Homebuyers: Avoid these pitfalls by doing your financial homework.
Category Advice
Buying a property is a significant financial decision that requires careful planning, so it's crucial to approach the process diligently with thorough financial homework and preparation to avoid potential dangers and pitfalls.
Many people simply aren't aware that financial preparation should begin as soon as the decision is made to buy a home and not only when the paperwork is required for the transaction.
Getting your financial ducks in a row early on can make all the difference because factors like overspending, inadequate mortgage research and ignoring hidden costs can easily derail your dreams of home ownership.
Understanding the potential pitfalls will not only help prospective buyers make informed decisions, but it will also protect their financial well-being:
Overspending and Financial Strain:
One of the primary dangers of not doing financial homework before buying a property is the risk of overspending because without a clear understanding of their financial situation, buyers may be tempted to stretch their budget or take on excessive debt.
This can lead to financial strain, with high mortgage payments, potential foreclosure risk and limited flexibility in managing other financial obligations.
By conducting a comprehensive financial assessment, including calculating affordability and understanding loan options, buyers can avoid overextending themselves and make a more prudent purchase decision.
Hidden Costs and Unexpected Expenses:
Failing to account for hidden costs and unexpected expenses is another common pitfall of inadequate financial preparation. Buying a property involves more than just the purchase price and buyers must consider additional costs such as property taxes, insurance, maintenance, and potential renovations.
Ignoring these expenses can quickly lead to financial stress and put buyers in a precarious position. Thorough financial homework, including budgeting for ongoing expenses and setting aside a contingency fund, is essential to avoid unpleasant surprises and maintain long-term financial stability.
Failure to Consider Long-Term Financial Goals:
Buying a property should align with long-term financial goals and neglecting to consider factors such as career prospects, family planning or future financial commitments can lead to an ill-suited purchase.
It is crucial to evaluate how the property fits into long-term plans and whether it supports personal and financial objectives. This consideration ensures that buyers make informed decisions that align with their broader financial goals.
Inadequate Mortgage Research:
Obtaining a mortgage is a significant aspect of buying a property, however, rushing into a loan agreement without proper research and comparison shopping can have serious consequences.
Buyers who fail to explore different lenders, mortgage rates and terms may well end up with a loan that is not the best fit for their financial situation which can result in higher interest rates, unfavourable loan terms or inadequate mortgage protection.
Diligent financial homework includes obtaining multiple mortgage quotes, understanding the terms and conditions, and seeking expert advice and a bond originator is an excellent one-stop-shop for ensuring that you get the very best available deal.
Lack of Market Knowledge and Investment Potential:
Neglecting to do comprehensive market research and analysis can prove costly down the line because buyers who fail to understand the local market trends, property values and potential for appreciation may make poor investment decisions.
Without the necessary financial homework, buyers may overlook opportunities for growth or purchase in an area with limited market potential.
Adequate market research, including consulting real estate professionals, studying historical data, and analysing future development plans and consulting property professionals is crucial to ensure a property's long-term investment potential.
Legal and Contractual Risks:
Failing to conduct financial homework can also expose buyers to legal and contractual risks because without a proper understanding of the legal aspects of property transactions, buyers may overlook critical details, misunderstand contractual obligations, or overlook potential legal pitfalls.
This can result in costly disputes, contractual breaches, or even legal liabilities. It is vital for buyers to engage legal professionals, review contracts thoroughly, and seek guidance throughout the buying process to protect their interests and avoid potential legal complications.
Not Seeking Professional Guidance:
Real estate professionals, including real estate agents, financial advisors, and attorneys, offer invaluable expertise to navigate the complexities of property transactions.
Relying solely on personal knowledge or the advice of friends and family may result in overlooking critical aspects of the process. Seeking professional guidance ensures comprehensive understanding and minimises the risk of costly mistakes.
By investing time and effort in financial due diligence, buyers can make informed decisions, protect their financial well-being, and set a solid foundation for successful homeownership.
Taking the necessary steps to do your financial homework will help you navigate the real estate market with confidence and peace of mind and will set you up for a financially secure future in your new property.
Asking Price:
The price set for the home, usually suggested by a real estate professional based on a competitive market analysis and agreed to by the seller. Depending on demand, buyers can choose to make offers above or below the asking price.
Bond Originator:
A free service that can help buyers find the best deal on their home loan. Bond originators have several services that will help buyers navigate the bond application process more efficiently.
Conveyancer (also known as a transferring attorney):
A legal professional who will attend to all the paperwork and other legalities that are required for a property transfer to take place.
Deposit:
An amount of upfront cash provided to the buyer upon acceptance of an offer to purchase. The rule of thumb here is roughly 10% of the asking price. A deposit is not a legal requirement but can make a buyer's offer more appealing and could help the buyer acquire the remaining home finance.
General Valuation Roll:
A document that presents a value upon which household municipal rates will be calculated until a new roll is issued. It is important to check this when it is released to make sure you do not end up paying more for municipal rates than what the home is truly worth.
House Price Appreciation:
A percentage of growth calculated based on average house prices in an area (usually calculated at a national level). These averages can provide an indication of how much more a property will cost in a year's time. For landlords and tenants, these averages can provide an indication of what a fair annual rental escalation could be.
Interest Rates:
There are various rates at which interest is calculated on debts, including home loans. Consumers should focus on the Prime lending rate, as this is the base rate that banks use when offering loans to consumers. This will either be above or below Prime depending on how good your credit score is.
Off market sale:
When a property is for sale, but it has not yet been publicly advertised or listed on any property portals.
Pre-approval:
A certificate issued by a bank that provides a buyer pre-approval of a certain loan amount, calculated based on what a buyer can afford. These amounts are only 100% finalised after the bank has completed a property valuation and has received a signed Offer to Purchase on a property.
Reserve Price:
The minimum price set for a home when it is sold via auction.
Sole Mandate:
A written agreement that places the responsibility on a single agent for a period of time. It is often far more effective to sign a sole mandate and allow one agent the space to secure the best sale. A sole mandate is also a more convenient option because sellers will only have to liaise and deal with one agent rather than several.
Turn-key property:
A property that is move-in-ready, with no need to do any further renovations or updates.
Unconditional offer:
An offer to purchase that is not subject to any other conditions, such as a home loan or private home inspection, etc.
Zoning: the type of property that can be built on a plot of land. Local planning authorities control zoning permissions.
There are a lot of moving parts to any property transaction. That is why the real estate profession exists. Property professionals are there to help guide clients through these transactions. Never feel afraid to ask questions if you are ever unsure of anything during the process.
Here are some key learnings which every first-time buyer should know when deciding to purchase their dream home.
1. Location, location, location! Also known as the Three L's:
There are three micro locations that define the actual location of a property on a macro level. If the property you want to purchase is in an estate for example, you may want to find out what area of the estate it sits in and what that actual area provides, such as a good sea view, etc.
2. Financial stability is important:
Get your credit card payments and debts in order.
3. Budget:
Establish a realistic budget to determine your affordability. Create a budget and try to stick to it so that you can enjoy the process and not put yourself under too much pressure.
4. Find a trustworthy real estate agent:
This is the person that will assist in picking out your potential home and exploring your new neighbourhood and is also responsible for scheduling tours and negotiating important contracts on your behalf. Ensure that this is someone you trust, to have your best interests at heart.
5. Get approved:
Get a pre-approval letter before you start shopping! This will help you have realistic expectations on what you can afford.
6. Be mindful of transfer and closing costs:
First time buyers usually tend not to factor these costs in, and it comes as a huge surprise at the end. Doing your homework is a very vital part of house hunting.
Becoming a first-time homeowner can be an overwhelming experience and requires careful consideration of several factors. With the expert advice, first-time home buyers can make an informed decision and successfully unlock the door to their dream home.
Extract from Property 24
Author: Extract from Property 24
