Are you thinking of buying a home for the first time but are paralyzed by fear with all the things that could go wrong on what will conceivably be the largest purchase of your life? Maybe you have bought a home in the past and are now looking to upgrade, downsize, or relocate. You might even be an experienced homeowner with multiple purchases under your belt and think you are well-versed in what it takes to get a deal done. No matter which of those groups you fall into, chances are there is still an aspect or two you could improve upon to get the best deal on your next purchase. The real estate landscape is significantly more challenging to navigate than it was in the past, and the mistakes are more costly than ever.
So, what are the top 7 mistakes buyers make in real estate? Let’s take a look at these in no particular order:
Letting Emotion Supersede Logic and Reason
Buying a home is an emotional process. After all, this is likely to be where you spend a significant portion of your life or at least the foreseeable future. Emotions can control our decision-making process in multiple life areas, but as the price and impact of those choices increase, there is more at stake. You might get lured into purchasing the newest designer handbag because your colleague making the same (or even lower) salary than you bought it just so you feel on their level. One morning you wake up to see a new BMW in the neighbor’s driveway and decide you don’t feel right parking your Honda next to them and go out for a Mercedes upgrade.
What is the difference between poor emotional decisions in those instances compared to real estate? Well, the handbag should not put you in a financial dilemma every month when it is time to pay. If you run into financial hardship, you can always sell it on Amazon or Ebay to recoup some of the money. With the car purchase (or lease) you will have the monthly strain, but the end to those payments is generally only 3 – 7 years in the future, whereas a mortgage on your home will be 10 – 30 years. Depending on your geographic location, the cost of a real estate transaction can be substantial, thus making it difficult to sell quickly without taking a significant loss on your initial investment.
I always tell my clients that no one can sell anyone a house. The price tag is way too high, and individual tastes vary too widely for even the best salesperson to sell you on something you do not love or cannot afford. However, a buyer can quickly become their worst enemy when they stumble upon what appears to be the home of their dreams and caution is thrown to the wind trying to secure it above all others. Even in the most competitive seller’s market, it is unwise to put more power in their hands by letting them know you will do anything to make it yours. That is not to say you should not share this information with your real estate agent so they can guide you accordingly on the best way to structure your offer. Just be careful not to make it obvious to the homeowners or listing agent, either of whom may be present when you tour the home.
This one mainly applies to owner-occupied real estate and not investment properties (unless the investment is profitable enough to not risk losing because of pennies on the dollar). With that said, I am sure plenty of folks are reading this with some skepticism. After all, the goal is always to get the best deal possible, right?
Yes and no. Think back to the excessive emotion we just spoke about. You can work on controlling your emotions but always keep in mind there will be emotions on the other side of the transaction too. Depending on how long the seller has lived in the home, there are infinite emotional attachments at play in negotiating what their home is worth. The births of children, celebrating holidays, and other significant life events will all factor into what they perceive the value to be. And while that does not and should not impact true worth, how you handle that conversation can make all the difference.
If you’re thinking this is just a bunch of touchy-feely theory and not the reality of the real estate world, I’ve witnessed it happen – multiple times. To be clear, there is a difference between making an offer a few thousand dollars below the asking price because of issues with the property or a financial constraint, but do not throw around offers that are hundreds of thousands below the asking price with the expectation of having a civil dialogue. One of my clients was fortunate enough to recover from offering 900k on a 1.1mm dollar home after the seller refused to negotiate with him again. But that came at the cost of spending 1.2m. Another client was not so lucky when offering 300k for a 450k condo where the owner did cease negotiations entirely, even after his offer came up to the original asking price. The result from that one is more of an exception than a rule, but the seller was so offended she chose not to sell the property at all – and a year later, it is still off-market.
Balance your need to drive a hard bargain with your desire to make the home yours. When in doubt, take the hard bargaining to the car dealership. At least they will not get offended, and if they do, you can buy the same car in plenty of other places.
This topic falls somewhere between being too emotional and driving a hard bargain. When buying real estate, certain processes and procedures are in place to protect all parties involved – mainly the buyer, seller, and any mortgage company. And while buyers taking the risk in waiving some or all of these is not a new thing, the unprecedented seller’s market brought about by the pandemic has given rise to a much more aggressive use of this strategy as buyers try to differentiate themselves and prove they will be the least risky option.
The first and most common contingency buyers will offer to waive to get a leg up on the competition is the home inspection. A qualified home inspector is someone who works for you in evaluating the overall condition of the home; from major red flags to an extensive list of minor upkeep items, it is their job to make sure you are fully aware of what you are buying and what unexpected costs may arise later. If you are considering waiving this contingency, ask yourself if you would consider buying a used car without having a mechanic inspect it first. This is the same concept on a much larger and more expensive scale.
The next contingency buyers are waiving with growing popularity is the appraisal. If you are purchasing in cash, this item is not such a big deal, nor required. But if you are borrowing money, the lender will require an appraisal, and for the results to confirm the house is worth at least as much as the contract price. It can appraise for higher without any problems. But if it appraises lower, the door to liability and financial loss opens wide. When an appraisal is not waived, and the value comes in lower than the contract price, the options are in the buyer’s favor: walk away with your deposit intact or convince the seller to negotiate down to the appraised value. But when waived, the buyer is now responsible for paying the difference between the appraised value and the contract price or walking away and losing their down payment.
The last and most dangerous contingency to waive, especially if you do not have enough cash to pay for the home in full, is the mortgage. This is exactly what it sounds like. You and the seller are agreeing you will be allowed to buy the house, provided your mortgage gets approved. This may not seem like such a stretch if you have already received a pre-approval and been assured you qualify for a mortgage, but many things can go wrong or change from the time that paper gets issued until the point of closing. The bank reserves the right to decline the loan if there are any changes to your employment status, income, or credit report. Waiving your mortgage contingency will automatically forfeit your deposit to the seller if you can no longer secure the financing you once thought you had.
Skipping the Research
Whether you are working with a real estate agent or not, the ultimate burden of researching key information falls on your shoulders. This is the largest purchase of your life and blindly accepting what others have told you to be true would be foolish. Real estate professionals are also prohibited from providing or advising on certain pieces of research – some of which may come as a shock. My book covers these items in more detail but here are the major areas you should independently verify:
- School District
- Flood Zone
Each can substantially impact your purchase, quality of life, and future options. Misjudging taxes or additional insurance requirements brought about by the unexpected need for flood insurance could strain your budget or even disqualify you from obtaining mortgage financing if the numbers increase significantly enough to knock your debt-to-income ratios out of whack. Buying in the wrong school district can either negatively impact your budget by requiring the additional expense of a private school or affect your quality of life by settling for a subpar educational experience. And crime should speak for itself, but not only will it impact your day-to-day well-being, but will limit options for future reselling of the property.
Trying to Represent Themselves
At times, it might make sense to skip using a real estate agent, but for the sake of this blog, we will focus on all the reasons you should work with a professional when purchasing a home. First, you (generally) do not pay the real estate agent. The seller’s agent reimburses them at closing. Second, they have established relationships with other real estate agents, helping you navigate the offer process in ways the listing agent prefers and present your case in the best light possible. Most importantly, they have far more time to spend following up on offers made, scheduling inspections, and working with your bank to coordinate milestones in the mortgage process. All of these items allow you to focus more on living your life and having only the most pressing matters brought to your attention.
Putting in Offers Sight Unseen (buying from a distance)
This practice became a lot more common after the onset of the pandemic. Sometimes it was done as a precaution against getting infected, some for regulatory reasons, and others because the buyer was looking to relocate quite far away where showing up in person was not always possible on the short notice required to submit an offer in a fast-moving market. And while technology has allowed us to do much more remotely than ever before, buying a home should not be one of them.
That’s not to say using the internet and digital options to narrow the search isn’t a good idea and a way to save time. Think about it in terms of having a remote consultation with your doctor. Virtual options can be great for getting a general diagnosis on a non-urgent health condition. However, having surgery performed over the phone is probably not something many would be keen on.
Offering to purchase a home you have never seen opens the door for potential complications. The most obvious concern would be finding out you don’t like it as much as you previously thought after it is too late to back out. Staged photographs, digitally enhanced virtual tours, and other marvels of modern presentation can make something look much better on a screen than in person. Just think about the fast food commercials and billboards presenting mouth-watering depictions of menu items that never look quite as good in person. A less obvious concern is that your offer will not receive the same interest as that of someone who physically viewed the home. Both the homeowner and their agent are fully aware of the most obvious concern we just covered and will have it in the back of their minds that you may try to get out of the deal if disappointed when seeing it in person for the first time.
Interest Rates vs. Monthly Payment
As a society, it feels like we have been conditioned to think in terms of percentages instead of dollars. Financing companies will focus heavily on how low their APR is to steer you away from the competition. When rates are increasing, naysayers will try to convince you it is an inopportune time to buy a home and waiting for rates to come back down would be a better move. There is some logic to both of those approaches, but when thinking about the place you plan on calling home for the next 5, 10, or more years, it is the monthly payment amount that is the most important part of the equation.
Think about this for a moment. You find your dream home and get your offer accepted with what you think will be a 5% rate on the mortgage. But by the time you get to the stage of locking in the rate, the market has gone crazy, and rates are now 6%. Would that stop you from proceeding? If you are leaning toward yes, would you still feel the same way if I told you that the total increase in monthly payment (on a 250k loan) is only $157? Feel free to grab a mortgage calculator and confirm those numbers before answering. Most people spend more than that in a month on discretionary items like coffee and fast food that could easily be reduced to make up the difference. The moral of the story with this one is to never look at just one aspect of a potential purchase without accounting for the bigger picture.
If you couldn’t already tell, good real estate agents can be worth their weight in gold – and I am not just saying that because I am a broker. Quite honestly, the opposite is true as well. Bad real estate agents can seal your fate before the negotiations even begin. Your agent will be your representative handling all communication between yourself and the selling side. The seller’s agent will not want to work with someone who appears unprofessional, inexperienced, or in any other way unpleasant to work with. Their job is to close the deal as quickly and smoothly as possible for their client. Simply having to deal with a poor agent on the other side of the transaction can damage their reputation.
So, if you want to set yourself up with the best chance of landing your dream home, start by finding an agent you can trust – one who will not let you fall victim to these traps.