Buying a house is a type of investing, so the common mistakes of investing also apply to real estate.But in this answer, Iu2019ll talk about mistakes specifically pertaining to residential real estate, based on a) my home buying experiences, b) studying others, and c) reading.And these mistakes typically fall into four categories:Financing & FinancesOverpaying based on irrational reasonsTaking out unnecessary mortgageBuying a home that you canu2019t afford, especially without job securityOver-allocation of assets into real estateNot taking transaction costs into account when considering affordabilityLiquidity / ResaleNot buying a home with a view / low crime / good school district for a premiumBuying a home with extremely wacky / unconventional architectureBuying a home with a terrible layoutBuying something in an up & coming area that will take 10 years to gentrifyDue Diligence on the Property & the AgentNot checking comparable valuations with extreme anal-retentive-nessSkipping inspection for single family homesNot checking for pending assessments for condosNot reading HOA documents in full detail for condosNot getting a lawyer to read over title agreements & HOA, etcWorking with an agent who has too many clientsWorking with an agent with no track recordWorking with an agent who is overly pushyLegal & TaxBuying an investment property before primary residenceMistakenly assuming you can deduct mortgage interest no matter what+ Financing & Finances - RelatedOverpaying Based On Irrational Reasons:In real estate, it is very easy to fall in love for trivial reasons.I have seen people pay $50,000 premium for a remodeled kitchen that probably cost $9,000 to do.Thatu2019s why savvy real estate investors typically wait to remodel / refurbish right before sale.They want to get you to pay extra for emotional reasons.The stuff that typically get redone are a) kitchen, b) carpet, c) bathroom, d) counter-tops, etc. None of these are extremely hard to do it yourself. Most of the times, they are not worth paying extra $30,000 for.Of course, it is okay to pay extra for nicer finishes, etc, but only within reason.In any investing, most of the money is made at the time of purchase.In other words, the price you pay for the house will directly dictate how much you make / lose on the house.Taking out unnecessary mortgage when you can afford to put down a bigger down paymentIt blows many peopleu2019s minds, but it is not always favorable to take out a mortgage.Mortgage is not free money! (to state the obvious)The interest rate % on your mortgage is the interest you will have to earn / do better than.For example, if you take out a 15 year mortgage at 3% and do absolutely nothing with the money (and even worse, lose it in the stock market), you are worse off by taking out the loan.On the other hand, if you paid in cash, you are effectively earning the full imputed yield on your investment.Buying a home that you canu2019t afford, especially without job securityRemember, affordability is not decided by your mortgage officer.Only you can decide whether you can afford a place or not.Even if you have a job & income, you may be uncomfortable about your future prospects.If so, donu2019t take out a big loan when there are layoff rumors at your company / during recessions.Over-allocation of assets into real estateIf your net worth is $300,000 - letu2019s say - it doesnu2019t make sense to use all of it as a downpayment to a $500,000 home.In the above example, your allocation to real estate will be 166%!Think about what your nest eggu2019s allocation will be post-purchase prior to doing anything crazy.Not taking transaction costs into account when considering affordabilityA lot of homes look like great investment opportunities.. until you take into account the transaction costs.Big transaction cost items that people forget about are: a) resale commissions b) title transfer fees c) mortgage fees d) extra insurance e) potential future assessments / charges / maintenance costs f) vacancy costs+ Liquidity & Re-sale -RelatedNot buying a home with a view / low crime / good school district for a premiumYou should always think of re-sale value prior to purchase.Good attributes like higher floors, low crime, good school, etc, can make it much, much easier for you to sell the place.For example, it can take much longer to move an unit with no view versus one with a view.If that ocean view comes at a reasonable premium, take it.Buying a home with extremely wacky / old / unconventional architectureThinking of buying a condo in that turn of the century building?Thinking of buying a rainbow colored townhouse?Remember, not everyone shares your tastes.Buyers beware.Buying a home with a terrible layoutDoes your dream condo have a living room split into two small dens?Is your condo shaped like an S?Is your bedroom in between your kitchen and the living room?Terrible layouts obviously come at a discount and are harder to sell.Buyers beware.Buying something in an up & coming area that will take 10 years to gentrifyIn the Bay Area, people often tout Oakland as a great real estate investment opportunity.But hereu2019s the problem: you may not enjoy living there.Gentrification takes time.People have been saying Harlem as the next great opportunity since the 80u2019s.Thirty years later, Harlemu2019s price appreciation has nothing on that of better areas in Manhattan.+ Due Diligence - RelatedNot checking comparable valuations with extreme anal-retentive-nessUnderstand all the comparables in the neighborhood.Ask your agent to pull up all sales within the past 6 months and hand it over to you.Analyze them on a per-sqft basis, per building basis, block-basis, etc.Reduce it to a number.Skipping inspection for single family homesThereu2019s simply no excuse for waiving inspections, especially on single family homes.Donu2019t get surprised by a septic problem 3 months into the move.If you skipped inspection, you deserve to pay the $50K to fix that problem.Not checking for pending assessments for condosMake sure itu2019s crystal clear that there are no pending assessments for condos, and if there are, that the seller is paying for them.Not reading HOA documents in full detail for condosDoes your HOA have less than $100K left in the bank?Does your HOA strictly forbid renting?Does your HOA forbid you from having guests?Donu2019t find out after purchase.Not getting a lawyer to read over title agreements & HOA, etcHOA docs can be 200+ pages long.You wonu2019t have the time to read through everything.Just pay a little extra for a trained eye to sign off on it.Working with an agent who has too many clientsAn agent who has 100+ clients wonu2019t have the time for you.To him, youu2019re just a number.Donu2019t make him your buyeru2019s agent.Working with an agent with no track recordOn the other spectrum, donu2019t work with an agent who got his license 8 months ago.He simply is too green to help you maneuver around the jungle.Working with an agent who is overly pushyPushy agents are the worst, because they can amplify all your emotional weaknesses that cause stupid financial decisions.Itu2019s like having a financial advisor that always pushes you into the latest growth stocks that you have no business investing in.If your agent is constantly pushing a lemon, itu2019s time to chuck him/her.+ Legal & Tax RelatedBuying an investment property before primary residencePrimary residence has additional tax benefits that investment properties donu2019t.Donu2019t rush into buying a home if you donu2019t plan to live in it.Mistakenly assuming you can deduct mortgage interest no matter whatIf your standard deduction is larger than your deductible portion of mortgage payments, thereu2019s less tax benefit of mortgage loans.+ EpilogueThese about sum up the biggest mistakes you can make when purchasing homes.Remember, buyers beware.
