First Time Home Buyer? Five questions to get you started.
Choosing a home for your primary residence can be quite the daunting task. Buying that property can feel like almost as much of a commitment as getting married: can I really see myself spending the next five years in this house? Could I spend forever in this house? Will it meet all of my needs, or am I settling? What about all the other houses that I can no longer choose, because I put all my chips on this one? Is this diamond in the rough really going to turn into a diamond, or am I marrying a money pit? As my husband and I approach the one year anniversary of closing on our own first home (a fixer upper project for the history books), I thought I'd take a moment to reflect on what may have been the hardest part of this entire process: choosing the property in the first place. If you're thinking about buying your first home, here are five things to consider as you start your search.
1. Neighborhood: What kind of experience and qualities are you looking for?
Before you even start tramping through open houses, it's a good idea to narrow your search to a few neighborhoods you'd be happy in. If you're new to a city, as we were to Philadelphia when we started our house search last spring, it helps to start picking destinations all over the city to go and spend an afternoon or evening to start getting a feel for the neighborhood vibe. We were having dinner in Fairmount, brunching and browsing shops in Queen Village, attending concerts in Fishtown, and picnicking in West Philly parks. As you get to know the neighborhoods, you'll quickly come to understand what you love and what you could do without. Maybe you're looking for a 'hood filled with young professionals and a hopping night life, or maybe something quieter and more family friendly.
Though the vibe is critical, don't forget to do the rest of your research. What is the average cost per square foot in the area, and how much space does your budget afford there? Is there a prevalence of violent or property crime in the neighborhood? What are the demographics, and how are they changing? What are the school district boundaries, and how are they rated? (Note: whether you have school age children or not, this is always a key metric for resale value in the future should you ever decide to sell.) Are there any public or private financial incentives for certain districts that might lower your tax burden, offer mortgage or closing cost reimbursement, or otherwise inflate property values within that boundary?
In our case, we fell in love with the leafy green oasis of West Philadelphia -- sprawling parks shaded with towering oak trees, lush and carefully tended gardens overflowing sidewalks, and the vast majority of homes sporting actual back yards rather than sunless concrete patches. In a city full of cracked and broken concrete, the green, bike-friendly "suburb" of West Philadelphia feels almost like Portland. Developed as a streetcar suburb in the 1920s, the western half of the city strikes a balance between density and spaciousness, and we were able to afford a considerably larger home than we could have in Center City or Fishtown.
2. Amenities: What are your must-have amenities and infrastructure to have within walking distance?
Once you've figured out the neighborhood you're ready to call home, it's important to consider the holy grail of real estate: location, exactly. What amenities are located nearby? What is your preferred mode of transportation, and what infrastructure exists to support that? Are there enough local amenities that you can perform most of your weekly trips within walking distance, and can you walk to your workplace? If you need to take public transportation, how far is the walk to the nearest train or bus station? If you bike, are there bike lanes in place already, and would you feel safe biking there? If you own a car, or must drive frequently, will you be able to park your car at or near your house, and will you have to factor in the cost of a parking permit?
Walkable amenities are a key measure of the health of a neighborhood, and they will be a major factor in the ease and enjoyment of your future daily life. When you have to run out to buy eggs or coffee in the morning for breakfast, how far is the nearest grocery or convenience store? Can you make your weekly grocery haul on foot, by bike, or will you have to drive? How many coffee shops, restaurants, and bars are nearby, and are they places you would enjoy? If the neighborhood is still developing, are new businesses actively entering the area? What kind of growth might you expect over the next year or two? You're going to want to look for amenities you can start using right now, from the day you move in -- this is your daily life, and while future development might help your resale value, you need to be able to live your life here from day one.
Though the University City area of West Philadelphia certainly offered more amenities, we ultimately found a house farther out that was located only three blocks from a train station -- the 52nd Street stop on the Market-Frankford Line. Although we do own a car, we perform most of our daily activities on foot, by bicycle, or occasionally by train in the winter or bad weather. The car we park on the street nearby with no need for a parking permit, ready to use for picking up construction materials or long weekends away. Our preferred grocery store is about a fifteen minute walk, but we can easily get there by bike in about six. I run my architecture practice out of my home studio, and my husband can easily bike to his office at 30th Street Station with safe, accessible bike lanes all the way. When I have meetings or appointments in Center City, I often bike or take the train. Though this area of West Philly is very much in the early stages of redevelopment, there are numerous coffee shops and restaurants on nearby Baltimore Avenue which we can access quickly by bike or a leisurely walk, and frequent music and arts programming activates both large parks nearby.
3. Price: How much does it cost, how much can you afford, and how much can it appreciate?
Cost is perhaps the most obvious factor for you to consider, but one that most people fail to properly evaluate. To figure out your target price range, you need to consider more that what you can "afford." While a mortgage lender will look at your total savings, monthly income, and debt ratio to determine the upper bound of your financial capacity, you should hesitate to buy something at the limit of your resources. Though you may be making a comfortable salary at the job you currently have, it's important to consider how your circumstances may change in the future. Do you want to keep working at this job, or do you hope to be able to leave this job to start your own venture in the future? If you lose the job, how will you recreate the income to continue to afford your home? Don't fall into the trap of "working to pay the mortgage" -- this is the number one excuse I have heard people give when explaining why they are afraid to take the leap and leave their day job to pursue their side hustle. A home should be an asset that facilitates your personal and financial goals, so make sure you consider your future financial situation when determining how far to stretch your monthly mortgage budget.
In our case, we were both well employed with relatively secure salaries and could have afforded a much larger mortgage than we ultimately took. However, we both knew that the five year plan included me leaving my job at a large architecture firm to start my own company, and we chose to take a smaller mortgage in order to minimize our future cost burden. We also chose to renovate rather than buy a move-in-ready "rehab" property, so buying at a lower purchase price also meant reducing the amount of our down payment, which left more cash in our pocket to put towards the renovation. Little did we know how important that cash would become down the road (more on this later).
On the subject of price, it's also important to consider the appreciation potential of your purchase. Whether you intend to sell down the road or not, the appraised value of your home matters tremendously for both resale and equity. If you buy a home for $300k in an already fully developed neighborhood such as Old City, the value of your home over the next five years is likely to increase very little or even decrease as the market fluctuates, because the neighborhood's value has already peaked. However, if you buy a home for $300k in an edge neighborhood that's in the process of developing, the value of your home will most likely increase rapidly over the next five years. This means that your percent equity will rapidly increase as well, and if you started the mortgage with PMI (private mortgage insurance, usually in place if your down payment is less than 20%) you should be able to reappraise yourself out of it in a year or two, thus lowering your monthly payment even further.
4. Value: Are you committed to a move-in-ready home, or would you be willing to undertake a renovation yourself?
Similar to the appreciation potential, it's also important to consider how much value add potential a particular property can offer. If it's been recently renovated, it's actually at the top of its value and the perceived value of the interiors may actually depreciate over the coming years as brand new finishes age. If contractor finishes are too trendy or fashionable, they may begin to look dated over time. On the other hand, if you are willing to put in the time and effort of renovating a property yourself, you can add enormous value through fixing up an older property that hasn't yet been updated. You can often buy these properties at a much lower sale price, leaving room in your budget to spend money on updating systems and finishes to your own taste. Owner renovations often result in much higher quality results than those completed as a flip, because you're going to invest in equipment, fixtures, and finishes that reflect your values, age well over time, and reduce operating cost over the long term.
When we first started looking, we weren't sure we wanted to undertake a renovation project -- it seemed enormously time consuming, and we had never even owned a home before. As an architect, I knew plenty about building systems of large, institutional facilities, but I had never applied that knowledge to a house. The more we looked, however, the more we saw example after example of bland, flimsily constructed contractor rehabs, beautiful in realtor photographs but revealing their poor quality the moment you walked in the door. Cheap finishes, unfilled nail holes, slanting floors -- all asking top dollar in a market with far less supply than demand. We ultimately couldn't justify buying something we didn't even like at the far end of our price range, and we couldn't ethically tear out brand new finishes later to replace them with what we really wanted. After four months of looking, we finally selected a gorgeous old Victorian twin built in 1925 -- complete with knob and tube electrical, oil heating, cracked and leaking cast iron plumbing throughout, and a leaky roof. But she was beautiful, and we decided to undertake a full systems renovation while keeping the character of the house intact: original oak floors throughout all three stories, walnut stained woodwork and trim, plaster over lath everywhere. Was it more of an effort than we ever imagined possible? Absolutely. But was it worth it? Without a doubt.
5. Size: How much house do you really need?
Though it may be tempting to settle for a tiny two-bedroom in an expensive, exciting neighborhood, it's critical that you ask yourself how you really intend to use your home. As you start to look at open houses, evaluate each property against the lifestyle you intend to live. How much time will you spend at home, and does it offer enough space for the activities of your daily life? Where will guests stay when they visit, and would you be willing to share one bathroom with them? Do you need a separate room or space for a home office? Where will you store the things that are important to you, or would you be willing to downsize? If you live with a partner or housemates, is there space for each of you to have privacy when you need it? If you like to cook meals at home, how spacious and functional is the kitchen, and is there a space for you to grow a garden? If you don't have children but you've thought about it, is there room for a nursery? At one point in your growing family would you run out of space and have to move to a larger home? It's important to consider both how you live now and how you want to live in the future. Your home is the backdrop for all of life's activities, so feel free to use this purchasing opportunity to make structural changes in your lifestyle that reflect the life you want to live.
Having spent two years in a tiny, two bedroom, one bath apartment in Northern Virginia, we knew we needed more space in our future home. We love having visitors and we wanted our friends and family to be able to stay with us when they visited, so having more than one bathroom was critical. I knew I would be working from home, so space for a studio was necessary as well. We love throwing dinner parties for friends, so a spacious kitchen with a dishwasher was a must. Ultimately, we wouldn't be able to afford the size we needed in a more established neighborhood such as Fishtown or Queen Village, but we found our space in West Philly. We never meant to end up with five bedrooms, but the house we finally found that met all our other requirements and fit into our price point? She was enormous, and I now have the custom kitchen of my dreams. I designed it, after all.
Once you've thought through these different factors, you'll be ready to narrow your search and start seriously considering individual properties. During this phase, go to as many open houses as you can in order to understand what's out there and eventually make a better informed purchasing decision. This will help you gain a sense of the relationship between price, location, and quality, getting you ready to determine a reasonable offer price when you finally find the house that's right for you. How do you find the right house for you? Stay tuned next week for Part Two when I'll get into the specifics of evaluating an individual property.