Buying your next home can be a daunting task, especially if it’s your first home.
It’s exciting but full of complexities.
While it’s likely to be the largest financial transaction you will ever make, we’ve found that many home buyers are poorly prepared to ensure they make a good purchase decision.
And it’s not their fault.
The system is stacked against them, with much of the power being on the side of the seller.
To help guide you, let’s look at a few Common Mistakes made by Home Buyers – ones that you should avoid.
1. Using an out-of-town lender.
Getting a mortgage in a timely and hassle-free manner is the “key that opens the door” to your new home.
Lenders who don’t live in the area you are buying in will not have the contacts needed to process your loan in an efficient and timely manner. Are you aware that if your lender fails to get you your loan on time, that your earnest money deposit may be at risk of being forfeited?
Your best bet is to ask your real estate agent whom they have used before and who they trust.
If it is important to you to use a lender from out-of-province (family member, friend etc.), your best bet is to have your lender refer your business to a local lender. This will help insure that your out-of-state lender receives a referral fee, they don’t violate state mortgage laws, and most importantly you are able to close on the home you want to buy.
Mortgage story: The very first transaction I was involved in after I got my real estate license was a nightmare due to a negligent lender. I was representing a buyer from Johannesburg (I live in Kwa-Zulu Natal) that insisted on using a Johannesburg lender. Unfortunately the lender would rarely return calls or answer his phone. He failed to close on time. We extended the closing date time and again, and time and again the out-of-province lender failed to have the loan ready. The buyers were frantic and the sellers were angry. Finally eight weeks after we were supposed to close my buyers finally dropped the lousy lender and went with a local lender that I recommended. To my buyer’s amazement, by using the local lender, we closed the transaction 10 days later.
2. Not using a loan approval letter when making an offer on a property.
You’ve found “The Home” and want to make an offer to buy it. Now anybody can make a full price offer and get it accepted.
What if “The Home” is priced at R1,275,000 but you offer R1,250,000 and say that you will pay for the home by getting a new loan?
The sellers, when presented with your R1,250,000 offer, know nothing about you except that you seem to think their home is worth less than they feel its worth. At that point they will probably do one of two things. They might reject your offer outright. Or they might counter your offer at close to their asking price. As far as they’re concerned they never considered your original offer to be a “real” offer.
Do you think that they would have taken your R1,250,000 offer more seriously if you had said you could pay cash? Of course they would have, after all money talks.
What if you had already received full loan approval from a lender. Not just pre-qualified, or pre-approved (Being pre-approved is kinda like being pre-pregnant), but fully approved for a home loan with a letter from the underwriter to prove it. A letter that is as good as “cash in the bank”. You’ve become a “Power Buyer”! You never know, maybe the seller would accept your offer, rather than letting a good buyer get away.
Wow, if your offer was accepted, you just saved R25,000 on the purchase of your home! And all you had to do was meet with the lender before you went house hunting.
3. Buying too much house for your income.
Things happen in life that you might never expect. Don’t unknowingly “open the door” to future foreclosure and bankruptcy by getting a mortgage that you can “grow into”. Life rarely works out the way you expect.
One of the best moves I’ve ever made was purchasing my current home. When I bought this home I qualified for a home twice as expensive as the one I bought. Payments on my home rarely cause me stress or concern.
4. Thinking “short-term”.
Want to really scare me? Tell me you want to buy a home today and that you will want sell it in two, three or four years. Yikes! Talk about wanting to lose money.
Real Estate home values generally rise very slowly in a slow or soft real estate market. In South Africa, our average time between hot markets (when home values rise quickly, usually doubling) is ten years. If you bought R1,250,000 home in a slow market, in three years it might be worth R1,265,000. Your cost to sell with commission and other costs would leave you in a ‘no-profit’ margin.
If you have to move within three years of buying a home, it would be better to use the home as a rental for a few years, and sell it when the market will allow you to make a profit. Better yet rent it out until the top of the next hot market, then sell it and potentially make R250,000 profit.
5. Waiting for the “bubble” to burst.
Hot markets come and go. Cold markets come and go. Markets become over-priced, then over-time become under-valued. If you are waiting for a severe correction in real estate prices, pull up a seat, because you might be waiting a long time.
Homes, unlike other investments (the stock market for example) are valuable in two ways: 1) Psychological value – homes have value because everyone thinks they should, and 2) “real” value (people, homeowners and renters, need shelter).
Because homes are valuable in both respects, home values historically will usually only level out after a hot market. Sometimes homes will lose some value but not very much. St. George homes lost about 5% of their value after the last hot market in 1995…sort of like a balloon deflating because it took several years for this to happen.
If I were looking to buy a home I would be more concerned with interest rates and less concerned with playing with bubbles.
6. Not choosing a real estate agent carefully.
In our town about 75% of real estate agents have been in the business one year or less. I suspect that this is true nationwide. The hot market of 2005 caused everybody and their brother to want to get their real estate license. When you contact a local agent, you probably have a 3 out of 4 chance of getting an agent who is severely under-qualified to represent you in the purchase of R1,250,000+ investment…your home.
You’ll want to contact at least four agents to make sure you are getting the best one you can find. Ask questions and then trust your instincts as to which agent is the best one for you.
7. Not having a home inspection done by a Professional Home Inspector.
A good, experienced Home Inspector will catch problems in a home that most homebuyers would miss.
I have seen all of these items missed by a potential homebuyer, but caught by a home inspector:
a. A dryer vent, venting into the attic
b. A ground fault interrupt breaker not working (this can kill you!).
c. Evidence of termites
d. Aluminum wiring
e. A roof leaking into the attic, but not into the main part of the home (yet!).
Several years ago I became aware of a transaction in a real estate office where the buyers decided not to have a professional inspection on an almost new home they were buying. They “inspected it themselves” to save the R3000. Too bad they didn’t catch the fact that some of the basement windows leaked badly when it rained. The water stains were clearly visible had they known to look. That turned out to be a huge mess involving lawyers, threats and grief. This could have been avoided by paying the R3000 to have a Professional Home Inspection.
8. Not receiving a home insurance at closing.
It’s 3:00 AM. You wake up hearing water running in your newly purchased home. It keeps running. And running. You get up to check it out and find your basement floor covered with water from the broken water heater. Luckily the damage from the water is minimal. You go to look for the Home Insurance confirmation in the documents you received when you bought your home the previous month. You know that the home insurance company will replace your broken water heater for only R550. Suddenly, you slap your hand to your forehead and make the Homer Simpson “Douhhh” sound as you realize that you didn’t get a home insurance because the seller wouldn’t pay for it and you certainly didn’t want to pay for it.
Lesson learned, always get home insurance you buy a new home, even if you have to pay for it. It is money well spent. I would never buy a home without purchasing home insurance. It just makes good sense.
9. Not meeting the neighbors before you make an offer.
Don’t you really hate it when your neighbors suck? Don’t you think it would be a good idea to do a little door knocking before you buy your new home? How about going online to look at your provinces website for registered sex offenders?
We had a client who did a little door knocking before he bought a foreclosed home in Westriding. He was buying the home for his personal use and as part of the “due-diligence” he decide to meet the neighbors. He asked which house was the “bad house” on the street. He came to find out it was the home he was buying because the previous owners were noisy, rude, dirty, and didn’t care for their home. He changed that by buying the home and moving into it.
10. Not doing proper research and preparation
The wise home buyer will analyse assets, decipher debts and get pre approved for finance before plunging into the house hunt.
Get to know the neighborhood – remember you’re not just buying a house; you’re also buying a location.
It’s important to find out about the quality of schools, the crime level, transport and possibly upcoming zoning issues.
Not all parts of every suburb are ideal spots to live.
11. Falling in love
If you think a house is ideal, don’t let the seller’s agents know.
Agents are good at reading emotions and negotiating the last cent out of prospective purchasers.
A wise home buyer knows there’s lots of houses – and there’s one out there that’s the right house at the right price.
If you can’t afford it, move on and keep looking.
12. It’s not all about price!
We all know you make your money in property when you buy, but that doesn’t mean you must buy cheaply.
You make your money by buying the right property not a cheap property.
Price is what you pay, value is what you get.
This means you don’t make your buying decision purely on price.
You can always buy cheap properties in secondary locations or on main roads, but you’ll be stuck with a secondary property – not a good idea.
However, when you’ve found the right property – it’s important to make a proper offer.
One that secures your home, but that does not overpay.
Don’t base your offer on the seller’s asking price.
Instead, get a comparative market analysis from your buyers’ agent.
This analysis will reveal recent asking and sales prices of similar homes in the neighborhood.
With this type of knowledge, a wise home buyer can make an offer that is appropriate.
13. Not having the right protection clauses inserted in the contract of sale
Don’t sign anything until you are sure your interests are protected.
While the standard contract to purchase a property will give you a “3 day cooling off period” (this varies in different states) smart purchasers request additional clauses to protect their interests.
Don’t be fooled by an agent who says you can always ask for changes or an extension later. That’s not the way it works.
The only way to get changes to a contract once it’s been signed is to end the existing contract and renegotiate a new one. And the seller doesn’t have to agree to your requests.
14. Underestimating the full costs of buying a home
Many homebuyers fail to budget for the full costs associated with buying a house.
Firstly there’s the acquisition costs.
Things like stamp duties, rates, valuation costs, loan application fees and mortgage insurance.
Apart from budgeting for moving costs, be prepared for the unexpected when you move into your new home.
It’s funny how things that have been working for years seem to break down, as if they knew there was a new owner.
Set aside a budget for those irritating and sometimes costly breakdowns.
Then…don’t underestimate the ongoing costs of owning your property.
Owning can cost much more than renting with expenses like rates, insurance and maintenance.
15. The “Fed Up” purchase
You’ve been looking for a few months but haven’t found your dream home.
The agents are misleading you; you may have been out bid by someone who had deeper pockets than you.
You’re Fed Up!
One big mistake home buyers make is to buy a property in desperation.
They buy something reasonable rather than something that really suits their needs because they’re sick of the emotional rollercoaster of home buying.
This is a decision you may live to regret for a long time.
Rather than buying out of frustration, stop looking for a while, or better still get a buyers’ agent on your side to save you time, to look in nooks and crannies you wouldn’t have thought of and to find those silent sales for you – the off market properties.
16. Misunderstanding the real estate agent’s roll
Real estate agents are friendly people and in the course of shopping for a house, you will spend a lot of time with various agents.
However, the wise home buyer understands who’s working for whom.
Unless you have engaged an exclusive buyers’ agent, then the agents are working for the sellers.
Don’t be mistaken – a selling agent can’t work in the interests of both the buyer and the seller.
In fact they’re legally and morally obliged to work for their client the seller.
However wise home buyers know how to level the playing field by engaging a buyers’ agent to represent their interests.
17. Going solo
The sellers have an agent protecting them, looking after their interests and advising them, but most home buyer’s go solo.
Sure you’ve read some articles and done your research on the Internet, but this is likely to be your largest purchase ever.
And those emotions will cloud some of your decisions.
You wouldn’t go to court without a solicitor on your side – would you?
You probably have a good head on your shoulders and may even have a good working knowledge of the home buying process.
What you probably don’ t have, however, is perspective.
If, how and when you buy a home are all decisions that will have major consequences.
That’s why it’s important to have the same protection on your side that the seller has.
That’s why it’s critical to engage a professional buyers’ agent to represent your interests.
There you go; some simple steps to keep yourself, as a homebuyer, out of hot water. Violate any of these steps and you may end up losing a little or a lot of your hard earned money. Now go out and find the home of your dreams!