Buying A Home: Advantages to Buying

Owning v. Renting

Our goals are simple -- to ensure that you're happy with the home you buy, that you get the best deal you can, and that owning the home helps you to accomplish your financial goals. Most people should eventually buy homes, but not everyone and not at every point in their lives. To decide whether now's the time for you to buy a house, consider the advantages of buying and whether they apply to you.

Owning should be less expensive than renting Here's a guideline that may change the way you view your seemingly cheap monthly rent. In order for you to see how expensive a home you could afford to buy while having the same approximate monthly cost as your current rent, simply do the following calculation:

Take your monthly rent, multiply by 200 = purchase price of home

Example: $ 750 x 200 = $150,000

So, in the preceding example, if you were paying rent of $750 per month, you would pay approximately the same amount per month to own a $150,000 home (factoring in tax savings). Now your monthly rent doesn't sound quite so cheap compared to the cost of buying a home, does it?

Even more important than the cost today of buying versus renting, what about the cost in the future? As a renter, your rent is fully exposed to increases in the cost of living, also known as inflation. A reasonable expectation for annual increases in your rent is 4 percent per year.

Wealth and Equity

Over the many years that you are likely to own it, your home should become an important part of your financial net worth -- that is, the difference between your assets (financial things of value that you own such as bank accounts, retirement accounts, stocks, bonds, mutual funds, and so on) and your liabilities (debts). Why? Because homes generally increase in value over the decades while you're paying down your loan (mortgage debt) used to buy the home.

Even if you're one of those rare people who owns a home but doesn't see much appreciation (increase in the home's value) over the decades of your adult ownership, you will benefit from the monthly forced savings that results from paying down the remaining balance due on your mortgage. Retirees will tell you that one financial joy of retirement is owning a home free and clear of a mortgage.

All that home equity (which is the difference between the market value of a home and the outstanding loan on the home) can help your personal and financial situation in a number of ways. If, like most people, you hope to someday retire, but (also like most people) saving doesn't come easily, your home's equity can help supplement your other sources of retirement income.

Tapping into equity

How can you tap into your home's equity?

Some people choose to trade down -- that is, to move to a less costly home in retirement. Sell your home for $250,000, replace it with one costing $150,000, and you've freed up $100,000. Subject to certain requirements, you can sell your home and realize up to $250,000 in tax-free profits if you're single; $500,000 if married.

Another way to tap your home's equity is through borrowing. Your home's equity may be an easily tapped and low-cost source of cash (the interest you pay is generally tax-deductible).

Some retirees also consider what's called a reverse mortgage. Under this arrangement, the lender sends you a monthly check you can spend however you want. Meanwhile, a debt balance (that will be paid off when the property is finally sold) is built up against the property.

Balancing your investment

In your zest and enthusiasm to buy a place and make it your own, be careful of two things.

Don't make the place too weird. You'll probably want or need to sell your home someday, and the more outrageous you've made it, the fewer the buyers it will appeal to -- and the lower the price it will likely fetch. If you do make improvements, focus on those that add value: for example, skylights, a deck addition for outdoor living area, updated kitchens and bathrooms, and so on.
Beware of running yourself into financial ruin. Changing, improving, remodeling, or whatever you want to call it costs money. We know many homebuyers who have neglected other important financial goals (such as saving for retirement and gaining the tax benefits of doing so) in order to endlessly renovate their homes. Others have racked up significant debts that hang like financial weights over their heads.

The Perfect Agent

"What's it worth?" The wrong answer to this question can cost you big bucks! Worse yet, there's no simple answer to this deceptively simple question because home prices aren't precise. Houses sell for fair market value, which is whatever buyers offer and sellers accept. Fair market value is not a specific number; it's a price range.

A good agent can be the foundation of your real estate team. An agent can help you find a home that meets your needs, negotiate for that home on your behalf, supervise property inspections, and coordinate the closing. Agents often have useful leads for mortgage loans. A good agent's negotiating skills and knowledge of property values can save you thousands of dollars.
Recognizing the attributes of the best agents
All the best agents have certain important qualities in common:

They educate you: Your agent knows the buying process and carefully explains each step so that you understand exactly what's happening at all times. Agents should be patient, not pushy.
They enable you to make good decisions: Your agent always explains what your options are so that you can make wise decisions regarding your best course of action. They advise you if they think that you should add other experts (property inspectors, lawyers, and so on) to your team -- experts don't threaten a good agent.
They voluntarily limit themselves geographically and by property type: Good agents know that trying to be all things to all people invariably results in mediocre service. Even though real estate laws are the same throughout your state, different areas within the state generally have radically different market conditions, local zoning ordinances, and building code restrictions.
They have contacts: Folks prefer doing business with people they know, respect, and trust. You can make use of your agent's working relationships with local lenders, property inspectors, lawyers, title officers, insurance agents, government officials, and other real estate agents.
They have time for you: Success is a two-edged sword. An agent who is already working with several other buyers and sellers probably doesn't have enough surplus time to serve you properly. Occasional scheduling conflicts are unavoidable. If,however, you often find your needs being neglected because your agent's time is over committed, get a new agent.

Your Agent and You

After working so hard to find a great agent, it would be a shame to inadvertently ruin the relationship. Good buyer/agent relationships are based upon pillars of mutual loyalty and trust that develop over time.

More isn't always better One common fallacy is thinking that five agents will be five times better than one agent. The more agents you work with, the better your chances of quickly finding your dream home. Things don't work that way in the real world.

One good agent can quickly show you every home on the market that meets your price, neighborhood, size, and condition specifications. If none of the houses is what you want, good agents keep looking until the right home hits the market. They don't limit their searches to houses listed by their office. Whether you work with one agent or one hundred, you'll see the same houses.

Agents know that they won't get paid if you don't buy. That risk comes with the job. What agents hate is losing a sale after months of hard work because they called you shortly after another agent called you about the same house. That risk is unnecessary.

Don't be surprised, however, if good agents in the same area opt out of a horse race. Their odds of getting paid for their work increase dramatically when they spend their time on buyers who work exclusively with them. Loyalty begets loyalty.

Another fallacy is viewing your agent as your adversary. Some buyers think that the less their agent knows about them, the better. Such buyers believe that, after agents know why they want to buy and how much cash they have, the agents will somehow magically manipulate them into spending more than they can afford.

Good agents ask such questions because they need to be sure that you're financially qualified in order to avoid wasting your time and theirs by showing you property that you can't afford. If your agent knows that you're under deadline pressure to buy, she'll give your house hunt top priority.

Good agents won't betray your trust. They know that if they take care of you, the commission takes care of itself.

Good agents know that you have the power to impact their careers. If they please you, you'll be a source of glowing referrals for them.

Other Key Advisors

Home Inspectors
A home's price is directly related to its physical condition. Homes in top shape sell for top dollar. Fixer-uppers sell at greatly reduced prices because whoever buys them must spend money on repairs to get them back into pristine condition.

You can't know how much work a house may need just by looking at it. You can't see whether the roof leaks, the electrical system is shockingly defective, the plumbing is shot, the furnace's heat exchanger is cracked, the chimney is loose, or termites are feasting on the woodwork. Invisible defects like these cost major money to repair.

Because you don't want to inadvertently become the owner of a home with such expensive hidden problems, you need property inspectors on your team. None of the other players on your team are qualified to advise you about a house's physical condition or the cost of necessary corrective work.

Finding a home inspector
A Home Inspection is a very important part of the home buying process. Home inspections generally provide buyers with information about the property's major systems including, although not limited to, heating, air conditioning, plumbing and electrical systems, foundation and structure, roof and flashing and possible environmental conditions affecting the property. Expect to receive a written report from the home inspector. Choosing a qualified individual to perform the inspection can be a daunting task. The following is a list of items that should be taken into account when choosing a Home Inspector:

Ask the Home Inspection Company to provide proof of Errors and Omissions Insurance Coverage
Ask the Home Inspection Company to provide proof of Public Liability Insurance Coverage.
Obtain the name of any professional organizations the company or individual are members of and follow up with that organization.

Finding financial and tax advisors
If you want to hire a financial or tax advisor, interview several before you select one. Check with your agent, banker, lawyer, business associates, and friends for referrals. As is the case with selecting your agent, you should get client references from each tax advisor and call the references.

Here are the qualities to look for in a good financial or tax advisor:

Does the advisor work full time in this occupation? The realm of personal finances and taxes is too vast for you to trust a part-timer. You need the services of a full-time professional.
Does the advisor speak your language? Good advisors can explain your options in simple terms. If you don't understand exactly what the tax advisor is saying, ask for clarification. If you still don't understand, get another tax advisor.
Is the advisor objective? Hire someone who works solely by the hour and doesn't have a vested interest in the advice that they give you. Never blindly follow the advice of experts because you're in awe of their expertise.
What is the advisor's fee schedule? Hourly fees vary widely. Don't pick someone strictly on a cost-per-hour basis. Furthermore, the quality of the seasoned veteran's advice may be superior to the quality of the novice's advice.
Is the tax advisor a Certified Public Accountant (CPA) or Enrolled Agent (EA)? These professional designations indicate that the tax advisor has satisfied special education and experience requirements and has passed a rigorous licensing exam. A CPA does general accounting and prepares tax returns. An EA focuses specifically on taxation
Does the tax advisor have experience with real estate transactions? Tax practice, like law or medicine, is an extremely broad field. You need a tax advisor whose clients have tax problems like yours.

Understanding Agency

Single agency
In this form of representation, a Broker/Licensee represents one of the two parties (seller or buyer) in the transaction and will play one of two roles:

Seller's Agent: In this type of agency, a Broker/Licensee works solely for the seller.

Buyer's Agent: In this type of agency, a Broker/Licensee works solely for the buyer. A Buyer's Agent represents only the buyer even if the seller pays a portion or all of the commission.

Dual agency
Dual Agency is the most confusing and least understood form of agency. In this form of representation, the Broker/Licensee represents both the seller and buyer equally.Although this is allowed by law, the confusion begins because logically, a Licensee can't represent your best interests as a seller (for instance, getting the highest price possible) while representing the buyer's best interests (getting the lowest price possible) at the same time.

The most common type of Dual Agency involves two different Licensees who both work for the same Broker. For example, you list your home with Sarah, a Prudential Fox & Roach licensee who agrees to be your exclusive agent. Unknown to you and Sarah, Betty Buyer met Bob, who is also a licensee from Prudential Fox & Roach. Betty liked Bob's style and asked him to represent her exclusively as a buyer's agent. Bob enthusiastically accepted. So far, so good! You have Sarah, your exclusive agent, and Betty has Bob, her exclusive agent. Everything is fine, until Bob shows Betty your house. Betty loves it and instructs Bob to write up an offer on it immediately.

At the moment Betty decides to look at your house, the agency relationships that you and Betty have with your respective agents change. Like it or not, Sarah suddenly represents both you and Betty. Similarly, Bob becomes your agent as well as Betty's agent.

Why? Even though two different agents are involved in the transaction, both agents work for the same real estate broker - Prudential Fox & Roach. Prudential Fox & Roach and the licensees represent the seller and the buyer as soon as the property is shown. That's dual agency. Because Prudential Fox & Roach is a large brokerage operation with many offices and licensees, your odds of experiencing dual agency are high.

Pennsylvania, New Jersey and Delaware all permit dual agency relationships as long as the agency status is disclosed in advance, and confirmed by both parties, in writing. Undisclosed dual agency occurs if the seller and buyer have not been advised about or consented to Dual Agency and can be used as grounds to have a purchase agreement revoked and may permit the injured parties to seek recovery against (that is, sue) the Broker.

Designated agency - available in Pennsylvania only
Designated Agency allows individual licensees to maintain their exclusive status of representation with a seller and buyer, even when both parties are represented by the same Broker.

In this type of relationship, the individual Licensees each represent one of the two parties to the transaction, work for the same Broker and each plays one of the following roles:

Seller's Agent: In this type of agency, a Broker/Licensee works solely for the seller.

Buyer's Agent: In this type of agency, a Broker/Licensee works solely for the buyer. A Buyer's Agent represents only the buyer even if the seller pays a portion or all of the commission.
While the licensees remain in the exclusive relationships with you, the Broker will act as the dual agent in this type of relationship, and is responsible to oversee the activities of the Licensees involved in the transaction. Again, consent in writing is required.

In the event a single licensee represents both the seller and the buyer in a transaction, the agency relationship will change and the Licensee will act as a dual agent as described above. Written consent of the parties is required for this change to occur.

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