Feb 2023
Friends,
This month’s mailbag is all about first-time home buyers.
But even if it’s not your first rodeo, stick around and you might pick up a few helpful tips.
A quick word on the current state of the local housing market…
Demand has continued to outpace supply, which has swung the pendulum back to being a seller’s market. As of today, there are currently 53 single-family homes and 48 condos/apartments for sale in Ann Arbor. For a city with 121,000+ residents, that’s a lean inventory. This bottleneck has led to a return of “highest and best” offer deadlines for coveted listings after a single weekend on the market.
What does that mean for first-time buyers?
Keep scrolling to find out.
Joe,
In most cases, I would recommend starting the early stages of the process as early as 12-18 months out. This is the time to make a game plan and get your ducks in a row. When it comes to actually previewing properties, I recommend giving yourself about 4-6 months to get an offer accepted and close on your first house.
With inventory so tight in the current market, being prepared and decisive is the name of the game.
Here are the following steps for first-time buyers, and the approximate length of time each one takes.
Step 1: Meet with a local lender and get pre-approved for a mortgage
1-3 business days
Step 2: Meet with a realtor to answer all your questions and walk you through the home-buying process
1-2 cups of coffee at Hyperion (my treat)
Step 3: Learn the Market / Get an Offer Accepted
2-8 weeks
Step 4: Home Inspection
Within 7 Days of Offer Acceptance
Step 5: Appraisal / Mortgage Approval
2-3 Weeks After Offer Acceptance
Step 6: Final Walk Through / Closing
4-5 Weeks After Offer Acceptance
Denise,
Taking the leap from renting to home ownership can be a daunting one. That being said, I’ve never met someone who said “I wish I would have rented for a few more years before buying.”
While there are some upsides to renting, the long term downsides are glaring.
Not only does renting yield zero return on your investment, there is a 99.9% chance that leases will continue to rise every year. A conventional mortgage means securing a guaranteed monthly payment for the next 30 years, and building equity in an appreciating asset.
Renting also means that you are handcuffed to your lease agreement for 12 months at a time, and can’t even paint your bedroom or build a fire pit without landlord approval.
Now let’s talk about the elephant in the room that intimidates most first time buyers:
how much money do you need for a down payment?
Spoiler alert: it’s probably less than what you think. This brings us to step 1 of the home buying process:
Meet with a local lender to get pre approved for a mortgage.
This is critical for two reasons:
This will give you clarity on how much house you can afford, and what kind of down payment, monthly payment, closing costs, and interest rate to expect. Even if you find out that it’s not the right time yet, you’ll walk away with a plan.
Unless you are paying cash, a pre-approval letter is a pre-requisite when submitting an offer on a house. Without that letter, your offer will not be considered.
The application process is relatively painless and saves you a lot of time and stress when you are ready to make an offer.
One important note on getting pre-approved:
Using a local lender truly strengthens your offer, and might give you the edge in a bidding war. Why? Online mortgage lenders might seem like less of a hassle and advertise “too good to be true” rates, but their loose application process yields shaky results at closing, causing a red flag for many sellers reviewing offers.
Craig,
Someone’s done their fair share of reading between the lines when it comes to listing descriptions.
It is human nature for buyers to walk through a listing and instantly start deducting from the asking price with every defect or questionable wall color. In some cases, these calculations are justified. However, most listings are priced with these known expenses in mind. In many cases, sellers don’t have the time or resources to fix up their house before selling, and price accordingly.
That being said, there are some highly useful formulas out there to determine a fixer-upper’s estimated value. My team uses a sophisticated table that takes into account any cosmetic, structural, or mechanical updates needed, and uses more turn-key comps as constants in the equation. This gives our buyers some data to lean on before making an offer.
The X-factor to consider is how much “potential” ( to borrow another overused buzzword in real estate) the house has for you personally, and how it stacks up to your other options in the market.
Here’s my advice to anyone considering a house that “needs updates.”
Make a list of all the repairs needed and the estimated cost for each project
Be honest with yourself about how comfortable you are with power tools and learning from YouTube videos
Hire professionals for the big stuff. Going the DIY route is honorable, but the peace of mind and resell value will trump the money you save on the front end
At the end of the day, the true market value of a home is what someone is willing to pay for it. In other words, beauty is in the eye of the beholder.
Question for Next Month’s Mailbag?
Wes,
This is the question I get most often with first time home buyers. I am prepared for this one.
Especially in the early going, I recommend using a cheat sheet like this one that I made for my clients.
In terms of short / long term planning, it’s important to consider the following things:
Is this a wise investment in terms of appreciation?
Am I going to outgrow this place too quickly if I start a family?
What re-investing will I have to do if I stay here long term or before selling?
Colleen,
Winning a bid with love letters to the sellers is an urban myth.
Truth be told, many listing agents refuse to present them to sellers as it opens the door to potential discrimination. If a seller chooses a buyer based on demographic information provided in a letter, this could be a violation of the Fair Housing Act.
Other than offering the most money for a house, have your realtor find out what is most important to the seller. The listing agent will not be shy if there are contingencies that will move the needle. They might say one of the following…
Cash is King. This eliminates the need for mortgage approval/appraisal, and ensures a speedy closing. In a 2021 survey of Zillow agents, this was the #1 deal sweetener listed
Escalation Clause. Hedge your bets by agreeing to increase your offer in increments of $1,000 - $5,000 higher than the competition, while setting a cap on the max you are willing to go.
Offer Occupancy. If the sellers need to find a place to live, you can offer either free or paid occupancy for x amount of days after closing.
Use a Local Mortgage Lender. Listing agents know that local lenders are able to close faster, have a better understanding of the local market in terms of appraisals, and are more rigorous during the pre-approval process. Stay away from online lenders.
Guarantee Covering an Appraisal Gap. If you are bidding well above the asking price, you might consider agreeing to cover some or all of a potential appraisal gap to ensure the financing is approved. This is a route I only recommend to buyers who plan to stay in the house long term and let it appreciate in value before selling.
Do not waive the inspection. If you are looking for an edge in this department, you can agree to waive the right to negotiate defects under $5,000 - $10,000 or make it a red light / green light altogether.
What’s going to be in next month’s mailbag?
Submit your mailbag questions here.
