Other buyers select a small home and, when they outgrow it, they add on or remodel it so it becomes bigger and better than other homes in the neighborhood. When they decide to sell, they find that their home won’t appraise for as much as they value it, and they won’t be able to recover the money they have put into it. In real estate lingo, that’s called a white elephant.

As a prospective home buyer, it’s tempting to sink your money into one of these white elephant deals. It appears you’re getting a bigger home or one with more amenities for a good price. However, when you decide to sell, you may find it takes longer and requires deep discounts to move it.

On the whole, it’s better to sell a home you’ve outgrown and buy a larger one in a neighborhood that will support the square footage you need. It’s interesting to note that, when asked why they overimproved for the neighborhood, owners often say that they intended to live in the home forever, so it didn’t matter.

Then, however, a job loss, relocation, divorce, or similar problem forced them to sell—and ‘‘forever’’ suddenly became the present. Americans are a mobile society, and according to the National Association of Realtors, the average length of time people stay in a home is slightly over six years although that will probably change as the current home buying and selling economy plays out and owners stay put longer.

• Be wary of fixer-uppers. Make a list of necessary repairs and needed upgrades, and get bids from contractors on the costs of bringing the house up to local codes or your standards. If the cost of rehabilitation plus the sale price is more than the cost of similar homes already upgraded, look elsewhere.
• If there are a lot of for sale signs on the lawns of other homes in the area, that’s a red flag. Find out why.
• Have your Realtor check the multiple listing services for records for the average listing prices and actual selling prices in the area; this ratio of list price to sales price indicates value; for example, a ratio of 90 percent means that homes are selling on average 10 percent below what they are listed for. Find out also how many days the homes stay on the market before selling.
• Good schools in the neighborhood add to a home’s value. If the area schools have a bad reputation, consider looking elsewhere.

A trap that first-time home buyers commonly fall into is the dream that they can buy on the cheap, fix the place up, and sell it for a profit. Fixing up a home for profit can work if you know what you’re buying. Unfortunately, many would-be homeowners attend seminars or read books on getting rich quick in real estate and look for a cheap home they can fix up, without regard to the caveats listed above.

Whether you go for the max or keep your mortgage payments comfortably low, you want to avoid costly mistakes that many home buyers make at this stage, as well as putting the sharpest focus on what to look for in your search. Here are some helpful hints you can use as you start putting together a home search strategy. Continue reading →

On the flip side, the argument to buy conservatively is that you will not become a slave to your mortgage payments. This way, you keep your payment as low as possible, pay off the mortgage early, and can allocate funds for other needs. Continue reading →