How To Invest in Real Estate

Suburban neighborhood

Buying real estate does not need to be a complex, scary process.  The key to success-and simplicity-is planning.  Yes, it is one of the most expensive purchases you will ever make.  But, it is one of the few things you will ever buy that will, with rare exceptions, steadily go up in value.  Most people eventually view the purchase of a home as one of the best financial investments they have made in their lives.  Let's get started.  

  1. Determine your wants and needs.  This is one of the most difficult parts of the process.  You need to take the time to determine what you and your family are trying to accomplish. Here are some questions to ask:
    • Where do you want to live?  There are many things that enter into a decision about location.  Convenience to work, transportation, the school district, neighborhood amenities, property taxes are all things that play a role.  Think about them ahead of time to minimize the time spent looking.

    • How much space do you need?  Bedrooms, bathrooms, garage, family room, lot size, fenced yard, kitchen, dining room, living room.  Your current living situation may help you determine which elements of a house are high priority, which would just be nice amenities, and which would be deal killers if they were missing.  Make sure to consider things like appliances, and air conditioning.  Other things like avoiding overhead power lines, busy roads, nearby dumps and flood plains, should be added to the list.
    • How important is condition?  If you are willing to do some fix-up work you can often get a better house for less money.  Make up your mind before you start looking what you would be willing to tackle in the way of a rehab project.
    • When do you want or need to move?  Every market has a cycle.  During an off-season, you will be able to buy the same size and type of property for less than during peak selling season.
    • How much are you able to afford?  You may want to get pre-qualified for a mortgage, but check your own credit report before taking this step.  Get any errors cleared up in advance so that they don't effect your credit scores and hence your loan rates.  Once you are pre-qualified for a mortgage, this will take some of the guesswork out of figuring out what price of house you should be looking at.  Keep quiet about what you can afford to pay.  The real estate agents may use this information against you in your negotiations if they know the numbers.

     

  2. Do some background research on the area, as well as the properties in the area.  I like to go to open houses, read the local paper, take my dog for a walk around the neighborhood, and talk to people on the street.  Get an idea about what house values are so you will be prepared to make an offer when you find the right property.
     
  3. Line up your team.  You will need a real estate attorney and a home inspector.  Do some homework in advance, get referrals, and interview them.  Make sure the attorney specializes in real estate, and the home inspector is licensed and insured.
  4. Decide if you want to deal directly with homeowners. If you feel comfortable dealing directly with owners, you could send a note to all the property owners in your target neighborhood telling them that you are interested in buying a house in their neighborhood. This might flush out owners that are interested in selling but hadn't yet gotten around to listing their houses.  This could allow you to get a better price from an owner that wouldn't need to spruce up their home, endure the foot traffic produced by listing their home, wait for a buyer to come along, and pay an agent a commission.  Saving all of this time, hassle, and expense often makes it worthwhile for them to give you a bargain.
     
  5. Hire a local real estate agent (only if you decide to skip Step 4 or Step 4 produced no results).  Make sure to get referrals and interview several agents before choosing one.  Give them the list of criteria and goals you have established for your property search, but remember to keep the target purchase price a secret.  Giving them a range is okay.
     
  6. Look at properties, and add to or correct the goals and objectives as you go along.  When you find a property that you are interested in, ask your agent to give you information on all similar properties that have sold in the area in the last 6 months.  Sold "comps" will help you establish a value for the property.

  7. Make an offer.  You should have clauses in your offer that make it contingent on your attorney's approval, and on an acceptable home inspection.  Both of these contingencies should have time frames that reflect the time your chosen attorney and inspector need to get the job done.  Make the offer lower than the price you would actually be willing to pay.  Everyone thinks they need to negotiate on real estate transactions.  You need to be able to give the seller some concessions, or they will not feel good about their negotiating skills.
     
  8. If you reach a meeting of the minds, great.  If not, move on.  The reality is, there are many properties that will suit your needs.  Don't fall in love with them or you will pay too much.
     
  9. Close the deal. Take the contract to your attorney for review, hire the home inspector (and termite inspector, if needed), and follow the steps that are necessary to close a purchase in your state.  In some states, the attorney drives the process.  In others, a title company does this work through escrow. 

Congratulations - homeowner!

 

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