LA Times – May 21, 1989 – ROBERT J. BRUSS
Contrary to what you may have heard, the American dream of owning a home is not beyond the reach of most income earners. Every day, thousands of home buyers successfully purchase homes even though statistically they cannot afford to do so.
If you really want to buy a home, stretch your budget. Cut out non-essentials such as vacation travel, luxury purchases and entertainment. The sacrifice to buy your own home will be worth the slight inconvenience. Yes, you can afford to buy a home if you know how. Here are 10 tips for the would-be home buyer:
1. Don’t be discouraged about home financing. The major home loan lenders say a home buyer’s monthly mortgage payment should not take more than 28% of his gross income. However, many mortgage lenders will approve home loans for credit-worthy borrowers whose mortgage payments take 30%, 33% or even 40%.
Ask your realty agent to recommend “easy lenders” who are portfolio lenders. They can be very flexible if you have good income and good credit. Try to avoid the mortgage lenders who sell their loans in the secondary market to tough lenders such as Fannie Mae and Freddie Mac, who require you to jump through hoops before you can qualify for a home loan.
2. Don’t depend on just one lender. Unfortunately, some home loan lenders are bait and switch artists. They will promise you wonderful loan terms to induce you to apply for a mortgage with their firm.
However, they will keep you waiting for loan approval until shortly before your sale is scheduled to close. Watch out for any lender who will not give you a firm written loan commitment within five days after application with at least a 45-day lock-in provision.
To make matters worse, the bait and switch lenders will inform you at the last minute of the loan term changes, after it is too late to apply elsewhere.
The way to avoid this problem is to apply for a home loan with more than one lender. Then, if the best lender lets you down, you have a backup lender. I realize lenders don’t like this suggestion, but their unreliability has made it necessary.
3. Consider other home finance methods. There are many ways to buy a home other than the customary 20% cash down payment and an 80% mortgage. Low or no down payment methods include VA, FHA and PMI (private mortgage insurance) mortgages, lease-options and seller financing such as a first or second mortgage carried back by the seller. I find the best candidates for seller financing are homes that are vacant, have been on the market for several months and are being sold by retirees who need extra retirement income.
4. Don’t offer too much for a home. One of the biggest mistakes home buyers make is offering too much for a home. Remember, you can always come up in price but you can’t come down.
Before you make a purchase offer, insist the realty agent prepare a written “comparative market analysis” form showing recent nearby home sales prices and the asking prices of neighborhood houses currently for sale. Then you will know the correct price to offer for the home you want to buy.
5. Don’t be in a hurry to buy a home. Closely related to overpaying for a home is the mistake of rushing to buy a home. Corporate job transferees are especially guilty of this mistake. If you are not familiar with a town, take your time buying. Renting an apartment or a house temporarily is better than buying the wrong house or overpaying for it.
An especially desirable alternative for transferees to a new city is to lease a house with an option to buy. This gives you the opportunity to try out the residence and the neighborhood before purchasing. If possible, negotiate a rent credit toward the down payment if you decide to exercise the purchase option.
6. Don’t buy a “red ribbon” deal. There are two types of homes. One is the “red ribbon deal,” a home in perfect condition with a top-dollar asking price. This type of house appeals to most home buyers. The other type of house requires fix-up work but is offered at a price less than the full market value if the house were in perfect condition. Purchasing the fixer-upper house is the best bargain if you can buy it 20% to 30% below market value for a similar house in tiptop condition.
7. Don’t be too fussy. If you insist on over-inspecting a house for every possible flaw, you will probably lose it to a less demanding buyer who realizes no house is perfect. The best way to solve this problem, if you question the physical condition of a house you want to buy, is to make your purchase offer contingent upon a satisfactory professional inspection within five days.
8. Don’t get into a bidding competition with another buyer. If there is competition from other buyers for a home, I find it best to back away. Bidding with another buyer for the same house can only drive the price higher.
Wait to see what happens with the other bidder for the house. No matter how much you may want to buy a special house, in a bidding competition the winner will be the seller, not you.
When I learn there is another buyer who has made a written offer for a house I want to buy, I politely walk away and let the realty agent know I will be waiting in case the other buyer’s offer is not accepted. Several times I have purchased investment properties where the other buyer’s offer was not acceptable.
9. Don’t buy a house with a major incurable defect. I used to only buy houses for investment in quiet neighborhoods. Then one of my favorite real estate agents sold me a bargain-priced house located near a noisy freeway. I thought noisy freeways were an incurable defect. But I have since discovered many people don’t mind noise. In fact, one of my tenants in that house told me he can’t sleep when he goes away on vacation because he misses the humming noise from the freeway.
But some incurable defects, called “economic obsolescence” by appraisers, should be avoided. They include a home near a smelly factory or downwind of a sewer works. Another incurable defect is a bad floor plan, called “functional obsolescence” by appraisers.
However, if you can devise a way to cure a serious home defect, such as adding a second bathroom to a three- or four-bedroom home, then you will have made a profitable improvement.
10. Check the school district quality before buying a home. Perhaps the first step in your search for the ideal home should be to check the quality of the local school district if you expect the home to appreciate in market value.
Good families want to move to top quality school districts, and they flee bad schools, thus hurting the resale value of homes in poor quality districts. In most states you can obtain comparative school quality statistics, such as student scores on standardized tests, from the city or county education office.