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A Twitter follower recently sent us this article on Yahoo Finance.
Yahoo Finance: Lack of knowledge leads to big regrets for Ontario’s first-time homebuyers
First of all, I love how the stock photo model in that picture is somehow simultaneously looking sad AND flexing subtly for the camera. “My home purchase went so bad, the only thing that can cheer me up are tickets to the GUN SHOW!”
But aside from that, here are a few highlights from the survey done by the Real Estate people:
- 32 per cent of first-time homebuyers did not “feel prepared or knowledgeable about buying a home.”
- 20 per cent are blindly offering more than they’ve budgeted without knowing if they can get the financing.
- 45 per cent of first-time buyers wished they had done things differently when buying their homes
- 69 per cent of people have “no idea what they’re doing when they’re signing those deals”
OK. Good…
So we have a real estate market in this country where two thirds of people admit they don’t know what they’re doing, and about half came away from the buying process regretting what they just did. This is, by the way, the biggest purchase most people will make in their lifetime, and the consequences of which will remain with them for the next 25 years. Canadians LOVE to feel smug when comparing themselves to their American counterparts, but I’m starting to think that smugness may not be entirely justified.
As we’ve yammered on about in the media, our turning point when we finally became disgusted with the real estate markets came when we were looking at a house in the neighbourhood of East York in Toronto. A house that had been getting run-down and dilapidated for many years, one whose owner was an obvious hoarder with mental issues (he kept painting UFO on the windows with what I can only hope was red paint) went on the market for sale. We laughed and thought “What idiot would buy that thing?” A few weeks later, the house was sold for $500k.
We then watched as the buyer (a flipper, obviously) moved his contractors in and proceeded to perform the most half-assed reno we’ve ever seen. Done in a month, it was obviously just a cosmetic rush-job that didn’t bother addressing the obvious structural issues that come from being owned by a crazy tin-foil hat hoarder. The floors weren’t even, the tiles in the bathroom weren’t lining up with each other, and the stairs into the house weren’t even the same size (everybody who went into the open house kept tripping). Even a cursory home inspection would have thrown up more red flags than China.
A month later: Sold over asking for $800k.
During our house hunting days, the home inspection clause was always the first one that the seller demanded we drop. Yeah, that sounds legit. I’m going to plop down hundreds of thousands of dollars on this place and I’m not allowed to even look at it? If someone was selling you a sandwich, and when you asked what was inside they got offended and insisted you weren’t allowed to look before you bought it, what would you do? You’d rightfully tell them to fuck off and then promptly report them to the Health Inspector.
That buyer of the $800k snake pit is screwed. They’re going to be screwed for the next 25 years as they realize their house is unliveable, and unsellable. And in a red-hot seller’s market where every condition is being dropped to participate in a manufactured bidding war, anyone who buys anything in this country is getting equally screwed.
Now it’s no secret that we have a few opinions on house ownership, but if you for whatever reason have to buy a house:
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- Make sure your real estate agent represents you and you alone. If they represent both the buyer AND the seller, that is a massive conflict of interest.
- Insist on a Home Inspection. This is non-negotiable.
- Never sign an offer when you aren’t 100% sure about the financing. If you later can’t get that money for whatever reason, the seller can and will sue you for damages. A friend of mine got caught in this trap, and the resulting flameout caused a messy and expensive divorce.
- And if you find yourself having to drop one or more of these conditions in order to “buy now or buy never,” walk. Staying a renter while getting rich, retiring in your 30’s and travelling the world ain’t such a bad alternative.
I own 3 properties and believe me the first 2 came with a fair amount of regret. I agree with this post, with a few caveats.
1. Get your own Home Inspector. Almost all Agents these days, have “their own” inspector, that they insist on using. If that seems shady… it’s cause it is. Book your own!
2. Most real estate agents will insist you sign a contract to deal with THEM only. You are under NO obligation to do this. A good agent will only make you sign when you are ready to put an offer in. Don’t sign with them before you’re ready.
3. When buying, leave your emotions at the door. A Paint job, shiny wood floor and new kitchen backsplash are easy and cheap upgrades to distract you from the big costs.
Things you should be looking for are maintenance records for the furnace and AC, transferable warranty on the new roof? aluminum wiring that hasn’t been pig-tailed properly? water spots on the ceiling below the bathroom (easily visible on popcorn ceilings). Patched up baseboard in the bathrooms around the tub (clear sign of water damage or mould). Not painting behind the toilet (toilet removal is easy). These are all signs of a shitty home-owner, who didn’t care.
4. Just because the bank approved you for 750k, doesn’t mean you should spend that much. Dear GOD why do people spend more than they can afford just cause the bank said they could. The larger the property, the higher the property taxes, the more you’ll spend on hydro and water, the more expensive that new roof will be. You’ll have to buy a larger furnace and more expensive roof. You’ll have more ducts that need to be cleaned, this list is endless. Bigger ain’t always better.
5. Re-sale… can’t say it enough. Re-sale, re-sale, re-sale. You have to look at re-sale options such as… Do you have no rear neighbors? Are you an End unit? Is there a new Grocery store and high school opening down the street? Painting those rooms “Hot Pink” doesn’t appeal to wide buyer audience, but beige does… ya… beige.
Just things to consider.
A lot more involved than just meeting with a happy broker.
Cheers
AnOldSoldier.
I’ve heard a lot of talk from friends and colleagues about having to wave a home inspection when they were trying to buy a house. I work in economic policy and this just strikes me as a very clear area the government would want to get involved. I’m generally in favor of limited government intervention in the market, but how unreasonable would it be for legislation to say: you can’t force someone to wave a home inspection as part of their bid. This just seems like low hanging fruit from a consumer protection standpoint.
As I’ve never gone through the process of buying before, I’m genuinely interested if someone wants to explain why this wouldn’t work/be beneficial.
Awesome points! Thanks for sharing.
“Dear GOD why do people spend more than they can afford just cause the bank said they could.”
+1000 points for this comment. I have no idea why people do this. Yes, the banks, you should definitely trust and listen to THOSE guys. They clearly have your best interest at heart.
Haha…that fortune cookie is awesome! Great post BTW!
Watch out, legally speaking, both RE agents are being paid by the vendor and hence, both actually work for the vendor. Caveat emptor.
Couldn’t agree more: both realtors work for the seller.
Yes, from that perspective, since both are being paid by the vendor, so they’re both incentivized to close the deal and get you to pay as much as possible.
The financial blindness of the people can indeed be crazy. I tell you another example: the prime rates of most Eastern European countries were very high before 2008, so were the mortgage interest rates. At least the ones denominated in local currency. So banks started to offer mortgages in Swiss franc and people loved it because of the lower interest rate. Basically on the top of their mortgage risk they have undertaken a huge FX risk. Guess which currency was the “winner” of the financial crisis… And guess how many people could afford the increased mortgage repayments (on the top of falling property prices)…
FX risk AND interest rate rate risk?! Wow. Sign me up! *eye roll*
That picture of the sad-looking couple looks either like their house has been foreclosed on or a house they wanted to buy but was sold to another (who must truly be sad) couple. If latter, then they have every reason to be happy because they are free to move anywhere to get a better paying job and reach FI early: http://tenfactorialrocks.com/buy-or-rent-consider-career-cost/
Great article! This kind of thing happened during 2008 where jobs were available on the other side of the country but people couldn’t take it because they were stuck paying off their (now underwater) mortgages.
Flexibility definitely helps your career prospects.
Thank you FireCracker for another great article. If your book was published in 2012 and I have read it then, I may not buy our home.
In 2012, my husband and I bought our first home in San Francisco. I can relate to 2 highlights of the real estate survey you mentioned:
1. We did not feel prepared or knowledgeable about buying a home. The sad part was that my husband had a brokerage license in real estate at the time. When he was on sick leave for a broken ankle the year before, he took online courses in real estate. His book knowledge did not prepare us for home buying.
2. We wished we had done things differently when buying our first home.
Furthermore, I regretted home ownership in the first 5 years because of the repairs, maintenance, and cleaning. It is a lot of stress because we own an old home, there are added expenses e.g. property taxes, homeowner insurance, gardening, utility bills, etc. We don’t know how things work and how to fix electricity, plumbing, roofing, water leaks, walls, stairs, deck, etc. We had to do a lot of research and talked to many contractors. We further got ripped off by a contractor – a friend of a friend. Despite all the stress and house works, we paid off the mortgage in 3 years. I no longer regret owning, but I still radiate toward renting. My husband is the opposite: he likes the privacy of home ownership. We both love our city, its natural beauty and cultural offerings. For now, we agree to disagree on renting versus owning.