Hello and welcome to our third post here at Pittsburgh Circle Properties. Last time we covered some topics for sellers so today, in the interest of balance, I’d like to offer a buyer-centric post. We’ll cover some topics of general interest to buyers, toss in a sprinkling of my advice, and wrap up with some hopefully useful conclusions. Please keep in mind that this is not financial advice, and I’m not a professional financial advisor. The information and opinions here are based on my own personal experience and research, and should be taken as such.
What’s the first step to buying a piece of real estate? Quite simply put, it is making the decision to do so. You may think this is obvious, and wonder why I’m even spending time on it, but it is no small thing! This is a decision to invest substantial resources over a long, to very long, period of time, and as such should not be taken lightly. This is a decision that requires some intestinal fortitude, and is in and of itself worthy of respect! So, if you are considering owning real estate, read all you can. Speak to a real estate professional, talk to friends, and family, watch YouTube videos, whatever you need to feel confident in making an informed decision. Heck, feel free to reach out to me if that suits you. The key here is to consume the information you need in whatever way works for you. If you decide to buy, then that’s great, keep on going for some more of my thoughts. If you decide not to buy, that’s great too. You’ve likely learned something and exercised your own good sense and judgement. I still hope you’ll stay with this article of course. We do like to keep our site statistics up! ote: I’m working to keep this article fairly agnostic as to the reason for and type of purchase. The intent is to be applicable to personal and investment properties. There is one caveat that when it comes to investment properties, this article fits best with small multi-family and single homes as there are some different dynamics when you get into purchases of more than four residential units.
Alright, now let’s say you’ve decided that now is the time to buy. At this point the first thing I do is to start a list of ‘must haves’, ‘nice to haves’, and ‘irrelevants’. Say I’ve decided to buy a new rental property. I decide that ‘my must haves’ are two or more units, it has to be at least a duplex, it must be in at least a C+ neighborhood, and it must have no major defects with the foundation. My ‘nice to haves’ may be something like, garage or off-street parking, brick construction, above-average yard space. ‘Irrelevants’ may be something like current landscaping, interior colors, etc. A couple notes here; these lists are by no way exhaustive. They’re just meant to show some examples. ‘Must haves’ are things that will cause me to drop a property from consideration. ‘Nice to haves’ are things that may entice me to move a little faster, pay a little more, etc. ‘Irrelevants’ are items that do not impact my decision one way or the other. You could also add a list of ‘must not haves’ or ‘can’t stands’. These are things that, if present, would cause you to drop a property from consideration. For me, some examples of this are the presence of an HOA, financed solar panels (too much extra paperwork) or too much risk of flooding. Also, I’d like to comment a bit on neighborhood classification. This is something that can be a bit up to interpretation. The main take away here is that location matters, so be sure to know what sort of location it is you are looking for. I love my neighborhood and am always looking to buy more property here. Others may consider it poor or dated or lacking in growth potential. In the end, value is in the eye of the beholder!
Now once we have our list of guidelines, we should think about our budget. This includes down payment and monthly costs, but it also includes how much we are willing to spend on repair and renovations. For myself I’d rather spend 80k on a purchase and 20k on rehab, than to spend 100k on a purchase. My reasoning behind this is that I’m likely to have to do work to a property anyway, so I may as well get it for as low a cost as possible. Also, this way I have more capital and can make the repairs/upgrades when and how I wish. You may not agree, and that’s ok. Just know your strategy. A note here to homebuyers, it may seem harsh, but there is a reason you’re advised not to spend more than 28% of gross income on housing. I violated this rule once, and got burned like the first pancake on Sunday morning!
Now we have our checklist, we have our budget, what next? If we do not already, we may want to get a real estate agent. Here is where I discuss with my real estate professional my wants, needs, budget, and timeline if applicable. He or she can then set up a search and start the listings flowing. Once the listings flow, I use my ‘must haves’ and if applicable, ‘can’t stands’ to filter out those properties I want to see.
Thus, armed with a list of properties, it is time to head out with our agent or broker. When visiting a property, you should receive a copy of the listing, and if you ask for it, the seller disclosure. It can be helpful to have folders or binders to keep these organized for later review. It is also good practice to carry a pen for note taking. If you really want to go all in, a tape measure or other measuring device may not be a bad idea. “Is that doorway really 22 inches?” “Seriously, that step can’t have a 10-inch tread!”
Now I learned early on in real estate school that 80% of people can’t visualize. Any seller who can know this and leverage it, stands to get better deals on a more consistent basis. Can you look at the crummy, oddly shaped 4th bedroom and see an upstairs laundry? Can you see the galley kitchen stretched two feet into the cavernous dining room? Can you look past the terror of orange shag carpet? If yes, then you are in a great place to negotiate, my friend.
After the walkthrough, I like to review my notes, and discuss with my broker. If something stands out and screams ‘make an offer’, I run the numbers again, bounce them off my broker, and some of my closest family, and take a moment to pray for wisdom. I usually step away for a while at this point. This could be for a couple hours or a couple days, depending on the urgency of the situation. If after this break, and another running of the numbers, things still look good, then I may make an offer.
Some miscellaneous things to consider here:
- Taxes, be sure to know and verify the real estate taxes on your perspective property. Remember that your monthly payment will contain your principal and interest, insurance, and TAXES! Only home owners and renters pay real estate taxes, really. Landlords pay them, but they’re a passthrough cost. That having been said, even landlords need to know the taxes as they impact monthly cost. If the taxes are too high for you to make a solid return, given going rents in the area, that could seriously impact the decision to buy. The astute reader may be thinking “but hey, if taxes are a passthrough cost, how could local rents be too low to cover local taxes and give basically a reasonable rate of return?” Well, I’m glad you asked! Several things could be at play here. Perhaps the property you are looking at has a bad assessment. Perhaps other landlords charging low rent were able to secure loans at much lower rates, or acquired the properties long ago at a very low base cost. They could of course also be skimping on upkeep, but in general this is only the practice of a few bad apples. You can often appeal a bad assessment, but this is tricky and can even be risky so I personally don’t buy a property counting on a successful appeal. Note, if I do win an appeal, I use the boost in cash flow to accelerate planned improvements and to keep rents from rising. I can do this because I acquired the property based on a ROIC figured with the original high taxes.
- Consider whether the property faces North, South, East, West, etc. and what impact this will have on those living there? What will the sun or prevailing winds have to say about quality of life?
- I also try to visit a property at different times of day and on different days of the week.
There are a lot more elements to buying than those we’ve discussed. We have financing, inspections, appraisals, closings, and the list goes on. Quick note on closings, you are likely to have to front a year of real estate taxes as part of closing costs, so again, another way the taxes enter into the mix. At any rate, there is much more to discuss, but this post is pretty long as it is. I do intend to tackle these topics as we go. If you have any particular item you’d like covered sooner rather than later, please let me know, and I’ll take that into serious consideration.
For now, I’ll just say the following, in conclusion:
- The decision to buy real estate is a big one. If and when I am in the situation, I never take the decision lightly.
- It is important to know what one wants to buy, for what reason, and for how much.
- Those who carefully screen their prospective properties and who can see past first impressions often have an advantage as a buyer.
- Keeping an eye out for things like taxes, location, ebb and flow of traffic etc. are more likely to be happy with their purchase.
- As always, a good real estate agent is worth their weight in gold!
Thanks for reading, happy buying, and let’s talk again soon!