Houston Texas Real Estate Center
Houston-REALTORS®, Broker (713) 589-2220

Dear Home Buyer,

Two things you need to consider here: Your NEEDS…and your WANTS. They’re two very different things.

You may need four bedrooms because of your children, or need a 3-car garage because of your three cars.

What you’ll find is your needs are fairly basic. It’s the "wants" that take a little more time to clarify. Here is a list of needs you should consider before looking for your home:

A great way to get a handle on your wants is to take a good look at your present home. What do you like about it? Do you like its open floor plan? Do you like the kitchen and eating areas? Do you like the common area layout?

List out everything you like about your present home, or homes you’ve visited.

Now, let’s take a look at what you don’t like about your home. Do you hate the flat roof? Do you hate the master bedroom layout? Are the bedrooms too small? Is the kitchen too far from the garage?

If you dislike something with your present home, you’re going to dislike it with your new home. So the better you can identify these items, the more likely you are to avoid them.

Here’s a good suggestion: Take out a piece of paper and draw a vertical line down the middle. In the left column, write down everything you like about your present home. In the right column, write down everything you dislike about your present home. It’s also important you understand WHY you dislike something.

Now, from your list of "likes," let’s compile a list of features you want for your new home. Here’s an important tip that will help you really narrow your focus.

Take out another sheet of paper and put two columns on it. On the left hand side, you will be listing out the features of your home. And on the right hand side, you’ll be listing out the benefits. For each feature, you want to list the benefit of that feature.

Features tell you what something IS: three bedroom, two bath, 3-car garage, etc. Benefits tell you what something DOES. Benefits fulfill desires.

For example, a great room concept (feature) will be ideal for entertaining friends and family at special times (benefit). So on the left hand side, you would put "great room." And on the right hand side, list out all the benefits (or reasons) for the "great room" design: family entertaining, business entertaining, Thanksgiving holidays with the family, etc.

If you’re a husband and wife looking for a home, this exercise will eliminate many disagreements down the road. You will both understand what the other wants, and WHY they want it.

I recommend you RANK each feature in terms of its importance to you and your spouse. You’re both going to live in the home, so you better understand what the other is looking for.

For example, a well designed gourmet kitchen (remember, list ALL the features of the kitchen you’re looking for) may rank high with a woman, while having a workshop may rank high with a man. Try to understand each other’s priorities.

Ranking will also show you areas you may need to eliminate because of price constraints.

And by having each person rank the importance of the features they want, you won’t be eliminating a high priority item and putting additional stress on an already stressful time.

Your ability to afford a home will be related to a number of items. They are:

The PRICE of the home.

Your DOWN PAYMENT on your home, and thus the amount financed.

The INTEREST RATE and POINTS of your loan - the amount a bank charges you for the money.

The TERM of your loan: 10 year, 15 year, 30 year.

The overall TYPE of your loan. Most common is fixed vs. variable rates, but there are hundreds of loan packages from which to choose.

And just in case you were looking for a specific "rule of thumb," for financing your home, you should know that…

Here’s a simple and fast way to "ballpark" the actual annual return on investment you get from the money you put down on your home:

Take a look at the homes in your area. How much have they appreciated each year on average, over the past five years? For example, you might find that values have increased an average of 1.5% a year.

Now, take the total cost of your home, multiply that value times 1.5% (the average expected annual appreciation of your home). For example, a $150,000 home increasing value at 1.5% for the first year. Thus, the home will be worth $2,250 more a year from now.

Now, divide the amount of increase in your home ($2,250 in the example) by the total amount of Down Payment you put into the home. For example, if you put down 20% (or $30,000), then $2,250/$30,000 = 7.5%.

Now 7.5% sounds like a fair investment. But the question you need to ask is this: Can you make more than 7.5% elsewhere?

And did you notice something else here? Had you put down just $15,000, your return on your Down Payment would be 15%!

The moral of the story: Putting more money into your home may make your banker happy, because it lowers the risk of getting his money out if you default.

And it may make your overall payment a little lower…

But it may be a wiser decision to put less into your home, IF you can locate an alternate investment that will pay greater interest on your hard-earned equity.

Now, let’s shift gears a little and talk about the impact Term and Interest rate will have on your overall financial picture…

That’s money taken out of your pocket if you don’t look for good rates!

And if you think interest rate has an impact on your overall financial picture, take a look at what modifying the TERM of your loan can do.

Here’s another example of a $150,000 loan at 7% interest. But this time, we examine the total interest paid when you select a 30-year vs. a 15-year vs. a 10-year amortization:

The "bottom line?" Estimate the maximum amount of payment you can afford, and adjust TERM and INTEREST RATE of your loan to minimize the amount of total interest you’ll pay.

But then your banker cuts in and says, "but the interest you pay is Tax Deductible…" And you should know this: If you’re in the 28% tax bracket, for every dollar in interest you pay, you only save 28 cents. Don’t go spending a dollar to save 28 cents if you can help it!

Another consideration in the formula is the amount of POINTS your lender will charge you to initiate your loan. And what you’ll notice is there’s a GAME being played with you.

And if you don’t know the rules of the game, YOU LOSE!

Sitting across from a banker while he throws obscure numbers at you like you’re a human dartboard can be pretty overwhelming. And frequently you’ll hear terms like "7.5% with 1.5 points," or "7.25 with 1 point."

All-the-while you’re thinking to yourself, "I have no idea what the financial impact of this guy’s blabbering means to me." And quite frankly, your banker knows…

So hopefully this little "ballpark" example will help you quickly determine the best points-to-interest rate for you. How many points should you pay, and what formula is best for you? Here’s a little help…

If a banker is giving you several options of interest rates and points, you need to sort out the financial consequences so you don’t lose money. Say, for example, you were considering two loans. Both are for $150,000, and both are 30-year amortization.

What’s the ONE factor that will determine which loan is better?

The first thing you need to think about is how long you’re going to live in that home. The average homeowner spends about 5.5 years in their home before selling for whatever reason.

So, for example sake, let’s say you plan to live in the home five years. Here’s how you determine which deal is better:

Take the difference in monthly payments (principal and interest only) of EACH loan.

Multiply that amount by 12 months to get the annual amount of difference.

DIVIDE that amount into the $$ amount of points you pay to determine the number of years at which you recover the points paid up front. If the number of years is LESS than your anticipated time in your home, you’ll be better off paying the points and getting the lower rate. If it’s higher than you plan to spend in the home, opt for the lower points.

The difference in monthly payments is $51 a month ($1049 - $998 = $51).

$51 X 12 months is a savings on (approximate) interest of $612 per year.

Total Cost Of Points divided by $612 is 6.13 years ($3,750/$612 = 6.13).

The result? If you stay in your home for five years, you will NOT recoup the points you paid up front with the savings in a lower interest rate. Recoup time is about six years and two months to breakeven.

So your best bet would be to select loan #1.

If, however, you planned to keep your home beyond six years and two months, you’d be better off with loan #2 (i.e. the overall savings in interest rate will exceed the amount you paid in points - not considering the time value of money).

Are you starting to see how important it is to understand your home’s financing? How important it is to shop for the best rates, terms, and points?

Good! Now, let’s move on to another important secret for buying your home…

One of the biggest mistakes people make when buying homes is they rely solely on "local neighborhood market analysis information" to determine the right price to pay for a home.

Before you buy or refinance your home, INSIST on seeing a "total market overview" of exactly what is going on in the ENTIRE market. Then narrow your analysis to local market information.

Why do I say this? Because you want to know two things: 1) What is the ENTIRE market doing with values? Are they going up? And by how much? 2) What is the specific area doing with market values? How does it compare to what the total market is doing? Are the growth rates the same, lower, or higher than the overall market?

Understanding these parameters will save you thousands of dollars when you make an offer on a home. I frequently perform both of these analyses for my buyers, in an easy to understand format, so you know EXACTLY what you’re buying!

OK, so let’s say you’re now pre-qualified with financing, and you’ve also found a number of homes to preview.

It’s now time to find not only a home that fits your needs, but a home that will be a good investment. What are some of the things you should look for?

Well, the first thing I always look for is what I call "siting." Siting involves evaluating three areas: Location, Lot siting, and Home siting.

The general location of the home you’re considering could determine how happy you’ll be living there, and what kind of an investment you’re buying. Here’s an important tip that will almost always make you money…

Why do I say this? Because the better the neighborhood, the better the appreciation for you over time. And if you buy the midrange home, the home will "generally" appreciate faster and greater than a higher priced home in the same area.

Plus, you will most certainly spend money updating or decorating your new home, and you don’t want to get "upside down" on your home’s value after spending money for improvements. So remember…

Now the second area you need to consider is Lot siting. Lot siting has to do with WHERE your particular lot is located in the subdivision you’re considering. Ask your agent for a plat map of the entire subdivision. Now take a look at where your home’s lot is located in the subdivision.

Is it near a common area? Does it capture better views than other lots in the area? Is it more private, or shaped better than other lots? Is it near a loud street?

Lot siting in a neighborhood will give you a basis for knowing how well the home will appreciate vs. other homes in the neighborhood (assuming the home is reasonable).

Finally, you want to look at the Home siting. How well did the builder take advantage of all the amenities the LOT offers a home? Are the views great? How’s the curb appeal? Is there a balance between front and back yards? Do you see any drainage problems because of where the home has been located on the lot?

Think through these things as you visit each home.

Now, as you approach your home, there are other things you want to keep in mind…

What is your initial reaction of the home as you approach it from the street? This is called "curb appeal," and it has a great impact on the value of the home. Is the home sited right on the lot? Notice the areas around the home? Are they well maintained? Is the landscaping groomed?

Take a look at the structure of the home? As you go through the home, windows and doors should be square, and they should close correctly. Look around windows and doors for cracks. Check corners of rooms for sloping or tile/wood cracks. These may reveal foundation or water problems.

Now think about the floor plan of the home. Is it functional? Do the common areas flow the way you want them to? Are the halls narrow and long, or are they open? How far will you have to carry the groceries from the garage? Are the rooms the right size and height for your desires? If there have been any additions, were they done professionally? Do they fit with the flow and style of the home?

Now, check the roof and ceilings. Is the roof the type you prefer? Is it in good condition? When was the last time the home was roofed?

Now make a basic check of the plumbing, mechanical, and electrical systems. Do drains and toilets work correctly? Is the property connected to sewer, or will you have to deal with a septic system? Is the electrical wiring up to code? And are the mechanical systems working properly? Make sure you get these systems inspected by a licensed contractor or inspector BEFORE you close any deals.

Years ago a real estate expert told me that the party who is less motivated almost always gets the better deal. The ONE single element that will determine how well you negotiate your offer is…

If the home has been on the market for over a year, perhaps it’s because the seller hasn’t been motivated enough to sell. Or perhaps the home hasn’t sold and he/she is very motivated.

And if you’ve been looking for four months, your kids are late for starting school this year because you haven’t found a home yet, and you now have found the right home, YOU may be very motivated to buy!

Nevertheless, here’s a tip you MUST bring to any real estate transaction…

If you’re all giddy about the home. If you can’t hold back your emotions when around the home, then you’re going to get clobbered when negotiating the purchase.