With prices appreciating as much as 30 to 40 percent per year in some neighborhoods, some homeowners are wondering if they shouldn't be investing in real estate much as they would invest in the stock market.

In This Section:

You'll find everything you need to know to come out ahead when buying a used home, including negotiating tips, scams and pitfalls to avoid, where to buy, where not to buy, and legal tips. We'll also cover how to choose a good real estate agent. Many concepts here can apply to homes and condos, or any other big purchase

Be sure to get your credit score before you shop for a house
Everyone has a credit score calculated at the time your credit report is requested.  It's based on over 100 different proprietary variables and algorithms developed by Fair Isaac (FICO).  The range is 300 to 850. You can get your credit score from Equifax Score Power, True Credit or Qspace. Most lenders consider people above 650 to be prime borrowers, meaning they will most likely be approved at favorable rates.

Every person you come in contact with wants to sell you something.
Don't you dare think that anyone you'll come in contact with is looking out for your best interest.  Every person you come in contact with wants to sell you something.  That's their job, their #1 priority.  Your happiness is 2nd to their mission statement. Once you overcome this common naive mistake that most home buyers make, you'll be able to make much better informed decisions that will save you the most money.

Just because you are approved for $200,000 does not mean you have to spend that much.  If you can get a great house for much less than you are approved for, then that is the best move financially for you.   There is no rule that says you have to spend the max, although most people finance on the outer fringes of their ability to sustain the payments.  Don't let your agent try to qualify you for more than you are comfortable spending. They act like they are doing you a favor. They'll tell you "Oh, I can get you approved for a higher mortgage through my banking contacts".  
Translation: "I want to sell you a more expensive house and get a higher commission.  Buying a more expensive house does not always mean it's better, it just costs more." Your credit score will be used against you so find out what it is from The "merged comprehensive reports from the big 3 credit bureaus" are the ones to get, from sites like Equifax Score Power, True Credit and Qspace.

Common Home Buyer Mistakes
Many home buyers mistakenly think that they are protected by using a "Buyer's Agent", or a mortgage broker who will "find them the best mortgage".  When I ask them who is paying the buyer's agent, they respond with "They just get a percentage of the sales price".  OK, and how is this different from a seller's agent?  You can put a sheep's clothing over a wolf, but it's still a wolf. The higher the selling price of the house, the more commissions are earned by the seller's and buyer's agents. Another common mistake home buyers make is thinking the price in writing is set in stone. The pen is mightier than the sword and sellers use it to their advantage when selling houses. But you can bypass this common buyer’s mistake by adopting a counter intuitive method of thinking. Just remember this one important rule:

Sellers do not set the price, it’s the buyers who set the price
How many times have you sold or traded in a used car and not gotten anywhere near what you wanted for it? This is because you thought you could set the market, but the market told you otherwise. Whether it’s a house or a car, the market sets the price, not the seller. Once you get past this mental roadblock, you'll find it much easier to offer much less than the asking price. The stock market is a good example. If you were unfortunate enough to buy the over hyped $150 “dot bomb” stocks in early 2000, you soon found they were selling under $1. Although you wanted $150 when you sold them, no one wanted your shares, and you suffered a huge loss. Houses are the same and many sellers are under the wrong impression that real estate must appreciate. There are no rules of what appreciates or depreciates.  So don't be bashful about offering a low price on a house. Some homeowners who are selling their homes get the idea in their head that their house should sell for say $200,000 because they bought it a few years ago for $175,000.The seller may become indignant when you present them with a low ball offer. They may have bought the house when the market was hot, and in a soft market, their house may not be worth the asking price.

During the dot com rush of 1998-2000, many homes in Silicon Valley sold the day they went on the market, selling for much more than the asking price, thanks to foolish buyers and bidding wars.  See my point? The buyers set the selling price, not the sellers. People were shelling out $500,000 for tiny 2 bedroom 2 bath, one car garage "doll houses" that you and I would never consider living in at all.  When the dot coms became dot bombs in 2000-2001 and layoffs were in full swing, it took weeks to sell their homes, and many people took a bath on the resale.  Sellers often got thousands more than their high asking price thanks to idiot buyers caught up in bidding wars.

By nature, us foolish humans have a hard time dealing with the fact that our property might be worth less than we paid for it.  In overdeveloped areas, houses can lose their value rapidly, and you can use this to your advantage when buying a recently built home. One area of Pembroke Pines, Florida was bursting with development for a few years straight. People selling homes they bought new 2 years before were losing $20,000 on the sale of their homes because they were competing with all the new construction nearby. Buyers bypassed 2-3 year old houses for brand new homes with better amenities and updated building codes for the same price or slightly higher.

You cannot guarantee impartiality
Anytime your real estate agent's commission is based on the selling price of the house, you cannot guarantee that the agent has your best interest at heart.  The only way to guarantee that is to pay a large fee to a real buyer's agent, and they don't get any percentage of the selling price.  That fee however, removes the benefit of bypassing the commissioned real estate agent in the first place.  Never tell anyone but yourself how high you are willing to go.  By law the seller's real estate agent has a fiduciary responsibility to the seller, and they WILL tell the seller everything you say, so pretend you are in a police interrogation.  The agent will ask you how high you are willing to go on the house.  Don't fall for this trick.  Just give them the price you want to pay for the house and if they ask how high you are willing to go, tell them that's it.

Don't buy a house in an urgent rush
Don't wait until the day you have to move out of your old house or get transferred to buy a house.  You need time to carefully plan your purchase.  It can take 2 months or more to get an agent, shop for the house, get approved for a mortgage, and close escrow.  If you know you will be relocating and need a house soon, you should start looking now, because you don't want to be pushed up against a wall and forced into making costly and hasty decisions with adverse financial ramifications that will come back to haunt you.  Just like on our other site  we warn car buyers not to wait until their old clunker dies before buying a new car. If your car is dying, you'll be forced into making hasty decisions and signing deals you should never have signed. Never let a dealer know you are desperate for a car. If the sellers know you are desperate to get a house soon, they will not drop the price. This little mistake can cost you thousands.  Always make the sellers think you have plenty of time and resources to analyze each deal carefully.  Make sure they know you are the one that they have to chase.  then the deal will proceed on your terms, not theirs.

Q:    What can I afford to buy? 

A:    What you can afford is the first thing you should determine, - (you will not have any problem finding a home in Columbus, Ga that fits your budget and criteria) -  and that depends on how much income and how much debt you have.  In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.

You should check with several lenders before you start searching for a home.  Most will be happy to approximate what you can afford and prequalify you for a loan.

 The price you can afford to pay for a home will depend on six factors:

Gross income.

The amount of cash you have readily available for the down payment, closing costs, and cash reserves required by the lender.

Your outstanding debts.

Your credit history.

The kind of mortgage that you select.

Current interest rates.

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known).  If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. 

This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances.  Your total debt-to-income ratio should be in the 34 to 38 percent range.

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Q:    How much money do I need?

A:    Several factors including type of loan, purchase price involved in down payment, closing costs, home inspection, earnest money.

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Q:    What is earnest money?

A:    Earnest money is a deposit to show the seller in good faith that you are serious about buying their home.  The money is refunded to you at closing to be applied towards your down payment.  (Minimum 1% of the purchase price)

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Q:    What is the standard debt-to-income ratio? 

A:    A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total.

The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income.  

Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment.  Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.

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Q:    What's a home inspection? 

A:    A home inspection is when a paid professional inspector -- often a contractor or an engineer -- inspects the home, searching for defects or other problems that might plague the owner later on.  They usually represent the buyer and or paid by the buyer.  The inspection usually takes place after a purchase contract between buyer and seller has been signed. 

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Q:    How do I find a home inspector? 

A:    Your realty agent is one source.  Inspectors are listed in the yellow pages.  You can ask for referrals from friends.  Ask for their credentials, such as contractor's license or engineering certificate.  Also, check out their references.

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Q:    What are closing costs? 

A:    Closing costs are the fees for services, taxes or special interest charges that surround the purchase of a home.  These costs include attorney fees, document preparation, survey, lender fees, prepaid interest, homeowner's insurance, and property taxes.  Unless, these charges are rolled into the loan, they must be paid when the home is closed. 

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Q:    Who pays for closing costs?

A:    This is negotiable.  Several factors are taken into consideration:

Purchase price of the home.

The type of loan involved.

Down payment on a home.

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Q:    How do I get started on buying a home?

A:    Contact Janet Baskin, no-obligation consultation and buyer's packet.

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Q:    What home-buying costs are deductible? 

A:    Any points you or the seller pay for your home loan are deductible for that year.  Property taxes and interest are deductible every year.  Check with your tax preparer for other deductions.

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Q:    How do property taxes work? 

A:    Property taxes are what most homeowners in the United States pay for the privilege of owning a piece of real estate, which on average, is 1.5 percent of the property's current market value.  These annual local assessments by county or local authorities help pay for public services and are calculated using a variety of formulas. 

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Q:    Are property taxes deductible? 

A:    Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes. 

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Q:    How do I find out if the seller is being honest about the condition of their home?

A:    Home inspections, seller disclosure requirements and the agent's experience will help. Disclosure laws vary by state, but in some states, the law requires the seller to complete a real estate transfer disclosure statement.  Here is a summary of the things you could expect to see in a disclosure form:

In the kitchen:  a range, oven, microwave, dishwasher, garbage disposal, trash compactor.

Safety features such as burglar and fire alarms, smoke detectors, sprinklers, security gate, window screens and intercom.

The presence of a TV antenna or satellite dish, carport or garage, automatic garage door opener, rain gutters, sump pump.

Amenities such as a pool or spa, patio or deck, built-in barbeque and fireplaces.

Type of heating, condition of electrical wiring, gas supply, and presence of any external power source, such as solar panels.

 The type of water heater, water supply, sewer system, or septic tank also should be disclosed.

Sellers also are required to indicate any significant defects or malfunctions existing in the home's major systems.  A checklist specifies interior and exterior walls, ceilings, roof, insulation, windows, fences, driveway, sidewalks, floors, doors, foundation, as well as the electrical and plumbing systems.

The form also asks sellers to note the presence of environmental hazards, walls, or fences shared with adjoining landowners, any encroachments or easements, room additions or repairs made without the necessary permits or not in compliance with building codes, zoning violations, citations against the property and lawsuits against the seller affecting the property.

Also look for, or ask about settling, sliding, soil problems, flooding, or drainage problems and any major damage resulting from earthquakes, floods, or landslides.

It's important to note that the simple idea of disclosing defects has broadened significantly in recent years. Many jurisdictions have their own mandated disclosure forms as do many brokers and agents.  Also, the home inspection and home warranty industries have grown significantly to accommodate increased demand from cautious buyers.  Be sure to ask questions about anything that remains unclear or does not seem to be properly addressed by the forms provided to you.

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Q:    Can you give me some tips on negotiation? 

A:    The more you know about a seller's motivation, the stronger a negotiating position you are in. For example, a seller who must move quickly due to a job transfer may be more agreeable to a lower price. Other people more motivated to sell include people going through a divorce or who have already purchased another home.

Remember, that the listing price is what the seller would like to receive but is not necessarily what they will settle for.  Before making an offer, check the recent sales prices of comparable homes in the neighborhood to see how the seller's asking price compares.  

Keep in mind that if your offer is too low, that the seller may be insulted, therefore rejecting your offer.

Pipe cleaner?

Liquidity in its purest form is essentially barter--an exchange of goods, products, services, or even promises--in lieu of cash. Real estate transactions are a simple matter of trading benefits between principal parties. Yet most people are never able to relate this simple concept to buying and selling real estate?

Oddly enough, many real estate investors have failed to fully explore this concept. Unfortunately, many smaller real estate investors have limited horizons with regard to the full spectrum of time-proven alternatives for maximizing the benefits when buying (or selling) investment real estate!

And like many retail real estate customers, too many creative real estate investors fail to fully and carefully think through their objectives and how they might best achieve them. They fall back to thinking that cash is the only answer!

At the same time, most retail real estate agents, note brokers, and even note investors are not even familiar with many of the creative financing structures that have been transpiring for decades.

Astute creative real estate investors and private note investors recognize that there are over 160 methods for acquiring real estate--only THREE of which are all cash (cash, cash to the existing Loan, cash to a new loan).

They realize that knowing how and when to use even just a few of these techniques can often replace the need for cash, thus injecting liquidity into the marketplace to facilitate more transactions and generating desired benefits for the parties--benefits that might not have occurred otherwise.

The following are just a small sample of the more common techniques that experienced investors use to buy or sell property. And most of these will usually have private notes somewhere in the mix:

• Sell land only

• Sell building only

• Sale with option to buy back

• Sale with leaseback

• Sale-leaseback with option to buy back

• Installment Sales IRC 453

• Wrap-Around Mortgages

• Pyramid Financing

• Exchanges IRC 1031

• Exchange land only

• Exchange building only

• Using trusts, especially Land Trusts

Several of these, such as well-crafted Wraps and Pyramids, are particularly powerful when institutional financing is hard, and/or expensive to come by. There are also many techniques for successfully selling privately held owner carryback notes, to maximize the benefits necessary to meet the needs of the parties, including the basic Split Down and Partial Purchase

Let Genie out of the bottle with liquid paper!

The private cash flow industry is again becoming fertile ground for small investors to pick up more of the quality notes that were previously snapped up by the larger institutional note buyers.

Enlightened investors who use even just a few of the proven, practical real estate financing options available--including how to use other deal structures in lieu of financing--will profit handsomely by helping others solve their problems.

The use of real estate notes (by local and private investors) to buy, sell, and trade for accumulating equities inherently injects liquidity into the real estate markets, allowing transactions to again flow.

Real estate agents and note brokers who become familiar with at least some common alternative financing techniques, understand the basic fundamentals, and recognize how they can profit from making note holders, property sellers, and less astute investors aware of them will become rainmakers!

The real estate markets are changing. Are you ready to make it rain?