Every first time home buyer should read this!
In a world where access to information (of any kind) is ubiquitously available at a touch of a button, it is of great surprise how a significant proportion of first time buyers fail to understand the fundamentals of ‘bricks & mortar’ and subsequently make decisions which are based more on emotions rather than facts.
We live in an information overload world. On a daily basis, from the moment we open our eyes we are inundated with media influencing every decision we make. The headlines determine what food we eat and what we drink and even a single documentary on Netflix suddenly makes half our close circle become vegan over night. We have become the generation of headline readers. Perhaps it has always been the case, it is just more prominent in 2016!
As professional real estate investors, at Thompson McCabe we provide advisory and consultancy services to a wide array of clientele, a small percentage of whom happen to be first time buyers. It is astonishing how a large proportion of these people are purely driven by the headlines that they consume from reading the local newspapers on their way to work that morning or the interviews broadcasted as part of the nine o’clock news the night before. Those lucky few first time buyers who have complied with the outrageous deposit requirements and yet are unable to put an end to what is a prolonged and in many cases subconscious procrastination about whether to buy? Not to buy? Is the market in a bubble? Will prices come down next year? A million and one ‘what ifs’ all of which are predicated on what the newspaper articles were predicting that morning! The attention and focus is in the wrong area. After all, where focus goes energy flows! The emphasis is on the key word attention!
So where should the focus be for the first time buyer? What should the first time buyer do to make an informed decision and commit to what undoubtedly will be the biggest transaction of his/her life to date?
1. Do your homework. Make specific decisions on the location based on realistic affordability checks. Drill down deeper by postcodes. Location is one of the most important factors when it comes to real estate. Investigate the history as well as the future prospects of your chosen locations. Ten years a go a number of towns which are now regarded as highly trendy and up and coming along the London Cross Rail Network were considered undesirable. Fast forward to 2016, they get a lot more attention and have significantly appreciated in value with even greater prospects for the medium term future. Schools, transport links and local amenities always play a big part in prosperity of an area and therefore longevity of your investment in your first home.
2. Be patient. Arrange a minimum of one hundred viewings before even placing an offer. The most common trap that first time buyers fall into is becoming romantic with paying attention to the aesthetics of a particular dwelling without necessarily having spent enough time and attention researching the market. Whilst the physicality of the dwelling is, and should be important, it should not form the basis. The more you view the more you will understand the underlying values of similar properties in similar postcodes against the prices which they are being marketed for. You will grasp how much bang you can realistically get for your buck! Understanding the difference between value and price will allow you to easily identify mis-priced opportunities. Regardless of how the local market is behaving there are always opportunities where you can uncover hidden value. The variable is once again is paying attention with patience and knowing where to look!
3. Understand the costs. Most first time buyers have never taken the time to understand the additional costs that they need to account for in addition to the purchase price of their property. Legal fees, taxes, survey costs, financing arrangement fees as well as other administration related expenses that can easily add ten to twenty percent to the purchase cost; on average. Make sure you do your numbers on a property by property basis to avoid getting caught off guard and face the undesirable prospect of finding the perfect home that ticks all the boxes and running out of cash at the eleventh hour!
4. Understand the legal facts. The tenure of properties in the UK makes a huge difference to your legal entitlement over the property you are taking ownership of. Freehold properties are typically valued higher than leasehold. Simply put, when you buy freehold you own the land and the dwelling that is built on it, where as when you buy leasehold you do not own the land and your ownership is determined by the criteria and length of time stipulated within your lease which is drawn up by the freeholder who ultimately is the controlling party. There are also running costs associated with leasehold properties for the ground rent and service charges. These service charges are contributions towards maintenance of the building as well as any surrounding grounds. Flats and apartments are created under leasehold tenures. The terms of the lease dictate the length of time you are legally entitled to own the property before the freeholder can renegotiate the terms and charge a premium for your renewing the lease. Typically speaking, as the terms of a lease fall below 70–80 years the process for securing financing from a lender becomes more difficult. Alterations, refurbishments and cosmetic related works within a leasehold property are strictly governed by the terms outlined within the lease. This is often overlooked by first time buyers and can become a bureaucratic exercise further down the line if the leaseholder decides to make any changes. Moreover, if there are any plans to carry out building related works, freeholder consent can often take up considerable time to obtain and in some cases requires paying professional fees in order to involve architects and structural engineers, depending on the scope of works, not to mention the charges which will be imposed by the freeholder once a formal proposal has been submitted.
5. Reverse engineer the process of buying your ideal home to when it comes to you selling it. Ask yourself whether it will have the same appeal to the prospective buyer however many years down the line as it does to you today? Going back to the earlier point about the common the mistake of making a romantic decision about what becomes a first time property purchase based on certain aesthetics which may look appealing on a particular day can become a deterrent to the sale-ability of the same property further down the line. A more specific example of this point would be both the desirability and curb appeal of period properties compared to new builds. Period properties are always more desirable and achieve a premium compared to new builds. They simply get more attention! Furthermore, period properties have more character and the length of time they have been in existence is a testament to their longevity whether as a lot (not all) new builds lack the build quality aspect and their appearance very soon deteriorates. This will directly impact their appeal in the future. The typical UK home changes ownership between every seven to eight years on average. The bi-focal approach to picking the right property that will fulfil your requirements today and deliver ROI in the medium to long term will be the right strategy to execute and one that is worth paying a great deal of attention to!