By Sid Davis
No one likes to make mistakes, especially when buying a home. They're not only time-consuming, but they can cost you a lot of money. Three of the costliest mistakes a home buyer can make include:
Too many homebuyers approach the process too casually. Perhaps they don't realize that their decisions can have a major impact on their lives for years to come. Here's how these common home-buying mistakes can occur and how to avoid them.
1. Not having an exit strategy.
Many younger first-time home buyers purchase one-bedroom condos, small two-bedroom homes, or homes on land in planned-unit developments which might have amenities such as a golf course. They don't stop to think that in a few years their homes will become too small should kids come along or their income increase. Too often, these properties are hard to sell and accumulate less equity than homes with two or more bedrooms.
For example, a recent college graduate who just started his first professional job heard that it was better to own than to rent. He visited a new condo project and was smitten by the amenities and lifestyle the development offered. He bought a unit and lived there for two years. Then he got married and when he and his wife had a baby two years later, the one-bedroom condo suddenly became a tight fit. A bigger home rose to the top of their priority list. They started looking and found some nice homes they could afford, but they'd have to sell the condo first.
A Realtor told them that getting a buyer would take a while because quite a few units were for sale. He'd probably have to discount his condo close to what he owed because other owners had dropped their prices to rock bottom.
The condo has been on the market a year, and no offers have been made. They're considering renting it out if they don't get an offer in another couple of months.
Before you buy property, think about how long you intend to live there. The average home buyer stays in a home for about six years, so do some "what if" thinking before you commit.
2. Buying a property that's hard to sell.
This is one the biggest mistakes home buyers make. It happens so often that you wonder what buyers are thinking when they sign the purchase agreement. The most common reason these home buyers give for why they bought a certain property is that it was an attractive deal. It was the biggest house they could find for the price.
Typical hard-to-sell properties are:
- Homes that back up to railroad tracks, freeways, industrial areas, frontage roads and other problem areas.
- Homes that have been over-improved for the area. A typical example would be a 900-square-foot bungalow with an addition on the back or side. Sometimes it's a well-planned addition that blends in. Other times it's a tacky add-on.
- Neighborhoods that have become run down with a high percentage of rentals or foreclosed properties.
- Homes that stray too far from the architectural mainstream of what people are buying. Typical examples are round homes, earth-covered homes and conversions from other buildings, such as barns, silos and sheds. They can be quaint and even be featured in a home magazine, but selling and getting back the money invested in them is not always easy.
- Properties that have a lot of landscaping problems. Examples are a steep slope for a backyard or a gully, little or no backyard, or no privacy from neighbors. The way a house sits on a lot also can affect value.
- The most common problem is exterior and interior colors that don't complement or fit the house. You may love bright blue, but if you paint your house that color, you've just reduced its value considerably.
Another common reason buyers give for purchasing these problem properties is that they can fix them up or correct the problems. That may be so, but by the time they add up the costs and time, it would have been much cheaper to buy a better house or one in a better location.
When you look at a property and see a negative but feel other features may outweigh the problems, especially price, slow down and think it through. There are red flags waving.
Some people make their properties impossible to sell. Consider the homeowners who spent $30,000 adding on to a small (800-square-foot) 40-year-old house. The addition was done professionally and did blend in. Still, the end result was an older house with an add-on. In this case, the most it would add to the house's value was around $10,000. Unfortunately, the owners had taken out a second mortgage to do the addition, and now they couldn't sell the home for anywhere near what they owed.
For them, the worst case was that they would have to stay in the home for a few years until they paid down the loan. It could get ugly if they have to move because of a job transfer in the next few years.
A lender who prequalified you for a loan may tell you that you're able to buy a $150,000 house. But spending the full amount you qualify for may put you out of your comfort zone.
You may be left without enough cash flow to decorate or put in a grass yard for a few years. Some homeowners can handle this, but others become frustrated by having no furniture or a dirt yard. Instead, consider buying a smaller house so you have money left for decorating and the yard.
Qualifying income-to-debt ratios are more credit-driven than in the past, and lenders are approving income-to-debt ratios as high as 65%. That means that your house payment and all other debts equal 65% of your income. Some families can manage that kind of debt load. Others would go broke fast. It's up to you to look at your lifestyle and realistically determine what you can handle.
There's another way to look at the amount of home you can buy. Some people claim you should buy the most home you possibly can now. As your income goes up and home values rise, you win. You not only save a move but end up with more equity and a home you'll enjoy more.
This approach worked for many owners who bought in the past 30 years and have watched their homes' value soar dramatically. Many of these homeowners say they struggled in the beginning, but as their incomes went up, the house payments took a smaller part of their paycheck.
Consider the couple who bought their home in 1979 for $32,000 and recently sold it for $196,000. Their house payment in the beginning took nearly a third of their income. By the time they sold it, it was nearly paid off and took less than 10% of their pay.
Neither way is right nor wrong. It depends on your values and priorities.
