1. Using an out-of-town lender.
Getting a mortgage in a timely and hassle-free manner is the “key that opens the door” to your new home.
Lenders who don’t live in the area you are buying in will not have the contacts needed to process your loan in an efficient and timely manner. Are you aware that if your lender fails to get you your loan on time, that your earnest money deposit may be at risk of being forfeited?
Your best bet is to ask your real estate agent whom they have used before and who they trust.
If it is important to you to use a lender from out-of-state (family member, friend etc.), your best bet is to have your lender refer your business to a local lender. This will help insure that your out-of-state lender receives a referral fee, they don’t violate state mortgage laws, and most importantly you are able to close on the home you want to buy.
Mortgage story: The very first transaction I was involved in after I got my real estate license was a nightmare due to a negligent lender. I was representing a buyer from Las Vegas (I live in St. George, Utah) that insisted on using a Las Vegas lender. Unfortunately the lender would rarely return calls or answer his phone. He failed to close on time. We extended the closing date time and again, and time and again the out-of-state lender failed to have the loan ready. The buyers were frantic and the sellers were angry. Finally eight weeks after we were supposed to close my buyers finally dropped the lousy lender and went with a local lender that I recommended. To my buyer’s amazement, by using the local lender, we closed the transaction 10 days later.
2. Not using a loan approval letter when making an offer on a property.
You’ve found “The Home” and want to make an offer to buy it. Now anybody can make a full price offer and get it accepted.
What if “The Home” is priced at $275,000 but you offer $250,000 and say that you will pay for the home by getting a new loan?
The sellers, when presented with your $250,000 offer, know nothing about you except that you seem to think their home is worth less than they feel its worth. At that point they will probably do one of two things. They might reject your offer outright. Or they might counter your offer at close to their asking price. As far as they’re concerned they never considered your original offer to be a “real” offer.
Do you think that they would have taken your $250,000 offer more seriously if you had said you could pay cash? Of course they would have, after all money talks.
What if you had already received full loan approval from a lender. Not just pre-qualified, or pre-approved (Being pre-approved is kinda like being pre-pregnant), but fully approved for a home loan with a letter from the underwriter to prove it. A letter that is as good as “cash in the bank”. You’ve become a “Power Buyer”! You never know, maybe the seller would accept your offer, rather than letting a good buyer get away.
Wow, if your offer was accepted, you just saved $25,000 on the purchase of your home! And all you had to do was meet with the lender before you went house hunting.
3. Buying too much house for your income.
I used to do “Broker Price Opinions, or BPO” for banks. This is where a bank would contact me to find out the value of a home that they had given a loan on. Often times this “BPO” was because the homeowner was losing or had lost their home because they could no longer afford the home. What a terribly sad event for that family.
Things happen in life that you might never expect. Don’t unknowingly “open the door” to future foreclosure and bankruptcy by getting a mortgage that you can “grow into”. Life rarely works out the way you expect.
One of the best moves I’ve ever made was purchasing my current home. When I bought this home I qualified for a home twice as expensive as the one I bought. Payments on my home rarely cause me stress or concern.
4. Thinking “short-term”.
Want to really scare me? Tell me you want to buy a home today and that you will want sell it in two, three or four years. Yikes! Talk about wanting to lose money.
Real Estate home values generally rise very slowly in a slow or soft real estate market. In St. George, where I live, our average time between hot markets (when home values rise quickly, usually doubling) is ten years. If you bought $250,000 home in a slow market, in three years it might be worth $265,000. Your cost to sell with commission and other costs would be $18,200. You would lose $8,200 for your short term thinking.
If you have to move within three years of buying a home, it would be better to use the home as a rental for a few years, and sell it when the market will allow you to make a profit. Better yet rent it out until the top of the next hot market, then sell it and potentially make $250,000 profit.
5. Using 1031 exchange money to buy personal property.
Do you really want to risk having the IRS charge you with fraud? Enough said.
6. Waiting for the “bubble” to burst. Hot markets come and go. Cold markets come and go. Markets become over-priced, then over-time become under-valued. If you are waiting for a severe correction in real estate prices, pull up a seat, because you might be waiting a long time.
Homes, unlike other investments (the stock market for example) are valuable in two ways: 1) Psychological value – homes have value because everyone thinks they should, and 2) “real” value (people, homeowners and renters, need shelter).
Because homes are valuable in both respects, home values historically will usually only level out after a hot market. Sometimes homes will lose some value but not very much. St. George homes lost about 5% of their value after the last hot market in 1995…sort of like a balloon deflating because it took several years for this to happen.
If I were looking to buy a home I would be more concerned with interest rates and less concerned with playing with bubbles.
7. Not choosing a real estate agent carefully. In our town about 75% of real estate agents have been in the business one year or less. I suspect that this is true nationwide. The hot market of 2005 caused everybody and their brother to want to get their real estate license. When you contact a local agent, you probably have a 3 out of 4 chance of getting an agent who is severely under-qualified to represent you in the purchase of $250,000+ investment…your home.
You’ll want to contact at least four agents to make sure you are getting the best one you can find. Ask questions and then trust your instincts as to which agent is the best one for you.
8. Not having a home inspection done by a Professional Home Inspector. A good, experienced Home Inspector will catch problems in a home that most homebuyers would miss.
I have seen all of these items missed by a potential homebuyer, but caught by a home inspector:
a. A dryer vent, venting into the attic
b. A ground fault interrupt breaker not working (this can kill you!).
c. Evidence of termites
d. Aluminum wiring
e. A roof leaking into the attic, but not into the main part of the home (yet!).
Several years ago I became aware of a transaction in our real estate office where the buyers decided not to have a professional inspection on an almost new home they were buying. They “inspected it themselves” to save the $300. Too bad they didn’t catch the fact that some of the basement windows leaked badly when it rained. The water stains were clearly visible had they known to look. That turned out to be a huge mess involving lawyers, threats and grief. This could have been avoided by paying the $300 to have a Professional Home Inspection.
9. Not receiving a home warranty at closing. It’s 3:00 AM. You wake up hearing water running in your newly purchased home. It keeps running. And running. You get up to check it out and find your basement floor covered with water from the broken water heater. Luckily the damage from the water is minimal. You go to look for the Home Warranty confirmation in the documents you received when you bought your home the previous month. You know that the home warranty company will replace your broken water heater for only $55. Suddenly, you slap your hand to your forehead and make the Homer Simpson “Douhhh” sound as you realize that you didn’t get a home warranty because the seller wouldn’t pay for it and you certainly didn’t want to pay for it.
Lesson learned, always get a home warranty you buy a new home, even if you have to pay for it. It is money well spent. I would never buy a home without purchasing a home warranty. I never sell my own properties without a warranty for the buyer. It just makes good sense.
10. Not meeting the neighbors before you make an offer. Don’t you really hate it when your neighbors suck? Don’t you think it would be a good idea to do a little door knocking before you buy your new home? How about going online to look at your state’s website for registered sex offenders?
I did a little door knocking before I bought a foreclosed home in St. George. I was buying the home for my personal use and as part of the “due-diligence” I decide to meet the neighbors. I asked which house was the “bad house” on the street. I came to find out it was the home I was buying because the previous owners were noisy, rude, dirty, and didn’t care for their home. I changed that by buying the home and moving into it.
There you go; 10 simple steps to keep yourself, as a homebuyer, out of hot water. Violate any of these steps and you may end up losing a little or a lot of your hard earned money. Now go out and find the home of your dreams!
The post Top 10 Critical Mistakes Homebuyers Make and How to Avoid Them first appeared on Advisors to the Ultra-Affluent – Groco.