A house is the biggest purchase that most Americans will ever make. With no experience, how can first-time buyers know what to look out for? On this week’s episode of Industry Focus: Energy, host Nick Sciple together with Motley Fool analysts Dan Kline and Maurie Backman shed some light on real estate. Whether you’re thinking about buying a home soon or saving it for a nebulous “someday,” tune in for some advice on buying your first home. Advice like:
- Don’t sign on for private mortgage insurance if you can help it.
- Factor in the cost of home repairs.
- Know how to shop around for maintenance deals.
- Know your state laws and fees.
- Double-check the broker fees.
- Get to know the area in advance.
Tune in to learn more.
A full transcript follows the video.
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Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, and we’re talking about our favorite tips and tricks to use when buying a home. I’m your host, Nick Sciple, and today I’m joined in studio by Motley Fool contributors Dan Kline and Maurie Backman. Dan and Maurie, good to have you here!
Dan Kline: Hey! How are you?
Maurie Backman: Hey!
Sciple: I’m doing well! I’m excited, we’re going to talk about home buying today. When you think about it, the home is the most expensive thing that the average person buys in their lifetime. It’s part of the American dream. But it’s something that, again, the average person only does once or twice. It’s really hard to understand exactly what you need to do when you go through this process, and it’s really complicated. We have the two of y’all here today to talk about your favorite tips and tricks. I know Dan’s bought several properties over the years —
Kline: [laughs] I’m not the average person. My wife and I, in the first 11 years we lived together, moved every year. They weren’t all purchases. Some of them were rentals, we lived in New York. But even our first three homes we owned, we were there less than 18 months before — it was a housing boom. So we would look and see, “Wow, our house is worth $X more. What if we moved to this town that isn’t quite as nice?” And we did the home trade step-up game a lot of times.
Sciple: Yeah, a little location arbitrage to step on up. Well, talking about a normal market and what you should do every time you buy a home, let’s go through y’all’s top five tips when it comes to home buying. The first one y’all have is to make sure to have a 20% down payment on the home to avoid… what’s PMI stand for?
Backman: Private mortgage insurance. It sounds like it’s a good thing for you, the buyer —
Kline: It is not!
Backman: It is not, right. Dan, tell them!
Kline: PMI is basically insurance you pay for that protects the bank or the lender. It’s more or less like saying, “Hey, I’m going to buy auto insurance. That auto insurance doesn’t pay repairs for me. If I have to bring the car and to be repaired, the auto dealer is insured of getting paid.” So basically, you’re paying for insurance that if you default, they will get paid anyway. In general, if you don’t have 20% equity, you have to pay PMI. And there’s no hard and fast rule — when you get to 20% equity, you’re allowed to ask your bank to remove PMI, but they don’t have to do it. The last thing you want to do is have to refinance your mortgage, which comes with 2% to 5% in closing costs, just to get rid of this payment.
We understand that 20% equity is not attainable for everyone, but there is a major negative. On a $200,000 loan, it’s maybe $150 to $200 a month, for something that you’re paying for that in no way benefits you.
Backman: Right. PMI, some people think it’s just a little fee you pay up front, you roll it into your closing costs. It’s not. It’s essentially a surcharge on your mortgage payment, every month, for what could be a very long time.
Sciple: Right, to ensure the bank if they have to foreclose on you. Hopefully, you’re going to pay the thing off. You know that you’re a responsible borrower.
Kline: One of the issues right now is that appraisals tend to be very, very conservative. You might live in your house for two years and go, “Wow, the market’s exploded. I paid $300,000 it’s worth $400,000 now. I have 20% equity.” Good luck getting an appraisal to match that, which is what’s required. Unless you’re actually paying down the original loan, it becomes very difficult to get rid of PMI.
Sciple: When we look at the data, most people really don’t end up putting down 20% on their home. Most people, when they buy their first home, actually put down 5% or less. Do you have any advice for people that are trying to save this 20% down payment, what they can do to get there to avoid these issues with PMI?
Backman: First of all, I think it boils down to the same strategy you would use anytime you’re trying to hit any sort of savings goal — map out a budget and just live really frugally to bank cash. Get yourself a side job if you need it. There’s a lot of ways to drum up extra money in a not-so-lengthy period of time if you really commit to it.
Kline: I also think you need to figure out why you don’t have the 20%. If you’re buying a home you can easily afford, and that extra 15% you have invested in other areas that are producing a better return than not having PMI and the small amount less you’ll pay, that’s sensible. If you’re only putting 5% down because you’re stretching your budget to get there, you don’t have any equity to play with. You don’t have any ability, if things go wrong, to tap into your house to save your house. So you’re probably buying a house you can’t afford.
Sciple: Another question a lot of folks probably have is, “Hey, I’ve got this big chunk of student debt that’s hanging over my head, but I want to be in a home. I’m getting into the age where I want to have kids and things like that.” How should folks think about focusing on paying off their student debt before getting into a home or carrying both at the same time? What are the factors folks should take into account when making those sorts of decisions?
Backman: To an extent, I think they’re two different beasts. It’s not unusual for someone these days to carry student debt for — unless you’ve got a federal loan that’s a reasonable sum, it’s probably going to take you more than 10 years to pay off your loans. That means that conceivably, you’re hitting your 30s, your mid-30s, you want to buy a house, maybe you’re not free of that debt. I don’t think it’s a bad idea to have some sort of student debt and take on a mortgage, as long as you have the income to keep up with all of those payments. I don’t think having student debt needs to be a barrier to homeownership. I think it boils down to, like Dan said, just take a look at your finances and make sure you can actually afford this home, keeping in mind that you’ve got this debt payment every month for the foreseeable future.
Kline: Student loans debt is an exception to the debt rule. You might have a car payment, you might have student loan debt. Don’t buy a house if you have a bunch of credit card debt. First of all, your ability to get a loan will be very compromised if you have that level of debt. Pay off what you can. Consolidate your student loans to the best rate possible. Remember that when you go to a bank or a lender to borrow money, you want to put the best picture forward. They’re going to look at your debt to income ratio. You might get a better rate on a loan if you pay down $20,000 of student debt. It might be worth waiting 18 months or a year, however long it takes you, so you can do that. Really, this is an area where you don’t have to apply for a mortgage. You can go talk to a mortgage broker. You can go talk to your credit union, your bank, and say, “OK, I’m going to apply for a mortgage a year from now. What can I do to make my picture look the best?” When we applied in Florida, we had credit card debt because we had put all of our moving expenses on the credit card, and in the cycle we hadn’t paid it off. And when I sat down with the mortgage broker, he said, “Oh, you need to pay that bill in full, now.” And we did. You really want to prepare, and start preparing not a week before you apply, but at least a year before you apply.
Backman: Right. That leads into something else. It’s a really easy thing that everyone can do. Check your credit score before you apply for a mortgage. If your credit score is not good, you might either not get approved for that mortgage, or you might snag a pretty unfavorable rate. You don’t want to be locked into that for however long it is until you’re able to refinance, and then, as Dan said, there’s a cost of refinancing. Be aware of where you stand credit-wise, too.
Sciple: I’m glad y’all mentioned refinancing costs. Your next tip is to be aware of these closing costs. Can you talk about what closing costs are and how significant they can be when you’re getting your first mortgage or refinancing an existing mortgage?
Backman: Yeah, they can be pretty substantial. They can be anywhere, I think, from 2% to 5% of the value of your loan.
Kline: It’s everything from, in most states, you need a lawyer, the other side needs a lawyer. There are recording fees for the deed.
Backman: Origination fees.
Kline: We once paid something called a miscellaneous fee. I complained about it. It was $175 or $150 on a $60,000 mortgage at the time. We were buying a co-op in New York. And I said to the bank, “What is this? I’m not paying a miscellaneous fee if you can’t tell me what it’s for.” And they said, “Well, you don’t have to pay it, but we’re not going to write the check.” [laughs] So, you need to understand. And in some cases, you might as a buyer be able to ask the seller to cover a portion of the closing fees. In some cases, they’re getting a big chunk of cash. They’re cashing out their house. So, if you’re a well-qualified buyer, it’s going to be an easy close, they might go to you and say, “All right, we’ll pay some of it.”
Backman: But that’s more of a concession. It’s 100% the buyer’s burden.
Kline: And the rules are different in different states. In Florida, you don’t need a lawyer. If your real estate agent has handled this type of transaction before, you might save $1,000 on not having a lawyer do absolutely nothing. A lawyer doesn’t come to the closing, just rubber stamps a bunch of papers. You really need to look at every line item there and question. If there’s something that doesn’t make sense, or you go, “Hey, can’t I do that myself?” Sometimes you can. You can do some of the filing or the title lookup, or who knows what. It’s different in every state. You need to understand it.
Backman: Right. But I will say that in many cases, the closing costs really are not negotiable; however, your lender should give you some sort of good faith estimate at some point in the process that tells you what you’re actually looking at in closing costs so you can prepare for that.
Kline: And it’s a good faith estimate because depending when you close in the month — we sold a house that had an oil burner. And you have to pay for the amount of oil that’s left. The price of oil changes, the amount changes. So literally an hour before closing, somebody came in and did those numbers. Different costs might change. If it’s the first of the month, you might have to pay an HOA. If it’s quarterly, maybe they’ve already paid it, so you have to pay them back —
Backman: Right. You might have to pre-pay a portion of your property taxes, and that just gets tacked on. Now, the one thing about closing costs, you can often just roll them into the mortgage. Let’s say your closing costs are total $6,000. It’s not like you’re then expected to necessarily write a check out for $6,000 that day, hand it over, say, “Here, here’s my closing costs.” You can often roll it in, and that makes it a little bit more manageable. But it is something to just be aware of.
Kline: And when you refinance, that’s a case where you want to shop around. A credit union might have a very low cost of refinancing. Your bank, to keep your business, might be willing to do a 1% refinance. If your credit is good, and you’re refinancing because you started with maybe an unfavorable mortgage — most people now, rates are so low, it’s hard to refinance at a lower rate if you have a mortgage in the last four or five years. But if you had bad credit, if you made a bad decision, talk with your bank. Sometimes they’ll do a fake refinance, where they’ll give you better terms because you’re a good customer.
Sciple: The transparency around a lot of these things with mortgages has really, really bumped up since 2008. I remember in law school doing a class about residential mortgages, and the one pager that banks have to give you to break out all these different fees and the mortgage. If you go shop around, it’s really easy to look right on the piece of paper they hand you at the bank to really compare among what your options are. Really something to recommend for folks.
Let’s go into your next tip. Tip No. 3 is to know what the taxes are going to be on your property. What’s the way folks can keep track of that when maybe they’re looking at a potential real estate purchase?
Backman: I would say two things about that. No. 1, the current property tax bill is something that should be disclosed to you at the time that you’re just plain looking at the house or whatever the home is. If your realtor doesn’t have that information on the listing, which would be rare, you can usually just access local or county records and look it up. But here’s the thing — you don’t want to just look at what the property taxes are that day that you’re going to look at the house. You want to look at the property tax history. Some areas are more prone to significant property tax hikes than others. If you’re looking at a home that’s got, let’s say, $6,000 in property taxes, but you see that just two years ago, those property taxes were $4,500, that’s a red flag.
Kline: You also want to look at the neighborhood. A lot of cases, a sale of a home triggers a reevaluation. The little old lady who’s lived there for 40 years, her taxes might be $5,000 a year. Next door might be paying $12,000 because the home has changed hands six times. If you buy that house, you might find in the next year, all of a sudden, your tax bill is going to go up.
You also want make sure that you have the same tax law as the person you’re buying from. In Florida, we have a homestead exception. There is a certain amount of your property tax, if this is your primary residence, you don’t have to pay if you’ve lived there a certain amount of time. On a more expensive home, it’s not a relevant number. But on a $100,000 condo, it can be half the property tax. So you might see, “Wow, this is only a $600 a year property tax.” But for you, it’s actually a $1,300 a year property tax. You really need to have someone working with you, ideally, a real estate agent, who knows the market and can tell you, “Hey, this is where it is now. This is where it’s going. This is how it will apply to you.”
Sciple: Yeah. We mentioned off the top of the show how going through a real estate transaction is something that very few people do. However, realtors do this as part of their business, so they can really help guide you through some of these issues.
One question I wanted to follow up with you guys talking about real estate tax is, with the changes in the tax law when it comes to state and local tax deductions, how does that affect the math that you do when looking at a real estate purchase and really evaluating your tax bill for your property?
Backman: If you live in a high property tax state, it could impact you a lot. Where I live in New Jersey, the average property tax bill is somewhere in the ballpark of $8,000 to $9,000 a year. But I know people in my own neighborhood who are paying easily double. With the SALT deduction, the state and local tax deduction, which encompasses property taxes, now capped at $10,000, there’s a lot of folks out there, if you live in a high property tax state, you’re not fully writing off your property taxes, not even close. There’s that consideration.
Kline: I live in a no-state-income-tax state. So that property tax deduction is an important one. I also live in a state that generally has bad schools, so our property taxes aren’t that high. You’re in a position where, for me, I’m not going to hit that $10,000 limit. So I theoretically could buy something with higher property taxes and have it be a benefit.
Sciple: OK, let’s go talk about your next tip. And that’s to know the maintenance costs on your home. That can be difficult to do because how am I going to know the last time they replaced the air conditioner or things like that? How do you track that for a property you may not be as familiar with over time?
Backman: Well, first of all, just as a general rule of thumb, and there’s always exceptions, but as a general rule of thumb, homeowners are advised to estimate their standard upkeep at anywhere from 1% to 4% of their home’s value. That’s standard upkeep. That doesn’t account for things like the roof needing to be replaced or the heating system going kaput. Now, the logical part of you will say that if you’re buying a fairly new home, your upkeep might fall toward the lower end of that range; and if you’re buying a home that was constructed in 1922, it might be higher. But definitely get yourself a good home inspector.
Kline: Plan for the worst. Maurie has been in our vacation home in the Orlando area. We bought a home, and inspection was not required, but we had a contractor go look at it. And the contractor looked at it, and he said, “Well, the roof is going to be good for a few years, but eventually, you’ll need a roof.” And we had the AC company come service the AC, and they said, “Yeah, your units not powerful enough on a hot day to keep your whole house cool quickly. But there’s nothing wrong with it, it will last three or four more years.” They both died within a week of each other. The AC had to be replaced immediately. $4,000 or $5,000 expense. The roof, after one of the storms, it started raining inside the house.
Backman: Luckily, he replaced those things before I got there.
Kline: Actually, the roof still needs to be done.
Backman: Well, the AC is working great!
Kline: So, two expenses that I counted on, and said, “OK, I’ll have to spend about $10,000 to $12,000 on these over the next three years,” I had to do all at once. So it wasn’t fun. But all it did was speed up my expenditure on something I knew was coming. You need to ask, how old is the roof? The heating and AC system, not only do you need to know how old it is, you might need to research that unit. How often does it need to be replaced? Your hot water heater now is going to go every three years. That’s a $400 or $500 expense, it’s not that big a deal. But the right HVAC unit might last 15 years. A cheap one might last six. So you really need to do your homework there.
A home inspection is important. I bought a lot of houses, and I’ve made every one of these mistakes. I now flush every toilet. Turn on the tubs, fill them and see if they drain. We had a tub that didn’t drain. And we were told, in a house that didn’t have a basement, that our pipes were under the living room, and the pipes were collapsing.
Backman: Oh, great! That’s what you want!
Kline: The fix for that is to dig up your living room and replace the pipes from a house built in the 50s. So, you really need to see what they are, because once you buy it, it’s yours.
Backman: I definitely agree. When you’re walking through that house, when you’re interested in the house, touch everything. Open doors. Do they stick? Are they splintering? Chances are, there’s some sort of issue, there’s a reason that things are getting warped. Another thing, and I’m not sure how to check for this, sinking foundations are a big one. How do you check for a sinking foundation?
Kline: Have a contractor look at the house. A good home inspector will notice that. But you really need to put the home through its paces. It sounds silly; you’re not literally going to take a shower while you’re walking around the house.
Backman: But you can turn the shower on.
Kline: Turn the shower on five minutes and see if the water is still hot. Look up. We’ve made this mistake. Look up, you’ll see water damage. If you notice that one area of paint is nicer than the other, they don’t have to disclose that, but they have to answer it if you ask the question. And they might say, “Yeah, someone left the tub on and it overflowed.” Or, maybe there’s a leak in the roof. You won’t always get to the bottom of why something happened. But sometimes, there’s water damage where, yeah, our washer/dryer exploded and we had to replace all this. Or, in the case of one of the houses, hey, the basement floods every time it rains. That’s why the washer/dryer were up on cement blocks, and I didn’t think to ask the question.
Sciple: Long story short, pay attention to detail in particular when you’re walking through the home.
I want to follow up. On the front end, you’ve accounted for your repair expenses. But a thing that’s really significant for me when I’m thinking about owning a home as a millennial is, I’m going to have to do these repairs at some point in time. When I was at my parents’ house, maybe I vacuumed the house, maybe I did the laundry, but I didn’t put a new roof on the house, I didn’t replace the air conditioner. I didn’t do all these types of maintenance repairs that you don’t really do until you become a homeowner. What advice do you have to someone who might be a new homeowner who might not be familiar with these sorts of maintenance projects that you have to do to figure out who a good contractor is? Can I do this repair myself? All those practical tips that come into actually owning a home yourself.
Kline: You have to do your homework. We’ve been very lucky that in both of our home locations, we have contractors that we’ve become friends with. In one case, it was the guy that did maintenance for the previous owner. His wife now picks my son up when I’m not there. I can’t change a light bulb, he does odd jobs for me in between work. We’ve been very lucky. But we have to replace our floor. We’re doing all-new flooring. Flooring in a condo in Florida, you can’t do on an owner permit. It has to be a licensed contractor permit. So, my friend, who is very handy but not a licensed contractor, can’t do it. So I had him help me interview people to do it. You have to get the references, you have to check their past jobs, you have to google, “What should a roof replacement cost me in this area?” and understand the difference between a $6,000 roof and a $9,000 roof. Or in the case of some places with snow, the difference between a $9,000 roof and a $30,000 metal roof that can bear all the weight of snow and you never have to shovel your roof. You have to figure out all these things. And if you’re handy, maybe you can like put a TV bracket up. I can’t. You could pay Best Buy, and it’s $250 for them to do it. Or you could go online and pay someone $40 to come over and do it. And it might not be as clean, and the person might not be as professional, but your TV will be hanging.
Backman: That’s something else. It’s a good point that Dan touched on. You have to know your own abilities when you go into homeownership. If you’re pretty convinced that you fall into the “I can’t change a light bulb” camp, you need to pad your budget for maintenance and repairs. Chances are, you’ll be outsourcing a lot of stuff that you can do yourself. I’m pretty not-handy. Thankfully, my husband is handy. So if it’s a simple plumbing repair or something pretty basic, we’re not dropping $100 on a service call or $150 here and there. He’s doing it himself. But make no mistake about it — if our roof ever needs to be replaced, we’re calling roofers.
Kline: And what type of home you buy should reflect your handiness. We don’t live in a single-family home because I can’t fix stuff. We live in a condo. The windows are not my responsibility. The outside, the roof. I don’t have to clean the pool. I don’t have to, I don’t know, dust the gym. That made a lot of sense for me. And I joke that I can’t change a light bulb, but the last time we had a light bulb go out, I climb up on the ladder, I unscrew the thing, it took a while, it was kind of difficult. I changed the light bulb, I put the thing on, and I think, “Well, I’m not going to screw it in quite as hard so it’s easier next time.” Two minutes later, kablam. [laughs] Glass everywhere!
Backman: That’s so where that one was going. [laughs]
Kline: And my wife has forbidden me changing a light bulb, to the point that we’ve changed some of our fixtures to put in LEDs that don’t need to be changed more than once every 10 years.
Backman: Right. Another thing is, if you are relying on outside contractors, always comparison shop. Even if you get a good recommendation, never just go with the first quote you get. What do you really know if you’re getting a fair price unless you get a couple of different people in and say, all right, well, this one wants to charge me $800 for this project; this one wants to charge me $650. What is it about this first person that’s worth $150 more?
Kline: It’s very much like buying a car. If you go in knowing what you should pay — with our flooring, we have one quote that’s about $9,000 and one that’s about $7,000. The guy who’s charging $9,000 is better. The quality of the flooring is better. What we haven’t figured out is if the cheaper one is good enough. And it probably is. They’re both pretty nice flooring because the statute requires you to have a certain thickness — that’s the other thing you need to know. In some markets, you can do a roof repair under a certain dollar amount without a permit. In other markets, you need a permit to do anything exterior. In some, you don’t need to do interior work, unless it’s electrical.
Backman: By the way, on those permits, often your township or whatnot will charge you for the privilege of updating or repairing your own home by charging you a permit fee.
Kline: On our floor, it gets 10%.
Backman: I think in my town, the permit fee is generally a function of the cost of the project. When we finished our basement, we had to take our estimate to the township and say, “OK, we’re looking at spending $X to finish our basement.” And they said, “Oh, great! We’re glad you’re doing this, this and this, because now we get to charge you whatever percent of that.” And it’s like, awesome. We budgeted in what we thought we could afford for the basement, and then we got slapped with this ridiculous, multi-hundred-dollar permit on top of it.
Kline: And what’s worse is, your property tax can increase if you markedly improved the home, or increase the square feet of livable area.
Backman: Mm-hmm. Trust me, if you live in New Jersey, and you basically finish off your basement and add a good 900, 1,000 square feet of extra living space, your property tax bill starts to look really, really scary.
Sciple: All that to say, know your maintenance costs, know what you need, and do the research.
Kline: I think we’re saying don’t buy a house! [laughs]
Backman: [laughs] Don’t not buy a house if you’re equipped to buy a house, but know that the down payment that you come up with is just the tip of the iceberg. You’re signing on to be financially responsible for maintaining a structure for the foreseeable future. Which is why I always tell people — and let’s be clear, everyone should do this — if you’re buying a house, make sure you have a healthy emergency fund. Make sure you have a healthy amount of money in the bank, ideally, a good six months’ worth of living expenses or more. You’re now responsible for, again, all these things that could go wrong.
Kline: And amazing things go wrong. [laughs]
Backman: Right. I will say that my husband and I bought a new construction house back in 2009. I can’t tell you how many repairs we had within the first two years. And you’d think we’d be protected from that because everything was brand spanking new, but, no.
Sciple: All that to say, a home is a long-term commitment, and you need to treat it that way when it comes to maintenance expenses and saving for your home. As part of that, that ties in nicely with our fifth tip, which is to think beyond your immediate needs. You’re going to be in this home for the long term. What needs might you need in the future? You want to talk a little bit about that, and how to think about that when buying a home?
Kline: A lot of people buy a first home when they have a baby. You see this on House Hunters. “Oh, that room is small, but it will be the nursery.” Well, it takes a lot of vision as a parent to figure out your kid’s going to get bigger.
Backman: Or you might have more of them.
Kline: We once moved out of a house because we could not picture our son ever being able to do stairs. So we moved to a ranch house. And it was kind of a dangerous house, it was hard to protect the stairs, so it sort of made sense. But when we looked at houses, we didn’t go, “Let’s buy a house with stairs that we can easily put gates on.” We just didn’t look at houses with stairs, [laughs] not thinking, “Our kid will get older and stairs might be a benefit in terms of separation.” Maybe your kid only needs a small amount of space outside when they’re young. But as they get older, they might want to kick a ball around. Is there a park nearby? What’s the walking distance to schools? Is there a supermarket?
Backman: How are the schools?
Kline: Yeah. What’s the crime like? When you’re your age and don’t have kids, you have more flexibility to buy in a neighborhood where the schools are bad. But your resale is harder because it limits your pool of people you can sell to. You really need to think about it. Look, you can’t predict every part of life. People have kids accidentally, they get sick when they didn’t plan on it, lots of things happen. But if you logically know you’re probably going to have kids, or you’re probably not going to have kids, or, you might work from home in a year from now so you need space in your house to do that — you need to at least do a, “Here’s what we think is going to happen” test.
Sciple: When you talk about making a long-term commitment to your home and preparing for the future, what your future needs might be, what do you think of the concept of a starter home? “This is my starter home. I’m going to live in this home for a period of time, then I’m going to resell it and move up to a larger home as my needs adjust.” Is that a decision that’s not prudent for someone to make?
Backman: I think that’s an OK decision to make, especially if, for example, let’s say you buy a smaller home that’s a starter home because right now, it’s just maybe two of you. And you know that you want to have kids in five or six years. The thing is, remember those closing costs we talked about? You have to be in your home for a certain amount of time to essentially recoup those costs. What is it, three to five years?
Kline: It depends what you pay.
Backman: But is that the general benchmark? I think they say three to five years. So, it’s not a good idea to buy a starter home and think, “All right, I’ll flip it in a year.”
Kline: Unless, if you live in a market where you can say, “Wow, the prices are only going up. This is a hot area; the schools are great. I can reasonably assume, if I live here three years, I’m going to be able to sell at a premium that covers all this,” that’s a risk. But Maurie lives in a market where there’s very limited rental. When we lived in Connecticut, you could not rent a single-family home and guarantee you’d be able to stay there through your kids going to school. So you had to buy a starter home. It was the price of entry to being in that market. In Florida, there is almost no place where there aren’t rental communities next to ownership communities. In that case, I would actually suggest you rent below your means so you can save up for the home. But this depends on — we talked about sort of the house as a savings account, which is a bad idea. But if you’re not the type of person who can be disciplined and put the money away, you might be better off having a home that you use and build equity as a way to buy your bigger home.
Sciple: Here’s a question. Say I’m moving to a new market. You talked about in Florida, the availability of rental properties, or Connecticut, where you have to purchase a home. If you’re unfamiliar with the market, and you’re moving somewhere, and you’re trying to plan for the future, what advice might you have for someone like that, to plan what purchases they need to make?
Kline: Go stay there!
Backman: Spend some time there!
Kline: Yeah. Before we bought our Orlando property, we rented, probably illegally, Airbnb a lot of the time, in not quite the complex we bought in, but in many similar ones. We learned things. We didn’t want a gate. Gates added security, but if Maurie’s going to stay there for the weekend with her family, I have to put her on the list. And the list never works right. So, it was always a hassle. We learned we didn’t want that. We learned we didn’t want to be near the main highway, we wanted to be one highway over, so if I wanted to run out and get coffee, I didn’t get hit with the Disney traffic that can make a mile take 35 minutes. You really need to learn the little things like that. That’s not always plausible to do. But I am a big fan of, if you have to move markets, rent for a year. You will learn what you don’t like.
Backman: Right, exactly!
Sciple: Yeah. I think a lot of good practical advice for folks looking to buy a home. As we set off the top of the show, it’s a transaction that people don’t do a lot in their life, so to get some advice from y’all, who’ve done it before, and have gone through some of these issues, whether it’s maintenance, or any of those sorts of things, I think is really valuable.
Before we go away, do you have any final thoughts for our listeners about buying a home, things that they really should focus on when they look to make a home purchase?
Backman: One big one, assuming that you’re set in your job and locked into your job, test run your commute. That’s a big one. When I moved out to New Jersey, I was still working in Manhattan. You’d think, “Oh, they’re right next to each other. How bad of a commute could that be?” It was bad! [laughs] One of the things was, my husband actually lived out there — before he was my husband — he lived out there at the time, and I would come out on weekends a lot. I wasn’t necessarily commuting during the horror of rush hour, so I didn’t have a very fair idea of what it would actually be like in practice, day in and day out.
Kline: You really need to know what’s important to you. My wife and I have bought so many homes, we traded space for location. I live in downtown West Palm Beach, I can walk everywhere. But I went from 3,000 square feet in Connecticut to 1,350 square feet. But we knew we needed a third bedroom. Not because we have guests, but because we have cats, and we can’t close the door on the main bedroom. If she goes to bed an hour before I do, she can’t close the door, so I can’t watch TV in the living room. I go watch TV in the third bedroom with that door closed because for some reason, the cats don’t cry outside of that room. That sounds silly, but it’s super important lifestyle to her getting up at six in the morning to go to work. I don’t go to work. I sit on my couch and work. So, that was very important. We could have had a bigger two-bedroom in the same building, but that layout wouldn’t have worked for us.
Sciple: Yeah, know your needs.
Backman: Know your needs, exactly!
Sciple: Dan and Maurie, thank y’all so much for taking the time to talk to us and for sharing all your knowledge when it comes to real estate purchases.
Backman: Yeah, this was great!
Kline: Thank you, and don’t buy a tiny house! Terrible idea, even if it seems like a great one! [laughs]
Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear. Thanks to Dan Boyd for his work behind the glass! For Dan Kline and Maurie Backman, I’m Nick Sciple. Thanks for listening, and Fool on!
Daniel B. Kline has no position in any of the stocks mentioned. Maurie Backman owns shares of Walt Disney. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.