ADVICE TO FIRST-TIME BUYERS
1) Make sure you feel your marriage is sound enough to go ahead and get serious about buying. It can be a great boost to a marriage, or it can be just the opposite if you get to arguing about things or discover you have much different ideas about what you like, what is important, etc. Also, if you own real estate and split up later on, it makes things stickier and more difficult. Renting does not create these issues so much as you know that no matter how right or wrong it may be for you, you only have to live with it thorough the term of the lease. And, then it's over and you can go elsewhere to greener pastures.
2) Going elsewhere - real estate is what is called a "non-liquid" asset. If you want to cash out of it, it is not easy and takes a while. It's not like selling stocks, or even a car.
3) Decide early on if it makes sense for you to buy now. Do it before you look at many ads and definitely before you actually see any property. Human nature being what it is, it is too easy to get yourself into the trap of studying about some purchase and then getting yourself excited by the very study of it and going ahead with it regardless. I am very guilty of that, and a lot more than once. I'll get a notion that I need something, or even just might like to have it, then I start researching it and pretty soon, it has become a "gotta have" item. No big deal if we're talking a pressure washer, but quite different if it is a home.
4) Buy versus rent? Here's how I would approach that question.
a) First, it costs money on top of the purchase price to buy. There are things like "points" (fees charged by banks, based upon your mortgage ($100/$100,000 of loan = 1 point), origination fees, appraisals, inspector fees, various filing fees, mortgage tax (if the state has one - and most do), the attorney fees (in Florida, they normally do not use attorneys - but someone is going to get paid for that work), title insurance - optional here, but pretty mandatory in some states, at least as practiced. It is a one-time insurance policy that one takes out at purchase. The title company that issues it agrees to defend your title against all comers, for as long as you own the place. I personally do not get it when I can avoid it, for 2 reasons. First the attorney who passed on the title is liable if the title turns out to be faulty and he carries insurance to protect him from such oversights. Secondly, most of my own places are held only short term and title insurance is for life or as long as you own it. And title claims by others are rare. Your own situation may differ substantially.
b) And then there are property taxes. They have to be paid ON TOP of your mortgage payments and they add to the cost of ownership.
c) And lastly there are costs of selling. The big one here is real estate commission, which is quite often 6%. Right after it comes another set of attorney's fees, possible mortgage prepayment penalties, more filing fees, a .4% transfer tax (in NY). You had better budget at least $15000 for all these costs (a+b+c), maybe even $20-25000 on a more expensive place. All this needs to be figured in as a more or less hidden cost of ownership, and divided by the amount of time you would expect to live there.
d) Why buy then? Of course if you buy, you will no longer have to pay rent, or deal with obnoxious landlords or other tenants. You can fix the place up how you want or let it go to hell, however you like. You become the boss.
e) There are other big pluses too. The obvious one is appreciation and that is nearly impossible to predict. I'd be rich if I could. On a long-term basis (like, decades), real estate appreciates, and significantly. But in a one, two, or even a five year period, that may not be true and it CAN depreciate as well. Recently, much of the US, real estate was losing value. Until then, it gained like crazy, more than 20% in our area. Depreciation is good only if you are buying and it's terrible if you want to sell. I have seen extreme cases (like lower New England in the mid-eighties) where people got foreclosed upon who had never been late with a payment. Their equity sank so low as a result of depreciation that the bank had to take steps to take over the home before it was worth less than the loan. But that is an extreme case and there are far more examples of folks making $100,000 a year on appreciation. In general, over the long term, real estate appreciation lags behind the stock market and sometimes behind bonds and savings interest. But it is a heck of a lot more fun than stocks. You can do something with it, you can use it., you can offset rent.
f) And there are subjective pluses, things that may be important but cannot be quantified - things such as the joy and pride of homeownership. You may love to do home maintenance and/or improvement, and it becomes a plus or, if you hate it, it becomes a minus. Either way, it will have to be done, even on a new home. The new home just puts off the inevitable a few short years. Remember, NO home is perfect that was made by human hands or cared-for by humans as well.
g) If you are in a higher tax bracket, there may be very real tax advantages to you. Do not ignore this and get good advice from a qualified professional if you think you may see a significant benefit from the deductions. Renters get few tax deductions.
5) In general, you are better off buying a poorer home in a good neighborhood than the great home in a so-so neighborhood. When you fix up the poorer home, you are more likely to gain when you sell. The home that is improved well beyond the standards of the neighborhood sells at a discount.
6) Fix up or buy something in better condition?
a) First, "sweat equity" is very real and can yield wonderfully. That is, it can if you are good with your hands and can find the time to do the work. While you are doing the work, living there can be hellish - but the hassles will probably pay you well. Remember though, it always takes longer and costs more than the husband first thinks.
b) Don't do a poor job thinking it will enhance the sales value a lot. A poor fix-up job fools only the least sophisticated buyers. The sharper ones will figure that they have to tear it out and start over and will factor that into their interest in the property.
c) If you do your remodeling with resale in mind, be conservative. No odd colors, stick with good old off-white and use decorating schemes that will appeal to nearly everyone and drive no one away. The really expensive parts of a makeover will almost never add their costs to the home's value. Try to have an idea of who your prospective buyers will be and plan with them in mind as well as yourself. That said, a place that is completely buffed will bring a premium.
d) The "3 P's" are what pays off the best - Painting, Papering, and Picking Up. There is an economic term called "lost capital". Understand it. It's when you spend $5000 on an improvement to make your property more attractive and you increase its value by $2500 as a result. Go ahead with it if you think you will get the other $2500 back in use or enjoyment from the improvement. If not, then you'd better think twice.
7) Schools: with some folks, it becomes a fixation and that can lead to big mistakes.
a) A good kid, a smart kid will get educated well in nearly any school he is likely to attend and a lackluster student will do the reverse. It is the middle, larger, group that we should be the most concerned (but not overly concerned) about.
b) And don't ignore schools completely if you have no expectation of having your own children in them. First, good schools add to a home's value and some day you may want to sell (they also may add to the taxes - but that's another subject). Secondly there is benefit to the community to have good schools, whether it is cultural or recreational advantages or just having a better class of Walmart workers.
c) And always remember that schools, like tax bills, can change in ways one cannot predict. There is a school system near me that many folks want their children in. A good friend used to teach there and I asked her how good it is. She laughed. When pressed, she said that it used to be good, but it was only the elementary that was especially good now. It takes a while for this knowledge to filter down.
d) Drugs and choice of friends: This is crucial to getting a good education and many otherwise good schools fall down here. It is not something they are rated for and you are not likely to find it out over the internet. And some schools that seem mediocre in their official scores may give your children a better education than you originally thought simply by allowing your children to avoid these pitfalls.
8) Short commute versus cheap housing: Here's how I would value this.
a) First, I figure how much extra it will cost me a year to go to work from the longer distance. That is the easy part and you just adjust it for the number of years you want to figure for.
b) You then need to add something for your time, unless of course you consider commuting time relaxing. It is probably not fair to use what you get paid in order to figure your commuting time costs, not unless you would have been paid for the time you didn't have to commute, which would not include many people. But figure something in - there is a real value to you to being able to spend more time at home.
c) So, now you add these together, factor in the number of years you expect to live there and be at that job and see if it is offset by the lower price of living further away from work.
d) Don't forget to add in something for subjective factors - proximity (or lack thereof) to shopping, recreation centers, hospitals, cultural events, schools, relatives and friends..... There are many more other subjective factors as well - amount of land, views, quiet and seclusion (which are not the same thing!), landscaping and gardening, pets and animals, recreation on or near to your property, even the "feel" you get for a place. Neighbors are another one to consider - - but not too much. Both good and bad neighbors can and do move away. Children will grow up and leave.
e) There are a few minor objective factors to keep in mind. There are generally less heating costs (and greater cooling costs) in the city as opposed to the country. There may be additional village or city taxes. In the country you may not have municipal trash pickup. You will buy slightly more gas in daily affairs because of longer travel, though that will be offset by getting better gas milage. And in the country, you may expect to have to provide your own water and septic, which will mean greater initial outlay if you are building. It will also mean somewhat more trouble and probably quite a bit less monthly expense.
9) What do banks want? Remember they intend to make money from you. You have to decide if you can also profit from the relationship. They are looking for just a few things, if you boil it down.
a) First, they want someone who is creditworthy, someone who is a good bet to pay back what they loan you. Credit scores and personal references are pretty important here.
b) Secondly, they want to make sure their security for the loan (ie - the property you buy using their money) is safe. That is why they ask for down-payments and why they have appraisals done. Another reason for the down-payment is to hold your interest in the property if things should get bad for you. The family with a large downpayment is much less likely to walk away from the loan than someone with just $1000 down.
10) Mortgage Brokers: It seems that everyone wants to use them. The corner neighborhood bank has been left in the dust. If you are just buying a home on a lot, don't bother to read further.
READ THIS IF YOU WANT FARM TYPE OF PROPERTY!
I don't have good experiences with many mortgage brokers in my particular practice, mostly because it involves larger than "normal" property. For some reason which has never made sense to me, they want nothing to do with property larger than a lot (say under 5 acres - it varies). Everything about that figure will be considered as zero when their lenders get into the act. But it is not worth zero of course and naturally the sellers expect to be fairly compensated for it. What does this mean? You read an ad for a low rate of interest and a low downpayment. "Great" you think. That's right, so you think.
Everything sails along pleasantly until appraisal time when the appraiser gets instructions from the lending agency to consider nothing above a certain size lot. The rest is not considered - but you have to pay for it and that will mean a bigger downpayment than you were led to believe.
Now why am I down on mortgage brokers for this? First, many of them do not listen to you when you describe the place you expect to buy. They may know they don't have lenders for that additional land and still they lead you on. It's unforgivable in my opinion, but I have seen it happen so often, sometimes repeatedly to the same person (who can't be too bright). Sometimes they charge high fees and do not deliver an acceptable mortgage, or even any mortgage - be sure to find out these things ahead of time. They are also paid by the lenders for finding customers. That said, there are some fine persons in this business, just like in the logging business.
There are people out there who will lend on land, ones who will consider everything you are buying when they have it appraised. Expect to need a greater downpayment and perhaps to pay a higher rate of interest from them. Consider such a loan as somewhat commercial; it's not just a home but also land and maybe barns that you are buying.