Buying a home is the biggest purchase that most of us make. And while real estate can be a great investment, today I want to focus on the actual home-buying process and all the strategies and tactics you need to do it well.
This topic was inspired by a conversation I had for the podcast with real estate professionals David Greene and Rob Abasolo from the BiggerPockets Real Estate podcast (🎧Ep.121). We covered everything from finding deals and picking an agent to inspections and insurance.
So today, I'll share everything I can so you’re well-equipped to be a seasoned pro for your next home purchase.
🏠 Why buy a home?
Before diving into the home-buying process, knowing why you want to make this significant investment is essential. The type of investment (primary residence, an investment property, or a vacation home) changes the home you might seek and how you treat, manage, or run the property.
Fortunately, while there are a few exceptions, the home-buying process remains fairly standard, so this post be helpful for all of you. However, if you're looking for a vacation home, you'll love my post on the topic.
🤝 Finding the right real estate agent
Enlisting the help of a skilled real estate agent can make all the difference. A knowledgeable agent can guide you through each step, answer your questions, handle paperwork, and protect your interests. The best part? As the buyer, you don’t have to pay the agent, as the seller covers the deal’s commission (typically split between the buyer's agent and the seller's agent).
What to Look for
The first thing to look for in an agent is someone with a track record of selling many houses. Repetition does develop mastery.
The second thing is to look for an agent who owns real estate. Agents with personal investment experience have a unique perspective and can offer valuable insights others might overlook, like spotting bad neighborhoods, possible tenant problems, and poor floor plans.
The third thing is finding an agent that understands the financial aspect of real estate. Agents will typically lead with personality and likability. But being the nicest or friendliest does not mean they are the smartest. Agents who prioritize financial considerations can help you make intelligent decisions that align with your long-term goals. You want them to tell you about the important town considerations, how insurance might change in certain zones, tax aspects, and if the property could be a rental if you were to leave.
Finally, a great agent will make sure you have access to the right resources even after the home-buying transaction. Find an agent with a well-curated list of reliable vendors, such as trusted contractors, cleaners, landscapers, and other service providers, to help manage properties for personal use or investment.
Dual Agency
One tactic I've used for our past two home purchases is asking the sellers agent to represent me as well, something called dual agency. I don't recommend it for anyone who isn't very confident with the process and leading negotiations, but the advantage I've seen is that because the agent will get both commissions if you buy the property, they're definitely motivated to help you get the home.
So let's say the seller agreed to paying a 6% total commission split between two agents, meaning the sellers agent would get 3%. You could propose a dual agency deal, where the sellers agent reduces the 6% total commission to 5% and credits 1% back to you. That means you and the seller both get 1% back AND the agent makes 1% more – a win for everyone!
Note: dual agency isn’t allowed in all states.
📈 Finding value
Understanding your leverage is crucial. In a hot market with limited inventory and numerous buyers vying for properties, getting a discount may not be feasible. However, in less competitive markets, you can deploy various tactics to improve your chances of getting a better deal.
One approach is to target properties that have been on the market for longer. Sellers tend to have the leverage early on in the process. But this fades when houses are on the market for longer periods. Sellers may become more open to accepting offers they might have rejected when it was first put on the market.
A second approach is to look for properties with poor photos, need light renovations, or even have features that other buyers might overlook. David and Rob believe the best deals are homes with bad smells, ugly floor plans, or dated interiors that you can easily improve with a little effort.
Dealing with Hot Markets
In hot real estate markets with high demand, finding a suitable property before it becomes popular can be challenging but possible.
Building a solid network of realtors can help you stay informed about off-market or upcoming listings. However, you want to be strategic because contacting multiple agents and expressing interest in buying a home without a clear commitment can backfire. Agents may see such behavior as lacking loyalty, reducing their motivation to prioritize their interests. You don’t want to send the vibe of an “open relationship.” That said, it might work better in a cold market where agents do more work for a sale.
🔍 Due diligence process
The “window shopping” stage might be fun and exciting, but when it comes down to the offer stage, many people get stuck dragging their feet.
They need time to think about it.
It’s important to understand that submitting an offer is not a commitment to purchase the property. Most offers come with contingencies, allowing buyers to back out if they discover any issues during the inspection, appraisal, or loan process. It’s a perfectly reasonable strategy (with the right agent) to move fast on the contract, then slow down to do your inspections.
In competitive markets, some sellers may not accept offers with contingencies, but don’t let that deter you. There are strategies you can use to stay ahead.
- For instance, California law grants buyers seven days to review property disclosures once received, giving them time to decide without penalty. If the listing agent fails to provide the disclosures upfront, you get extra time to complete your due diligence - and you can back out without penalty.
- Another strategy involves earnest money deposit. David said there is no recourse for the seller to demand the money if the earnest money is not deposited and you back out of a deal. So if you’re a buyer, negotiate a longer period to put up your earnest money and use that time to do your own diligence/inspections. Or, if you have a seller that is a stickler with contingencies, try to negotiate for low earnest money. Put up the money, and if you change your mind, the worst-case scenario is just losing that lower amount. It sounds unfavorable, but it's better than buying a home you don’t want.
Inspections
A home inspection is a safety assessment of a listed property. It’s important to note that the inspector is an objective party to provide a professional evaluation.
As the buyer, use the inspection to negotiate changes to the offer based on the property’s condition. Sellers generally don’t want to make concessions, but buyers can always negotiate. Even with an “as is” listing, because it turns out “as-is” is a pretty flexible term.
As the seller, sometimes paying for a home inspection is a smart strategy before listing it. The report upfront can help persuade buyers to waive inspection contingencies, streamlining the process and making the sale more attractive. If you’re a buyer and encounter this strategy, you don’t have to hire your own because home inspectors are almost always neutral professionals. However, David and Rob suggest calling the seller’s home inspector to get additional information or perspectives on specific items, like:
- Is a stated issue common for homes like this or in this area?
- Does the issue concern you?
- When you looked at the house, what stood out most from the inspection?
Another thing David shared was paying attention to the sewer lateral connection in inspections. Older homes may have sewer lines running through the front yard that can become infiltrated by tree roots over time. This can lead to clogs and expensive repairs. Getting the sewer line scoped by a plumber before finalizing the purchase is crucial to avoid unforeseen expenses.
💰 Financing
When going through the financing process and getting pre-qualified for a mortgage, paying attention to your debt-to-income ratio (DTI) is crucial.
Lenders typically look at your DTI, the percentage of your monthly income that goes toward paying off debts. The preferred range varies depending on the lender, but a rule of thumb is a DTI below 36%, with 43% historically being the cap.
To calculate your DTI, add all your monthly debt payments, including credit cards, student loans, car payments, etc., and divide that by your gross monthly income. If your DTI is too high, it might affect the amount you qualify for when buying a home.
Hold off on opening new lines of credit for at least six months before purchasing a home to maintain a clean credit profile during the mortgage application process. Being mindful of your DTI can ensure a smoother loan approval and increase your chances of getting your mortgage’s best terms.
Mortgage Brokers
When securing a mortgage, you have two options: working directly with financial institutions or collaborating with a mortgage broker.
While institutions like Wells Fargo or Chase are popular, mortgage brokers offer distinct advantages.
- Brokers can access the same lenders but often receive better pricing because they compare multiple options.
- They can save you time by shopping for various loan products and negotiating on your behalf.
Their expertise and experience in navigating complex deals can be invaluable during financing.
Conforming vs. Jumbo
Conforming loans adhere to guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac. They meet the loan limits established for specific areas and have more flexible qualification criteria.
In contrast, jumbo loans exceed these limits and are used for high-value properties in expensive real estate markets. Jumbo loans have stricter qualification requirements, higher interest rates, and larger down payment demands.
Fixed Rate vs. Adjustable Rate
Fixed rate mortgage are fairly standard and it means your interest rate and payment amount won't change over the 10-30 year timeframe of the mortgage. However, given high mortgage rates right now, some individuals might consider exploring adjustable mortgages (ARM) where you can lock in a lower rate for a shorter period of time (1-10 years) and then the rate adjusts a new market-based rate after that.
It's a great option to get a lower rate if you don't think you'll be in the home for more than the fixed rate period (though if you're not going to be in the home too long, I'd argue it might make more sense to rent). However, the most common argument I hear from people getting an ARM is that their plan is to refinance the home to a fixed rate mortgage before their adjustable period expires.
However, weighing the risks and historical experiences with ARMs is essential. During the 2007-2008 financial crisis, many people with ARMs at the end of their fixed period experienced substantial rate increases, leading to unaffordable mortgage payments and foreclosure. Regulations now limit how much ARMs can adjust, but borrowers must still assess their risk tolerance and financial goals before choosing between a fixed-rate mortgage and an ARM.
Finally, while it might seem like current mortgage rates are high relative to the past few years, keep in mind that rates didn't drop below 5% from 1971 to 2008, so we might just be looking at the new normal.
Interest Only Mortgages
Another mortgage feature you could consider is an Interest Only mortgage, where you only pay interest the first ~5-10 years of the loan. After that period, you then start making payments for interest and principal. The upside is that you have a lower payment for the interest only period, but after that your payment goes up to something higher than if you had paid principal and interest from the beginning.
Now I probably have a contrarian take here, but I love interest only mortgages. Why? Because I wouldn't adjust my spending/savings based on my mortgage payment. Meaning that if choosing an interest-only mortgage meant a $500/mo lower payment, I'm not spending that money, I'm still saving it (it'd likely just go into my Wealthfront account). And because I benefit from the appreciation of my house at the same rate, whether I pay down the mortgage more or not, I'd rather save my money somewhere that it'll actually generate a return (aside from lowering my monthly interest payments, because I'm paying down the loan).
However, for as much as I'd prefer an interest only mortgage so I can invest in the market instead of into equity in a home I already own, there's two reasons we didn't get one (we have a 30 year fixed):
- The bank we got our mortgage from charged a much higher rate for an interest-only mortgage, such that it was no longer worth it.
- I couldn't find a 30 year interest only mortgage where it was interest only the whole time. I know I could have just refinanced after 10 years to another interest only mortgage, but we bought in 2020 and I wanted to lock in those rates for 30 years.
Down Payment
The down payment decision depends on your situation. For primary residences, FHA loans allow a low down payment of 3.5%, making them attractive for first-time buyers or those with limited funds. However, conventional loans usually require a 20% down payment to avoid private mortgage insurance (PMI).
Consider the opportunity cost of tying up more cash in a down payment. As interest rates fluctuate, the cost savings from a larger down payment may be less significant. If interest rates are high, a larger down payment could lead to substantial savings on your monthly payments.
📃 Home Insurance
I also recently hosted a podcast deep dive on optimizing your insurance policies, which was partially based on my newsletter post on insurance tips last year. Check them both out for more insurance information and to hopefully save some money.
I’m keeping a running list of hoe much money I've helped people save by repricing their policies, so I'd love to hear from you if you save some money. Just yesterday someone told me that episode is now saving them $15,000/year!
That said, here are a few actionable tips to navigate the world of home insurance:
Assess your coverage needs: Before selecting an insurance policy, carefully evaluate the coverage provided and consider the potential cost of rebuilding your home in case of a disaster. Some lenders and insurance companies may have minimum coverage requirements, but it’s vital to ensure you have enough coverage based on the cost of rebuilding your home.
Extended reconstruction coverage: To safeguard against rising building material costs or unexpected circumstances, consider adding extended reconstruction coverage to your policy. This add-on offers extra protection beyond the policy’s face value, ensuring you can rebuild your home without unexpected expenses.
Insurance in high-risk areas: Obtaining insurance can be more challenging and expensive in regions prone to natural disasters like wildfires or hurricanes. Before closing on a property, ensure you can obtain insurance at a reasonable cost and that it adequately covers potential risks associated with the property’s location.
Don’t assume bundling is best: While bundling home insurance with other policies may seem convenient, it’s essential to research and obtain quotes from multiple carriers to find the most cost-effective coverage for your specific needs.
Know your homeowner's insurance: Homeowners insurance covers damage or destruction to your home, loss or theft of possessions, personal liability for accidents on your property, and additional living expenses if your home becomes uninhabitable. Understand the coverage labels like Coverage A (main dwelling), Coverage B (other structures), Coverage C (personal property), Coverage D (loss of use), Coverage E (liability), and Coverage F (medical payments).
Documenting everything: Take a video on your phone, walking through every room and showcasing your possessions. Having this documentation will help ensure proper reimbursement if a covered incident occurs.
💵 Ways to save on insurance
Regarding saving on homeowners insurance, here are several to consider:
Consider your deductibles: Opting for a higher deductible can lower your premium, but remember that you’ll need to cover small expenses out of pocket. Reserve this approach if you only want to cover the significant/catastrophic issues, but you’ll also need to ensure you have sufficient funds in your emergency fund to handle any smaller incidents.
Explore discounts: Many insurers offer discounts for installing security systems, fire sprinklers, security cameras, and alarms that report to local fire and police stations. These safety features can reduce your policy costs by 15% to 20%. Additionally, some insurers offer affinity discounts for members of specific organizations or credit unions, so it’s worth checking if you qualify for such programs.
Comparison shop: Do your own research. Some insurers have quizzes about your home’s characteristics to streamline the comparison shopping process.
Remember, your home is more than just a physical space—it’s a valuable asset, and having the right insurance coverage ensures its protection.
✒️ The closing process
Lastly, I wanted to touch on the closing process. While we didn’t talk about this, it is an important part. And thanks to David and Rob, they covered this topic on another Bigger Pockets episode in January.
Here are some of the highlights:
In some states, using an attorney for the closing is standard, while others may opt for a title company. With modern technology, remote notary services have allowed investors to sign closing documents from anywhere, even while on vacation or at a restaurant. COVID-19 has also brought changes, allowing some transactions to involve the pre-signing of documents, with funds held in escrow until the official closing date. This flexibility has expedited the process and provided a smoother experience.
Before closing, conducting a final inspection or walkthrough of the property is essential, even if it has been vacant during the contract period. This inspection verifies that the property is in the same condition as when the contract was initiated, ensuring no unexpected issues have arisen.
During the actual closing, buyers should carefully review the closing statement. A reputable title company or attorney should provide the closing statement beforehand for review. The statement includes important details, such as proration of rental income and property taxes or rental income, if the property has tenants in place. Prorating ensures that both parties are fairly compensated for their respective periods of ownership and tenancy.
Familiarize yourself with all the fees involved in the closing process, such as filing fees, title fees, survey fees, and any other charges. Review the closing statement carefully to avoid surprises.
Another important consideration is that closing costs negotiated during the transaction might not be included in the initial paperwork submitted to the title company. Buyers must communicate these details clearly and confirm that the closing statement accurately reflects the agreed-upon credits and adjustments, whether they are lender credits, seller credits, or other adjustments made during the negotiation process.
To avoid last-minute issues, scheduling the signing of paperwork early in the day is advisable, allowing time to address any discrepancies and prevent delays. Human error can occur during the closing process, so vigilance on the part of the buyer is crucial to ensure accuracy and successful closing. If any discrepancies are identified, delaying the closing to address and rectify the issues is acceptable.
🔥 Rapid fire Tactics
Here are a few tactics I’ve learned from my experience buying two homes and a fractional vacation home with Pacaso:
- Get a second opinion - If an inspection raises concerns or reveals a costly concern, consider getting a second opinion to safeguard your investment.
- Find the priority - Whether the seller wants a quick sale, a nice family to live in their home, or the highest price, understanding their motivation allows you to leverage that one crucial lever.
- Ask about the items in the house you want to keep - Small wins can add up during negotiations. You might score free furniture or appliances they planned to replace, saving you money on new purchases. Or, in my case, a huge TV and five lime trees.
- Protect your privacy - Put in the contract that the seller should remove photos of your new home from online listings after the sale. Also, if privacy is an even bigger concern, consider purchasing the home through an LLC to prevent your identity from being in public records. If you want more tips on protecting yourself and your identity, check out my newsletter and podcast on the topic.
- Raise the price + add seller credits - If the seller doesn’t budge on credit for repairs, propose raising the price and having the seller provide a credit for the same amount. This spreads the cost over the mortgage term, easing your immediate financial burden, especially if you’re tight on capital.
- Keep all documents and property information in one place - A Google Drive folder is a simple yet efficient way to organize everything. Gather essential documents like pay stubs, tax information, and bank statements before applying for a mortgage. Having them readily accessible will streamline the pre-approval process with different lenders. Don’t forget to log all property improvements. This accurate record can lead to tax deductions when you sell.
