You’ve finally made the decision to buy a house. It’s a huge step for you financially, and you don’t want to make a misstep. You think you know what to look for when buying a house, but when you start clicking through Zillow, everything in your price range seems so…well…not exactly your dream house.
It can feel deflating when you realize that your vision of buying a perfect house in your favorite neighborhood doesn’t match up to your reality. Actually, it can be down right depressing.
Maybe you start to panic and wonder if you could ever be happy buying a house that isn’t up to your standards? Should you fork over the extra money each month and stretch your budget to buy one of the nicer homes on the block?
The smartest thing you can do is to buy the least expensive home in the neighborhood you desire. Let’s talk about what to look for when buying a house, and why you should smile smugly when you close on the cheapest house on the block.
Premium prices are mostly about cosmetics
In most planned neighborhoods and subdivisions, houses are pretty similar from one to another. A builder buys up a tract of land, subdivides it into individual lots, then puts up dozens or even hundreds of essentially identical units.
If that’s the case, then why are there price variations of 10% to 15% on properties for sale in the same subdivision? Cosmetics. Outdated cabinets, flooring, ugly wall colors, and neglected landscaping are all easy to change yourself after moving in.
Ask any successful real estate investor and they’ll tell you it’s better to buy a house that needs a good cleaning, a fresh coat of paint and a yard clean up. You’ll get more house for the money.
Until a generation or so ago, first time home buyers often bought “fixer uppers” (aka houses that needed some love and elbow grease). Today, everyone wants to buy “turnkeys,” which are houses that are in move-in condition, no remedial work necessary. It may be more convenient to buy such a property, but you’ll pay tons more for it.
Any extra price you pay will be financed
When it comes to what to look for when buying a house, there are two important points to remember here:
- Any premium you pay for a house will be proportionally included in your mortgage and paid for over a 15 or 30 year period, and
- The benefits of the cosmetic superiority of one house over another will last about five years at best. After that, you’ll have to start replacing and repainting anyway
Let’s say you have a choice in buying Property A that needs some tender loving care for $200,000, and Property B that’s in mint condition and selling at $225,000. You plan to put 20% down in either case, and take a 30 year mortgage for the balance. The down payment on Property A will be $40,000, while on Property B it will be $45,000.
The mortgage on Property A will be $160,000, and on Property B it will be $180,000. At 5%, the monthly payment on Property A will be $859, while the payment on Property B will be $966. That’s a difference of $107 per month. Over 30 years that’s a total of $38,520 over the life of the loan.
So here’s where we’re at: you’ll pay an extra $5,000 on the down payment for Property B, plus an extra $38,520 in mortgage payments, for a total of $43,520!
If you buy Property B, all that extra money will be paid so that you can avoid some routine work on the house and maybe $5,000 in cash outlays to bring the house up to standard. That doesn’t sound like a good deal at all.
You’ll probably customize the house when you move in
How many people move into recently redecorated homes, only to do their own redecorating just a few months later? The new carpets and window treatments are pulled out and replaced with different styles or materials, as are late model kitchen appliances.
The point is, when you move into a new home, you’re going to customize it to make it your own, no matter how superior the condition of the home was when you bought it.
Neighborhoods determine property values, not the houses in them
It’s easy to fall in love with a house when you’re out looking. Emotion plays a huge role in the purchase of a home. But, it’s equally important to realize that a house doesn’t establish value; the neighborhood the house is in plays a far greater role.
Neighborhoods with great public schools, walking distance to restaurants, or beautiful tree-lined streets, can all play a part in the desirability of a neighborhood.
It’s sometimes said that when it comes to buying a house, you’re better off buying the cheapest house in the most expensive neighborhood. If you follow that advice, the house you buy will be on the lower end of the price range. There will be room to increase the property’s value by making improvements after you move in.
Alternatively, if you buy at the top of the range, there’s little you can do to increase the value.
So, when you’re considering what to look for when buying a house, try to think like an investor instead of a home buyer. You are looking for the greatest potential for increased value in your purchase.
Don’t wait too long for your dream house
When you continue paying rent while you wait until you can afford your “dream house,” you’re not thinking like an investor. An investor knows that potential for increased value is what to look for when buying a house. The sooner you can make your home an investment, the better.
If you want to learn more about the basics of how to invest in real estate, start here.