3 Tips for First Time Home Buyers
If you are thinking about buying a home for the first time, I want to offer a strategy that is rarely used, but hugely successful for those who do. Before I jump into our recommended first-time home buyer strategy, there are a few things you need to know:
- The average home buyer will buy a home and then sell it within 2 to 5 years. First time home buyers are often closer to the lower end, staying in their first home for only 2 or 3 years.
- First time home buyers are more likely to purchase a home as a commodity rather than an investment.
- First time home buyers don’t know what they want until they’ve lived in a home for a couple of years.
- Selling a home can be profitable, but it does have costs associated with it so you need to be smart when you choose a home to purchase.
- What you qualify for and what you actually are comfortable with paying each month are often way off, so make sure you know what you can afford for your mortgage on a month to month basis.
- First and second time home buyers are more likely to relocate due to changes in employment or growth in a family rather than just having a desire to live in a new location or change in floor plan.
So if you knew before you bought your first home that there is a good chance that you will desire another home in 2 to 5 years and want or have to move, and when you sell a home it can cost you money, wouldn’t you want to position yourself to capitalize not only on having a great home, but a better financial position for your second and third house and/or be positioned well if you must transfer for a job?
Generally when buyers are looking to buy a home, whether they know it or not, they mentally decide whether they want to put precedence on either the type of home or the location. We generally find 80% to 90% of first time home buyers as well as second time home buyers are buying the home first no matter the neighborhood while 80% to 90% of third- and fourth-time home buyers buy choose a neighborhood first and then locate a suitable home.
For example, if I am a first time home buyer preferring to purchase the best home for me, location matters a little, but it’s really the home I’m choosing as long as it’s in the general location I need to be in. Buying location first means I picked a few specific neighborhoods or a school district and I will only look at homes in those specific areas and won’t consider a home anywhere else no matter how amazing.
There is no right or wrong way to find the home you plan to buy for you and/or your family to live. This is just one strategy that can position you to have more money and clarification when you are ready (which will be sooner than you think) to buy your second or third house, thus putting you in a better financial position.
The strategy is a combination of the below options:
- Buy a property under market value (foreclosure, short sale, bad condition, etc.)
- Buy the most sellable product in the area (school areas are different than retirement areas, which are different than young professional areas)
- Buy in a great location
When you hear all these, you think, “Well, that is a no brainer”. And yes, it may be. However, more often than not, most first and even second time home buyers start looking for a new home and quickly their eyes get big after finding a “nice” house. They forget about all of the facts they should consider in order to strengthen their financial position down the road and just buy because it feels good now, not knowing how painful it could be if they had to sell or wanted to sell in two years.
So exactly why should you consider those three tips when searching for your new (or next) home?
Buy a property under market value
(foreclosure, short sale, bad condition, etc.)
Most buyers start off searching for a home under market value, but quickly get distracted on what looks nice versus what is a good value. When you are in a great market like we are here in the Austin/Round Rock area, “great” deals are harder to find. Many properties that would be considered the best deals would request a lot of cash to fix up and most first-time home buyers don’t have a lot of cash to immediately put into a home that needs tons of work to make nice or even just liveable.
However, finding deals several thousands or tens of thousands below market value that do not need a lot of money put into them are not too hard to find if you know where to look. They are out there, but most do not look as attractive as the newer homes or homes that are at or above market value. But even gaining $10,000 to $20,000 on the front end of buying could make all the difference in selling later and having cash in your pocket.
Buy the most sellable product in the area
(school areas are different than retirement areas, which are different than young professional areas)
Buyers do not always realize it, but there are certain homes that sell better in certain areas. An easy example is to not buy a two story home with the master upstairs in a retirement community unless it has an elevator. The majority of people moving into the area will be older and most won’t want or be able to climb stairs on a daily basis. A condo in the suburbs is a lot harder to sell versus being in downtown Austin, where they are extremely popular because the suburbs draw families that need more space than a condo can provide. A two bedroom home in the suburbs in a great school district is not an optimal product for a place where you see large families congregate.
You need a good local Realtor that truly knows the entire local market so they can help guide you in determining the best area for your and your family’s needs. A lot of Realtors may claim they’re area experts, but they don’t always keep track of developing neighborhoods and demographic shifts as areas grow and change, so make sure you search for an agent you feel is smart and understands the big pictures of real estate in your desired area.
Buy in a great location
Location, location, location. This one is easy. If you buy a place that everyone loves to be and where everyone wants to live, normally even in a down market you would be safe. For a first or second time home buyer, buying the least expensive home in the most expensive neighborhood puts you in a great position to take advantage of the higher property values without having to shell out a bunch of cash. Choosing a great location could be buying close to a bustling downtown, in a developing area with tons of buzz and potential, in a high-end neighborhood everyone wants to live in, by a major employer where workers want to live to decrease commutes, in a highly rated school district, etc.
Can location hotness change? Normally not and if it does, it happens slowly. School districts can change and quality of individual schools can shift, businesses can relocate and/or go out of business, and foreclosures could start popping up in individual neighborhoods during a downturn in the economy, so it is never 100% that the hot area you move into will remain popular forever. Certain areas are almost always good and that too can be easily tracked and figured out if your Realtor is an expert on the area.
In short, there is so much more to buying a home than most people think. Most buyers look at buying a home as if they were buying any commodity like a flat screen television. That’s not necessarily bad because it is your home and you decide what you want to do. However, I’m just offering a strategy to help position you and your family for financial success in the future.
If you can manage 2 or 3 of the above options, you will position yourself for future success when it comes time to sell.
A great Realtor will be your real estate financial adviser and not only tell you how good a home is to buy, but how good or potentially bad that same home may be to sell. If you find a Realtor willing to look out for your best interest and knows how to interpret the market, you might find yourself with $20,000 to $80,000 extra to use toward your second, third, or fourth house and have a lesser chance of being tens of thousands of dollars upside down. A great Realtor is a huge asset to have on your team and will help you keep in mind that it’s important to consider how the house might sell later before making such a huge financial decision.