1903 N. Church St., $60,000, Nims Real Estate Group, Inc. to Regal Realty Group, LLC. 90 Clubview Place, $292,500, Bradley S. and Shaylon C. Grant to Terry

What are the most common mistakes that home buyers make?

Buying a house is a type of investing, so the common mistakes of investing also apply to real estate.

But in this answer, I’ll talk about mistakes specifically pertaining to residential real estate, based on a) my home buying experiences, b) studying others, and c) reading.

And these mistakes typically fall into four categories:

  • Financing & Finances
    • Overpaying based on irrational reasons
    • Taking out unnecessary mortgage
    • Buying a home that you can’t afford, especially without job security
    • Over-allocation of assets into real estate
    • Not taking transaction costs into account when considering affordability
  • Liquidity / Resale
    • Not buying a home with a view / low crime / good school district for a premium
    • Buying a home with extremely wacky / unconventional architecture
    • Buying a home with a terrible layout
    • Buying something in an up & coming area that will take 10 years to gentrify
  • Due Diligence on the Property & the Agent
    • Not checking comparable valuations with extreme anal-retentive-ness
    • Skipping inspection for single family homes
    • Not checking for pending assessments for condos
    • Not reading HOA documents in full detail for condos
    • Not getting a lawyer to read over title agreements & HOA, etc
    • Working with an agent who has too many clients
    • Working with an agent with no track record
    • Working with an agent who is overly pushy
  • Legal & Tax
    • Buying an investment property before primary residence
    • Mistakenly assuming you can deduct mortgage interest no matter what

+ Financing & Finances – Related

Overpaying Based On Irrational Reasons:

In real estate, it is very easy to fall in love for trivial reasons.

I have seen people pay $50,000 premium for a remodeled kitchen that probably cost $9,000 to do.

That’s why savvy real estate investors typically wait to remodel / refurbish right before sale.

They want to get you to pay extra for emotional reasons.

The stuff that typically get redone are a) kitchen, b) carpet, c) bathroom, d) counter-tops, etc. None of these are extremely hard to do it yourself. Most of the times, they are not worth paying extra $30,000 for.

Of course, it is okay to pay extra for nicer finishes, etc, but only within reason.

In any investing, most of the money is made at the time of purchase.

In other words, the price you pay for the house will directly dictate how much you make / lose on the house.

Taking out unnecessary mortgage when you can afford to put down a bigger down payment

It blows many people’s minds, but it is not always favorable to take out a mortgage.

Mortgage is not free money! (to state the obvious)

The interest rate % on your mortgage is the interest you will have to earn / do better than.

For example, if you take out a 15 year mortgage at 3% and do absolutely nothing with the money (and even worse, lose it in the stock market), you are worse off by taking out the loan.

On the other hand, if you paid in cash, you are effectively earning the full imputed yield on your investment.

Buying a home that you can’t afford, especially without job security

Remember, affordability is not decided by your mortgage officer.

Only you can decide whether you can afford a place or not.

Even if you have a job & income, you may be uncomfortable about your future prospects.

If so, don’t take out a big loan when there are layoff rumors at your company / during recessions.

Over-allocation of assets into real estate

If your net worth is $300,000 – let’s say – it doesn’t make sense to use all of it as a downpayment to a $500,000 home.

In the above example, your allocation to real estate will be 166%!

Think about what your nest egg’s allocation will be post-purchase prior to doing anything crazy.

Not taking transaction costs into account when considering affordability

A lot of homes look like great investment opportunities.. until you take into account the transaction costs.

Big transaction cost items that people forget about are: a) resale commissions b) title transfer fees c) mortgage fees d) extra insurance e) potential future assessments / charges / maintenance costs f) vacancy costs

+ Liquidity & Re-sale -Related

Not buying a home with a view / low crime / good school district for a premium

You should always think of re-sale value prior to purchase.

Good attributes like higher floors, low crime, good school, etc, can make it much, much easier for you to sell the place.

For example, it can take much longer to move an unit with no view versus one with a view.

If that ocean view comes at a reasonable premium, take it.

Buying a home with extremely wacky / old / unconventional architecture

Thinking of buying a condo in that turn of the century building?

Thinking of buying a rainbow colored townhouse?

Remember, not everyone shares your tastes.

Buyers beware.

Buying a home with a terrible layout

Does your dream condo have a living room split into two small dens?

Is your condo shaped like an S?

Is your bedroom in between your kitchen and the living room?

Terrible layouts obviously come at a discount and are harder to sell.

Buyers beware.

Buying something in an up & coming area that will take 10 years to gentrify

In the Bay Area, people often tout Oakland as a great real estate investment opportunity.

But here’s the problem: you may not enjoy living there.

Gentrification takes time.

People have been saying Harlem as the next great opportunity since the 80’s.

Thirty years later, Harlem’s price appreciation has nothing on that of better areas in Manhattan.

+ Due Diligence – Related

Not checking comparable valuations with extreme anal-retentive-ness

Understand all the comparables in the neighborhood.

Ask your agent to pull up all sales within the past 6 months and hand it over to you.

Analyze them on a per-sqft basis, per building basis, block-basis, etc.

Reduce it to a number.

Skipping inspection for single family homes

There’s simply no excuse for waiving inspections, especially on single family homes.

Don’t get surprised by a septic problem 3 months into the move.

If you skipped inspection, you deserve to pay the $50K to fix that problem.

Not checking for pending assessments for condos

Make sure it’s crystal clear that there are no pending assessments for condos, and if there are, that the seller is paying for them.

Not reading HOA documents in full detail for condos

Does your HOA have less than $100K left in the bank?

Does your HOA strictly forbid renting?

Does your HOA forbid you from having guests?

Don’t find out after purchase.

Not getting a lawyer to read over title agreements & HOA, etc

HOA docs can be 200+ pages long.

You won’t have the time to read through everything.

Just pay a little extra for a trained eye to sign off on it.

Working with an agent who has too many clients

An agent who has 100+ clients won’t have the time for you.

To him, you’re just a number.

Don’t make him your buyer’s agent.

Working with an agent with no track record

On the other spectrum, don’t work with an agent who got his license 8 months ago.

He simply is too green to help you maneuver around the jungle.

Working with an agent who is overly pushy

Pushy agents are the worst, because they can amplify all your emotional weaknesses that cause stupid financial decisions.

It’s like having a financial advisor that always pushes you into the latest growth stocks that you have no business investing in.

If your agent is constantly pushing a lemon, it’s time to chuck him/her.

+ Legal & Tax Related

Buying an investment property before primary residence

Primary residence has additional tax benefits that investment properties don’t.

Don’t rush into buying a home if you don’t plan to live in it.

Mistakenly assuming you can deduct mortgage interest no matter what

If your standard deduction is larger than your deductible portion of mortgage payments, there’s less tax benefit of mortgage loans.

+ Epilogue

These about sum up the biggest mistakes you can make when purchasing homes.

Remember, buyers beware.