Buying property is an exciting endeavor that offers both stability and opportunity for financial growth. Whether you’re a first-time buyer, or you’re looking to expand your real estate portfolio, navigating the market can be an arduous process. To help you along the way, this guide provides a step-by-step approach and tips to facilitate your journey. By mapping out your needs, determining your financial capacity, and taking strategic action, you can confidently make informed decisions that align with your goals. So, let’s delve into this guide to buying property with essential considerations and practical steps that will empower you to find the perfect property and turn your dreams into reality.
A Guide to Buying Property: At a Glance
Figure out what you want
When it comes to buying property, first thing’s first — you need to figure out what you want in a property. This includes the basics — property location, purpose, type, etc. Let’s dive into the considerations of each of these categories.
Location: Where do you want to purchase a property? Which city or locality? Perhaps this is where you already live, somewhere you want to live, or a place that you see presenting a good investment opportunity.
Purpose: What kind of property are you looking for? Are you looking for a home for yourself? Or are you looking for an investment property, whether that be a fix & flip or a rental unit? Or perhaps a combination of both — a multi-family rental owner-occupied property?
Type: Do you want a house, or an apartment/condo? Houses tend to have more space, come along with more autonomy, but you bear the burden of maintenance. While apartments are typically less space, maintenance is taken care of by the property managers. Condos are like apartments, but do not always have complimentary maintenance. Some condos charge separately for maintenance and up-keep, such as snow removal and landscaping services, through what are commonly known as Home Owner Association (HOA) fees. Both apartments and condos offer less autonomy due to building rules or condo association restrictions.
Tips
Try not to fall in love with “dream houses” — Instead, think in terms of the property at least being better than your current situation. Depending on the market, you can often buy a property, live there for a while, then rent it out and use the proceeds to purchase another property. This is especially true when interest rates are low.
Create a spreadsheet of properties with listings you are interested in — Add any key data about these properties, including price, square footage, bedrooms/bathrooms, estimated rent, and contact information. This helps compare properties against each other.
Figure out what you can afford
Once you know what it is that you want, it’s time to figure out what you can afford. There are a few considerations at this step.
The first distinction to make is that the down payment and related closing costs are one-time, while other expenses are ongoing. So the down payment depends on your assets and savings, while ongoing expenses, including your mortgage, are more about your income. There are online calculators available to help you determine how much you can afford, factoring in credit score, interest rates, monthly payments, down payments, and closing costs.
It is a safe practice to get a property a bit cheaper than the online calculators suggest is viable, as there are many expenses that go into the property that may not be immediately visible. Known costs are principal and interest, property tax, insurance, HOA fees, and utilities. However, maintenance items can come with large one-time costs, for example, replacing an air conditioner unit. In addition to maintenance, would be any improvements you plan to make, such as painting a room up to replacing a kitchen. Planning your cash flow even after purchase is a key consideration.
There are IRS tax guidelines that should be considered as well. For example, it may be possible for you to itemize your deductions at tax time and deduct mortgage interest and certain property taxes. This may allow you to purchase something at a higher price. It is important to speak with a tax professional as the guidelines can change from time-to-time and can be very specific to your financial situation.
To be fairly conservative, target the all-in monthly cost to your current rent expense (assuming you are paying rent). This may mean a smaller or less desirable place, but it gives you a lot of financial headroom. Another reason to go a bit cheaper is that if you can finance slightly less of the property, say 70% instead of 80%, you are more likely to qualify for the loan, which gives the seller some comfort that the close will go smoothly.
You should also be sure to get a mortgage pre-approval letter from a bank to get a sense of your monthly cost, which can vary with your credit score, the term and prevailing interest rates today.
It’s important to have some methodology in place to make sure you get a fair purchase price. Property can be valued in several ways. It’s a good idea to look at comparable sales in the same neighborhood. You may also benefit from assessing the rental market — take a guess at the net operating income of a property, evaluate against price per square foot, and estimate the replacement cost of the property. Try not to pay more than land value plus build cost. Also, try to get an intuitive sense of the market and where properties are priced now versus historically. This part is hard — in frothy markets, this may mean “sit on the sidelines.”
For more guidance on determining what you can afford in an investment property and determining profitability, check out our article “How to Determine the Financial Viability of an Investment Property.”
Determine how you want to be represented
Because buying property is a complex process, and one that can be overwhelming for first-time buyers, it is important to think about how you want to be represented or guided in the process. Of course, there are many ways for a buyer to find available listings by searching the internet, just keep in mind that finding listings is often the tip of the iceberg. Setting up a showing, learning about property details and history, comparing property sales to hone in on buy price, determining quality of school districts and neighborhoods, etc., are just a small sample of the factors a buyer would want to keep in mind.
In addition to the property-specific aspects, preparing and submitting an offer, then negotiating, then getting to the actual settlement phase, may go more smoothly with the advice and guidance of a professional. Some buyers do some work on their own then use a real estate attorney to assist. For most others and licensed real estate professional is used.
Make it Happen
The “make it happen” phase is roughly split between “pre-offer” and “post-offer,” which have very different characters.
Pre-Offer
So you’ve surveyed your region, and there is a place you like that meets all your financial criteria. You prepare to submit an offer.
Submitting an offer can happen in various ways, for example a signed purchase agreement, or via email. Typically, the state will have a standard purchase contract, which the overall purchase gets built around (using “riders”). For instance, see the as-is purchase agreement in Florida when submitting the offer. The offer usually comes with proof of assets.
In determining the offer, you need to know how much leverage you have. The seller’s agent will always tell you that offers are coming in and need to be submitted by such and such day, i.e. three days from now. You can guess at how desirable the place is, and the general character of the market, to assess how true this is.
In a market with a very high median days on the market (like NY at the time of this article’s publication), you may have more leverage, though you will still tend to find wide variance per property. Usually, properties priced at market median or a bit below will go faster because the pool of buyers is larger.
Generally speaking, the fewer contingencies, the stronger your negotiating position. Sellers prefer cash offers because they aren’t worried about the bank appraising the property differently or the buyer not qualifying for financing. If you are a house flipper, you might waive inspection because you know you can fix just about anything yourself.
If you really want to win the property, offer at list or slightly higher. If you think you have leverage, go lower. Expect in either case the seller to come back and ask for more money. This is why it is good to have target prices in mind for where the deal is very attractive, viable or not.
Typically a good-faith deposit will be involved. As part of the offer, you will negotiate the close date and any contingencies such as financing, inspection, etc.
Post-Offer
Once the offer is accepted, it is not unusual for the seller to sometimes become lazier. It is against their interests to do an inspection because it could mess up the deal or knock down the price. Meanwhile, they may be worried that you will fail financing, so there is usually a date past which the financing contingency expires. Sellers are hoping to get past that date. Even if you want to close earlier, which in theory helps the seller, it can feel like you are the project manager as the buyer after the transaction is locked in.
Also at this stage, you (typically your attorney or the closing agency) conduct a title search. You need to pay a firm to get a report on the property title and then check whether it is clean. A title that isn’t clean can have a “lien” on it, or sometimes it can’t be located at all. You also typically need to procure title insurance, which is supposed to protect you against issues coming up in the future. The attorney or closing agent would also handle this.
If it’s a financed transaction, property tax and homeowner’s insurance may be bundled together in your monthly payment. Some lenders require this of certain buyers. Just keep in mind that you are essentially pre-paying your cash to the bank to cover these expenses, so if these expenses can be managed by you directly, it can help your cash management.
At closing, the attorney or closing agent will be seeking to ensure that all of the necessary documents are in place. Typically a settlement sheet will be provided in advance showing all of the inflows and outflows of money for both buyer and seller. There may be a balance of funds due from the buyer at closing, or at times funds may be due from the seller to the buyer. Paying attention to all of these details along the way makes settlement go smoother for all parties.
When this is all done, or simultaneously, you get the keys!
Key takeaways —
-
- Figure out what you want: Before buying property, determine your desired location, purpose (e.g., home or investment property), and property type (house, apartment, condo). Avoid getting fixated on “dream houses” and focus on finding a property that improves your current situation.
- Figure out what you can afford: Consider both one-time expenses like down payment and ongoing expenses like mortgage payments and maintenance costs. Use online calculators to determine affordability, but be conservative and account for additional expenses. Familiarize yourself with IRS tax guidelines and consult with a tax professional to understand potential deductions.
- Determine how you want to be represented: Buying property can be complex, so consider whether you need assistance from professionals like real estate agents or attorneys. They can guide you through the process, provide valuable advice, and help with negotiations, settlement, and other important aspects.
- Make it happen: When submitting an offer, assess the market and property desirability to determine leverage. Minimize contingencies to strengthen your position. Negotiate the offer, including the close date and contingencies. After the offer is accepted, stay proactive, conduct a title search, and secure title insurance. Pay attention to financing, property tax, and homeowner’s insurance. Finally, ensure all necessary documents are in place for a smooth settlement.
