Like me, a good friend of mine recently bought a house after a long and arduous search. In talking with him I thought his journey to buying a house would provide some timely advice for those in the market to buy a house (hurry before the new home buyer credit expires), or for those who can relate when they bought their own home. He was kind enough to share his story with real numbers. There are some great learning points here when or if you are already looking to buy a place in today’s tough housing market.
Recently my wife and I got married, and for us this was an easy decision. A harder decision was working out where we were going to live and how we wanted to go about becoming financially secure. I have jotted down some of the experiences that we went through recently that may enlighten and assist you in the process of buying a home of your own
Firstly we had to decide where we wanted to live. For me I didn’t care too much but my wife certainly did. She had an area picked out near her parents and family and friends. While it was not a deal breaker for me where I lived, I still wanted to be able to access my family and friends without having to make it a day trip. We ended up compromising on a new development nearer her family, but still very accessible to the places I wanted to visit. [Editors note – He knows what it takes to keep a happy marriage!]. While not important to us currently, we do want to have kids in the future and so had factored in proximity to train stations, parks and good schools.
Our next step was to decide what type of place we wanted to live in. After living in an apartment during the early days of married life we wanted to live in a stand alone/single family house. Some people are happy to live in an apartment and there are advantages to that like little or no yard maintenance. However, for us we wanted some space to bring up a family so a house with a reasonable backyard was our preference.
The next item for us was research. I cannot stress how important this has been and how much the Internet helps. We contacted a few local real estate agents and were on their mailing lists (we didn’t pick a single one initially, though they all tried to lock us in!). We subscribed to all the well known realty web sites and every second night we would be on the web looking at new places. We didn’t set a tight limit initially as we wanted to get a feel for what places around the area were worth. So our range was $400,000 (something that was derelict and in a poor location) to $700,000 (something that we knew we would never be able to really afford). What it did give us was an idea about what price gave you what features.
Generally we found that in the area we were looking $500,000-$550,000 was mostly a knock down job (i.e. needed a lot of work). These were places rented out to tenants who didn’t seem to care about the place and the owners were happy to let it run down. The house would also be in a poor location, i.e. on a main road and subject to a lot of traffic issues.
$550,000-$600,000 would fetch you a place that may have been in a solid area but the place would require moderate to extensive repairs. Alternatively you could get a well kept house with moderate to low repairs but in a poorer area. $600,000-$650,000 would give you either a good location and well kept house or a great location (water glimpses is the term used by local real estate agents) and a place that would require moderate repairs. $700,000+ would give you a great location (water views) and a decent house; location generally spiked the price from there.
We did this research over 6-12 months and had a feel for what things were worth after about 6 months. The reason I had added the extra 6 months was due to the market being extremely volatile and the economic outlook bleak. We were also watching interest rates closely, since every quarter percent drop would save us thousands over the life of the loan and make homes out of our range affordable. During this time, clearance rates (number of homes sold) for the areas we were looking in dropped about 20% to 40%. However, in the areas we were looking at, clearance rates were still above 65%.
With changing interest rates we needed to set a limit that we could afford. Our thoughts were that we would aim for a good block with a house that needed moderate to significant repairs. (I classify $20,000 as a moderate repair budget and $50,000 as significant). We developed a sliding scale to factor in the rising interest rate impacts, which would be partially offset by our increased savings over that time. If we found a place we loved early in our search our top price would be $560,000 and later on our top price would be $580,000. However with more time to save, our top range would reach $600,000 in a year.
The approach help us greatly when looking at places. There were a couple that were outside our top price, but we kept an eye on them knowing that if they didn’t sell, as the months would go on, it might come down a little due to lack of interest and fluctuating interest rates, and we would have more money as we kept saving for a deposit.
Our eventual home first came on the market with a listing price of $540,000. From the pictures on the Internet it looked like it could be worth more $540,000 place so we went to take a look. (Tip : A big help here was to go to open homes, even again if it is not what you want, it gives you an idea of what you get for your money based on market supply/demand).
Looking at this place in person confirmed our view that it was worth much more than $540,000 and so we were very interested. If the place sold for less than $550,000 it would be a bargain. So going back to our research we looked at what nearby places were initially listed for and what they sold for, and also looked at the selling agents’ history. We found out that this agent almost always undervalues a property. This is to attract interest and on the first open home there was plenty of interest.
Our initial thoughts were that this place should have been listed for around $580,000. A place two doors up in better repair went for $630,000 only a few months ago. We guesstimated that we would need about $50,000 for repairs and worked back from the $630,000 to get a price we thought we would need to pay.
The place was up for auction and we asked the selling agent what price would take it off the market. The agent said if they got a high $580’s offer the owners would accept an
offer and sell the place. But at the time we could not afford that, again using our sliding scales we kept to our budget. The place of your dreams can turn into a nightmare if you are up to your eye balls in debt. It ruins the feel of your new home and puts unnecessary stress on your relationship. We decided that we would hold off but told the agent we were keen on the place and if any offers came in then to let us know.
Over the weeks we kept in constant contact with the agent to see if there were any offers on the property and if the sellers had lowered their asking price (after all the housing market was in free fall!). The agent though was playing games about how many contracts went out to interested people. But we felt that maybe there was really only one or two people out there ready to buy that wanted this place.
So we took our chances, got a private home inspection/appraisal done to see what the state of the house was and if we could use any home repairs as a negotiating point with the seller. Sure enough the reports came back saying that there was about $50,000 worth of repairs needed. The reports always sound worse then they are, (this is my opinion anyway) for the inspection companies to cover themselves. So armed with this knowledge we informed the agent of the required repairs.
The vendor still wanted high 580’s a price we could not go to and that the seller would now sell the house via an auction. So we decided that we would go to the auction and see really what the market is saying. There are good and bad things about an auction. The good thing is that it is all in the open. No matter how many sales you go through, you will never know if/when the agent is telling the truth and when there is a little bending of that truth. With an auction it is no longer in the agents’ hands. The people interested have to sign up and you can see really what bids are out there. The bad thing about an auction is that it is stressful and you need to be able to provide a 10% deposit on the day. The agent will generally accept a personal cheque.
We went to the auction and eventually had our top bid of $570,000 accepted. A great feeling which you have to go through in person to understand! Our research gave us the knowledge to know what the place was really worth and our discipline and sliding scale approach ensured we could realistically afford the place.
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