Why Buying a Home is a Good Idea

The Best Investment
As a fairly general rule, homes appreciate about ten or fifteen percent a year. Some years will be more, some less. The figure will vary from neighborhood to neighborhood, and region to region.

Ten percent may not seem like that much at first. Stocks (at times) appreciate much more, and you could easily earn over the same return with a very safe investment in treasury bills or bonds.

But take a second look…

Presumably, if you bought a $300,000 house, you did not pay cash for the home. You got a mortgage, too. Suppose you put as much as twenty percent down — that would be an investment of $60,000.

At an appreciation rate of 10% annually, a $300,000 home would increase in value $30,000 during the first year. That means you earned $30,000 with an investment of $60,000. Your annual "return on investment" would be a whopping fifty percent.

Of course, you are making mortgage payments and paying property taxes, along with a couple of other costs. However, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.

Your rate of return when buying a home is higher than most any other investment you could make.

Income Tax Savings

Because of income tax deductions, the government is subsidizing your purchase of a home. All of the interest and property taxes you pay in a given year can be deducted from your gross income to reduce your taxable income.

For example, assume your initial loan balance is $240,000 with an interest rate of six percent. During the first year you would pay $14,400 in interest. If your first payment is January 1st, your taxable income would be $14,400 less — due to the IRS interest rate deduction.

Property taxes are deductible, too. Whatever property taxes you pay in a given year may also be deducted from your gross income, lowering your tax obligation.

Stable Monthly Housing Costs

When you rent a place to live, you can certainly expect your rent to increase each year — or even more often. If you get a fixed rate mortgage when you buy a home, you have the same monthly payment amount for thirty years. Even if you get an adjustable rate mortgage, your payment will stay within a certain range for the entire life of the mortgage — and interest rates aren’t as volatile now as they were in the late seventies and early eighties.

Imagine how much rent might be ten, fifteen, or even thirty years from now? Which makes more sense?

Forced Savings

Some people are just lousy at saving money, and a house is an automatic savings account. You accumulate savings in two ways. Every month, a portion of your payment goes toward the principal. Admittedly, in the early years of the mortgage, this is not much. Over time, however, it accelerates.

Second, your home appreciates. Average appreciation on a home is approximately ten percent, though it will vary from year to year, and in some years may even depreciate.. Over time, history has shown that owning a home is one of the very best financial investments.

Freedom & Individualism

When you rent, you are normally limited on what you can do to improve your home. You have to get permission to make certain types of improvements. Nor does it make sense to spend thousands of dollars painting, putting in carpet, tile or window coverings when the main person who benefits is the landlord and not you.

Since your landlord wants to keep his expenses to a minimum, he or she will probably not be spending much to improve the place, either.

When you own a home, however, you can do pretty much whatever you want. You get the benefits of any improvements you make, plus you get to live in an environment you have created, not some faceless landlord.

More Space

Both indoors and outdoors, you will probably have more space if you own your own home. Even moving to a condominium from an apartment, you are likely to find you have much more room available — your own laundry and storage area, and bigger rooms. Apartment complexes are more interested in creating the maximum number of income-producing units than they are in creating space for each of the tenants.

If you are moving to a home for the first time, you are going to be very pleased with all the new space you have available. You may have to even buy more "stuff."

The Business Cycle and Buying a Home

There are times when the economy is brisk and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more, buy new cars, and….

…They buy houses.

Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession.

During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment - perhaps because of a layoff in the family.

Supply and Demand

When the supply of available houses is greater than the supply of buyers, appreciation may slow and prices may even fall, as happened in the early eighties and the early to mid-nineties.

If you are lucky enough to purchase a home during a slow period, you can be reasonably certain the economy will begin to show strength again. At times, real estate values may even surge drastically. In many regions of the country, this is precisely what occurred in the late eighties and nineties.

Why You Should Not Wait

Plus, "timing the market" generally works best for first-time buyers. People who already have a home usually need to sell it in order to buy their next one. If a "move-up" buyer wants to buy a home during a depressed market, that means they usually have to sell one during the slow market, too. If a seller wants to sell his home to take advantage of a "hot" market when prices are fairly high, they generally have to buy their next home during that same hot market.

It tends to equal out.

Finally, the business cycle can change over time. Since 1983, we have had two fairly long expansions with only a slight recession in between each. You would not want to wait nine years to buy a home, would you? You could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices.

Are You Buying a House or a Home?

As you read and study about buying real estate, you will often find the words "house" and "home" used interchangeably. There is a huge difference between a house and a home.

A house can be a place to eat, sleep, park your car, and put all your "stuff" (including other family members). It is a material possession and an investment. A home is where you feel comfortable, warm, safe, and protected. A home is where you live.

A house is something you buy logically. A home is an emotional purchase. When buying real estate you have to balance your emotional wants and your logical needs because there will almost certainly be a time when the two conflict.

Example

For example, you may want a house with a view, but the payment is higher than you feel comfortable with on a thirty-year fixed rate mortgage.

What do you do?

Purchase the house anyway and budget more carefully for the next few years? Buy the same house without the view and get it cheaper? Make a larger down payment by borrowing from your 401K or family members, so you get a lower payment? Get an adjustable rate mortgage with a smaller payment instead of a fixed rate loan? Or buy a smaller house and still get the view?

When viewing the house, most people look at it emotionally and envision it as a safe, happy, comfortable home. Later, when making the offer or filling out a mortgage application, your logic may begin to kick in, instead.

Balancing Act

The trick in buying real estate is to view all decisions with both a logical perspective and an emotional perspective. If a situation presents itself that requires a trade-off, decide on whether there is a huge conflict or a small one. Logic should win the big conflicts, but emotion should always be a factor, even winning the small ones.

You will find yourself owning a warm, happy, safe home — and an investment for the future at a price you are willing to pay.

Things Not to Do Before Purchasing a Home

Don’t Move Money Around

When a lender reviews your loan package for approval, one of the things they are concerned about is the source of funds for your down payment and closing costs. Most likely, you will be asked to provide statements for the last two or three months on any of your liquid assets. This includes checking accounts, savings accounts, money market funds, certificates of deposit, stock statements, mutual funds, and even your company 401K and retirement accounts.

If you have been moving money between accounts during that time, there may be large deposits and withdrawals in some of them.

The mortgage underwriter (the person who actually approves your loan) will probably require a complete paper trail of all the withdrawals and deposits. You may be required to produce cancelled checks, deposit receipts, and other seemingly inconsequential data, which could get quite tedious.

Perhaps you become exasperated at your lender, but they are only doing their job correctly. To ensure quality control and eliminate potential fraud, it is a requirement on most loans to completely document the source of all funds. Moving your money around, even if you are consolidating your funds to make it "easier," could make it more difficult for the lender to properly document.

So leave your money where it is until you talk to a loan officer.

Oh…don’t change banks, either.

Should You Change Jobs?

For most people, changing employers will not really affect your ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can be disastrous to your loan application.

Salaried Employees

If you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time, switching employers should not create a problem. Just make sure to remain in the same line of work. Hopefully, you will be earning a higher salary, which will help you better qualify for a mortgage.

Hourly Employees

If your income is based on hourly wages and you work a straight forty hours a week without over-time, changing jobs should not create any problems.

Commissioned Employees

If a substantial portion of your income is derived from commissions, you should not change jobs before buying a home. This has to do with how mortgage lenders calculate your income. They average your commissions over the last two years.

Changing employers creates an uncertainty about your future earnings from commissions. There is no track record from which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter cannot be certain that past earnings will accurately reflect future earnings.

Changing jobs would negatively impact your ability to buy a home.

Bonuses

If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. Then they will average your bonuses over the last two years in calculating your income.

Changing employers means that you do not have the two-year track record necessary to count bonuses as income.

Part-Time Employees

If you earn an hourly income but rarely work forty hours a week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job, so no way to accurately calculate your income. If you remain on the old job, the lender can just average your earnings.

Over-Time

Since all employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you stay on your present job, your lender will give you credit for overtime income. They will determine your overtime earnings over the last two years, and then calculate a monthly average.

Self-Employment

If you are considering a change to self-employment before buying a new home, don’t do it. Buy the home first.

Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.

If you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay that until you purchase your new home.

Why Search for a Realtor, Anyway?

Finding Your Realtor by "Accident"

When someone decides it is time to sell their home, they interview several Realtors from different companies to determine which one is best for them. They want someone who will represent them and someone they feel will do an effective job at marketing their home. However, when someone decides to buy a home, they usually end up with their Realtor through sheer accident.

Why don’t home buyers search for a Realtor the same way that home sellers do?

Instead, homebuyers usually end up with a Realtor as a result of answering an advertisement. The advertisement will give a brief summary of a home available for sale along with the price, but it says nothing at all about the Realtor.

Listing Agents and Selling Agents

You see, there are two "sides" to every sale. The seller's side is represented by the listing agent. The buyer's side is represented by the selling agent. The selling agent can also be referred to as the buyer's agent. Selling agents (buyer’s agents) do not usually list very many homes for sale. They deal mostly with homebuyers. Selling agents "sell" the homes that are placed in the Multiple Listing Service by the listing agents.

Most agents concentrate primarily on one side or the other. This is not a "hard and fast" rule. There are also agents who split their time equally between buyers and sellers. Often, these are the very best Realtors. The fact of the matter is, if you are buying a home who do you want on your side? A Realtor who deals primarily with sellers? Or one who deals mostly with buyers?

If you call on a single classified advertisement in a newspaper, an ad in one of those homes selling magazines, or a listing on the internet, you are most likely calling the listing agent.

Should You Call the Listing Agent?

First, very few people actually buy the house they call about.

For argument's sake, suppose that you call the Realtor who is listing the property you "might" be interested in. It turns out that the house is absolutely perfect and affordable and you want to make an offer. Do you want the same agent who represents the seller to also represent you?

When you make an offer to buy a house, you are entering a negotiation. The seller wants as high a price as possible and the buyer wants the lowest price possible. Plus, there is more to buying a house than just settling on a price. If a Realtor represents both sides, there is a potential conflict of interest, although an ethical Realtor can often equally represent both sides. In such a case, however, the agent becomes more of a transaction facilitator than an agent working actively on behalf of either the buyer or seller.

You must keep in mind that there are times when it might not work out, too. The listing agent may choose to represent only the seller and that would leave you without your own advocate.

The Crux of the Matter

Most real estate transactions go fine, but almost everyone has a challenge or two. These challenges are often routine, but sometimes not. Because the agent has divided loyalties, one side or another may doubt where those loyalties truly lie. Mistrust develops. This can take a small problem and blow it way out of proportion. At that point it becomes a crisis.

Having an agent on your side as your advocate removes the mistrust and helps keep things on an even keel. If a challenge develops, you know where your agent stands.

Plus, the seller pays for it — you don't.

Why Listing Agents Advertise - Is it What You Think?

Listing agents place ads for several reasons. First, they need to show the seller that they are doing something to sell their home. Second, by showing how much they advertise, they can also attract other individuals who are thinking of selling their homes.

They point to their ads to show their clients that they are aggressively marketing the property. When other home sellers constantly see ads from a particular Realtor, they are inclined to want to list with that Realtor, too. So even though the ads look like they are directed toward home buyers, they often have another purpose. To attract home sellers.

What sellers don’t realize is that a listing agent’s true marketing emphasis is directed toward other Realtors, not the general public. Their main goal is to convince the selling agents (buyer's agents) to find buyers and make offers. This is a good thing because if you are selling a home, you want as many Realtors as possible bringing buyers around to take a look. Most of a listing agent's marketing efforts toward other Realtors are invisible to the general public, but it is where an effective listing agent does a home seller the most good.

Selling agents (buyer's agents) do advertise homes for sale in order to attract buyers. Although the ads do market a specific property, they are mostly intended to attract buyers in general — not a buyer for that specific property. The agent would be happy if you did buy the property you called on, but it happens so rarely that they do not expect it.

What happens when you call on a real estate ad is that you often schedule an appointment to go look at the advertised home. While you are out looking at that home, you will probably want to look at others — so the agent will show you a few other homes, too. Eventually, you and the Realtor will zero in on what you need and like in the proper price range and you will make an offer.

That is how most buyers find their Realtor — by "accident."

Why Search for a Realtor, Anyway?

Using Your Own Realtor

Actually, the best thing for you to do when you see an advertisement in the paper is to call your own Realtor and tell them about the ad. Since addresses usually do not appear in advertisements, your Realtor will call the listing agent and find out the MLS number for the property. If the listing is on the internet, it probably already provides the MLS number.

The house may turn out to be a great home for you, but it may also be a property the Realtor has already disregarded because it backed up to a busy noisy street and you have told your Realtor you wanted a quiet neighborhood.

First you have to have a Realtor you can call

Every Realtor can show you every property available for sale in the Multiple Listing Service. Since that is true, you can call any real estate office and find a Realtor willing to show you houses for sale. The problem is that you do not know if you are talking to an excellent Realtor or a lazy inactive one.

Shopping for an Agent

Your first step should be to shop for a Realtor, not to shop for property. Shop for a Realtor the way you would shop for a good attorney, accountant, mechanic, plumber, doctor, financial advisor, or other professional.

If Automobiles were Houses

Imagine that automobiles are sold like real estate, with no more car lots or dealerships. Both new and used cars are just parked on the street. So if you want a Ford, there are no more Ford dealerships. No more Lexus dealerships or any other kind of dealerships, either. If you want to look for a car on your own, you just drive around and see what you can find. Even then, you can only look at the outside, because you don't have the keys.

There are some people that have the keys. They also have a computer that tells them where all the cars are parked, what model and year they are, what size engine they have, and how many miles are on the odometer. They get paid a commission for selling the cars.

Some of these commissioned agents just sit around and look at the computer, waiting for the phone to ring. Some of them go out and locate the new cars, physically inspect the interior and exterior, and flip on the ignition to listen to the sound of the engine. They are interested in finding the best cars so their customers refer future clients to them.

Who would you rather call?

You have to get a "buyer’s" agent instead of a listing agent. You want someone of value to represent you, not someone who is full of "puff."

Interviewing a Good Realtor

When you interview Realtors for the job, you want someone who will be concerned about you and will take care of your interests. You want someone who demonstrates ready knowledge of homes available for sale and does not have to call you back after they "check on the computer." This ready knowledge demonstrates they have actually been out previewing homes and don’t just sit around waiting for the phone to ring.

You also want someone sharp enough to ask you questions as well, including your financial and debt information. By asking these questions, a good Realtor will be able to determine the proper price range you should be looking in. By asking about your family, an agent will be able to tell if what you need in a home is something available in your price range. You want a Realtor who is bold enough to talk straight with you instead of always telling you what you want to hear.

When a Realtor Asks to Meet With You

Finally, any decent agent will always ask for an appointment to meet with you, too. It is only natural, since they earn their living by commissions. However, Realtors are also supposed to act as your agent, looking out for your interests before their own. You want a Realtor who takes that responsibility very seriously. If someone seems too much like simply a salesman, then maybe you should look a little further.

Thinking Ahead About "Buyer’s Remorse"

If you are thinking of buying your first home, you should take out a pen and paper right now and draw a line down the center of the paper. Calmly and logically, think of all possible advantages to buying a home and write them down on one side of the page. Afterwards, you should list all the disadvantages on the other side of the line.

Then save the list in a place you will be certain to remember.

Sound silly?

Of course it sounds silly. Who needs to write down their reasons for buying a home? After all, home ownership is the central theme to living the "American Dream."

Naturally, while in hot pursuit of this dream you are going to be excited about the future — researching neighborhoods, searching MLS sites on the internet, viewing homebuyer’s magazines full of appealing homes that are just "minutes from the beach" with "fantastic views" and "cozy family rooms."

Next comes the really good stuff — looking at houses. Full of imagination and optimism for the future, you wander about each home envisioning a happy and contented life for you and your family. The first house may be "too big," and another may be "too small," but you are certain to find one that seems "just right." So you make an offer and wait anxiously and excitedly for the counter-offer. Finally, you and the seller agree on terms and you have bought yourself a brand new home!

Congratulations! Break out the champagne and celebrate!

However…
Later that night or perhaps the next day, you start to worry about whether you made the right decision. Doubtful thoughts will intrude. Can you afford it? Is it the right time? Should you have waited? What if you lose your job? What if this happens? What if that happens? Anxiety and stress set in. Sleep may be hours in coming.

This is a normal response to buying a home and is called "Buyer’s Remorse." You have just made the single biggest purchase you have ever made in your life and it can be downright scary. Logic deserts you. Worry takes over.

Remember your list?

Back when you were thinking semi-logically, you were fairly rational about home ownership. You catalogued the good and the bad, weighed them against each other, and decided that buying a home was the smart thing to do. Reviewing the list will help resolve your buyer’s remorse.

You will not be totally stress-free, but it will help.

Of course, in spite of this advice you will probably not take the time to make that list now — before you buy a home. Hardly anyone ever does.

So when buyer’s remorse sets in and you remember reading this column, here is what you do...

...get a piece of paper and draw a line down the center. Then… You know the rest.

Looking at Homes for Sale

Looking at homes for sale via the internet is fun and exciting. At first.

After a while, it gets a little frustrating, but you've learned a lot. You have a general idea of what homes look like in the area, prices, differences in costs for numbers of bedrooms and bathrooms and you have ideas about what community you want to search.

Looking at homes online helps provide a context for what comes next.

The "real" home hunt.

Who do you take with you?

If you’re married, you take your spouse. There is always the chance you’re going to find something perfect and you cannot make a decision without your spouse. Well, you can…but you’ll probably pay for it later.

If you’re a couple, then take your partner for the same reasons.

If you’re single and buying on your own using your own money, then you can take a friend, but it isn’t necessary. You will make the final decision on your own.

No matter how old (or young) you are, don’t take a parent with you.

Apologies, and there are exceptions to the rule because parents really do want the best for you and want you to be successful. Buying a home is part of being successful and they wholeheartedly want you to buy a house, but… not this house, and… …not that house.

Some psychological “thing” just does not allow your parents to totally let go (regardless of your age), and this trait exhibits itself by diluting their enthusiasm when you start getting specific about what home you want to buy.

Parents don’t do it on purpose. They can’t help it, and you can’t blame them. Yet it happens.

Oh yes. There is one other person you take along with you (hint, hint) — your experienced, capable, professional, friendly real estate agent.

You've just done the easy part.

Real Estate Agent and Real Estate Agent

Many people think of the real estate agent as a salesperson. Many agents (perhaps most agents) would jump at the chance to be "just" a salesperson. But they aren't just a salesperson. Most states have legislated it so that real estate agents are also — agents.

An agent is "responsible" to their clients. They have a duty, called a "fiduciary duty." This means the agent is responsible to act in the best interests of their client. A car salesman does not have to act in your best interests — they just have to sell the car. It isn't that simple for real estate agents.

Real estate agents not only have to sell the house, they have to be responsible. That involves a lot of liability, which is one reason for all the disclosures and the pages and pages of contracts, and why they want to be paid for being more than "just" a salesman.

We look forward to working with you and GOOD LUCK TO US!