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First Time Buyer’s Guide

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In the beginning…

I will never forget what an old-timer once told me about real estate. I was complaining to him about a troublesome apartment project that I owned and operated. He listened patiently to my lamentations and then said, “There is no bad real estate, only bad prices.” He told me in his own way that I paid too much for the buildings. The more I thought about what he said the more it made sense to me. My problem property would not have been a problem had I paid less for it! This seems obvious on the face of it, yet every day I see people repeating my rookie mistake—greed and misplaced faith has run many an investment on the rocks. Looking back on that transaction I can see all of the warning signs. I chose, for many reasons, to ignore them and press on. I regretted that purchase for years even though eventually inflation allowed me to break even.

When you sell a property you have little control as to the ultimate selling price, the market is the market. Therefore, the economic quality of the deal was decided before you closed escrow. Making the first purchase successful is paramount to your future success in building real estate wealth. First time buyers often let emotion dictate the eventual quality of the investment. Even if the primary reason for the purchase is for a residence, it is still an investment. And for most Americans, the largest and most important one they make in their lifetimes.

So what are some of the major pitfalls to be avoided?

The most common error revolves around emotion. The first purchase is seen as the family stead now and forever. It must therefore meet a more encompassing set of criteria that often have little to do with investment quality. The reality is this; people will buy and sell and move around before finding that property that truly becomes the family home. When you are starting out forget the new sod or the fresh paint. Instead ask this question: Will this property meet a strict standard of investment quality? To be a winner be prepared to live in less and earn more. Chances are you will be moving on in three to five years; the more you make with each move along the way determines just how well you will do over time.

The second most common error…

is an aversion to owning and living in a multi-family property. First time buyers, tenants themselves, seem to have an inbred distaste for tenants and the rental business. The economic benefits of this approach far outstrip, in the long term, the economic benefits of a single residence. Yes, it is less comfortable than owning your own single-family dwelling. You will have occasional problems with tenants. You will also get more economic leverage and increase your net worth faster with this approach. And the best part is that you will live in a better neighborhood than the one you could buy if you own a single-family home. Call me for a further explanation of this point. Why younger buyers eschew this vehicle has always puzzled me.

The third major mistake…

is of timing. Try not to buy when everyone is buying. My mantra has always been never be a buyer in the first half of the year. There is something about the New Year and buyers. Sellers operate on another rhythm. Remember this purchase is not about finding the perfect abode; it is about making the most money so that you can eventually find and afford that perfect home. So go shopping when no one else does. Mid-December until the first few days in January is my personal favorite. Start in the dog days of August and start picking through the leftovers. You will find a good deal.

The fourth misstep…

is trying to do it your self. Recognizing that I have a vested interest in obtaining customers, but you should still hear my argument. Find a good agent and stick with them. Find one that believes in your philosophy and is not just looking to get on the sales board this month. You need to sell your loyalty in order to get the best deal. A typical buyer like this calls thirty agents and asks them to call if they get a good opportunity. When I have something good I start with the most loyal client and work my way down. That is human nature.

A variant of this mistake involves purchasing a property directly from the listing agent. The concept, in theory, is that by not using your own agent, there will be commission savings that will be passed on to you. If that agent reduces their fee from five percent to three and one-half percent, that would mean a reduction of $6,000 on a $400,000 asking price. You can see from the numbers that the potential for being penny wise and pound-foolish is huge. That $400,000 price could go to $370,000 or $390,000. You are at the mercy of the seller’s agent. I have seen too many buyers skinned on this one so beware.

As a first timer you should find an agent that is willing to work to meet your investment goals and is willing to spend the time to educate you on this business. Your ambition, some capital and a good agent will work every time.

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