Purchasing a new home can be a very stressful experience. Most people are making the largest single purchase of a lifetime when selecting a primary residence. In addition to the monetary implications of such a large purchase, the actual process of buying a home contributes significantly to this stressful event of purchasing a home. Especially in today's markets, buyers must be well informed and have a good understanding of a property's underlying value before making the purchase decision. Prospective buyers saw real estate values plummet across the country during the mortgage meltdown.
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Even in a difficult market, once buyers are able to select a residence that meets their personal and financial criteria, it is important for them to remain diligent until the property closes. Buyers should not let the home of their dreams escape them over minor differences during the buying and negotiating processes. Let's examine some of these minor roadblocks and maybe you will be able to overcome, or at least recognize, them when you decide to purchase your dream home. (For a background, see our Investopedia Special Feature: Subprime Mortgages.)
Prospective buyers should not let minor aesthetic differences hinder their big picture view of their dream house. If appliances or the decorative theme are not up to your expectations, keep in mind that most of these things can be easily modified over time.
Perhaps more important when viewing the interior of the home is to check for overall structural soundness and try to focus on potential rather than current appearance. So, how do you do this? A good strategy is to secure a licensed home inspector prior to closing on your deal. The inspector will provide a detailed analysis and cost breakdown on actual required repairs. Depending upon which state you reside in, the home inspection can be part of the actual contract. The home inspector will assess every aspect of the home's interior and exterior. The inspection findings may be legally used as leverage in the home buying process:
If the cost of repairs exceeds a preset dollar amount, the contract can be revoked if that is explicitly stated in your contract. For example, if the home inspection requires $8,000 worth of repairs for "structural soundness," but your contract states that you will not purchase the home unless repairs are below $1,000 then you have legal recourse for getting out of the deal. Typically, you are responsible for the non-refundable cost of the inspection, but most people are willing to incur that cost in order to save thousands of dollars down the road. The idea here is to focus more on the integrity of the home itself as a first step rather than your distaste for the current interior design or décor. (To learn more, see Do You Need A Home Inspection?)
Buyers should not get discouraged when their potential dream homes require some old-fashioned manual labor to get it up to their standards. Real estate professionals refer to this as "sweat equity." Sweat equity is a time investment by the potential buyer to clean, redo and repair the potential property once the purchase is complete. Rarely are homes purchased that require no effort on your part. New construction is perhaps an exception, but a poor real-estate market can be littered with short sales and foreclosures - many of which are neglected, vacant properties. Also, many purchases are older properties with excellent construction characteristics but needing some "elbow grease."
Similar to the aesthetic differences mentioned above, leveraging resources such as a licensed real estate sales person or family and friends is a good first step. Licensed real estate agents are likely to point out things that can be accomplished by the typical home buyer versus those things that would be better served with professional assistance or advice. (See Do You Need A Real Estate Agent? for more.)
Financial Differences of $5,000
Although $5,000 is not a trivial amount of money, that sum and slightly higher should not interfere with purchasing your dream home. Based upon your due diligence and research, you have done or have had your real estate agent do a market analysis of your potential dream property. You have already done your part to minimize your price risk and now the deal needs to happen but there is not an agreed to price.
So, where can you find anywhere between $5,000-10,000 to make your transaction successful? Here are some considerations: Look into government incentives like the first time home buyer credit or repeat home buyer credits that were available for home buyers until middle of 2010. Such incentives may be used for down payment assistance which could essentially covers your price difference. Secondly, ask your real estate agent (if you are using one) to trim their commission. Asking for 1-2% reduction in commission can be a good source of additional funds. real estate agents make $0 if your deal doesn't go through, so they have as much incentive to keep your deal alive as you do. If none of these apply to your particular situation, then you may need to be creative. Asking the seller to buy down your mortgage points is also a viable option. Check with your mortgage broker and get a quote on how much a buy down of one point would cost. It will likely not be enough to cover a $5000-10,000 deficit immediately, but over a 30-year period this will save thousands of dollars.
(To learn more, read Mortgage Points – What's The Point?)
The Bottom Line
Purchasing a home is a long-term investment. The process of buying a home can be taxing. Many of today's homes will be purchased as short sales or bank-owned properties. These distressed properties typically will take longer to close than the traditional, seller-owned properties. Remaining patient and diligent and not letting minor repairs or a few thousand dollars in price will likely pay dividends for years to come. (For more, see 10 Tips For Getting A Fair Price On A Home.)