I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…
The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.
The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40, 000 more than the buyer wanted to pay.
The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.
Expert: The price on this property is $240, 000.
Buyer: What? I definitely can’t afford that!
Expert: That’s about $1700 a month, not including insurance and HOA fees.
Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.
Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.
Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).
Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment.
That’s the point at which my jaw dropped open. She shouldn’t consider the total cost? Are you kidding me? I’m no expert, and I don’t own a home yet, but there are a few rules I’m going to stick to when I do buy.
Know What You Can Afford
When I finally take the plunge to buy a house, I’m going to figure out how much I can easily afford per month. If the bank tells me I can afford to put 30% of my income toward my mortgage payment, but I know I can only fit a payment of 25% into my budget, I’m going to figure out my target price based on what I think. I’ll figure out the approximate amount of insurance, taxes, and any other fees, and work that into the number as well. I’ll also decide what mortgage terms I want. A fixed rate, 15 year mortgage would be ideal. From there, I’ll come up with a target house price. And I won’t look at anything more expensive.
Human emotions are powerful, and when we see something we really want, we can often talk ourselves into buying it, even if we can’t really afford it. The amount of credit card debt in this country is indicative of that. I’m not going to put myself into a situation where I might be enticed into making a stupid decision that will cost me for the next 30 years.
Never Look at a House Before You Know the Price
I couldn’t believe the buyer even walked into that house without knowing how much it cost! She set herself up for disaster. As predicted, she fell in love with the house, and deeply desired to buy it, even though she couldn’t afford it. That made her vulnerable to taking on a less than ideal mortgage. I imagine that’s how many people got caught up in the mortgage crisis we have today.
Be Willing to Do Some Work
After looking at house #2 (the dream house), the buyer was shown a third house. It was a modern house, like she wanted, but it needed a little work. It was bargain priced at $174, 000 and, for an additional $30k, the buyer could do enough work to bring the house up to her standards. But our naive buyer balked at the thought of doing the work.
Take Time to Think If You’re Unsure
A tactic that the property expert used on the buyer was to tell her that the properties were flying off the market like hotcakes. She kept stressing that the buyer needed to make a decision quickly, or avoid losing the property. While that may be true, if you’re hesitating about signing on the dotted line for any reason, take time to think it over. It’s better to lose out on a property than to make a $200, 000 mistake. There will always be other properties, but once you buy a house, it’s difficult to undo your mistake.
So what did the buyer end up doing?
Much to my chagrin, our buyer went with expensive house #2. She negotiated the price down to $233, 000, and she went with a 35 year loan. If it were me, I would have taken house #3 and gotten the same quality of home for $33, 000 less. It just makes better financial sense.
The bottom line is, if you’re a new buyer, do your research. Don’t blindly trust the “experts”. Their job is to sell you a house, so they can make a commission. Though I’m sure there are many honest and helpful realtors out there, they do have a financial interest in making a sale. It’s always wise to figure out what’s best for your financial situation on your own, rather than trust someone else to do it for you.