My Top 9 Tips For 1st-Time Home Buyers
Having bought my 1st home at age 22 and after taking part in dozens of purchases over the years, I’ve been asked by so many people for tips to buy their 1st home. Depending on where you live, the market can be red hot where multiple offers and bidding wars are normal, leaving many of you wondering how to even compete.
In this article, I will talk about common dangers of being a buyer, how to navigate through those pitfalls, and some of my top techniques that I employ when I’m shopping around for a home. Even if you are an experienced home-buyer, many of the tips and tricks I’ll talk about in this article are applicable to buying any home, not just a primary residence.
Everyone’s against you. Find the right realtor.
I don’t know about you, but being a buyer feels like everyone involved in your (future) home purchase is working against you. Obviously, the seller and their realtor are striving to sell the home to you at the highest possible price, so there’s no way they’re on your side. Even your buying agent gets paid more if you buy a more expensive house, since they receive a % commission of the purchase price.
That’s why it’s so important for you to work with a realtor you trust and isn’t too pushy. Personally, I want my realtor to work their tails off to earn their commission, even if I’m not paying them directly (the seller pays realtor commissions). They should be proactive, great communicators, experts in your local market, have a great network of agents and sellers who might be more willing to sell a home to you, and have clever techniques to help you close on a property. I despise it when I reach out to a realtor and their reaction is to simply add me to a mailing list that ultimately goes straight to my junk folder.
Know your numbers inside and out
Far too often do people buy a home because they think it’s a better financial choice than renting. However, that’s not always true. It really depends on your situation, and the answer comes down to math. To help you figure that out, I’ve provided a table of expenses below that highlight the differences between home ownership and renting.
| Own | Rent |
|---|---|
| Homeowners insurance | Renters insurance |
| Mortgage | Rent |
| HOA (maybe) | HOA (included in rent) |
| Property taxes | - |
| PMI (private mortgage insurance) | - |
Running through the above table - Homeowners insurance is usually much higher than renters insurance. Not all homes or rentals have an HOA, so this expense is really situational. Mortgage is typically higher than rent, too, but there are two parts that make up a monthly mortgage payment:
Principal - money that pays off your loan balance. This money is ultimately yours and not the lender’s.
Interest - money that goes to the lender.
So I think the comparison of mortgage vs rent is a little misleading. It should actually compare monthly interest vs rent.
Property taxes can be a huge added expense for home owners, so watch out for this one if you’re a 1st-time home buyer! And lastly, you may have PMI (private mortgage insurance) if you don’t put the minimum 20% down payment to acquire your home.
Now that you know some of the differences in expenses between home ownership and renting, crunch the numbers before you dive into the home-buying process. It will help you set a limit on how much you should purchase, which is really important, especially if you end up in a bidding war for a home you really like! You don’t want to regret your purchase after it’s too late to back out.
20% down
Many 1st-time home buyers fall prey to lenders who lure them in to “low down” payment lending programs. However, putting less down on a property isn’t necessarily a good thing. The less you put down, the less of the home you actually own and the higher your mortgage payment will be. And if you put less than 20% down, you’re usually required to pay for PMI (private mortgage insurance), which is an added monthly expense you can’t easily remove even after you reach the point of owning 20% of your home years after your purchase. That’s why I advocate for putting at least 20% down. Lastly, if you don’t put at least 20% down, sellers in a competitive housing market are less inclined to accept your offer because they may be concerned that you’re not as qualified as other buyers, increasing their odds of you backing out on a deal.
Prequalification
Before making an offer, be sure to have a prequalification letter from your lender. If you don’t, how do you know how much a lender is willing to lend you? And if you make an offer on a home without a loan contingency (which allows you to back out of a deal if the loan falls through) and you find out you aren’t qualified for the loan amount you need, you may wind up being forced to cancel your purchase contract and losing your earnest money (which can be thousands of dollars). Lastly, other buyers who do have a prequalification letter show the seller that they’re serious buyers. So if you’re the one who doesn’t bring one to the table, your offer has lower odds of being accepted.
Reduce your competition
Know your seasons
The hottest months for real estate are in the sunny seasons, starting with spring then summer. And for homes that go to great schools, spring is usually when parents are out in droves hunting for homes, since they want to ensure their children make it into the next school year that starts later that August or September. So to reduce your competition, you may want to consider shopping in the slower seasons like in the fall and winter.
Dual agent
In many real estate markets, it’s common for sellers to pay 3% commission to the selling agent and 3% commission to the buying agent. However, if the seller’s agent is open (and legally allowed) to be a dual agent to represent both you (the buyer) and the seller, the agent will receive both the seller’s and buyer’s commission! It’s a great deal for the agent, but it can also benefit both you and the seller.
Because the agent now receives both commissions, they’re very likely to agree to accept less than the total 6% commission. For example, let’s say the total commission drops to 4% and that the seller is trying to sell a $1M house. This means the seller will pay 2% less commission, instantly saving them $20,000! The seller knows this and may be appreciative of you helping them save money. Therefore, they may be more willing to accept your offer at a lower price than the competition’s.
Lengthy DOM
In real estate, DOM means “days on market,” the number of days a home has been listed for sale. A very hot home will likely have a low DOM, and less desirable ones may have a high DOM. But not all homes with a high DOM are necessarily bad, as most people think. So you can use this to your advantage and look at homes that have been on the market for a while that have fallen off your competition’s radar.
Potential, not perfection
Most of us are drawn to homes that are new and modern. And while that’s nice to have, it’s not necessarily the most important factor. Definitely check the home’s price history, because if the home is newly remodeled and was recently purchased anytime in the past year or two, it’s very likely that an investor purchased and remodeled it with (likely) cheaper materials that get the most bang for their buck. In my opinion, how new and nice a home looks is cosmetic and can be changed at a later point in time. What can’t be changed (or is expensive and difficult) is the home’s layout and core structure.
So when shopping for a home, I always look at their potential, not what they look like today. Remodeling a home isn’t as difficult or as expensive as most people think. And if the home has a great layout but doesn’t look nice, it’s likely most people are turned off by the lack of prettiness. But that presents an opportunity for us home-buyers!
New constructions
Instead of buying a lived-in home, you can try to find a brand new construction. And if you do, you don’t have to worry about any bidding wars with other buyers. You only have one person to negotiate with: The builder. Builders often throw in some incentives towards upgrades (usually on the order of tens of thousands of dollars) and closing costs (thousands of dollars in savings) if you use their preferred lender. If you’re lucky and get in at an early phase of a development, you may have a little more negotiating power since the builder would be looking to get their product moving and lock in some early sales. The best thing about this option is, not only do you have a fixed sales price (at least the base price, before optional upgrades), you get a brand new home that no one else has lived in!
Final words
In summary, be sure to partner with a realtor that gels with your personality. They should be your greatest ally throughout the home-buying process. You also want to be sure that you absolutely need to know your numbers inside and out, or you might wind up becoming “house rich, cash poor,” which will cripple your cash flow overnight! Don’t let that be you.
Lastly, I talked about several ways to reduce your competition, so be sure to use as many of them as possible to your advantage! My hope is that some of these tips will not only help you buy the home of your dreams, but to also save you some time, money, and stress throughout the process. Happy house hunting!
