As an HGTV-addict, I sometimes want to shout at the featured homebuyers on shows such as Property Virgins and even Selling New York, which caters to a wealthy clientele. Ignore the light fixtures, they can be easily replaced! Don’t pay any attention to the paint color, you can fix it in an afternoon! Listen to your home inspector when he says that water damage could indicate serious problems!
Homebuyers, especially those with little experience, are prone to making all kinds of mistakes, from ignoring catastrophic problems (water damage) and obsessing about details that barely matter (wallpaper). Today, with low housing prices in many areas and equally tempting interest rates, more newbies are being lured into the market. A recent survey by market research firm Mintel found that first-time buyers now make up 45 percent of the market, up from 34 percent in 2007. But are they equipped to make the right choices? Here are three classic mistakes they make:
1) Being turned off by problems that are easily fixed. According to a recent survey by Coldwell Banker, almost nine in ten first-time buyers are looking for move-in ready homes. They don’t want to have to fix the kitchen or redo the bathroom before settling in. They also want to live near shops, their work, and “highly-rated” schools.
While location isn’t negotiable, many smaller fixes are, such as a dirty carpet or scratched up hardwood floor. Jane Hodges, author of the forthcoming book Rent Versus Own (Chronicle Books, 2012), was concerned about cracks in the plaster of her first home, but she later found it was just a cosmetic blemish that could easily be painted over. Hodges suggests asking your real estate agent for help understanding how costly fixes will be, and to grill the home inspector, as well. “Buyers sometimes focus on things like carpet, but that’s really a renters’ mentality. They forget you can make all these changes,” she says.
The buyer-friendly market means that many first-time buyers can satisfy their high standards. Most participants in the Coldwell Banker survey found that they could buy a home sooner than they expected, and at a better price than they expected. Four in ten got more space and half scored a neighborhood that exceeded their expectations.
The lesson: High standards can work to your advantage, but don’t forget that some fixes are relatively easy (and cheap), such as cosmetic makeovers.
2) Overlooking hidden costs. In addition to the down payment and subsequent regular mortgage payments, home ownership also brings a slew of other expenses, from closing costs to appliance maintenance to homeowners insurance. That’s why Hodges warns against doing a simple comparison of monthly rental payments versus mortgage payments. Home maintenance typically costs one to three percent of the purchase price, which is as much as $9,000 a year on a $300,000 home. “If your motivator is that rent is going up, you need to think about the actual operating costs,” says Hodges. “Homes might not be as cheap as they look,” she adds, especially if you buy a distressed property that hasn’t been well-cared for in recent years.
The lesson: Leave plenty of room in your budget to absorb the extra expenses of homeownership. That usually means borrowing far less than the bank approves, and taking expected income fluctuations into account, as well.
3) Failing to budget for DIY-projects. Not so long ago, DIY television shows and Home Depot ads lent an air of romance to giving your home a little TLC. But more recently, the art of fixing up houses has fallen out of favor. According to Mintel, the DIY (do-it-yourself) home improvement market has fallen 21 percent in the last 10 years. The reason appears to be financial. While about one in four would-be-DIYers say they want to start on a major renovation, they simply can’t afford it right now.
The lesson: When purchasing a home, reserve some cash for needed DIY projects during the first year of home ownership.
Since there are bound to be plenty of unexpected costs during that first year of home ownership, padding your budget can prevent late-night panic attacks when the dishwasher starts leaking all over your new floor.
Kimberly Palmer (@alphaconsumer) is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.