Over the years, I’ve worked with several first-time homebuyers, and I know that buying in today’s market is particularly tricky because:
- There is so little inventory and properties are getting multiple offers
- Prices are rising quickly which causes fear of loss, frustration, and maybe even panic
- Interest rates are rising which further erodes affordability
Here are several tips to help you make the best decisions when purchasing your first home. Do not let panic or fear take hold. You can get into the right home at the right price in a great location if you follow these guidelines.
First-time home buyers generally consist of the young workforce and early-state families are who between the ages of 25 and 40 years old. This means your household income is likely between $40,000 and $80,000 per year and you are single or just starting a household. Based on this, you are likely able to afford a home between $160,000 and $300,000 assuming you have at least a 10 percent down payment.
If you’re a first-time homebuyer, follow these tips and get into the best home for you and your family:
1. Save Save Save!
If you are in your mid 20’s and you have that first big job, this is the time you can put away big pieces of money! Live cheaply now and you will have a pile of cash for a down payment when you decide the time is right to buy. As my dad used to say, “These are the good ol’ days” And he was right! You can save more now than when you have children and feel the need to buy a home in that school district with the great reputation.
Options to save money? Live with mom and dad for a few years or live with friends in a house or apartment in a less expensive zip code. Be urban pioneers, live cheaply in an up-and-coming area of town. Eat out less, party at home, go easy on the vacations and clothes. Sound rough? If you want to save, it will never be easier than now. Save at least 20 percent of your income or more if you can! Pay off those student loans. Defer! You will be better for it and 30 years from now you will be glad you did!
2. Learn all the costs of home ownership.
We bought our first house in Detroit when I was 27; I had no idea that Detroit had an income tax! My agent did not tell me that! That was an expense I never planned on. A great agent and lender team can outline all the expenses for you and make sure you are comfortable with the payment and expenses before you make the offer. These are some often-overlooked expenses: A reserve for repairs and improvements (put aside 200-300 per month). This will cover things like roofs, furnaces, driveway repairs, new appliances, a bathroom remodel, landscaping projects (remember big trees do fall down), and more. Also, check with the utility company and get the average utility bill amounts. And after you move in, consider getting an energy audit done. Don’t forget to factor in the cost of commuting – both in terms of time and money.
3. Don’t underestimate these benefits of home ownership
- Tax deductions: You can deduct mortgage interest and property taxes.
- Its a leveraged investment: This article shows how your investment is impacted in different market scenarios. In an instance where the market goes down 10 percent right after you purchase, if you hold for 10 years, you will have $150,000 in equity.
- Your rent cannot be raised. Forget landlords altogether!
- Growth on taxable value of individual parcels of property is limited by Proposal A to the lesser of inflation or 5 percent.
- It’s a tangible asset.
- It can contribute to asset diversification.
4. Buy now and hold for the long haul
Home ownership has always been a great investment with an average return of around 4 percent per year. Historically, you can see that even if you bought at the very height of the market (2004-2006), we are now above that point on average. People who bought quality real estate have seen significant gains (see #5 below). By buying now, you may feel that you are overpaying. Next year you’re likely to already be looking at prices above what you paid and in several years, if you are not saving significant amounts of money you could find yourself priced out of the market by waiting.
5. Work with one skilled agent to undertake a systematic search
Find and hire one agent to work with you. Interview a few or several, or get a recommendations from a friend or family member. I often see people going helter-skelter from one home to the next in different areas of town with no systematic strategy for their searches. This is a great way to get caught up in excitement and buy a house that may not be the best fit for you.
Also, I often see people going to the listing agent thinking that is going to get them the best deal or best chances of getting a property. Remember the listing agent has a duty to the seller – not to you, the buyer. Enter into a buyer agency agreement and put a great agent to work for you.
Great agents are trained listeners. They know the market inside and out and can quickly identify homes and areas that you may not know about or have overlooked. Take advantage of this experience and expertise! Great agents are also expert negotiators. That doesn’t always mean they are going to get you a huge discount on the property, but it could mean additional terms, like occupancy, inclusions, or repairs. In this strong market, they may get you positioned over multiple other offerers and get your offer selected. It’s the difference between you getting your house or not!
6. Buy for quality of life
Buy a home that allows you and your family to live your best life possible! At the end of the day, a home is where you are going to build your lived experience – it should contribute to the best, most memorable experiences possible. Find a home that maximizes these things for you and everything else will be fine. My suggestion is to not buy your home as an investment first. Before the great recession, people often bought as much home as they could afford thinking it was maximum leverage. Well, buying beyond what you need is a waste of money. Today the trend is going back toward smaller, more efficient homes.
7. Pay for quality and location
Buy a home built with the best materials and workmanship you can find with a well-thought-out floor plan, well-sited on its lot, and located correctly in the neighborhood. Again, a great agent will have the experience to show you how these choices play out. These homes will be more expensive AND will offer the best appreciation when it is time to sell. Buying a home that is cheap that compromises too many of these factors is almost surely be bad investment.
Follow these tips and I believe you will make the best investment and quality of life decisions possible in finding and purchasing your new home. I would love to hear about your experiences purchasing a home, both good and bad. Give me a call at (734)845-9700.
Ann Arbor area homes and condos for sale between $150,000 and $300,000