So You’re buying a house…

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Congrats! Good for You! I’m really excited for you, truly. The process of buying a home can be really stressful. You’re going to swing and miss on more houses than you can count, but the only thing that matters is finding that perfect house. There are a few things that you should know before putting in offers though. We’re going to go through a few concepts that will make it clear if you’re getting the deal of the century on your dream home or getting swindled out of your money.

  • Check out the P/R ratio: One of the first things I do before I even go to a property is look at the price to rent ratio. This ratio looks at how much it costs to own a home, compared to how much it costs to rent a home for a year. So, for example, if the ratio is 14 and the home price is $200,000, that means the home would rent for $1,190.48 per month. Seems a little on the high side unless the location is outstanding. If you run a few more calculations you’d find that it would be in your benefit to buy. The return on buying the house would return about 6-8%, which is right below small company stocks and mutual funds (adjusted for inflation). The main lesson to take from this, since nobody likes doing extra math, is to take a P/R ratio of 15 or under as a good sign.
  • Scam? What Scam?: People would never trick you while buying a house. Right? Actually…Wrong. One of the growing economic crimes is fraudulently flipping houses. The gist of the scheme is to have the house appraised at a higher value than it’s worth, and then sell it to a buyer who doesn’t know any better. This crime has seen a recent spike in activity with the low house prices. All those low prices created an arbitrage situation, and some people decided it would be a good idea to make a bigger profit from the situation. While a person in the real estate industry or someone with a master’s degree in economic crime may be able to sniff such a scheme out easily, your average excited home buyer is often ripe for the picking. It’s always good to do your research when buying a home, especially if it’s a being sold by the owner, or a small time agent.
  • Compare it: Here’s an easy way to know whether or not you found a great deal or not. Look at the comparable houses list. Your agent should be providing this, but sometimes it slips through the cracks. That list will show you the prices of other similar houses in the area. Realtors tend to add on extra for additional square footage, views, or any upgrades that the house has. This gives you the best idea for the price range of a house.

I get it, you’re probably already looking at 1,000 different things regarding your house. Problems with the layout, the paint, and the backyard all pile up in your mind, but it’s important to keep in mind the financial side of the choosing the right house as well. Make sure to remember these 3 things when looking at the price of a house and you should have a good idea of whether or not it’s the deal you dreamed about.

This is a guest post by Scott Griffin