Are you a first-time home buyer looking to get on the ladder? Or a seller seeking advice on refining their property to attract the right attention? This article explores what you (both first-time home buyers and sellers) need to know and what to look out for.
Choosing between renting and buying your home is an important life decision. But what are the key advantages and disadvantages of each — and what do first-time home buyers look for when they are about to make that change?
Let’s take a quick look at what young renters saving for homeownership want compared to those who are looking to upgrade their current home.
One in five people rent from a private landlord, with 48% aged 35 or under. Though renting means you do not own your property, at the right price, it has some advantages.
For instance, as a renter you have little to no responsibility regarding the upkeep and maintenance of the property. Renting is also incredibly flexible, which is great for those who are not sure what city they will be living in within the next couple of years.
If the rent is affordable, you can also save towards home ownership while relishing independence from your family.
However, when you are renting you are not building any equity in your home. And you are limited in what you can do to the physical structure of the place you live as it does not belong to you.
While mortgage payments and property taxes are often more expensive than monthly rent payments, a portion of that money will reduce the balance owing, putting more positive numbers on your total equity balance sheet.
Plus, as the house value increases, so does the amount of equity you can claim as your own.
Renters and owners also have different costs to consider, especially when it comes to insurance. Take the contrasting priorities of landlords and tenants for example.
As a homeowner or landlord, you might look to protect your property using property insurance management companies, which among other things cover repair costs due to damage caused by tenants.
On the other hand, tenants, given they don’t own the property, only look for insurance that covers their personal liability and their personal belongings.
When it comes to renters becoming first-time buyers, however, things quickly change. Read on as we explore some key insights into what first-time buyers look for when taking the leap away from the rental market.
What first-time buyers are looking for (3 key insights)
Being a first-time buyer is exciting, especially after renting for a long time, but there are many considerations to make and things to look out for.
I clearly remember making this move myself, many years ago. Our growing family had been renting properties for several years and I kept watching that rent money go out of my bank account month after month with little or northing to show for it.
I also didn’t like the fact that the place we called our home could be yanked out from under us at the whim of someone else. Yes, renters have some protections, but even a lease only lasts a year and there are various clauses that give a landlord the right to stop renting to you.
It was a frightening prospect, of course, sinking THAT much money into a single purchase. And this was many, many years ago… when house prices were much lower.
Do I regret making that leap? Not for a moment! When I think about the equity in my home vs the amount of money that I would have spent to help pay someone else’s mortgage, I am very happy that we decided to become first-time home buyers. Hopefully, when it’s all said and done, you will too.
Here are three key insights into what first time buyers are looking for when buying property:
Government Support for First-Time Home Buyers
Buying your home is expensive. In the UK, for example, average house prices settle around £254,000 — this is a big ask when typical salaries fall short at about £36,000. And when you factor in other hidden costs: stamp duty, deposit repayments, seller fees, along with many more. It becomes very clear why you aren’t expected to own your home until the age of 34.
If you live in any of the hotbed cities in North American (think San Francisco or Toronto) you can be looking at well over $1 Million for an average family home.
With that said, many young first-time buyers can get on the property ladder by taking advantage of several government offers. Sticking with the UK example, here is the support available to first-time buyers in the United Kingdom:
- Help to Buy: support buying a new build house within a regional price cap
- Right to Buy: apply to buy property you already live in
- Shared ownership: purchase a share of the home from its landlord
Support like this is not exclusive to the UK, however, many similar shared equity schemes are available all over the world. Read up on the offerings in your local area to see if first-time buyers can have a leg up onto the property ladder.
Canada, for example, has a first time home buyer plan where the government provides partial funding for the purchase but retains a small bit of equity in the home. Eventually, that equity needs to be repaid (after about 25 years – or when the property is sold).
This can help reduce the burden of a down payment, but it also means a looming repayment that will need to be made someday in the future, which is an additional risk.
Say, for example, you purchase a newly constructed home in Canada for $800,000 and you take advantage of the shared-equity mortgage. The government will provide up to $80,000 – which definitely helps the affordability of the home.
However, the government now owns 10% of your home. If that home increases in value to $1.5 million – you owe the government $150,000.
Granted if – 25 years later – you have a home worth $1.5 million that you (effectively) paid $720,000 for – it’s not such a bad thing.
But, let’s look at the same scenario if the market declines.
You’ve purchased a home for $800,000 – $80,000 from the government means you’re in for $720,000. You’ve put $80,000 down yourself, which means you have a mortgage of $640,000.
Let’s say the market drops by 40% within 2 years and you’re forced to sell for reasons beyond your control.
You’ve now sold the home for $480,000. You’ve barely paid anything off the balance, so you still owe over $600,000 on the mortgage AND you still owe the government $48,000.Luckily, the amount you owe the government has also decreased, proportionate to the fair market value.
This isn’t a worse scenario than if the buyer had purchased the entire property themselves and suffered a similar loss. In fact, the government will take part of the loss because of the property decline.
However, what this plan could do is convince first-time home buyers to purchase beyond their means.
The US has some plans as well that are aimed at first-time home buyers. As a first-timer, you have access to several state programs, tax breaks, as well as federally backed loans
Plus, there are several home ownership benefits that military personnel (current and former) can take advantage of.
Location and house size
Let’s be honest, first time buyers cannot tick everything off their bucket list on the first time of asking. Your dream home may be two or three houses down the road. But a starter home is perfect for exactly what the name implies… getting started.
Purchasing property is expensive — and unless buyers have significant financial backing (e.g. super wealthy parents), you likely won’t find everything you want in your first property.
This brings us to the classic size vs location debate: do you want a large house and sprawling garden in an awkward location? Or perhaps a modest flat in your dream city fits better?
It is a never-ending conundrum where the answer changes from person to person.
Trade-offs are part of the property search, particularly when buying for the first time. It’s important to be realistic about what you can afford and where. Research shows people are willing to prioritize certain aspects over others as a way to get on the property ladder faster.
When house shopping (and I have done it several times since that first purchase) I always found it handy to create a Pros and Cons list when comparing houses.
But remember to weight each one on a scale of 1 – 5 so that a small con (let’s say you don’t like the color of that one bedroom) doesn’t get the same weight as a big plus (let’s say it’s in the school district you want).
List them all, score them all, and then take the list with you when you do a second showing.
With the house I currently live in, we had narrowed it down to two properties which had VERY close pros and cons scores. However, the other house won by about 2 points.
We decided to take the list with us when we did our second – and final – viewing before we were ready to put in an offer.
To be honest, we had practically decided to buy the other home because of the pros and cons numbers.
Then, on the second inspection, we noticed something in the other home that we had forgotten about. The other house had it as well and we had listed it as a pro, with enough points that the home in second place – with the new points added – suddenly became the winner.
We put an offer in, bought the house, and have lived in it happily for over 15 years now.
Would we have been as happy in the other house? Looking back now, I don’t think so.
Room for compromise with the current owners
Purchasing property can often be a stressful time for all parties involved. From accepting an offer to exchanging contracts, dealing with all the paperwork in between requires patience and compromise on both ends of the transaction.
Buying a home is a long-winded, intricate process that takes many steps to complete: mortgage valuations, dealing with lawyers, arranging for insurance, all before agreeing on a date of completion.
While many first-time buyers are keen to finally reach moving day, they are doing this all for the first time. It’s important that you — as individuals who have done this all before — show lenience and afford them time to learn the ropes.
With the help of brokers, agents, and lawyers, you’ll have the professional support needed to help make the deal go through — but you can do your part by applying less pressure and avoiding making any last-minute changes to the contract.
From defining the difference between buyers and renters to revealing three key insights into what first-time home buyers look for. Being more amenable, seeking external support, and refining your understanding of the housing market is how you get the best deal on your home (whether you’re buying or selling).