Questionable financial advice: on homebuying

Let me just start off by saying that Dave’s not a bad guy.  He means well and his advice is usually pretty good.  Certainly much better than no advice if you really need to figure out which way is up.

But I do have a couple bones to pick with his “5 Must-Do’s Before You Buy a Home” –

1. Kick debt to the curb and pile up cash.

Sure – this is optimal.  Not going to argue that.  But I completely disagree with the idea that you should hold off building your own wealth (i.e. equity in a home) and continue throwing money at someone else’s income statement until you have competed this step.  Especially considering that it is increasing impossible to begin life without debt of some sort – student loans, auto loans, even a credit card balance to pay moving expenses while you get set up.  If you follow this advice you will not begin to build wealth until very, very late in life.

“Most people don’t wait to have this foundation in place when they buy, which leads to tough times when they face unexpected expenses or job loss.”

Sure – but you can either have those tough times as a renter or as a homeowner with an actual asset to your name.  So this particular point makes no difference either way.

2. Set yourself up to win with a nice down payment.

Again – sure, this is optimal.  Not going to argue that.  But again with #1, you are facing a HUGE opportunity cost if you spend your life getting to this point (and paying thousands and thousands of dollars in rent that could be working toward equity in your own home) before you consider buying a home.

3. Keep your budget conservative.

Now this one I am 142% behind. (Can I even be 142% behind something?  Sure I can!  It’s my blog; I can do whatever I want.)

This is ESSENTIAL.  Figure out how much money you can comfortably commit each month, then use a mortgage calculator using conservative estimates of your interest rate (at least 2% over what you expect to get), insurance, property taxes, PMI, and flood insurance (if you think you need it).

And don’t forget, your new home comes with extra costs like yard maintenance, roof replacement or repair and upkeep for your heating and cooling system.”

Yup.  Don’t forget those things, too.

4. Don’t let emotions rule.

142% agreed here, too.  This goes along with #3 above – figure out your (conservative) budget, aim for lower, but don’t go one penny above what your limit is.  You will be grateful for your self-discipline when those unexpected expenses come up.

5. This is no time to go on autopilot.

This.  Exactly.  When we bought our house, getting the offer accepted was the easy part.  Make sure you know exactly what you need to do, WHEN it needs to be done, and then get it done early.

Other thoughts – 

“All debt is bad debt.”

No.  All debt is less than optimal.  There’s a difference.  All things being equal, you shouldn’t go into debt.  But all things are not equal – sometimes (err … often), the cost of NOT going into debt is far too high.  Examples abound – college (assuming you treat college as an investment and chose a major with good job prospects), cars (you need something safe to transport your family), medical bills (because home births aren’t always the best idea), moving expenses (to get to the job you got hired for after college) … I could go on.

The name of the game is cash flow management.  Figure out what you need, don’t pay more for it than you have to, add up your income, add up your monthly commitments (i.e. payments for things), and use the rest of your money for groceries, gas, and paying down the debt you have.  Being debt-free is a great way to live, and I hope to get there someday, but it’s just not possible to start out that way.

When is it a good time for me to buy a home?

When you can afford it (see #3 above), and when you know you are going to stay in the same place for several years.  There are significant transaction costs to buying and selling a home, so this isn’t something you want to be doing very often.

Take notes from friends and family that have bought houses so you figure out what your must-haves are.  A home is a BIG purchase, so you need to know what things will make it worth it for you to commit to a house.  Do you need a park nearby?  Do you need a particular school district?  Do you need a Starbucks around the corner? (Not that I know ANYONE like that ….) Do you want to be within 3 miles of an emergency room?  Once you find a house that meets all your must-haves that you can afford (see step #3 again – I can’t emphasize how important this is), then GO!

Have fun – enjoy the ride!

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4 comments

  1. Very common sense advice Athena. Sorry to all of you real estate agents out there, but I would even consider the potential of NOT using an agent to sell one’s home later, once becoming a homeowner. This may of course depend on the personal situation of the seller and the market in which one is selling, but sometimes a good real estate lawyer is all that is needed. In markets where house prices are high, I think the commissions agents receive can become absurd.

    1. Really? That would be something I would love to know more about. I’m still living in the first house I bought but I don’t know what the future holds, so I always like to be aware of my options.

      Thanks for the tip.

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