With a strong buyer’s market, reduced property prices and low interest rates, it’s a great time to think about making the leap from renter to homeowner. Before you decide whether or not to sign on the dotted line, here are ten things to consider:
1. Home ownership is a long-term commitment. Unlike renting, which allows tenants to move every year at the end of a lease, homeowners should plan to stay put for at least four years. Factoring in closing costs, taxes and real estate fees, selling a home any sooner than four years after purchasing is likely to result in a financial loss. This number will vary from region to region and is dependent upon market conditions, but the days of buying a house and then flipping it six months later for double the purchase price are long gone.
2. Taxes. You have to pay property tax when you own a home. Your property tax is calculated by multiplying the assessed amount of your property (as determined by your local municipality) by the prevailing tax rate (also known as the “mill levy”). As a renter, you’re technically paying property tax as well; you just don’t see it because it’s built into the cost of your rent. When you own your property, you can choose to pay into an escrow account with your mortgage company and let them take care of paying the property tax, or you can pay your taxes directly to the city. You will be billed twice annually, and the cost of property tax varies dramatically from town to town and region to region. The upside to the tax situation is that home ownership is heavily subsidized by the federal government, meaning that your property tax, interest paid on your mortgage, and points paid at mortgage origination are all acceptable tax deductions. Renters do not see any tax benefits from their monthly payments, even though, as mentioned, the landlord usually builds the cost of property tax into their rental price. For many people, their mortgage interest constitutes their biggest tax deduction. Additionally, capital improvements (permanent structural improvements or renovations which make the property more valuable) made to your property, can be added to the basis of your home to reduce any capital gain implications when you sell. Co-op owners pay taxes as a part of their “maintenance” payment each month.
3. Owning your own home means you can make any changes you want. Sort of: For many structural changes you will need to obtain a building permit and the work will need to pass city inspections. And in New York City, many, if not most renovations will need approval from the building’s board. Of course, it’s fine to do things like painting the walls, but be sure to check with the proper authorities before adding a bathroom, changing flooring, or taking down a wall.
4. When something breaks, you have to fix it. When you’re renting and something goes wrong, it’s easy enough to just put in a call to the landlord, the super, or the management company and have the problem fixed with no out-of-pocket cost. When you own property, these repairs become your financial responsibility. Be sure that in addition to the monthly cost of ownership (mortgage, common charges, taxes, insurance, utilities) you also have enough room in your budget to pay for the unexpected. Co-ops and condos with on site supers and maintenance workers alleviate some of the hassle of small repairs, but they typically will not handle larger repairs or renovation work.
5. If you have a fixed rate mortgage, your monthly payment will stay fairly steady. You can expect increases in common charges and taxes to drive your monthly costs up a bit each year, but unlike rent, which can increase each time you renew your lease, your baseline mortgage payment will stay the same year over year.
6. Home ownership can be considered an investment strategy. For many people, long-term home ownership has served as a safe and predictable financial investment with steady appreciation each year. That said, the financial crisis of 2008 has left many homeowners underwater and unlikely to ever recover their lost equity. The investment potential of home ownership can be an appealing reason to purchase, but it shouldn’t be your only reason.
7. You need to have your finances in order. Mortgage lending restrictions have tightened significantly in the last three years, and if you plan to finance your purchase you will need to have enough seasoned (in your bank account for at least three months) liquid assets to cover a down payment and closing costs, and demonstrate adequate reserve funds to satisfy lender and co-op or condo board requirements. You will be required to document your income through bank statements, pay stubs and tax returns and your employment status will also be verified. Lenders and boards want to see that you can afford to buy the property, make your payments, and keep paying should something (job loss, injury, illness, divorce) happen that might interfere with your income. Even if you pay cash for your home, in NYC you should still be prepared to share all of your financial information with the co-op board if you wish to have your purchase approved (unless you are buying direct from a sponsor, which is a topic for another post).
8. Get pre-approved. If you plan to get a mortgage, the pre-approval serves two purposes. First, it will tell you how much mortgage you can get. This is NOT the same thing as how much home you can afford. You need to take the pre-approval amount from the mortgage company, look at how much your up-front costs will be (down payment, closing costs, points, etc.), and look at the monthly payment and decide, based on YOUR financial situation how much you can really afford to pay. The second thing a pre-approval does is tell sellers that you are a serious buyer. No home seller wants to waste precious time tied up in contract with someone who ultimately will not be able to get a mortgage. A pre-approval tells sellers that you have taken time to talk with a lender who has gone through your financial information and that the lender has faith in their ability to get you approved for a mortgage.
9. If you are buying a co-op, even if you have an accepted offer and secured financing, you still need to prepare for the reality of being interviewed by the board. For some buyers, board approval can be a significant obstacle to home ownership, so thorough preparation is key. Have your board package professionally assembled and prepare yourself for the questions you may be asked. Before your interview, Google yourself to see what sort of information is out there about you and be prepared to answer any concerns that might arise from that.
10. When you sell your home, you are responsible for paying closing costs. Transfer taxes, flip taxes and other fees are required at closing. And of course – there is also the broker’s commission. Most sales contracts specify that the seller is responsible for paying 6% of the total sale price of their home as a commission. That 6% is usually split 50/50 between the seller’s agent and the buyer’s agent. There are alternative selling methods out there (such as RealDirect’s “owner-managed” service) which do not charge a 6% commission for selling your home, but either way, remember that their are costs affiliated with the sale of your property and they will be your responsibility. Making decisions about when to sell and for how much should always take these costs into consideration.