Why even buy a house?
On the path to financial independence buying a house can have a huge impact, both positive and negative. There are major advantages to renting, and some bloggers advocate renting forever. But renting has its downsides. Being in a rental means you may not be able to modify your property to your liking. It also means that improving the property benefits someone else financially. Finally there is a major lack of control; if the owner decides to sell the property when the lease is up, you are now looking for a new place.
Tip 1. Avoiding societal programming when buying a house
There are a lot of ads that promote the idea that ‘owning your own home’ is a major life achievement. But let’s analyze this for a minute. First, why does the real estate industry use the word home instead of house? Are you buying a home or a house? If you buy a house and you put down 1%, do you really ‘own a home’? You have a mortgage and the rights to live in the house. If the house increases in value you will reap the rewards. But if the market is flat or it decreases in value you also suffer the consequences. If you buy the house outright with cash, clearly you are a ‘house-owner’. That’s it, you either own a house or you don’t. Make sure the emotion of a ‘home’ is distinct from a house.
Tip 2. Run the numbers
Is the market overheated where you plan to buy or have prices recently dropped? How does renting compare to buying? What will recurring expenses including property tax be? Buying a house is a major financial decision. Make sure you compare the numbers between renting and owning before you take the leap.
Tip 3. Understand that house ownership is not a diversified investment
Investing can be relatively easy. You can buy a highly diversified mix of equities using a Three Fund Portfolio. You are buying thousands of companies and if one goes bankrupt, it will have a minimal impact. Buying a house is the opposite. If a drug dealer with pit bulls moves into your neighborhood, your investment will be impacted. Or if a horrible neighbor moves in next door to you and you decide to sell and move, you will have to pay realtor fees, typically 6% for the transaction. If these scenarios sound unlikely, talk with people you know, it is not as unlikely as you might expect.
Tip 4. Get to know the area you will buy in
We rented for about a year in the Palouse before we bought. It meant moving one more time, but it was well worth it. We got to know the lay of the land and we had a year to look at potential properties. Much of what you learn will be location-specific. After a winter in the Palouse we realized that some of the properties we had looked at would have really been a pain to keep the driveway clear in the winter. Properties up on hills at an extra 200 feet of elevation with long driveways require significant snow removal equipment. Another thing we learned is that properties in the country that are up on hilltops in our area can have poor wells, and some are exposed to high winds. In contrast the property we bought is lower, protected by a hill and has a great well. We talked with someone who lived on an unprotected hilltop, and they said the noise from high winds gets old.
Tip 5. Understand that your realtor and you have different goals
I have looked at ‘For Sale by Owner’ (FSBO) properties and what I’ve found is that the sellers often have unrealistic expectations of what their property is worth. So my expectations to efficiently close a deal with a FSBO are low. I recommend working with a realtor as both a buyer and a seller. But I understand that a realtor wants to sell a house, and then move on to the next sale. They work on commission. I want to buy one house that suits my needs. So even a buyer’s agent has a different goal than you do. As long as you understand that, a realtor can be a major resource. I have used three realtors and all three were experienced professionals. I prefer to use an experienced realtor who may not have as much time to spend with you as a junior realtor, but has a lot of experience negotiating. Once you find the right property you want someone who can close the deal.
Tip 6. Don’t rely on your realtor to bring you leads
We actually found our current property using Craigslist. I also scanned realtor.com daily. When we found a property we would do a drive by before contacting our realtor to look at it. I have found that many properties have a deal-breaker that can be identified by just doing a drive-by. Examples include; junk-yard neighbor, highway traffic noise, party-house neighbor, rooster neighbor. Take advantage of our data-driven society. Realtor.com and Craigslist both allow you to search by map. For buying in the country this can be a major advantage as you can quickly identify the properties outside town.
Tip 7. Know your deal breakers
For us noise pollution is a major concern. Even neighborhoods with 5 acre properties can have significant noise from neighbors. In the country, noise can come from many sources including powersaws, roosters, traffic, and nearby industry. Another deal breaker for us was structural problems or a bad well. Knowing your deal breakers beforehand can save significant time.
Tip 8. Don’t minimize the amount of work that needs to be done to fix up a property
When we bought our first house I had the attitude of, ‘I can fix that’. But the problem is once things start adding up it can become years of work. So while a few jobs are OK, be careful about being too optimistic about how much work each job is. I now have much more of an appreciation for turn-key properties. Having someone else deal with all the contractors before you buy is an advantage. Also know what you like to do. If you like working outside, maybe property that needs a lot of outdoors cleanup would be OK. Maybe you don’t mind painting.
Tip 9. Get to know your neighborhood before you buy
Once you close, you are locked into your property. If it turns out that on every Friday night the neighbor has a bonfire and races dirt bikes it’s too late for you. Make a few drive-bys at different times to assess the neighborhood of your new house. Friday and Saturday night are good times. Even if you have made an offer it’s not too late, keep doing your research, it’s well worth it in the long run. Drop by your neighbors and introduce yourself. You may learn about the prison that is going in next year… Get out of your vehicle and walk around. Sometimes just walking on foot can alert you to things that you might not notice driving by.
Tip 10. Don’t be in denial about future development
If you are buying in an area with a lot of surrounding vacant land, don’t assume it will stay that way. Maybe the lot next to you could potentially block your view? Assume it will be sold and they will build a house to block your view. If you become enamored with a property and have been looking a long time, you might be willing to ignore red flags. Don’t.