The decision to buy your first home is exciting and exhilarating, but before you set out to start climbing the property ladder, you need to set a realistic budget so that your dream doesn’t turn into a financial nightmare. “It’s important to understand that buying your first home is not just about the mortgage,” says […]
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A first-time home buyer falls in love with a property: afraid to lose out, any & all helpful advice gets thrown out the window, an offer gets put in and accepted. This first-time home buyer has now spent more than he can afford on less of a house that he wanted.
Does this sound familiar?
This is but one of the common mistakes first-time home buyers make when plunging into one of life’s most exciting, exhilarating and exhausting times: buying your first property.
At this point, there’s a lot that comes into play that you need to be aware of as you’re going through the different stages of buying your first property. Buying a home is quite different to what you’ve ever purchased before, which is why it’s very important to plan ahead!
Most real estate agents will agree, when they ask first-time home buyers about their home-buying experience afterwards, that the majority of first-time home buyers indicate that they would do things quite differently if they had to do it all over again.
If that’s truly the case, why not learn from their experiences?!
Here are the 10 common mistakes first-time home buyers make:
Mistake 1: First-time home buyers don’t really know what they want
First things first: as a first-time home buyer, you need to decide what it is that you’re looking for.
This might come across as ‘duh’ advice but many first-time home buyers spend a lot of time looking at a lot of properties, only to release that they should have had a basic ‘plan of action’ prepared before they started their search.
Take a few hours (Yes, really! It’ll save you lots of sweat & tears down the line!) and seriously think about what you would like to have in your new home:
- How about deciding on which part of town (or country) you would like to live?
- Do you need to be close to work or perhaps you like to be close to the social scene?
- Next up is the type of property: ranging from apartment, cluster, or freestanding house?
- Is security very important or do you prefer a lot of space?
- Which main feature is the most important to you?
- Location question. Check. Type of property question. Check. Features. Check. At this point, you’ll probably need to put down the number of bedrooms. Depending on your family situation (single, small family, divorced with kids etc), you will have to make changes to the number of rooms accordingly.
- And lastly, do you prefer a ‘finished product’ or don’t you mind doing some renovations to the property?
Which might sounded like a bit tedious at first, having gone through this short questionnaire above, you ought to now have the major lines of your preferences on paper. How about that!
Try to be somewhat flexible to what you came up with above, as some properties might be perfect for you, but might have a small garden vs. your desired large garden. Or combination of your preferred location and its offered features only allow you certain properties.
Don’t worry about the details: The purpose here is that you need to have formulated a better idea of what you’re looking for before you actually start the home search!
Mistake 2: First-time home buyers don’t know what they can afford
Here, one will have to face reality as it’s unfortunately what limits most of us: our budget. How much can you afford to spend on a monthly bond repayment? How much money can you use as down payment? This will immediately set the tone for the type of property within your financial means!
If the last financial crisis has taught us as a home buyer anything, it is that the amount the bank says you can afford and the amount you think you can afford are not always the same!Click To Tweet
At this point, you may want to jot down a list of all your monthly expenses, such as:
- credit card payments
- car loan payment
- car insurance
- student loan payments
- health insurance
- retirement savings
Obviously, in this exercise, you won’t need to write down your monthly rent amount. However, don’t forget to add a few of those big yearly bills on that list! (eg annual vacation, school fees or certain insurance payments) Once you’ve subtracted these expenses from your take-home salary, you ought to have a good idea of how much of a monthly bond repayment you can afford.
Would it be fair to state that, if you were looking at homes outside your price range, you’re setting yourself up for disappointment? The odds of the banks lending you the requested higher amount are quite low and you’ll have wasted everybody’s time and energy.
Bottom line: know your budget and stick to it!
Mistake 3: First-time home buyers dismiss renting as a possible better financial decision
When going over the renting versus buying scenarios, we know that buying is more expensive in the early years and becomes cheaper, until renting a property becomes more expensive. At what point does one decide to rent or buy? Studies have estimated that “breakeven point” to be between six and eight years, depending on one’s financial situation and the local property market.
If you foresee a structural change in your financial situation, or even plan to move in the next handful of years, perhaps stick to renting as it will put you in a better financial position in the long(er) term.
Ask yourself this question: “Will I be here for just a few years?”
Anything less than a firm ‘no’ won’t suffice in justifying spending heaps of money in buying the property, paying closing and bond costs, and estate agent commissions!
Financially, it might be better to rent until you’re ready to stay for longer.
Mistake 4: First-time home buyers underestimate the cost of their home
By now, you have realized that buying a house doesn’t mean that the costs of owning that house have ceased. If anything, they’re accumulating at a steady monthly pace, starting with the biggest portion of them all: the monthly bond instalment.
First of all, there are the transaction costs involved when acquiring the property (closing costs). Unfortunately, it seems that a lot of first-time buyers do not realise there are more costs to buying a home than the actual purchase price!
Here’s a short list of costs with buying property in South Africa:
- The biggest chunk will likely be the transfer duty, which is payable to the South African Revenue Service (SARS) every time a property gets sold and that gets determined by the property’s value. The first R750,000 ($75,000) is not subject to transfer duty. On an example of a purchase price of R1,000,000 ($100,000) you would be looking at R7,500 ($750) in transfer duty.
- The conveyancing transfer fees are payable to the conveyancing attorneys handling the transfer from a 3rd party into your name. With the example of R1,000,000 ($100,000) purchase price, this would be a R14,250 bill ($1,450).
- The attorneys will charge you for a number of petty costs, which includes the Deeds Office fees, tracking of deeds, searching, copying, and FICA. This amounts to around R2,200 ($220) for our R1,000,000 ($100,000) purchase example.
- If you’re opting to go with a bond, you will facing a number of additional costs as well. Your bond will need to be registered with the Deeds Office via the attorneys. This bond registration fee, plus a few additional costs, would add up to total bond costs of around R12,220 ($1,220) in the full bond of R1,000,000 ($100,000) example.
So, if the price limit of your budget is R1,000,000 ($100,000) to purchase a home as that’s all the money you have available (via personal savings and bank loans), you need to know that the extra costs will increase by an additional R40,000 ($4,000), which practically means that your maximum house purchase price should be around R960,000 ($96,000) instead!
Quite a crucial calculation detail you do not want to miss! The last thing you need is to put an offer forward of R1,000,000 ($100,000) on your dream house, only to come to the realization that you don’t have another R40,000 ($4,000) to take care of all these extra costs!
Unfortunately, it doesn’t stop here!
Once these purchase costs are paid, as the new homeowner, you better not forget about the total cost of homeownership, as you now will face quite a few extra costs which you didn’t have as a tenant:
- Municipal property rates: every few years, the municipal valuation of your property gets adjusted. Depending on your area, a certain multiplier is used in combination with your municipal valuation to arrive at your monthly rates bill.
- If you own a property in an apartment complex or cluster, you’re very likely be paying levies as well. These pay for security guards, grounds maintenance, building/walls upkeep etc.
- The monthly electricity, gas and water bills will be arriving at your doorstep as well.
- Bills for the homeowner’s insurance (building), as well as household insurance (content), will also be payable.
- And finally, one can’t forget the daily/weekly/monthly house repairs and maintenance (eg painting, plumbing, roof, pool etc).
You can quickly see that a simple monthly bond payment isn’t your only cost owning a property! It is becoming very clear that getting a good grasp on one’s finances is very important when buying your first-time home.
Recent surveys have pointed out that almost half of all the first-time buyers with regrets indicated that they paid too much or perhaps should have put more money down when buying their property. Nearly 40% were very surprised to see how much a house actually costs to maintain!
Do you have a really good idea of your future expenses as a homeowner?
Mistake 5: First-time home buyers overestimate the size of their home
Recent statistics indicate that nearly 2/3 of all first-time buyers wish they had bought a bigger home. Whether it was the kitchen that turned out too small or some of the bedrooms looked bigger when they initially bought it, first-time buyers tend to have regrets for not having gone for that property with the bigger underroof area.
Buying a property is a medium-to-long-term engagement, so first-time buyers ought to think very carefully how a particular property will evolve along with your family’s needs. As a young married couple might consider expanding their little family, they ought to think how this property will suit their five-year plan.
Which possible life changes might happen that might require that extra room or additional space?
Mistake 6: First-time home buyers wish they had researched the neighbourhood
Don’t take the online home values and neighbourhood information for granted. Assuming there are data available on it of course! How does one go about choosing a neighbourhood?
Take a few hours out of your schedule to park and sit near your prospective new home on a Monday morning to see how busy the home-to-work traffic really is. Are you experiencing neighbouring streets using your street as a shortcut or does it remain quiet during rush hour? Try to do the same thing on a Friday night. Who knows, the neighbourhood might come alive and turn out to have a few busy party streets?
Besides the neighbourhood social activity, you may want to research the recent sales. Are you buying the most expensive house in the neighbourhood or have similarly-priced properties sold as of late?
As we briefly touched on some of these neighbourhood questions, were you able to honestly answer them?
Mistake 7: First-time home buyers regret the parking arrangement
You have to admit, parking didn’t necessarily come up as a concern for you as a first-time home buyer. Yet, one-in-six first-time home buyers with regrets wished they could do something with their current parking arrangement.
We tend to get excited about the layout of the property, its fascinating features or even the potential defects, but when it comes to the parking situation, many first-time home buyers don’t have it on their priority list. Not that they aren’t interested, there’s just too much other ‘more fun‘ stuff requiring their attention!
Taking it a step further, the choice of yard space is along the same line of thinking as your parking arrangement. Almost of a quarter of homeowners showed some form of regret regarding their yard. Too big, too small, too much to maintain etc. Obviously, if ‘bigger and more‘ is what you’re looking for, be prepared to move further away from the city centre!
Do you consider yourself happy with a smaller parking situation or yard space?
Mistake 8: First-time home buyers have debt ahead of the home
An important ratio used by many lender is the so-called debt-to-income ratio. As the average consumer debt has expanded by 25% in the past 5 years, student loans/debt are said to be at the base of this (even though car payments have a chunk of it as well!). This financial burden is keeping most first-time home buyers from buying their dream home, as it limits how much (and how quickly) they can save for a down payment.
Not only are these first-time home buyers not able to save for a better deposit, but their debt vs. income level is off-balance as well, which negatively affects the lender’s decision to lend out money. Especially since credit standards have been tightened, hereby making it even more difficult to borrow with less-than-perfect credit scores!
Wouldn’t it be easier to show a record of savings instead of trying to climb out of (too much) debt?
Mistake 9: First-time home buyers let their emotions do all the talking
When it comes to buying a home, the first-time home buyers’ heads are seriously spinning. It really is one huge emotional process!
Are we making the right decision? Is this really what we’re looking for? Have we seen enough properties before committing?
On the one hand, you have those first-time home buyers who know their budget ahead of time. Yet when they see that dream property which is considerably priced above what they had in mind spending, all logic goes out the door and they’re now frantically searching to close that financial gap. Unfortunately, most of the time, reality only sets back a few months later when they realize the implications of their financial situation!
On the other hand, there are first-time buyers who have been warned about falling into that trap of overpaying and want to see every DIY, developer’s dream, hidden gem property out there. They’re going to buy that once-in-a-lifetime property below market, fix it up themselves and still have paid less than what they would have otherwise in a normal property transaction. That’s all fine and well, but there’s mostly a reason why that property went for as cheap as it did. Renovations can cost a lot of money – even if you do them yourself!
In the end, the market has been playing on all of the right emotions of those first-time buyers!
Mistake 10: First-time home buyers assume their home’s value will appreciate
First-time home buyers need to make sure that their property won’t become the be all and end all of their savings! Look what happened to those who put everything into their property in the mid-2000’s! Where did all that equity go to? Thus, although the monthly bond payments will be due, one ought to make sure that money also continues to go into other saving accounts (eg the retirement savings accounts).
Of course, we all buy property as an investment and are looking forward to the potential growth in value. Although, as individuals, we cannot control what the overall property market will do in the next decade or so, we can follow the basic rules of buying a home, such as making sure the property’s location is well-chosen and that the value paid for the property was a fair market-related amount.
As a first-time home buyer, you need to be aware that buying that first property will probably won’t be your last property! So, act accordingly and don’t be betting the entire farm on it!
Is this first home purchase exactly what you wanted? Likely not, but given the (likely limited financial) tools at your disposal, it is the right home for you at the time of buying!
Its location or some of its features may not be 100% your choice, but one needs to prioritize what’s important. An extra (baby) room in lieu of a bigger yard? An extra garage space instead of that pool you were keen on?
The more you educate yourself beforehand, the less stressful it will be, and the more likely you will be to get the property you want for a price you can afford!Click To Tweet
Can you see how easy it is to fall into the trap of those common mistakes first-time home buyers make? Do yourself a big favour and read thoroughly what’s been discussed in this article (as well as reference articles below) and you’ll be another step closer (and wiser) to buying your first home!
Other Mistakes First-Time Home Buyers Make & Related Resources:
- Top First-Time Home Buyer Tips via Bill Gassett
- First-Time Home Buyer Tips: How to Buy Your First House via Andrew Fortune
- Five Mistakes To Avoid When Buying A Home via Kyle Hiscock
- First-Time Home Buyers: Stay Away From These Pitfalls via Inlanta Mortgage
Please use the above-mentioned helpful information in avoiding many common mistakes first-time home buyers make! It might actually save you thousands of bucks!
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About the author: The above article “10 Common Mistakes First-Time Home Buyers Make” was written by Xavier De Buck, your top-producing Johannesburg real estate agent with the Luxury Portfolio team of Chas Everitt International Group. Xavier has been nationally recognized and awarded for providing service excellence, exceptional property sales, whilst exhibiting the highest level of professionalism. With over 15 years combined experience as a real estate agent and real estate investor, if you’re thinking of buying or selling a home in Johannesburg, Xavier would love to share his property knowledge and expertise.
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