You’ve never bought a house before, and you’re nervous about spending this much money at once. Who wouldn’t be? As a first-time homebuyer, you’ve been dreaming about and saving for this moment for years.
However, as of the spring of 2021, it’s a seller’s market in many parts of the country. David Small is an experienced agent in Florida who works with 66% more single-family homes than the average agent in his area, and he’s seeing “multiple offers within a 48-hour period; people are going massively over asking, paying cash, and they don’t have appraisal contingencies.”
But he knows how to get value for his clients and make sure they’re not overpaying. Here are some tips for how to get the best value from your first house purchase.
1. Make sure the time is right for you to buy
In most cases, it costs money to buy a house. You may have saved up enough for a down payment, but have you planned for all of the other expenses?
In addition to the down payment and closing costs, you have to pay movers or rent a truck. Your furniture may not fit in your new home, or you could need to buy a lawn mower if you’ve never kept a yard before. No matter how thoroughly you budget for the costs to buy, you’ll likely have one or two surprises.
And you don’t recoup the momentary loss from buying immediately. There’s a break-even point (typically after you’ve lived in your house a few years) when the amount you’ve saved by becoming a homeowner finally outweighs what you spent to buy the house, so you want to make sure you’ll be in the property long enough to reach it.
2. Know the difference between price and value
A house might be overpriced or underpriced to its true value; they don’t always align. Sellers may think a home is worth more than its actual value, and therefore price it too high.
On the flip side, the same home could represent a different value to different homebuyers. As Small points out, “Buyers who say ‘We absolutely do not want a swimming pool,’ they would value the home at $325,000 to take out the pool’s value. But somebody else might think, I want a pool, and to them the home is worth $350,000.”
Amenities such as location, a mother-in-law suite, or a pool could add or subtract value in your eyes.
Your goal as a buyer is to avoid overpriced homes, uncover underpriced homes, and in general make sure that you feel comfortable you’re paying a fair price for what you’re getting.
3. Work with a local expert
Real estate agents are on the frontlines of home purchases, and they’re best able to help you assess what a good value even is!
They’ll know if an area is up-and-coming, if the city is investing in improving schools, or if a major corporation is opening a new location. Small says that if a buyer really wants to live in a certain neighborhood, he’ll also send them nearby homes that meet their needs.
“Even five minutes outside of that neighborhood can be very comparable,” he says — but often buyers don’t know the market as well as an agent with years of experience.
This in-depth knowledge can help you identify a home that’s likely to increase in value over time.
4. Learn about the place where you want to buy
In some metro areas, certain neighborhoods or even blocks are considerably more desirable than others. This could be due to access to public transportation — a home three blocks from the commuter rail is worth more than one one block away — or other variables.
If you’re looking at an unfamiliar neighborhood, check out schools and walkability, proximity to public transportation, and other features that make an area desirable.
5. Dig into where the neighborhood is going
You can learn about upcoming developments through the Chamber of Commerce or public records departments. These records will help you understand if the area where you’re about to move is about to undergo some serious changes … or if it’s going to stay mostly the same for now.
“I’ll look to see if there’s a supermarket going in,” Small explains, “because they’ve done their background research of where the neighborhood is going.”
Other signs that property values in that area could improve shortly include widening roads, putting in big amenities like a theme park, or building splash pads, tennis courts, or a community swimming pool in town.
Don’t forget — serious change can be a good thing! A major investment in a new rail line that connects the area to the city, money spent to improve the schools, or corporate development can all increase property values.
6. Ask your agent to explain comps to you
Comps is a short term for “comparable recently sold homes,” and they’re usually the best benchmark for how an appraiser would value your home. Comparable homes will have similar square footage, the same features (such as a garage or pool), and the same number of bedrooms and bathrooms.
Remember that homes aren’t exact replicas of each other, so there might be some regression analytics involved if all the recently sold homes have three bedrooms and your house has two. If an appraiser can’t find any similar homes priced as high as your home, it’s a sign that you could be overpaying.
7. Take the temperature of the real estate market right now
Is it a buyer’s market or a seller’s market? Ask a local, experienced agent for their read on market conditions.
In a buyer’s market, there are more sellers than buyers. This means that you have more negotiating power than the seller. Sometimes, you can buy a home for lower than the list price.
In a seller’s market, there are more buyers than sellers. Competing offers and negotiations can drive the sale price much higher than the list price. You may have to make offers on several houses before having one accepted.
In some hot housing markets, buyers are waiving inspection and mortgage contingencies. When homes are selling for $100,000 more than the list price, you’ll have a hard time finding a home with good value.
If it’s a seller’s market in your area and you don’t have to buy now, it’s better to wait until the market has cooled. You’ll be able to negotiate more and ask the seller for concessions, such as help with paying closing costs.
8. Get preapproved for a loan
It’s important to get preapproved for a loan before you start house shopping. This will clearly tell you how much you have to work with, budget-wise.
Part of getting value in a home is making sure that it fits your budget and financial situation.
9. Don’t shop at the top of your budget
Shopping at the top of your budget could leave you in financial trouble if the unexpected occurs, like a loss of income or a downturn in the housing market. Think of your preapproval amount more like a credit limit than the aimed-for list price that you’re trying to buy.
When filtering real estate listings in online searches, try setting your upper limit beneath the preapproval’s limit. Leaving room in your budget also means that you could buy an “as is” home or fixer-upper and be able to make improvements right away.
10. Ask for help with closing costs
If you aren’t buying a seller’s market, or if you have some negotiating power in other aspects, ask the seller to pay some of your closing costs. Closing costs, such as a title company’s fee, legal expenses, or taxes, can add up to between 2% and 5% to your loan’s overall cost. If the seller is willing to pay half, it could save you thousands of dollars.
11. Determine what’s important to the seller
Price is always key, of course, but there are other things that might matter to a seller. If you can make a more attractive offer in other areas, you could get the home for a lower price.
If they’ve already purchased another home, they might want a faster closing. Or, if they’re struggling to find a new place or need time to move, renting the house back from you for a month or two could appeal to them. Sellers have been known to turn down higher offers if they need more flexibility.
If becoming a landlord sounds risky, don’t worry! They pay their rent at closing out of the home sale proceeds. And your agent will help craft the purchase and sale agreement to protect your interests during the interim period. (Don’t forget to talk to your insurance agent, too!)
If you can bake their wants into your offer, they might be willing to go for a lower offer.
12. Look carefully at “For-Sale-By-Owner” houses
In a seller’s market, some sellers may think they can list and sell their homes themselves to maximize their profit. They want to avoid paying a real estate agent’s commission, but they don’t always discount their sale price by between 2% and 6% of that commission. If you decide to look at a FSBO house, tread cautiously.
Because they’re not working with an agent, the seller didn’t have someone to pull comps when setting their price. They might not have taken into consideration the home’s condition, or detractors such as being in a flood zone. However, if you have a great agent who can pull comps and guide you on a FSBO purchase, you might find a deal.
13. If an as-is house would work for you, think about it
“As is” houses are homes that may need repairs or major work done. However, they’re not always in bad shape.
In estate sales, the heirs may simply not know enough about the home to provide a full seller’s disclosure. Because these homes aren’t in top condition, they often list and sell for less.
Before deciding to include “as is” or distressed properties in your home search, ask yourself if you can move into a fixer-upper. Not every household can manage a fixer upper, but could you live with an outdated kitchen or bathroom?
If you have some handiness with fixing up homes, or if you feel confident that you could afford to pay for the work, then this might be an excellent way to get a good value on your house. You’ll immediately add value when you spruce it up.
When Lauren and Oron bought a fixer-upper with HomeLight agent Annette Wilcox’s help, it needed both cosmetic repairs and fixes to the HVAC and water lines. Because Oron could do all the repairs himself, they saved a lot of money and eventually sold the house for a $90,000 profit.
Lauren’s advice to homebuyers looking at fixer uppers?
“If you’re not familiar with houses and fixing them up — get a good inspector.”
14. Always get an inspection
Even if you’re comfortable buying a home “as is,” you should still get a home inspection. In an “as is” sale, the seller may not accept offers with inspection contingencies, and you may not be able to negotiate after the inspection, but at least you’ll know what you’re getting into.
If there’s an inspection contingency in your offer, you can back out if there are any serious issues. And there won’t be any repercussions such as losing your earnest money.
15. And don’t forget the appraisal!
An appraisal is an official valuation of your house performed by a certified professional. They will look at factors such as the age and condition of the home, its location, and comparable sales in the neighborhood to land on a value.
While there is some subjectivity, “an appraisal is by definition a defensible document that needs to show supporting data,” says Thomas Cullen, an independent appraiser with 30 years’ experience.
Even if you aren’t getting a mortgage loan, it’s smart to get your house appraised. You can hire an independent appraiser to make sure that you’re paying a fair price.
Small says that when he has cash buyers, he still puts an appraisal contingency in their offers.
It’s important that “they’ve always got that there and have the option to pull out if the value comes in significantly lower,” he says.
16. Walk away
It’s hard to walk away from a home once you’ve got to the point of getting the appraisal. You may have started daydreaming about the paint color you’re going to use in your bedroom, or making lists of furniture to buy. But if the appraisal comes in significantly lower than your offer price, it might be smartest to walk away.
Overpaying for a home is a sure sign that you’re not getting a good value, and you could end up underwater on your mortgage. Sometimes you have to let a few properties go before you find your castle.
If you’re concerned about getting good value out of a house purchase, work with an experienced agent who knows the market ins and outs. They can steer you away from overpriced properties and towards a home that will meet your needs and your budget.
Header Image Source: (Juan Carlos Becerra / Unsplash)