Let’s be honest, with the rising prices of real estate, a thought that has crossed many people’s minds is, “How will I ever afford a place of my own?”
There are many people who are still waiting for the “bubble” to crash and refuse to commit to buying a place. I’m sure that if you’re one of them, prices have continued to increase while you’ve been waiting. As an investment professional and a person who follows the real estate market closely, I always tell friends and family (especially those looking to buy their first home) that if you plan to live in a particular area, it will be a market adjustment and your home value will increase again commensurate with the cost of living- even if the market “crashes”.Think about it. There was a time when homes cost $18,000 for a detached bungalow on a large lot in Toronto. Prices went up to $50,000, $100,000, $500,000 to a norm of well over a million. The market will never correct itself back to prices like $100,000. If it does correct itself, it will likely fall 20-30%, and will move in line with the cost of living. As cost of living goes up, one of the things that will inevitably rise, is the cost of real estate.
That’s why I’ve put together some key tips on how to keep cool in this hot real estate market and how to ensure that you’re making the best decision possible.
Hire a Real Estate Professional
Unless you’re a pro and this is your 10th time buying a house, don’t try to save a few bucks on commission fees by forgoing a real estate professional. It’s well worth it when you’ve committed to several hundreds of thousands of dollars on a purchase. It’s important to find a real estate professional you like. Don’t hesitate to shop around for a real estate professional until you find one who you get a good feeling from. You should get the impression that they understand your needs and you’re on the same page. They should be there to make this process as comfortable as possible for you. Another benefit of hiring a real estate professional is that they can guide you through the process and walk you through all of the paper work. Buying a house is often synonymous with the term “signing your life away”. Be sure to sign it knowing what you’re signing off on. A real estate professional is there to guide you step by step.
Just because you’ve been pre-approved for a certain mortgage amount, doesn’t mean you can afford it
Before beginning this process, you need to figure out your budget. Not only do you need to save up for a down payment and pay closing costs, you will be responsible for many monthly expenditures, which are not just limited to your mortgage payments once you move in. As a homeowner, you are responsible for mortgage payments, property taxes, home insurance, hydro, gas, TV, internet, and the list goes on. When determining what you can afford, add up all of your monthly expenses (don’t forget entertainment!) and compare it to your monthly income. There should be a sweet spot of what monthly mortgage you can afford that doesn’t stretch you too thin.
Know your risk tolerance
Ensure that you’ve accounted for rising interest rates. If interest rates were to rise tomorrow, could you still afford your mortgage payments? What if the market does cool down and the price of your home temporarily decreases? Is this a setback you can withstand?
In a competitive market, you may forego home inspection to make your offer more desirable, but think about the possible risk you are taking on by doing so. What if you forego home inspection and you end up getting stuck with a big bill at the end – is this an unexpected cost you can afford? Generally, a newer home will have less complications. I recommend you tread carefully with older homes that can have a slew of problems that aren’t visible to the naked eye. A good thing to know is that the Tarion new home warranty covers some aspects of a home for up to seven years, even if it changes owners.
Emotions and home buying don’t mix
Don’t get attached to a home until it officially becomes yours. When searching for homes, I understand you can become infatuated with a listing, but leave all emotions at the door. You don’t want to get emotionally attached to a home in the moment and regret the decision later. This is especially important in bidding wars. You should set a budget and work with a real estate professional to determine the fair market value of a home and set a maximum amount you are willing to pay for a house. Don’t get caught up in a bidding war and try to get the home at any cost which could possibly take you well over your budget. Remember, an owner may deliberately list a home at a lower price to setup a bidding war, which is intentionally done to introduce behavioural bias by creating emotional attachment and competition.
Keep an open mind and be flexible
Sometimes, a good deal can happen at any moment, and you’ll need to be ready to jump on it when it does. Have a back up plan incase you end up in a situation where you own two homes, you’ve just bought one and now need to sell the other. Your closing dates may not align or there may be a period of time where you need to figure out an interim home. Do you have a plan for that?
Also, keep an open mind about location. Homes in Toronto and nearby suburbs are getting more and more expensive where untraditional suburbs nearby are becoming more attractive. With the rise of work from home options and flexible working hours, commute is becoming less of a factor and where you choose to live doesn’t necessarily have to depend on vicinity to your workplace.
For more tips and to brush up on your real estate knowledge, click here for some quick and easy reads.
This post has been generously sponsored by the Real Estate Council of Ontario, the opinions and language are my own.