For this installment of the Financial Peace University series, I’ve summarized some of Dave’s main tips about buying and selling real estate (along with my commentary) into list form.
Dave is a proponent of purchasing your own home, but only in a very responsible manner. He points out that real estate is a good investment for the following reasons:
- Home mortgages act as a forced savings plan.
- Owning a home is a hedge against inflation.
- If you live in a house for 2 years or more you don’t have to pay taxes on the appreciation (limited to $250,000 per person).
However, Dave doesn not recommend using real estate as an investment unless you can pay cash outright.
The most powerful point Dave makes about buying or selling a home is that these are the largest transactions most people will make in their lifetime. As a result, it’s possible to lose or make a lot of money depending on how you do it. It’s well worth putting in some extra effort and hiring expert help to ensure you maximize the benefits and gains of real estate transactions.
Here are Dave’s tips on buying and selling real estate.
Tips on selling a house
- Don’t “live” in your home when it’s on the market – You have to think like a retailer and market your home. When your home is on the market, you must constantly be thinking about how others will percieve it. You can’t really live in your home as usual when it’s on the market – it has to be ready to show at a moment’s notice. Don’t require the buyers to use their imagination.
- 50% of real estate sales come from the sign out front and curb appeal – Make sure the outside of your home looks nice and well groomed. Tear out overgrown shrubs and trees. Paint the outside. Repair damage in the concrete. My own personal tip is to take a photograph of your home; you tend to see flaws much more easily looking at a photograph for some reason.
- Get a good realtor. He/she will make your more than what they cost you. A good realtor knows how to market your home, negotiate (good cop, bad cop), and evaluate the value of your home better than you do. Don’t hire a relative as your realtor. Interview realtors. They should be in the $1 million club (have sold $1 million in real estate in the last year). They should present to you their plan and referrals.
- Don’t buy home warranties unless it’s a condition of the sale.. They’re not worth it.
- Appraisals aren’t the law, but they’re better than your “feelings” – Appraisers give only an opinion and don’t have the final, difinitive value for your home. However, their estimate will still be more accurate than your gut feelings.
Tips on buying a house
- When buying a home buy title insurance – Title insurance is worth it. It covers you when there’s unclear ownership of house (e.g. aunt suzy never signed off on sale of house and still has rights to the home). It also covers undiscovered liens against house.
- Get a survey when buying – Oftentimes, the advertised property boundaries and the actual boundaries are quite different. This is particularly true on a property without clear boundaries such as fences.
- If you use an agent to buy, get a “buyers” agent – a “buyers” agent is an agent that only represents you, the buyer. Some agents represent both sides – the buyer and the seller – and therefore have an inherent conflict of interest. A buyer’s agent will only have your best interest at heart.
- Don’t buy at the top of the neighborhood, but at bottom – The crumbiest house in a nice neighborhood will inherently be worth more by virtue of the neighborhood. If you fix it up at all, the value of the house can significantly increase. In contrast, if you buy the nicest house in the neighborhood and fix it up, the value can only increase so much because it will typically stay within the range of the value of the other houses in the neighborhood.
- Houses tend to appreciate most in locations with views and on the waterfront
- Look for houses that don’t look nice and you can get a bargain – This is the inverse to the principle of marketing your house – you want to look for owners that haven’t marketed and presented their house very well. If you can use your imagination and overlook cosmetic flaws that can be easily fixed, you can often get the best deals. A little imagination and elbow grease can go a long way.
- Always buy a home that is attractive from street and has a good basic home plan – It’s very hard and costly to make changes to the bones of a house. Unconventional home plans and lots can be very hard to sell.
- Get an independent house inspection when buying – Getting an independent house inspection will not only protect yourself against hidden flaws and problems, but you can also use it in the contract as a way out of the deal if things don’t line up to your expectations. In many cases you can negotiate to have seller pay for home inspection
- Don’t take out a mortgage for more than 25% of take-home pay (e.g. after taxes, 401k, etc.) – Dave recommends putting down as much as you can on your house. His suggestion to take out a mortgage for no more than 25% of your take-home pay is radical but would save people endless financial headaches if followed. See my earlier post about calculating how much of a mortgage you can afford.
- You should put at least 10% down – Dave ideally recommends paying cash for your home but recognizes that most people won’t do this. Instead, pay as much down as possible. Most people follow the opposite advice and try to pay as little down as possible.
- Never get a 30 year mortgage – get a 15 year mortgage instead – Again Dave goes against common practice with this recommendation. If you already have a 30 year mortgage, he recommends you keep it and pay it down like a 15 year mortgage. If the current interest rate is lower now, re-finance to a 15 year mortgage. The idea that you’ll take out a 30 year mortgage and pay extra is statistically not true. In the end, you’ll just pay what is required. Sam’s note: I agree that most people won’t pay extra on their mortgage. However, if you have a proven track record of controlled budgeting, go ahead and do it. Because my wife and I keep to a tight zero-based budget, we are successful following this strategy.
- Never get an adjustable rate mortgage – Adjustable rate mortgages are meant to protect banks against decreasing interest rates, not to protect you. Particularly in today’s environment interest rates are historically very low and for the most part have nowhere to go but up. Another reason to avoid ARMs is that 35% are calculated inaccurately. If you already have one, make sure you audit it. Dave recommends refinancing your ARM if you have one.
- Put 25% down to avoid paying Private Mortgage Insurance (PMI) – PMI costs roughly $75/mo for every $100k in loan value. If house appraises to 20% equity, call the mortgage company to remove the PMI. The bank may require an appraisal. Once your equity reaches 22% of the value of the house, the mortgage company is required to drop the PMI without notice.
- Avoid FHA and VA loans – FHA (Federal Housing Administration) and VA (Veteran Administration) loans are not good deals and are meant for people without enough money to get into a home otherwise. They are guaranteed by the government. FHA and VA loans charge an MIP which is just like PMI, but it’s carried throughout the life of the loan so they are more expensive.
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