Disclaimer: This is based on my experiences as a buyer, please consult with a licensed realtor to understand the nuances of your market and situation.
So, you’re thinking about making the biggest purchase of your life: buying a property. Congratulations on making this decision!
There’s a lot reasons to buy, over renting. Biggest reason is lifestyle. Buying a property can open up doors for creating passive income, a stable household, and not having to worry about moving frequently. Plus, the fixed cost of a mortgage helps manage your budget better, lower your living cost while your salary and savings increase.
Biggest downfall, it can feel like you are trapped. It’s a big investment and can feel permanent (especially after signing all that paperwork!). But have you considered turning your home into a passive income machine? Having the house paid for by a tenant, and something extra toward the savings account is a beautiful thing. Let’s talk about what’s required during buying a property.
Don’t hate me, but we gotta start with your budget. Starting here is unpleasant, but it creates grounding on what is feasible before the allure of seeing properties which can stray you from this base.
Establish a budget, before looking at properties
How much house can you afford? $100k, $300k, $1M
It depends on your goal, income, support, and location. Mortgage companies are open to giving you up to 6 times your annual salary. So, if you’re making $50k per year, you may be approved for a $300k house. I don’t recommend it.
The more you borrow, the higher your risk being stretched thin. I would advise staying within 4 times your annual salary. This way you can comfortably make payments from your current income, and as your income increases you have excess income without overextending yourself. So, for a $50k salary, try to stay around a $200k house.
Bankrate has a calculator to see how much your monthly cost may be for a property. I STRONGLY advise you spend some time playing around with the calculator and find a budget that works for you now. DO NOT plan with future earning potential in mind.
Once you have your budget, apply for pre-approval. If you apply for pre-approval to multiple financial institution within 14–30 days then it may be counted as one inquiry (experian). So, once you’re you’ve established a budget, start looking but remember to apply for pre-approval. Pro Tip: Credit Unions give lower rates than larger banking institution.
Stay under 4x your annual salary, this keeps you from over extending yourself and allows you to build an emergency fund. Establishing your budget will keep you from becoming over excited and spending more than you can truly afford. Get a pre-approval when you’re ready (90 days) from purchasing. It’ll make the process smoother.
Location, Location, Location – It’s almost everything
Congratulations! You know your budget, you have your pre-approval. Now, it’s time to Zillow a few locations and assess if the properties you like are within your budget.
You will be tempted to increase your budget to get into the “right” location, I advise against it. If you allow your budget to sway, then you may find yourself over extending yourself which could become a pain point in the future. Be careful.
That is why we talk about establishing a budget first. It’s not sexy, but it’s great for life satisfaction.
If your ideal home is within your budget in your desired location, great! On to the next step. Drive by, drive through, and drive slowly. Keep in mind, the more research you do here, the more informed you will be and the more negotiation power you have when it comes to putting in an offer.
The purpose of driving by, driving through and driving slowly allows you to see the neighborhood, how neighbors engage with each other, the cleanliness of the area, the potential crime rate. You’re essentially examining the culture of your location.
Identify 3–5 locations (cities, towns). This can be your current footprint, proximity to work, friends, family, access to public transport/highway/etc. (I actually triangulated my friends/family, work, and proximity to city amenities)
Drive through during a workday, weekend, and nights.
Slowdown and engage with your future neighbors — assess community culture. (Safely and with precautions of course in this COVID pandemic)
Research the schools in the area — If that’s important for you. Pro tip: better schools mean better resale value, easier to rent out, etc.
Be flexible with your location, adjacent locations may allow you to stretch your $$ while getting the benefits of your desired location.
Stick to your budget, find general locations and start driving, observing, feeling the culture of the neighborhood. Do your research, drive around and make it into a fun activity. My partner and I had a Saturday ritual of grabbing our favorite bubble tea and going on these winding drives. You never know which pocket neighborhood might be just perfect for you.
Good agents make the experience more enjoyable, taking into account your lifestyle, personality, budget, etc. They advocate for you at every corner.
Shop around for your agent. Look for personality fit, knowledge and experience of the agent, share what you’re thinking and see what they recommend. Are they seeing your vision, your location? Are they plugged into parts of the town you are interested in? Are they challenging you and asking you introspective questions (this can be good)? Are they helping you find pocket (gem) neighborhoods? Do you feel pressured to make a decision ? All of these things matter because at the end of the day it is your time, your investment, and your money. Everyone makes money in a sale except the buyer.
A good agent is able to not only find the right home, but do the essential research to ensure you are making an informed decision, negotiate and advocate for you. Remember, this will likely be one of the biggest purchases of your life, take the time and work with someone that understands you and your needs.
Find someone that fits with your personality, approach and is easy to communicate, while advocates and challenges you. They are on your corner and will need to make you feel comfortable because you make this big purchase. All agents have their strength, you need to focus on what strengths are important for you.
Buying a property – The “Process” is…
It can be easy, it can be regretful, it can be frustrating, it can be a missed opportunity, and so on…
Remember, buying a property is a process, unless you can outbid and close immediately you may not always get your dream property. The faster you’re able to adapt to changing situations, the smoother the transition. Sometimes, you’ll love a place and before you see it someone else has already purchased it. Sometimes, you’ll place your bid and someone will make a cash purchase. Sometimes, you’ll be in the process and during an inspection you’ll discover several challenges. Sometimes, you’ll find a brand new place with no headache.
I could go on, but the biggest take away is you have to establish your comfort zone and know it may take you months before you make that purchase. Have flexibility, stay adaptable, establish your minimum requirements, and stick to what you want.
It’s a process. Stay agile, nimble, and trust that you’ll find the property that’s right for you.
Negotiating: asking less never killed a deal
Congratulations! You love your property, you’re ready to put in an offer. This is a big step, and it goes by fast. Make sure you’re putting in a competitive offer that’s within your budget. Many buyers miscalculate their closing costs. Between an offer’s acceptance and signing, there are costs left and right, often at the expense of the buyer. This includes inspection, title and legal fees, proof of insurance, and if purchasing a property in an HOA, there are assessment fees. It all adds up, and is not cheap.
I suggest adding 5% to your property cost for closing costs. If you’re able to afford a $200k house, you may be looking for something between $180k to $195k, just to give you that extra room for closing costs. Closing costs and downpayment will need to be paid at signing.
Here are the tips for negotiating:
Ask your agent about comps — Comps is a report of surrounding properties that sold recently, you can see if your property is overpriced, underpriced, or priced accurately.
According to the comps and what you can rationalize the property value should guide you in your negotiations. I suggest always negotiating.
Ask a close relative, friend, partner to play devil’s advocate. This will help you see flaws in your perfect home and you can use their perspective to help you negotiate.
Few things to remember, negotiations can be back and forth. So, hold your ground when possible. They may be testing you to see if you’re willing to pay more than your offer. Nudge a little, when/if you’re ready. For example, if the house is listed for $198k, you can start by offering $194k and ask the seller to pay $2k towards closing (totaling $192k offer). They’ll come back with $197k and $3k towards closing, etc.
Who pays closing costs is negotiable; HIGHLY encourage that you have the seller help you pay your closing costs, which means less out of your pocket at signing. For example, if the house is listed for $198k, you can ask the seller for $5k towards closing, and you’ll pay $198k (totaling $193k offer).
ALSO — Mortgage rates can be negotiated too, so if you’re getting a better rate from a competitor you can tell your primary financial institution that you’d like a better rate of you’ll move your business to the other mortgage company.
Due Diligence, Identify everything that’s wrong
Due Diligence is about 7–10 day period where you get an inspector to inspect your new property for any issues. They are a good investment, because if they find any issue, big or small, you can return to the seller and ask them to fix the issues or lower their cost. For example, if the AC is old and needs repair, you can ask the seller to repair the AC or shave $$ off the offer price.
During to due diligence period, you are the only person under contract. Neither you nor the seller can back away with written permission. Now, if the seller disagrees to fix the issues and won’t lower the price, you can end the contract and walk away from the house, within the due diligence period, without penalty.
Many due diligence contract asks for 1% downpayment be made as a “good faith” payment. If the contract continues to closing that percent is applied towards the downpayment. If the contract is cancelled during due diligence, the money is returned to you. If the contract is cancelled after due diligence, the earnest money is kept.
Closing, stretch your fingers to avoid hand cramps
You did it! It’s your signing day, you have all your finances in place and you’re ready to get ownership of the property. Only about 100,000,000 paperwork to sign, downpayment and closing costs to be paid out and keys to your new home is within sights. But, before you sign, make sure you do one last thorough walk through of the property.
The previous owners may have forgetting their mail, packages, etc. Or they might have destroyed a wall when taking out the decorations. The goal is to have the place clean and move-in ready before you sign.
Everything looks good. You are ready to take ownership of your new property!
After closing, CONGRATS!!
Celebrate! You did it. Relax, enjoy. Cardboard boxes and Pizza is a common move-in picture because the process is exhausting, the moving is exhausting, but now you have your new home. You make it represent your style.
About my property buying journey:
I wish I had a checklist when I was buying my first, 2nd or third properties. It’s exhausting remembering all the process and figuring out what to do and when to do it. This article isn’t everything you need to know, but it’s a good start. I plan on making a check list and a timeline because as a new homebuyer the process is confusing. I remember I was questioning everything and it took nearly 2 years to find the right place. The second property took 3 weeks, the 3rd property took 2 months. And there’s fun and horror stories behind all those purchases.
Biggest Tips: Establish your budget, drive around and find pocket communities, and hire an agent you trust.