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Posted at May 24, 2006, 10:38 am: I wrote this for my stepson who lives in Alaska -- he's 25 and moving back to the continental US this fall, and he wanted to know about buying a house. It's really long. But if you are a young person and thinking about your first house, it could be useful. If you aren't, it's probably not worth your time. Anyway, this is most of what I know after buying, or in some cases not buying, several houses over the last 15 years. 1. The realtor is not your friend. The realtor will act like your friend, much the way a casino host will act like your friend. But in the end, the realtor has no responsibility to you the buyer. In many states they have a fiduciary responsibility to the seller, so they are actually being paid to work for the other side. But at the end of the day, the realtor is about one thing—the commission—and will do whatever it takes to get you into a house, any house, so they get paid. Think of the realtor as a car salesman – you wouldn’t dream of trusting a car salesman. But for some reason people listen to realtors for advice about buying a house. 2 Not all real estate is a good investment. If you want to invest in real estate, that’s great. Just don’t do it in conjunction with buying the house you are going to live in. Because with investments, you need to make unemotional, financially sound decisions, and you won’t be able to do that with something you are attached to. Like all investments, there are good investments and bad investments. If you are using real estate for an investment, you better know what you are doing and you better know your market. If not, then someone who knows it better than you is taking advantage of you. I guarantee it. 3. All houses don’t gain value. This is a fact and it’s undisputable. Over a 20 year period, most property gains value, but you probably won’t hold your house for 20 years, and even if you do there are still no guarantees. In a high housing market like the last few years, it’s very likely you could buy a house today and not be able to even sell it for the same price in a year. Sure, 20 years from now it will probably be worth more than you paid for it – but if you have to sell in year 5, that’s not going to help you. 4. Don’t be afraid to “throw away money” on rent. This is dinosaur thinking. You’ll hear someone say “you need to buy, because you’re just throwing money away on rent.” That’s crap. By renting you’re keeping your options open and you’re probably saving money. Here’s an example of how renting can “make” you money. Say you have the choice between renting and buying…rent is $1200 a month and your mortgage plus taxes plus insurance plus repairs will be $1500 a month. You can afford $1500 a month. Take the extra $300 a month and invest it in a bank CD at 4%. Now, at the end of 2 years, you find out you need to move. Who has more money? Well the renter has $7200 plus interest. The buyer has the equity they’ve built up in the home. Oh, sorry, they didn’t build any equity because the way that mortgages are structured you don’t build much equity the first two years. Now the housing market went up 5%, but you have to pay the realtor 6% to sell your house, so that’s kind of a wash. And it takes 60 days to sell your house, so you eat $3000 in mortgage while having to rent a house somewhere else as well. There is a point when buying makes sense – because after a few years you will build equity, and it will shift the balance in favor of buying. So here’s the question to ask yourself – how long are you staying in that house? If the answer is “I don’t know” then think about renting. 5. Don’t buy a house if you are single and under 30. You won’t find this one in any book on home ownership, but it’s a flat ass rule. Because if you are single and under 30, you don’t know how long you are staying in the house. You might think you do, but you don’t. Because you’re going to meet a lady and fall in love and get married. And she’s not going to like your house. She might say she does, or she might even move in there because she thinks it’s a smart money move, but in the end she’ll hate it and you’ll either move or she’ll hate you too. Or she’ll be silently bitter, and you’ll hate her. And either way, it’s expensive, because you’re either trading in your house or your wife, and both those things come with a cost. I’ve moved more times than I can count. I let my wife pick the houses whenever possible. I set the financial parameters, she picks the floor plan. This is the secret to a happy marriage, I’m pretty convinced. 6. Know what you can afford. Don’t let someone else tell you what you can afford, because they are not looking out for your best interest. The bank does not care about you. The bank will lend you more than you can afford, because they know you will pay your mortgage because you are afraid to lose your house. People will try to tell you that you should buy a bigger house, because you won’t be happy in 5 years with a small house…and there’s some truth in that. So don’t buy the small house you won’t be happy with…but that doesn’t mean you buy the bigger house, either. Maybe it means you rent for a year until you can afford the bigger house. There are a ton of variables, but the most important ones are: how secure is your income, and how confident are you that your income will be the same or higher over the next 3 to 5 years? If you’re not sure about your career, it’s probably not a great time to buy a house. If you work on a commission based income, how confident are you that you’ll still make that money next year? You probably want to leave a buffer. As a rule, consider about 25% of your income as the right amount to spend monthly for a house. Don’t forget to include taxes and insurance in the payment when you calculate. The realtor and bank will tell you a higher number than that, probably from 30% to 33% for the house, and as much as 36% for total debt, but if you don’t believe me, ask a financial counselor with no vested interest in selling you a house how much they think you can afford. Spending $500 on a financial planner could end up saving you a lot more in the long run. If you know you’ll be getting a raise in the next year or two, you can probably consider a somewhat larger percentage, but you should be very sure that the raise is coming before committing. 7. Hire your own inspector. The realtor will lead you to a house inspector if you want. That’s like having the car salesman lead you to a mechanic. It might not be collusion, but do you really want to take the chance? Is the inspector who gets referred by the realtor going to risk that realtor’s repeat business by telling you something bad about the house? Maybe, maybe not. 8. Fix your credit before you buy a house. Check your credit report 6-12 months before you think about buying. Is it below 720? If so, start working on your credit now. It will affect the terms of your loan (or even the approval of your loan). The difference in mortgage rate between someone with a 720 credit score and someone with a 620 credit score is right around 1.5 to 1.75 percentage points. Meaning that if the best loan is a 6.5% loan, a credit score of 620 MIGHT get you an 8% loan. 9. Have a down payment and get a real mortgage. You can buy a house with zero money down if you have good credit. Don’t. Because the loan for the first 20% of the house will be at a much higher rate, and if that home price drops you have zero equity to absorb the difference, which is really, really risky. And if you don’t have 10%-20% of the house price set aside, you probably shouldn’t be buying anyway. You’ll get advice contrary to this, but mostly from people who want to sell you something. There are exceptions to this – VA loans come to mind – where the loan is designed as a no down payment deal. Realtors and banks may try to talk you into gimmick loans, the worst of which is the “interest only” loan. The realtor will offer this because they can sell you a bigger house, netting them a bigger commission. Consider getting pre-approved for a mortgage before going shopping if you are sure you’re going to buy. This is an absolute must if the market is really hot and houses are selling the day they hit the market…being the pre-approved buyer might mean the difference between getting your house and not getting it. Do not confuse “pre-qualified” with “pre-approved.” You want to be pre-approved. 10. Know the market. Are there a ton of houses for sale? If so, you have leverage – learn it and use it. Closing costs are expensive…if the market is soft, a lot of times the seller will pay the closing costs if you make it a point…but they aren’t going to volunteer. Remember that everything is negotiable, so the more you know the better position you are in to negotiate. Know the price of the last 5 houses that sold in your area – how much did they sell for per square foot? Has that price been rising or falling? How long has the house been on the market? 6 months? If so, consider lowballing your offer…the owner might be a little desperate. On the flip side, if the market is smoking, go in knowing that if you find what you want you need to be ready to act immediately. 11. Understand closing costs. In most cases, the buyer pays the closing costs – which can run from 2% to 6% of the cost of the house. You’ll pay this out of pocket on the day you close. $200,000 house? Be prepared to write a check for $5,000 to $12,000, depending on the market. This is in addition to your down payment. 12. Don’t buy a house with the thought “I can always rent it if I have to move.” This was the single dumbest thing I ever did in my financial life. Renting a residential home is a –EV game. It could work out in your favor, much the way roulette could work out in your favor. But the odds are it probably won’t. If you get in a bind and have to rent out a home, that’s something you deal with, but don’t go into a situation planning on that as your solution because it’s a bad plan. It would take me 3 pages to explain everything bad about it. Rental properties can be a good investment, but only when you know what you are doing and buying them specifically as an investment. Take this simple example – you plan to rent the house out to cover your mortgage. Now take 10% off of that for the rental agent. Now take one month off a year for the times when it isn’t rented. Now take out expenses, because when your tenant breaks the toilet, you are going to have to replace it. And the list goes on. 13. Buy the neighborhood, not the house. This is really, really hard to do, because you fall in love with a house, not a block. But if you don’t like your kitchen, 4 years from now you can remodel it. You can’t remodel your neighborhood."how do you play that crap?" "It's easy...you hit the button that says 'call'" Original of the message was taken from http://www.bonuswhores.com/phpBB2/ Replies:Very nice post.-+Try Charlotte, NC. Great post Mike. Get a buyers agent. -+Indeed. I agree with Gonzo here. Yeah, like I said she was great. I should also mention that a good buyers agent should also explain to ... I happen to be that young buck with a overly eager girlfriend who just... I'm a little too young to buy a house, but I do suppose that's my ulti... Good posts Mike. -+The PMI option isn't a bad one for people who want in on a market but ... The PMI option isn't a bad one for people who want in on a market but ... The PMI option isn't a bad one for people who want in on a market but ... Excellent post Mike. Did anyone mention a 15-year (fixed) mortgage instead of a 30-yr? Wit... I agree with everything but No. -+It's not about being bitter. If Phatlad has his house in Oklahoma, he didn't own any real estate wh... -+I refuse to marry a woman who would be so fickle about a dwelling. I think the more important part of number 5 is the greater chance of r... 5 years of college down the drain. I refuse to marry a woman who would be so fickle about a dwelling. I refuse to marry a woman who would be so fickle about a dwelling. I refuse to marry a woman who would be so fickle about a dwelling. I refuse to marry a woman who would be so fickle about a dwelling. I refuse to marry a woman who would be so fickle about a dwelling. Damn. -+We have a lot in common Matt. Oh, but they are. thanks OP, I saved the text of the post in a word doc for later refere... Other Topics of Bonus Whores:EPASS QuestionJennifer Tilly's Tits Finally! Poker Trading Cards! 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