Monday, September 7, 2020 / by Ken Couture
Shopping for your first house is stressful enough, but when you're finally ready to be a homeowner and the pickings are slim, the process can become a roller-coaster ride of hope and fear.
"Buyers walk in a home and say, 'This is it!' Then, they see all the business cards [from other agents] on the table and start panicking," says Georgia Stevens, president of the Seattle King County Realtors and managing broker of the Compass Washington agency.
Today's housing market is red hot, with homes getting multiple offers and selling above list price in many cities. Sixty-eight percent of U.S. homes sold in July were on the market for less than a month, and the median existing-home price was up 8.5% from July 2019, according to the National Realtors Association.
In conditions like these, it's natural to worry about losing out to other buyers. But the bigger danger is letting a scarcity mentality hijack the process, luring you to overspend or settle on a house that you'll regret buying later. Here's how to keep a cool head as a first-time home buyer.
Start with an authentic budget
Get on solid financial ground from the beginning. Figure out how much home you can afford, and get preapproved for a mortgage before looking at homes. A mortgage preapproval is an offer from a lender to loan you a certain amount under specific terms. Without one, real estate agents and sellers won't take you seriously, and offers from preapproved buyers will likely be accepted over yours.
Decide on a price range based on both how much you can borrow and your budget, making sure to give yourself room to breathe.
"I always caution borrowers not to stretch for a home, and to establish a realistic budget that will afford a financial cushion for the future," Scott Lindner, national sales director for mortgage lending at TD Bank, said in an email. "This is even more important in the current uncertain environment."
Learn what to expect before you shop
"It's all about preparation," says Alicia Holdaway, president of the Salt Lake Board of Realtors in Utah and an agent with Summit Sotheby's International Realty.
Before she shows buyers any homes, Holdaway walks them through a real estate contract and explains all the terms and what may be negotiated. Together, they discuss the risks of making specific concessions, so the buyers can decide the terms they feel comfortable with.
"Right now, the emotion is lowest and logic is highest," she says. "As soon as we look at homes, those are going to swap."
Work with an experienced real estate agent who can guide you through decisions before you get swept up in the love for a home and the drive to win, Holdaway advises. Then, when you're making offers, your agent can help you stay grounded.
"It's so important that buyers work with somebody who can stay steady," she says.
Be firm on your needs, flexible on the rest
Think deeply about why you want to buy a home, says Josh Harris, a certified financial planner and lecturer in finance at Clemson University. Use those reasons to help distinguish between the features you need and the amenities that would be nice to have.
Then, be picky about the must-have items, Stevens says. She tells of clients who recently were tempted to settle for a home with a defective floor plan — there was no shower upstairs with the primary bedroom. Stevens had her clients walk up and down the stairs and imagine doing that every morning to shower and get dressed. They decided to keep house hunting.
Be willing to compromise on cosmetics you can change and amenities you don't need. Sometimes first-time buyers expect homes to look perfect, says Stephen Medeiros, president-elect of the Massachusetts Association of Realtors and an associate broker at Keller Williams Realty in Dartmouth.
Remember, you can repaint, scrape off wallpaper and change things like flooring and countertops. That's what Medeiros did when he bought his first home. Years later, after improving it and building equity, he sold the house for a profit and bought a nicer home.
"A house may not be HGTV-ready, but it can be something that can be improved over time," he says.
Don’t let negative emotions get the upper hand
It's natural to feel anxious and frustrated sometimes when you're house hunting. Just don't let those emotions take over.
Anxiety can lead you to rush into bad decisions or get stuck and make no decisions at all, says Harris, who is on the board of the Financial Therapy Association. Take a break to get some perspective when you're feeling anxious. Confide in a friend who's outside the homebuying process, and get a reality check from your real estate agent.
Pace yourself to prevent frustration. A common first-time home buyer mistake is looking at too many homes, Holdaway says. That gets exhausting and can lead buyers to make decisions just to get the process over with.
"They're sick of looking, and they say, 'I'll make it work. I just need a house,'" Holdaway says. Narrow the homes you visit to those that meet your budget and criteria.
Stick to your price range and priorities
There are many concessions you can make to win over a seller. They range from low-risk measures, such as being flexible on the closing date, to high-risk moves, such as waiving the right to request repairs or to back out of the deal depending on the home inspection results. The hotter the market, the more concessions buyers are under pressure to make. Be sure you understand the risks, and don't waive any protections you can't afford.
You may have to offer above the list price to compete in some markets, but make sure that offered price is still within your budget. Look beyond the bidding war to the years you'll spend repaying the mortgage.
"You don't want to live for your home," Medeiros says.
Sticking to your budget may mean you'll lose out on some homes. But that's OK.
"There's always another great house," Stevens says. "This isn't the only one."
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