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Debunking a Few Home-Buying Misconceptions

The following is a guest post by Tali Wee of Zillow.com.

couple looking at a home to buyNavigating the home buying process as a first-time buyer can be confusing, risky or even defeating. Buying a home is one of the most expensive purchases buyers make in their lifetimes, so it’s vital they make informed decisions. Some common sense negotiating tactics don’t translate to the housing market, confusing even the savviest shoppers. Plus, risky strategies work well for some buyers’ circumstances but disadvantage others.

It’s important for buyers to do their own research before accepting rumors as truths. Here are a few common house-buying misconceptions.

Misconception #1: Buying a home is a quick process, especially in competitive markets.

It is possible to process home purchases rapidly when both the buyer and seller are rushing to close. However, closing on a home generally takes 30-45 days and first-time buyers typically take months to find homes they love.

Everyone can visualize their dream homes, so it’s tough to balance those ideas with the realities of affordable properties. In many cases, first-time buyers have smaller down payments, non-conventional loans and possibly lower credit scores which reduce the chances of their offers being accepted. It’s not uncommon for first-time buyers to be outbid before having their offers accepted.

Once accepted, sellers dictate the move-in date. Some buyers move in immediately after closing the sale, and others wait months depending on the agreement.

Misconception #2: Real estate agents lead the home-buying process.

Although real estate agents guide homebuyers through the steps of viewing and purchasing homes, proactive buyers truly lead the process. Buyers must actively locate homes within their price ranges and visit open houses regularly. In competitive markets, homes may transition from “listed” to “pending” status in just a couple of days. Agents with numerous clients can’t physically visit all of the available listings to capitalize on the opportunities.

The best way for buyers to succeed in competitive markets is to get pre-approved for a loan and obtain a real estate agent beforehand. When buyers find homes they want to make offers on, they contact their agents to draft the paperwork quickly. Buyers should actively search for listings online and sign up for listing alerts to know when properties enter and leave the market. The more homes buyers visit, the greater understanding they build of market value. Such knowledge advises buyers on how much to offer.

Misconception #3: Initial purchase offers should be low and negotiated higher.

Everyday negotiations indicate it’s better for the buyer to start with the lowest offer and negotiate up to a compromised purchase price. But when buyers give low offers on a home, sellers usually reject them. Buyers shouldn’t offer more than they believe properties are worth, but the initial offer should take into account the comparable properties and market value. Remember, buyers can reduce their offers after inspection to cover the costs of any repairs.

Misconception #4: Waiving inspections is a smart way to beat other cash offers.

In competitive markets, buyers sometimes waive property inspections to enhance their offers. Sellers prefer offers without the hurdles of home inspections, especially since buyers assume the risk of property damages. Without prior inspections, buyers might purchase homes with expensive repairs such as major water damage, sewer problems or structural erosion due to termites, rodents or mold. Therefore, it’s always smart to perform an inspection before purchasing a home.

Pre-inspections allow buyers to examine properties before making offers to avoid the risk, but still waive the inspection steps for sellers. After viewing a property, the buyer’s agent schedules a time with the seller’s agent to open the property for an inspector. Each inspection costs the buyer anywhere from $250 to $1,500 depending on location, size and age of homes. In competitive markets, buyers have an extremely limited window to schedule pre-inspections before making offers.

Misconception #5: Buyers should make the largest down payment possible.

Although large down payments reduce the total costs of mortgages for borrowers, it’s wise to reserve funds for additional home-buying expenses. Buying a home is expensive and financially-minded buyers exploit every money-saving opportunity. Larger down payments mean buyers borrow smaller loans, and therefore owe less interest. Plus, borrowers who apply down payments of less than 20 percent of the purchase prices of their homes owe private mortgage insurance (PMI). Lenders require PMI to protect their sizable property investments until borrowers own 20 percent equity. Homebuyers who avoid PMI with larger down payments do save money.

However, buyers should save enough to completely cover their closing costs and moving expenses. First-time buyers coming from small rental apartments or furnished spaces require basic furniture and utilities in their larger spaces. Plus, new homeowners take pride in settling in, which sometimes requires painting, planting a garden or accessorizing the kitchen.

Avoid the influential misconceptions surrounding the home-buying process. Buyers with the greatest success allocate at least three months for their home search, offer fair but sizable purchase prices, put at least 20 percent down and schedule a pre-inspection for their new home.

Editor’s Questions: How long did it take you to buy or sell a home? How effective was your real estate agent? Have you ever been burned by foregoing an inspection? How much money do you think a buyer should use for down payment…Is more better?

Next Post: The Final Destination Is Worth the Pain of Starting Over

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Comments

  1. Great article! This exposes so many of the misconceptions concerning purchasing a home. Real estate agents can be so beneficial to use when purchasing a home because they can inform you of different options and issues. Thanks so much for sharing this information!

  2. Cashville Skyline says:

    Great advice here! I purchased my home over 5 years ago and I was happy with the process. Regarding the inspection, it’s prudent to ask around to find a meticulous inspector. A real estate agent likely has a relationship with the person they use and they may not be as thorough as you need. Also, I regret not putting down 20%. PMI is brutal – $60 bucks a month! With an FHA loan, the value of the home is irrelevant and they make you wait until you reach a certain amount with the loan itself. I’ll finally be free by next June!

    • The real estate agent would be the first place I’d look for a referral to an inspector. We’ve been through several inspectors and have finally settled on a good one for the rental properties we purchase. You have to go into your house purchase with your eyes wide open and an inspector can help that happen.

  3. Cash Cow Couple says:

    This is great advice. We haven’t bought a home yet (only a mobile home that we paid for with cash) so it is good to get these misconceptions out of the way for when we do decide to buy.

  4. Brad @ How To Save Money says:

    I cannot imagine buying a home without an inspection under any circumstances. You would have to be nuts to take the sellers word about the condition of the house. I don’t care what the competitive pressures, with the amount of money you are investing in a home, you just have to have it inspected.

    • “…to take the sellers word about the condition of the house.” Right…no way I’m doing that. A good inspector is very detailed and can find things you wouldn’t otherwise know to look for.

  5. Shannon says:

    I think a huge misconception is around the timing people budget for when buying a home. As a financial advisor, when I had clients going through the mortgage process or re-fi process, I would always guide them on the fact that it would take a lot of time, energy and documentation. Lenders just require much more information than they used to and it is time consuming.

    • “…Lenders just require much more information than they used to…” For now they do. We will see how long that lasts. I have a feeling standards will lapse again the further away we get from the housing crisis.

  6. Good to know you shouldn’t lowball the initial offer. I’ve never bought a home so I know very little about the process.

    • “…lowball the initial offer.” It’s a good suggestion but I think it depends on your goal and the situation. Someone facing a foreclosure for example may be incredibly inclined to sell, even when offered a ridiculously low price. We lowball offers for rental properties because a) we are not emotionally tied to the property and b) we are trying to get a great deal. If they don’t go for it we simply walk away and wait for the next property. If they bite, then we’ve just picked up an incredible deal.

  7. I can see how skipping the inspection might seem like a way to save money, but I think that’s one of the most important steps and could save you thousands of dollars and lots of stress.

  8. John S @ Frugal Rules says:

    I don’t think I could ever buy a house without getting it inspected first, that would just post too much risk for me as you never know what the house has going on. Our agent was actually really helpful. She was referred by several family friends and she is the ultimate reason why we got the house we did as the selling couple was going through a divorce and one of their family members had also put money into the house so we had to negotiate with three different people who were all unhappy with each other.

    • We also got our current home from a couple going through a divorce situation. They were in a hurry to sell to settle the agreement and had dropped the price significantly. Bad situation for them but a good situation for us to walk into.

  9. Holly Johnson says:

    Ugh, I agree with these! Buying a home is a long process and you should never waive the inspection!

  10. It took us a couple months to buy our home, and our real estate agent brought us to homes but for the most part we told them which ones we liked from the automated MLS query they set up for us. I don’t see any reason to pay more on a down payment than 20%. It’s ideal to avoid PMI, but once you hit the level that avoids PMI I think leveraging low interest rates to invest more in the stock market is a better way to build wealth.

    • “…e told them which ones we liked from the automated MLS query…” That is what we do as well when we are looking to purchase our rental homes. And I agree…20% down to avoid PMI is a must. It’s worth waiting and saving that amount for a down payment.

  11. Natalie @ Financegirl says:

    I love misconception 2! I have a friend who just bought a home with her husband for the first time and they were really disappointed that the realtor didn’t tell them all this extra stuff to ask for. I felt bad because a little research would’ve prevented that.

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