Home Buying At Any Stage In Life
I find that when people think about financial planning, they often think about saving, saving, and then saving some more. As most of you know, I'm an advocate of saving and planning for the future. But remember, you save and you plan so that you can spend that money when you need to (or want to). And knowing how to spend money in a way that works within your financial plan, in a way that keeps your future as secure as possible, is essential.
One of the biggest purchases many will make, after saving for some time, is a home.
The current economic climate is really not doing homebuyers any favors. Recent trends are showing that prices are moderately rising, and the number of people buying homes is rising as well, while the number of homes for sale is not keeping up with demand. It's basic supply and demand. According to the National Association of Realtors, the rising demand, coupled with stagnant or dropping supply, may lead to an estimated 4.4 percent increase on existing home prices this year and 3.4 percent the next year.
So, let's talk today about different kinds of homebuyers and the financial advantages and challenges for each group.
First-time homebuyers tend to be between the ages of 21 and 35, early in their careers, starting a family and looking for that "starter" home. The first-time homebuyer is often lacking in cash and without a home to sell, so it can be hard to compete with those who can put a larger chunk of change on the bargaining table. But this also brings an advantage: flexibility. While other homebuyers usually must coordinate their purchase with the sale of their current home, it can put pressure on both parties. First-time homebuyers, on the other hand, are able to give the sellers some wiggle room in terms of when they need to be out.
My advice to first-time homebuyers is to position yourselves to be ready before an opportunity presents itself. Check your credit score before you even begin looking for a house and take care of any red flags that may have arisen. Having a better credit score and low debt can help you avoid higher interest rates and mortgage insurance. You can also get pre-approved, which is a green light to sellers who want a problem-free sale. This pre-approval is the best thing you can do to counteract the lack of cash I mentioned above.
The second group of homebuyers are those looking to move up to a larger and more expensive home. This demographic tends to be ages 36 to 55. Kind of reminds me of the song, "We're moving on up... to the East Side" from the hit comedy show of the 1970s, "The Jeffersons." For those who currently own a home and are looking to "move on up" to a larger or more expensive one, your most valuable asset is the home you currently own. And, as a seller, you have the upper hand with the current housing market. But this also leads to a challenge: that once you sell your home at its maximum price, the clock begins ticking to find your next home. This pressure can cut down on your price flexibility and your ability to bargain with sellers.
The best thing you can do when trading up is to sell your home before you make any offers on another. It might scare you to hit "start" on that time bomb, but the days of submitting an offer dependent on the sale of your current home are over. You need to limit the contingencies on any offer you put in, and having the sale of your home off your plate is a good start. You also should look into new homes, as these are often sold on a first-come, first-served basis. This means there are no bidding wars, simply a small deposit (a specified percent of the purchase price) on the new home, which usually is not due until the mortgage is closed. This gives you a clear time line on half of the buy/sell process, and takes the stress out of the time component.
Lastly, we have those homebuyers looking to downsize. These folks tend to be the empty nesters, ages 56 and older. These buyers have the biggest advantage in terms of cash on hand and they also likely have some geographic flexibility, as there is less concern about work commutes or school districts.
My advice to those boomers looking to downsize is to consider a condominium or a townhouse. Both condos and townhouses will allow you to maintain homeownership, without the work that comes with a stand-alone home. And, their prices aren't soaring as high as the prices of the average home.
No matter what group you may belong to, the best thing you can do when selling your current home is to give it a bit of a facelift. It may be outdated or you may have that one bedroom painted blue and yellow with pink polka dots because your youngest went through a "design" phase. Take the time and money to update and stage your house. Doing so can make a big difference.
Buying a home can be a big decision, and a small mistake can mean tens of thousands of dollars lost. Spend your money the way that you save it: carefully and thoughtfully.
This content created by Rick Durkee in conjunction with Fusion Capital Management.