10 Common Mistakes First-Time Home Buyers Make

Posted by Steve Harmer on Monday, October 3rd, 2016 at 10:19am.

A first-time home buyer falls in love with a property: afraid to lose out, any & all helpful advice gets thrown out the window, an offer gets put in and accepted.

This first-time home buyer has now spent more than he/she can afford on less of a house that he/she wanted.

Does this sound familiar? How can you avoid these mistakes

This is but one of the common mistakes first-time home buyers make when plunging into one of life’s most exciting, exhilarating and exhausting times: buying your first property.

At this point, there’s a lot that comes into play that you need to be aware of as you’re going through the different stages of buying your first property. Buying a home is quite different to what you’ve ever purchased before, which is why it’s very important to plan ahead!

Most real estate agents will agree, when they ask first-time home buyers about their home-buying experience afterwards, that the majority of first-time home buyers indicate that they would do things quite differently if they had to do it all over again. If that’s truly the case, why not learn from their experiences?!

Here are the 10 common mistakes first-time home buyers make:

Mistake 1: First-time home buyers don’t really know what they want

First things first: as a first-time home buyer, you need to decide what it is that you’re looking for.

This might come across as ‘duh’ advice but many first-time home buyers spend a lot of time looking at a lot of properties, only to release that they should have had a basic ‘plan of action’ prepared before they started their search.

Take a few hours (Yes, really! It’ll save you lots of sweat & tears down the line!) and seriously think about what you would like to have in your new home:

How about deciding on which part of town (or country) you would like to live?
Do you need to be close to work or perhaps you like to be close to the social scene?
Next up is the type of property: ranging from apartment, townhouse, half duplex or freehold house?
Do you prefer a lot of space?
Which main feature is the most important to you?
At this point, you’ll probably need to put down the number of bedrooms. Depending on your family situation (single, small family, divorced with kids etc), you will have to make changes to the number of rooms accordingly.
And lastly, do you prefer a ‘finished product’ or don’t you mind doing some renovations to the property?

Which might sounded like a bit tedious at first, having gone through this short questionnaire above, you ought to now have the major lines of your preferences on paper. How about that!

Try to be somewhat flexible to what you came up with above, as some properties might be perfect for you, but might have a small garden vs. your desired large garden. Or combination of your preferred location and its offered features only allow you certain properties.

Don’t worry about the details: The purpose here is that you need to have formulated a better idea of what you’re looking for before you actually start the home search!

Mistake 2: First-time home buyers don’t know what they can afford

Here, one will have to face reality as it’s unfortunately what limits most of us: our budget. How much can you afford to spend on a monthly bond repayment? How much money can you use as down payment? This will immediately set the tone for the type of property within your financial means!

At this point, you may want to jot down a list of all your monthly expenses, such as:

credit card payments
car loan payment
car insurance
student loan payments
health insurance
retirement savings
groceries
etc.

Obviously, in this exercise, you won’t need to write down your monthly rent amount. However, don’t forget to add a few of those big yearly bills on that list! (eg annual vacation, school fees or certain insurance payments) Once you’ve subtracted these expenses from your take-home salary, you ought to have a good idea of how much of a monthly bond repayment you can afford.

Would it be fair to state that, if you were looking at homes outside your price range, you’re setting yourself up for disappointment? The odds of the banks lending you the requested higher amount are quite low and you’ll have wasted everybody’s time and energy.

Bottom line: know your budget and stick to it!

Mistake 3: First-time home buyers dismiss renting as a possible better financial decision

When going over the renting versus buying scenarios, we know that buying is more expensive in the early years and becomes cheaper, until renting a property becomes more expensive. At what point does one decide to rent or buy? Studies have estimated that “breakeven point” to be between six and eight years, depending on one’s financial situation and the local property market.

If you foresee a structural change in your financial situation, or even plan to move in the next handful of years, perhaps stick to renting as it will put you in a better financial position in the long(er) term.

Ask yourself this question: “Will I be here for just a few years?”

RENT OR BUY? WHAT MAKES MORE SENSE FINANCIALLY

Anything less than a firm ‘no’ won’t suffice in justifying spending heaps of money in buying the property, paying closing and bond costs, and estate agent commissions!

Financially, it might be better to rent until you’re ready to stay for longer.

Mistake 4: First-time home buyers underestimate the cost of their home

By now, you have realized that buying a house doesn’t mean that the costs of owning that house have ceased. If anything, they’re accumulating at a steady monthly pace, starting with the biggest portion of them all: the monthly mortgage payment.

Kamloops Real Estate Closing Costs First of all, there are the transaction costs involved when acquiring the property (closing costs). Unfortunately, it seems that a lot of first-time buyers do not realise there are more costs to buying a home than the actual purchase price!

Here’s a short list of costs with buying property in BC:

The biggest chunk will likely be the transfer tax, which is payable to the government of BC every time a property gets sold the amount which gets determined by the property’s value is due. The tax is charged at a rate of: 1% on the first $200,000, 2% on the portion of the fair market value greater than $200,000 and up to and including $2,000,000, and. 3% on the portion of the fair market value greater than $2,000,000.
The fees payable to the lawyers for tax and utilities adjustments and title fees.
The lawyers fees.

So, if the price limit of your budget is $350,000 to purchase a home as that’s all the money you have available (via personal savings and bank loans), you need to know that the extra costs will increase by an additional 2% - 5%, which practically means that your maximum house purchase price should be around $337,000 instead!

Quite a crucial calculation detail you do not want to miss! The last thing you need is to put an offer forward of $350,000 on your dream house, only to come to the realization that you don’t have another $5,000 for Property Transfer tax, lawyers fees, adjustments and moving costs to take care of all these extra costs!

Unfortunately, it doesn’t stop here!

Once these purchase costs are paid, as the new homeowner, you will now be faced with quite a few extra costs which you didn’t have as a tenant:

Municipal property rates: every few years, the municipal valuation of your property gets adjusted. Depending on your area, a certain multiplier is used in combination with your municipal valuation to arrive at your monthly rates bill.
If you own a property in an apartment complex or cluster, you’re very likely be paying strata fees. These pay for grounds maintenance, building/walls upkeep etc.
The monthly electricity, gas and water bills will be arriving at your doorstep as well.
Bills for the homeowner’s insurance (building), as well as household insurance (content), will also be payable.
And finally, one can’t forget the daily/weekly/monthly house repairs and maintenance (eg painting, plumbing, roof, pool etc).

You can quickly see that a simple monthly mortgage payment isn’t your only cost owning a property! It is becoming very clear that getting a good grasp on one’s finances is very important when buying your first-time home.

Recent surveys have pointed out that almost half of all the first-time buyers with regrets indicated that they paid too much or perhaps should have put more money down when buying their property. Nearly 40% were very surprised to see how much a house actually costs to maintain!

Do you have a really good idea of your future expenses as a homeowner?

Mistake 5: First-time home buyers overestimate the size of their home

Recent statistics indicate that nearly 2/3 of all first-time buyers wish they had bought a bigger home. Whether it was the kitchen that turned out too small or some of the bedrooms looked bigger when they initially bought it, first-time buyers tend to have regrets for not having gone for that property with the bigger living area.

Buying a property is a medium-to-long-term engagement, so first-time buyers ought to think very carefully how a particular property will evolve along with your family’s needs. As a young married couple might consider expanding their little family, they ought to think how this property will suit their five-year plan.

Which possible life changes might happen that might require that extra room or additional space?

Mistake 6: First-time home buyers wish they had researched the neighbourhood

Don’t take the online home values and neighbourhood information for granted. Assuming there are data available on it of course! How does one go about choosing a neighbourhood?

Take a few hours out of your schedule to park and sit near your prospective new home on a Monday morning to see how busy the home-to-work traffic really is. Are you experiencing neighbouring streets using your street as a shortcut or does it remain quiet during rush hour? Try to do the same thing on a Friday night. Who knows, the neighbourhood might come alive and turn out to have a few busy party streets?

Besides the neighbourhood social activity, you may want to research the recent sales. Are you buying the most expensive house in the neighbourhood or have similarly-priced properties sold as of late?

As we briefly touched on some of these neighbourhood questions, were you able to honestly answer them?

Mistake 7: First-time home buyers regret the parking arrangement

You have to admit, parking didn’t necessarily come up as a concern for you as a first-time home buyer. Yet, one-in-six first-time home buyers with regrets wished they could do something with their current parking arrangement.

We tend to get excited about the layout of the property, its fascinating features or even the potential defects, but when it comes to the parking situation, many first-time home buyers don’t have it on their priority list. Not that they aren’t interested, there’s just too much other ‘more fun‘ stuff requiring their attention!

Taking it a step further, the choice of yard space is along the same line of thinking as your parking arrangement. Almost of a quarter of homeowners showed some form of regret regarding their yard. Too big, too small, too much to maintain etc. Obviously, if ‘bigger and more‘ is what you’re looking for, be prepared to move further away from the city centre!

Do you consider yourself happy with a smaller parking situation or yard space?

Mistake 8: First-time home buyers have debt ahead of the home

An important ratio used by many lender is the so-called debt-to-income ratio. As the average consumer debt has expanded by 25% in the past 5 years, student loans/debt are said to be at the base of this (even though car payments have a chunk of it as well!). This financial burden is keeping most first-time home buyers from buying their dream home, as it limits how much (and how quickly) they can save for a down payment.

Not only are these first-time home buyers not able to save for a better deposit, but their debt vs. income level is off-balance as well, which negatively affects the lender’s decision to lend out money. Especially since credit standards have been tightened, hereby making it even more difficult to borrow with less-than-perfect credit scores!

Wouldn’t it be easier to show a record of savings instead of trying to climb out of (too much) debt?

Mistake 9: First-time home buyers let their emotions do all the talking

When it comes to buying a home, the first-time home buyers’ heads are seriously spinning. It really is one huge emotional process!

Are we making the right decision? Is this really what we’re looking for? Have we seen enough properties before committing?

On the one hand, you have those first-time home buyers who know their budget ahead of time. Yet when they see that dream property which is considerably priced above what they had in mind spending, all logic goes out the door and they’re now frantically searching to close that financial gap. Unfortunately, most of the time, reality only sets back a few months later when they realize the implications of their financial situation!

On the other hand, there are first-time buyers who have been warned about falling into that trap of overpaying and want to see every DIY, developer’s dream, hidden gem property out there. They’re going to buy that once-in-a-lifetime property below market, fix it up themselves and still have paid less than what they would have otherwise in a normal property transaction. That’s all fine and well, but there’s mostly a reason why that property went for as cheap as it did. Renovations can cost a lot of money – even if you do them yourself!

In the end, the market has been playing on all of the right emotions of those first-time buyers!

Mistake 10: First-time home buyers assume their home’s value will appreciate

First-time home buyers need to make sure that their property won’t become the be all and end all of their savings! Look what happened to those who put everything into their property in the mid-2000’s! Where did all that equity go to? Thus, although the monthly mortgage payments will be due, one ought to make sure that money also continues to go into other saving accounts (eg the retirement savings accounts).

Of course, we all buy property as an investment and are looking forward to the potential growth in value. Although, as individuals, we cannot control what the overall property market will do in the next decade or so, we can follow the basic rules of buying a home, such as making sure the property’s location is well-chosen and that the value paid for the property was a fair market-related amount.

Closing thoughts

As a first-time home buyer, you need to be aware that buying that first property will probably won’t be your last property! So, act accordingly and don’t be betting the entire farm on it!

Is this first home purchase exactly what you wanted? Likely not, but given the (likely limited financial) tools at your disposal, it is the right home for you at the time of buying! Its location or some of its features may not be 100% your choice, but one needs to prioritize what’s important. An extra (baby) room in lieu of a bigger yard? An extra garage space instead of that pool you were keen on?

Can you see how easy it is to fall into the trap of those common mistakes first-time home buyers make? Do yourself a big favour and read thoroughly what’s been discussed in this article (as well as reference articles below) and you’ll be another step closer (and wiser) to buying your first home!