The process of buying a home is riddled with obstacles. Whether financial or mental, there is always something standing in the way of a transaction. Even seasoned investors will encounter problems when buying a property. It is how you choose to face those problems that will make all the difference between failure and success. New investors, on the other hand, may not even know how to approach certain scenarios. However, it is important to note that there is a right way and a wrong way to go about buying a home. Done correctly, it can be a very lucrative and enjoyable experience. It literally pays to know what you are doing. Perhaps even more importantly, it pays to know what not to do. In other words, learn from those that have come before you. Here are some of the most common mistakes first-time buyers make, and tips to successfully navigate them:
1. Failing To Come Up With A Realistic budget
The prospect of buying your first home, for whatever the exit strategy may be, is accompanied by a significant amount of homework. That said, the more you know about a respective property, the better. Subsequently, the more accurate you are with your data, the more likely you are to come up with a realistic budget. In creating a budget, there are many things to take into account, but there is one thing that many first-time buyers forget about: the cost of actually owning the home. Otherwise known as holding costs, there are expenses beyond that of the actual rehab. It is up to you to know these additional costs before purchasing a home.
It is absolutely imperative that all of the costs that come with owning a home are accounted for. As a real estate investor, how much money you make on a deal is directly correlated to these costs. Any miscalculation or neglect to account for a specific expenditure will be reflected in the bottom line. Unfortunately, there are many first-time buyers who fail to account for all of these items – not matter how short or long the property is in their name. Taxes, insurance, association fees and utilities are just to name a few. These are in addition to the actual rehab expenses.
Knowing what these costs are and budgeting for them ahead of time is important for anyone, but especially the first-time homebuyer. When looking into a home, be sure to have a good understanding of where your money will be going. Be proactive and find out how much utilities will cost. You have every right to ask for a recent utility bill, or even water bill for that matter. Some cities even require the utility costs to be included when listing a property. Once you have a good idea of each additional cost, be sure to budget accordingly. How long do you intend to hold the property? What is your exit strategy? These are just a few of the questions hat impact holding costs.
2. Taking Too Long To Make A Decision
As a real estate investor, speed of implementation is critical. Nonetheless, first-time buyers can suffer from what we in the business call “analysis paralysis.” This is when indecision prevents a deal from moving forward. Essentially, an inability to act quickly on a deal will result in no deal at all. This is one of the biggest obstacles facing first-time buyers. Not moving on a house fast enough and taking too much time to make a decision is a particularly common occurrence. Even the slightest hesitation can give a competitor the opportunity to buy the home first.
Though a multi-offer scenario is a seller’s dream, it is far from ideal for a buyer. In this competitive real estate market with low inventory and high buyer turnout, you need to move quickly in order to reduce your competition. You must know how to analyze a deal correctly, and efficiently. Above all, you need to trust your research.
Speed of implementation is critical at this moment, as deals remain available for a finite period of time. For this reason, it is important to start the three-step deal evaluation process as soon as a lead has been determined:
- Phone Analysis:Engaging prospective sellers over the phone will permit investors to gauge whether or not a property is worth pursuing. Determining how serious a seller is will ultimately affect the way in which you should approach them, if at all. During this conversation, you will want to learn as much as you can about the property, the seller’s motivation and price and any mortgage information they are willing to share.
- Desktop Analysis: Here you will want to do some research of your own. Acquire property records and use every valuation tool made available. Obtaining the property tax card from county records will reveal details that include: assessed value, heated square footage, the number of bedrooms and bathrooms, and much more. After you have compiled a list of relevant data, use the information to determine the After Repair Value (ARV) of the subject property. The ARV will establish a rough estimate of what the house will be worth if it is fixed up and resold in pristine condition. Use the same date to determine the As-Is-Value too. Knowing these numbers will help determine your exit strategy.
- In-Person Analysis: Assuming the previous steps have culminated in a hot lead, the next step is to conduct an analysis in-person. Set up a meeting to see if the property corresponds with the seller’s description and continue to reevaluate a more-accurate price point.
Once you are comfortable with the data, and you feel the deal is worth pursuing, make an offer. However, this is a time sensitive period. All of this should be done as quickly as possible.
3. Not Comparing Mortgage Rates & Lender Options
As easy as it is to conduct a few online searches, it really is better to compare mortgage rates and evaluate lender programs in person. There are too many factors that go into each of these respective areas to trust a brief online search. On top of that, many first-time buyers may not understand how to quantify the information presented to them on the Internet. That said, it is always in your best interest to call a local mortgage lender and sit down in person with them to talk about the most current rates and programs available to first-time homebuyers.
4. Neglecting The Debt-To-Income Ratio
The concept of a debt-to-income ratio is relatively simple, but something few first-time buyers fail to understand. Nonetheless, the debt-to-income ratio has a huge impact on buying power. So what is the debt-to-income ratio?
Your debt-to-income ratio can be a valuable number — some say as important as your credit score. It’s the amount of debt you have as compared to your overall income. According to Bankrate.com, “Lenders look at this ratio when they are trying to decide whether to lend you money or extend credit. A low DTI shows you have a good balance between debt and income. As you might guess, lenders like this number to be low — generally you’ll want to keep it below 36, but the lower it is, the greater the chance you will be able to get the loans or credit you seek.”
Knowing this, it is important not to make any unnecessary big-ticket purchases before trying to buy a home. Speak with a lender to make sure your debt-to-income ratio is in line with the types of purchase you intend to make. It is better to learn this now than when you are moments away from closing on your first property, only to have to back out at the last second. This is something that can prevent you from getting the home you want. Conversely, a good debt-to-income ratio can help secure the funding you need.
