Great Savings Tip #99 – Save On Real Estate

Our Great Savings Tip series continues.


Today’s tip: Save Money Buying Real Estate


This tip is number 99 out of 100 in our Great Savings Tip Series—designed to help find ways to spend less and save more. For more ways to save see our Great Savings Tips page with a complete list of all our tips. 


We’re Talking Real Money


Tip #99) Save Money Buying Real Estate. When it comes to buying a house, we start talking about one of the biggest purchases most people make in their lifetimes.  This makes it more important that ever to proceed with due caution.  So where does one begin?

Will you new house have a view?

Where do you want to live?

Here are 12 critical factors to consider when buying real estate:


(1) Map out a financial strategy by considering all the costs.  Start by getting a firm grip on your personal finances, especially your income and expenses.  You’ll want to pay off as much credit and installment debt before you buy, as well as save up for a down payment.  You’ll also run into costs and expenses that go beyond the price of a house itself so be prepared.  There will be costs related to the purchase like home inspections, legal fees, or potentially a survey if there’s any question over boundaries.  You may also run into possible travel, moving or storage expenses.  There can also be certain repairs or improvements required if the seller is unwilling to pay for them.


Expect to spend money on tools if you buy a house.

This yard has potential, but you'll need lots of tools for the job.

Sadly, the upfront cost of buying a new home is only part of the equation.  All homes require constant upkeep.  This means you could end up buying new tools and equipment like lawn mowers, trimmers, power tools, ladders, etc.  You might also need to hire a professional for lawn and yard care if you’ve never had to do it before, or if you don’t have the time to do it yourself.  Bottom line:  Get a handle on all the costs of home ownership before going in.  For more information on whether buying a home really makes sense in your situation, check out our recent post “Should I Buy or Rent?”


A recently upgraded kitchen.

Kitchen upgrades can run in the tens of thousands unless you can do some of the work yourself.

(2) Is a fixer right for you? If you’re good with tools and have plenty of time and money, buying a fixer-upper can be a great way to get into a home for less money.  Fixers can usually be purchased for a substantial discount, and the fact they need improvement means there’s a greater potential for home appreciation (assuming the home market in your area is generally on the upswing).  However, fixers aren’t for everyone.  The way to make a fixer pay the most is by being able to do a lot of the work yourself.  Thus, if you aren’t handy with tools or aren’t interested in learning to do the work yourself, look for homes in better condition.


There's a lot of satisfaction in fixing up an old home.

This kitchen needs an upgrade. Do you have the money or time to do it?

Living in a fixer while it’s being remodeled can be a real pain.  You can count on tripping over your stuff, shuffling it about, constant sawdust, not to mention potential issues with weather if some part of the house needs to be overhauled—like the roof or a wall.  As a rule of thumb, my father who was a builder and did a number of home remodels said, “Plan on your project taking 2 ½ times longer and costing 2 ½ times more than you originally expect it to.”  Though it may not be true in all cases, his advice is a good warning to anticipate the unexpected in any kind of remodeling job.


(3) Price is negotiable. The price on a listing should always be considered a starting point in negotiation.  Several factors can affect how firm the seller is in regards the sales price:


(a) How long has the home been on the market?  The longer it’s been on the market the more the seller should be willing to negotiate.  An old listing means the market is slow and/or the seller has priced their home too high.


(b) The economy.  Price is always a function of the local market conditions so if the area is depressed sellers have to reflect that in the way they price their homes.


There are apartments nearby, but far enough away to be acceptable.

Find out what's unique about a neighborhood. Is there something you want to avoid?

(c) The condition of a home is another factor in pricing.  If the home needs work, or more work than originally anticipated due to a home inspection it should cost less than a similar home in a better condition.


(d) Location.  Location plays a huge role in pricing.  Even in nearby neighborhoods, similar homes can be found for substantial differences in price.  It pays to learn what goes into those differences before making your offer.


(e) Selling costs.  Depending on the economy and local real estate market, sellers may be more motivated to pay closing costs or points on a buyer’s home loan. These costs can easily add up into the thousands so make sure you’re real estate agent helps you structure the deal for the best possible outcome.


(4) Commissions are a factor for buyers, too. Since sellers have to pay the commission out of their proceeds, how does that affect buyers?  If the house is sold by a typical real estate agency a sales commission generally runs 5 to 6% of the sales price, with half going to both the buying and selling brokerages.  That means any seller trying to sell their own home (For Sale By Owner or FSBO) or those using a “flat fee brokerage” to sell it will be paying less commission.


One might assume a FSBO home should cost less.  After all, if a seller pays less commission, there should be more room to negotiate, right?  Actually, the opposite circumstance occurs far too often—meaning FSBO sellers tend to price their homes higher.  The reasons for this are varied, but many FSBO sellers start out with overly inflated notions of what their property is worth, and they may also be selling their home with very limited equity it in.  This means they may owe almost as much as the house is worth.  Clearly, with limited equity, their ability to afford a bigger commission comes into play as they won’t want to end up owing the bank money after they’ve sold.  It pays to be aware of these quirks as you go to negotiate a price.


A gas fireplace can add a lot of ambience if the installation is complete.

Some home projects may be sold as is. It's good to have an inspector look them over.

(5)  Home inspections are a must. Absolutely every buyer should get a home inspection.  This even applies to those buying new homes.  The whole purpose of a home inspection is to discover potential problems with the house and thereby cut your losses.  A good inspector will spend up to several hours going over a home and then will be able to give you a verbal and written report (the written part can take a couple days).  You should plan on spending time with the inspector as he looks over your potential home.  Don’t worry about tagging along—you’re paying for this! And as you go, don’t be afraid to ask questions or point out potential problems you might have noticed.


The fix in this bathroom is a straightforward one.

This bathoom is new, but the contractor forgot to run a bead of caulk around the tub.

During the inspection a good inspector will put on their overalls and crawl underneath the house.  They’ll also don a breath mask and bump around in the attic.  They will check the roof for leaks, the condition of the gutters, the foundation for cracks, the heating and cooling system, the electrical panel, the appliances and so on.  Not all inspectors are equal.  If your real estate agent is experienced they’ll be able to provide a recommendation or two.  Though a home inspection can cost several hundred dollars it is some of the best money you can spend to know exactly what you’re getting into.  Hopefully, the inspection will go smoothly and you won’t run into any major problems.  Yet if you do, you can back out of the deal or renegotiate the price as long as you’ve stipulated the deal is “Subject to inspection” in the sales contract.


(6) Cutting the cost of your mortgage. The cost of your mortgage (i.e. your interest rate and the points your pay on your loan) is originally determined by your credit history, income, debt load and the amount of cash you have to put up for a down payment.  If you pay less than 20% down, expect to pay a monthly premium for mortgage insurance (also known as PMI) on top of principal and interest.  Since income and debt play such a big role, do everything you can beforehand to beef up your finances.  You might: (a) Pay off some or all of your credit cards. (b) Check your credit history and make sure it doesn’t contain any errors. (c) Earn some overtime (if it’s an option) and (d) Save up toward a down payment.


Beyond interest, there’s also the question of how you go about paying off a mortgage.  If you can swing the payments, the interest rate on a 15 year mortgage will run less than the rate on a 30 year mortgage.  That means it will significantly cut your overall cost of housing.  That cost includes the price you pay as stated in the sales contract, any financing charges for taking out a loan, and the interest that accumulates over the life of the loan.  It’s often shocking to learn that the interest can double or even triple the original cost of your home. Therefore, anything you can do to cut the amount of interest you pay ultimately impacts your overall wealth.  For more information on this topic, see our post “Cut Your Mortgage Down To Size”.



(7) A good buyer’s agent can save a bundle. Some of the best advice you get may come from your “Buyer’s Agent”.  A buyer’s agent is a real estate agent you agree will represent you in your real estate purchase (laws may vary between states so ask you agent what their duties are and who they represent).  In the old days, almost all agents were technically representing the seller.  Fortunately, that situation has changed in the past decade or so and more and more states allow for a buyer’s agent to represent the buyer.  Why is this important?  Because you want someone who knows the market and can point out your best options without any conflict of interest.


Besides having a feel for the area, a good buyer’s agent will also:


(a) Be able to recommend people for home inspections, title insurance, legal help, etc.


A good buyer's agent will pre-screen potential homes for you.

It might be a great house, but wouldn't it be nice for your agent to rule this one out based on the neighbor's junk?

(b) Scout out the area.  The best agents know the area and once they know what you’re looking for will often be willing to pre-screen homes for you.  That can save a lot of time looking at properties you’d rule out anyway.


(c) Help negotiate.  A good agent will know how to structure a deal and what kinds of selling expenses you should ask the seller to pick up. Also, having the right contract addendums to make sure you’re interests are well taken care of is critically important.  Of course, your agent will also present your offer to the seller’s agent or seller (if the seller doesn’t have an agent).


(d) Help you watch out for pitfalls.  You can end up saving thousands by passing on a deal your agent flags as bad one.  For example, a buyer looking at condos may not think to ask about the meeting minutes of the condo association’s board of directors, but a good agent will.  They’ll know from experience that if there are any significant maintenance or legal problems cropping up in the association, they should be part of the official record, and thus, you should be able to review them as part of your deal.


(8)  Get to know the market area. Every market area is different.  There are different economic conditions, different types and qualities of builders, different zoning, laws, and regulations, etc.  There are also differences in schools or essential services like hospitals and fire protection.  Some areas also have certain public nuisances like excess airline, freeway, or train noise, or they may be close to gun ranges and gravel pits, or lie in the path of certain types of industrial pollution.  As all these factors come into play, they can affect the price of housing in a given neighborhood.  It therefore pays big time to look at an area not just from the standpoint of price alone, but from all the factors that go into making up that price.


(9) Prepare to act quickly. The best homes tend to sell quickly no matter the condition of the market.  That means that as you prepare to buy, it pays to get your paperwork and financial house in order first.  Your agent should be able to help with this.  If you don’t have a mortgage lender, your agent will be happy to recommend a couple of names for you.  And no matter who you end up with, you can submit the necessary financial information before you begin looking at houses.  The lender can then give your agent a “pre-approval” letter.  The pre-approval letter will give you and your agent an idea of what you can afford.


Don't wait to the last minute to prepare for your move.

Got stuff stacking up? Maybe it's time for a garage sale.

It can also pay to prepare for your ultimate move.  For example, prior to moving might be a great time to think of downsizing by holding a garage sale.  Or you may want to consider storage options if you’re new home isn’t going to be ready when you need it.  For more information on garage sales and moving see our Great Savings Tip #83 – Hold A Garage Sale and Great Savings Tip #94 – Cut Moving Expenses.


(10) Clear title is critical. Whether or not economic conditions are bad, it always pays to have a title company perform a title search.  The purpose of a title search is to see what liens, loans or judgments have been recorded against the property.  Especially when a seller is underwater (meaning they owe more than the home is worth), you’ll want assurances that they have clear and marketable title to the property. If for some reason they don’t, then you could spend a lot of extra time and expense trying to sort it all out, or in a worse case, you might be asked to come up with funds to help clear title. Now, unless you’re absolutely in love with the property, that’s probably not even worth your consideration.  In fact, if your title search reveals problems with the title you should be able to back out of the sale without penalty as long as your contract provides for this option (and it should).  Again, a good agent can guide you as you put your offer together so you’ll be covered should unexpected problems arise.


(11) Listen to your gut. Suddenly in a bidding war?  Did you just discover there’s water in the crawlspace?  Have you done a little spying and discovered the neighbors are loud or overly nosy?  If you’ve done your homework and come up against something that just doesn’t sit right, it might just be time to walk away from the deal.  Hopefully, your agent helped you structure your deal for the unexpected so you have an easy out.  Don’t worry about walking, either.  It’s a big world out there and in today’s market there should be lots of other properties to consider.


(12) Legal expenses make cheap insurance. There’s no shame or harm in getting legal advice when it comes to matters of money.  And since buying a home is such a big deal, a few hundred dollars for an attorney to review your documents can potentially mean saving thousands over the long run.  If you are uncertain about any of the terms or any part of the contracts you’ll be required to sign then ask a lot of questions.  And if you’re still unsure, then by all means get an attorney!


For a complete list of all our Great Savings Tips click here.


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