A house is the largest consumer product in existence.
- Buying a home is a privilege, not a right.
- If you want to buy a big house like your parents’, remember their first house.
- Buying a good home takes wisdom and patience, so carefully consider the decision.
Buying a house can be rewarding, but must be for the right reasons and isn’t intrinsically superior to renting:
- The risks of owning a house can be severe if you get the wrong one, and you’re stuck with its problems until you can sell it.
- Compared to a higher down payment, the tax advantages of a home are almost never worth the costs of a mortgage, but they do add stress.
- A house can be a great investment, but you won’t receive returns until you either sell it or rent out rooms.
Make sure to budget other associated expenses instead of simply “rent”:
- Mortgage principal (which you’re essentially saving away until later).
- Mortgage interest
- PMI (an insurance for the lender if you can’t put 20% down on the property)
- Property tax
- HOA fees, if applicable
- Pool maintenance, if applicable
- Home maintenance
- Necessary repairs and improvements (~2%/year of house’s value in good condition, and ~4%/year if it’s old)
- Any local taxes (e.g., school levies, mandatory inspections)
- Utilities (e.g., gas, sewer, water, electric, trash)
- Homeowners insurance
- Protection/security fees (in a dangerous area)
Depending on your lifestyle, renting may be a better idea:
- You may not live geographically in the same area for long.
- You have poor knowledge of the area.
- Your work arrangement is volatile or uncertain.
Renting, however, should be temporary if you expect to live in a region for more than 5 years:
- “Home” is an emotional word and more than a financial transaction.
- A house is a forced savings plan.
- Houses hedge against inflation.
- House equity grows tax-free.
Only buy a house when the market and family timing are right.
The housing market should not be high.
- Inflation can mean getting back the money you invested in a high-market buy can take 15 years.
- To accommodate the size of the investment, timing the market should always be a little slower than most other markets.
A two-bedroom apartment is fully sufficient for two children, sometimes three, so do not buy a house as a “starter” for a new baby.
Save a down payment beforehand:
- A home equity loan is the same as any other debt, but larger, so compounding interest works the same.
- e.g., a 6% 30-year loan on a $225,000 house after 10 years of minimum payments:
- A 15-year mortgage ($1,899/month) will have $98,210 remaining, or 43.6% of the principal.
- A 30-year mortgage ($1,349/month) will have $188,292 remaining, or 83.7% of the principal.
- The best house purchase is a 100%-down payment, though most people can’t typically afford one starting off.
- Do a break-even analysis to find out how long until you’ve paid off 20% of the home (when you can drop PMI) and how long to pay off the rest at (preferably) the same payments.
The real estate industry
A realtor is a salesperson collecting a commission on the world’s most expensive consumer product.
Realtors have access to the MLS (Multiple Listing Service), which lists most homes for sale:
- 90% of buyers start on the internet through services like Zillow, so homes don’t need to run through the MLS anymore.
- Each MLS has its own region, so make sure your realtor knows the rules for that specific MLS before engaging with them.
However, you usually must have a licensed realtor buy a house, so look for a reputable one with a service like Angie’s List.
- The buying and selling realtor collect ~6% commission, split between both of them.
- Their commission is the only way they make a living, but it is a negotiable rate.
- An agent can be a buying or selling agent, but can also act as a “dual agent”.
Home loan financing
Get pre-approved for a mortgage before you start shopping, not just pre-qualified:
- A 1% increase in a home loan will likely be about an extra $100/month and ~$50,000 more across the loan’s life.
- It’s tempting to buy as high as you’re qualified, but focus on your budget and long-term goals.
Federal Housing Authority (FHA) loans are through Freddie Mac & Fannie Mae:
- HUD (Housing & Urban Development), a government organization, issues them.
- They are usually privately insured against default.
- They were a large part of the 2008 global market crash.
- FHA loans are often for lower-priced homes with first-time buyers.
- Down payments can be as low as 3% or lower, but fluctuate all the time.
- Avoid FHA loans if possible, since they are usually more expensive than conventional financing.
VA loans are like FHA loans, but insured through the US Department of Veterans Affairs instead:
- VA loans have different details and conditions, so read carefully.
- They are similar to FHA loans with government oversight, and a large down payment on a conventional loan is less expensive in the long-term.
Conventional loans are arranged with a bank:
- A bank will check your credit score to see your reputation in paying off obligations.
- Most banks want to see a 10% down payment to demonstrate your willingness to pay off the loan.
Owner financing lets you pay the owner directly, which lets you be more creative when structuring the loan:
- You’ll have to prove your credit-worthiness to the seller more than a bank.
- Be very careful that you’re not exploited:
- Make absolutely sure everything you discussed is signed in writing.
- If you’re unsure about the agreement have an real estate accountant, attorney, or realtor look it over.
- Avoid any balloon payments at the end even if the payments are less, since not having the balance available allows the lender to repossess the home with most of your house already paid-for.
- Watch for buydowns, because their terms may be worse in the long-term.
You’ll need a manual underwriter if you’ve had little to no debt to influence your credit score:
- Use your bank’s, or shop around if they don’t have one.
Sometimes, you can get a house for a fraction of what you’d normally pay:
- If you can identify a poorly staged house, you can usually find a house most other people would overlook.
- Depending on the state, you can buy a house for a few dollars or for free if you live in it for a certain number of years.
- Your family or friends may want to quickly sell and leave a house.
- Banks will sell foreclosed homes for a reasonable price.
- You can take an assumable loan (someone gives you the remainder of the loan along with the deed to the house) from anyone, even when they’re not on the market.
Typically, to secure financing, you’ll also have to get Private Mortgage Insurance (PMI) for the lender to trust their investment towards you.
Home loan features
An “ideal” home loan has a few qualities:
- Fixed rate
- 15-year term
- A monthly rate that’s up to 25% of your take-home pay
- At least a 10% down payment
Fixed Rate vs. Adjustable Rate (ARMs):
- In an ARM, the borrower risks higher interest rates later for the lender to give a lower interest rate now.
- Never get involved with ARMs, since the bank considers their best interests over yours.
- If you have an ARM, immediately refinance!
Private Mortgage Insurance (PMI) is designed for the lender, not you.
A piggyback loan, (also called an 80/10/10 or combination mortgage) is available for when you can’t afford a standard loan:
- Arrange for 2 mortgages at the same time, with one being 80% of the property’s value and a second ARM “on the back” at 10%, with a 10% down payment.
- Sometimes this can be an 80/15/5, with the down payment being only 5%.
- One advantage of a piggyback loan is that it can help avoid PMI, and only if you can pay off that ARM very quickly.
- Another advantage is that it can sidestep “jumbo loan” requirements by splitting up the mortgages, which can be difficult to otherwise navigate.
Interest-only/negative amortization loans:
- The minimum monthly payment is only covering interest, and only over-payment can affect the principal.
- Even with low rates, you’ll never own a house with an interest-only loan unless you frequently make extremely high over-payments.
- Negative amortization loans are worse, with monthly payments less than the compounding interest.
- The only reason anyone would want an interest-only loan is to quickly flip it.
- To avoid the risks from a loan of that scope, just rent somewhere instead.
- Reverse mortgages convert paid equity into cash, but their fees make the arrangement unwise.
- Find other ways to finance your retirement:
- Make lifestyle changes.
- Sell the home.
- Look for government assistance.
- Rent out a room.
Accelerated/bi-weekly payoff programs:
- Accelerated payment programs require you to pay the mortgage off faster.
- Instead of signing an agreement that forces you to make more payments, simply make an over-payment every month.
People very frequently fall in love with a house they can’t afford.
- The 3 C’s of home buying: Cautious, Careful, Coherent
- Before you even start looking, clarify your needs and wants.
Buy in the bottom price range of your preferred region and neighborhood.
- If you feel up to the challenge, hunt for abandoned or run-down houses.
- For more selection, consider moving somewhere with a lower cost of living.
- Consider a smaller house or one you can build onto.
Thoroughly research, and walk away if things look bad.
- Home-buying is very emotional, so walking away can be difficult.
- Always get a land survey if you’re not buying a standard subdivision lot.
- An appraisal is only a professional opinion of value, but still worth getting before moving forward.
Have a certified home inspector mechanically and structurally inspect the house.
- A home inspection includes a report with everything related to the house’s function:
- Electrical, plumbing and HVAC systems
- Walls, ceilings, floors, windows, and doors
- Roof, attic and visible insulation
- Foundation, basement and structural components
- Home inspections are always worth the price.
The house should be (or can be made) attractive from the street.
- Observe the surrounding neighborhood and how old the houses are.
- Look for urban decay or bars on windows.
- Watch to see if children are playing outside.
- Look for nearby construction, since new shopping areas and expanding neighborhoods are a sign of a healthy community.
Note the house’s floor plan.
- Look at the county assessor’s information on the property to find tons of small potentially relevant details.
- The kitchen is the “hub” of a house, so it should be accessible and well-connected with the other rooms:
- Has a convenient eating area to accommodate people.
- Has an island for easier food prep.
- Walk-in closets and en-suite bathrooms are extremely convenient.
- Ideally, has wraparound porches with open space to relax and play.
- If you’re willing to do the required maintenance for it, a swimming pool.
The three rules of real estate: Location, Location, Location.
- Buy near water if possible.
- You should enjoy the view from the property.
- Mind noise pollution from loud nearby locations (e.g., freeways, industrial areas).
- Check your phone’s signal in the house to ensure you have convenient service.
- If you’re afraid of the flooding, get a house at the top of a hill.
- If you’re concerned about thieves, get a house close to a police station.
- If you want more reliable electricity with less downtime in a brownout or blackout, get a house near a hospital.
- If you want the snow plowed by your house first, find one near a school.
- If you want rapid pizza delivery or convenient fast food, get a house within walking distance of a strip mall.
If you like the house and can make an acceptable offer, the house will go into escrow.
- Escrow is a middle holding place for the buyer and the seller to ensure everything is clear for the exchange.
- House escrows take about a month, though they can sometimes take longer.
- At any time during escrow, you or the seller can back out with few adverse consequences.
- If you’re offering a low down payment, sellers very frequently will drop you at any time for someone else with at least 10% down.
If the appraisal is not the same as the selling price during escrow:
- Ask the seller to lower their asking price, which is least likely to work.
- If it has incorrect information, challenge the appraisal or request a new one.
- Cancel the contract.
- With your own expenses in mind, meet in the middle of that difference with out-of-pocket cash.
- Ask a realtor what to do.
Always buy title insurance that covers when anyone questions your property ownership.
If you’re looking at a more rural property or plan on building one yourself, there are more things to consider.
After escrow has closed
You now own your house, and will have to move into it.
Before moving into the basement, test it for radon and radon-proof it.
Make improvements after you’ve moved in to maximize enjoyment of your new home.
- Have a relative order for your projects:
- Make sure the roofing material sufficiently seals the top of the house.
- Most household electrical wiring and plumbing is easier to install if you do it before you paint (since you can patch it up without having to match colors).
- While it won’t add much to the financial value of the house, winterizing it can make it more enjoyable.
- Add any additions to the house (e.g., extra living space, conversions to other types of rooms, fixture upgrades).
- Keep the house sufficiently painted to weatherproof, protect, and insulate the house.
- Install or update the flooring last, after finishing all the other repairs and improvements.
- Most of the work is relatively easy to learn, especially if you search how to do it on the internet.
- Making additions before selling it later can make a lot of money back for the effort.
- At the same time, making it early after you’ve bought it allows you enjoy the things you worked on for at least a few years.
- Any updates you make while moving in might require touching up or re-updating when you choose to sell.
If you hire a contractor, use a service like Angie’s List to find high-quality workers.
- Hire them for their service after you’ve bought the supplies and parts already.
- Sometimes an HVAC or electrical service provider will offer an extended maintenance agreement, which is often not worth the expense unless your items are likely to break down.
Compared to the rest of the neighborhood, never over-build your home with additions and improvements.
Whenever you can, overpay the mortgage to trim down the loan’s principal.
There are many good reasons to sell a house.
A. You bought or inherited a house you can’t afford.
- If the housing market changes, you might have an upside-down loan (owing more than your house is worth).
- A short sale sells the house for less than it’s worth, but considers that sale as full payment on the loan.
- Simply abandoning a mortgage without paying is called a strategic default, and is completely unethical because you’re breaking your promise.
B. You’re no longer satisfied with the house or your lifestyle needs have changed.
- Your family is now too big for your house.
- The house has become too much trouble to maintain.
- Now that the children moved out, the house is too big.
- The house has too many painful memories attached to it.
C. The house is too expensive to maintain.
- New work opportunities require you to frequently travel far away.
- Your child would benefit from a better school district.
- The house is worth more than you owe on it, and you’d like to reinvest.
When you want to sell, think like a retailer.
- Most people act on their feelings through the whole experience and are usually unprepared.
- Treat it as a business transaction that requires marketing, haggling, and awareness of agreements.
A. Immediately shop for a realtor
Unless you are sufficiently experienced in real estate sales, a great real estate agent is absolutely worth the cost:
- They can expose you to many more potential buyers through their MLS.
- A good real estate agent sells more houses in a week than you will in your life.
- You’ll likely sacrifice a 6% commission for a 10% increase in the selling price.
Before deciding, interview at least 3 agents:
- Only rely on friends or family to sell if you don’t really care whether they do a good job.
- Do not sign an elaborate listing contract where you can’t leave it but they can.
- Keep in mind that some agents charge additional marketing fees beyond the house’s commission.
A great realtor has very specific qualities:
- Has 4+ years of experience and sells 35+ homes each year.
- Has an average list-to-sale ratio over 100%, which means they consistently get above asking price on each sell.
- Has an average time-to-sell similar to your area’s standard rate.
- Knows the area (which isn’t a deal-breaker if the realtor is really good).
- Outlines what marketing will work and how If you bring up something for the market they’re appealing to, they should explain to you why they won’t use it.
- Will honestly tell you what you need to hear.
- Will work harder when issues arise.
- Ask for references, since they should have a long history of satisfied customers.
Observe their communication skills:
- Promptly returns phone calls, ideally within a day.
- Expresses their point politely and quickly.
- Patiently explains their methods and the industry’s processes.
- Firmly grasps information about the industry.
B. Accurately value the house before listing
Note the housing market:
- Are houses in your neighborhood selling quickly?
- Have house values in your area shown consistent growth?
- Is your estimated house value trending up or down?
- How does your house value compare to the rest of your city?
- Expand your search to look for nearby current listings, recently sold houses, and foreclosures.
Time your listing in the winter to sell faster.
Unless you’re a professional specializing in house values, do not try to figure out your selling price by yourself:
- Emotional Equity: the difference between what a house’s owner feels their house is worth and its actual worth.
- Don’t include your sentiments or add your new home’s costs into your house value.
- Depending on your situation, you might also have to settle for a lower price during negotiation.
Don’t try to “test” the market by setting the price above market value:
- You’ll have the house on the market for an uncomfortably long time.
- When you list it on the internet, nobody will even consider it without an appropriate price.
- The lower your price, the faster you’ll sell.
- If the price is below market, you may draw potential buyers into a bidding war.
- If you’re willing to take the risk and want to sell it quickly, consider putting it up for auction.
Ask your realtor do a free Comparative Market Analysis (CMA):
- A CMA compares nearby homes currently on the market and sold within the past few months.
- Its purpose is to find the price of houses with similar size, bedrooms, exterior, interior, and location.
Before committing to sell, analyze how much you’ll profit:
- Take the market value from the CMA and subtract the balance left on your mortgage.
- Take closing costs off of that amount, which are usually 6-10% of your house’s value.
- Subtract the approximate cost of moving and storage fees.
Ideally, budget your cash flow to address expenses before they come:
- Repair and improvement costs
- Moving costs
- Potential closing costs
- New home costs
C. Mentally prepare to sell
For several months, you’ll be slightly inconvenienced in your own home.
You will become less happy, so remember why you’re selling.
To avoid extra stress, try to arrange a home sale contingency if you already have a home:
- A sale and settlement contingency means you haven’t found a buyer yet and are marketing the home, which isn’t that attractive to potential sellers because it has many potential snags.
- A home settlement contingency is when your home is already under contract, is in escrow, has a home inspection, and is moving toward a closing date, and sellers tend to like the arrangement pretty well.
If you haven’t found another house by the time you’re considering selling, find a rental property with a short-term lease as a backup or in-between instead of backing out of the deal entirely.
- You’ve already come this far, so moving out to a new place is an ideal way to embrace a new chapter of your life.
D. >1 month before listing
Ask your realtor where your money will matter most:
- The most significant repairs keep the electrical, plumbing, HVAC, and roof in excellent condition.
- Your most significant cosmetic improvements will be toward the living room, kitchen, dining area, and master suite.
Make all the necessary minor fix-ups and repairs, since you’ll make enormous investment returns and will sell almost twice as fast.
Hire a home inspector to identify issues before they might ruin the deal during escrow.
Paint the house.
- Painting is one of the most cost-effective ways to increase the value of a house.
- Make the main entryways look good.
- Make the whole house have a matching tone, preferably a neutral color to maximize appeal to the most people.
- Pay particular attention to the outside which faces the street, especially the trim and stucco.
- Paint all cabinets and walls.
Replace or upgrade everywhere around the house.
- Update the flooring, especially the carpets, or hire a professional to deep-clean the rugs.
- Improve, install or update the light fixtures, especially over the dining room.
- Create a batten wall or add baseboards.
Improve the kitchen.
- Kitchen repairs are usually the most profitable.
- Consider granite/marble countertops or at least replacing the current counters.
- Put new hardware on the cabinets, or get new doors and veneer.
- If you can, make the kitchen match the bathrooms.
- Replace the sink with a modern one.
- Put in new appliances.
Improve the bathroom.
- Put new hardware on the cabinets.
- Update to modern faucets.
- If you can, try to make it match the kitchen and other bathrooms.
- Replace the towel racks and other accessories like the shower curtain.
Make the outside more inviting.
- The most important aspect of preparation is curb appeal (how it looks from the street).
- Improve the landscaping.
- Prune bushes, trim trees, add color with flowers.
- Add fresh mulch or wood chippings, put a giant pot of flowers by the front door.
- Pull any weeds, water the plants.
- If you’re in a dry climate, install drought-tolerant plants.
- Add to the outside.
- Replace the entry door.
- Repair or replace the garage door.
- Create crown molding.
- Add a corrugated steel privacy fence.
Add legal living space.
- Add an extra room or a shed.
- If it’s an older house, add a laundry area.
- Look for dead space in between rooms.
Build “accessories” for the house.
- Build a bookcase into a wall.
- Install an upholstered bench into a stair landing.
- Make an extra closet with bookshelves and tension rods.
Update the laundry space.
E. 1-2 weeks from listing
Make the house look inviting, as if someone lives in it but there’s room for someone else to move in.
- Potential buyers and appraisers should see the house as their home.
Put away all non-routine items.
- The more things you store away, the more spacious the house will feel.
- Move everything you can to a storage unit.
Rearrange and put away furniture.
- Place nice patio furniture out.
- Arrange the furniture with conversation (not TV-watching) in mind.
- Store any bulky furniture in the bedroom if you must keep it in the house.
- Remove most of the linens from the linen closets.
Replace, remove or put a slipcover over worn-out furniture.
Replace all the lights with brighter ones.
Put on new bedding and throw pillows.
If the house is vacant, make it look like someone lives there.
- Lightly stage the important rooms.
- Have lawn and cleaning services take care of the house if you can’t.
F. 1 week before listing
To make every room look as large and expansive as possible, Clean everything immaculately.
- Scrub every surface to a shine.
- Clear every window, door, surface, closet, and cabinet of debris or clutter.
Hire a professional photographer.
- Your realtor should know a good photographer.
- Professional photos will frame the house with the best possible angles.
- Many potential buyers won’t even consider a house without a set of good photos.
- If it makes sense for the image you want, also hire a professional videographer for a more pronounced presentation.
Change small details everywhere to make the house more appealing.
- Open up all the windows and drapes to let in light.
- Living room:
- Set new throw pillows on the sofa.
- Add a vase of flowers on the coffee table.
- Since they don’t photograph well, don’t scatter rugs around any rooms.
- Set the dining table with the best dishes, flatware, and linens.
- Keep the counters sparse and spacious.
- Have a few trendy-looking stainless steel appliances out.
- Close the toilet lid.
- Hide the laundry hamper and any personal towels.
- Put clean ornamental towels on the towel racks.
G. When people arrive, they should fantasize being “home”
The house should look as reasonably close as possible to the photographs.
Strike a balance between “for sale” and “inhabited”:
- Put things away as soon as you’re finished with them.
- Have a small to-do list for any prospective buyers stopping by.
- Have your pets live somewhere else until escrow opens.
- Keep your children out of trouble and motivate them to help with everything.
Before the buyers come, bake something that smells pleasant or burn scented candles.
I. Prepare for a long negotiation process
Each state has a different type of contract phase, so make sure your realtor knows how that state performs it.
A. the potential buyer will give an initial offer:
- Give preference to a buyer pre-approved for a mortgage, since the deal may fall through without it.
- Until you make a deal, the numbers don’t matter, so be prepared for hard-hitting negotiations over the house’s value.
- Every potential buyer will want to save money, so they will bring up problems with the house you’ll need to explain.
- Offering a home warranty will not typically close the sale, but consider it if the buyer wants it.
- Stay fully aware of the details of any papers you sign, especially:
- Purchase price
- Closing or escrow date
- Special allowances for personal property, home improvements, and closing costs
- Contingency deadlines for the home
- Inspection, appraisal and buyer financing
- Other contingencies like the buyer’s home sale contingency
- Track the entire dollar amount you’ll end up spending.
- Don’t take a low offer personally, since it’s still an opportunity to sell your house if you want.
B. after the initial interest and agreed-upon deal, the potential buyer will have a home inspection:
- The buyer will typically have an inspection independent of yours, and it’s not uncommon for that inspector to find issues your inspector(s) hadn’t found.
- To cover repair costs, either offer cash at closing or a discount on the sales price.
- Sometimes, depending on the buyer’s loan, the appraiser may require certain repairs done.
- Have your realtor negotiate with the buyer to see if you can meet the buyer in the middle.
- If the buyer expects you to fix it, it’s usually better to hire a contractor your realtor knows instead of risking the buyer demand a re-repair.
- If a title search uncovers an open lien on the property, you must either pay for it or use your title insurance.
C. the potential buyer will make an appraisal:
- Make a detailed list of improvements to the home and prove it with invoices or receipts.
- Have your real estate agent provide well-researched comparables to support your sales price.
- On appraisal day, keep the house in pristine condition.
- If the appraisal is lower than your selling price you have several options:
- Your agent can dispute a questionable assessment.
- Drop your contract price.
- The buyer can bring the difference in cash.
- You and the buyer meet somewhere in between.
- Leave the deal.
D. the buyer will arrange a loan commitment:
- At this point, your realtor should be proactive.
- Contacting the buyer’s lender to push the approval process forward.
- Investigating anything that may risk endangering the deal.
- Connecting the buyer with an alternate lender if the first one pulls out of the deal.
- If the buyer cannot secure financing for any reason whatsoever, leave the deal.
Once you’ve sold your house, move as soon as you can
Keep the buyer informed about when you’re moving and what stays with the house.
Make sure escrow closes on the house before you start moving.
- Expect the best, but be prepared for the worst.
On closing day, bring a photo ID and the house keys.
Keep your end of the agreement and leave on a positive note with the buyer.
Walk yourself through it with a moving checklist.
Pay down your mortgage ASAP
Technically, a mortgage can allow the bank to repossess the property if you ever stop paying it.
Work as fast as possible to pay the mortgage down to 80% of the home’s value, which involves doing several things at once:
- Make a routine of as much over-payment as you can manage.
- Add renovations and improvements that will add more value to the house than paying down the loan dollar-for-dollar.
- When the housing market next peaks, have an appraiser value the home again and refinance.
Upkeep of a house simply involves making steady, consistent decorations and renovations, along with repairs.
- Prioritize survival-based and structural needs (e.g., roof, plumbing) over conveniences (e.g., internet) or luxury/cosmetic (e.g., carpet, smart doorbell).
- If it’s a nice house, your work is relatively easy, but homes in disrepair will need many projects until you can feel comfortable.
- Make sure to set reasonable goals and pace it according to your budget and time.
Try to fix small problems before they become large ones.
- Sewage plumbing blockage is comparatively easier to fix when you have some running water through it (e.g., using a drain cleaner).
- If your plumbing system becomes unpredictable, either flush the toilet paper on a second flush or place it in a trash can.
- Electrical shorts are less miserable to fix than blackouts.
- Fix most leaks as soon as you know of them, which typically comes from old roofing or an insufficient drainage system.