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Posted at 05:30 AM ET, 08/22/2012

A real estate investor’s guide to buying a home

Most people only buy a couple homes in their lifetime. This lack of experience leads many home buyers to feel woefully unprepared — increasing their stress level which affects their decision-making at the worst possible time.  The process doesn’t have to be so complicated if you keep things in perspective. 

 Keep in mind that you’re not getting married.  You don’t have to make a lifelong commitment to a home. So relax, a little, you only need commit to a home for a few years. You can always move later if you fall out of love with your home, as long as you buy right.

 I buy a home almost every month. And even with my experience it’s hard to know whether to pounce on a deal or to walk away.  I rely on a set of rules that can be used by anyone buying a house:

 ●Determine your needs for the next five years: Affordability is number one. Make sure you consider all the costs of principal and interest payments, taxes, insurance, maintenance and utilities.  Your family size, lifestyle and profession are also important factors.  But, remember those big beautiful homes take a lot to heat, cool and keep beautiful — i.e. maintenance. 

I’m struck by all the people who buy half million dollar McMansions and then fail to maintain them.  Do you really want to vacuum, dust and heat two or three rooms that you’ll never use.  I urge you to buy the right size home; bigger is not always better.

 ●Get the facts:When I have a tough decision, I am comforted by facts.  The number one rule is do not overpay for a home. Try to determine what the home is worth based on comparable sales. Be very careful trying to project future value. The very best real estate professionals are shaky at best when it comes to predicting appreciation.  I never buy on future value and I believe that illusion is what got many of us in trouble during the last bubble. 

 If the home needs repairs, be very realistic when you estimate costs.  Too many people think they can paint and carpet a home for a couple thousand dollars. Hiring reputable professionals can be much more costly and many would-be do it yourselfers have been overwhelmed with the time, effort and disruptions required by such projects. And, on the flip side, don’t let a home inspection scare you away from a good deal. Every problem is fixable as long as the home price is low enough.  Get a couple bids for any needed repairs even if you think you can do it yourself and make sure the home price reflects the appropriate discount for the needed work.

 I recently had a friend who sought my advice. He was trying to buy a short sale. I warned him about how slow and murky the short sale process could be, but he loved the home and moved forward anyway.  To my surprise, the bank accepted his price of $520,000 on a home that was probably worth $650,000.  But the home inspector found a laundry list of items that needed repairs.  The list looked scary but it was probably only about $20,000 worth of work.  My friend walked away from the deal despite the fact that he would have had over a $100,000 in equity at closing.

 ●Don’t fall completely in love: Lacking experience, people rely on their emotions. Real estate agents know this. They try to decorate and stage a home so that people fall in love and forget the facts. When you get too determined to get a specific home, you get into bidding wars and overlook discrepancies that need more attention. Remember a house is just sticks and stones and there are plenty of them out there. You make it a home.

 I really wish people were more realistic about houses.  When I’m remodeling a home for resale and I’m faced with a decision to either improve the home’s insulation or make the home more beautiful, I’m almost always forced to beautify.  Remember: It’s much easier to replace kitchen cabinets some time down the road than it is to reinsulate a home.  But people aren’t concerned or willing to pay for what’s behind the walls.  They should be.

 ●Get professional help: Professionals will help you with all the above items.  The key is to trust but verify.  Not all real estate agents are created equal so interview several and ask for references.  Educate yourself as much as possible so that you can better utilize your agent.  Real estate agents have many tools to help determine value. 

Ask your agent to go over comparable sales with you — not just spit out a value.  This will help you feel confident about your offer and reduce the risk of complications from a low appraisal.  Appraisers are right 90 percent of the time, but they’re not perfect.  I had a home recently appraise for $236,000 by one appraiser and $170,000 by another.  After disputing the low appraisal, he came up $40,000.  This is a perfect example of trust but verify.  Real estate agents, home inspectors, appraisers, lawyers, surveyors and contractors are all valuable resources but they’re no good if you disregard their advice.

 ●Don’t be afraid to pull the trigger or walk away: Once you compile all the facts concerning a house you love, it becomes a much easier decision.  If you love a house, the price is fair and affordable then don’t be afraid to seal the deal. 

On the other hand, if the home price is above market value or not appropriately discounted for the amount of work it needs, then remind yourself that there are plenty of other houses to choose from.

Read more on Justin Pierce’s experiences as a real estate investor

Justin Pierce is a real estate investor in Northern Virginia. In his occasional column, he will write about investing in real estate.

By Justin Pierce  |  05:30 AM ET, 08/22/2012

Tags:  investor

 
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