Monday, March 3, 2014

tips for buying a house

A friend recently asked me for tips for buying a house.  My tips are below.

The biggest tip I can give you is not to stress.  It's expensive, it's complicated, and it is the biggest purchase you'll make in your life.  It's easy to stress.  Stay calm, people buy houses every day, and you've got advisors to handle all the paperwork.  At the end of the day, just make sure you trust your advisors, and feel comfortable with the house.  

I bought my first place 14 years ago or so in downtown Campbell.  A small condo.  It was $435k (a bargain today!), and I put 10% down, got an 80% primary mortgage, and a 10% secondary mortgage.  The $44k that I put down was the most money I'd ever had in my life at the time (I had just started at PwC).  But my point is this... it was incredibly stressful.  Especially the first offer I made (I ended up making 10).  Signing my name to a piece of paper committing to spend that much money was so stressful.  The second home I bought was tons easier... no stress by that point, and I just signed anything they put in front of me.  It wasn't just that I had more money available, but just that I learned the experience wasn't worth having a panic attack over.  In other words ... remain calm.  Some pointers:

You're going to sign a lot of paperwork. I've never read it all.  I've never read .. basically any of it.  It's all boilerplate.  I probably should have read more of it.  But my real point is:  Don't stress.  People buy homes every day.  If you TRUST the people you're dealing with (real estate agent and finance person), and you've done your homework on the house you're getting (inspections), you should either feel comfortable, or not comfortable. If you don't feel comfortable (pressured into something) - just say no.  If you feel comfortable, and you trust your advisors, then don't stress.

Every home has something wrong with it.  Every wood home in California has termites.  When you have your home inspection done (you need to hire your own inspectors - it's not that expensive and it's routine), they'll find problems.  The only question is are any of the problems really bad (electrical wiring is unsafe, etc.).  I panicked about termites, only to discover later that every wooden structure has them.

- Because no house is ever going to be perfect, you're going to have to make some compromises.  But don't make big ones.  You're going to live in this house for a very long time - you need to be happy there.  You and Becca might want to make lists of what's important to you, prioritize, and compare.  You can always change the wall color or the flooring, or replace the toilets and fixtures.  But it's hard/expensive to add another bedroom.

- It's a LOT easier to replace flooring and paint walls before you move stuff in.  If you do plan to do any renovations, you'll want a time buffer (a week?) between when you move out of the rental and move into the house.

- You're better off hiring movers than trying to do it yourself.  You can box everything up yourself, but hire movers to transport the boxes and move the heavy furniture.  It's just not worth it to do it yourself if you have a house full of stuff.

You likely won't understand your mortgage closing statement.  Even with a financial background, if you can understand it, you're a genius.  I am convinced they make it purposefully confusing to hide things.  Make them explain everything to you, and just realize that things like "title insurance" and "escrow fees" and "recording fees" such are basically just ... borderline scams.  But they're required, and it's part of the process.

- Owning a house is more expensive than just the mortgage payment.  Property taxes are a lot, and they come twice a year, so you have to budget for it.  Every April and December, writing that big check is quite a shock.  You may also have HOA dues, and you will have insurance.  You'll also probably have to buy some furniture and appliances.  It's not cheap, but those are one time expenses.  I made a list of what I needed to buy (everything from a refrigerator to a BBQ set), and prioritized.  Some of the things I still haven't bought - it just wasn't that important in the end.  Don't go cheap on appliances - you're going to have your fridge and washer/dryer for 10-15 years or more ... get good stuff.

Don't skimp on insurance.  God forbid, but if something happens, you want your insurance company to give you a new house.  Not write you a check for the *depreciated value* of the contents.  You want a new house with new contents ("replacement value").  And smoke detectors in every room, including the garage.  Safety is important.  If it's a 2-story house, you need escape routesfor the kids (i.e., those ladders you throw out the window so you can climb down, if the main staircase is blocked).

Check out the neighborhood at various times of the day/night.  I parked my car at 9pm to check out the noise levels at night.  Is there plenty of lighting at night?  What's the neighborhood like?  How far is freeway access, and what is the traffic like getting to the freeway access points?  Where's the nearest grocery, drugstore, and Target?  Do the neighbors seem ok?

- Before you move any furniture in, make a video (cell phone camera is fine) of every room, and every wall.  That will record where the outlets are, in case you cover any up with furniture.  Once you're moved in, make another video of every room and every closet.  Do this once a year.  It's useful for insurance purposes should anything happen.

- Set an annual reminder to do some basic annual home maintenance (I do mine every Thanksgiving):  Replace the furnace air filter, replace the water filter in the fridge if you have one, replace the batteries in the smoke detectors, paint touch-ups.

- Hidden keys are useful:

- Keyless entry for the garage door is also handy:

I have yet to be impressed by any real estate agent.  I've found it best to do your own searching for houses (Zillow, MLS Listings), use the agents to get you into the house, and handle the paperwork.  Otherwise they seem fairly useless.  Even with handling the negotiations, it isn't clear to me that they work for me -- they're paid as a % of the purchase price, so they don't have an incentive to drive the price down.

Their fee comes out of the seller's pocket.  If the list price is 100, the agents split 5%, the seller gets 95.  The agents typically get 2.5% each (buyer and seller).  So it's tough to know if they're acting in your best interest since they have a financial interest in this.  Honestly, I'm convinced the only thing real estate agents are good for is the paperwork (and there is a lot of that).

You also want a good mortgage person - it sound like you have that - but if there's ever a snafu in buying a house, it's with getting the mortgage funded.  The first time I used a loan broker who was just a middle-man.  After that I've always had a mortgage person who worked directly for the bank (Chase or BoA).  That seemed to cut out the middle-man, and since there's only like .... 5 banks left in the world ... it's not like there's that many places to get a mortgage from these days.

Since you're going to be owning the house for what I assume is a long time, and interest rates are still basically at record lows or close to it, I assume you're looking at 30 year fixed rate mortgages.  The variable rate mortgages have lower initial interest rates, but obviously interest rates are going up not down long-term.

       Have you fired your agent before? Is it hard or common to do if I had to?

I haven't really had to do this, but the usual rule is that unless you put an offer down on a house they find for you, you're under no obligations to them.  With my current house, I found it myself, and it was new construction so I didn't technically need an agent (the seller's sales agent handled everything).  I "fired" him before I signed the paperwork, but I paid him some money for his time of showing me around... I didn't feel comfortable not giving him something for his time, but 2.5% of the purchase price made no sense given what he didn't do. 

Usually when you hire a real estate agent you don't sign a contract with them, at least not that I remember, so you're not on the hook.  They get paid by the seller, not by you.  Having said that, firing a real estate agent wouldn't be ideal so it'd be best to find someone you're comfortable with.

If the offer gets accepted, you're on the hook.  There are "outs" (contingencies) if the inspection turns up a bad problem, or you can't get financing.  Otherwise, you're on the hook if the offer is accepted.  In a hot market the agent might urge you to "waive the contingencies" - to make your offer more attractive.  I wouldn't be keen on doing that.  I'd want an "out" if the inspection turns up bad.  Unless they've already had the place inspected and the report looks trustworthy.  Otherwise if you do withdraw your offer after it's accepted there is a penalty amount (the amount of your deposit that you have to commit to when you make the offer).  I forget how much that is - $20k or something, but that's not a situation you'd want to be in.