How to Control the Emotions of Home Buying

Buying a home is almost always an emotion-based process. Once you find a home you like, you become emotionally attached to it. Emotional attachment can cause you to make unwise decisions when making an offer, handling negotiations, and so forth. Once you’ve fallen in love with a house and visualized it being your home, you’ll start to do WHATEVER it takes to make sure it becomes your home.

This is about the worst possible way to buy a home, but also may be the best possible home for you.  You do want to fall in love with your new home, but you also want to be careful.

You can literally cost yourself thousands of dollars, if not tens of thousands of dollars, by being too emotionally attached. Instead of letting emotions rule the game, try to include some common sense in the buying process. Real estate investors have a saying that goes, “Don’t fall in love with the house, fall in love with the deal.” This is easier for an investor as he won’t live there, but you should be aware of this, and use your head.

Having said that, I realize that you will always have some emotional attachment to your house. You need to like it. Your goal is to strike a balance between liking the house and using common sense to tell you whether you are sacrificing too much to try to get the house. If you find you have to make lots and lots of compromises to get a house, stop yourself and ask, “Is this really worth it?”

Remember to strike a balance between emotions and common sense in your home buying process. It will help you enjoy your home that much more once you actually move in.

As they say in real estate, the three most important things to consider when buying a home is location, location, location. Once you have established what you need and want in a home, you need to decide where to look for a home.

1. School District: There are some important components to location when making this decision. If you have children, one of the big ones is the school district. If your children are already in school, you need to decide if you want to stay in the same school district so they don’t have to change. If they aren’t yet in school, you want to consider what school district you prefer, and specifically what schools in the district you want them to attend. Historically, homes in good school districts appreciate better and hold their value better than equivalent homes with poorer quality schools. This makes school selection not just an important investment in your children, but also an important investment in your home.
2. Work: Another important location factor to consider is proximity to work. Given the uncertainty of the cost of gasoline, commuting costs are definitely worth factoring in. It’s also important to factor in the amount of time your commute takes. If you live an hour away from where you work, not only are the gas costs going to be enormous, but that means two hours per day of driving, which is a lot of extra time away from home.
3. Lifestyle: Amenities are also important when deciding on location. How close do you want to be to the grocery store, your favorite restaurants and your favorite entertainment locations? Long travel times to get to these locations is not just inconvenient, but adds to gas costs too. In some cases, if you are trying to cut down on dining out to save money, you might want to move just a bit farther away from your favorite restaurants so you are less likely to frequent them.
4. Safety: The last location factor to take into account is crime. For the sake of the safety of you and your family, the lower the crime rates, the better. It will also affect the long-term value of your home. If you live in a high crime area, appreciation rates will be slower and in a down market, your home will decline in value faster. Larger cities tend to have higher crime rates than small towns, so you can’t compare the crime rate in San Francisco, California to Cheboygan, Michigan. However, many cities have good and bad neighborhoods. As a general rule, the better the neighborhood, the better off you are.

In summary, you want a house that is in the best school district, a five minute or less commute to work, close to all of the best amenities and in a zero crime neighborhood. If you find one, let me know because I’m not sure they really exist. Obviously, when you add all of these factors together, selecting the location for your home is a series of compromises. You want good schools, but you don’t want that to put you an hour away from work. You want to be close to amenities that are important to you, but not too close if it means you have to settle for a high crime neighborhood, and so on.

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The Top 3 ways to Determine a Homes Value

In most states there are values determined by the tax assessor’s office. It might be called your tax value, assessed value or something similar. That number might not be 100% of the property value. Usually there is some type of formula that each city or state uses.

Unfortunately using the taxable basis fails to take into account a number of things, like:

1. What are homes actually selling for in your neighborhood?
2. What is the condition of your home?
3. What upgrades have been made to your home?

As you might be able to guess, all of these factors can have a huge impact on the value of your home and would be in no way reflected on the taxable basis. The result, your home will either be over- or under-priced.

Here are the top 3 ways to determine a value of a home:

1. Appraisal

An appraisal is probably the most accurate way of determining a home’s value. While it seems to be the most costly in the short term, what it can save you in the long run by having your home accurately priced offsets the upfront cost. If you are going to sell your home on a “For Sale by Owner” basis, I cannot encourage you enough to have an appraisal done. When you order the appraisal, make sure you ask for a market value. This will give you the closest possible pricing guide for your home.

1.     Real Estate Agents

Making use of a real estate agent can be an excellent way to determine the value of your home. Real estate agents, like appraisers, actually look at recent sold comparables and look at your home to determine how its condition affects its value, and then suggest a price before listing your home. Unlike appraisers, they also take into consideration the current competition. They will perform an analysis of value, for no charge in most cases.

When you meet with an agent, ask to see “comparables”. They should show you recent sales comparables as well as what is currently on the market. Ask the agent WHY they are suggesting a particular price. Also ask them what you should expect to receive for a sales price on your home. A good real estate agent should easily be able to justify the asking price with accurate comparables and condition analysis of your home.

2.     Your Neighbors

Another method I have seen employed quite often is to price a home’s value based on what your nearby neighbors are trying to sell their homes for, and then almost always adding some. Why would you add some? Of course, your home is better, right? It might be or it might not be. But most sellers think their home is nicer or more updated than their neighbors. Be careful with this, as it can be a dangerous way to price your home.

This method makes several assumptions that will likely lead to pricing trouble:

1. You are assuming that your neighbors’ homes are priced accurately.
2. You are assuming that your home is genuinely comparable to your neighbors.

Even if you happen to live in a neighborhood of identically sized ranch houses with identical lots, there can still be pricing differences based on the condition and improvements in the home. If you have a finished basement or a newly remodeled kitchen, you need to be able to accurately set a value for those improvements.

Want to learn more about selling your home as a rent to own?  See Wendy Patton’s book, Rent to Sell, Your Hands on Guide to Sell Your Home When Buyers Are Scarce.

If you have any questions or comments please feel free to leave them in the comment section!

1. Price

Typically buyers won’t try to negotiate price.  They often accept your asking price (which includes a rent-to-own premium) because of the flexibility they receive by doing rent-to-own.  However, should a buyer try to negotiate on price (and they will if they read my book, Rent-to-Buy) there are a couple of ways to counter them.

1.         You want to emphasize the flexibility they are receiving by being able to rent the home before they buy it.  This type of flexibility justifiably commands a greater price than a comparable home being sold conventionally.

2.         You want to emphasize the rarity of what you are offering.  Simply put, a buyer who is buying a rent-to-own home has very few choices in homes.  There aren’t that many out there.  This rarity also makes the home more valuable.

2.         Option Fee

More than any other term buyers will likely try to negotiate a smaller option fee.  In some cases they’ll do this because they don’t have enough money saved, in other cases they’ll do it simply because they don’t want to part with the money.

Obviously the more option fee you receive the better because it means the buyer is less likely to walk away from their money.  When a tenant-buyer tries to negotiate a lower option fee you can counter it by:

1.         Pointing out that the option fee counts as a down payment when they are trying to qualify for a mortgage and the larger the option fee the better it will look to the lender.

2.         (If the tenant-buyer has poor credit) Explain that you are taking a risk by letting someone who can’t currently qualify for a mortgage move into your home and that the option fee is your security against that risk.  Tell them that the option fee conveys their seriousness about the home.

3.         Closing cost contributions

Typically at the beginning of the option period tenant-buyers won’t ask for or won’t know they need to ask for help with closing costs.  This usually comes up at the point when they are applying for a mortgage and discover that they need to pay them.

This is when either their real estate agent or their mortgage broker will tell them that they can ask the seller (you) to help pay closing costs.  The way this is usually handled is that the purchase price is increased to offset all of or part of the closing costs.  Assuming that the home will appraise for enough to cover this.

You may have done this when you bought the home yourself, it’s a very common practice.  By increasing the purchase price to cover closing costs, it’s mostly a wash for you as the seller.  It does end up costing you a little bit with increased taxes, commissions, title fees and so forth based on the slightly higher selling price (maybe a couple hundred dollars depending on the cost of your home).

I recommend granting this concession if you can because it gets your buyers to buy your home.  The cost to you is pretty small so it’s worth it to get your home sold.  If you suspect that your home won’t appraise for enough to cover the closing costs because property values are going down in your market, you may want to encourage the tenant-buyer early during the rental period to start saving some money to cover their closing costs when they get a mortgage, this way you are less likely to have to add them into the purchase price.

I’ve talked a fair amount about why you NEED to offer your home on a rent-to-own basis to get it sold in this market. But I haven’t talked at all about the benefits to you in doing so. After all, most of us hate doing things just because we HAVE to, we would much rather do things we WANT to do.

Here are some of the reasons rent-to-own can be beneficial for you:

1. Higher Purchase Price - Rent-to-own sales typically command a price premium over traditional sales. The buyer is paying extra for the flexibility he receives by not having to do an outright purchase immediately.

1. Higher Rent - You may be able to charge more for monthly rent in a rent-to-own than you would for just a straight rental. I will cover this in more detail later.

1. Cash Flow - If your monthly payments are less than the monthly rent, the difference goes into your pocket.

1. Option Fee - This upfront fee paid to you by your buyer is what secures the purchase price down the road. If the buyer closes on the home, it would be applied towards the purchase price. If the buyer elects to not purchase the home, the option fee is forfeited and still remains yours. Either way you win. If you were to just rent the home, the tenant would put down a security deposit. The option fee is different than a security deposit. A security deposit is owned by the tenant and can’t be used by the owner, except for repairing damages, unpaid rent and other provisions as mandated under state laws.
2. Eliminates the Burden of the Mortgage Payment – If you have already moved on to your next home and your old house is sitting empty while you try to sell it, then you are saddled with TWO mortgage payments. Hopefully you aren’t in this position, but if you are I feel your pain. Ouch! If the house has been taking a while to sell, you know how fast the money coming out of your pocket adds up. It gobbles up any equity you have at a frightening rate. Placing a rent-to-own buyer that pays that extra mortgage can take away your pain.

As you can see, selling your home as a rent-to-own offers a lot of benefits to you: Higher purchase price, cash flow, higher rent, option fee, selling faster and more! To learn more ways a rent-to-own can be beneficial for you check out my book Rent-to-Sell.

When qualifying a good buyer for a lease option you are looking for someone that had a blip in their credit and now they are on their way to financial stability.  When you look at someone’s credit, see if they are on their way up or not.  You can see what they have paid recently and what is still behind.   This will show up on their credit report.   Learn to read credit reports and get set up on a system that works for you.  If you don’t know which system to use, talk to others in your real estate investors group.  They will know which companies provide which services in your area.   You can also work with a mortgage broker to run credit and do the lease option approvals.

Once you have approved a tenant for your lease option home; all you have to do is draft the paperwork and have them sign it all.  You need not give more than 12-18 months to the buyer on an option. This timeframe is most often enough for a good option tenant to get a mortgage.  If at the end of the time period they just need a few more months or they want to extend, it is your option to decide if that is what you want to do.    This is when you can also renegotiate.   Maybe the homes in that area appreciated more than you expected, then you would want to extend, but increase the purchase price somewhat.  You could also ask for another $500-3000 option fee, to extend the option.  You can also raise the rent slightly.   There are times I have given my tenants an extension for free, because of circumstances.

For more information on How to Qualify a Buyer  you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals.

Screening a buyer for a lease option is extremely important and yet some of us investors still go by instinct or illegal decisions.   There are two areas to discuss on screening;

1)       Detailed Screening

2)       Fair Housing.

‘We liked them’, some investors will say to me.  There are too many really good liars in the world and those of you that feel you can ‘read’ people and relying on that are in for a rude awakening.  Many of my worst situations came from my own ignorance of believing in people.   We should all screen people as if we were blind and deaf.   We would then screen them strictly on the facts and not our opinions or prejudices.

Screen a tenant by reviewing the application in my course.  Have them fill it out.  Check it for accuracy.  Make sure they did not lie to you.   If someone lies to me, they are denied the occupancy.   Check their name – get a copy of their driver’s license.    Check their employment – I confirm the pay amount, hours they work and time on the job.   Check their banking information, you might need it later.  Also check their landlord history , the current land lord may want to get rid of them, but the previous has nothing to hide.  Call them both!   Confirm it is the real landlord by one of two ways; check it on county records, or call person and say a different amount of rent than on the application.

Fair Housing:

Fair Housing is an entire seminar in itself.  Realtors around the country have half to full day training sessions on this topic alone.   Fair housing rights when violated can cost owners hundreds of thousands of dollars.  This is not an area where you want to mess up.  The bottom line is this: select a tenant on their application alone and nothing else. There are federally protected areas and there may be some state protected categories also.  Each state has their own protected areas, so check your state for the details.  The way to be really safe is don’t judge anyone by the way they look or talk. This is why I say that we should be blind and deaf to select a tenant.  If we would just evaluate on the application process alone, then we would stay out of trouble.  Then the selection would be based truly on the facts not our gut feel or our instincts.  Besides, many times we think our ‘intuition’ is that someone is ‘good’ and they later are not so ‘good’.   Stick with the law and you will be safe.

As you can see screening a buyer for a lease option is highly important. For more information on How to Screen a Buyer and putting your standards in writing you can check out my book Investing in Real Estate with Lease Options and Subject-to Deals. Stay tuned for the next topic How to Qualify a Good Buyer.

Share with me some of your tips on How to Screen a Good Buyer in the comment section!

In a recent post I discussed why Soft markets are GOOD rental markets to invest in. Now is the best time to buy Real Estate.
Here are the 3 best ways to Buy Real Estate in a Down Market:
#1 Lease Options
Lease options are Great for down markets. The opportunities are plentiful because there are lots of sellers out there having trouble selling their homes. This means they are looking for alternatives, and what you can offer them with a lease option is a whole lot better than just renting out their home or having to do a massive price cut.
The other great thing about lease options in down markets is that you have extremely low risk. No matter what happens in the market you’ll come out okay, because you aren’t obligated to buy. But even if the market were to go down more you can always try to renegotiate with the seller and get a better deal so you can still close. To learn more about lease option investing visit my website at http://www.wendypatton.com

#2 Wholesaling A.K.A Cooperative Lease Options
Cooperative Lease Options is a safe form of investing in down real estate markets, provided you have end buyers lined up before you close. There will be plenty of opportunities for wholesale deals, but the challenge may lie in finding your buyers.
If you are doing Cooperative Lease Options it’s a good idea to have a strong buyer list lined up. You don’t want to close on the property without an end buyer because you are in a down market. If the market continued going down you would be stuck holding the property as the value declined.
What I really like about wholesaling is that you can keep your risk level low by not having to own the property. You just flip it to your end buyer. Minimizing risk in down markets is very important. To Learn More about Cooperative Lease Options Click Here.

#3 Cash Flow Rentals
Some down markets are positively flush with great cash flow opportunities. Down markets mean that the renter pool has grown as well. If you make sure the numbers work and that the rental market is strong you can do very well with cash flowing rental properties. Passive income every month is a great way to build your wealth.
While there is some risk associated with a rental property in a down market, because you do actually own the property you can easily mitigate that risk by making sure the numbers work before you buy. If a property cash flows you can hold it forever without having to worry about what the market does. To learn about some great cash flow opportunities, the same area that I’m buying in right now, Click Here

Rapport building is very important and key because you’re asking someone to give you control of their house with little to no money down in both lease options and subject tos. Getting the seller to feel comfortable with you is the most important technique to learn for these techniques.  This is equally true with Realtors.  If the Realtor likes you, they will translate their like and trust of you to the seller for the lease options.

Here’s a tip: When you’re in the seller’s house, tell them what you like about their house, not what you don’t like.  For example, perhaps you’ll see something unusual, like older wood work or a nice fireplace.  Ask the seller about it.  If you see that the seller likes golf, talk golf whether you like golf or not.  Always focus on the positives, the interesting things.  People like to know that you like their house, and that builds immediate rapport.   Sellers will give you a better deal and be more likely to negotiate if they like you.

Check out Chapter 06 of my book Investing in Real Estate with Lease Options and Subject-to Deals: Powerful Strategies for Getting More when You Sell, and Paying Less when You Buy to learn more about negotiating the deal and other steps to buying on Lease Options and Subject Tos.

Whether you are a home seller, a real estate agent or a real estate investor you should be using Craigslist to advertise your home as a lease option or rent to own.  I do almost all my advertising exclusively on Craigslist now and generate tons of good rent to own buyer leads.

It’s free, it’s easy and the competition (at least in my area) is low.  Buyer’s look here though and it has served as a powerful lead generator.

Here are two sample ads I have used:

Ad 1:

$2195/4 BR – Great Home on Rent to Own (Wayne)

A great home in Wayne on a Lease Option/Rent to Own.  Call today to find out more how I can help you.  I help buyers find lease options or contract for deed homes.  Working with buyers that have credit issues is my specialty.  Own a home even if you need some time to improve your credit.  STOP RENTING!  There are no fees to you for my service. Wendy at Keller Williams Realty, you can email me at wendy@wendypatton.com – You will need a minimum of $10,000 to get into a home with this type of transaction.  I look forward to working with you soon to buy your new home.

Ad 2:

$1695/3 BR – 3/2/2 in Great Area – Lease Option (Clifton)

Clifton great home with 3 bdrms, 2 baths, and a 2 car garage.  Nice area.  Lease to own with $7,500 down.  Credit problems ok.  My specialty is working with buyers who have less than perfect credit   There is no fee to you.  Email me today, Wendy at Keller Williams, wendy@wendypatton.com

Both of these ads have drawn solid responses from lease option buyers.  If you are a real estate agent or a lease option investor you can use these ads even if you don’t have a lease option home available yet.  Once you get the buyer leads then you can find a lease option home that works for them.