Once you have your personal mortgage payment (24% or your monthly take-home pay) number in hand, it is time to go looking for a house. Here are a few ways to buy a house for less:
- Buy a foreclosure. In today’s sad housing market there are some amazing deals to be made on beautiful homes that are being foreclosed on. Foreclosures happen every day in every state. However, right now, there are thousands (if not millions) of homes in foreclosure (take a peek at HUD homes too -- they are merely foreclosed homes that had an FHA loan). The previous owner could no longer afford the monthly payment and the bank has had to take ownership of the house back. In a foreclosure you buy the house from the bank. The bank does not want to own the house and they are often willing to sell it at a substantial discount in order to get it back into a mortgage where they can make money off the interest again.
- Buy a Short Sale. A short sale is similar to a foreclosure, except that the owner still technically owns the house but is behind on their payments and will soon go into foreclosure unless they sell it. The delinquent owner is trying to convince the bank to let them sell the house to a new owner for less than they paid for it and have the bank eat the difference between the old loan and the new loan – rather than the owner still owing that money to the bank (BEWARE: the seller will be taxed on the "forgiven" part of their home loan -- that can be extremely expensive. Doing a short sale also goes on your credit report). It is a horrible thing to be a seller in this category, but the new owner gets a great deal – sometimes saving 50% on the house.
- Buy a modest home in a great neighborhood. Remember the old real estate saying: Location, Location, Location. This is ALWAYS TRUE. The value of your house is always going to be tied very tightly to where your house sits. If you have a modest home, but it sits in a beautifully cared for, desirable neighborhood, it will be worth more than if you have a gorgeous home in a declining neighborhood or next to a gas station or freeway. Be very aware of what surrounds the house you buy. Good neighborhoods tend to see their home values increase over time and your demure home will climb right along with it – at a much faster and higher rate then a great home in a medium or declining neighborhood.
- Buy a fixer-upper. If you buy that modest home in a good neighborhood AND it needs some work – you are getting a home run. (As long as the work to be done is not too extensive.) I’ve known many, many people who have moved into a house that had a nice location, but it needed some new paint colors, some lawn care and maybe a few new roof tiles. The price for a house with these kinds of problems goes WAY down – often tens of thousands of dollars. Old kitchens and bathrooms especially drive a house price down like nothing else -- remember this tip when you're selling yours. If you’re willing to put in a bit of elbow grease, you can really get a nice home at a cheap price and turn it into your dream house.
- Stay put: Another way to save big money on a house is to stay put. Buy a house that meets your needs and live in it for 50 years. The house will appreciate around you. Even in a less than desirable neighborhood. Buy something modest and make it work. Those children who need so much space when they’re teens, move out sooner than you’d guess. Before you know it you’ve got an empty nest. Might as well let them share bedrooms and bathrooms for a few years (it builds character!) and not end up with the mega-house to heat and clean after they’ve all move out. Inflation will work in your favor as long as you are not constantly restarting your 15 or 30 year mortgage by moving. One of our older relatives bought a home back in the 1930’s for about $12,000. His daughters sold it when he passed away in the 1990’s for over $400,000. Real estate – over enough time – does go up.
- Have a long-term plan: I have a good friend who has owned 4 homes in the nearly 20 years I’ve known her. They have lived the last 8 years in a FABULOUS home in one of the very exclusive guard-gated neighborhoods in our area. From what I hear, their house is paid for. But they had a plan – all those years ago on how to get there. House One: When their oldest child was very small, they purchased a HUD home. Take a look at the last link for the rules on buying a HUD home. It was a small home in a medium-level neighborhood. But they paid pennies on the dollar of what it was worth. They redid some tile, painted it inside and out and fixed up the yard and sold it 3 years later for tens of thousands of dollars more than they bought it for. House Two: They found a builders close-out house in a brand new neighborhood that was being sold $25,000 below the cost of other similar homes, because it was the last one of its kind and the builder just needed to sell it. They put in a nice yard, and kept it in good shape and 3 years later they sold it for tens of thousands of dollars more than they paid for it. Are you seeing a pattern?? House Three: They built house #3 and the husband acted as general contractor (saving tens of thousands of dollars). He used every connection he had among builders, carpet sellers and such to keep his cost very low. This house was in a guard-gated community near the airport. So, even though it was in an upscale neighborhood, the noisy location kept the lot prices low. This was a beautiful home with many designer amenities, but all installed following a strict budget. They lived in this house for about 5 years – and you guessed it, made a killing when they sold it. House Four (current home): Again they built this home and acted as their own contractors. This house is massive and spectacular. And paid for. All because they had a plan and were willing to put in some work to get there.