Market Analysis for Starter Homes
By Michelle Sonali
Updated: July 30th, 2019
Why Should I Buy a Starter home?
Buying a starter home comes with a lot of joys. It means finally having the flexibility to do absolutely anything you want to do with your home. You can remodel it, make extensions, or get a wooden flooring. Also, you can create space for the appliances that you’ve always wanted to have to have in your rented home. You will never have to worry about your lease term coming to an end and you have plenty of tax benefits that you could never get with a rented home. It’s also your first step towards investing in real estate. In addition to the joys, it is also a good financial investment if you do it right.
How Prepared Are You to Buy Your First Home?
Buying your starter home is a crucial decision, it requires a whole lot of planning and research.
They say “ignorance is bliss”, but it isn’t true when you are buying a starter home. Buying your starter home is a crucial decision, it requires a whole lot of planning and research. You can’t just decide to buy your starter home one night and then go buy the first home you fall in love with. That is the recipe for a financial disaster.
Investing in the right starter home is highly important. If you do it right, its value will only increase and when you feel it’s time to buy your forever home, you could either sell it at a higher price or rent it out for a good amount. When you buy a property for the first time, you lack awareness about most of the factors that go into owning and maintaining it. Terms like home appraisal, home inspection, private mortgage insurance and home warranty are mere words and you don’t actually know the price they come at. Talking to friends and family who own homes helps you understand what the actual deal is and how their buying decisions affected their lifestyle. Home Warranty Reviews has analyzed different people’s buying decisions and the impacts it has had on their lifestyle. Well planned buying decisions have affected the homeowners lives positively while purchases made without sufficient research lead to negative impacts on homeowners.
What Are the Different Aspects That You Need to Keep in Mind Before Buying Your First Home?
There are a few major aspects that you need to consider before buying your first home. Factors like your finances, the home itself, and the state that the home is located in play a bigger role in your home buying decision than you can imagine.
Here’s a checklist to help you find the perfect starter home. Print out a copy of this checklist and carry it with you when you go looking for homes. Make sure that the home that you plan on buying has all the 6 parameters ticked off. Then you can be sure that home will not only cater to all your needs but also have a great resale value.
As this will be your first experience as a homeowner, you may not be aware of all the expenses that you will come across as a homeowner. First-time homeowners face multiple financial challenges, this is why it is so important to plan your finances in a way that it provides enough room for miscellaneous expenditures.
1. Make a budget to suit your priorities
Just because your earnings allow you to spend more than you require, don’t increase your budget. Remember that this is your starter home and that you don’t plan to live here forever. Your intention is to save enough money while you live here so that you can buy your dream home in a few years and move into it. The price of the home is just the beginning of all the expenses that come along with it. Your Real Estate Agent will not stop at showing you homes that fit your budget, but he/she will also show you homes that are slightly above your budget. Don’t let your budget increase with every home you see, stick to your original one.
2. Bigger the home, higher the expenses
One extra room will require more air conditioning or heating, which means that your electricity bills will be higher. If you decide to change the flooring, you will have to buy tiles for one whole extra room. In case your ceiling gets damaged, the repair costs will be higher. Not to forget, with every extra room all your additional cost like your home insurance, maintenance costs, taxes, etc, go up.
If you have kids or intend to have kids in the next 5 years or so, then you could consider that extra room. But if it’s going to be empty, it definitely isn’t worth it.
3. Let your mortgage not be forever
How many years do you plan on living in the home? On average most people live in their starter home for 5 years. Keep that in mind when you’re taking your mortgage. It is ideal to clear your mortgage before you decide to sell your home and move into your forever home. The smaller the budget for the home, the faster you pay off your mortgage.
4. A home won’t be the only thing you need
You don’t want to spend all the money you’re earning on paying back your mortgage. You want to save money as well. Don’t compromise on recreation and vacations because of a high mortgage. You might enjoy living in your own home, but taking a few days off to relax on a beach is something that nobody would want to miss.
5. Your kids don’t just need more room
If you have kids or are planning to have kids, they might fancy big cool rooms, but that’s not the only thing that your children will need. They also need a college degree and means to build their skill set. You wouldn’t want to tell your child that you can’t give him/her money to go on a school trip or to attend sports coaching because of a decision that you didn’t think through a few years back. Your child’s overall development is important, and to ensure that it happens, you need money. After all, you won’t be staying in your starter home forever, so it’s alright to adjust for a few years so that your future will be way more comfortable.
6. Prepare for future uncertainties
Take your’s and your spouse’s job stability into consideration. Ask yourselves if your jobs are stable, would your job require you to relocate, what would happen if one of you lost your jobs? Will you still be able to handle the mortgage? How is the job market for your skills in the area? Most mortgage companies believe that your debts should be less than 36% of your total gross income. In July 2017, the largest US mortgage lender Fannie Mae increased the DTI (debt-to-income ratio) to 50% from their current 45%. But they are not the ones paying your debts.
During the mortgage crisis from 2007 to 2009, countless households were unable to pay their mortgages on newly bought homes due to unemployment caused by the Recession. Why go through all that stress? Instead, plan your investment in such a way that an unexpected factor such as unemployment will not take a huge toll on your mortgage and lifestyle.
Make sure you set aside a contingency fund for uncertainties like unemployment, sudden illness of a family member, or any other contingencies that could arise.
7. Plan for your future
Health, energy, and youth don’t last forever. You need to start saving for your retirement before it’s too late. According to a poll conducted by Harris Poll on over 1,000 middle-class adults between 25 to 75 years in 2014, it was proved that the average American adult is not good at planning ahead. The results shared in USA Today showed that about 55% of the sample population planned to save for their retirement at an older age in order to make up for their shortfalls.
For first time homeowners, Housing Schemes by US Department of Housing and Urban Development offer the lowest interest rates along with the other benefits like perks on your downpayment. Make sure that you take maximum advantage of the benefits that you are offered.
How to Select the Right Starter Home?
Don’t let your heart take over your mind when it comes to buying a starter home. You may find the perfect place that suits you just right with the right number of bedrooms, large windows, and a spacious kitchen. But the location’s livability conditions may not be high. Buying your first home can be an expensive affair, so you need to make sure that it turns out to be a good financial investment. Most people buy a starter home with the intention to move out of it one day and buy their forever home. At this point, they either put their starter home up for sale or decide to rent it out. Either way, you’re going to want to earn money from it. The valuation of the home for sale or even for rent is subject to certain real estate factors. Apart from the price aspect, you may also find it difficult to find someone who would want to live in the space if the livability conditions are on the lower side. Here is the list of factors that affect the livability aspect of a home.
1. Location of the home
Location is the most important factor to consider when you are on the lookout for a home. If the neighborhood is good and is situated in a place that has easy access to the subway, everyday utilities, and recreational places, it is definitely worth putting down on the list of homes that you are considering. Sometimes you may find an ugly home that you don’t find appealing in a very good locality, but don’t let that stop you from buying the home. You can renovate and redecorate the home to make it suit your likings but it is impossible to change the location of your home.
2. Position on the block
Every home on the block isn’t the same. Some homes may have shorter setbacks from the property line when compared to others that have a bigger setback and is better ventilated. The view you get when you look out of your window makes a difference. Picture yourself waking up in the morning and walking over to your window, you have sunlight on your face and you see your neighbor’s driveway. Now isn’t that a pleasant sight? But what if you looked out of your window and you got a good peek inside your neighbor’s messy living room? It definitely wouldn’t be the best way to begin your day. This isn’t the only problem that you might face if the home’s position is not looked into carefully enough.
If the home is at the bottom of a slope, it is likely that you will face drainage problems and have water clogging in your basement. If you are considering buying a condo as your starter home, a unit on the first or second floor is preferable when compared to those on the sixth or seventh floor.
3. Long-term value
A starter home’s long-term value is something that is extremely important and must be kept in mind all the time. Everyone who moves into a starter home doesn’t plan to live there forever. You might love the neighborhood and plan on continuing to stay there for a longer time, but it is still an aspect that cannot be ignored. Whenever the need arises to sell or rent it, you must be able to get a good deal.
No matter how good your negotiating skills are, it is very likely that you will end up paying the market value for the home when you are buying it. You need to see how you can add value to the home so that it fetches you a good sum when you think it’s time to move out.
4. The school district
The nature of the school district makes a big difference when it comes to the kind of neighbors you will be interacting with and the type of people your kids will interact with. The environment that your kid grows up in plays a role in influencing his/her personality. It is important for your home to be located in a good school district, if not a top school district. In case you don’t have kids, the resale value factor must always be considered.
5. Crime rate
You need to be aware of the crime rate in the area that you would be living in. If it’s a great home selling at a very good rate, it is likely that the crime rate of the locality could be high. Run through the crime stats of the neighborhood. There are websites that give you snapshots of the crime stats of areas. So you don’t need to visit the local police station and run through the files to get this information.
6. Neighborhood’s character
It’s good to get a feel of the neighborhood and know what your future neighbors would be like. If you are someone who loves throwing lavish house parties on weekends and your next door neighbors have babies, the music and noise from the parties may inconvenience your neighbors and it could lead to disputes. It could also be the other way round, you might like your weekends quiet and enjoy hitting the sack by 9 pm, but if your neighbors are hard core party freaks who play loud music, you won’t be sleeping anytime before 3 am unless you have a sound proof bedroom.
Visit the neighborhood on weekdays and weekends at different times of the day so you get a feel of the neighborhood. You just don’t want to get a negative surprise after you buy the home and move into it.
It’s always nice to be able to walk over to the nearby park for a stroll or to the drugstore to buy your prescriptions. Having sidewalks usually means that people do walk around the neighborhood and it is usually a sign for lower a crime rate in the area.
8. Taxes, Dues and Fees
The amount that you spend to buy a home won’t be the only money that you will be spending on the home. There are multiple costs that you will incur apart from the regular maintenance expenses. If you are buying a home in a community that has a homeowners association, they generally have an assessment before informing you about the fees that you need to pay. Condos have monthly fees that could work out to be nearly as high as the taxes, but single family homes usually have an annual fee that works out to be relatively much lower when you break it up month wise and compare them to the monthly fees of condos.
Don’t forget that taxes in cities are much higher than taxes in the suburbs. If you want to buy a home in a city, go across the city boundary and look at homes in the neighboring jurisdiction. You might find a home that is just as good as one in the city, but you can be assured that you will save a huge amount on taxes.
How Does the State You Live in Affect Your Decision to Buy a Starter Home?
The employment conditions and the weather conditions differ from state to state. Both these factors affect the real estate prices in the region.
Employment is one of the key factors that influence the population of a place. Where there is employment, there are people and a need for housing. Employment opportunities affect the value of a home in the following ways:
- If you or your spouse happen to lose your job, it won’t be difficult to find a new one. That means that you wouldn’t need to relocate.
- When there are employment opportunities nearby it is easy to find someone to whom you can rent or sell your home.
2. Weather conditions
Just like jobs, good weather also attracts people to a place. Once people live in a town or city that is in a state that has beautiful weather, it is very unlikely that they will move to another town or city, unless something drastic comes up. People are always inclined to buy a home in a place that has good weather conditions as the maintenance costs are low.
If you happen to live in a city that is prone to natural disasters and you want to buy a home, there are a lot of extra factors that you need to look into.
How Can a Homeowner Ensure That Their Home Remains Safe?
After considering all of the above factors and deciding on buying the home, find out if the home has home insurance and home warranty. These two additional investments can save you from paying huge bills if anything goes wrong with your home.
1. Home Insurance
Ask the owner if the home that you are buying is covered by home insurance and what damages the current home insurance plan covers. Most home insurances cover external damages caused by theft, fire, hail, windstorms, and lightning. Depending on the city that the home is located in and the natural disasters that it is prone to, update your home insurance plan to ensure that your home is fully covered. If your home gets damaged by a windstorm, the cost to repair the damages could be high. You can’t postpone repairing your roof by a month or two until you save up enough money to pay for the repairs. This will not only cause you inconvenience, but it may also lead to additional damages. It is difficult to pay the entire cost to repair damages up front, this is where home insurance can save your wallet and mind. The insurance sum is a nominal figure when compared to the actual cost paid to repair the damages.
Natural disasters can never be predicted months in advance and when they do hit, the toll taken on life and property is usually big. Paying for repair damages in addition to your mortgage is definitely not easy. Hence, having home insurance is the primary basic necessity for any home. However, there are many costs that your home could face that are not covered under home insurance. Most of these costs are covered under a home warranty.
2. Home Warranty
Most homes come along with a home warranty. However, homes that are new don’t require home warranty as almost all the appliances in the home are new and are already covered by a manufacturer’s warranty. But if the home is not new and the seller does not have a home warranty, buying a home warranty becomes extremely important. Say your central air conditioning has stopped working in the first month after moving in, bearing the complete repair cost at that tender point just after you have paid a huge amount of down payment is not an easy thing to do. This is where your home warranty will swoop to your rescue and make your cost minimal!
The cost of home warranty varies depending on the age of the home and appliances in it. You can calculate the approximate cost of your maintenance expenses with our home maintenance calculator and compare it with the cost of a home warranty for your home. You can also get a free quote from some of the best home warranty companies across the USA. Just like how buying a home requires research, even buying a home warranty policy does. On the basis of user reviews, Home Warranty Reviews awards the best home warranty companies across the US to help people pick a reliable home warranty program. Good luck home shopping!
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