This post is a must read for all potential home buyers! While most of my trainings focus on real estate investing, these 7 powerful rules are geared towards buyers looking for a home to live in. These insights come from thousands of home purchases I have personally observed over the years. This real world wisdom will help you make a more informed house buying decision, so please heed this advice. I have friends and family who didn’t follow some of these rules and they ended up regretting it.
As a professional real estate investor, I have dealt with thousands of motivated sellers either directly or indirectly. I know exactly what puts them in difficult situations. Some of it is out of their control, but other times it’s because they broke one of these seven sacred rules. Here are Phil Pustejovsky’s 7 rules for buying a home…
Rule 1: Choose Wisely
Purchasing a home can be a little like going to prison. You may think this is extreme, but it can be a whole lot easier to get in than to get out. I have witnessed the pain that a home can cause when someone wants to get out of it and they can’t.
An obvious example of this is when someone gets a job transfer, but they can’t sell the house. The spouse and kids are stuck in the old home and they’re separated for months, sometimes even years. This can cause so much stress on the family, so you must choose wisely. Choosing wisely is going to be a theme through the rest of these rules because it’s a lot easier to get in than to get out.
Rule 2: Be Patient
It sounds easy, but can be so hard for most of us to follow. It’s not just human nature that is driving you to decide on a home immediately. There are other forces at play, like all the marketing being thrown at you from mortgage brokers, real estate agents and builders.
We want instant gratification, but buying a home is such an enormous decision. If you make the wrong one, like I mentioned in rule number one, it can feel like going to jail. Making a wise decision requires patience.
The One Year Rent Rule
If you are being transferred to a new area that you aren’t familiar with, I recommend using what I call the one-year rent rule. Instead of buying a home right away, you need to rent for a year. This is important because there’s a lot you don’t know about the area, your job, and how you will live there.
For example, while living in Nashville, some friends of mine gave me a call. They were transferring from Colorado to Nashville and asked if I would assist them with purchasing a home. I advised them to wait and rent for a year. They resisted that idea because they wanted to be homeowners and renting felt like throwing away money for a year.
I told them that home ownership is the winner in the long run, but this is a new transition. Having never lived in Nashville they don’t know where they want to be in the city or what the traffic patterns are. They don’t even know if the job is going to work out. By being patient and renting for a year, they can take the time to look for what they want in the area that’s most convenient for them to live in.
Wait and Get to Know the Area
I didn’t represent them as an agent and they ignored my advice. They bought a home and it didn’t work out well for several reason. First of all, they didn’t like the area as much because it wasn’t close to new friends and their activities. Also, because of traffic patterns, her work commute, which should have been a twenty minute drive, ended up taking forty-five minutes.
They made the wrong home buying decision because they weren’t patient. They bought in 2007 and by 2008, real estate collapsed. As a result they were stuck in the home and couldn’t resell. Only recently did they finally sell their home. That’s how long it took to recover from that, and it was like a prison for them. The bottom line is you need to be patient.
Wait for What You Want
Even if you are moving within an area that you are familiar with, you still need to be patient. Don’t settle but wait for what you really want. There will be new properties that come along, so don’t assume that if you don’t see it now, it’s never going to show up.
My in-laws knew exactly what they wanted, but when we were looking it wasn’t available at their price point. I encouraged them to be patient and in the meantime we would do everything possible to find the right deal. In a booming market, two and a half years later, the perfect deal came up. We had an offer in as soon as it hit the market and they got a great deal. Be patient and wait for the right deal. Don’t buy into the lie that if it’s not available now it never will be.
Rule 3: Five Year Minimum
Homeownership only makes sense if you plan to live in the home a minimum of five years. If not, it makes more financial sense to rent in the short term. I have a great video on this subject called Should You Own or Rent Your Own Home. In it I share that in the long term home ownership really wins big. However, even in a healthy market, you have commission and closing costs when you resell. Those costs usually eat up any appreciation in the first couple years. Since renting tends to be a better deal financially, you need another couple years to outpace renting. This is why I recommend a minimum of five years.
Now, this is difficult to follow because statistically Americans tend to stay in the same home for an average of five years or less. That’s a problem because renting would be a better deal. However, if you are sure you are going to be there at least five years, now you’re in the strike zone. Then it is better to be a homeowner.
Rule 4: Don’t Build New
Building new used to make sense, but it doesn’t anymore. Over time more and more building codes have accumulated, making building new difficult and much more expensive than it should be.
Don’t Build New Residential
Recently, someone bought a vacant lot next to a property that I owned and built a home on it. When building they discovered a new flood zone code that ended up costing them $65,000 more than they budgeted. That included both the cost of the work and the materials for the new foundation, as well as the dirt to raise the house up high enough to meet the new code. It was a nightmare and they ended up moving in about six or seven months later than expected. When asked if they would ever build again, they said, “No, never again.”
Don’t Build New Commercial
Always buy existing, even if you’re a business owner looking for additional commercial property for your business. Existing structures were approved and permitted with earlier codes. Buying existing is really all about the government making it difficult to build new these days with more onerous codes.
Rule 5: No Brand New Areas
Do not buy a home in a subdivision that is being built out, or is in a section of town where there are subdivisions under construction. This is risky for several reasons.
First, buying a newly built home in a subdivision still under construction puts you in competition with the builder if you ever need to sell, and the builder will beat you every time. Even if your subdivision has been completely built out, they might put another development right next door. We’ve done a lot of deals as investors where the homeowner bought the property, then a couple years later they need to sell and can’t because they are unable to list it low enough to compete with the builder.
Buying in New Areas Can Lead to Lost Opportunities
I had a family member buy a newly built home in a growing subdivision. I advised against it, but he still did it. Because it was a new build he was able to do some custom upgrades. This is always a sucker play because they cost way too much and you never get your money back when you resell. Two years later, his spouse gets an unexpected job opportunity that requires them to move. He’s confident that that he doesn’t have to worry about resale because his house has upgrades and his development is finished.
However, directly across from his subdivision they’re building 2,000 homes that he had to compete with and he lost. They are still living there and she wasn’t able to take that great job opportunity, all because they didn’t choose wisely. Remember, it’s a lot easier to get in than get out.
Exceptions to the Rule
The question remains, what if these are the only homes available to you? I have a post called How to Better Understand Your Local Real Estate Market. You may want to watch it and get a better understanding of what real estate in your area is doing.
You might get away with buying a new build if it’s the last home in a newly built subdivision and there are no more developments being built. However, since that is extremely rare, I think you’re much safer buying in an established neighborhood. There you have a sprinkling of different aged homes and aren’t competing with the builder if you ever need to sell. This puts you in a better position not to lose money if you needed to sell before the five year mark.
Rule 6: Buy Below Your Means
Houses are so much more expensive than you anticipate. It’s all the expenses you have not calculated, like unexpected repairs and appliances that quit when you least want them to. You need to buy below your means because being a homeowner is far more expensive than being a renter.
Tips to Buying Below Your Means:
- It’s better to go with a smaller down payment and keep remaining savings as an emergency fund if you don’t already have one. You need to prepare for the worst as a homeowner because the worst may happen to you.
- Connect with a mortgage professional as early as possible. Learn what you can afford and compare that to what you are already spending. This enables you to go into the home buying process knowing the top price you can pay.
- In some areas to afford anything requires you to push it to your highest price point. I advise that you rent, building up your income and assets, and then buy a property that fits your needs.
- Beware of owning real estate with a homeowner association because that can also crush your means. You never know when they will tell everybody in the neighbourhood that they need to pay an extra $4,000 because the sewer system needs repair. I have a video you can watch to learn more on this subject.
Do not buy above your means because then you put yourself right back in prison again. You will end up owning a home where your entire pay check is going to your mortgage, taxes, insurance and maintenance.
Instead, buy below your means which will have a huge impact on what happens down the road. You won’t be stressing all the time just so you could live in that slightly bigger brand new built home in that brand new subdivision that’s ultimately just a bad idea.
Rule 7: Know Yourself
Know exactly what you want in your home, and then you can go about finding that. I have a great video on How to Get a Great Deal on Your Dream Home. In that video I share with you a technique that I’ve applied in my own life and teach my friends and family to do too.
However, it only works if you know exactly what you’re looking for. If your married, you need to come to some understanding of what that is. Be open and flexible, deciding what is mandatory, making sure you get what you absolutely need and then don’t worry about the things that you don’t. You need to look at a lot of houses, so you must be patient because it can take some time.
Consider Properties That Need Some Work
With such a shortage of properties at a more affordable price point, you might want to consider houses the need a little cosmetic work. You can apply to a loan program that will make funds available to you for renovations after you close. This may mean you have to wait a bit to move in, however you then have a remodelled home done the way you want. This all boils down to knowing yourself. Once you know exactly what you’re looking for, you can go after it and get it.