,971 Pct. households $200,000+ income: 37.5% Los Gatos is one of several cities near San Jose on this list. Like these cities, Los Gatos likely benefits from the overall boom in the San Jose real estate market, which currently has the lowest vacancy rate of all metro areas surveyed by Trulia at just 1%. Currently, a number of unique properties are available in the city, including an 11,000 square feet property with an eight stall horse barn and a garage that fits 12 cars listed at slightly under $13 million. Also for sale is the former home of Apple Inc.’s co-founder Steve Wozniack. It is currently listed for $4.5 million. Read more at 24/7 Wall St.
Avg. listing price: $1,495,364 Median household income: $120,670 Pct. households $200,000+ income: 39.3% In Palo Alto, 48.7% of adults have a graduate or professional degree — well more than four times the national rate of 10.3%. The city’s proximity to Stanford University, one of the top universities in the nation, may be partly the reason behind the city’s highly educated population. Among the companies headquartered in the city are Hewlett-Packard and Tesla Motors. The city is a large employer of highly skilled employees, as 25.3% of its workers are employed in professional, scientific and management occupations, well above the 10.4% of workers nationwide. Perhaps the most famous resident of Palo Alto is Facebook founder Mark Zuckerberg, who Read more at 24/7 Wall St.
Avg. listing price: $1,506,909 Median household income: $107,860 Pct. households $200,000+ income: 34.9% Menlo Park is one of just four cities where the average listing price for a four-bedroom home exceeds $1.5 million. As of 2010, the median income in the city was slightly below $108,000. However, the recent Facebook IPO has been a windfall to the area. In June, real estate listing service Zillow reported that the “proportion of million-dollar listings” in Menlo Park — where Facebook is headquartered — rose by 87% between the company’s IPO filing and its first day as a public company. Among the houses available in Menlo Park are a five-bedroom home with a gym, theater area and wine cellar, which is listed for $4.6 million, and a six-bedroom 5,200 square feet home that’s listed for slightly under $5 million. Read more at 24/7 Wall St.
Avg. listing price: $1,582,434 Median household income: $145,023 Pct. households $200,000+ income: 43.1% Though home prices in the nearby San Jose metro area fell by 25.1% peak-to-trough, Saratoga is yet another example of how the Silicon Valley housing market has recovered. Currently, the median price per square foot for homes in San Jose is $337, according to Trulia, more than all housing markets except San Francisco and Honolulu. Prices for many homes in the area have skyrocketed, according to listings on Zillow. A home currently listed for nearly $10 million last sold for just over $2.1 million in 2000, while a home listed for $14.9 million last sold in 1994 for just over $1 million. As of 2010, 43.1% of Saratoga households earned more than $200,000 per year, while 40.9% of adult residents had a graduate degree, versus 10.3% nationwide. Read more at 24/7 Wall St.
Avg. listing price: $1,658,000 Median household income: $107,007 Pct. households $200,000+ income: 37.6% Outside of Northern California, Newport Beach is the most expensive city to buy a home. Home prices are so high in the city that in 2009 legendary bond investor Bill Gross bought a nine-bedroom, 11,000 square feet home for $23 million — and then tore it down. In 2011, Gross listed the empty plot of land for $26.5 million. Orange County as a whole has a vacancy rate of just 1.5%, among the ten lowest in the nation. Despite a 32.7% drop in home prices from peak to trough during the recession, Orange County’s median price per square foot is $265. This trails only the Honolulu, New York, San Francisco and San Jose metro areas. Read more at 24/7 Wall St.
Avg. listing price: $1,706,688 Median household income: $149,964 Pct. households $200,000+ income: 43.6% In Los Altos, the average four-bedroom, two-bathroom home lists for nearly $50,000 more than any other city in the nation. According to Coldwell Banker, for that price a buyer could purchase 28 similar homes in Redford, Mich., the nation’s cheapest housing market. In Redford, the average home lists for just $60,490. Currently, asking prices in the San Jose metro area have risen 12.7% year-over-year, according to Trulia. This is more than nearly every other metro area in the country. Read more at 24/7 Wall St.
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