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Is This Your First Time?
 Information for New Buyers
The joy of ownership
The steps in the process
Finding a property
The joy of ownership
A welcoming retreat at the end of a long day. A place to build your dreams. An investment in your future. Those are the joys you'll experience as a homeowner.
A home of your own:
Lock the door and the world goes away. Open the door and welcome all you friends. Paint the rooms any color you choose. Lay carpet to highlight the color of your cat. Hang a two-hundred pound painting on any wall. Or tear out the wall. Or move it. Or build a new one. This home is yours. It can grow and change as you do.
The investment:
For many people, home ownership is the largest and most successful investment of their lives. The value of a home typically grows over time, more than most other investments. And a home is one of the most secure investments available. It is an asset that always has value, and can always be sold.
Tax advantages:
Interest on your home is one of the few loan costs that is still tax-deductible. Other costs of maintaining and improving your home are sometimes deductible. In many instances, the capitol gain on the appreciation of your home is not taxable. Home ownership can reduce your tax liability today, and significantly improve your retirement assets.
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The steps in the process
To become a homeowner, you'll need to do most of this, in approximately this order:
- Arrange for a down payment.
- Select a realtor to work for you.
- Determine the size and type of home you need.
- Arrange financing.
- View a variety of homes.
- Make an offer, which will include an earnest money deposit.
- Work with your realtor to negotiate and sign a contract.
- Bite your nails for a couple of weeks while your realtor handles the inspection, appraisal, disclosures, etc.
- Arrange insurance, utility connections, and phone installation.
- Come to the closing with your down payment, and a well-rested writing hand for signing a lot of documents, under the watchful eye of your realtor.
- Take the keys, and open the door of your new home for the first time.
- Move. (Well, it can't all be fun.)
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Finding a property
There's more than price involved, though, when you shop for a first home. Location is critical. You want your first home to be in a neighborhood you'll enjoy, perhaps close to your job, or to recreational opportunities. You also want to buy a home that will be easy to sell in a few years. Sometimes a difference of a block or two in location can create a significant difference in the value of a home, because of things like traffic patterns, and adjacent zoning. Your realtor's experience is priceless in evaluating location.
Many people enter the housing market by buying a classic fixer-upper, a house that can be remodeled to significantly increase its value. That's a great strategy for people who want to do the work. There are some risks, though. Some houses in the low-priced end of the market may have serious defects, or may need extensive work. It's usually not a good idea to do so much work on a house that it becomes the highest priced house in the neighborhood; that puts an upper limit on the future value of the home. You will want to work closely with your realtor to be sure you don't risk your investment, or acquire a property that needs more work than you are willing or able to do.
You and your realtor may need to be patient, and look at a lot of properties, but together you'll find your first home. You'll love it!
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Real Estate Investment Strategies
Buy Low—Sell High
Every real estate purchase is an investment. If your property is your home, you may think of its investment value as a secondary consideration. On the other hand, you may be planning your home purchase as an integral part of your overall long-term investment strategy— or you may be purchasing a piece of property for rental or resale only, and never intend to live in it.
The fundamental idea of investment is simple—buy and sell for the most advantageous possible prices—but there are countless critical details that affect the success of an investment.
Buying for the right price
Selling for the right price
Buying to rent
Buying to restore and sell
Buying for the right price
The first step in determining the right price for a property is to determine recent selling prices of comparable properties. These comparative values may be available from public records, but your realtor can obtain them more easily, and in a more timely manner, through a multiple listing service. Determining which properties are truly comparable requires skill and experience. Some of the variables that affect the value of a property include: lot size, finished square footage, number and sizes of rooms, age and condition of structure, and location.
There are numerous components to these variables, as well. For example, evaluating the condition of the structure involves assessing such things as the soundness of the foundation, age and condition of the roof, and condition of mechanical equipment such as the furnace.
Many factors affecting the value of a property may not be readily apparent. For example, a particular property may have structural damage that diminishes its value, and has caused it to sell for a lower price than similar properties. That damage will probably not be shown in any publicly available records. Or a house may have an exceptionally well finished basement that has added to its value, but is not revealed in available information. If properties like these appear in a list of comparable homes, they distort the valuation of all the similar properties.
There are other things to consider in determining a fair price for a property. Unique features or structural defects of course affect value. Proximity to a freeway may increase the value, as long as the property isn't close enough to be impacted by the noise. Being close to shopping usually boosts value, but being too close to commercial property can significantly degrade value.
Today's value may not be the only consideration. The likely future value is just as important. Certain areas of a city may become highly desirable as a result of nearby business development, or overcrowding in adjacent areas. Public or private development in a neighborhood can substantially affect the future value of a particular property. For example, a new neighborhood school might cause a property's value to increase—unless the school will be built across the street, or on the next block.
Knowing the right price for a property and actually buying it for the right price are two different things. Ideally, you want to buy for less than the nominal value. One strategy is to simply offer a few thousand dollars less than the asking price for a property. That strategy can backfire, though. In a hot real estate market, higher offers may be made within a few hours of your offer, or a seller may simply refuse an offer that seems too low. In a soft market, a low offer may be less than the value the seller has invested in the property, also causing a rejection.
Buying for a low price usually involves viewing and evaluating a lot of properties, then moving quickly when an exceptional value appears. A home that has been poorly maintained may look worse than it really is. Its distressed condition may depress its price, and discourage many would-be buyers. But cleaning, painting, and some simple electrical or mechanical work may quickly restore the home's value. Such a home is likely to be an especially good investment as long as there are no major structural or mechanical defects.
The timing of your purchase is also important. Buying when the market is slow might help you buy for the best possible price. Talk to your realtor about the best time of the year to buy in your area.
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Selling for the right price
Be sure to read the article on Buying for the right price. Selling, like buying, starts with evaluating comparative values— and all the comparative considerations we've discussed with respect to buying still apply to a sale.
Of course, there are many things to consider in maximizing the selling price. Many people don't want to spend money working on a house just before they move out of it, and some expenditures will not return their value. However, judicious expenditures on certain items can return much more than the out of pocket expense. An experienced real estate agent can help you know what should be done, and what shouldn't.
Be guided by the concepts, "clean" and "pretty." Things which can be done at a reasonable cost, that make the house look like it has been well cared for usually pay off. Painting usually helps, especially if some of the existing paint is peeling, dirty, or discolored. Even a small spot of peeling paint significantly degrades the visual impression of a house. Rooms with mismatched paint colors also detract. Cleaning always helps. Of course, floors should be cleaned. Clean windows usually make rooms seem brighter and fresher. Consider small details as well—things like the top of the water heater, the outside of the furnace, and the inlet valves behind toilets and free-standing sinks.
Exterior appearance is also vital. The street view is the most important part of the first impression the house makes. Clean up yard trash, mow and edge the lawn, and trim hedges. Consider planting some fresh flowers. Take a look at the address numbers—they'll be one of the first things people see. Look for peeling paint on soffits and window frames.
Be careful, though, about concealing structural defects with plaster and paint. It is unethical and in some cases illegal not to reveal knowledge of defects in a property. It's probably a good idea to have a structural engineer examine any suspicious cracks before a property is placed on the market, and before any patching is done. A small crack in a wall is usually not a serious matter. Sometimes, even a large crack is not a problem, but it's a good idea to get a professional opinion, and divulge the findings to any potential buyer. Once you know the facts, its OK to plaster and paint.
Safety issues are also critical. Furnaces and water heaters are likely causes of safety problems. Again, a qualified professional inspector can give your furnace and heater a clean bill of health.
Another cosmetic consideration is the appearance of furnishings in the house. Many people assume that furnishings and personal effects don't matter, because they aren't being sold. Actually, they're very important, because they contribute significantly to the visual impression of the property. If you're moving because your house has gotten too small, it's probably too full of furniture and belongings. Consider renting a storage locker while you're preparing and showing your house. Pare the furnishings down to a minimum, and remove a lot of your personal items. Store all but two or three of the family pictures on the mantle. Put away all the books that are stuffed sideways onto the bookshelves. Hide that chair you love to sit in, that looks like it's seen better days. Remove any furniture that makes a room look crowded.
Some realtors actually keep a stock of furnishings on hand that show well in houses, and may advise you to store some of your own things and furnish with theirs while your house is on the market.
Timing is important when selling, just as it is when buying. Most markets have slow real estate seasons—in many areas, the winter. That's not a good time to be on the market if you have a choice. Selling at a peak time will usually put extra money in your pocket.
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Buying to rent
When you contemplate the purchase of rental property, you must consider gross income potential, maintenance costs, cash flow, appreciation potential, and tax consequences.
Paramount's article on taxes will give you some important information, but the key piece of advice you'll find there is to consult with a qualified tax accountant, and with your real estate agent to be sure you know all the provisions of tax law, and how they will affect you.
Most investors need positive cash flow. That simply means that the rental income exceeds all costs for things like mortgage payments, HOA fees, property taxes and maintenance. It's a good idea to write a business plan for the investment. Your real estate agent, your tax accountant, and possibly a real estate attorney can help you anticipate all the costs and contingencies. Be sure you don't overlook a significant expense. It's no fun to be paying money out of your pocket every month when you had planned on having extra income.
Setting the rental rate for a property is similar to setting the sale price for a home. The starting place is to analyze rental rates for comparable properties. The next step is to consider any characteristics, such as parking or amenities, which make your property more or less valuable than similar properties. Basically, a rental is worth what you can get for it. If you show a property for several weeks, and don't rent it, you probably need to reduce the rate.
Evaluating appreciation potential for rental property is no different from evaluating it for other property. Almost any property will grow in value over a long period of time. The key is to try to discover areas that will appreciate more than other areas. Your real estate agent's expertise is invaluable in reading trends.
Rental property can be a lot of work, but it can provide significant income, while it grows in value. The appreciated value of income property can be an important part of a retirement plan.
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Buying to restore and sell
Restoring and selling property can be a rewarding way to make significant income. Some property owners may be unable to do the work involved in getting a property ready for sale. Some buyers are also unable or unwilling to do fix-up work. If you have the knowledge and skill to rehabilitate a house, you can buy a property below the market value, significantly improve its livability, then sell it for full value. Everybody benefits.
To learn about this strategy, start by reading Paramount's articles on buying, selling, and taxes.
The one important difference between restoration and other real estate investment is that restoration is short-term. That may mean that more financing options are open to you. Interest rates are less important than with conventional financing.
When you do a restoration, it's important to carefully analyze what work should be done. Of course, any defects that affect safety must be repaired. Other things that impact the essential comfort and livability of the home are also essential. The low-cost cosmetic items, such as paint and carpet will almost always return your investment. Some of these things might be done by the sellers if the issues are raised during the purchase process. If the seller can't do the work, perhaps it can be financed by a sale-price reduction or other allowances.
Other questions require more thought and planning. Should you build a garage, install a new stove, or bathtub, or finish the basement? Should kitchen cabinets be restored? How about landscaping? Gutters? Roof? You want to do work that will increase the sales value of the property.
And who should do the work? If you're skilled at some of the building trades, you will probably want to do a lot of it yourself. Even if you're not a plumber or carpenter, you can do a lot if you're willing to buy some new tools (twist my arm!), and invest some learning time. Some specialized work, such as air conditioning repair is beyond most of us.
Many of these decisions, though, will simply be dependent on the time and money available. In many areas, a larger garage will return significant increase in property value. But if you don't have the funds available, or if you must turn the property within a couple of months because of financing, you may not be able to expand the garage. And you might be fully capable of doing both the plumbing and electrical work yourself, but may not be able to do both in the time available-so you will have to hire someone for one or the other.
This is your project, and you call the shots. Do a little more, or a little less. There's no right or wrong way to proceed, as long as you enhance the value of the property, and create a livable environment for the next owners. Your real estate agent's experience with valuing property can help you analyze many of your decisions.
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Taxes
Our first piece of advice for you is, "See your accountant." There are many subtleties and frequent changes in tax law—and real estate investment involves significant amounts of money. It's prudent to seek professional tax advice.
Owner-occupied property
The key tax provision relating to the home in which you live is this: if you have loved and lived in your home for more than 24 months, talk to us and your Accountant about avoiding Capital Gains taxes. Talk to your Paramount Broker, and to your tax accountant to be sure you understand what legally constitutes residency.
Investment property
There are also beneficial tax provisions available if you are buying and selling property to produce capital gains and rental income. The most significant of these is known as a 1031 exchange.
Please contact us for more information.
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Legal & Financial Details
Then there are the details. Your Paramount Broker knows exactly what to do in your real estate transaction, and when to do it.
Please contact us and we'll be glad to help.
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