Welcome to Loggerhead Realty
Buying a home or homesite
If you have decided
to purchase a home or homesite, chances are you have many questions. Here are
some tips to consider when planning your purchase.
When
you get a raise or accumulate some savings, you may find yourself confronted
by an innate instinct of modern civilized men and women.
The
desire to spend money.
It
begins simply, by going out to restaurants, then accelerates to purchasing clothing,
electronic gadgets, and since North Americans have a special fondness for the
automobile, you may even buy a "brand new car."
If
you're married or ambitious, a few months later your thoughts eventually turn
toward buying your own home. Or a move-up home, if you are already a homeowner.
Next,
you contact a loan officer to get prequalified for a mortgage loan. You
state your desired price and how much you can put down. You provide your
income and may even supply pay stubs and W2 forms. The loan officer methodically
crunches the numbers (by telephone, in person, or even over the internet).
"If only you didn't have this car payment..."
Debt-to-Income Ratios
and Car Payments
You see, when determining
your ability to qualify for a mortgage, a lender looks at what is called your
"debt-to-income" ratio. A debt-to-income ratio is the percentage of
your gross monthly income (before taxes) that you spend on debt. This will include
your monthly housing costs, including principal, interest, taxes, insurance,
and homeowner’s association fees, if any. It will also include your monthly
consumer debt, including credit cards, student loans, installment debt, and….
…car payments.
How a New Car Payment
Reduces Your Purchase Price
For example, suppose
you earn $5000 a month and you have a car payment of $400. At current interest
rates (approximately 8% on a thirty-year fixed rate loan), you would qualify
for approximately $55,000 less than if you did not have the car payment.
Even
if you feel you can afford the car payment, mortgage companies approve your
mortgage based on their guidelines, not yours. Do not get discouraged, however.
You should still take the time to get pre-qualified by a lender.
However,
if you have not already bought a car, remember one thing. Whenever the thought
of buying a car enters your mind, think ahead. Think about buying a home first.
Buying a home is a much more important purchase when considering your future
financial well being.
Do
not buy the car. Buy the house first.
No Major Purchase of Any
Kind
Review
the article titled, "Don’t Buy a Car," and apply it to any major
purchase that would create debt of any kind. This includes furniture, appliances,
electronic equipment, jewelry, vacations, expensive weddings…
…and automobiles, of course.
Don’t Move Money
Around
When a lender reviews
your loan package for approval, one of the things they are concerned about is
the source of funds for your down payment and closing costs. Most likely, you
will be asked to provide statements for the last two or three months on any
of your liquid assets. This includes checking accounts, savings accounts, money
market funds, certificates of deposit, stock statements, mutual funds, and even
your company 401K and retirement accounts.
If
you have been moving money between accounts during that time, there may be large
deposits and withdrawals in some of them.
The
mortgage underwriter (the person who actually approves your loan) will probably
require a complete paper trail of all the withdrawals and deposits. You may
be required to produce cancelled checks, deposit receipts, and other seemingly
inconsequential data, which could get quite tedious.
Perhaps
you become exasperated at your lender, but they are only doing their job correctly.
To ensure quality control and eliminate potential fraud, it is a requirement
on most loans to completely document the source of all funds. Moving your money
around, even if you are consolidating your funds to make it "easier,"
could make it more difficult for the lender to properly document.
So
leave your money where it is until you talk to a loan officer.
Oh…don’t
change banks, either.
Should You Change Jobs?
For most people, changing employers
will not really affect your ability to qualify for a mortgage loan, especially
if you are going to be earning more money. For some homebuyers, however,
the effects of changing jobs can be disastrous to your loan application
The Best Investment
As a fairly general
rule, homes appreciate about four or five percent a year. Some years will be
more, some less. The figure will vary from neighborhood to neighborhood, and
region to region.
Five
percent may not seem like that much at first. Stocks (at times) appreciate much
more, and you could easily earn over the same return with a very safe investment
in treasury bills or bonds.
But
take a second look…
Presumably,
if you bought a $200,000 house, you did not pay cash for the home. You got a
mortgage, too. Suppose you put as much as twenty percent down – that would
be an investment of $40,000.
At
an appreciation rate of 5% annually, a $200,000 home would increase in value
$10,000 during the first year. That means you earned $10,000 with an investment
of $40,000. Your annual "return on investment" would be a whopping
twenty-five percent.
Of
course, you are making mortgage payments and paying property taxes, along with
a couple of other costs. However, since the interest on your mortgage and your
property taxes are both tax deductible, the government is essentially subsidizing
your home purchase.
Your
rate of return when buying a home is higher than most any other investment you
could make.
Income Tax Savings
Because of income
tax deductions, the government is subsidizing your purchase of a home. All of
the interest and property taxes you pay in a given year can be deducted from
your gross income to reduce your taxable income.
For
example, assume your initial loan balance is $150,000 with an interest rate
of eight percent. During the first year you would pay $9969.27 in interest.
If your first payment is January 1st, your taxable income would be almost $10,000
less – due to the IRS interest rate deduction.
Property
taxes are deductible, too. Whatever property taxes you pay in a given year may
also be deducted from your gross income, lowering your tax obligation.
Stable Monthly Housing
Costs
When you rent
a place to live, you can certainly expect your rent to increase each year –
or even more often. If you get a fixed rate mortgage when you buy a home, you
have the same monthly payment amount for thirty years. Even if you get an adjustable
rate mortgage, your payment will stay within a certain range for the entire
life of the mortgage – and interest rates aren’t as volatile now
as they were in the late seventies and early eighties.
Imagine
how much rent might be ten, fifteen, or even thirty years from now?
Forced Savings
Some people are
just lousy at saving money, and a house is an automatic savings account. You
accumulate savings in two ways. Every month, a portion of your payment goes
toward the principal. Admittedly, in the early years of the mortgage, this is
not much. Over time, however, it accelerates.
Second,
your home appreciates. Average appreciation on a home is approximately five
percent, though it will vary from year to year, and in some years may even depreciate..
Over time, history has shown that owning a home is one of the very best financial
investments
The
Business Cycle and Buying a Home
There are times when the economy is brisk and everyone feels confident about
his or her prospects for the future. As a result, they spend money. People eat
out more, buy new cars, and….
…They buy houses.
Then,
for one reason or another, the economy slows down. Companies lay off employees
and consumers are more careful about where they spend money, perhaps saving
more than usual. As a result, the economy decelerates even further. If it slows
enough, we have a recession.
During
such a time, fewer people are buying homes. Even so, some homeowners find themselves
in a situation where they must sell. Families grow beyond the capacity of the
home, employees get relocated, and some may even find themselves unable to make
their mortgage payment - perhaps because of a layoff in the family.
Supply and Demand
When the supply
of available houses is greater than the supply of buyers, appreciation may slow
and prices may even fall, as happened in the early eighties and the early to
mid-nineties.
If
you are lucky enough to purchase a home during a slow period, you can be reasonably
certain the economy will begin to show strength again. At times, real estate
values may even surge drastically. In many regions of the country, this is precisely
what occurred in the late eighties and nineties.
Market Timing is Difficult
One problem with
attempting to time your purchase to the business cycle is that no one can accurately
predict the future. Another challenge is that interest rates are generally higher
during a depressed market and income may not be keeping up because less overtime
is available and bonuses or commissions are down. With higher interest rates
and lower earnings, fewer people can qualify for a home purchase than in more
prosperous times.
Why You Should Not
Wait
Plus, "timing
the market" generally works best for first-time buyers. People who already
have a home usually need to sell it in order to buy their next one. If a "move-up"
buyer wants to buy a home during a depressed market, that means they usually
have to sell one during the slow market, too. If a seller wants to sell his
home to take advantage of a "hot" market when prices are fairly high,
they generally have to buy their next home during that same hot market.
It
tends to equal out.
Finally,
the business cycle can change over time. Since 1983, we have had two fairly
long expansions with only a slight recession in between each. You would not
want to wait nine years to buy a home, would you? You could miss out on a substantial
amount of appreciation by waiting, and end up paying much higher prices.
Finding Your Realtor.
When someone decides
it is time to sell their home, they interview several Realtors from different
companies to determine which one is best for them. They want someone who will
represent them and someone they feel will do an effective job at marketing their
home. However, when someone decides to buy a home, they usually end up with
their Realtor through sheer accident.
Why
don’t homebuyers search for a Realtor the same way that
homesellers do?
Instead,
homebuyers usually end up with a Realtor as a result of answering an advertisement.
The advertisement will give a brief summary of a home available for sale along
with the price, but it says nothing at all about the Realtor.
Listing Agents and
Selling Agents
You see, there
are two "sides" to every sale. The seller's side is represented
by the listing agent. The buyer's side is represented by the selling agent.
The selling agent can also be referred to as the buyer's agent. Selling
agents (buyer’s agents) do not usually list very many homes for sale.
They deal mostly with homebuyers. Selling agents "sell" the homes
that are placed in the Multiple Listing Service by the listing agents.
Most
agents concentrate primarily on one side or the other. This is not a "hard
and fast" rule. There are also agents who split their time equally
between buyers and sellers. Often, these are the very best Realtors.
The fact of the matter is, if you are buying a home who do you want on your
side? A Realtor who deals primarily with sellers? Or one who deals
mostly with buyers?
If
you call on a single classified advertisement in a newspaper, an ad in one of
those home selling magazines, or a listing on the internet, you are most likely
calling the listing agent.
There
are many things that should be considered when buying a home. Since most homebuyers
expect to buy a bigger and better home someday in the future, resale value is
an important factor in decision-making. You use the proceeds from selling one
home to buy the next one.
While
no one can guarantee that your home will grow in value, there are steps you
can take that maximize your potential gain.
"Location, Location,
Location"
"Location,
location, location," is a common and almost hackneyed phrase in real estate
literature. Your agent may even throw it at you when you ask for advice about
buying a home. However, what does "location, location, location,"
actually mean? Why repeat it three times?
Mostly,
"location" is repeated to emphasize that it is extremely important
to the resale value of your home. The idea is to buy a house that will appeal
to the largest number of potential future homebuyers. A careful choice of location
can minimize potential negative influences on future resale value, and maximize
positive influences.
Focusing on resale value requires you to make several different "location"
choices. The first choice you have to make is "which community?" At
the very least, you should narrow your choice down to just a few local communities
Buying a Home With a View
Homes with a pleasant
view of the horizon often sell at a premium above similar homes without the
view. However, if a view is important to you, buy it mostly for your own pleasure
and not as an investment. Though you may place a considerable dollar value on
the view, future buyers may not be so like-minded. It may take you longer to
find a buyer when it comes time to resell the house. Or you may end up dropping
your price to more nearly match other sales prices in the neighborhood.
In
short, if you are buying a house with a view, try to pay as little extra as
possible. Otherwise, you might not get your money back.
Lot and Landscaping
Even though most
real estate value is usually concentrated in the building, the lot is important,
too. Obviously, it should be as level as possible. Assuming the property is
in a typical neighborhood, the lot should be rectangular – no odd shaped
lots or oddly situated lots.
Yard
sizes are smaller in modern homes than in older homes, but there should still
be a decently sized front and back yard. Do not buy a house where the entire
back yard is taken up by a swimming pool, for example.
Do
not purchase an over-landscaped property, either. You would normally pay a premium
for that, which you may not be able to recover when you sell. You will get your
best value if the house is moderately landscaped or under-landscaped for the
area. You can always improve the landscaping during your ownership by improving
the grass and adding bushes and trees. Just do not spend too much.
House Size
In
each residential neighborhood, houses will vary in size and rooms, but they
should not be too different. If resale value is an important consideration,
you should not buy the largest model in the neighborhood. When determining market
value, the homes nearest to yours are most important. If most of the nearby
houses are smaller than your house, they can act as a drag on appreciation.
On
the other hand, if you buy a small or medium house for the neighborhood, the
larger homes can help pull up your value. This is one of those times where determining
your "wants" versus your "needs" can be extremely important.
Buying what you need in a more prestigious neighborhood may provide more financial
reward than getting what you want in a less desirable neighborhood.
Bedrooms and Bathrooms
Three and four
bedroom houses are the most popular among homebuyers, so if you can stick in
that range you will have more potential buyers when it comes time to resell.
Five is okay, too, as long as you do not have to pay too much extra for the
additional bedroom.
There should always be at least
two bathrooms in a house, preferably at least two and a half. One bathroom with
a place to wash up for day-to-day visitors, one for the master bedroom, and
at least one to be shared by the other bedrooms.
Closets, Garages and
Laundry
Walk-in closets
are extremely desirable for the master bedroom. For the rest of the house, just
be sure there is plenty of closet space. Don’t forget space for linens
and towels.
Garages
add to the resale value and you should always make sure to get at least a two-car
garage. Lately, three-car garages have become desirable in some areas of the
country.
The
laundry facilities should be located somewhere convenient on the main floor
of the house, but not in a place it will create an eyesore. Think about whether
you want to walk up and down stairs when carrying loads of laundry.
The Kitchen
Family activity
centers around the kitchen, so this is the most important room of the house.
Larger kitchens are better, and they should be provided with modern appliances.
Obviously, the dining room and breakfast nook should be located adjacent to
the kitchen. In newer houses, the family room should also be extremely close
to the kitchen.
There
should be easy access to the back yard, as there will be occasions for barbecues
and outdoor entertaining. In addition, it should be a short trek between the
garage to the kitchen so hauling groceries in from the car does not become a
horrendous chore.
Fireplaces
The only room where
you absolutely have to have a fireplace is the family room. A fireplace in the
living room may be nice, but you pay extra for it and will probably rarely use
it. At best, it serves as a focal point of the living room, but does not add
much in real value.
Swimming Pools
Swimming pools
do not provide as much added value as they once did. Safety issues about families
with younger children have become more publicized than in the past, so families
with small children tend to avoid homes with pools. As a result, having a pool
may actually reduce the number of potential homebuyers when you try to resell
the home.
Buy
a home with a pool for your own enjoyment, not as an investment.
Since
we are on the subject of swimming pools, here is a word of advice: If you want
a pool, buy a home that already has a pool. Paying a contractor to install one
for you is like throwing money away. You will never get a dollar-for-dollar
return on your investment.
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