In my previous post about the basics of buying a home, I mentioned some point that you should be aware of.  One of the points is to know the right questions to ask.  Here is a list of questions I always make sure to ask:

1. Why is the seller selling? – This question is solely for negotiation purposes.  I wrote previous posts about negotiations, which you might want to check out.  In this situation, you want to know more information about the seller’s position.  Did they buy another place already? Are they moving out of state? Are they upgrading to a larger place? Essentially, you want to know how motivated they are to sell.  If the seller has already bought another house, they are likely paying two mortgages and are pretty desperate to sell soon.  This puts you in a strong position to negotiate.

2. How much of the building is owner occupied? – This is only if the property is a condo in an apartment building.  The % of owner occupancy can play a role in your financing options.  More on this later.

3. Does the tax figure include a residential tax exemption? – Usually, the seller will let you know what the tax expense is each year.  Many towns will give you a residential tax exemption and allow you to pay lower taxes each year that you live in the apartment.  If it is an investment property in which you are not living there, you won’t get the exemption. This is good to know, so you can see what your monthly expenses will be to own the house.

4. What kind of heating system and how old is it? – The type of heating system can make a big difference in your monthly costs.  Oil can be costly and annoying to have to get heating oil delivered to your property.  You want to make sure that it has been updated and is working well.  Of course, many of these things will come up in inspection, but it never hurts to know before you make an offer.

5. How old are all the appliances, windows, roof, water boiler, etc? – It is good to know how old things are and the last time they were renovated as they could impact your valuation of the property.  If the roof is likely to need to be repaired in the near future, you want to know that.

6. How is the condo association? Are there any anticipated extra condo association expenses? – Of course, this only applies to condos.  You want to know any future expense that could occur.  Sometimes, condo associations want to make repairs to the building as a whole and it is up to the condo owners to pay for this.  You want to know ahead of time if there are plans for this so you know that you will need to pay that once you own the condo.

7. Have you been showing the property a lot? – This is another question to gauge your negotiation strength.  If the house has been shown a lot recently, you might have a lot of competition.  If it has not been shown much at all, you know the seller doesn’t have many potential offers to choose from.

Does anyone else have any good questions to ask?

As a part time real estate agent, I wanted to share some tips and advice for potential buyers. It is a very good time to buy a home at this time, but buying a home can be stressful and is a major purchase for most people.  Here are some important steps and details to understand when looking for a home to buy.

1. Always work with professionals – If you are buying a home, get yourself an experienced real estate agent who has extensive knowledge of your area of interest.  The agent representing the buyer splits commission with the seller’s agent so he/she will not cost you anything anyway.  It is true that you could try to do the transaction without the agent and negotiate for a lower price, claiming they don’t need to pay the portion of the buyer’s agent’s commision, but the seller’s agent will need to take a hit in commission.  Also, this is not a wise tactic for first-time homebuyers since they are inexperienced and need the advice of the real estate agent.

2. Shop around for the best mortgage rate & understand all your financing options – Everytime I walk into a local bank and look at the mortgage rates, I cringe.  Not only are the rates much higher, but they also make you pay points (pay percentage points of the loan upfront to lower the rate).  Make sure to look around for the best rates.  Another post will come with more details about this.

3. Be organized – Be very organized with your paperwork.  You will need to provide a ton of information for your mortgage provider so make sure to have all your personal financial information in order.

4. Don’t buy a house you can’t afford – This is a simple concept and is self explanatory.  Make sure you still have savings after you place your downpayment and don’t buy a house that that requires monthly payments that are too much for your salary.

5. Value the property correctly – The worst feeling is to realize that you paid too much for a property. There are a few ways to value a property.  Make sure you do your homework and find a price for the property that you are comfortable with.  Do not rely on the list price as an indicator or the value of the property.  Here is a previous post about how to value a property.

6. Ask the right questions – When you go to see a property, there are plenty of questions you should be asking.  Some questions can help you negotiate better and some will give you more information on the condition of the property. Another post will follow with some examples of good questions to ask.

I previously mentioned that it is a good time to buy real estate. It is important to understand how much to pay for the property.

When you are thinking about buying a home and you finally find the right property, one of the most important considerations to make is how much to actually pay for the property. Basing your valuation on the listing price is not a good idea since that is set by the seller. I think there are three main ways to value real estate:

1. Replacement Value
2. Market Value
3. Cash Flows

Valuing a property by replacement value is basically how much would it cost to replace the building and the land. I do not believe this is an accurate calculation since it only takes into account the costs of the land and the building.

Market value and cash flows should be used in tandem to get a good range of values for the property. Market value reflects what the market is willing to pay for the property. This takes prevailing market conditions into account such as the current economy and current real estate market conditions. The way to get a number using this valuation technique is to use comparable transactions. If you have a real estate agent, you can ask them to find this for you. They will go into multiple listing service (MLS), the database that real estate agents use, and will find similar/comparable properties that are close in proximity and have sold recently. The sale price of the similar property will give you a good idea of the market valuation. However, since there is rarely a property that is exactly the same, you cannot take this number at full value. This is where the cash flows come into effect.

If you want a good investment in the property, it helps to think about how much cash flow the property can generate. In other words, how much rent can you charge for the property and does that rent cover the expenses. In order to make this calculation, you would need to consider the mortgage payments, property taxes, homeowner’s insurance, and any other expenses related to owning the property. Although you may not be renting out the property, this valuation technique gives a good frame a reference and provides perspective on what it is worth.

Once you establish a price range that you are comfortable with you can submit a lower offer to begin negotiations.

I am currently on the market to buy a home and almost every time I tell someone that, they ask if I am planning on living in the area for a long time. It seems that it is the general assumption that if you purchase a home then you have to live there for years to come. I really don’t believe this is true. I am a big proponent of owning as opposed to renting because if I am going to make monthly payments for housing, I might as well be contributing to building equity in my own home.

I fully understand that not everyone has the means of owning a home. It is tough enough to save up enough money for a down payment, but I think many people count themselves out of owning a home before even considering it as an option. With a little research, one would find that with an FHA loan, only a 3.5% down payment is required in comparison with the typical 20% for a traditional mortgage. I believe that if the buyer does not purchase a home that is too expensive for them, then the monthly expenses of owning the home would only be marginally more than the average rental of the same size. Essentially, the monthly payments that previously would have gone to rent, could invested in the home. Also, many people do not consider the huge tax shelter that owning the property would provide. Individuals can deduct all the interest paid on the mortgage in their annual taxes and can significantly reduce their taxable income each year. Furthermore, for this year only, the government is offering a first time homebuyer’s tax credit of $8,000, which you do not have to pay back. This is essentially $8,000 in your pocket! With today’s depressed prices in real estate, low mortgage rates, FHA loans, and tax benefits it actually makes a lot of sense to consider home ownership.

Some people argue that buying a home in a certain area forces you to stay there for a number of years. To some degree this is true. It would not make sense to buy a home in an area and then try to sell it again in a short amount of time, especially if you are still trying to pay down the mortgage and build equity in the property. This is where the selection of the property is important. If you select a home in an area that has a strong rental history and there is high demand to rent the property, you should not have to continue living in the area if you should choose to move. All you would have to do is to rent it out so that the monthly rent covers the monthly expenses of owning the property. This way you can move and rent an apartment somewhere else and still end up paying what you were paying before, assuming the cost of living is similar. In order for this to work, you would also need to select a home that has monthly costs that are similar to the average rent charged in the area.

I think that homes can be a great investment. I do plan on staying in my city for a few years, but definitely not for too long as I’m too young to settle down and still would like to live in other places. However, I do think it would be an oversight for me not to buy a home. It could be a great investment, especially since the city I live in has a very strong rental history. The money that I spend on rent every month is basically going to waste, but if I could spend close to the same amount in mortgage payments and consider it an investment, I could take big steps in building my net worth.

Do you think buying a home is an option for you? Was there anything mentioned in this post that you would like to know more about? Please feel free to comment.