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7:19 am - Tuesday October 22, 2019

Buying a Home – an In-Depth Look at the Process

| Home Finance and Mortgage | Rating: 4.5
by Numan

Buying a home is probably one of the more major decisions in our lives. I’ve decided to buy a home about a year ago. After a long and tedious year I can gladly say I’m writing this post from my new home. The process of buying a home is tedious, long and difficult both physically and mentally. It can be a bit easier with experience but I don’t think it changes much when you buy your second home later in life. It’s just the way it is.

A year ago my wife and I decided we had enough of renting. We sat down and looked at our options and the process we’re about to go through. We had little knowledge and experience but we compensated for it with common sense and hard work (as everything in life).

You can find your dream home in a short period of time and maybe even get a good deal on an asset with future potential but this is definitely not the case most of the times. That’s why hard work is so important and cannot be replaced.

We eventually bought a 3 bedroom apartment in the heart of the city in a very central location. We renovated it and now live happily in it completely at peace with the choices we’ve made. We had our differences and difficult moments but I can truly say it was worth it.

In order to write a useful post on buying a home I’ve looked back and examined the process we went through phase by phase. I’ve tried to emphasize the more important aspects of it and what could be my added value to you as readers.

The following breakdown of the process is what I came up with eventually:

#1 Considering your personal status

This very basic first step is usually intuitive and happens whether you’re aware of it or not. Buying a home has a lot to do with your personal status and plans for the future. No use buying a 3 bedroom apartment if you’re expecting your family to grow in the next 6-9 years. Buying a home is a major decision usually taken by couple that reached a certain level of commitment in their relationship. My advice in the matter is to carefully examine your current and future personal situation. There is no need to rush into buying a home if you are unsure of anything.

When buying a home your expenses are never ending and will amount to much more than the price of the asset itself. You won’t get the money back if you decide to sell the house after 1 year. Actually you’ll have to pay to close another deal. Think carefully on how ready you are to go through with the process.

As I’ve already written this happens intuitively and most of the times on an unaware level. Being aware is always better and taking 5 more minutes to think things over might save you a lot of money in the future. You could always rent for a couple more months before you commit.

#2 Getting a good grasp of your budget and financial capabilities

you’re dream home will always be one you can’t afford (well, almost always). Deal and closing costs can amount to 3%-5% of the price of your home (Real-estate agents, lawyers, taxes, paperwork and more). Renovation is another bottomless pit. When I finished work on my home and moved in I was over my budget by approx. 10,000$ which took me 5 months to recuperate from. I don’t really think you can stick to your initial budget, much like any project. However, it is important to keep track and monitor your financial ability at all times.

Consider your ability to pay back mortgage payments carefully. How fixed is your income? How much can you afford to pay back each month? Mortgage payments, in general, should not be more than 30% of your monthly income. Avoid biting on more than you can chew.

Buying a home is a complicated financial deal which requires leverage (mortgage and loans) with many implications (Read more about leveraging risks and benefits here). Plan your budget carefully and leave room for error. You will end up buying a more expansive house than you hoped for. It’s natural since you’ll be looking at the better part of homes you’ll be able to afford. Just be aware of your limits and capabilities.

#3 Rent or Buy?

The eternal question of rent or buy has been discussed in length. I’ve personally written two detailed posts on the matter:
1) Should you Rent or Buy a Home ?
2) Understanding Important Hidden Psychological Aspects of Rent vs. Buy Comparisons

Many rent vs. buy comparisons are simply wrong. The financial comparison is not a simple matter at all. The subject of rent or buy deserves some attention and you should get knowledgeable in the financial reason behind it. Two thumb rules to satisfy any immediate appetites:
1) The more equity you have the more financially reasonable it is to buy a house (not always, naturally).
2) The real difference in the comparison comes from your expectations on the future value of your home. As buying with a mortgage is leveraging you will make a decent profit on money you didn’t have to begin with should the house price rise significantly (again, more details in the posts I linked to).

#4 Location, location… location

Location probably affects the value of your home more than any other variable, either real and current or potential. Location cannot be over emphasized. Location is affected by many other considerations such as closeness to family members, public services, personal preferences and more.

Sit down and think about your preferences. Consider your current and future personal status as always. If you plan on having kids soon you might want to consider a property closer to your parents or good schools for example. Are you a city or country person? Do you mind traffic? And so on and so forth.

If you’re buying a house with a partner agree on your mutual preferences together.

#5 Research

Once you’ve decided on location preferences you need to start researching. Usually several areas (neighbourhoods, districts, cities etc.) will fit your preferences. In order to be a smart buyer you really need to start researching each and slowly yet surely narrow down your search.

Each housing market is different. Properties within several miles can have different price behaviour and different characteristics you need to be aware of. Be familiar with price levels, future potential, trends and even the branding of the environment.

Needless to say research should also include all the aspects of living: public services, neighbours, crime, traffic, taxes, comfort, available leisure activities and much more. Don’t be afraid to ask around. People will be eager to help and answer questions. Sometimes small talk with a future potential neighbour can expose crucial information.

#6 Footwork

Good old fashioned footwork (or car work) cannot be replaced. Take the time to compliment your research and choices with thorough explorations of potential properties and areas. I’ve visited over 20 properties in 3 cities before I decided on buying one.

Footwork is required in order reach a level of readiness to buy a property. I’ve never heard of someone who bought the first property he saw. As human beings we will always consider what we are missing on.

The process will often yield surprising results and end in new revelations on your earlier preferences. Seeing many properties adjusts your expectations and your wants and wishes. You’ll realize what you find really important and what you only thought you like but really is just redundant.

#7 Making your choice

After setting your preferences, researching and exploring it is time to narrow and zoom in on: an area, a type of property, personal preferences and more. This will happen naturally it helps to make a conscious decision. Only by narrowing the scope of your search scope will you be able to really be familiar with the property or properties you are about to bid on. It is impossible to get to know 30 properties in 3 different cities each with its own characteristics and housing market.

Without focusing and making a choice you’ll probably continue drifting through the endless amount of properties out there.

#8 Getting professional assistance

I can’t stress enough how important it is to get professional assistance when buying a home. Real estate agents, lawyers, accountants and more are called professionals for a reason. The real estate world is complicated and requires expertise.

Real estate agents can save precious time and help with locating the best assets for your budget. They live and breathe the market and exist because such professionalism is required. A good lawyer can help complete a deal quickly and without risks. You really need the best protection you can get when dealing with a huge expanse such as buying a home.

#9 Negotiating

Negotiating is a very valuable skill. I seriously doubt it can be taught (I myself am a lousy negotiator) but understanding some truths can really help you. Each percent in this deal is significant and well worth the effort.

First of all, be aware the seller has one advantage from the start. He named the price. When you think of it we, as buyers, often treat the seller’s price as a point of reference other then deciding for ourselves what the right price to pay for a property is. Shake off the seller’s price and get a good idea of what the real value of the property is to you. Getting 5% off a property priced at 110% isn’t a good deal.

A significant portion of the negotiations gets done through professional real estate agents. Be aware of their interest in getting the deal closed and use their skills to your advantage while not letting them pressure you into raising your offer “just a bit more” for the 5th time.

There are always other properties. While you should be ready and able to spot a good opportunity and act fast don’t act out of pressure and fear of the property being sold to someone else. The only way to get a good deal is to be patient and ready.

#10 Renovating

To me this step was the hardest of all. Entire libraries can be written on the subject of renovations with more to follow. What makes this step really hard is a combination of the following, in my opinion:

1. Renovating on a tight budget – Usually, renovating after purchasing the property is done under a tight budget as we’ve already spend what we could on buying the property. Each surprise is more crucial and has more impact on your decision making.

2. The uncertain nature of renovation, our relative ignorance and your average contractor – Renovating a home is painful enough without having to learn your electricity needs to be re-wired or that there is a termite infestation in your home. Most of the times we don’t even know what the contractor is talking about, and certainly don’t know why he’s charging what he does and for what? On top of this many contractors are not, let’s put it mildly, easy to get along with. They have a tough profession with tough clients and they will usually outwit you when it comes to money or work.

3. The enormous varieties of designs of all kinds and the length between expectations and reality – When buying a home you have a concept of how it is going to look like and how you will design it. Often reality has other plans. Designing is a high premium market with varying price levels and never ending supply of ideas and designs. Starting from tiles and flooring, bath and showers, furniture, appliances and what not. When renovating painful decisions and compromises are an everyday matter.

Many of the stages and tips I detailed earlier are valuable when renovating. Planning the budget carefully, researching and understanding your wishes and wants, getting professional assistance such as designer and architect can really help (that’s what I did), negotiating with several contractors and choosing a good one is crucial to the success of the renovation.

#11 Moving and making it a home

The final step takes work as well. After completing a renovation you’d probably feel this is the easiest thing you’ve ever did. You will find out soon enough how many things are still missing, how much more money is needed to get everything just perfect, how you’d like to change some things already… and more.

Take a deep breath and relax. Let your new home sink in (and your financial situation as well with seemingly endless payments and loans). Take the time to think of the process you’ve just been through and plan ahead.

You’ll always want another couch, a better oven or TV, a new bedroom and more. Housing expanses are some of the highest there are and there is no need to go crazy over living space. Plan a monthly budget for home purchases and improvements and try to stick with it. The first month or two will be the hardest but you’ll get used to it soon enough.

This concludes my post on the process of buying a home from my recent experience. In the near future I hope to focus more on the major steps and elaborate more on each with more tips and ideas. Your thoughts, questions, comments and more are always welcome and are greatly appreciated.

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