Most residential real estate agents understand that a few solid rules govern much of the market and industry. Check these out and see how many have applied to you already, or which ones you can incorporate into your real estate future.
1) Location, Location, Location: It’s an oldie but a goody. Where you purchase is everything. A house worth $300,000 in a neighborhood is worth less money a few streets over next to a gas station. Think carefully about where you purchase; the city, the area, the neighborhood, even placement on the street (corner versus the middle of the block) has an impact on the real and perceived value. Selling smart means buying smart to start with.
2) The 10% Rule: Remodeling? Upgrading? Adding on? The ten percent rule says that you shouldn’t increase the value of your property >10% of that of your neighbors. If you live a $250,000 neighborhood, and decide to install a $100,000 kitchen, you won’t get your money back when it comes time to sell. Fit, finish, appliance choices, craftsmanship and details need to closely match the average home in your area to reap the maximum resale benefits. Now, that doesn’t mean you should forgo what you really want…if a $100K kitchen is your dream and you’re a fierce and constant cook in the home, you should get what you want. It’s your home. But know that your resale options will be limited.
3) Estimating Closing costs: For buyers, the closing costs portion of the transaction is a moving target, with inflated, confusing and flat-out over-priced fees commonplace in some markets and with some closing companies or attorneys. A general rule of thumb for costs is 2-5% of the purchase price. Regional variations are wide-spread and costs are all over the map, so ask a lot of questions, verify the amounts, and rely on your agent to help you negotiate.
4) Interest Rates vs. Purchasing Power: Almost as important as the purchase price, is your interest rate. The lower rate you get, the more expensive home you can afford, with no additional income or increase in monthly payments. If you think half-and-quarter points don’t matter, they do. A quarter-point increase in interest rates means a LOSS of 2.5% in the increased price of a home you can purchase; here’s the formula:
.25% increase = decrease of 2.5%
A one-percent drop in interest rates can mean up to a 10% increase in purchase price…for example: affording a $500k house with a 6% interest rate means that, in order to keep the SAME monthly payment at 7%, you could only afford a $450K house.
5) 1% a Year: That’s how much you should plan on spending for annual maintenance costs and repairs. One percent of the purchase price means keeping up with heating and cooling cleanings each season; carpet shampooing, replacing broken toilet flappers, pressure washing, everything. Some years will be more expensive than others, say, when the exterior is painted or stained, or a furnace needs to be replaced. But in general set money aside for these costs. I see homes every week with deferred maintenance and in addition to making fixes and replacements more expensive in the future, when it comes time to sell, buyers often wonder what else is wrong with a house that’s been poorly cared for, and may move onto a house that shows that it’s had more TLC.
There are a lot of benchmarks, generalities and rules of thumb in real estate. Take these to heart and remember that your situation is unique!