My Life and Views on Personal Finance

 Note: This is the third of a multi-part series about buying a house.  Read Part 1 and Part 2 before this post.

If you decided to use a real estate agent, you can skip this post. 

Ok, if you’re still reading, let’s get to the real work of purchasing a house.  First off, let’s figure out how much you can save by not using an agent, so you can decide if the extra work is worth your time.  When you buy a house, 5 – 6% of the purchase price goes to the real estate agents involved, and it’s typically divided in half.  So you can plan on saving an extra 2.5 – 3% by doing this work yourself.

So, now that you’ve determined if it’s worth your time, let’s do some work!  Now that you’ve hopefully stepped foot in quite a few houses, you should have a good idea of the build quality and features of the house you’re planning to purchase compared to others in the same price range. Using that knowledge, take a look at the houses that have sold in the past 6 months that fit in that range on sites like zillow.com and trulia.com.  At first, try to pull in properties just within the same subdivision.  If you can’t find enough to compare it to (I try for 5-7), expand out to surrounding subdivisions that might have a similar resale value as the neighborhood in which you’re looking.

Once you find a few houses that fit the same criteria, look at the price the house sold.  Then look at all the features between that house and the one you are going to be making an offer on.  This is where the magic of a real estate agent comes in.  You need to be able to figure out how much money you can attach to different items within both the house you’re looking at and the one you’re comparing it to. 

For instance, if you see that a house you’re comparing has an updated kitchen, and it looks like they used middle-of-the-road products to redo it, you’ll need to know if that was a $5,000 difference or a $15,000 difference.  Once you can determine that, you’ll need to subtract from that amount off the sale price of that house to determine what that feature should bring in the house you’re looking at.  If the house you’re looking at had the upgrade, add it to the sale price of your comp.  Do this for all the important features, such as kitchen and bathroom remodels, basement additions, one or two or three car (or none) garages, decks (both covered and uncovered), square footage, number of bedrooms, bathrooms, etc. 

Once you feel that you’ve got all the major differences between the two houses down, you can add/subtract the numbers from that comp to determine what the house you’re looking at should be priced at.  Do this for 5-7 houses, and you’ll come up with 5-7 different prices for your offer.  Average that amount, take off the 2.5 – 3% for the real estate agent, and you have what you should pay for that house. 

When making the offer, work with the seller’s real estate agent.  Tell them that you want to work directly with them, and that you want the buyer’s agent’s commission taken right off the price of the house.  Knowing what you should be paying for the house based on  your research, make an offer that’s lower than that.  The price should be based on whatever strategy you want to do.  You should be able to feel out the buyer’s agent to give you an idea of how much flexibility you have.  You can offer something much lower than your magic price, but I wouldn’t recommend paying more than that price.  You can always find another house.  Don’t overbid!

Hopefully you can get to a price you can both agree on.  At that point, you can follow the advice of the seller’s agent for all the closing documents.  If that’s the case, congratulations!  You just got your offer accepted.  But you’re not done with the process of buying a house just yet.

Now that you will be signing a contract, you’ll want to get an inspector to look over the home and make sure there’s nothing major you’ll need to do to it.  Lots of things could be wrong with the house that you won’t find out until after you live there for a while.  Always get a home inspection done!  I’ll cover that and more in Part 4.  Stay tuned!

 Note: This is the second of a multi-part series about buying a house.  Read Part 1 before this post.

So now you’ve figured out how much house you can afford, and have saved at least 20% of that amount.  You might think this is the time to find a real estate agent and have them show you some houses, right?  WRONG!  Don’t get an agent just yet.

First you’ll need to decide if you even need a real estate agent.  An agent can be helpful in finding you a house, but all agents work on commission.  If you play your cards right (and you’re willing to do a little homework), you can get the house cheaper without a real estate agent.  Instead of paying them a commission, you get to take that price off the purchase price of the house.

That being said, choosing an agent does have its advantages.  They will look up houses that fit your criteria, and can sometimes find them quicker than you can on your own.  Most agents have a strong network of other agents built up to where they can find out about properties before they even hit the MLS, which is all you have access to on your own.  They also do a lot of work at closing for you, which makes the process go much smoother.

If you end up working with a real estate agent, and they show you multiple houses and do a lot of work for you, don’t take their advice and cut them out of the equation.  This is how they earn their living, so if you go down the road of using an agent, include them the whole way (including closing).  Don’t take their advice, have them find and show you several properties, then go behind their back and buy without them.  If you use them as a resource, pay them for that advice.  That’s the service they provide.

Ok, back to the subject at hand.  Now you’re at the step of starting the process of trying to find your new home.  This is the fun part!  Start at sites like Zillow (my favorite), Realtor.com, and Trulia to try to find homes that fit your location/criteria.  Find a few that you like, and contact the realtor for that property.  Simply ask them if they can show you the property.  You still need a real estate agent to walk you through the property, but they aren’t doing much work for you at this point in time.  When you go through the house, get a feel for the property and the real estate agent.  Once you’re done, get the agent’s card, and take some notes about the pluses/minuses about the house.  It’s always a good idea to take a camera and take some pictures too, so you can refer to them later.

Continue that process for a while, so you get a good feel of the houses in your price ranges and the real estate agents you can work with.  When choosing a real estate agent, look for both the personality and how you feel they will do in getting you the best deal on the house.  Ask them for some references, and try to find some reviews online (just type the agents name and the word reviews after it in any search engine). 

If you find an agent that you like more than the others, and decide to use a realtor, start contacting that person to show you the houses.  Tell them what you’re looking for, and they’ll help you find even more houses to walk through.  Keep looking online though, because you might find something your realtor could miss.

If you decide you aren’t going to use a realtor, just keep contacting the person for each house listed on the online site.  This way, you won’t waste much of their time.  You can even mention that you are not using a realtor, and you appreciate them simply showing you the house.

Once you find a house you want to actually make an offer on, remember to not get your heart set on it.  There are plenty of houses out there that will be a good fit for you, and you will most likely end up getting a bad deal if you get set on just one house.

If you choose to go with an agent, this is the time where they will really provide you with the biggest benefit.  They will do a lot of homework to find a fair price for the house, and work with you on what offer you can make.  Take all the information in, and make the best informed decision you can.  Remember, you can still offer whatever you want on the house, even if your agent doesn’t agree with you.  But they are the experts here, and have a good idea of what the house is probably worth in your particular area, so I’d recommend listening to their advice.  And remember, if you don’t get this house, there’s plenty of other options out there.  It’ll just take some more time to find them.

If you decided the agent’s not for you, I’ll cover the work you need to do to find out the fair market value for the property in Part 3.

No matter what you decide, always make sure to get a home inspection done.  I’ll cover that in Part 4.

See, now aren’t you learning a lot about buying a home?  There’s a lot more info to come, so stay tuned.

This is the first in a multi-part blog about buying a house.  Buying a house is most likely the largest expense you will incur in your lifetime, so you want to make sure you get the best deal possible.  Buying a house just to live there for 3-4 years is not a good idea, so you should only buy if you’re planning on staying there a while (especially in today’s market). 

The first thing you need to do is figure out how much home you can afford.  Go to a site like www.mortgagecalculator.org (that’s my favorite) to see what you can afford.  Put in the price you plan on paying for a house for the Home Value field, and subtract your down payment to put in the Loan Amount field.  If you’re not sure what you can afford, you should ballpark something with a mortgage of less than 2.5 times your household income.  You can always adjust it later.  Another good rule of thumb is to make sure your monthly payment (including principle, interest, and taxes) is 25% or less of your take home pay on a 15 year mortgage.  If you fit into both of these categories, you’ll be in good shape.

Note: I’d strongly recommend putting 20% down, as that will avoid you paying any PMI on your home.  If you don’t have 20% to put down, rent someplace as cheap as possible, and stock money away until you hit that 20% level.  Don’t even start looking until you hit that level, or you’ll be too tempted to buy. 

To find an interest rate to use, go to www.bankrate.com.  I’d strongly recommend a 15 year loan.  You get a better interest rate on a 15 year compared to a 30 year, and you build equity much quicker.  On a 30 year loan, you pay basically nothing but interest for about 10 years, so you end up paying a lot more for the same house over time.  A 15 year loan is always much, much cheaper in the long run.  For the actual number to use in the calculator, take an average of what you find on Bank Rate’s website.  Don’t take the lowest number, because you realistically won’t get that number.  The average is probably closer to what you’ll find. 

Find out what your property taxes are for the area you’ll be looking.  You can go to zillow.com, look at some recently sold properties in the range you think you can afford, and find out what tax rates were paid over the past year are on a handful.  Then take the taxes paid divided by the sale price of the home, and you have your tax rate.  Average out the tax rate for all 5 properties, and you should have a good idea of what to use in this field.

This next box (PMI) is why I wouldn’t buy a house unless you have 20% down.  You can ignore it altogether, as it only applies to the first 20% of equity you build up in the house. In case you don’t know, PMI (or Private Mortgage Insurance) is a huge ripoff designed to be used by people who buy more house than they can afford.  It’s like paying rent on top of your house payment, as it goes to the bank to hold on to your money.  You never get any of it back, and it goes toward nothing.  Avoid it like the plague (I’m speaking from experience here, but that’s a whole other post). 

If you can’t afford the monthly payment for the price of the house you filled out above based on having at least 20% down, and on a 15 year loan, you can’t afford that much house.  You’ll either need to save more, or adjust your expectations on what type of a house you can afford (in other words, lower the price of the house you can afford).

Mortgage calculators can be used as a planning tool early in the house-buying process.  They can help you figure out what goals you need to hit before you start looking to buy a house.  You’ll regret it if you don’t do this step.

In Part 2, I’ll cover what to do once you save that 20% down payment.