I’ve recently went through the painful process of buying a home. Being a first time home buyer I’ve obviously made quite few mistakes so I’m writing this post as a future reference for myself, while also hoping that it may help somebody out there who is in the same situation as I was.
To begin, let me focus on few things that I, subjectively, view as completely false now that I am a homeowner. I really believe that before making final decision you should revisit your list of reasons to buy house. There are quite few myths floating around, and before proceeding any further we need those debunked.
House as an investment
This is probably one of the biggest myths fueled by real estate industry and government. When you take into account closing costs, yearly maintenance costs, association fees, taxes and bunch of other costs you never needed to worry about when you were renting, it’ll be obvious to you that in BEST case scenario you are looking at 1% yearly return. To emphasize again, I am talking about BEST case scenario. Would you ever buy a stock that will probably lose value, but could MAYBE give you 1% yearly return? Of course not.
And it’s not housing market, but never-ending string of fees that will bury you. For example, on my closing statement, for $345K house purchase, between me and seller we’ve paid about $40K in closing fees (me about $13K, him about $27K). To even better illustrate the point – seller’s agent, who did nothing to sell the house for about 6 months, and my agent who just showed me 3 properties before I decided to purchase (I’ve done extensive research before purchasing) have split about $17K in commissions.
The only way the make whole “House as an investment” / “Buy house to make money” idea work is to flip houses. Purchase, quickly remodel, sell. However, this is obviously not for you as you don’t have your own full time lawyer, agent and contractors. But even if you did, time is of the essence – you don’t want to end up owning a house, paying all the taxes (which go up because of improvements), insurance, association fees – you want to sell as soon as remodeling is done.
To conclude – house as an investment is a fairy tale fueled by real estate industry and government – they both profit immensely in real estate market. Real estate agents obviously make hefty commissions while government pockets taxes. Speaking of taxes…
Buying house is good for your tax return
Another huge myth. The ONLY real tax benefit that comes from home purchase is that you are able to deduct INTEREST generated by your mortgage payments. To quote my case – I am to have about $10K in interest during first few years. But I am also to have about $6K in property taxes. So, me and my wife will get to deduct about $16K rather than $12.4K (standard deduction in 2014). But, while previously we didn’t need to spend a dime to get standard deduction, we now need to spend money. Also, since house was purchased in August, obviously for the first year standard deduction will be bigger then itemized deduction we are talking about. And few years down the road I’ll obviously need to add more itemized deductions if I am to see any tax benefit from owning a house.
You need to settle for X
X can be a house you have found and is OK, agent that you started working with, lawyer, process, fees. Reality is that you do not need to settle for anything. As a matter a fact, if your agent tells you this – change your agent.
Believe me, if you are bothered by anything in the house the first time you see it – once you own it – it’ll bother you even more. Especially if you have a good credit and can afford to pay for a good house – until you sign closing statement – you are in control. As soon you sign closing statement and get the keys, you are on your own and anything that was left unsolved is burden you’ll be carrying solo.
Don’t be fooled thinking that your agent and your lawyer are looking out for your best interest. They work on commission, which means that they are extremely interested in closing house purchase as quickly as possible so that they can move onto next client. Do not give in and do not settle. If the house that you have found doesn’t WOW you – do NOT buy it. If your agent is not responsive or is rolling his/hers eyes when you request to see yet another property – change your agent.
Often people you deal with during house purchase will try to use your inexperience to shun you and make you give in to their interests. Again – do NOT give in and do NOT settle. You are the one that’ll end up with bill worth hundreds of thousands of dollars, so you better be extremely happy with what you are getting, rather than just satisfied.
Valid reasons to buy house / home
So, now that we’ve gone over few things and understand that house is generally a terrible investment, which will substantially increase your yearly expanses (taxes / maintenance / fees) and that you acquire through intimidating, complicated multi-month process, you may end up saying – OK, why would I even consider buying a house? Well, here are few reasons:
You like the neighborhood
Simply put it’s a good neighborhood, good location, you like it there and you know that you’ll be staying for a while. I STRONGLY recommend that before buying a house you do quite bit of traveling. I won’t get into market out of USA, but before purchasing a house, it would be ideal if you’ve lived and worked in different neighborhoods in at least 3 or 4 cities in the USA. Of course, this is not something many people can do … but also don’t be complete opposite – born & raised in certain neighborhood and you end up buying house there. With so many great places to live, use the advantage of being young to try out what’s out there. In 99% cases you’ll end up in much better area.
To confirm your reasoning on this topic, be sure to look into Rent vs Buy calculator. If the one I’m linking is too intimidating for you, Google for Rent vs Buy calculator – there are quite few options and you are bound to find one that you can use.
As soon as you have kids, lots of priorities shift. That downtown condo that’s close to clubbing scene now doesn’t seem like a good idea. Simply put, if your family is growing, it’s quite benefitial to buy a house in a good area. Most of your property taxes go toward things like schools and parks, so you need to make use of what you are paying for. If you take schools into account, you are well off paying huge chunk of extra money just to be in good school area. With private schools currently running at about $9K/year per child on average, you are looking at $108K for 12 years of education at minimum. I won’t even get into increasing education costs, frustrations of having your child in a bad school, potential college bills for those without scholarships and other things. Just be aware that if you have 2 kids, paying $50K more for a property in a great school area is a bargain.
Tired of moving
Simply put, at certain point of time, it’s no longer economical to rent bigger places just to be able to keep all the stuff you’ve aquired. Maybe you finally want to be able to improve few things in place you live – like unlocking front door with your phone. Or maybe you are just tired of moving whenever it’s convenient for landlord.
Sure, we all love our neighbors (right?), but as we grow older it is quite beneficial not to influenced by whoever is living left/right or, god forbid, above you. Living in a condo and densely populated areas has it charms and it’s advantageous when you are young, but believe me, by the time you hit 30, you are best off if you have a home that’s sufficiently isolated and not influenced by anyone. If you or your significant other simply don’t like houses (or can’t afford the one you like), look into purchasing townhouse – they often have somewhat more modern architecture, are more affordable and come with few neighbors.
Through the series of blog posts that follow I’ll try to explain the process of home purchase from the perspective of first time buyer. I’ll try to share everything I’ve learned and give practical advice whenever possible. If you have any questions or you advice to share, feel free to leave comments – anything that can help prospective home buyers is welcomed.