Since I’m a general know-it-all, and like unlike most people do not have problems managing finances, people ask me about real estate issues a lot.
If they have a decent attention span and live in Seattle, I point them to the Seattle Bubble Blog. It does a great job of debunking a lot of the fluff that many people with a vested interest in selling something commonly tell prospective clients.
Without talking about market conditions just yet, let me give you my brief outline of why buying real estate might be an ok idea.
First, you the reader, should know that if you live in a nice city, you are likely better off renting. This is a fact unless you live someplace crazy-rural or you make way more money than most. You are better off just saving and investing your money than getting tied up in the never ending cashfest that is home ownership. Here is a New York Times calculator to play with that basically proves this if you use it correctly. Give it a try knowing that historical appreciation rates for property is under 5% and for the last two years it has been in negative numbers.
If you’re one of the few single or combined incomes that could use a large enough deduction from your income taxes and get a little bit of investment from it, lucky you. If you’re not sure, think about the following:
- The interest on your mortgage is deductible
- The added property taxes are not
- Neither are the costs for upkeep. (Note that repairs are not tax deductible, but improvements to a home are. This is why most people who can afford it add improvements instead of just remodeling.)
Basically the money you save by not paying rent needs to be greater than the total amount you pay out in closing costs, taxes, interest, and the amount “saved” by not giving it to the taxman. This is not most people. Most people are told that housing is a great investment, so they buy it anyway. This is part of why values of the housing market are falling like a stone right now.
So you’ve run the numbers. You understand the realities of taxes and financing. You’re considering that housing is not an investment, but a luxury that may possibly yield a profit in the end if you get lucky. How do you get the best deal? After having personally owned a couple of different residences and been involved in the transactions of several others, I have some suggestion that you may find useful.
1) Ditch your emotions and make the best deal you can.
Most buyers make impulse buys because a kitchen is pretty, the bathrooms have been remodeled, or there is a nice view. Don’t be that guy. Be critical and see it for what it is. It is a business decision. Make the best deal possible for you. This means buying the most value for the least of your money that you can. The only person with a vested interest in this is you.
Your real estate professional, if you are working with one, is motivated by the sale and the possibility of referral and repeat business. They have other commitments. They only have so much time to give you. Do not make the mistake of thinking that they will find you the best deal. They only want to find you a deal that you are happy with so that they can get paid. Romanticizing ideals past these simple motives does you no good.
Look at a lot of options yourself. Get a sense of what things are worth by yourself. Know how much you are willing to spend and your financial limitations.
2) Get the right tools for the job
If you don’t know what you’re doing, you’ll likely need to work through a full service professional to make sure you don’t get completely hosed. If you’re done this dance before, why pay for it? You will understand:
- The bidding process and what conditions can be put into an offer
- Inspection and conditions for sale
- Closing details and games people will play with you
- What can go wrong
- The idiosyncrasies of the area
If you can handle these things, think about using a low cost broker or a tool like Redfin. The buyer’s agent commission is usually something like 3% of the value of the property. It can be more of a builder offers incentives because of their greater profit margin they have available to make deals, or less if the seller has stipulated so in the MLS listing. Sellers of moderately priced homes usually offer 3% so that buyers agents will bring prospective buyers to see the property. If the seller was offering 2.5%, the thinking is that they will get less interest because the agent wants their cash. It is perfectly sensible and is one of the many details of the experience that can be misunderstood.
If you use a site like Redfin, they capture about 1% of the deal and issue you a 2% rebate.
So, tools and resources that should be examined include:
- Brokerage sites such as Redfin
- Appraisal sites such as Zillow, Eppraisal, and Cyberhomes
- Foreclosure information sites if you want to take the added risks involved. These are usually funded by a monthly membership fee.
3) Spare no ones feelings
This is not a relationship. You are not dating or paling around with friends. This is a business transaction. Be brutal and fight for your best deal. Make low offers. What you do with your wallet is what a piece of property is worth. It is not your responsibility to fund someone’s retirement or otherwise give them a fat profit. You have enough to worry about without thinking about the goals on the other side of the table. Big money means that the details count for a lot.
4) The details are gold
Always get an inspection by inspectors that work for you. It is worth the money. Look at the tax records when constructing your deal. Try to know as much as possible as information is your friend.
5) Good luck
When you have done all of your homework and come up with a sound strategy for buying in a particular area, get your pre approval from for financier and start making offers. Finding the best deal on financing is also no simple matter and be aware of how referrals and business relationships may have vested interests.
If I’ve pointed you to this write-up after you’ve asked me about “so what’s the deal with buying a house,” let me know if it helped you.