The process of buying a home can be exciting for anyone – investor or not. However, it is important that you do not pursue a property with blind ambition. Having said that, it is very easy to get carried away with a beautiful home, especially if you are not familiar with the numbers. You can’t let your affinity for a property prevent you from making the right decisions. All too often, new investors will make foolish mistakes and acquire a property that is not right for them. A move such as this can cripple a business. Therefore, you need to be aware of the following home buying mistakes, and how to avoid them:
Overextending Yourself
As a real estate investor, the thought of taking on a deal without a plan is almost inconceivable. But mind you, I say almost because relatively inexperienced investors have a tendency to leap before they look. In all of their excitement, they may follow through on a lead that is genially a poor idea. While the ambition is nice, and a boon for morale, it is also blind. Having said that, investors are advised to have a plan in place for every property. Subsequently, before even looking at a property, you need to have your finances in order. Knowing how much you can afford is a critical first step. Not only will this keep you on budget, but it will also prevent you from overspending.
While there are several online calculators to help you rationalize your expenditures, they are nothing more than an estimate. By no means should the amount offered by a generic online calculator supplement the foundation of your bottom line. Simply use it as a guide. The number provided should then be adjusted based on your particular situation. What does your credit look like? How much will your debt-to-income ratio allow you to borrow? You really need to gauge how much you can afford without overextending your resources. Perhaps even more importantly, if you are using a lending institution, you need to know how much you qualify for.
Investors are advised to meet with a lender prior to engaging in any activity. The idea is to find out how much you can afford to borrow. Once you know how much you have to work with, then and only then should you start your house hunt. It is important to work within the confines of your loan. Do not overextend yourself to the point where a lost deal will ruin your business.
Assumptions
Again, investing in the real estate industry is foolish without a plan in place. The more organized you are, the better a transaction should transpire. With that in mind, it is best not to assume. While you are trying to determine how much you can afford to pay for a property, outline a strict budget. Make sure you are basing any numbers off of hard facts. Essentially, know how much you can afford and do not go over that number. You are in this business to make money. You will only serve to eat away at your bottom line if you assume inaccurate expenses.
Account For Additional Costs
Purchasing a property is a complicated and sometimes lengthy process. There are a lot of numbers that can be thrown around. To a relatively inexperienced investor, those numbers can do little more than confuse. Yes, there are a lot of things to account for. However, that is no excuse to be ill prepared. Aside from the mortgage and subsequent rate, buyers need to account for closing costs, property taxes, HOAs and insurance costs. Depending on the property, there may even be more expenditures.
Typically when you rent a home, you generally only have one payment – rent – and maybe even renter’s insurance, depending on the landlord. However, when you buy a home, the mortgage payment is only the beginning of costs. Homeowner’s association fees can be as low as $0 or as high as a few hundred dollars per month, depending on where you live and the amenities and services offered. In addition to all of these costs, if your down payment is less than 20 percent of the selling price, you may end up paying an additional cost – private mortgage insurance (PMI) – which is basically insurance for the lender in case you default on your loan.
Neglecting To Protect Your Investment
Upon searching for the perfect property, it is not uncommon to become infatuated with a home. It is, after all, an exciting experience. However, it is important not to make any rash decisions before you view the property in a more detailed light. What was originally a great looking property may be nothing more than a money pit once you really get down to it. Essentially, you can’t know what you are getting into until you really get a feel for the property.
Be sure to protect your investment, and your business for that matter. Home inspections provide you with some protection. The inspector will be able to find problems that you can’t and you want to know these problems before you sign on. “The seller isn’t likely to tell you there’s mold in the basement or the walls are poorly insulated,” reports MSN.
Contingency clauses also offer a form of protection. “A mortgage financing contingency clause protects you if, say, you lose your job and the loan falls through or the appraisal price comes in over the purchase price. Should one of these events occur, the buyer gets back the money he used to secure the property. Without the clause, he can lose that money and still be obligated to buy the house,” explains Justin Lopatin, a mortgage planner with American Street Mortgage Co., to MSN.
Underestimating Rehabs
Relatively new investors tend to harbor a sense of paranoia. At the very least, they may be naïve in their investing endeavors. Being overly optimistic, however, can lead you down a slippery slope. In such a scenario, buyers may tend underestimate problems. There in lies the problem. The second you underestimate a fix is the moment when you risk going over budget and eating into your bottom line. If a home has a few problems, new investors may view them as easy fixes and are unrealistic when it comes to the cost and time it takes to fix up the home. This is a cardinal rule in the field of real estate development. Do not – I repeat, do not – underestimate any fixes. In fact, it may be beneficial to overestimate rehab budgets and time frames. That way, any money that is left over can be used as a buffer for the rest of the project.
