Buying a Home

[qesehmk]

Alright friends. We just purchased a home - FINALLY 12 years after we arrived in US! Creating this thread to discuss home purchasing for those interested.

Summary

Home ownership is everybody's dream and a key step in life. The timing could vary from one person to another but the key factors for decision making as well as things that bring true joy in this process are quite similar. Financial situation, need for flexibility, personal/family situations and likes and most importantly being comfortable putting a peg in the ground are things that are key factors for decision making. However once you buy a home, the joy of home ownership, a sense of belonging, the way kids enjoy their own home is very real and invaluable even if one chooses to ignore the material comfort of the physical home ;and possible financial benefits of home ownership.

The remaining article (divided in two posts here) talks about following key steps:
1. To Buy or Not To Buy
2. Financials
3. Home Search
4. Price Negotiation
5. Contracting
6. Move & Setup

1. To Buy or Not To Buy
We arrived in US 12 years back. Then new 3-4 bed houses were available for as low as $60K in the midwest. And we thought we are certainly going to buy one right after college. Our reasoning then was simple, instead of paying $700-$1000 per month to an apartment, $60K for a new house was a no-brainer.

However, by the time I graduated and moved to Arizona for work, the housing market was already hot. By the time we were settled and ready to purchase the house which was around May 2003, we realized - the time is probably wrong.

So lesson # 1 - Purchasing a house immediately when you move from one city to another makes sense especially if relocation is paid by the employer. That will

a) cover lots of costs either fully or partially - moving / closing / financing etc.
b) save you from multiple moves.
c) most importantly help you time key things in your life. many times we do have good gut feel of what is right. But fear prevents us from doing the right things. And I am talking purely about financial decisions!

The lack of green card notwithstanding, we were not sure we were going to settle in US. That substantially impacted our desire to buy home.
So lesson #2 - If you are anyway going to settle in US, then everything being equal, it's a good idea to buy a home. Do not delay it.

Finally financial planning actually paid a huge role in the decision. Until very recently we paid house rent almost same as a 3 bed apartment in Phoenix. And so enjoyed living in a house and yet were worry free from all hassles of owning house. But frankly we avoided the housing bubble and also purchased house today at a reasonable price and at very low interest rate. However I can confidently say that lesson #3 is that buying a house is NOT just a financial decision. Financial factor is a necessary factor but not a very critical one IMHO.

There are of course reasons why one shouldn't buy a home:
1. Job Uncertainty
2. Location uncertainty
3. Immigration uncertainty
4. Not wanting to spend time maintaining property chores!

But I think we finally made a decision to put a peg in our life and who knows tomorrow we might actually move to India. But the key to happiness is being rooted in today where you are rather than plan too much ahead in future or get stuck in past; and so we chose to do so.

2. Financials

Financials of course is a key thing. Rent vs Own comparison of course factors in. Renting means no maintenance costs, HOA fees, property taxes, insurance or warranty costs. Owning of course entails all those costs - but then owning also entails benefits such as building of equity as well as tax deductions on interest and property taxes. But equally importantly owning means locking in your monthly payment which is not true for renting. The rent will increase YoY. And that would be quite a lot over 30 years. With owning - yes you may end up paying more on the first month. But then that stays constant. Over time of course you are paying more towards equity rather than interest. So one needs to arrive at a comfortable factor from financial perspective to make a sound financial decision on buying a house.

Then the question is how - high you should go? A rule of thumb says 3 times your annual salary is ok. But depending on the market - the ratio could be 5-6 e.g. in san francisco or 1-2 in ohio. Of course one can choose to stay at 3 and choose to buy less or more home.

Finally the question is how much should you pay down. You can pay down 3.5% (e.g. with FHA loan for first time homebuyers) or upto 20% or more with lenders like citi wells fargo etc. We chose to pay 5% down simply to make sure - if there is another housing shock - we don't loose too much equity. I have friends who paid down 300-400K on a 600-700K house and then during the housing crisis the price crashed 60%. While the chances of further price erosion are less - it is entirely possible that the prices could continue to come down - especially as the interest rates go up. Another thing that does influence down payment is that it costs to buy a home other than the price of the house. The process to buy home - called closing - usually costs 0.8-1.0% of house purchase price. So unless the seller is covering that cost for you, you should be prepared for that cost as well.

Another cost that one MUST be cognizant of when buying a home is the cost to sell home. This matters a lot to somebody who is thinking of selling the home 3-5 years within buying it. The cost to sell home is HUGE. 6% of the selling price + closing costs (primarily title insurance). For a $500K house that would equal to $33-35K. It would be foolish to not consider this cost when making a decision to buy a home. Of course you can try to sell your home without an agent but I do not personally know anybody who has successfully sold or bought a home without agent. Just saying....

Finally, interest rates matter too but I am not a big believer that I would make a decision based on interest rate. The reason is - A persons ability to pay is tied directly to his income. And income doesn't vary hugely. So one is looking at 2-3-4K as his/her monthly budget to pay for house. So if interest rates go high - the house prices will come down to match the consumer budgets. So you can see why the interest rates are low today. That's the way to ensure "Price Stability" which Fed says is its mandate. (Funny how the same mandate is not followed on food and gas!!! Officially those things are out of inflation bucket. But hey that's a political discussion and so I digress!) So fed is trying to ensure that house prices do not go below where they are by adjusting interest rates.

I have come to the conclusion - that howsoever smart you are financially - including wharton MBA or Chicago MBA - DO NOT FIGHT THE FED. In other words don't try to think too much about interest rates and where house prices will be 5 years from now etc etc. Just do basic arithmetic on rent vs own and that's good enough.

Last few things that are important to consider about financials are loan time horizon (15 years vs 20 vs 30 vs 40 vs ARM) and type of loan FHA vs non-FHA, interest only vs normal etc. I didn't think too much there - 30 years conventional mortgage and no points. Period. Didn't want to be too smart and go for ARM. The rates are already low enough. I did look at 15 year rates though 2.85% sounded really good. But then one has to ask - can one just make extra payments and try to pay off in 15 years? I think that is perfectly possible. So I chose flexibility of 30 years rather than lure of lower interest rate. You can calculate the price of this flexibility over 30 years and make a decision for yourself.

One final advice - go for a local lender who works with a national lender. This is very useful to achieve quick close. The national lenders are swamped with work. So the closing process there is taking 2 months or more. A local lender also will be desperate to win your business. So you actually will find better deal. Get preapproved for 20% more than your budget. Get a quote from multiple lenders and play them against each other. Check if your employer has preferred lenders who will give you a good deal.

3. Home Search

I do not have any different advice here other than what everybody says - Location - Location - Location. First and foremost find an area that suits your daily schedule and is conducive for your career growth and your children's education as well as family friends cultural enrichment. Other than these things do use online resources to find out demographics of the area from economic, age, education and criminal perspective. Usually every county/ state has a sex offender registry and you can also find the registered sex offenders in an area.

Then we simply used ziprealty to find a good house. (But missed on using redfin which today seems better than ziprealty - plus they give 1% or more cashback!). Make sure you know whether you want 2 story vs 1 story, the size of house, pool or not, how old and so on. I wouldn't venture too much there - but my personal preference was for two story primarily for kids safety reasons. Just can't have their bedrooms on ground floor. But that's me. Don't read too much into it. Size is an important thing. As long as you can afford it - have a good size home. I am a believer in bigger the better (to the extent you can manage it!). Having a gated community is a plus but not a must in my opinion. But I more emphasized in spacious roads and less crowded layout of the community. I certainly will advise you to avoid crowded communities and especially Z lots where the lots are in Z shapes. Finally ensure HOA fees are not going to kill your budget. So this whole deal about community center / club house etc is ok ... but decide yourself whether you really need all that.

Article continued below..

[SmileBaba]

Alright friends. We just purchased a home - FINALLY 12 years after we arrived in US!

Congratulations Q! Hopefully this thread will bring lot of information and tips on Home buying.

[qesehmk]

article continued from post above..

You might be wondering why I haven't talked about construction quality. To be honest I don't really know much about it. So I made sure we bought a new home with a reasonably reputed builder. That's the best way to ensure you are not going to be likely to have to pay for any repairs at least for 5-10 years. There are many things that you will know about a home ONLY after you get a professional home inspection done. That report will tell you many technical things about the house. But of course that will happen only AFTER you are in contract on a house. In our case e.g. I understood that our then future home was overspec'd from energy efficiency perspective and it was built on a pretensioned concrete slab - both of which are great things if you can get them. The latter ensures that the house doesn't sink uneven. But to keep this phase simple, once an area is selected - simply go for a new house (0-5 years old) especially if you are a first time homebuyer. That will avoid lot of headache.

4. Price Negotiation

Price negotiation varies with time and market. But now a days you can reasonably ask for upto 7-10% less of the asking price. Of course before you make an offer do your homework on per / sq ft pricing using redfin or ziprealty. After 3000 sq ft. the per / sq ft price drops significantly. So keep that in mind. Any kind of too much of customizations - howsoever costly - you shouldn't be paying for - e.g. water fountain in the backyard or some artwork on the roof in the bedroom! The only upgrades that will carry some value is flooring, countertops, cabinets, basic yardwork. Appliances, drapes, custom features in backyard - isn't what I would personally pay extra premium for at all.

Then, make a serious offer once - one that you think is value for both parties and try to stick near that number. Getting seller concessions would be nice. But that generally raises doubts about buyer's ability to put money on the table. Having a good agent comes useful in negotiations. Stupid agents can give away your intentions on price. So beware of that.

5. Contracting & Closing

Contracting and Closing is an interesting phase that typically starts with offer acceptance and ends with registration of the house in your name! The key things that happen here are:
1. Offer acceptance & buyer having to pay earnest money i.e. deposit in good faith
2. Home inspection - don't skip this one. It only costs 400 dollars. Considering the risk you are taking - that is money well spent.
3. Home appraisal - this is a must before the bank actually releases money for you. This is yet another 400 dollars expense.
4. Closing - here the title company (businesses that facilitate transaction between buyer and seller by authenticating title of the home as well as providing guarantee on the title), will basically get the title from the home owner, ensure correctness and finally transfer it in buyer's name AFTER buyer's bank releases funds. This cant be avoided at all. There are tons of small charges - so make sure you understand everything. The title company will provide you a good faith estimate of closing costs working with your lender. Usually that shouldn't vary a lot.A chunk of closing costs actually go towards payments for HOA / property taxes in an escrow account which means not all closing costs are actual costs of closing process. I wouldn't complain about that
5. Registration in the county office - Once the house is closed ie. title company has done its job - next it asks the county office to register the home in buyer's name. But it will take a month or two before the county website will actually show it in your name.

6. Move & Setup

Obviously before you purchased home, you had to transfer the utilities in your name from the day of the purchase. You may want to think about having a home security system -- especially for families where one partner keeps travelling. We did a lot of shopping at costco - especially shelf liners. It's unbelievable how a stupid thing like shelf liner can cost so much! Home warranty - most of my friends told me to skip it - especially when the house is new. That's $600 saved per year.
Instead of spending too much on professional movers - we moved over 2 weeks. But practically the day you move your kitchen - that's when you actually move. So time it accordingly. We basically got the largest U Haul - $139 including gas - dollys and pads and tax for 1 day. Also from u haul website we selected movers based on reviews (most and best reviews). However when the guys turned at our home to do the move -- they looked like part homeless people and part serial killers. I mean seriously... no jokes here. But they turned out decent poor people who just were looking for jobs in this economy. Having more hands is useful. Many of our friends offered to move but we politely declined. Yet a few showed up and proved how stupid we were in declining help!! So - if somebody offers to help - say yes! With 8-10 people working - it took 5 hours to move when 70% of the stuff was already packed. But it's that additional 30% that just kills you.

Then we immediately threw a housewarming party 2 weeks later. That way we were forced to setup the house in a fixed timeframe.

I guess that's about it. Home sweet home. Good luck for getting your own!!

[Kanmani]

Q, Congratulations!!!

Nice analysis .

[qesehmk]

Thanks SmileBaba & Kanmani. Hope people find our experience useful. This is a critical part of everybody's life and wish everybody well in achieving their dream!

Congratulations Q! Hopefully this thread will bring lot of information and tips on Home buying.

Q, Congratulations!!!

Nice analysis .

[GhostWriter]

Congrats for buying a house Q and thanks a lot for sharing your experience in detail. I am thinking of buying one in 2013 or early 2014, waiting because of the two points you mentioned - location and immigration uncertainty. Hopefully they will resolve in next 1 year or so. One question for you - did you consider buying a condo vs. buying a house or were you always more inclined to get a house.

[qesehmk]

Ghost - Thank you! Condo is a good idea if you plan to move to another city or sell it out entirely. In other words only for temp duration.

With time and family growth - its very hard to live in condo - unless you are living in manhattan SFO LA etc. If you are EB2 with date in 2008 or earlier I think your GC is already preadj'd. So if the job is stable - I would've gone for a home if I were you. (Of course I didn't do that myself. So the advice I give you is based on our inability to decide where to settle as well as on hindsight!!).

Congrats for buying a house Q and thanks a lot for sharing your experience in detail. I am thinking of buying one in 2013 or early 2014, waiting because of the two points you mentioned - location and immigration uncertainty. Hopefully they will resolve in next 1 year or so. One question for you - did you consider buying a condo vs. buying a house or were you always more inclined to get a house.

[isantem]

Thank You Q for sharing your experience with us. Enjoy your new house!!!

[pdfeb09]

Congratulations Q !!

Your article could not have come at a better time for me. We are looking at a house that both,my wife and I, liked. We are negotiating the terms with the builder. Hopefully things go well and we move in.

Thanks for sharing your experience and the lessons.

[bvsamrat]

Congrats Q

I just wanted to add for the location selection

Most of people buying house select : Kids school as primiary criterion and good school zone gets good premium now and also in future

Congratulations Q !!

Your article could not have come at a better time for me. We are looking at a house that both,me and my wife, liked. We are negotiating the terms with the builder. Hopefully things go well and we move in.

Thanks for sharing your experience and the lessons.

[Pedro Gonzales]

A couple of points from my experience:
a) Check your title company / lenders work. I was using pretty reputable firms (BofA was my lender) but found errors in their work every time. At the end, the errors only mean you'll under or over fund your escrow so it'll all even out, but when you're writing a big check (20% downpayment in my case), every $ counts.
b) I agree with Q on the advantages of new houses, but the advantages of older houses that I found were i) bigger lots, ii) location constraints (there weren't new houses being built where I wanted to buy), iii) mature gardens and taller trees, and **) more filled out neighborhoods with kids running playing outside and in the park, people seemed to know each other better, etc.
c) Get the homewarranty if the appliances are out of warranty. Mine was a 20-year old house with 5 to 20 year old appliances and i didn't get the home warranty (my realtor asked us not to because she was going to gift it to us, but that gift never came), and I've spent thousands on 2 new air conditioners, a new water heater and a new garage door opener. There are so many things in a house that things will break and that's okay normally, but if you're extended already because you've used up most of your savings buying the house, you don't want surprises.
d) Subscribe to Angie's List. It only costs $6 a month but it'll save you way more than that when you need a contractor due to a) contractor discounts, and b) the ability to dig through reviews to find cheaper contractors. Besides, there are good contractors and there are bad ones and you really want to stay away from the bad ones.
e) Make the house your own. You've spent years avoiding nailing anything to the wall in a rental, go crazy and hammer a nail in just for the heck of it. It feels good.
f) Make friends at the neighborhood Home Depot / Lowes. You will absolutely need their help. Q, in case you're near it, the Home Depot on 54th Street between Chandler and Ray is awesome. Knowledgeable folks, especially in the plumbing, painting, and electrical departments.
g) Start a vegetable garden. The veggies taste better than the store variety. Home Depot and Lowes are fine for implements / fittings etc, but for actual plants Nurseries are hands down better in quality and only slightly more expensive.
h) Use Craigslist to buy stuff. It takes time but it's tons of fun (my wife and I spent at least one day every weekend going through estate sales), and also, $2k worth of furniture painstakingly selected from craigslist will look like its worth $20k. Same thing with tools for your garage. You can spend $500 to get basic tools from a store, but the same $500 can get you $2k worth of used tools on craigslist.

[qesehmk]

isantem thank you!

Thank You Q for sharing your experience with us. Enjoy your new house!!!

pdfeb - good luck! We also thought this was a good time - prices are low - rates are ultralow. So we went for it and got a rather large house for us. Good luck on negotiating but more importantly make sure you and wife REALLY like the house. That's more important. You won't regret if you paid 10K more for right house. But a financially good deal on wrong house - will be regretful thing. Let us know when you buy one!

Congratulations Q !!

Your article could not have come at a better time for me. We are looking at a house that both,me and my wife, liked. We are negotiating the terms with the builder. Hopefully things go well and we move in.

Thanks for sharing your experience and the lessons.

bvsamrat - completely agree - unless somebody is into charter or private schools. Our son who right now is in a private school - will now join public one next year onwards and needless to say we purchased home in an area with a good public school.

Congrats Q

I just wanted to add for the location selection

Most of people buying house select : Kids school as primiary criterion and good school zone gets good premium now and also in future

Pedro - my brother from another mother - I lived in that very area where that home depot is! Thanks for all these tips. I will shop craigslist now for all things garage and thanks for the angie's list info too. We sure will need a handyman in future.

[qesehmk]

sport, thanks. Here is something to consider.

If one has a child that is 8 years old, in just another 8 years the child may leave house. So you and the child has only 8 years to enjoy together in your own house.
That's quite a heart wrenching thought if you think that way.

I was not very intelligent to think of all these things and then make a decision about home buying. But I realized all these non-financial considerations AFTER we made a decision. And the more we progressed, the more we were convinced how important it was for us to buy a home.

Don't mean to say it will be so for everybody. Just putting some thoughts on the table.

Q, congratulations on the home-ownership! We almost bought a house last year, so I can relate to the excitement one feels at the time.

Pedro, those are good tips. Many of those accurately outline the reasons why we chickened out at the last moment - we are just too comfy in our apartment where we don't pay utilities and the maintenance is all take care of. Argh...I know that some day, I have to shake off my laziness, but I keep postponing the day.

[bvsamrat]

My Random thoughts and suggestions on Home buying and decision. These are not in order.

I lived in 3 different countries(1st one is of course India-Bombay). In all places, my first action was to look to buy a house at an earliest opporunity and proved beneficial.

But the main hurdle in USA is - Financially you do not gain much unless your stay is atleast 10 Years. But in any investment (if you consider house also as an investment), 10 years is minumum you should look to get returns

Once again 'buying or not 'decision might depend on location of your city, If CA(LA-SFO) or NY City or similar urban city areas, where the house costs are very high. But again if you can afford, it might be the right season as the market is at bottom and your will get a good interest rate. But consider only if you plan to stay for atleast 5 years.

People staying in other areas such as GA/Texas/Midwest etc. may find houses affordable.

Secondly- Build a good credit rating atleast >700

Thirdly - Finding a mortgage bank. Use an agent and if can get quotes from more than one bank. Do not be afraid to get offers from more than one agent. Credit checks more than 1 or 2 would not hurt your credit score if done in a single month.(Recently I refinanced my homeloan and had negotiated with 3 banks and finally settled with an agent who provided best rate. But find out which would be the final bank that services your loan(as most of the initial mortgages are transfered to major banks). Some banks are notorious in unnessary follow up on regular payments,which you do not want

Fourthly- Whether you will put 5% or 20%.

It depends on how much morgage insurance premium(MIP) you pay. In the recent times, MIP is high, which you can save if you can dish out 20%. But remember this 20% investment has risks associated withit and same if invested elsehwere may fetch very good returns. Also check if MIP and interest payment may get tax releif, that is an added advantage.

Always look for real estate broker who can give you part of his commission(generally they get 3% and can give back 1.5% to you depending on if you are buying from a resale or new home


Now on selection of houses.


If house assesemnt available, then see if the proportion of land value to the house value. Generally with time, land vaue appreciates and house value depreciates(This is true anywhere in the world).

If house is more than 10 years old - consider all white goods need major servicing or replacement- Air conditiioning/furnace and water heating are costly items

In cold regions, if your house is more than 10 years old, consider that utility bill will be higher than new homes of similar size.

Lastly-select the neighbourhood, where you have freinds of your community also reside. This is very important for your children who can get along with others and family help whenver needed.

[pdfeb09]

Well, we finally moved in a few weeks ago. It is a great experience. Everything Q and others have said is valid and I won't repeat it here. The kid has already vindicated our buying decision from his point of view.

pdfeb - good luck! We also thought this was a good time - prices are low - rates are ultralow. So we went for it and got a rather large house for us. Good luck on negotiating but more importantly make sure you and wife REALLY like the house. That's more important. You won't regret if you paid 10K more for right house. But a financially good deal on wrong house - will be regretful thing. Let us know when you buy one!

CHECK -- Got ourselves into a school district with great schools.

Most of people buying house select : Kids school as primiary criterion and good school zone gets good premium now and also in future

Pedro,
Thanks man .. will use most of your tips.. I can already see the chores lined up and it's going to take a good amount of sweat for the maintenance.

sport,
We were in the same boat in 2011. We started looking with a great zeal and enthu. After looking at a lot of properties, doing a bunch of calculations, and taking a stock of the current situation at that time, decided against it until this year. Take your time and trust me, things will work out great once you are ready.

[qesehmk]

Congrats pdfeb09!! Home sweet home finally. I can relate to that. Wish you all happiness and health in the new home!

[pdfeb09]

Congrats pdfeb09!! Home sweet home finally. I can relate to that. Wish you all happiness and health in the new home!

Thanks Q! Wish you and everybody else the same !

[pdfeb09]

Congrats pdfeb! That's great to hear.

I have been missing in action for the last few weeks. I finally pulled the trigger and started a new job in a nearby company. That's keeping me busy and I hadn't checked the predictions or even VBs lately. Just yesterday, I checked the VBs. Well, we are still stuck but it's great to see EB3-ROW moving fast. But at this point, we almost don't care. Life on EAD is great and it's even sweeter when those renewals are totally free and get approved in a month.

We are also almost ready with plunging into the housing market. The prices are still low, interest rates are still great and we have enough money and are emotionally ready. So we will be buying soon.

Thanks ! Glad to hear that you are gearing up for the plunge. Good Luck with the search. Hope you find a great place you can call home. Good Luck with your new job too !