3 Action Steps You Can Take TODAY if You’re Thinking of Buying a Home
If you’re thinking of buying a home in the near future but aren’t quite ready to take the plunge, here are 3 action steps you can take TODAY to set yourself up for success.
Action Step 1: Determine Your “Must-Haves”
Even if you aren’t quite ready to buy today, you can get yourself started off on the right foot by determining what is important in your future home. What you want to buy and where you want to buy it will affect all the other decisions that follow.
Generally, I recommend starting with the location. While you don’t need things nailed down to a single street or community development, screening locations ahead of time can really help de-stress the home buying process. Here are some questions that might help you hone in on the ideal locations to start looking:
1. How close do I need to be to work?
2. Do I plan to drive or use public transportation?
3. How much are property taxes in the area?
4. Does the area take out local property taxes?
5. What amenities does the community offer?
6. What is the school district like?
7. Do I want a new construction home or a pre-existing home?
8. How safe is the area?
9. How close am I to restaurants, shopping, or the highway?
10. How is traffic in the area?
Next, focus on some of the specifics of the home. Things like: the number of bedrooms/bathrooms, the size of the yard, the design of the home itself, and the functions it will need to fit your family and your life. Determining these essentials not only narrows down your search criteria but also serves as a double-check for the locations and budget you’re considering. For example, Perhaps you need 4 bedrooms for your growing family but you want to live in the city where larger properties come at a serious premium. The needs of your situation might just price you out of a few locations.
Finally, start thinking about WHY you are buying a home. And fair warning, it can also be one of the harder answers to pin down. Because the decision to buy a home is motivated by both financial and emotional incentives, it’s important to understand what you are going to prioritize. For example, if your primary driver for purchasing a home is to start building equity and to stop “throwing away money on rent”, you probably want to focus on the analytical aspects and whether the math makes sense for buying. After all, if the goal is to make a better financial move, then buying only makes sense if it truly does save money in the long run. On the other hand, let’s say your primary motivation for buying a home is so you can finally get a yard for your dog. While you obviously care about the finances of buying, you probably won’t let them hold you back from finding the right place. Your dog is a part of the family and she needs space to run around, I get it. It’s part of the reason we bought over 2 acres here in Cleveland, Ohio.
Want a free checklist to help with you determining your must-haves? Check it out here:
Action Step 2: Figure Out Your Budget
I know, I know — Figuring out a budget isn’t exactly the most exciting part of shopping for a new home. But make no mistake, determining how much house you can afford is an essential part of the home buying process. I’ve worked with many clients who came to me with no idea of their price range but were “ready to look at houses”. Don’t fall into this trap! It’s incredibly easy to fall in love with a house that is outside your budget.
Selecting a budget also means being on the same page with your spouse or significant other. I once asked a client about their budget and was told the “husband’s budget” as one number and the wife’s budget as something totally different! Time to get on the same page. Start by seriously asking yourself the following questions:
1. Are my student loans and other debt causing me significant stress?
2. Am I adequately contributing to my retirement fund on a regular basis?
3. Have I built an emergency fund?
4. How might buying a home impact achieving my other financial goals?
5. Am I saving money each month or barely getting by?
While these questions probably aren’t good party conversation starters, they are good for forcing you to get real about your financial situation. For example, if you answered no to question 3, and barely getting by to question 5, you may need to focus on your balance sheet for a bit before tackling the costs of purchasing a home.
As for how to actually determine your budget, there are multiple strategies, rules, and formulas you can use but no single method is going to be the perfect option for everyone. One option I invite you to consider though is the 50/30/20 rule.
The basic concept is this: 50% of your spending should go to needs, 30% should go toward wants, and 20% should go toward savings. Needs encompass all the basic necessities like housing, food, clothing, childcare, minimum debt repayment, disability and life insurance, transportation, etc. Wants are the things you choose to spend your money on. These include obvious examples like taking in a show or eating out instead of making something at home. This category should also include the spending choices that might seem like needs but go beyond what is actually required. Yes, you need clothing, but do you need to buy six new dress shirts each month? Probably not. The last category is for wealth building. The focus here can be creating an emergency fund, paying extra on student loans, saving for an investment property, funding the kids’ college, and so on. As long as it contributes to your overall net worth.
Once you’ve broken out the spending in each of these categories, you can determine how much of that 50% for needs you have to set aside for housing. Remember: you will need to cover for the principal, interest, taxes, and insurance (otherwise known as PITI) each month. Making sure these payments fit comfortably into your total financial plan will give you confidence in your price range when its time to start house hunting.
This is also a good time to start thinking about your down payment. The typical down payment required for a conventional loan is 20% of the purchase price. On a $200,000 home, that’s $40,000 cash you’ll have to part with. Not to mention the $4,000 – $6,000 in closing costs that come with the lending process.
For many, finding enough for a solid down payment can be one of the most daunting parts of buying a home. Especially if you have student loans or other debts eating into your monthly cash flow. Just keep in mind, with decent credit and your pharmacist’s salary, there are many other loan options that require less down. FHA loans and pharmacist home loans only require 3.5% in most cases. Regardless of the loan you choose, nearly all home purchases will require you to have cash on hand when you buy. This also shouldn’t be confused with your emergency fund. Those dollars are separate and should only be used for the unexpected expenses you weren’t able to plan for.
Action Step 3: Connect with an Amazing Real Estate Agent
Many people tend to wait until the last possible moment in order to connect with a real estate agent. They don’t understand why they need one, don’t know how to find a good one, and are worried about how much they will have to pay them. I remember buying my own first home and having no clue about how to interview prospective agents or when was the right time to start involving someone in the process. Well, now that I’ve come through the other side, let me try to shed some light.
In a typical real estate transaction, there are two types of agents involved. The first is the listing agent. They represent the seller of the property and have been hired to sell the owner’s home for as much as he or she reasonably can. The listing agent will market the property, suggest updates or improvements that might increase the home’s value, and host open houses and showings for prospective buyers.
The second is the buyer’s agent. They represent the buyer’s interests in a property and have the responsibility of trying to get the best deal they can for their clients. Typically they will take their buyer(s) on showings, provide information about prospective properties or locations, and help with negotiations and purchase contracts.
Both of these agents are usually paid on a commission once a transaction is complete. On average, a typical listing agent will charge 6% of the selling price of a home back to the seller. This 6% is then split between the listing agent and the buyer’s agent and each side walks away with 3%. So, for a $300,000 home, the buyer’s agent and the seller’s agent will both make about $9,000 each for assisting their clients with the transaction.
Notice that in this standard scenario, both sides of the commission come from the proceeds of the sale. In other words, these are all being paid by the seller and not the buyer!
This is why getting an agent on your team as a buyer is so great. You get personalized attention, the expertise of a local professional, guidance throughout the entire home buying process, AND you get it all for FREE!
The only catch is making sure the agent you’ve connected with is really someone stellar. You want to make certain that the advice and guidance they’re providing comes from experience and with your best interests in mind. One of the best ways to do this is by talking with a friend or family member who has recently bought or sold a home. Ask about the agent’s communication style, their perceived knowledge of the local market, and how the overall process went with them involved.
But what do you do if you don’t know anyone local? Perhaps you’re moving to a new city for a job or you simply don’t know anyone who has used an agent recently.
That’s actually why we developed our Home Buying Concierge Services. A one-stop-shop for taking the guesswork out of finding a high-quality real estate expert, no matter where you live. Our network of top-tier agents has been vetted by us and is continually reviewed by our customers to ensure it’s made up of the best in the business – all at no cost to you.
Lastly, keep in mind that an agent is there to help you throughout the ENTIRE process of shopping for a home, not just the final negotiations. If you think you’re within 6 months or so of buying a home, it’s a great time to start tracking down a good agent. They can help you learn the neighborhoods, answer questions about the area, help connect you with lenders, and keep an eye out for good deals. This is the one member of your real estate team you want to engage with early on.