8 Tips For Prospective Homeowners Entering The Real Estate Market

by Silicon Valley Blogger on 2008-10-2520

Dust off your down payment. Here are some tips for first time home buyers who are ready to enter the current real estate market.

I remember how just a few short years ago, I felt eager about jumping into the real estate investing market as a landlady. Somehow, it seemed more compelling then, to try out our luck as real estate investors: the housing market was booming, house prices were catapulting into the stratosphere, and I knew several people with multiple mortgages who were on their way to building their rental empires.

Looking at how things have turned out today, I am relieved that I hesitated and avoided pursuing this strategy (not that I have any more money left to invest ;) ) while I cautioned many friends to hold off on buying at the housing market peak. Unfortunately, for many people I know, my second opinion fell upon deaf ears. As we survey the landscape of fallen foreclosures and deflated house prices, the irony is that the current period is a much better time to consider buying a house or investing in the real estate market. This buyer’s market is handing us bargains, but I have to admit that it’s not as much fun as it was a few years ago, when everyone was doing so well. Busts can be a bummer.

That said, being a contrarian today will serve you well. If you’re a first time home buyer waiting in the wings to buy a house, then you should feel like that proverbial kid in a candy store. The next few years will continue to be sore ones for the real estate market, so it’s a good thing you waited (to buy your house) — you’ll now be getting good value for your money.

first time home buyers

The following tips are for first time home buyers who are entering the real estate market at this opportune time. Note that these tips are meant to be “timeless” so that they remain useful regardless of when you decide to buy your first house.

Strategies For First Time Home Buyers

Let’s say you’re in your mid-twenties with a beau who isn’t much older. Full of love and ideals, you set out to look for a house as you are getting married in a few months. You are both working as teachers and your total annual gross income (before taxes and other deductions) amounts to $80,000 or approximately $6,600 a month. Some questions you may be contemplating:


Let’s check out a few pointers:

1. Should you time the market?

Is it time to buy? I’m going to say ‘it depends’. If you’re buying a home as your primary place of residence, market timing isn’t as big an issue as it is when you fancy yourself as a real estate investor. It’s not that difficult to recognize if we’re in a bubble or in a bust; the signs are everywhere — the state of the market is like the elephant in the room that we giddily talk about and which we respond to with a herd-like mentality.

When the bubble was going on, we all wanted to buy. When it popped, we couldn’t all get fast and far enough away. We all have this tendency to charge through the exits at the same time. But this is the time to become a contrarian. Buy when prices are low — whether it be now or in the next few years. You probably won’t go wrong entering the market today, especially in certain areas and markets that have hit the ground floor (at least, as compared to a few years ago!).

2. Gauge housing prices.

This advice is old hat, especially now that we’ve learned quite a few property market lessons: get a feel for prices before jumping in. Check out sales comps data and price per square feet. Talk to real estate brokers about where the values are.

3. Have a big enough down payment.

We’re in an age where we face tighter credit and greater loan limits. It’s a time to be more conservative about getting into debt (in this case, we may not have much of a choice). It’s a good time to think about buying a house if you have enough saved for it, though stretching your housing budget is no longer the “in” thing.

4. Get a home inspection.

Buying a house is probably the most important financial decision of your life. Any mistakes you make may come back and haunt you. For example, consider a young couple I know who bought a recently built house very close to a lake. After 2 years, they had water seeping through the floor of the living room and the seller refused to repair the damage, asserting that they never had a problem. You don’t want to go to court, even if you win the case. So be very careful, have a third party who is certified by the state inspect the house from top to bottom before you sign anything.

5. Do your due diligence.

It’s usually cheaper, especially in today’s market, to buy a used house; many people are facing foreclosure and some would be happy to “unload” their house at a bargain price. But be careful with buildings that are more than 15 years old. Check carefully; don’t be seduced by the seller’s good nature. Ask a certified expert to give it a clean bill of health. Take note that location is very important if you want to resell later at a good price. Check your target home’s surrounding environment and get to know some neighbors. Now is the time to perform your due diligence.

6. Determine how much house you can really afford.

Consider how you’ll be using your house over the long term. As it grows, will your family continue to live comfortably in your house, or will you need to consider upgrading into a larger home in the future? Take into account the possibility (or the reality) of children in your home — a growing family will increase your expenses every month and should be factored into your budget. It’s important to determine how much net income you can count on every month after various payroll deductions.

7. Crunch the numbers to confirm your true affordability.

Go through some numbers to determine your home buying budget. Let’s assume again that your net take home pay ends up being around $5,000. If you want to buy a house, you should not pay more than 20% (recommendations vary on this) of your take home income as monthly mortgage, or approximately $1,000 in this case. Many people face foreclosure today because they can no longer afford the loan. But if you have some savings (if you don’t, you shouldn’t even consider buying a house), it would be wise to give a down payment of at least 10%, and more if you can. These days, calculations will need to be much more conservative than they’ve been in the past.

And so, for this example, our recommendation is to buy a house (used or otherwise) that does not exceed $130,000. If you give $15,000 down, you would have a monthly payment of around $720 (6.44%*, 30 years), to which you should add another $300 to cover escrow**, insurance and an additional $50 to reduce the length of the loan. There is also the possibility of buying a condo if houses in your area are too expensive.

* Recently estimated quote
** Escrow is the amount the lender keeps in reserve to pay taxes and hazard insurance. You should let the lender take care of that so you won’t have to worry about paying the local taxes yourselves. Make sure that you keep a sharp eye on the process as lenders sometimes make painful mistakes (to the detriment of the consumer).

8. Embrace the home buying process!

Now go ahead and start looking, and when you find the house of your dreams, make sure nobody else is aware of your excitement (just like playing poker) before you sign on the dotted line. Find a reputable mortgage lender and haggle with the owners. Make them an offer they can’t refuse!

 
This post is brought to you by SVB and Jacques Sprenger.

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 16 comments… read them below or add one }

jim October 26, 2008 at 5:58 am

#9. Check your credit history!

Donny Gamble October 26, 2008 at 9:20 am

I think now is a pretty good time to purchase a home because housing prices are so low. One must do their due diligence when looking for a home to buy. It is no longer just about choosing the right location, there are new rules to the game that everyone should learn about.

sammy October 27, 2008 at 12:29 am

Hey nice tips for first time property buyers. And right now, it’s definitely a good time to buy or rent a property.

Start-Up October 27, 2008 at 9:41 am

Great post. Number 3 is key. I just recently closed on a new condo and would never have received a mortgage without a 20% down payment. They requested all sorts of verifications last second on my bank accounts and where the money was coming from. Credit is super tight.

Austin Real Estate Broker October 27, 2008 at 5:37 pm

Hey guys,
I have to tell you that now is a great time in most markets to buy. There are a number of reasons why.

First, you have a lot of choice in what you are buying. Sometimes, think 1998-2001 when you had to be happy with what you got OR pay through the nose by outbidding other folks to get the really great homes. Now, the neighborhoods are your oysters. :)

Second, rates are still near historical lows.

Third, sellers are willing to work with you to sell their home. Some sellers will do more repairs than normally would be agreed upon.

Lastly, there are various incentives out there for first time home buyers and lower income home buyers. From the looks of things the government may also increase the first year tax incentive for first time home buyers. Check city, county, and state programs for interest free loans, down payment loans at low interest rates, and incentives to buy in areas that the municipalities want to develop. In Austin, for instance, we have all of the above programs. You need a good broker and/or lender to make sure you take advantage of them.

Hope all is well with everyone!
Joe

Ed: Thanks for the tips Joe! This information is very helpful :) and heartening; I’d call it the silver lining that a lot of us are hoping for, as we wind our way through the bear markets and difficult financial crisis.

Dan Noble October 29, 2008 at 9:03 pm

Great post and an amazing departure from all the bad news – good job!

Now, some BIG additions;
In this market in this area, the first thing you do is get expert advice from veterans on both your potential financing first, then, as recommended above, realistic property values. And a good negotiator would round out your advisors.

Danno

Austin Real Estate Broker October 30, 2008 at 2:51 pm

Hi Ed,
Thanks for fixing my link. I like to look at the good side of things every once in a while! There are good things out there for folks who are willing and able to invest when the market is down. For instance, some of those programs that I mentioned are limited to a certain number every year. With sales suppressed this year, buyers have a greater opportunity to get them. Great post as well!

Joe

Ed: Sure, no problem! Ed is short for “editor” by the way. This is SVB! :)

woody November 6, 2008 at 6:34 am

Yes it is definitely the right time to buy or rent a property.

Mark @ Manzanillo Real Estate December 4, 2008 at 1:09 pm

It truly is a good time to invest in a property if you can muster up the cash. This is a very sensible approach to buying a house. We are building some luxury condos down in Manzanillo Mexico and are convinced they will succeed, even in this market. The peso is down, and the dollar is up, so no matter who you are- its a buyers market.

Dean Graziosi December 5, 2008 at 11:01 am

I agree with the last commenter on this blog. You can really find a great home pretty much anywhere across the country. I definitely believe that it takes the help of a foreclosure or short-sale expert in real estate to help you locate the perfect low-cost home. Don’t go out without the right information.

Dean Graziosi December 5, 2008 at 11:07 am

You must make certain that you are prepared go out there with the best knowledge regarding a specific housing market. Consult with an expert in the field. I recommend asking for help from a foreclosure or short-sale realtor.

JanetAnne January 28, 2009 at 1:15 am

The first thing that you want to do when you want to know how to wholesale houses is to subscribe to a list of houses that are in distress. This means that they are heading for foreclosure or are already in foreclosure.

Annie July 8, 2009 at 8:15 am

One of the biggest steps a person can make in their life is buying a home. Where you can finally get to have a place that is yours and you can do what you want with it. Thanks for the great tips!

Grafton MA Real Estate September 6, 2009 at 1:58 pm

It really is amazing how many opportunities there are right now for 1st time buyers. With Real Estate values in most areas of the country having dropped by a substantial amount over the last few years combined with tax credits and other incentives, there has never been a better time for a 1st time home buyer.

Rent to Own? June 14, 2010 at 10:42 am

I think the worst time to buy real estate is when the general public is eager to buy, and they say “Boy, there is a lot money in Real Estate”.

The best time is when people are scared.

Sell House Nashville July 17, 2012 at 5:58 am

Buying a wholesale property can be a great way to get in cheap, and some wholesalers have it set up to where you can get owner financing. Or, they may be willing to wait for you to get a bank loan, just get pre-approved first because these guys can’t wait around!

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