There are reasons most people have money issues — and at least one of those reasons is because they’ve never had any formal education in money management or learned how to evaluate investments. One area in particular where many tend to err is in the purchase of real estate; most people are really bad at evaluating the value of a piece of property or a home they’re about to buy. Most often the choice of a home is driven by emotion and not by numbers, and that’s exactly how the retail housing industry wants it to stay. If people were better at evaluating home purchases, housing prices wouldn’t be going up at the pace they are today.
The difficulty is that all real estate is local, and an individual home can only be properly evaluated in the context of the local market. A $200,000 home may be a bargain in one market and hopelessly overpriced in another,and those neighborhoods may not be that far apart. Too many people are trusting their real estate agents to make those assessments — but do you really want to trust the advice of a complete stranger, who is often a poorly-trained salesperson, on where to invest a quarter-million dollars? Your agent only gets paid if you buy a home, so the incentive is to sell you one.
Obviously the complexities of assessing home value are going to be far too difficult to cover in a single article, but at least we can look at the expenses most people overlook when buying a home. Even though the real estate market changes quite a lot, the associated expenses remain fairly constant.
Insurance
Too often the mortgage payment based on the price of the home becomes the focal point in evaluating how much home you can afford to buy, but the bottom line mortgage payment is only part of the story. You also need to insure your home against damage and floods. I’m constantly amazed at how many people discover, after the fact, that their home is in a flood zone. That’s one of the reasons I harp about evaluating the neighborhood as thoroughly as the house itself. You can check if your neighborhood is prone to flooding at FreeFlood.net, Fema.gov or the USGS website. Do be aware the government maps can be a bit confusing at first.
Also keep in mind that flood maps are constantly changing. It can come as a shock when homeowners get a notice in the mail that their house is now in a flood zone and your flood insurance rates just quadrupled. Oh, and your home just lost value, and you’ll have to sell at a loss to get out from under it. Thanks for playing the real estate game!
Moving Expenses
You may not think you’ve accumulated a lot of junk until you try to move it. It usually takes people a day or two of packing before they realize how badly they underestimated moving expenses. It’s not just that moving is so expensive, it also tends to come at a bad time. That’s a time when you also need money for closing costs, new furniture, and a host of other niggling expenses.
Maintenance
In a market with tight inventory, some buyers see a rusting HVAC unit, or minor evidence of leaking plumbing, and tend to gloss over such minor imperfections, thinking they can fix them later. Central A/C units, furnaces, roofs, and plumbing can all turn into nightmare repair expenses. Your real estate agent will doubtlessly try to dismiss those concerns with a supplemental home warranty, most of which, at least in my personal experience, aren’t worth the paper they’re printed on. If your gut doesn’t like the way the roof looks, pay attention to that feeling.
Taxes
The problem with being nailed to the ground is that city and county governments tend to see your home as a brick-faced ATM. They set the budget, then turn around and tell you what your share is going to cost. I’d love to be able to manage my budget that way. Not only do people forget about their tax bill, they forget it can go up; sometimes way up. We bought a house in the county one time in an area that was eventually annexed by a nearby city, and the property taxes literally doubled.
Utilities
While it’s easy to check the high and low utility bill for a particular address by checking with the local utility supplier, the rate of energy inflation is harder to track. If your electric bill goes up by 2% per year, then you have to find 2% in energy savings every year to stay even. Even if you check the electric bill, there’s also water, sewer, and gas to consider. At a minimum, check to see if the utilities come from the same town listed as the home address. If your utility services comes from a neighboring town, frequently the utility sharing deal includes eventual neighborhood annexation. If you get annexed you’ll be paying city property taxes and your kids might end up in a different school district, even if the home you originally purchased was in the county. Utilities are one of the sneaky ways cities broaden their tax base.
The more homes you buy, the longer your personal due diligence checklist will become. We need and deserve better housing options in America. Until we get them, let the buyer be wary.
