How to Buy Your First Without Making Your First Mistake
By Ward B.B. Davison, J.D. & Kaitlin Merchant
Originally published in the Texas State Bar Journal February 2014
So, you want to own your place of residence. You want to mow your own lawn. You long to pay taxes, insurance and possibly Home Owners’ Association dues. You want to be the person who spends en entire weekend shuttling back and forth to Home Depot to fix your own sink…only to give up and watch a plumber fix it in 15 minutes. Well…good for you!
But first, take a beat. Be aware that there are more risks than falling behind on your mortgage. Understanding those risks and preparing for them will help you make better, safer choices and set your mind at ease.
Do I Really Need a Realtor?
Look, I get it. Why should you pay someone a commission just to show you some homes? You know what you like. You know how much you’re willing to spend. Why do you need someone else who just wants to make a quick commission? The same reason I need to call a plumber. It’s easier and generally more economical to hire a professional than to stumble through the process alone.
This is Texas, USA. You don’t need a real estate agent. But not many of us purchase more than a few homes in our lives. And when it comes down to securing a fair price and avoiding some “big oops” moments, having the right agent can make a huge difference. Especially if the seller has representation. With this in mind, shop around and find an agent that you enjoy spending time with. Someone who seems to understand what you’re looking for. A professional with experience and know-how. There needs to be a high level of trust in that relationship in order for it to be beneficial for you.
What are the Major Factors I Should be Concerned About?
Maybe you have kids, maybe you don’t. Either way the quality of the school can tell you a lot about the quality of the neighborhood. Exceptions exist of course; there are some pretty good neighborhoods with some pretty bad schools. And if you do have kids, moving to a neighborhood with superior schools can save you a bundle on education as the costs are spread out among all the taxpayers instead of you having to pay for private school. Luckily, your realtor will be dialed in on the school situation, so you’ll have an expert to help you plan.
Taxes & Insurance
Once you own your own home you can get a Homestead Exemption in Texas, if you apply for one. This exemption allows you to lower the taxes you pay on your primary residence. Other exemptions exist if you are over 65 years old, disabled, or a veteran of our armed services. Even though you automatically qualify for these exemptions, you only get them if you apply for them.
Speaking of taxes, pay them. Failure to do so results in 1) economic penalties & interest on amount due, 2) possible wage garnishment, 3) having liens put against your house, 4) foreclosure. These penalties are serious and can add up quickly. When shopping for your home be sure you factor in annual taxes to ensure you’re not stretched too thin economically to enjoy your home. At the same time start factoring in insurance to annual costs to be sure you’re protected against acts of God. In Texas, it also might be a good idea to get a home warranty to insure your air conditioner and other expensive appliances. Property taxes will likely increase over time & insurance costs can fluctuate. Be sure to utilize your realtor or lender’s expertise when determining future costs of home ownership.
What is the Benefit of an Option Period?
One thing we can all agree on? Options are awesome. For a couple of hundred dollars you can secure an option period on the home. During that time, no one else can enter into a contract with the seller for purchase of the home that pre-empts your ability to buy. This allows you to secure a property that looks like a good deal while allowing you to do a little more digging. It lets you get some contractors in to take a close look at the foundation. Someone to check out the pipes and wiring. You can spend some time walking the neighborhood and meeting potential new neighbors. Have someone check the condition of the roof. In short, for a few hundred dollars you can buy a lot of piece of mind and the ability to walk away from a shoddy home…saving you thousands. An option period is not something the seller has to allow, so speak with your realtor early in the process about securing that convenience.
What is Title Insurance?
Title insurance is a required expense if you get a lender to help finance your home, but many people don’t understand what it does. Aaron Lee, an old law school chum, maintains a practice that focuses on real estate issues, including title insurance, in North Texas. Mr. Lee gave one of the best explanations I’ve ever heard about title insurance:
“First, we research the title, find any issues related to the current owner's title to the property and cure those issues before closing. Based on this work, we are able to offer a title insurance policy for the seller and for the buyer's lender. A title insurance policy protects the buyers from any possible defects in the title to the property they purchased so that they are assured that the house they bought is truly their house, subject to any voluntary liens they have put on it.
Second, my office also functions as an escrow agent. We handle all the monies for the transaction as a disinterested independent third party to make sure that both a seller and a buyer perform their respective obligations under the contract and that the monies are exchanged accordingly.”
Still want to buy a home? Seek professional help.
Seriously. When buying your first home, consult a real estate professional. And a tax professional. And a lending specialist (even if you’re paying cash). Half an hour with each of them could save you thousands of dollars, a few splitting migraines, and your relationship with a significant other. Good luck & happy hunting!
WARD B.B. DAVISON practices civil and criminal law in Austin and the surrounding counties.
KAITLIN MERCHANT is a real estate professional in Austin.