Don’t hide from the small details otherwise the big ones will take you by surprise.Getty
If you believe in the saying ‘small leaks sink big ships’ then you have probably bought a house in your lifetime. I’m not talking about plumbing issues, holes in the roof or tricks and scandals. I’m talking about the hidden forces you don’t even know are there when you make an offer on a house, buy it and then have the brazen wish of actually wanting to live in it. In all my years of seeing people negotiate housing deals it’s what they can’t see that ends up hurting them the most. Here are a few of the common blind spots that will probably make you end up paying more than you need to.
1. You didn’t know about the neighborhood shill.
There is a lot more to be said about appraisals than I can do justice to here, but I’ll touch on one aspect of them to say that I’ve seen a number of times how a single home that sells for higher than normal can inflate the prices in that neighborhood for the next year (or more). It starts with one seller getting lucky and garnering a high asking price—often thanks to buyers from out of town (or a relocation company) who just need to find the right house on short notice and aren’t in a position to haggle. That buyer has become a shill for the neighborhood without realizing it. Then a longtime resident of the neighborhood who has been lying in wait for years hurries to list their house so the recent comp sale shows up strongly in their favor when the appraiser comes around.
With two high-priced sales on record in a short time frame the rest of the houses in the neighborhood tend to follow suit until demand dies down and prices soften again. This shows up most commonly in dense urban areas where the neighborhoods are smaller, clearly defined and the homes are very similar to each other so there isn’t much variation for appraisers to take into account. Spend the extra time it takes to see how much homes in that neighborhood sold for going back at least two years—more than is required for an appraiser or an agent to come up with a number. That gives you an idea of whether there has been an outlier sale in the recent history and might give you some recourse for negotiating a lower price.
2. You didn’t anticipate your future.
Life changes are hard to predict, sure. But too many times I’ve seen buyers say yes to a mortgage when they know they will probably move in a few years. It typically costs around 3% of the transaction to buy a house and 6% to sell it again so if your house isn’t going to appreciate by at least 10% you’re going to lose money. “But I’ll just keep it as a rental,” people tell me. Yes, but when it comes time to refinance you won’t qualify for a lower interest rate because it isn’t owner-occupied. To make things more difficult you might end up moving further away from the house and will have to hire a property manager to deal with the tenants, which can significantly lower your profits. If you know you’re going to move in a few years but are ‘tired of throwing money away on rent’ then you need to make extra sure you’re buying a house that is going to appreciate faster than the median for your town.
3. You overestimated the value of things that are important to you.
Was it the dog park? Was it all the coffee shops within walking distance? For many buyers it is a combination of several things that add up to a neighborhood being perfect for what they want. But your combination is not going to match everyone else’s needs and when it comes time to sell, what you paid a premium for could end up being the reason you don’t get as much as you want for your house. I see this happen a lot with parks and other green spaces. Young families buy a house thinking it is a great place to take the kids, but then the kids get older and they want a yard. At that point the house has gained in value so it becomes financially out of reach for other families with their own young kids. And the people who can afford it are those who want a more urban lifestyle and don’t really care about a park. Pay for the park. Just don’t pay too much for it.
3.5 You ignored the surrounding neighborhoods’ future growth.
The two previous points come together in their own special blend when it comes to a home’s location. Even if you don’t want to live in one of the surrounding neighborhoods, their growth can still impact the prices where you live and not always in positive ways. Is newer retail coming to those neighborhoods which will make your locale appear economically depressed and slow down the price growth? Has there been a promise of new public transportation options but the project is continually stalled so buyers are reluctant to buy in your neighborhood? Is one getting a new elementary school which everyone is excited about, but makes your neighborhood look less desirable because those boundaries feed to an older school whose reputation suddenly looks worse in comparison? I’ve seen all these examples dampen prices in the neighborhoods on the periphery of where they are taking place. Don’t just research what is going on in the few square blocks where you want to buy; look at surrounding places to get a sense of the path of growth.
4. You focused too much on asking price.
The big number of an asking price seems like the scary one, but it is the small number of the interest rate that will end up costing you more. While you’re going back and forth negotiating about seller subsidies for a new paint job or getting the driveway fixed, the clock is ticking on the interest rate you were offered by the bank. When it gets close to the wire and something comes from out of nowhere to delay the sale even more (perhaps a change in the seller’s job offer so they need another month before they move out) then you risk losing out on the lower rate. An interest rate difference of half a percent can equal thousands in interest. Don’t try to save a few thousand up front if it means you’ll spend tens of thousands over the next twenty years.
5. You didn’t make an extra mortgage payment the first year. Then at the beginning of every year thereafter.
This is big. This could be tens of thousands of dollars big. If you have a $300,000 mortgage at 3.5% interest for a 25 year term you probably pay around $2,100 a month (including things like taxes and insurance). You will pay about $175,000 in interest over 25 years. If you make one extra mortgage payment in your first year you will save $4,500 in interest. That’s more than double the return on one mortgage payment. If you make an extra mortgage payment every year you will save about $31,000 in interest over the life of the loan. I’m using round numbers and allowing some room for error because it does depend when interest gets compounded. But if you make that one extra payment at the beginning of each year you’ll save even more in interest than if you spread it out to extra monthly payments. Use your tax refund. Don’t eat out for a year. Eat generic brand soup from dented cans found on the clearance aisle a day before their expiration date if you have to. Whatever you do, make extra mortgage payments as early as possible.
6. You didn’t go the extra mile to get a non-PMI loan.
If you have a decent credit score—say at least in the 650 range, though lower than that might not be a deal breaker—you can most likely get a mortgage without having to pay PMI or an overly high interest rate. But you have to do a little research to find the right lender. Here’s a list of 12 low downpayment programs from national lenders, seven of which don’t come with PMI requirements. It includes a program called NACA which is great for people with low credit scores because that doesn’t factor in to their interest rate.
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