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. That's when "buyer's remorse" may come up, but...that's a different article.

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.

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The Business Cycle and Buying a Home

Recession and Expansion

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.

In the business cycle of real estate, there are buyers' markets and sellers' markets...and some markets in between. It is all based on supply and/or demand.

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Why Buying a Home is a Good Idea

The Best Investment

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

Five 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 $200,000 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 $40,000.

At an appreciation rate of 5% annually, a $200,000 home would increase in value $10,000 during the first year. That means you earned $10,000 with an investment of $40,000. Your annual "return on investment" would be a whopping twenty-five 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.

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Reasons to Delay Buying a Home

Assuming you have the financial resources and the desire to eventually own your own home, there are very few good reasons to put off the purchase. You can miss out on years of appreciation if you do.

The main thing you want to avoid when buying a home is being put in a position where you will have to sell it too soon. If you have to sell a home before it has appreciated enough to cover the costs and commissions of selling, you could find yourself in a financial bind. This is especially true for those who buy a home with a down payment of ten percent or less.

Real Estate commissions traditionally run around six percent of a home’s sales price. The seller’s closing costs generally come to about one and a half percent. You can see how this can easily exceed the first year’s appreciation. If you made a minimal down payment, you could actually have to come up with cash out of pocket to sell your home.

New to the Area

A very good to reason to delay buying a home is if you have just moved to an unfamiliar area or region of the country. It makes sense to rent for a number of months before deciding on exactly where you want to live. Often when people buy a home immediately they find that they might have made a better decision if they had waited awhile.

Uncertain Job Future

You could be right out of college or expecting a promotion and a transfer. Or your company has announced an impending "restructuring." If any of these apply, it might be best to wait to buy a home. When you have a more accurate picture of what your next few years will be like, that will be the time to buy.

Marital Problems

Real estate agents see a lot of life unfold before their eyes. One of the saddest occurs when former clients divorce and are forced to sell a recently purchased house. It happens all too often when a family in turmoil decides that buying a new home may help resolve their problems. Perhaps it is inevitable that such problems occur, but selling a home before it appreciates can create an additional financial burden in an already difficult situation.

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Why You Should Not Buy a Car

When you get a raise or accumulate some savings, you may find yourself confronted by an innate instinct of modern civilized men and women.

The desire to spend money.

It begins simply, by going out to restaurants, then accelerates to purchasing clothing, electronic gadgets, and since North Americans have a special fondness for the automobile, you may even buy a "brand new car."

If you're married or ambitious, a few months later your thoughts eventually turn toward buying your own home. Or a move-up home, if you are already a homeowner.

Next, you contact a loan officer to get prequalified for a mortgage loan. You state your desired price and how much you can put down. You provide your income and may even supply pay stubs and W2 forms. The loan officer methodically crunches the numbers (by telephone, in person, or even over the internet).

"If only you didn't have this car payment..."

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Pricing Houses - Pricing Houses to Sell

Price Your House Right

The single most important factor to consider when selling a house is the home price tag: how much your house is worth. You don't want to overprice the house because you will lose the freshness of the home's appeal after the first two to three weeks of showings. After 21 days, demand and interest wane. On the other hand, don't worry about pricing it too low because homes priced below market value often will receive multiple offers, which will then drive up the price to market. Pricing is all about supply and demand. It's part art and part science, and no two agents price property the same way.

Pull Comparable Listings and Sales

Look at every similar home that was or is listed in the same neighborhood over the past six months.

• The list should contain homes within a 1/4 mile to a 1/2 mile and no further, unless there are only a handful of comps in the general vicinity or the property is rural.
• Pay attention to neighborhood dividing lines and physical barriers such as major streets, freeways or railroads, and do not compare inventory from the "other side of the tracks." Where I live, for example, identical homes across the street from each other can vary by $100,000. Perceptions and desirability have value.
• Compare similar square footage, within 10% up or down from the subject property, if possible.
• Similar ages. One neighborhood might consist of homes built in the 1950s next door to another ring of construction from the 1980s. Values between the two will differ. Compare apples to apples.

Sold Comps

• Pull history for expired and withdrawn listings to determine whether any were taken off the market and relisted. If so, add those days on market to these listing time periods to arrive at an actual number of days on market.
• Compare original list price to final sales price to determine price reductions.
• Compare final sales price to actual sold price to determine ratios.
• Adjust pricing for lot size variances, configuration and amenities / upgrades.

Withdrawn & Expired Listings

• Look for patterns as to why these homes did not sell and the common factors they share.
• Which brokerage had the listing: a company that ordinarily sells everything it lists or was it a discount brokerage that might not have spent money on marketing?
• Think about the steps you can take to prevent your home from becoming an expired listing.

Pending Sales

• Since these are pending sales, the sales prices are unknown until the transactions close, but that doesn't stop anybody from calling the listing agents and asking them to tell you. Some will. Some won't.
• Make note of the days on market, which may have a direct bearing on how long it will take before you see an offer.
• Examine the history of these listings to determine price reductions.

Active Listings

• These matter only as they compare to your listing, but bear in mind that sellers can ask whatever they want.
• To see what buyers will see, tour these homes. Make note of what you like and dislike, the general feeling you get upon entering these homes. If possible, recreate those feelings of reception in your own home.
• These homes are your competition. Ask yourself why a buyer would prefer your home over any of these and adjust your price accordingly.

Square Foot Cost Comparisons

• Remember that after you receive an offer, the buyer's lender will order an appraisal, so you will want to compare homes of similar square footage.
• Appraisers don't like to deviate more 25% and prefer to stay within 10% of net square footage computations. If your home is 2000 sq. ft., comparable homes are those sized 1800 to 2200 sq. ft.
• Average square foot cost does not mean you can multiple your square footage by that number unless your home is average sized. The price per square foot rises as the size decreases and it decreases as the size increases, meaning larger homes have a smaller square foot cost and smaller homes have a larger square foot cost.

Market Dependent Pricing

• Same house, three different prices. After you have collected all your data, the next step is to analyze the data based on market conditions. For comparison purposes, let's say the last three comparable sales in your neighborhood were $150,000. In a buyer's market, your sales price might allow some wiggle room for negotiation but be strong enough (near the last comparable sale) to entice a buyer to tour your home. To sell in this market, you might need to price your home at $149,900, settling for $145,000.
• In a seller's market, you might want to add 10% more to the last comparable sale. When there is little inventory and many buyers, you can ask more than the last comparable sale and likely get it. So that $150,000 home might sell at $165,000 or more.
• In a balanced or neutral market, you may want to initially set your price at the last comparable sale and then adjust for the market trend. For example, if the last sale closed three months ago, but the median price has edged upwards of 1% per month, pricing at $154,500 would make sense.

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Loan Preapproval - The Advantages of Loan Preapproval

Preapproval Letters Give Homebuyers an Edge

Real estate experts tell first-time home buyers that it's critical to apply for a loan before shopping for a home, and it's true; this is an essential first step. But do you know that it's far better to be preapproved for a loan than to be prequalified? There are more advantages to gaining preapproval than you would initially surmise. When the lender hands a borrower a preapproval letter, it means the borrower can: Save Time by Looking at the Right Homes
If your real estate agent is sending you automatic e-mail listings of available homes, you can ask her to change the parameters to more tightly encompass the [link ul=http://homebuying.about.com/od/buyingahome/a/buyerinfo.htm]selection of homes[/link] that you are qualified to buy.

• If you're not receiving e-mails from your agent, ask her to send them to you. Most MLS systems allow an agent to send clients much of the same data that agents receive. This way, you'll save time by checking out homes you can actually afford to buy instead of falling in love with pie in the sky.

• Spend More Time Examining the Right Homes
  By decreasing the inventory of homes to those that fit your parameters, you can allot more time to thinking about all the little nuances each home has to offer. Lots of home buyers never move past the price point when sorting out their preferences, but now you can devote your energies to looking at the little things that matter to you most such as whether your SUV will pass through the overhead space in the garage or smash into the microbeam.

• Gain Confidence & Avoid Disillusionment
  Now when you find that perfect home, nobody can take it away from you by telling you that you do not qualify to buy it. You can minimize anxiety and remove last-minute loan surprises that could disqualify you. You'll sleep better at night knowing that the home you selected is yours. Moreover, you can tell your relatives and friends that the home you made an offer is definitely going to close and you will not "lose face" with anybody.

• Increase Bargaining & Negotiating Power
  Sellers will be more likely to immediately accept your offer, even if that offer is for less than list price, because you are giving the seller peace of mind that her home is sold. She can take her home off the market and place it into pending status with confidence.

• Enjoy a Faster Closing Period
  Because there is no window period while your loan application is processed, the lender can speed up the entire processing procedure. Appraisals can be ordered immediately. It's possible to shorten a 30-day closing to two or three weeks, which comes in handy if a seller needs to quickly move and can't decide which offer to accept. Yours will move to the front if you can accomplish the seller's need to quickly close.

Because mortgage approval is generally the longest contingency to satisfy in a purchase contract, it is to your advantage to obtain a preapproval letter as soon as you're ready to begin your search. Lenders will render a decision based on your complete loan application, employment verification and data from all three credit reports.

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