The MOTHER EARTH NEWS editors' guide to buying a home with land
Whether it's an acreage hidden in the hills or a townhouse in the middle of a bustling city center, most of us are searching for a special place we can call home. We devote immeasurable hours imagining what we want, but may not know exactly how to find it and buy it. When a perfect Craftsman bungalow or spring-fed five acres finally does appear, we need all the advice we can get about how to make the wisest possible purchase. After all, buying a house or buying a home with land is certainly one of the biggest single expenditures most of us will ever make. And once you've bought it, there are no refunds or exchanges. It only makes sense to be cautious and know as much as possible before you buy.
First, forget the Joneses and home in on what you want — and what you can afford. Be realistic and you won't be disappointed. Examine your budget and figure out exactly how much money you can comfortably invest. Most people borrow money to buy a house, and most loan agencies will require you to pay at least 5 percent down in cash. They usually will loan you an amount that results in monthly payments between 27 percent and 33 percent of your net income, depending on your debt-to-income ratio, which they will help you determine. If you expect to apply for a loan, now is the time to amend a poor credit rating or establish your credit history. These factors determine how much interest you'll pay and what kind of down payment the bank will require. And don't forget to consider closing costs, inspections and miscellaneous expenses, which usually add at least a couple thousand dollars payable at closing.
If you're planning to buy undeveloped land, you should expect to pay at least 20 to 50 percent down in cash. Interest rates for a loan on the remaining 50 to 80 percent probably will be higher than for home loans.
When you're ready to buy, shop around to get the best bank loan terms you can. Credit unions may offer competitive rates and usually are easy to join. Mortgage companies have become aggressive, creative marketers for loans.
Check with your lending agency about obtaining pre-approval for a mortgage loan, so you're confident of what you can afford.
How Big the Home Mortgage?
A lot of people fantasize about paying cash for a home. True, you can't beat the security of knowing that you own your place, free and clear. However, keep in mind that the interest you pay on your home is fully tax-deductible. You may be better off, financially, investing your bankroll and mortgaging the house.
Most of us buy as much house as we can afford. For that reason, we often end up with a 30-year mortgage on 95 percent of the home's value. But an unexpected change in your ability to make loan payments could put you in dire straits if you've borrowed as much as you can afford. Even in active markets, homes may take months — or even years — to sell. When you can't make the mortgage payment, those months move agonizingly slow.
You may want to choose a less expensive home, and put down a higher percentage of the home's value up front. This lets you avoid mortgage insurance, a big hidden expense that is often required on mortgages above a certain percentage of the home's value. And it offers no benefits to the buyer — it only protects the bank! If your credit is good, your banker may be willing to supplement your mortgage with a home-equity loan (essentially a second mortgage), thereby avoiding the cost of mortgage insurance.
An added benefit to home-equity loans: If you're buying an expensive home worth more than, say, $300,000, you may be stuck paying higher "jumbo" interest rates. A home-equity loan could bring your mortgage balance below the limit, and secure a cheaper rate. And the interest you pay on home-equity loans is generally tax-deductible — just like your mortgage.
If you expect your income to drop within the next 15 years, you might prefer a higher monthly payment now and a paid-off home in 15 years. If you think you will retire in that period, your income may decrease to a level where the mortgage-tax deduction isn't that beneficial. Many banks offer 15-year mortgages at rates preferable to those on 30-year mortgages.
Remember, though, if you are going to have debt of any kind — car loans, revolving credit, whatever — you probably want to secure it with your home. You'll generally pay less interest, and the interest will be deductible.
Or if you decide not to be tied to a loan, read Rob Roy's book, Mortgage Free, which offers sound steps to financial freedom.
To Agent or Not to Agent
A lot of us idealize the "handshake deal" between two trusting, like-minded individuals. Nothing can spoil that vision quicker than a property-boundary dispute or toxic runoff from the neighbor's manure containment. Many real estate deals self-destruct before the papers are signed, just because communication breaks down during negotiations.
If you're a seller, you may want to hire a lawyer and put together your own transaction with a buyer. It can be a lot cheaper.
But if you're a buyer, there's not much logic in avoiding the real estate specialists. In fact, with the way the business works these days, you should probably start your search for a home with a trusted "buyer's representative" who is a licensed real estate agent. Their fee will likely come from the commission paid by the seller.
Here's what an agent can do for you:
- Access the multiple-listing service in your area to give you the widest possible choice of properties.
- Share expertise regarding valuations and locations, schools, amenities and other important background.
- Share experience of other deals, and help you make the right moves in negotiations.
- Negotiate directly with other real estate agents, who probably have a lot more experience than you do.
One important no-no: If you find a house and don't already have an agent, do not let the seller's agent select a buyer's representative for you. Interview some real estate agents and choose your own, based on your personal rapport.
Nine Steps to Success
- Know your budget and stick to it. Even if you've pre-qualified for a certain amount, you don't have to shop for a house or property that meets the loan's maximum. It's better to be conservative.
- List your "needs and wants," such as square-footage requirements, lot size and proximity to work. Your budget largely will determine your choices; prioritize your list and be prepared to make some concessions.
- Check weekly for new listings. Most real estate firms have Web sites and are multi-listed, enabling you to search all available home and land listings in a particular area. Read the local newspaper for new listings and open houses. The more you study the market, the better idea you'll have about what's a "fair price." Don't depend solely on your agent.
- Get the listing sheets for any houses you are interested in, and check each listing against your "needs and wants" list. Besides giving you the property's pertinent information, such as lot dimensions, room sizes and the age of the house, the listing sheet also may tell you how long the property has been on the market, which may give you some bargaining leverage.
- Get the seller's disclosure sheet for each property you visit. In many localities, a seller must fill out a multi-paged disclosure sheet, assessing the house from foundation to roof. If a disclosure sheet is not required by law, ask the sellers to complete one anyway. Although not as reliable as an independent inspection, seller's disclosure sheets are very useful tools for determining any current deficiencies known to the owners. If you purchase the house and then discover a defect that the seller should have acknowledged on the disclosure sheet, have your real estate agent address the issue.
- Make an appointment to view the property. Take a friend along to help you make an objective examination and spot any existing or potential problems.
- Take notes. Viewing prospective properties is both energizing and exhausting. You may think you'll remember every unique feature of each property, but after viewing even a few, most people can't keep track of all the pros and cons unless they take notes. Take the listing sheet and disclosure form with you to each property and jot down your observations directly on the listing sheet.
- Make sure to view the properties during the day, when you can thoroughly inspect property boundaries, the house exterior, etc. When you're perusing a property, also request the owner not be present. It's much easier to poke in closets and cupboards and ask questions of the real estate agent without the home owner on site. A house may look great with fresh paint and new carpet, but any potential long-term problems will be hard to detect. Check out closets and cupboards, under the sink, behind the furnace, in crawl spaces and attics. Flush the toilets and run the faucets. Open the windows. Look for leaks and cracks.
- Most importantly, ask lots of questions. You need to learn as much as you can before you make an offer. For major concerns, get the answers in writing. If it's a property on which you want to make an offer, don't hesitate to visit it several times. Besides inspecting and reinspecting the property, spend some time walking and driving around the neighborhood and chatting with neighbors. Visit at various hours of the day and during different days of the week. Investigate the zoning around the property, especially if it sits near undeveloped land. That sweet wildflower meadow that lies behind your dream house may be slated to house an industrial hog farm.
Wheeling & Dealing When Buying a Home
Buying a house involves more than just offering a certain price and having it accepted. Only part of the offer is about the price. The rest of it relates to inspections, repairs, and what is or is not included with the purchase of the house. When you're ready to make an offer, you should have a real estate agent representing only your interests (a "buyer's representative"). If you're negotiating a private transaction, consider retaining an attorney. Remember: Buying a house is the largest single investment most of us ever make. Better safe than sorry.
If you find what you think is your perfect property, beware of becoming too enamored with it. Be ready to walk away from a deal that doesn't meet your needs. Remember that you're in control: Set the terms the way you want them.
Before your agent writes up your offer (your realtor will provide the appropriate paperwork), ask for copies of any prior house-inspection reports that were done. If none have been done, we strongly recommend that you make your offer contingent on a whole-house inspection: At $150 to $500, it is well worth the investment. An independent contractor will inspect the house and provide you with a written, detailed report on the house's structure, roof, wiring, plumbing, foundation and windows. Consider including a clause in your offer stipulating that the seller must pay for any necessary repairs exceeding a certain amount. Even if no major problems are discovered, you'll learn a great deal about the home when you review the report with the inspector.
Not everything is covered in most "whole-house" inspections. Other specific inspections, such as termite, chimney, well or septic, should be negotiated with the seller, and should be stipulated in your offer to purchase.