It’s June 1, and Sally is considering buying her first home. She is paying $1,500 in rent to her landlord, and her lease ends on July 31. Sally approaches her real estate agent and tells him that she wants to purchase a property no later than July 31.
Her budget is up to $350,000. Her agent is delighted to hear from Sally, as she is a motivated buyer with a deadline and a budget, meaning sure business for him. He immediately begins showing properties close to her maximum price, and they go under contract on an average home for $335,000 by the end of June, closing a few days before July 31.
Sally happily moves in, glad to have beaten her deadline and her budget.
This seems like a pretty standard transaction, and your typical middle-class American is usually delighted with this outcome.
Except this premise is absolutely absurd.
A purchase plan like this gives the purchaser extremely high odds of ending up with the worst possible outcome—and very little chance of getting a great deal on that all-important first home purchase!
Just thinking about buying a home for the first time brings waves of emotion. It’s both an exciting and frightening concept for most people. First and foremost, know you’re not alone! Over one-third of all Americans are considering buying a home in the next five years. Our First Time Home Buyer’s Guide prepares you for the road ahead.
Stop Making False Deadlines
Think about this for a second. Sally made two egregious errors in her plan.
- First, she purchased a property that stretched her close to her financial limits, ensuring that she will not rapidly build wealth. That’s another discussion entirely, one that we go into in depth in another post on the subject of buying one’s first home.
- Second—and the major point of this article—is that she created a false deadline for herself that rushed her into making the most important financial decision of her life thus far in a hurry.
“False deadline?” you ask. “Her lease expired on July 31st! She HAD to buy before then. Otherwise…”
And to this I’d respond, “Otherwise, WHAT?!”
The fact that Sally’s lease expires on July 31st should have nothing to do with her decision of when and how to buy her first property. The fact that your lease is ending is a TERRIBLE reason to rush your first home purchase decision. The point of this article is to show you the absurdity of creating this false deadline for yourself and the potential it has to be one of the most costly mistakes you can make financially.
See, the thing about leases is that they are almost always negotiable. Consider this: If Sally had asked her landlord to go month-to-month for a few months, would the landlord have acquiesced? Many landlords, myself included, will happily go month-to-month with a quality tenant at a higher rate, especially if they are preparing to buy a first home. Turnover is costly, and delaying that turnover while receiving extra rent is usually a great thing for landlords! It will often offset even the costs of having to advertise the property for rent and find a new tenant in the off-peak season.
In spite of the fact that it might sting a bit to pay more rent, Sally should absolutely go month-to-month at a higher rate instead of timing her first home purchase around the expiration of her lease. If Sally pays an extra $100-$250 per month for a few months while patiently searching for a great deal, she might suffer out-of-pocket expenses of $600-$1,500 over a six-month period.
At the high end, $1,500 is 0.5 percent of a $300,000 home purchase. Again, that’s 0.5 percent.
That $1,500 is an immaterial amount of money in relation to the size of the financial decision at stake. I’d argue that the odds are excellent that Sally finds a much better deal over a six-month period with patient and methodical research—and no pressure to move quickly. And I’d argue that Sally finds it much easier to negotiate terms and price of a property once under contract with a seller without the self-inflicted artificially constructed pressure of a looming lease termination date influencing her decision-making!
Remember the Big Picture
I’d argue removing this ridiculous deadline from her decision-making process could be worth tens of thousands of dollars to the Sallys of the world, who otherwise might be rushing into their first home purchase.
“But my landlord simply won’t sign a month-to-month with me!” Sally might say.
Then, MOVE to a rental that will go month-to-month!
I am completely aware that no one likes moving unnecessarily. Too bad. This is a necessary move when considering your first home purchase. You are talking about taking a couple of crappy weekend days during which you temporarily move out of one rental and into another while you search for your first home purchase. The stakes are too high to fail to deal with the temporary discomfort of potentially having to move.
Related: The 5-Step Newbie Guide to Successful Real Estate Bookkeeping
Sally must accept this option as a possibility and be willing to take action and move if necessary. Sally might make a decision that is $10,000, $25,000, or maybe even $50,000 better without pressure than she might under pressure. Being able to walk away is a card that you MUST have at the negotiation table, and it is particularly important to the very people who voluntarily discard it from their hand by failing to find a temporary housing solution while searching for their first home purchase.
Suck it up and move multiple times in a year if you don’t have the option to reasonably rent month-to-month in your current place.
Time and again, people come to me with premises like this. They tell me that they plan to buy a first home or to “house-hack,” but they must make their purchase by a certain date when their lease expires. They are rushing into several-hundred-thousand-dollar decisions in order to save a few hundred dollars and a little bit of a potential headache. They lose the forest for the trees.
Do not do this to yourself. Do not put yourself under pressure to make a decision quickly.
Sure, a few hundred or thousand dollars in increased rent beyond your current monthly rate may seem like a lot of money. It IS a lot of money. But it is NOT a lot of money in the context of a several-hundred-thousand-dollar first home purchase that is likely to be the largest financial transaction you have undergone in your life to that point.
Understand the stakes, and understand the context. Pay the extra rent, move if necessary, and give yourself the extended timeline you need to give yourself the best possible odds of making a quality decision.
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