While a house can be a great investment and an even greater place to call home, there are specific mistakes everyone should be aware of and avoid at all costs. The following are five mistakes all homebuyers should avoid when looking into buying a new home:
1. Don’t Buy a House if You Have Plans to Move Again
Many people become enamored with the idea of being a homeowner and make a purchase even though they know they plan to move again soon.
Understandably, people feel it’s wrong to continuously rent and write checks to landlords while paying down zero equity on a house they do not own. Based on the feeling that paying down equity is better than paying a landlord, many people jump into home ownership with the idea that it is a good investment regardless of the time horizon.
If a potential homebuyer is not sure he plans to stay at his current location for more than two years, it is probably not a good time to make a purchase. With closing costs, property taxes and the possibility of a depreciating asset, homebuyers who move soon after purchasing a house might lose more money than the equity they pay down.
2. Don’t Blow Through a Set Budget
It may be due to the rise in popularity of home-purchasing shows on networks such as Home and Garden Television (HGTV), but many potential homebuyers set a budget and then immediately disregard it when they see a house out of their price range.
However, the budget was set for a reason. Back when emotions were not involved, the set budget was probably based on logic and financial constraints. It is important for a homebuyer to remove his emotions from the financial equation.
While budgets can be stretched and dollars met, many homebuyers do not take into account scenarios where income might decline or the real estate market might depreciate. If this happens, the budget reworked to buy a “dream home” ends up being a huge mistake.
To combat this potential mistake, make sure to get preapproved for a loan prior to house hunting. This way an upper limit is set and only houses below that limit are viewed.
3. Don’t Forget About Added and Hidden Costs
Alluded to above, buying a house is not a simple act of trading a rent payment for a mortgage payment. First, there are closing costs, property taxes, home owners insurance and even homeowners’ association (HOA) fees. Additionally, homebuyers almost never think about maintenance costs that are normally covered by the landlord of the place they are renting.
With all of these added and hidden fees, it is entirely possible that even a house within budget might quickly become over budget. It is important to factor in these costs when searching for a home and making a purchase decision.
To do this, inquire around as to how much average maintenance, other taxes and insurance cost in the home’s location. Add these costs to the monthly mortgage to get the potential real cost of home ownership.
4. Don’t Skimp on the Down Payment
While the economy continues to climb and houses continue to appreciate, do not forget about the 2008 financial housing crisis. While there were many factors to the economic downturn, a lot of it was due to lenders giving mortgages to unvetted buyers at little-to-no down payment.
While not all homebuyers default, skimping on the down payment means the monthly mortgage payment is much higher; do not forget this increases the interest payments. Even though it sounds better to put less down and then cover a higher mortgage with a level of monthly income a home owner might already have, do not be fooled. This is the exact mentality others had before defaulting pre-2008.
A small down payment ensures a homebuyer not only has a higher monthly mortgage, but also has less initial equity in the house. If something comes up and the home owner has to sell, it is possible he will owe more than the equity he has in the home.
Additionally, if a small down payment is put down, mortgage insurance needs to be paid until as much as 20% of the house is paid off, further increasing expenses. If possible, wait until 20% can be put down for the purchase of a home.
5. Don’t Forget to Take Advantage of an Inspection
If anyone has seen the HGTV shows mentioned above, oftentimes the most beautiful houses become the most nightmarish. This is because although a house may look great on the outside, there can be many problems waiting below the surface.
Leaky pipes, a lack of proper insulation, an eroding foundation and even a faulty chimney are just a few of the many problems that might not be found by a potential homebuyer at first glance. If the house is taken at face value and purchased, the new home owner becomes responsible for all of those potential problems.
It is important, then, for a potential homebuyer to have the house inspected by a professional inspector. These professionals know exactly what to look for when a house is on the market, even including hard-to-spot water damage and termite infestations.
Often, the cost of inspection can even be covered by the seller. If any significant damage is found during the inspection, the repair prices can be negotiated into the purchase price of the home, protecting the homebuyer from paying out-of-pocket for these costs.
Before you snatch a great buy on a home you love, your first question should always be: “What can I afford?” No matter what you want in a home as far as age, style, location or size, you could end up with a beautiful, furniture-less house if your mortgage payments eat up more than half of your income.(To learn about the process of buying your first home, read Top Tips For First-Time Home Buyers.)
Calculate an Affordable Payment
The 43% debt-to-income ratio rule is generally used by the federal housing administration (FHA) as a guideline for approving mortgages. This ratio is used to determine if the borrower can repay the mortgage; it often changes depending on market conditions.
All your debt payments plus your new housing expenses – mortgage, home owner’s association fees, property tax, homeowner’s insurance, etc. – shouldn’t equal more than 43% of your monthly gross income.
For example, if your monthly gross income is $4,000, multiply this number by 0.43. $1,720 is the total you should spend for debt payments including housing. Now, let’s say you have monthly minimum credits card payments of $120, a car loan for $240 and student loans for $120. By this rule, you have $1,240 per month you can afford for housing.
However, you also need to factor in the front-end debt-to-income ratio (DTI), the monthly debt you will have to incur from housing expenses alone. For example, although this metric is subject to change, during a recession it is usually greater than 30%. For example, if your gross income is $4,000 per month, you would have trouble getting approved for $1,720 in monthly housing expenses even if you have no other debt when the DTI is 31%. Your housing costs should be under $1,240.
Why wouldn’t you be able to use your full debt-to-income ratio if you don’t have other debt? Let’s say you’re debt free because you just paid off your vehicle loan. However, you may trade-in your car and take out a new car loan in six months. If your mortgage is 43% of your income, you’d have no wiggle room for when you want to or have to incur additional expenses.
Factor Budget Items Beyond Debt
You may love to cook with gourmet ingredients, take a weekend getaway every month, drink high-end wine or work out with a personal trainer. None of these relatively extravagant hobbies are budget killers, but they are reasons why you’d have to skip electricity bill payments if you bought a home based on a 43% debt-to-income ratio alone. Before you practice making mortgage payments, give yourself a little financial elbowroom by subtracting the amount of your most expensive hobby from the payment you calculated. If this amount isn’t enough to buy the home of your dreams, you may have to cut back on your hobby expenses – or start thinking of a less expensive house as your lifestyle-friendly dream home.
Play House, Financially
Save the proceeds from your current home in a savings account and determine whether or not, after factoring such expenses as car payments, you will be able to afford the mortgage. It is also important to remember that additional funds will have to be allocated for maintenance and utilities. These costs will undoubtedly be higher for larger homes.
If you can handle these extra payments without sweating extra credit card debt, you can afford to buy a home – as long as you have saved up enough money for your down payment.
Don’t Buy a Home Based on Future Income
Raises don’t always happen, and careers change. If you base the amount of home, you buy on future income, set up a romantic dinner with your credit cards. You’re going to end up with a long-lasting relationship with them.
It’s best to put down 20% of your home price to avoid paying private mortgage insurance (PMI). PMI can cost an extra $50 to $100 per month of your mortgage, sometimes more and sometimes less. But a smaller down payment won’t cost you buying a home. You can buy a home with as little as 3.5% with an FHA loan.
Bonuses to a larger down payment:
Smaller mortgage payment. For a $200,000 mortgage with a 5% interest rate for a 30-year term, you would pay $1,074. If your mortgage was $180,000 with a 5% interest rate for a 30-year term, you’d pay $966.28.
More lender choice. Some lenders won’t finance you unless you put at least 5-10% down.
While there are a lot of benefits to a larger down payment, don’t sacrifice your emergency savings account completely to put more down on your home. You could end up in a pinch when an unexpected repair arises.
When to Buy a Home
Ideally, you should buy a home in the opposite season from the best activities in your area. Find the nearest tourist area to your locale, and call a hotel and ask when the off season is. This is a great time to buy a home. Another strategy is if you are choosing an area with a lot of families, wait till October after kids are already in school.
Finding the perfect market conditions to buy a home is a little harder and riskier. You could decide to wait to buy a home because prices went up, but then prices go up further, and you can no longer afford a home in the area you want. As long as you plan on living in your home for 10-plus years, buy a home when you want to and where you want to, as long as you stick to your affordable payment range.
Planning to Stay Put
If you can’t estimate what city you are going to live in and what your 10-year plan is, it’s not the right time to buy a home. If you want to buy a home without a 10-year plan, buy a home that is priced much lower than the maximum you can afford. You’ll have to be able to afford to take a hit if you have to sell it quickly.
At a time when a lot of young adults are postponing marriage, the number of Americans buying a house on a single income is substantial. According to the mortgage software firm Ellie Mae, as many as 47% of Millennial home buyers last year were unmarried.
Buying a House on a Single Income Is Possible
Because single mortgage applicants rely on one salary and one credit profile in order to secure a loan, getting through the underwriting process can be a bit trickier. However, the more you understand about what the process entails, the better your odds will be of getting a lender to say “yes.” Here are four crucial things that can help.
Check Your Credit
When you apply for a mortgage on your own, lenders will be looking at just one credit profile: yours. Needless to say, it has to be in great shape.
It’s always a good idea to review your credit report beforehand, but that’s especially true of solo buyers. You can get a free copy once a year, from all three credit bureaus, at www.annualcreditreport.com. Make sure that it doesn’t contain any mistakes that will make you look like a bigger risk than you really are. If you see any, contact the credit reporting company right away, so it can investigate on your behalf.
You’ll also want to avoid doing anything that could hurt your credit, such as making big credit card purchase right before or after you apply for a home loan. And think twice before canceling any old credit cards. You might think you’re helping your cause, but you’re actually reducing the average age of your accounts and lowering your credit utilization ratio, two things that could hurt your application.
Look at Government Programs
A conventional mortgage typically requires a 20% down payment, something that can be hard to do if you’re drawing on only one person’s savings. But government-insured loans have a much smaller requirement – and sometimes none at all. For example, the popular Federal Housing Administration (FHA) mortgage program only mandates a 3.5% down payment. And if you’re a veteran or active member of the military, a Veteran’s Administration (VA) loan lets you finance the entire amount of the purchase, as long as it doesn’t exceed the appraisal amount.
There are some caveats, though. With an FHA mortgage, you’ll have to pay an upfront mortgage insurance payment (which can be financed) as well as a monthly premium. VA loans don’t carry an insurance fee, but they do assess a “funding fee” that can either be spread out over the course of the loan or paid in cash.
While low-down-payment requirements can help open the door to home ownership, they do carry risks. For example, paying 3.5% down doesn’t give you much of an equity buffer if the stock market takes a hit soon after you make the purchase. Putting down a little more, say 10% of the loan amount, will give you a little more peace of mind.
Protect Your Income
That first monthly mortgage payment can be startling for younger homeowners unaccustomed to such a big bill. As single home buyers rely on one source of income to pay the lender, it’s a good idea to take out some protection.
If your employer either doesn’t provide disability insurance or offers a bare-bones plan, you might consider looking into more-robust coverage on your own. That way you’ll get help paying your bills should you experience an illness or accident.
A specialized product known as mortgage protection life insurance can also help take care of your mortgage payments if you become unable to work. It’s only intended to help with home loan payments (some policies are a big more flexible), so it’s not a comprehensive financial solution. Still, because it typically has a looser underwriting process, it’s an option for those with riskier jobs or poor health, who consequently have trouble finding affordable disability coverage.
Put Someone Else on the Loan
Having a co-borrower on the loan can sometimes help home buyers clear the underwriting hurdle, especially if you don’t have a long credit history. The lender will look at the co-borrower’s income, assets and credit history – not just yours – when assessing the application.
While he or she may be doing you a huge favor by joining you on the loan, make sure the co-borrower knows the consequences. In the event you have trouble making your loan payments, the bank can go after the co-borrower, too. If you don’t want to worry about that, you should wait until you can qualify for a loan by yourself.
In today’s world of technology, more and more people decide to go house hunting online. Still, this doesn’t mean they won’t take the opportunity to take a look at your home on an open house day. In fact, this is one of the best ways to get your house noticed by potential buyers. But if you want to get the most of your open house day, you have to prepare for it properly. We have come up with 4 tips that will help you do so.
Get Rid of Pet Odors
If you have a pet, you might have got used to their odor in your home. But bear in mind that not all of the potential buyers might like animals and any odors like this might be a reason why they decide to set their sights elsewhere. It’s also important to mention that there is a lot of people who are allergic to pets, and they are always less likely to buy a home that smells like cats or dogs. Mixing 1 teaspoon of baking soda and 1 tablespoon of white vinegar in a spray bottle and spritzing the air all over your home should help you eliminate the pet odor.
Groom Your Garden
During your open day, potential buyers are not only going to examine the interior of your home, but they will also want to take a look at your backyard. That’s why you should make sure that everything in your backyard looks great. And grooming your garden is definitely a great way to start. You can mow your lawn, pull weeds and cut any old branches you come across. Remember that your front garden will be the first thing the potential buyers will see, so putting some extra effort into grooming is always a good idea.
Modernize Your House
It is no secret that modern houses are much easier to sell. Having this in mind, you should also try to do whatever you can to bring your home into the 21st century before you actually organize an open day. This means you should think about installing a smart thermometer or security camera. You can also have your TV mounted to the wall instead of having it stand on a cupboard, just make sure you hire professionals do this for you. If you live in Australia, you can always contact experts who offer wall mount installation services in Brisbane.
Remove Your Personal Items
Potential homebuyers always want to imagine your house as their new home. And if there are your personal items all over it, they will hardly be able to do so. For this reason, you should put away stuff like family photos or your kids’ drawings from the fridge. Also try to de-clutter the entire place as much as possible. Of course, this doesn’t mean you should take all of your stuff somewhere else. Just try to minimize the number of items that will prevent others from imagining your house as their future home.
Do all of these things and your open house day is guaranteed to be a big hit. The more effort you put into preparing for this event, the more likely you will be to make a sale. Not to mention that if you prepare properly, you might end up getting even more money for your house.
It’s 2017. Now what? Yes, the new year is typically a time for hope and renewal and for those who are looking to sell – and simultaneously buy – a home, it can represent a fresh start. But this year, political and social realities are giving some would-be home sellers pause.
Thankfully, the real estate market continues to show real strength, with many housing experts projecting home sales prices and inventory to rise in 2017, replacing doubts with consumer confidence.
“Housing prices rose nationally by around 6% in 2016, but the expected increase in 2017 ranges from 3% to 5%,” said 24/7 Wall St. “With inventory of existing homes at historic lows and a rise in interest rates thanks to the Federal Reserve, housing inventory for 2017 is almost certain to rise. For prospective sellers that means that if you were planning to sell your home this year, it’s time to get cracking.”
If you’re thinking about selling this year, these tips will help.
Sales have been swift in many parts of the country for several years now. That can make sellers who don’t get offers on day one feel antsy. Despite some ultra-competitive markets where multiple offers and offer-asking-price sales skew the national numbers, across the country, the average days on market of a home for sale is 50.
Price it right
You may be tempted to price your home at the top of the market – or set a new top if you’re in an especially desirable area and if inventory is low. But overpriced homes don’t sell, which is probably why your real estate agent is recommending a lower listing price.
If you’re insistent about your price, don’t be surprised if you get zero bites or the nibbles you do get are far below what you’re asking. Your agent’s pricing strategy will be based on market conditions and designed to get you the most money in the least amount of time. What it won’t be based on: What you owe on the home, what you think it’s worth based on your own estimation, or what you need to get out of it to buy your dream home.
Don’t be afraid to loan shop
If you’re selling your home to buy another, like most people, you might be concerned about rising mortgage rates. Rates are still near historic lows despite The Fed raising interest rates at the end of 2016 and indicating that further increases are in store for this year.
“Because the mortgage rate makes a big difference in how much you’ll pay for your home, it makes financial sense to shop around for the lowest rate you can qualify for,” said Investopedia. But many people don’t look beyond the first offer. According to a mortgage borrowers survey, “Almost half of borrowers seriously consider only a single lender or broker before deciding where to apply,” and “Seventy-seven percent of borrowers only end up applying with a single lender or broker, instead of filling out applications with multiple lenders or brokers to see which can offer the best deal,” said the Consumer Financial Protection Bureau.
Asking your real estate agent for a few different trusted referrals could make a big difference. “Getting an interest rate of 4.0% instead of 4.5% translates into approximately $60 savings per month,” they said. “Over the first five years, you would save about $3,500 in mortgage payments. In addition, the lower interest rate means that you’d pay off an additional $1,400 in principal in the first five years, even while making lower payments.”
Make sure your home is clean and lean
It’s more important than ever to make sure your home is as close to perfect as possible before you put it on the market. Unless your agent is planning to market the home as a “project,” it needs to be spotless. You’d be surprised how much better your home can look just by applying some simple staging secrets.
Listen to your agent’s advice
Staging may only be the beginning of what your home requires to get it sold, and your agent’s advice will be critical to getting it where it needs to be. “Sure, you no doubt know more about your home than anyone else. But your real estate agent knows more about how to sell it,” said Realtor.com. “And your agent may make some suggestions you might not like to hear. It’s tempting to take offense or just ignore this advice, but if you do, you could risk seeing your house sit on the market and grow stale.”
Be careful of over improvements
Getting your home in great shape may mean making some improvements, updates, and upgrades. But be careful not to go too far.
“Dying to install new kitchen cabinets or retile your master bath? Home sellers often assume any upgrades they make to their home will pay them back in full once they sell, but that’s rarely the case,” said Realtor.com. “On average you will recoup just about 64% of the money you spend on renovations once you sell—and certain improvements can actually work against you if they’re unusual or undesirable in your market, Jason Shepherd, co-founder of Atlas Real Estate Group, told them.
Downsizing to a condominium or apartment isn’t in everyone’s retirement plan. In fact, many people don’t want to give up their home or their community just because the years are marching on.
Forty-seven per cent of pre-retired and 56 per cent of retired survey respondents said “staying in my home is critical for my quality of life,” according to a 2015 HomEquity Bank/The Brondesbury Group’s retirement study of Canadians aged 55 plus.
However, aging in place may require some work. A HomEquity Bank/Ispos Canada survey focusing on Canadian homeowners 55 years and older asked if renovations were needed so they could remain in their homes. Fifty-eight per cent said that improvements would be needed (46 per cent said minor renovations would be required while the others said the renovations would be major).
Forty-four per cent of the 300 Canadian homeowners surveyed in spring 2016 said their kitchens and/or bathrooms would require work to make them accessible.
Another 38 per cent of those surveyed for the HomEquity/Ispos survey said they would have to add grab bars and hand rails in their home. Twenty-one per cent said they would want to install security or medical aid systems.
It’s never too early to start planning to age in place. “The earlier you start planning, the more prepared you will be to respond to changes that occur as you age, such as changes in your health, mobility or social connections,” says the Government of Canada website page.
“To successfully plan ahead, you need to start thinking about how you want to live as you age and what steps you need to take to achieve that lifestyle…Making choices now will give you greater control over your independence, quality of life and dignity.”
Go through your house to see what changes can be made to help you age in place, and as you renovate, include as many of those features as possible.
If you’re doing major renovations, you may choose to add an elevator, widen doorways and hallways or add large walk-in showers instead of a hard-to-climb-into freestanding tub. If major renovations aren’t feasible, you may want to add a stair lift to help you get up and down stairs, or add a full main-floor bathroom and convert a main-floor room into a bedroom so you don’t have to navigate stairs.
Door levers are easier to use than knobs. Consider installing electric outlets higher from the floor so users don’t have to bend as low, and place switches closer to the floor to make them accessible for people in wheelchairs.
Even if people don’t have mobility issues now, they may want to think about future accessibility designs. Adjust the height of counters and have a removable portion under the sink to accommodate a wheelchair.
The Rona Home and Garden website says a good bathroom layout should include a toilet area in the least visible part of the room, separate from the rest of the room if space allows. “For maximum comfort, allow 30 inches of space on each side of the toilet and 30 to 40 inches in front.”
In the shower and bathtub area, leave at least 60 inches along the side for easy access and another 30 inches in front of the tub. Include a cabinet or shelves to store towels and other necessities.
Leave eight inches free on either side of the washbasin. Vanity heights of 32 or 34 inches are more ergonomic for wheelchair users or smaller people, says Rona.
“Try to make sure cabinets are installed more than 36 inches from the edge of the bathtub or deck (for a drop in tub). If there is a wheelchair user in the family, allow at least 60 inches for easy manoeuvrability between fixtures and furniture.” A minimum of 60 inches between the different elements of the bathroom, such as countertops and fixtures, is required to manoeuvre with a wheelchair or a walking aid.
Other ideas include installing a taller toilet and adjustable-height shower heads. Cork floors are a warmer, softer and less slippery option than ceramic tiles for kitchens and bathrooms.
Real estate investors and first-time home buyers face an uphill battle in a slow real estate market. When it comes to buying and selling properties, it is still possible to make money, but it won’t be easy. However, avoiding some classic mistakes will help put you on the right track.
Mistake 1. Lack Of Research
Before most individuals buy a car or a television set they compare different models, ask a lot of questions and try to determine whether what they are about to purchase is indeed worth the money. The due diligence that goes into purchasing a home should be even more rigorous.
There are also research considerations for each type of real estate investor – whether a personal homeowner, a future landlord, a flipper or a land developer.
Not only must the prospective buyer ask a lot of questions about the home, but he or she should also inquire about the area (neighborhood) in which it is located. (After all, what good is a nice home if just around the corner is a college frat house known for its all-night keg parties? Unless of course, you’re attracting a student renter.)
The following is a list of questions that would-be investors should ask regarding the home in question:
Is the property built in the vicinity of a commercial site, or will long-term construction be occurring in the near future?
Does the property reside in a flood zone or in a problematic area, such as ones known for radon or termite problems?
Does the house have foundation or permit “issues” that will need to be addressed?
What is new in the house and what must be replaced?
Why is the homeowner selling?
What did he or she pay for the home and when?
If you are moving into a new town, are there any problem areas in town?
Mistake 2. Getting Lousy Financing
Though the real estate bubble in North America ostensibly popped in 2007, there are still a large number of exotic mortgage options. The purpose of these mortgages is to allow buyers to get into certain homes that they might not otherwise have been able to afford using a more conventional, 25-year mortgage agreement. (Learn more about exotic mortgages in Choose Your Monthly Mortgage Payments.)
Unfortunately, many buyers who secure adjustable/variable loans or interest-only loans eventually pay the price when interest rates rise. The point is that home buyers should make sure that they have the financial flexibility to make the payments (if rates go up). Or they should have a back-up plan to convert to a more conventional fixed-rate mortgage down the line.
Mistake 3: Doing Everything on Your Own
Many buyers think that they know it all, or that they can close a real estate transaction on their own. While they might have completed a number of deals in the past that went well, the process may not go as smoothly in a down market – and there is no one you can turn to if you want to fix an unfavorable real estate deal.
Real estate investors should tap every possible resource and befriend experts that can help them make the right purchase. A list of the potential experts should, at a minimum include a savvy real estate agent, a competent home inspector, a handyman, a good attorney and an insurance representative. These experts should be capable enough to alert the investor to any flaws in the home or neighborhood. Or, in the case of an attorney, he or she may be able to alert the home buyer to any defects in the title or easements that could come back to haunt them down the line.
Mistake 4: Overpaying
This issue is somewhat tied into the point about doing research. Searching for the right home can be a time-consuming and frustrating process. And when a prospective buyer finally finds a house that actually meets his or her needs/wants, the buyer is naturally anxious to have the seller accept the bid.
The problem with being anxious is that anxious buyers tend to overbid on properties. Overbidding on a house can have a waterfall effect of problems. Buyers may end up overextending themselves and taking on too much debt, creating higher payments than they can afford.; as a result, it may take years for the home buyer to recoup this investment.
Are You Overpaying?
To find out whether your dream investment has a high price tag, start by searching what other similar homes in the area have sold for in recent months. Any real estate broker should be able to provide this information with relative ease (particularly with their access to a multiple listing real estate agent database). But as a fallback, or if you are not using a realtor’s services, simply look at comparable homes in the local newspaper, and see what they are being offered for. Logic should dictate that unless the home has unique characteristics that are likely to enhance its value over time, the buyer should try to keep any bids consistent with other home sales in the neighborhood.
Buyers should realize that there are always other opportunities out there, and that even if the negotiation process becomes bogged down or fails, the odds are in their favor that there is another home out there that will meet their needs. It’s just a matter of being patient in the searching process.
Mistake 5: Underestimating Expenses
Every homeowner can attest to the fact that there is way more to owning a house than just making the mortgage payment. Unlike renting, there are maintenance expenses that go along with mowing the lawn, painting the shed and tending the garden. Then there are the costs associated with furnishing the house and keeping all of the appliances (such as the oven, washer/dryer, refrigerator and the furnace) running, not to mention the cost of installing a new roof, making structural changes to the house, or other little things like insurance and property taxes.
The point is that first-time investors tend to forget these costs when house hunting. Unfortunately, this is exactly why many new homeowners tend to be house poor and cash poor.
The best advice is to make a list of all of the monthly costs that are associated with running and maintaining a home (based upon estimates) before actually making a bid on one. Once those numbers are added up, you’ll have a better idea of whether you can really afford a property.
Determining expenses prior to purchasing a property is even more important for house flippers and investors. That’s because their profits are directly tied to the amount of time it takes them to purchase the home, improve it and resell it. In any case, investors should definitely form such a list. They should also pay particular attention to short-term financing costs, prepayment penalties and any cancellation fees (for insurance or utilities) that might be borne when the home is flipped in short order.
Insulation is one of those building products that you never see, because it is usually covered up by something else. But if you don’t have enough, or if it is installed incorrectly, you’re wasting energy and paying more for heating and cooling than is necessary.
There are a number of insulation products you can use to prevent energy loss. However, it is important to realize that insulation is only one part of a two-prong approach to energy efficiency. The other arm of the plan involves sealing all of the holes, cracks or openings caused by pipes, wires, chimneys or anything that creates an opening in a wall, ceiling, or most importantly, attic floor.
These openings allow interior air to escape to the unconditioned (not heated or cooled) space that surrounds your home. The sealing process is called “air sealing,” and requires silicone caulk and expanding foam that comes in a can. It isn’t exciting work, and while easy, it requires attention to detail. It is extremely important because the openings are escape routes for heated and cooled air and because many insulation products do not stop moving air. If you plan on insulating, be sure to attend to air sealing as well.
Where to Insulate
Basically, insulation should be placed in any area that separates your heated and cooled living spaces from areas that are not heated and cooled. These areas include:
Walls between the living area and an attached garage
Floors over unheated basements
Floors over crawl spaces
The effectiveness of insulation is measured by its R-value – “R” stands for resistance to heat flow. The higher the R-value, the better. It is important to match the insulation to the application as well. For example, fiberglass insulation has an R-value of about 2.8 to four per inch. Some foam panels have R-values of seven or eight. But you can easily find fiberglass batts or blankets that are 12 inches thick and designed for use as attic insulation, providing over an R-40. Standard foam panels only come in one-half to two inch thicknesses.
Some products are easier to install than others. Fiberglass batts simply roll into place. They are manufactured to fit snugly between ceiling joists and wall studs. When installing any insulation, it is important that the product be placed flat against the surface you are insulating. Any air space under the insulation or gaps around the edges will limit the effectiveness of the product.
Those who consistently make money in real estate know the market. They know the location and the history. They know what new developments are planned. They know the transportation and the schools. They know everything about the area where they invest. They have to know it all.
Staying ahead of the competition in real estate investment means doing your homework. If you are new to the business, it can be daunting, but in this article we’ll teach you five tricks that the old pros use to get ahead of the trends instead of chasing them.
Study Local Pricing
The first things to study are the current price trends in the area. For example, a potential investor should look to see if the price of homes is accelerating faster in one area than in others. Next, check to see if the average home price is more than in other neighboring towns. This will provide an idea of where the biggest demand is. Another reason to study these trends is that, over time, you will start to develop a sense for which prices are “fair” for certain properties and which are overpriced. For individuals looking to buy properties at the lowest cost possible, this knowledge can be invaluable.
Realtors and real estate agents are a terrific source for this information given their access to the Multiple Listing Service (or MLS). The local newspaper, the internet and the town hall may have a record of recent sale prices as well.
Look for a Catalyst
One sign that an area is up-and-coming and that it will be desirable in the future is the development of new infrastructure. When you see new roads and schools being built, it’s a sign that the community is set for a growth spurt. Investing in a growing community can be very profitable. In addition, certain types of development, like new shopping centers, may be extremely attractive to homebuyers, and may also help keep the tax base low.
Spotting new developments can be as easy as looking out your car window as you drive by. Telltale signs of land clearing, surveying or the beginnings of construction in and around major roadways are pretty big tip-offs. Also, look for widening of traffic lanes, the installation of turnaround lanes and the erection of new traffic lights. All suggest the possibility of increased traffic flow.
Next, visit town hall at the municipality or the county level, and speak with the road and the building departments. They should be aware of any major projects slated to begin in the area, and they may even be able to provide you with a connection at the state level so you can find out if any state-owned roads or properties are slated for development as well. Real estate agents also have general idea of what new projects are about to be undertaken.
Explore Low-Tax Alternatives
If there are two towns side by side – one with high property taxes (or with progressively rising property taxes) and the other with low property taxes – the one with the lower taxes will usually be more in demand.
Real estate agents can help you determine which areas have the best and worst tax structures. In addition, a simple call to the local tax assessor can reveal how much the town charges in taxes per $100 of house. The assessor can also let you know when the last time the area was evaluated by the township. Also watch to see if a reassessment is set to take place in the near future, as it may mean that property taxes are about to go up. Beware of towns and communities that are becoming overcrowded. Signs include schools filled to capacity and inferior roadways. This could mean the town will have to do some major construction to accommodate the influx of people. And how do they pay for that construction? Tax dollars.
Check the School Rankings
Nearly every state ranks its schools by how well students in each district fare on tests in math and English. Sharp-eyed investors should look for schools that are moving up or are atop the list. These areas are often desirable to parents. Access to quality education is a big selling point to new home buyers.
There are several ways to find this information. Check our your state’s board of education website. Also, PSK12.com has public school rankings for most states in its free section. Visiting the schools yourself is also a good idea. Schools that rank the highest are usually quite eager to provide information.
Watch the Outskirts
If the properties in a major city or town have become overpriced, the areas on the outer fringes most likely will soon be in demand. Areas in close proximity to major bus and rail transportation are even more desirable Nearly any area that is about to install a major train stop or a new major bus route will see its proverbial stock go up in value.
To find out what’s planned, you can check with the local railroad or bus company to see if they will be expanding service in the area. The local town hall or planning department will also have this information.
Everyone knows the standard summer safety tips: Only swim where there’s a lifeguard, apply sunscreen liberally, drink plenty of liquids. But there’s one item your financial advisor would probably like to add to that list: Beware of the sudden, seemingly unstoppable urge to buy a second home in the place where you just spent two idyllic weeks of vacation. As one financial website puts it: The summer is “a time to relax, kick back and make dumb financial decisions.” Buying that home may not be such a dumb decision after all, but it needs to be one that’s made with your head and not your heart – and only after consulting financial, legal and real estate experts.
If you do decide to buy a vacation home, you will be part of a rising trend that the National Association of Realtors (NAR) has been tracking since 2003. NAR’s 2015 survey reports that the purchase of vacation homes soared to a record high in 2014, with an estimated 1.13 million vacation home sales. The typical buyer had a median household income of $94,380 and bought a property a median distance of 200 miles from their primary residence. Lawrence Yun, NAR chief economist, calls it “astonishing growth” that nearly doubled the combined total of vacation home sales of the previous two years.
So what’s behind the surge? Yun attributes it to the fact that “affluent households have greatly benefited from strong growth in the stock market in recent years” and there’s been “long-term growth in the numbers of baby boomers moving closer to retirement and buying second homes to convert into their primary home in a few years.” Linda Rheinberger, a regional vice president of NAR who lives in Las Vegas – “ground zero when the market fell,” as she describes it – thinks that some of the reason for increased interest in vacation home buying now is that “people are tired of worrying when the next shoe will drop, their outlook on their finances [is] ‘calmer’ than a few years ago” and they don’t want to put off buying the vacation home they want.
Note: In this post, we are talking about purchases primarily for the buyer’s or his/her family’s personal use, not purchases made principally as an investment. Interestingly, the number of vacation home buys for investment purposes has fallen for the fourth year in a row.
Decision strategies: 6 questions to ask yourself
When it comes to the vacation home decision, Karyn Glubis, a broker in Tampa, Fla., has this advice: “Take your time. You don’t have to buy the first property you fall in love with…just like dating, there will be another to choose from that in the long run may be a better choice.”
And, before you say “I do,” ask yourself these six questions:
1. Can I afford it?
This is probably the most important question of all. For the answer to this, disengage heart, engage brain (and the brains of your trusted financial advisors). Calculate what the costs of owning a vacation home will be, including:
property taxes (which may be higher for non-residents than for residents)
insurance (post Sandy, flood insurance on the East Coast has skyrocketed)
water, gas, electricity
association membership in resort developments
an alarm system
the cost of someone to watch over the property while you’re away
And, you need a “slush fund” for the inevitable emergencies: Financial consultant David Monberg suggests that you set aside 1% to 2% of the purchase price of your home.
A calculation that may help answer the “is it worth it?” question: Estimate the number of weeks you will be spending in your second home each year and multiply that times the weekly rental rate at a favorite vacation spot. Is the rental more or less than you would spend on the second home? Andrew Novick, a Pennsylvania-based financial planner, says: “A good rule of thumb is to keep housing costs – for one or two homes – below one third of your income.”
Owning a second home is as much a lifestyle, as it is a financial investment issue. Monberg suggests starting with a thorough financial analysis – what are your long-term goals, and how will the second home purchase affect them? “Will it get you off course on your savings plan or your investment model? Is this a new goal or one that’s already been figured into your planning? Are you ready to add another five years to the timeline to accrue enough for retirement, for your kids’ college education?” There are no guarantees, he says: “You can’t factor in a ‘perfect scenario’ – the market will go up and it will go down. You need to factor in the bad times and the good because there will be both.”
For high-net-worth families: When considering the financial ramifications of purchasing a vacation home, Nikolay Djibankov, a financial advisor with the Matterhorn Group at Morgan Stanley Wealth Management, explains that typically for families with a net worth of under $10 million the primary questions are “can we afford it, what is the impact on our cash flow and long-term wealth plan, should we liquidate investments or finance the purchase with a fixed or variable mortgage?” For those with a net worth of more than $10 million, the issue becomes “how to structure the purchase of the property in order to mitigate estate-tax liability when property passes on to children and grandchildren? Structures such as the Qualified Personal Residence Trust (QPRT) may be useful – consult a reliable estate-planning attorney for advice on this.”
2. Shall I buy it with my friend, my brother, another family?
Co-ownership is one route to making the purchase of a vacation home financially feasible, but as broker Lee Williams cautions: “Get all the terms in writing. Nothing will strain or ruin a friendship faster than not having had a full discussion of potential issues before the deal is done. If you’re buying with another family, will both of you be using it at the same time? What are the guest policies? What happens if one family uses the home more often than the other?” And what happens if one family gets tired of it and wants to sell?
3. How will I use the home?
Are you really going to use this second home enough to make it worth the purchase? Tyler Gray, a financial advisor in Oklahoma, asked one client who wanted to buy a vacation home whether he could see himself vacationing in the same place for the next 15 to 20-plus years. “He answered, ‘No, of course not!’ We sat in silence for 10 or 15 seconds before the lightbulb went off in his head….for him it was a much better plan to simply rent a vacation home so he wouldn’t feel tied down to one place.”
If you do plan to rent out your home to offset the costs, be realistic about the income you’ll be able to generate, and be sure to check all of the building documents and association bylaws (if you’re in a resort community) and familiarize yourself with local laws that impact renting.
Peggy Fucci, a broker in south Florida, recommends that you turn to your broker to oversee the renting of the property if that’s the route you want to take. Remember, too, that being a landlord may not be something you’re going to want to be and that having someone else manage your property and rentals for you can carry with it a hefty fee – sometimes as much as 50%.
4. Where should my vacation home be?
If you are like most vacation home buyers, you want to buy in a place that’s totally unlike where you live full-time. Rheinberger says that 9 times out of 10 people want a climate, scenery, just about everything to be different from their primary residence. Forty percent of all vacation home purchases are in a beach area.
To see what are the most popular destinations for online searches for vacation homes, check out Trulia’s interactive site. Click on a city, and you’ll see what the top five most popular vacation destinations are in that area. According to this map, are top five in the U.S. are Ocean City and North Wildwood, New Jersey; Kissimmee, Florida; Ocean City, Maryland and Marco Island, Florida.
If renting out your home is part of your plan, you’ll want to buy in an area that attracts tourists. Ben Kinney, a realtor in Washington, suggests checking out Airbnb, HomeAway, VRBO, LoveHomeSwap, VRBO and Flipkey to find out what the favorites are on these sites.
To be sure you really like a location, rent before you buy. Novick recommends to his clients that they do this for a year. As he points out, “it can be an expensive mistake if the perfect vacation house turns out to be in the next town over.” Spend time in your prospective vacation home during all four seasons. “What is serene in the spring can be noisy and chaotic in the summer,” cautions realtor Melanie Siben.
Sharon McIntosh, a broker in New York City, bought a 1920s vintage Montgomery Ward kit house two years ago, which she’s been renovating and restoring ever since. She recommends that you look at the transportation possibilities. “How will you get there? If the drive is more than two or three hours you won’t want to go every weekend; I set my own limit at two hours,” she says. “How will your guests get there? It’s great to be on a train route, even a bus route is fine for some.” Also to consider, she says: Do you need hiking, swimming, access to restaurants, cultural activities? If the latter, consider a college town. Do you want to get away from it all or be with others who share your interests?
If you have young children, be sure that there is enough entertainment for them as well. Contact the local school district, recreation department, religious institutions to get a feel for what’s available for kids; talk to parents in the local grocery store and at the playground.
5. What kind of house will it be?
The majority of vacation home buyers purchase a single family home; 27% buy a condo and 18% buy a townhouse or row house. Tammy Barry, who does sales and marketing for Heritage Harbor Ottawa Resort in Illinois, says that buyers need to decide whether they want “the turnkey, maintenance-free lifestyle of a townhome or condo community or the extra space of a single-family home.” Either way, “vacation homes are places meant to spend time with friends and family; open floor plans and flexible spaces that can be turned into extra sleeping areas when company comes are what people want most.”
According to the NAR survey, the size of vacation homes declined by 200 square feet from 2013–2015, but some in the biz would like to see it decline even further. Dan Dobrowolski, founder of EscapeHomes, designs 400-square-foot cottages, many starting at $75,000. He promotes them for their beauty, affordability and portability. “We can produce and deliver a new authentic cottage-style vacation home within 60 to 90 days and folks can begin living in them immediately.” Who buys these “tiny homes”? According to Dobrowolski, “young couples and families, empty-nesters, single men and women, you name it.” Recent clients included a Silicon Valley couple who are putting theirs on property in wine country and professors at the University of Iowa who are putting theirs by a lake.”
6. What are the tax implications of a vacation home?
Current laws offer several tax breaks that can help make second-home ownership more affordable. If you use the property as a second home, not as a rental, you can deduct mortgage interest as you would for a primary residence. You can also deduct property taxes. When you rent out your property for more than 14 days, the rules get more complicated.
Cooling weather can mean a cooling real estate market, depending on where you live. Whether you are purchasing or selling a property, the supply and demand of housing matters. One of the factors impacting housing supply and demand is the seasonality of your market. While you might not think the seasons of the year have an influence on the price you are paying or asking for your home, it makes a big difference – in some cases, as much as 10%. How’s that for a seasonal discount?
Know Your Real Estate Market
The seasonality of a market varies from location to location. Each market has its own nuance. For example, cities like Phoenix experience a snowbird effect, wherein winter months are popular due to an influx of people coming from different regions, like the Northeast, who are relocating or buying a second home. Alternatively, in cities like Denver, the cold weather climate plays a part in the seasonality of the market by slowing down the typically brisk pace of home sales.
It’s important to be able to identify the factors that influence your region so you can understand the impact of seasonality trends on the housing market.
Key Factors in Seasonal Real Estate
While the weather is something that will differ in each market, there are some nationwide considerations that contribute to seasonal trends in real estate. The holiday season and school year both hugely influence the supply and demand of any given market.
Buyers and sellers with children typically do not want to uproot their family in the middle of the school year and will wait until its conclusion so they have more free time for moving and the chance for a fresh start once the next school year begins. In fact, studies have shown the busiest moving times of the year occur during the summer, with June being one of the busiest months and July 31 the single busiest day, meaning people are likely shopping the housing market at the end of the school year and as the summer draws to a close.
Additionally, you will likely find fewer people moving during the holidays, which essentially eliminates the period between November and January. During this time of year people do not want to add the logistics of moving to an already hectic holiday season filled with family obligations, end-of-year deadlines, unpredictable weather conditions and more.
How Seasonality Works for Home Buyers
Due to the fluctuations in supply and demand, it’s during this identified “seasonal pattern” that you’ll find you don’t have as much competition from the average homebuyer. With summer being the busiest moving time of year, people buy more aggressively than in the winter, limiting the number of available houses and raising market prices. In the winter, though, since nobody wants to deal with the inconvenience of moving during this time, these low-demand periods are perfect for those who are looking for a good deal. Because sellers aren’t necessarily getting a lot of interest or offers from others, they’re more willing to negotiate and you’re able to obtain a substantial discount on pricing.
Approaching Seasonality As a Home Seller
If you’re a seller, it usually means you’re a buyer. For a lot of people, this means you do not have the luxury of selling when everyone else is buying and buying when everyone is selling, because you need a home to live in during that gap. Additionally, as a seller, you want to be able to sell in a peak market when everyone’s getting eyes on your property and demand and pricing is high. However, if you don’t immediately need the proceeds from selling your home to go into the purchase of your next, then buying in the winter, setting up a short-term living arrangement – whether that be leasing, temporarily moving in with others or something else – and then selling in the spring, is a great way to maximize the trade between what you’re selling and what you’re buying.
Make the Most of Your Seasonality
For homebuyers, one of the best ways to determine how the seasons impact your specific market is to talk to your broker or agent. They should be able to provide you with the market metrics for your area, allowing you to monitor the patterns and fluctuations of average sales price for each month in the city where you are considering buying your new home. By comparing different months and years, you’ll be able to identify where there are significant peaks and lows and determine when there are substantial discounts on housing prices in your market.
Once you’ve defined the seasonality of your market, don’t let the “inconvenience mentality” keep you sitting on the sidelines. By not buying when everyone else is buying, you can find the house of your dreams and save money. Not only will you face less competition for the homes you are interested in, but sellers will be more motivated and any offer you submit on a home will stand a better chance simply because there are fewer buyers, meaning it’s unlikely you’ll have to deal with the aspects of multiple offers or going above asking price.
As with your groceries or clothes, when you’re able to get a discount it doesn’t make sense to skip the discount and pay full price. With real estate seasonality, it’s the same. You can save anywhere between 5%-10%, or tens of thousands of dollars, and have a better equity position in your home. Seasonality is simple supply and demand – don’t try and buy when everyone else is.
Refinancing applications are a significant portion of all mortgage applications according to the Mortgage Bankers Association (MBA), in part, because today’s relatively low mortgage interest rates encourage homeowners to restructure their finances. But whether or not a mortgage refinance is right for you depends more on individual circumstances than this week’s mortgage interest rates. Here are a few considerations to think about before applying for a home refinance.
The first qualification you will need to refinance is equity in your home. Dropping home values across the country have left many Americans “underwater,” owing more to their mortgage lender than their home’s current market value. Other homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders, but some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 10-15% equity will have an easier time qualifying for a new loan.
Lenders have tightened their standards for loan approvals in recent years, so some consumers may be surprised that even with good credit they will not always qualify for the lowest interest rates. Typically, lenders want to see a credit score of at least 720 or higher in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still obtain a new loan, but the interest rates or fees they pay may be higher.
If you already have a mortgage loan, you may assume that you can easily get a new one. But lenders have not only raised the bar for credit scores, they have also become stricter with debt-to-income ratios. While some factors such as a high income, a long and stable job history or substantial savings may help you qualify for a loan, lenders usually want to keep the monthly housing payments under a maximum of 28% to 31% of your gross monthly income. Overall debt-to-income should be 36% or less, although with some additional positive factors some lenders will go above 40%. You may want to pay off some debt before refinancing in order to qualify.
A home refinance usually costs between 3% and 5% of the loan amount, but borrowers can find several ways to reduce the costs or wrap them into the loan. If you have enough equity, you can roll the costs into your new loan, increasing the principal. Some lenders offer a “no-cost” refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Don’t forget to negotiate and shop around, since some refinancing fees can be paid by the lender or reduced.
Rates vs. Term
While many borrowers focus on the interest rate, it is important to establish your goals when refinancing to determine which mortgage product meets your needs. If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term. If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term. Borrowers who want to pay off their loan as fast as possible should look for a mortgage with the shortest term at payments they can afford.
When you compare various mortgage loan offers, make sure you look at both the interest rates and the points. Points, equal to 1% of the loan amount, are often paid to bring down the interest rate. Be sure to calculate how much you will pay in points with each loan, since these will be paid at the closing or wrapped into the principal of your new loan.
An important calculation in the decision to refinance is the breakeven point, the point at which the costs of refinancing have been covered by your monthly savings. After that point, your monthly savings are completely yours. For example, if your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs. If you intend to move or sell your home within two years, a refinance under this scenario may not make sense.
Private Mortgage Insurance (PMI)
Homeowners who have less than 20% equity in their home when they refinance will be required to pay PMI. If you are already paying PMI under your current loan, this will not make a big difference to you. But some homeowners who own homes that have decreased in value since the purchase date may discover that when they refinance they will need to start paying PMI for the first time. The reduced payments due to a refinance may not be low enough to offset the additional cost of PMI. A lender can quickly calculate whether you will need to pay PMI and the impact on your housing payments.
Many consumers rely on their mortgage interest deduction to reduce their federal income tax bill. If you refinance and begin paying less in interest, your tax deduction may be lower, although few people view that as a reason to avoid refinancing. However, it is also possible that the interest deduction will be higher for the first few years of the loan when the interest portion of the monthly payment is higher than the principle. Increasing the size of your loan due to taking cash out or rolling in closing costs will also impact the amount of interest you will pay. Points paid during a refinance can be deducted over the life of the new mortgage loan. Consult a tax advisor for individual information on the impact of refinancing on your taxes.