by Neil Kearney | Oct 11, 2019 | General Real Estate Advice |
Each month a different local top producing Realtor is featured in Boulder County Real Producers magazine. Neil is featured on the cover on of the October 2019 edition. Thanks to Darren Thornberry for writing a great article and Liv Berger for taking the photos!
You can read the article with the photos in the reader below. To turn the page click on the arrows in the lower left hand corner. To read just the text scroll down.
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Here is the copy of the article
Kearney Realty
Integrity is the Legacy
By Darren Thornberry
There are many clichés about surviving hard times (think lemons and lemonade), and people are fond of saying that they all have a kernel of truth in them. But a cliche is nothing like the true human story you’re about to read. The story of Neil Kearney, broker/owner of Kearney Realty, can’t be reduced to a cute sentence with a sappy message. It’s much more than that. It’s about a man with a work ethic as strong as steel who has weathered some deep personal storms but remains joyful, with an attitude of service that has been his ethos for decades. Kearney is widely known. He specializes in residential real estate throughout Boulder County. Neil graciously spent some time with Real Producers to talk about what makes him tick. Guess what: It isn’t real estate.
Neil, who grew up in Boulder, stayed home for his first two years of college at CU and graduated from Principia College (Elsah, Ill.), with a bachelor’s degree in business administration. He came home to tackle an MBA at CU but decided (self-starter that he is) to work in real estate so he could fund his graduate program. This wasn’t a random choice. By that time, his parents had been realtors for eight years. Neil’s mother Jo Kearney was already a top producer in Boulder. So he forged ahead, working and studying, until he finished grad school. “I told myself I’ll do it just long enough to get through school and find something else,” Neil recalls. “But by the time I graduated, business was going really well!”
That doesn’t mean it all just fell into place, though. When he started full time as a Realtor at age 23, he looked about 15 and had to work hard to gain clients’ trust. The baby face impeded overnight success!
Metro Brokers was a big part of Neil’s early journey as a Realtor. His father John ran the office for years, and that’s where Neil landed as a broker right out of college. Mother Jo was working for another agency at the time but eventually joined the family company. The Kearneys were a family force to be reckoned with, guided by Jo’s motto for life: Lead with love. “Mom was very charismatic and showed love to everyone in every interaction,” Neil says. “She taught me to be of service and to lead with love.”
John Kearney retired in 2008 and Neil then took over his family’s business in full, going completely independent as Kearney Realty in 2012 with a small crew of agents. And it was his father John who demonstrated integrity, calmness, and consistency to Neil — three principles he relies on in business and his personal life every day.
But even when the market was wobbly and slow circa 2008-2010, Kearney got out exactly what he put in. He showed up on time, took care of his clients, asked where and how he could serve them, and worked his butt off (as he still does) to write his regular newsletter, blog, and neighborhood guide. It was only a matter of time until things changed, and change they did in ways he could not see coming.
Storms and How to Weather Them Well
In 2015, John Kearney died. Five months later, Neil’s mother Jo was also gone. And in November 2018, Neil’s beloved wife of 25 years, Kristy, passed away. It would be a fool’s errand to try to put on paper what these family members mean to Neil and his sons Jake, 23, and Ben, 19, but suffice to say the losses are profound.
Jo’s and Kristy’s desks are quiet now, which has been a big transition for Neil. Kristy was with him at work three or four afternoons a week. Neil took some time off, but found that the structure and interactions in his workday were good therapy. Meeting interesting new people every day keeps him moving forward, even if he can’t see all that the future holds.
“The principles of how I do business haven’t changed,” he says. “I’ve always had a deep well of joy that can’t be tapped out. That’s who I am. Of course the situation is hard in some ways, but I have so much to be grateful for. I still consider myself very fortunate. It’s a matter of finding new routines to express that and be thoughtful as I move on in life.”
Neil’s long-standing spiritual community at First Church of Christ, Scientist, has rallied around his family, and his own deeply held faith has been an anchor. And after everything that’s happened, what gets him out of bed in the morning? “In the end, it has nothing to do with houses. It’s about serving people in a smooth, efficient, frictionless way. I take care of the details, and I’m grateful to be able to serve.”
Neil’s work as a Realtor has included long-term volunteer positions going back to 1998: BARA treasurer, BARA President, and IRES Board of Managers and Professional Standards at both the local and state level. Lauren Hansen, IRES CEO: “Neil served as an IRES Manager (MLS Director) for over a decade and it was not only a pleasure to work with him, but a privilege. The list of adjectives I could use to describe Neil is lengthy: Fair, balanced, thoughtful, and humble would be at the top of the list. He lives and breathes high standards and his perspective was always valued by our leadership.”
Neil is hands-on, to put it mildly. What he loves about real estate are the many hats that he wears on every given day. Depending on what needs to be done, he is the CEO, treasurer, marketer, photographer, writer, janitor, negotiator, trusted advisor, and more. He doesn’t get burned out by his work because his attitude is rooted in gratitude. “The process is important to me,” he says. “I’m an old fashioned guy, and I keep to what I’m good at. I work within my core competencies and it keeps the ball rolling. I try to live up to the integrity that I aspire to.”
by Neil Kearney | Aug 23, 2019 | General Real Estate Advice, Real Estate 101 |
Millions of dollars are being poured into the real estate industry through venture capital and much of that money is going into a segment called “iBuying”. IBuying is when a consumer sells their home to a corporation whose business it is to purchase homes using a streamlined process for a price derived by an algorithm, The sales transactions are cash purchases and can be completed quickly. In this article I will provide a high level overview of what it is, who is involved, the nuts and bolts of the process and the pros and cons of working with an iBuyer.
The concept isn’t new. We have seen homemade signs tacked to power poles and post cards offering to buy your “ugly house” for decades. The idea has always been to provide convenience to a small segment of the market who values the idea of selling their house quickly over getting every dollar out of the house. The logistics of how to get to your next house while dealing with the unknowns (time, price) of selling your current home are often a huge factor in the reason why people decide to stay put. Providing a method that simplifies that puzzle is a much needed service. But are the associated costs worth it?
The main entrants into the iBuying space are public companies (Zillow), venture capital backed startups (Opendoor, OfferPad, Knock), and brokerages like Keller Williams and Redfin. For these companies there are three possible revenue streams: 1) The return on buying a property for a discount and then selling it (sometimes at a much later date after renting it out or renovating it) for a higher price. 2) Fees collected as part of the transaction. These fees can run up to 10%. 3) The value of the name of the potential sellers who turn down the offer. Let me explain a bit more about each of these.
- Each company will generate an offer priced based on available data fed into their proprietary data stream. I can imagine that the algorithms include recent sales, forward looking market trends, assessor data, neighborhood statistics and more. After asking for an offer, the seller can expect an offer within 24 hours. There is no opportunity for negotiation. The price offered includes a discount for the liquidity provided and the risks to the company that include; condition risk and market risk (this hasn’t been tested in a stagnant or falling market). The price offered, while competitive is less than what the algorithm thinks that the house is worth. They are after all looking for positive investment returns and providing a convenience for the seller. They hope to buy as low as they can and sell later for a positive return.
- On top of the lower than market price there are fees associated with selling to an iBuyer. Reportedly these range between 7% and 10% of the agreed upon price.
- One figure I saw while researching this article said that as many as 90% of sellers turns down the offer. In today’s economy good data is money and qualified leads are money. These companies including Zillow realize that brokerages and individual agents will pay good money for a stream of seller prospects who have indicated that they are ready to sell. Like relocation companies who fund their services by charging hefty referral fees to Realtors, this data source will be an increasing source of revenue for the companies involved.
After requesting an offer from an iBuyer you can expect to receive a price within one day. If you accept the price and associated transaction costs in the offer you can then expect an inspector to visit your home to see if there are any repairs needed. If there are any repairs needed you can expect that the offer price to be adjusted to reflect the work needed. If the transaction proceeds past this stage you can expect to close as quickly as you need to.
Pros
Here are some of the reasons a seller may choose to work with an iBuyer.
- Fast closing schedule.
- Fewer unknowns, knowledge of what you are going to get up front.
- No showings. No prepping the house for showings.
Cons
Here are some of the reasons that a seller may choose not to work with an iBuyer.
- Not maximizing the sales price. Lower price given for a quick guaranteed offer. Just one offer, no supply and demand factors at work.
- Costs are typically 7-10% of the agreed upon purchase price. This is more than a typical commission.
- Not available for every home or in every market. Currently iBuyers are expanding quickly but are only available in 20 markets. They are not typically interested in luxury homes or higher price ranges.
In summary, iBuyers are expanding. It provides the seller with the peace of mind and convenience of a guaranteed offer and a flexible closing date. However, that convenience comes with a hefty price tag. It’s not for everyone but for those in a pinch it might be a good option. If you are considering working with an iBuyer it would be prudent to call a Realtor as well to get an opinion of price and an estimate of net proceeds after expenses. That way you will have the information you need to properly weigh your decision. Let me know if I can help in this manner.
by Neil Kearney | Jun 13, 2019 | For Buyers, For Sellers, General Real Estate Advice, Real Estate 101 |
When the weather gets hot and the big thunderheads grow in the afternoons along the Front Range of Colorado, there is a chance that ice will fall from the sky. Most of the time these hail storms are very localized and most of the time the size of the hail isn’t large enough to cause property damage. But when the conditions are right, the hail stones can grow to be quite large and cause massive damage to cars, roofs, fences, windows and gutters (not to mention damage to plants, flowers and crops).
Last year we had a series of hail storms in Boulder County that caused extensive damage. I was working on a number of home sale transactions when the storms took place, so I have a good sense of the contractural obligations and practical steps needed in order to keep the sale moving forward. Before I go any further I’d like to say that I’m not an attorney and I can’t give legal advice. Use this article as a guide, not as gospel.
The good news is that with most roofs and with most insurance companies, if there is enough hail damage it will be covered by your homeowners insurance. Your only obligation is to pay your deductible. The first step after a hail storm that has caused damage is to call your insurance company. One clue that damage has been done (besides the earsplitting sound of hail on your roof) is that you might start seeing roof contractors in your neighborhood, they may even knock on your door and ask to inspect your roof.
If your home is listed for sale but has not yet gone under contract with a buyer, your main obligation in terms of the real estate transaction is disclosure. In addition to communicating with your agent and revising your Sellers Property Disclosure, I would recommend taking the steps necessary with your insurance company quickly so that you know if the damage is covered by the insurance policy. Once you know it is covered start taking steps so that a new roof can be installed. Having the time to interview contractors and get bids is a luxury that becomes more rare once a buyer is involved. A new roof is a good selling feature and any damage will come up during the future inspection process once you find a buyer, so taking proactive steps is a smart way to go.
If the hail storm happens after you are already under contract with a buyer paragraph 19 of the Colorado Contract to Buy and Sell Real Estate (CBS1-6-18) is a good guide as to the rights and obligations of both the Buyer and Seller. It is printed below, but here are a few of the high points:
- Once the property is under contract, the seller has an obligation to deliver the house at closing “in the condition existing as of the date of this Contract, ordinary wear and tear excepted”.
- If the damage is less than 10% of the price on the contract and the Seller can repair or replace the damaged item with something of at least similar size, age and quality, then the contract moves forward. Be sure to disclose to the Buyer what has happened and what is being done.
- If the damage is more than 10% of the price of the home or the repairs cannot be made in time to meet the scheduled closing date, the Buyer has the right to terminate the contract and get their earnest money back. Buyers rarely choose this option because if they hang in there they will get the house and a new roof.
- Paragraph 19.1 deals with property damage that will be covered by insurance.
- Option 1: If work can’t be done by the closing and Buyer and Seller do not agree to extend closing, and the Seller has received the insurance proceeds, the Buyer has the right to the insurance proceeds in the form of a credit including the amount of the deductible. In practice, if there is a lender involved they don’t like this option. They require to see the roof completed prior to the closing or an escrow set up that ensures that the roof will be done. The insurance company also holds back a portion of the proceeds to make sure that the roof is done.
- Option 2: If acceptable to the insurance company and the Buyers lender, an agreement stating that the the insurance proceeds will be assigned can be agreed to. In practice if there is a lender involved they don’t like this option for the same reasons stated above.
- Option 3: Enter into a written agreement drafted either by an attorney or the parties to the contract (Buyer and Seller, not the agent) that outlines what will happen, when it will happen, who will pay, who gets to choose the style, etc. In the transactions I worked on last year where there was not enought to to install a new roof prior to closing, this type of agreement was signed by the parties. In one case the Seller wrote it and in the other the Buyer hired an attorney to write it.
From the Colorado Approved Contract to Buy and Sell Real Estate:
Except as otherwise provided in this Contract, the Property, Inclusions or both will be delivered in the condition existing as of the date of this Contract, ordinary wear and tear excepted.
In the event the Property or Inclusions are damaged by fire, other perils or causes of loss prior to Closing (Property Damage) in an amount of not more than ten percent of the total Purchase Price and if the repair of the damage will be paid by insurance (other than the deductible to be paid by Seller), then Seller, upon receipt of the insurance proceeds, will use Seller’s reasonable efforts to repair the Property before Closing Date. Buyer has the Right to Terminate under § 25.1, on or before Closing Date, if the Property is not repaired before Closing Date, or if the damage exceeds such sum. Should Buyer elect to carry out this Contract despite such Property Damage, Buyer is entitled to a credit at Closing for all insurance proceeds that were received by Seller (but not the Association, if any) resulting from damage to the Property and Inclusions, plus the amount of any deductible provided for in the insurance policy. This credit may not exceed the Purchase Price. In the event Seller has not received the insurance proceeds prior to Closing, the parties may agree to extend the Closing Date to have the Property repaired prior to Closing or, at the option of Buyer, (1) Seller must assign to Buyer the right to the proceeds at Closing, if acceptable to Seller’s insurance company and Buyer’s lender; or (2) the parties may enter into a written agreement prepared by the parties or their attorney requiring the Seller to escrow at Closing from Seller’s sale proceeds the amount Seller has received and will receive due to such damage, not exceeding the total Purchase Price, plus the amount of any deductible that applies to the insurance claim.
Should any Inclusion or service (including utilities and communication services), system, component or fixture of the Property (collectively Service) (e.g., heating or plumbing), fail or be damaged between the date of this Contract and Closing or possession, whichever is earlier, then Seller is liable for the repair or replacement of such Inclusion or Service with a unit of similar size, age and quality, or an equivalent credit, but only to the extent that the maintenance or replacement of such Inclusion or Service is not the responsibility of the Association, if any, less any insurance proceeds received by Buyer covering such repair or replacement. If the failed or damaged Inclusion or Service is not repaired or replaced on or before Closing or possession, whichever is earlier, Buyer has the Right to Terminate under § 25.1, on or before Closing Date, or, at the option of Buyer, Buyer is entitled to a credit at Closing for the repair or replacement of such Inclusion or Service. Such credit must not exceed the Purchase Price. If Buyer receives such a credit, Seller’s right for any claim against the Association, if any, will survive Closing.
What happens if the hail damage is discovered after the closing?
This happened to me last year as well. The Sellers were not aware of any damage and we had a successful closing. Soon after closing the Buyers noticed roofing contractors working on their street and had a contractor look at the roof. Damage was found. The Buyer’s contacted me and I in turn contacted the Sellers. The insurance company was called and it was determined that there was damage and that the last storm (they track these things closely) happened while the Sellers still owned the home and their policy was in place. The outcome was that the Buyers got a new roof and the Sellers had to pay their deductible and their insurance company funded a new roof.
Lessons learned:
- Keep the lender involved in the discussions. Different lenders handle this situation differently. Some allow credits and post closing escrows and some don’t.
- It’s helpful but not required to have a contractor meet the insurance adjuster at the house for the initial inspection.
- Some policies have depreciating coverage as the roof ages. This does not relieve the obligation of the Seller to replace the roof.
- After a hail storm it is really difficult to schedule contractors. Real estate contracts are time sensitive. Call quickly and be first on the schedule!
As I mentioned before, this is not exhaustive but I hope it does give you some useful information regarding hail and how it affects a real estate transaction.
by Neil Kearney | Oct 10, 2017 | For Buyers, General Real Estate Advice |
When a buyer is working with a real estate agent in Colorado there are two ways in which to work, as a Buyers Agent or as a Transaction Broker. It may seem to make sense to a buyer that if they are working with a Realtor that they are “their agent” and will automatically be working on their behalf. This ins’t true. In order to have a true agent a buyer must take that next step sign a buyers agent agreement. If there is no written agreement you still have someone working with you but not necessarily for you. In this post I will outline the differences between the two relationships.
Working With A Buyers Agent
- You can liken working with a buyers agent as working with a coach who has your best interests in mind. Think fiduciary, advocate or agency.
- Working with a Realtor as a buyers agent requires a written contract. This contract set’s forth loyalty and compensation. Loyalty is the promise of the buyer to work with just one agent, and depending upon how the contract is completed the buyer may be guaranteeing a commission to their agent upon completion of a purchase. See the note on compensation below.
- A buyers agent works as a fiduciary to their client. They owe duties of care including: obedience, accountability, loyalty (including confidentiality) and disclosure.
- In addition to the uniform duties owed to all clients (see the list under the “Transaction Broker” section, a real estate agent working as a buyers agent is obligated to:
- Promote the interests of their client with the utmost good faith, loyalty and fidelity.
- Seek a price or lease rate and terms that are acceptable to their client.
- Counsel their client as to any material benefits or risks of a transaction.
Working With A Transaction Broker
- You can liken working with a buyers agent as working with a referee who helps you through a transaction.
- In Colorado, unless there is a buyers agency contract signed, it is presumed that a Realtor is working as a transaction broker. There is no written contract needed.
- A transaction broker assists one or more parties through a real estate transaction with communication, interposition, negotiation, advisement, contract terms and help at the closing table, all without being an agent or an advocate.
- The uniform duties due to all parties a real estate agent comes into contact with are:
- Perform the terms of any written or oral agreement with Seller
- Present all offers to and from Seller in a timely manner regardless of whether the property is subject to a contract for sale
- Disclose to Seller adverse material facts actually known by Broker
- Advise Seller regarding the transaction and advise Seller to obtain expert advice as to material matters about which Broker knows but the specifics of which are beyond the expertise of the Broker
- Account in a timely manner for all money and property received
- Keep Seller fully informed regarding the transaction
- Broker must not disclose the following information without the informed consent of Seller:
- – That Seller is willing to accept less than the asking price for the property
- – What the motivating factors are for Seller to sell the property
- – That Seller will agree to financing terms other than those offered
- – Any material information about Seller unless disclosure is required by law or failure to disclose such information would constitute fraud or dishonest dealing, or
- – Any facts or suspicions regarding circumstances that could psychologically impact or stigmatize the property.
- Seller consents to Broker’s disclosure of Seller’s confidential information to the supervising broker or designee for the purpose of proper supervision, provided such supervising broker or designee does not further disclose such information without consent of Seller, or use such information to the detriment of Seller
- Brokerage firm may have agreements with other Sellers to market and sell their property
- Broker may show alternative properties not owned by Seller to other prospective buyers and list competing properties for sale
- Broker is not obligated to seek additional offers to purchase the property while the property is subject to a contract for sale
- Broker has no duty to conduct an independent inspection of the property for the benefit of a buyer and has no duty to independently verify the accuracy or completeness of statements made by Seller or independent inspectors. Broker has no duty to conduct an independent investigation of a buyer’s financial condition or to verify the accuracy or completeness of any statement made by a buyer
- Seller is not liable for Broker’s acts or omissions that have not been approved, directed, or ratified by Seller
- When asked, Broker (will or will not) disclose to prospective buyers and cooperating brokers the existence of offers on the property and whether the offers were obtained by Broker, a Broker within Brokerage firm or by another broker.
Compensation
In the vast majority of cases the compensation due a real estate agent are not affected by whether they are working as a Transaction Broker or as a Buyers Agent. When an agent shows a property that is listed through the MLS there is an offer of compensation from the listing broker to agent working with the buyer. This co-op commission is not a fixed amount and there is a space for compensation amount offered to both a Transaction Broker or a Buyers Agent, however in most cases the offer is the same. So as long as this amount is acceptable to the agent or is otherwise in agreement with the minimum amount specified in the Buyers Agency agreement the compensation to the agent isn’t an issue for the buyer.
by Neil Kearney | Nov 30, 2016 | For Buyers, General Real Estate Advice, Real Estate 101 |
If you have determined that you are ready to buy a house (click here for more information about determining if you are ready) the next question to ask is how do I do it? What is the smartest way to go about buying a home? What are the first steps in a home search? This article will show how to begin the process of buying a home as well as point out some common pitfalls that can be avoided.
Step 1 – Finding a Really Good Realtor
It’s easy enough to start browsing houses on the internet or going to the random open house, but at some point you will want to get more serious about looking at homes. The first step towards getting more serious about looking for a home is finding a good Realtor who has been through the process time and time again. Most people end up working with a Realtor, so why not engage one early on in the process? Realtor’s have tools that will save you time and put you on track to finding the right home more quickly. A good Realtor is much more than a person who shows you the houses that you have found online, they serve as an information source, an advocate and a guide through the process. Make sure you are working with a Realtor who is more interested in helping you find a great house for the long term rather than a quick sale for them. It takes patience and persistence to make sure you end up in the right home.
Note: A Realtor is a member of the National Association of Realtors and is bound to abide by a code of ethics. Not all real estate agents are Realtors. Make sure your’s is one.
Step 2 – Get Pre-Approved
One of the most important steps in a home search is to find a good lender and get pre-approved. Your Realtor should be able to recommend a few local lenders who have proven themselves to be responsive and know how to get the job done. Using a local lender is important, not only are they accountable but they are there to solve problems at the closing table if anything comes up at the last minute. Your earnest money is at stake! If your lender is delayed at the last minute or their money doesn’t make it to the closing table on time and the seller chooses not to give you an extension, you lose your earnest money. You cannot go back to your lender and recover those lost funds. Choosing a lender is more than finding the lowest interest rate, it is finding an advisor who will help you make a sound financial decision given your unique circumstances. The credit rules change often and it is important to use an experienced lender to help you get the job done in a timely manner.
Step 3 – Looking at Homes Online – The First Showing
The internet is a great tool when searching for homes. When you view internet sites such as Zillow.com, Realtor.com, Redfin.com and Coloproperty.com you are able to easily find and view homes for sale by putting in any search criteria. The results are quick and beautiful. It’s easy to get caught up in the great houses that are available.
But here are the pitfalls of the national home search sites:
- Many of the popular home search sites don’t have all of the properties listed for sale. Listing brokers determine who gets to display those listings and some don’t send to all of the available sites. Many company sites just get feeds from one MLS system so if a listing is listed in another (which is often the case in the Boulder area) those other listings are not displayed.
- The goal of the big national sites is to get as many views and clicks as possible. So properties show up as “active” until they are sold. Don’t fall in love with an active house on Zillow until you check with your agent to make sure that it isn’t already under contract.
- The agent who is listed in conjunction with a given property many not be the listing agent. So if you click on a “more information” button you will most likely be contacted by an agent who has paid for that opportunity and knows nothing about the house.
Now a word about search criteria. When clients tell me their “wish list” I write down every bit of it, but I then explain that it might be better to keep our search wide so that we don’t miss a house that meets 95% of what they want. In a market characterized by low inventory this is especially important.
Note – www.Coloproperty.com is the public site for the local MLS system IRES. This site changes the status of a property (active, under contract, sold) on their display right when it happens. So to get the true scoop go to this site. Disclaimer – I have served on their Board of Managers for 9 years now.
Step 4 – Viewing Homes In Person
How soon is too soon to start actually looking at houses looking? For example, if your lease is up in July and you don’t want to have rent and mortgage payments for more than 1 month, January is usually too soon. However, when to start depends upon how particular you are, how many homes are likely to come on the market during a particular time etc. This is a good conversation to have with your Realtor.
Once you and your agent have identified some properties to view the next step in your home search is that your agent will set the showings with each listing agent (through them, their company or a showing service). Sometimes homes can be viewed immediately but often times the owners require a few hours to 24 hours notice. Sometimes the listing agent needs to be at the showing and that complicates the timing.
Once you are inside a home you will have already begun to judge the house on these criteria; “could I live here?”, “how does it compare with other homes?”, “is this the one?”. If you quickly realize that this isn’t “the one” it’s still good to see the rest of the house but in my experience it’s not necessary to see every little thing. Who cares what the second basement closet looks like! You only have so much memory available and if you fill it up with the tiniest details of a house that you have already determined you won’t buy you end up confusing houses. Was it the yellow house that had the gold faucets or was it the one next to the park?
Once you find the one that you think you want to pursue you will want to go back for a closer look. This is the time to “kick the tires” and make sure you know what you’re in for. Hopefully the second time through will only make the heart grow fonder.
In the next installment in this series I will go through the process of what happens once you find a house that you love.
by Neil Kearney | Nov 28, 2016 | General Real Estate Advice, Real Estate 101 |
Am I ready to buy a house? It starts as a subtle suggestion in the back of your mind. You might hear yourself thinking; “this is ridiculous, rents are so high and I’m throwing my money away” or “now that I’ve landed that job I’m ready to settle down” or “we’ve been saving for years and now is the time to buy before prices go up any more”, or “all of my friends are buying places and they seem to be doing great”. Whatever dialog is whispering in your ear, there comes a time when it may make sense for you to buy a home of your own. But are you truly ready? This article will help first time home buyers to analyze that question and help get you ready to make the purchase.
Is it smart to buy a house? (when I say house I mean any residential real estate) If done correctly, owning a home is for many people best financial decision they ever make. According to the 2014 Survey of Consumer Financing by the Federal Reserve the median net worth of a homeowner was $194,500 compared to $5,400 for renters. During the time frame of 2008 – 2012 many homeowners were adversely affected by the housing crisis and economic downturn that resulted in a record number of foreclosures and short sales nationally. For those who bought just before the crisis or those who needed to sell when prices dropped in many areas (click here to see why Boulder County was named the most stable market in the country) owning a home may not seem like a wealth enhancing endeavor. But over time and for most people real estate is a great investment. Here’s why:
When you buy a home you tap into these three powerful methods of increasing wealth.
- Home appreciation – the prices of homes rise with inflation and local supply/demand factors. Prices rise over time.
- Principle reduction – as opposed to a rent payment, a portion of each payment goes towards paying down the principle balance. With each payment your wealth is increasing a little bit.
- Tax benefits of ownership – the mortgage interest deduction allows those who itemize their deductions on their income taxes to write off the interest paid on their mortgage payment. In effect you get a discount off of your payments made at the end of the year.
You may ask, “if it’s such a great deal why is the homeownership rate in America at just 63% and falling?” The truth is that homeownership isn’t for everyone. Here are some the reasons why it may not be a good idea to buy a house.
- Location instability – Homeownership is a longterm proposition. Buying a house now and then moving six months from now is a sure fire way to lose money. There are costs associated with both buying and selling and it takes time to recoup those costs. I usually recommend that you plan to be in the house a minimum of two years. Any less than that and you are speculating, hoping instead of playing it smart.
- Financial instability – In order to stay in a house you must have the financial wherewithal to withstand some unexpected expenses. If you are one paycheck away from being broke it’s best to save up a nest egg before buying. If you already have a list of debts it might be a good idea to pay those off before taking on another large debt. The more ready you are financially the better chance you have for making homeownership work for you.
- Ready for the responsibility? – When you own a house you must be willing to take care of the maintenance and any problems that come up. There are many items that need attention on an ongoing basis that take time and money and there will no longer be a landlord to call. Once you make the purchase you are in charge of anything that comes up.
Getting Your Financial House In Order
When you determine that in principle you are ready to take take the plunge into homeownership, you must then determine if your financial house is in order enough to make the purchase. Here is what I mean by having your financial house in order: down payment money in the bank (anything less than a 20% downpayment requires mortgage insurance which results in a larger monthly payment with no added benefit to you), in addition to the down payment you need to have a savings account that has 3 to 6 months of your household expenses as a cushion for the unexpected, minimize other debt – for most people they think it’s normal to carry car payment(s), student loan(s), and credit card debt, even if you qualify for all of these payments it may be a smart idea for you to delay a home purchase until these other debts are paid off. The more debt you have the more susceptible you are to losing your house in the case of a layoff or other unexpected financial hardship.
Another facet of having your financial house in order is your credit score. Credit scores have a huge impact on your ability to buy a house. If you have a credit score of less than 760 your qualification or the interest rate you are offered will be negatively affected. To check your credit score for free (with no strings attached) go to www.AnnualCreditReport.com. If you find out that your credit score will negatively impact you, figure out why your have a low score and start fixing your FICO score. This may take time so pay your bills on time and plan ahead.
How much should I spend on a house? There are a few rules of thumb regarding how much you should spend. Some say the total price shouldn’t exceed 2.5 times your household annual gross income. Another commonly heard standard is that your mortgage payment plus other debt payments shouldn’t exceed 40% of your income. However, in my experience I find that many people qualify for more than they should do. The term for allocating too much of your income to your house payment is “house poor”. Being “house poor” means that you are a slave to your monthly payment and don’t have the money to do the other things you enjoy.
My advice is to buy a house that allows you to be very comfortable in your payment. This will allow you to enjoy life and meet your other financial goals. Have a firm grasp of your budget and be sure to add into it the expenses that will come with buying a home, like new window coverings, increased utility expenses, needed upgrades, etc. Many times the actual answer to “how much should I spend on a house” is different than what your lender will qualify you for. Know your budget and think for yourself. Don’t keep up with the Jones’.
It all comes down to what you can comfortably afford and interest rates have a huge impact on what you can afford. My article The Impact of Interest Rates on Home Affordability delves deeply into the subject, but basically as interest rates rise the amount of the mortgage you can qualify for decreases. For example, if you qualify for a $355,000 mortgage and then interest rates rise by .5% you will need to drop your budget by at least $20,000 to keep the same payment. My advice is to pay attention and know that it makes a difference.
This article helps you think about if you are ready to buy a house. In the next article I will start to outline the how to go about buying a home in a smart way, the process.
