First-Time Home Buyer’s Guide: Everything You Need To Know
First-Time Home Buying GuideBuying a home is one of the most significant purchases you’ll ever make, so it’s important to know the ins and outs of becoming a first-time homebuyer in New York.
From the best boroughs to ideal properties and the prices involved, New York City offers many options for first timers in the market for a new home.
Venturing into The Big Apple to buy your first city apartment can be a daunting idea. However, the advantages of owning a piece of New York far outweigh the challenges of coming to grips with the city’s real estate quirks and idiosyncrasies. To take the confusion out of the home buying equation, here is a comprehensive guide to buying real estate in New York.
What does that mean for the first-time homebuyer?
It means trying to predict the future. In the next seven years or longer, do you plan to start or grow your family?
Is there a possibility your employer will transfer you to a location in another part of the country?
Do you have an ailing or aging parent who may need to move in with you?
Predicting the future also means buying only as much apartment or house as you think you’ll need, but not much more. In the past, the trend in a first-time apartment or home buying was to purchase a smaller, more affordable “starter apartment or home,” and then sell it in a couple of years when the family (and the household income) grew. Given the variables in the real estate market, that no longer seems like the best strategy. Today, you’re better off buying the apartment or home you think you’ll need for your family for the next ten years.
Apartments and homes with multipurpose rooms, like a dining room that can be converted to an office, or an attic that can become a bedroom, make sense as you try to arrange your home to meet your family’s changing needs. Resist the temptation to buy too much house.
The additional real estate taxes, utility payments, and maintenance and repair costs restrict your ability to save for other family necessities. As the saying goes, no matter how big your apartment or house is, you can only sit in one chair at a time.
Planning for the future
Buying a home makes sense if you plan to live in it at least five to ten years; any less, and you may wind up losing money in the transaction. The seller in a real estate transaction can easily expect to pay up to 10 percent of the sales price of the home in closing costs, allowances, commissions, necessary repairs, and other negotiated expenses. Also, sellers rarely get the full asking price for their apartment or home, unless there is a shortage housing inventory. It is also possible to get a full asking price if a home has been well-renovated, is in a great location, or if it features distinctive and appealing architectural detail.
Taking Care of the Preliminaries
Before you go searching for your first dream home, you have to figure out exactly how much you can afford. If you are taking the home loan approach, then you’ll need to check your credit score. Your credit score has everything to do with the type of loan you’ll qualify for.
Once you know your score, it’s time to calculate how much you can afford. This is where being honest with yourself counts. In other words, be as realistic as possible with your finances, and don’t forget to include the down payment, closing costs, and additional fees associated with the purchase.
Be Realistic
Whether you’re looking for a fixer-upper townhouse or brownstone Brooklyn, or a studio apartment in a walk-up building in West Harlem, focus your search as narrowly as possible and do it with a wish list in hand. Shopping aimlessly in a city of endless choices doesn’t work with designer clothing, let alone real estate –– an H&M budget won’t get you a suit from Prada, much in the same way a one-bedroom budget in Washington Heights won’t get you a sprawling two-bedroom in the West Village.
Have flexibility
Based on the initial wish list you had made before you began shopping, you might not be able to afford Park Slope, even though you have your heart set on that neighborhood. Adjacent areas of Brooklyn, however, could offer more space and additional amenities and still be within your budget, so stay open-minded.
If you aren’t prepared to stray from your dream neighborhood, adjust your list and scratch off that extra bath, or the outdoor space, both of which add thousands of dollars to an asking price.
Planning & Saving
Don’t start thinking about who you are going to get a loan from 1 month before you think about starting the hunt. Start planning for your new home well before you even think about contacting a real estate agent. A few things to consider are what you can realistically afford, where you want to live, and what other costs will be associated, such as HOAs and real estate taxes.
A down payment for a home is commonly set to 20%, but you can now get a loan with much less. However, you should consider if a lower down payment is worth the additional costs you may have to pay such as for mortgage insurance. Many people don’t think the fact that a 10% down payment on a 200,000-dollar home is 20,000 dollars. For many first-time home buyers, this is not a small amount, so start saving now!
Credit Activity
You can get one free credit report every year from each of the three big credit reporting companies. This means that you can get three a year if you use one from each. Go to annualcreditreport.com for more information on this.
Remember, they are the only site that is authorized to do this. Your credit score will impact your ability to get a loan. Plan, and you won’t find yourself being denied every loan you apply for.
In addition to making sure your credit score is healthy, you should avoid making any big purchases during the time you are hunting for your first home. Any activity that involves an inquiry into your credit, such as buying a car or signing up for a credit card, can lead to a drop in your credit score.
Hidden Costs
Getting a loan isn’t the only time you will have to talk money during the process of buying a new home. There are plenty of additional costs that can sneak up on you if you are not careful. One such cost is paying a home inspector. If you are buying a home, you need to have an inspector’s assessment, especially if you are not buying new.
Realistically, don’t expect a used home to be without damage. Depending on how lucky you are, expect to spend at least a few hundred dollars in repairs on your new home.
Appliances are another cost many first-time buyers don’t consider. Will the home you are buying come with a refrigerator? How about a washer and dryer? If no, then it’s best to have a budget planned for such costs.
Future Plans
How long will you be living in your first home? Are you going to start a family and need more space? Is your employment situation secure? Has there been a yearly increase in crime or a decrease in property values? These are only some of the questions you should ask yourself before buying that perfect dream home. Carefully consider your plans and resale value of your home. Remember, a home is more than just a place to live, it is an investment.
An issue commonly faced in bigger cities is urban sprawl. If you are in a developing area, then that can be great for your home’s value, but you should consider how your daily commute and noise levels will be affected.
Finding a Buyer’s Agent
Buying a home without representation and the help of a real estate buyers agent is doing yourself an injustice, so it’s important to find a broker that specializes in buyers. Buyers agents can help with everything, from finding your dream home and facilitating the sale to mortgage pre-approval, negotiations and contract finalization, and every home buying need in between.
You should do a lot of research into your buyer’s agent. A good agent will have your back and doesn’t just see you as dollar signs. Remember, an agent is there to make the whole buying process more comfortable. If you find that this isn’t the case, then get a new one, fast!. A good agent will not only be extremely knowledgeable about their subject matter but will also have plenty of experience buying homes in the area you are interested in. They will many times have insights into things that you may not have thought of.
Documents
There is a lot of paper shuffling that goes on during the home buying process. If you are unsure of what documents will be needed, don’t be afraid to ask a buyer’s agent. This will save you a lot of headaches. The last thing you want is to be digging around your office in the middle of the night because you forgot to send some important document.
Also, read any documents that are sent your way. First-time buyers can get excited about their new home and potentially miss something important in a contract.
Get pre-approved for a mortgage
Don’t waste your time, a seller’s time, or the time of the brokers involved in the sale by not getting pre-approved. Obtain a pre-approval letter before you begin searching for your next residence, ensuring that you’ll have the ability to make an offer should you stumble upon “the one.” Without pre-approval, agents and buyers won’t take you seriously, and they’ll move on to a buyer who has the necessary paperwork. Plus, you’ll know how much cash you qualify to borrow ahead of your search.
Get to Know the City
Getting to know an area before you commit to buy an apartment is always a good idea, and this is especially important when moving to New York City for the first time. Each borough and neighborhood has a different mix of cultures, characteristics, and subtle nuances that make each of them unique.
If possible, spend some time in your desired area and speak to the residents. Find out the prices available apartments are going for, what the residents are like, and their feelings about the neighborhood.
Choosing the Right Borough
Manhattan, Queens, Brooklyn, the Bronx, or Staten Island? That’s right, choosing the right neighborhood for you is the first step in owning a home. Although it seems a bit daunting, making a list of the pros and cons of each area will help you narrow your search.
Break your list into columns that include everything from price and location to population and taxes. Think about what defines each borough as well. Manhattan is a metropolis, whereas Staten Island offers a suburban feel. Once you tally the pros and cons and narrow your search to one or two spots, it’s time to figure out your budget.
Condo or Co-op
Condos and co-ops are very different forms of housing ownership. Each offers its own set of benefits and drawbacks. What may be a buyer’s perfect apartment in a building with a condominium ownership structure may not be worth purchasing if it were a co-op. Likewise, a co-op offers owners levers of control over the future of the building that many buyers insist on.
The financial structure of the two types of buildings differs in substantial ways. A co-op has an ownership structure closer to that of a public corporation than a typical apartment building. Instead of owning a particular apartment, like in a condominium, those that live in a co-op hold a share of the company that owns the building. The more valuable the apartment, the larger the percentage of the company the resident owns.
While most buildings being built in New York City today are condos, 85% of all the apartments available for purchase are still cooperatively owned. While some analysts predicted years ago that co-ops would soon begin restructurings themselves as a condominium, the bylaws of most cooperatives require a supermajority, or 66%, vote of approval by the owners to allow this to happen. Many even need a super-super majority, or 80% vote. This explains why recent history has made it clear: Co-ops are here to stay for the foreseeable future.
Your home as an investment
In the literal sense of the word, the house you live in isn’t a true “investment.” That runs contrary to conventional wisdom, but here’s why it’s true:
Apartment and home prices have grown only slightly more than inflation for more than a century. What this means is that if you bought an apartment or house in 1980, paid off the mortgage, and sold it in 2010, you’d have the same buying power as you did at the start.
The real estate market is a lot like the stock exchange. As a general rule, it tends to increase over time, but trying to gauge the perfect time to buy and sell is an imprecise science. When you want to sell your home sometime in the future, if you’re lucky, it won’t stay on the market longer than a year. No one can guarantee that’ll happen, though, leaving you unable to access your capital. It ‘s hard to predict what will happen to your neighborhood, development, or market in five or ten years down the road.
Just like stocks, you have to sell your apartment or house when you want to use the profit your investment generated. However, unlike stocks, when you sell your apartment or house, you’re selling the roof over your head.
Some of the wealthiest people in the USA build their wealth by owning homes and real estate. Even if you aren’t generating a high rental yield, buying the right property nonetheless can be an excellent investment. Owning a home is building wealth; it gives savvy buyers years to compound that wealth and accumulate more property.
For example, if someone had bought a home in NYC 30 years ago, that person’s net worth would have inflated by approximately 1000%. More than three-quarters of investors worth $1 million+ own real estate, according to a study conducted by Morgan Stanley. Directly owning private and commercial property was cited as being the number 1 alternative investment choice, with 33% of the surveyed millionaires saying they planned to buy within the next 12 months.
Owning your apartment or home can be a beautiful thing. It’s a shelter and a source of pride for you and your family. It often provides a cheaper overall housing alternative to renting. But it is not a guaranteed investment. Don’t think of the apartment or home you and your family live in as an investment; it could cloud your thinking and lead you to make buying decisions that aren’t optimal for you. Buy an apartment or house because you and your family love living in it, it meets the needs of your family, the schools are great, and you enjoy being part of the community—not because you think it’ll be a significant investment.
Considering opportunity costs
Opportunity costs can are defined as the loss of profit or value from something that is given up to acquire or achieve something else. For example, if you’re cashing in an investment like a stock that has consistently returned ten percent a year to cover the down payment on your apartment or home, you’re potentially missing out on all the earnings of those stocks. For younger investors who have 20, 30, or more years for investment growth, the lost profits could add up to a sizeable amount. This is why some financial advisers recommend that genuinely disciplined savers who invest wisely are better off renting than buying. What does this mean for the first-time homebuyer?
If you’re financing your down payment with a second mortgage, or part of it is a gift from family, your opportunity costs are meager. On the other hand, if you’re raiding your 401(k) or another brokerage account for a down payment, be conservative in deciding how many homes you can afford. A lower purchase price means a smaller down payment, which means more of your money can remain in long-term investment accounts. Another reason to buy only as much apartment or house as you think you’ll need in the next seven to ten years; you’ll lower your opportunity costs by maintaining a larger percentage of your other investment accounts.
New or resale, which is right for you?
In many instances, a resale is the only choice, especially if you have your heart set on a particular neighborhood or love the idea of restoring a beautiful space in a Pre-War building. However, for many first-time buyers, new construction is the better choice. For example:
Energy-efficient appliances and “green buildings” are becoming standard in today’s newly constructed apartments and homes. Efficiency standards have tightened considerably from 2010 to 2014, so energy costs are usually much lower in new construction. While it’s possible to retrofit older homes with more energy-efficient appliances, it’s expensive and rarely results in the savings available in new apartments and homes.
Most newly constructed apartments and homes come with fire-retardant floor covering and insulation, making them much safer in the event of a fire. Also, many builders hardwire carbon monoxide and smoke detectors in their buildings, which are more reliable and convenient than battery-operated models.
New buildings usually have sophisticated wiring capable of handling high-tech electronics, entertainment and security systems, and high-speed communications equipment. Customized wiring isn’t always possible in older apartments and homes.
You’ll save on replacement costs with a newly constructed apartment or home. Most major components have a lifespan of seven to ten years, and it’s possible for many to be covered warranties that can be extended beyond the first year. With older apartments and homes, it’s possible you’ll need to replace major appliances soon after you move in.
Many developers have mortgage banking affiliates that can customize financing, including down payments and interest rates, to meet your particular situation. They’re often able to defray some of the closing costs, too. However, the current market isn’t favorable for that unless the property is either in a bad location or grossly overpriced. While a seller of a resale home has some flexibility to contribute to settlement costs, they don’t have nearly the flexibility of a builder’s affiliated mortgage company.
So, which type of housing is right for which type of buyer?
Generally speaking, co-ops offer one significant advantage for some buyers: A more thorough screening process for potential buyers. The screening process is an arduous task for potential buyers Often just the interview with the board of directors will take up significant amounts of time, which is to say nothing of the various credit requirements to be met and paperwork to be completed.
However, once a buyer moves into the co-op, the social makeup of their neighbors tends to be much more stable and homogeneous. This can be either an advantage or a disadvantage, depending on what the buyer is looking for. For those looking for a place to retire or to raise a family, the knowledge that the social and physical environment of your building will not change for a long time offers a great feeling of security.
These same tight screening processes and regulations that make most co-ops a reliable, unchanging environment, however, also make them more difficult to sell and often quite impossible to sublet. This is particularly disadvantageous for buyers that do not plan on living in one place for an extended amount of time.
Indeed, the co-ops’ regulations give condos a relative value increase on the market: Investors and more mobile homeowners prefer condos. This additional demand for a much smaller supply makes condos the logical choice for most buyers. A recent study suggested that were the average co-op to convert to a condominium ownership structure, an average net gain in value of $15,500 would be added to each unit.
Get One Cheap
New York apartments are not typically considered as cheap. If you are willing to make certain sacrifices, however, you will be able to land yourself an excellent bargain.
Look at larger apartment buildings – Buildings with around 40 or more apartments are much more likely to have more appealing prices.
Search in the winter – There is less activity in the market during the winter months, and as a result, landlords are generally willing to deal with any vacant apartments they have.
Help out with the work – Some landlords have properties on their list that could use a little work. Offer to share the costs of repairs, and you can likely negotiate heavily on the price.
Check lesser talked about areas – Less publicized areas which are not as in demand can have nice cheap apartments which landlords are desperate to offload.
Save Some Room in Your Budget
There is no such thing as a perfect apartment. However, once you have secured the keys for one that closely matches your expectations you will have the freedom to perfect it. This is one reason it helps to have a budget that will allow you to make the purchase and have some funds left over for necessary renovations.
Even brand new homes can require some post-purchase spending. Factor in decorating or possible repair costs so as not to find yourself in a situation where you have to leave your new apartment to deteriorate.
Buying your first apartment in NYC might be one of the most challenging things you have to face thus far in life, but it can also be one of the most rewarding. In the end, it is not as daunting as you think.
Making an Offer
If you find a home that you love, make a reasonable offer. If the home is a good deal, then you can be sure you aren’t the only person who has come to this conclusion. Place a strategic offer that you are comfortable with. You can leverage your agent’s expertise for this part. If you are buying in a neighborhood where homes historically sell very fast, then you may not have time to negotiate on minor details, such as changing out light bulbs.
One of the most exciting and nerve-racking steps of buying your first home is making an offer. Counter offers aren’t uncommon in the home buying game, so it’s important to prepare for a second and sometimes third offer that’s within your budget.
Negotiations
If you choose to go with a real estate agent, they will handle all the negotiations and even make counteroffer suggestions. With a market as competitive as New York, multiple offers from different parties is a large possibility, so keep this in mind when it comes to your offer.
However, if you are in a buyer’s market situation where you have greater leverage, then don’t be afraid to take advantage of the opportunity. From real estate closing costs to repairs to even pest control subscriptions, you can find something that may help you sweeten the deal.
Getting the Right Mortgage
Congratulations! Once your offer is accepted, it’s time to find the right mortgage for your needs. Whether you choose an adjustable or fixed-rate mortgage, many tax advantages are specific to first time home buyers in New York, so it’s important to weigh all of your financial options before choosing a home loan.
When you’re ready to call yourself a homeowner, use the information above to help you along the way.
Are you ready to buy your first New York City home?
You may be wondering if you’re willing to purchase your first home. The answer depends on, in part, on your answer to the following questions:
Are you prepared to maintain and repair an apartment or home?
Are you willing to stay in the same apartment or home for at least five to ten years?
Do you have a realistic idea of the type of apartment or home and amount of space you’ll need for the next five to ten years?
Are you relatively sure your financial situation will remain stable or improve over the next several years?
Are you a disciplined saver who can build up an account for emergency repairs?
The financial and real estate markets are in harmony, making homeownership less risky and more affordable since 2008. Most economists predict that home prices will continue their steady rise.
For now, rates are low increasing buying power. However, interest rates have begun to climb and will continue to do so, lowering the amount of apartment or house you can afford later on. Buying an apartment or home is still cheaper than renting in New York, but as interest rates climb, this phenomenon is likely to change; waiting too long may push home ownership out of reach.
Buying an apartment or home is an exciting and often overwhelming experience; to help you understand the process and get the best possible outcome with your home purchase, we’ve prepared a Home buyer’s Handbook to help you get started. The information it contains, along with useful tips and recommendations, will give you a good understanding of the apartment or home buying process, and how to avoid costly mistakes.
Download free 127 page: First-Time Home Buyer’s Guide
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