If you are new to real estate, you can definitely get overwhelmed at making one of the biggest purchases of your life. However, the real estate buying process is really much easier than people make it out to be. While making a mistake can prove costly, the good news is that there are only a handful to watch out for and most of them are related to each other.
Getting into real estate can be an extremely profitable and rewarding experience. However...
You simply have to stay away from a FEW bad decisions.
Read on to find out the most common mistakes home buyers and investors make.
MISTAKE #1: TAKING TOO MUCH TIME
There are several reasons why someone might take too much time to buy a home.
People who waste time tend to do it the following ways:
1. Get stuck in Education Mode,
2. Get too picky with their Property Search
3. Try to "time" the market
4. Try to get rid of good debt before saving for a downpayment
NOTE: More on these in the topics below
The problem with taking too much time is that you're potentially losing out on lot of cash, in the following ways:
Appreciation: With prices generally rising in Toronto, you end up paying more for a home.
Equity: If you are renting, your money is going into rent, instead of mortgage payments. This means that any equity payments towards your mortgage loan are being lost.
If you have the funds and are ready to buy, we recommend taking action and purchasing a property within 6 months.
MISTAKE #2: GETTING STUCK IN EDUCATION MODE
Human beings have an innate tendency to try and complicate matters and not just in real estate (take a look at the fitness industry). You do not need to be an expert to become a home buyer or a property investor. There are professionals to help you with that i.e. your REALTOR®!
Trying to become an expert will take a lifetime. Don't lose precious time. Get into the market and learn along the way. As long as you don't make any of the big mistakes mentioned here, you should come out way ahead.
MISTAKE #3: BEING TOO PICKY
We get it, you want that perfect dream home or investment. But here's the truth; it doesn't exist OR is out of your budget. Simply put, the same mentality goes into choosing a home as it goes into choosing a spouse.
There is no such thing as perfect. Some compromise is required.
Keep in mind that the product that comes onto the real estate market is at the mercy of the sellers and builders. This means that selection is limited.
To top it off, you are also competing with other buyers (and in Toronto right now, there are more buyers than sellers)
Be too picky and you probably will end up taking too much time or giving up altogether.
MISTAKE #4: NOT THINKING LONG-TERM
If you try to time the market or make a quick buck, you're playing the short term game. You are likely to lose.
Real estate is a long term wealth strategy.
Go in with that mentality and reap the benefits down the road. We suggest holding on to a property for at least 5 years to see a good return.
MISTAKE #5: PAYING OFF GOOD DEBT BEFORE SAVING FOR A DOWNPAYMENT
Good debt is any loan with low interest (5% or lower). This is usually on something such as a student loan or a car. There is no rush to pay this debt, apart from your minimum payments. Yes, you are paying a little bit of interest, but that's a small price to pay if it means you can save time and buy a home sooner.
While paying off debt is always a good idea, it might be better to save up money first for a downpayment and purchase a property ASAP.
If you focus on paying the low-interest loan first, you may end up buying your property much later and paying a higher price for a home (thus ending up spending more in the long run).
EXAMPLE: You decide to pay up a $10000 loan completely, instead of using that money for a downpayment. Let's say this takes you a year.
You are now ready to buy a home. The home you could have bought 1 year ago for $500000 is now worth $520000. (assuming a 4% appreciation - which is quite conservative for Toronto).
Just to eliminate a $10000 debt first, you now spent $20000 more on a home.
Moreover, you lost a whole year of equity that could have gone into your home. This is the part of your mortgage payment that goes towards your home: known as principal.
MISTAKE #6: GET AFFECTED BY THE NEWS AND EVERYONE ELSE AROUND THEM
If you are looking for bad news, it is extremely easy to find it. If you are looking for advice, everyone is there to give it.
However, all this will cloud your judgement. Most people have your best interests at heart, but rarely will give you sound advice. Even your closest friends or loved ones. Would you trust your best friend to give you medical advice or would you go to a doctor? The same applies to real estate.
Stop reading the news. It almost always paints a bleak picture and twists facts.
"The market is going to crash or the bubble is going to burst".
This talk has been going on for the last couple of decades. But the truth is that Toronto is an extremely healthy market. If you think long-term and don't make any of the mistakes mentioned in this article, you should come out on top.
Why is Toronto a healthy market?
1. There is a significant growth in population.
2. Rentals are at their maximum capacity - Toronto has had a 1% vacancy rate.
3. The economy is stable
4. There are strict mortgage borrowing rules: this prevents buyers to purchasing beyond their means.
Simply put, supply exceeds demand. There just aren't enough properties on the market compared to the number of people who want to buy or invest in them.
MISTAKE #7: BUYING THEIR ULTIMATE HOME AS THEIR FIRST HOME
A lot of buyers have the dream of buying their suburban house with a white picket fence and a big backyard. Or if you want the city life, then a big 3-bedroom condo or townhome. In today's market, however, you cannot aim for such a property as your first home, unless you have a lot of money.
Instead, our suggestion is that you start small and move your way up. Start with something you can afford, even if it is not perfect or is a bit smaller that you prefer.
As you start building equity and the value of the property appreciates, you can sell it for a profit and upgrade to a bigger home.
This is called moving up the property ladder.
MISTAKE #8: STARTING A SEARCH WITHOUT A MORTGAGE PRE-APPROVAL
Most buyers get carried away with the excitement of a home search and forget about the mortgage pre-approval. Get a mortgage pre-approval before you start hunting for homes. There is no point looking at a property and then finding out that your bank will not approve you for that amount.
Having a pre-approval also shows your REALTOR® and seller that you are serious about purchasing a property.
MISTAKE #9: GOING TO A MORTGAGE BANKER (RATHER THAN A MORTGAGE BROKER)
Mortgage bankers work for a bank and represent one financial institution.
Mortgage brokers on the other hand, work independently and with a variety of financial institutions.
This gives them the ability to assess multiple options for you, to come up with the best mortgage for your situation.
MISTAKE #10: NOT KNOWING THEIR PERSONAL BUDGET
The pre-approval given by a bank simply sets the maximum amount that they are willing to loan you. It is important that you set your own limits to how much you are willing to put towards your house.
If you stretch yourself too far, you will end up sacrificing many other aspects of your life, simply to make your home payments. This is what we refer to as "house poor".
Make sure you have enough money saved every month towards your lifestyle options such as:
- going out for dinner
- hobbies and interests
MISTAKE #10: ONLY FACTORING IN MORTGAGE COSTS FOR THEIR CLOSING AND MONTHLY EXPENSES
Apart from your downpayment (5-20%), you will need more cash on hand to pay for items such as
1. Land Transfer Tax
2. Lawyer Fees
3. Moving Fees
A general rule of thumb is that you should have 1-2% of your property value available for closing costs.
If you buy a property worth $500000 with a 20% downpayment. This means that you should have $100000 available for the downpayment.
For the closing costs, you should have another $10000 (2% of property value) available.
Monthly Household Expenses
While your mortgage will make up the bulk of your monthly household expenses, don't forget to factor in other expenses such as
- Property Tax
- Condo Maintenance Fees
- Home Insurance
Use our Ontario Mortgage Calculator to calculate most expected expenses with Closing and Monthly payments
=> Ontario Mortgage Calculator
MISTAKE #11: NOT UNDERSTANDING GOVERNMENT ASSISTANCE PROGRAMS AND TAX INCENTIVES
There are several programs in place that help you with a home purchase. Ask your REALTOR® and learn more.
You can save a lot of money by being well-armed with this knowledge and buy a home sooner than you think.
As an investor, there are several ways you can save taxes as well.
MISTAKE #12: NOT NEGOTIATING PROPERLY
You have finally found the property that really interests you!
When it comes to negotiating a price for the home you are interested in, it is easy to let emotions let you make irrational decisions. A knowledgeable REALTOR® will ensure that you get the best possible outcome. Some common mistakes in negotiating are:
A) Offering More Than the Home is Worth
Prior to making an offer, compare this home and it's price to similar neighbourhood homes. Your REALTOR® should show you comparables and help you decide what this home is really worth.
Other important things to look at are:
- How many days has the home been on the market?
- How many other buyers are interested?
Once you are armed with the correct information, you can feel confident that you are offering the correct price; what you feel the home is truly worth.
B) Making An Offer With No Outs
It is easy to get carried away with an offer, specially when there are multiple bidders for the same house. Buyers make the mistake of making offers that release certain conditions, to appeal to the seller. This can be items such as
Willing to buy the home without an inspection: If you do this and find an issue with the home after, you are still obligated to purchase the home. The issue could be something that isn't apparent but can be found by a home inspector after a detailed look; structural damage, insect infestation, hidden fungus etc.
No Condition on Financing: This is where you make an offer without a confirmed mortgage. If your lender decides to refuse the amount, you are now stuck with the home.
Buying a property can be one of the most rewarding experiences of your life, as long as you avoid simple yet costly mistakes mentioned earlier. Ready to get into Real Estate? Read below.