Buying Property
Buying Property for the first time can be an overwhelming process. And if you’ve purchased property before, the next one always comes with its own set of circumstances, making the experience just as overwhelming as the first. The cost of the transaction itself produces a situation filled with anxiety and emotions.
A buyer, whether its your first purchase or third, must always start with a plan of gathering information and educating oneself on the property, its location, its value and financing.
Finding the right property starts with asking the right questions:
• What is the property worth in today’s market?
• What can we afford to buy?
• What is the best location?
• What are the issues / concerns with the location?
• Will this property fit our needs and lifestyle?
• What are the issues / concerns with the property?
• What costs are associated with the new property?
The Value of Property
The value of property is primarily driven by supply and demand—what is currently available in the market, and what is the current number of people desiring to purchase property. Value is also determined by location. The more desirable the location, the higher the price. It is also affected by amenities—parks, shops, access to freeways and transit, and other things that make life convenient.
When a property goes for sale on the market, it is highly likely that the property is valued by a licensed appraiser. A diligent appraiser will thoroughly go through the steps identifying and exploring the market area (neighborhoods, demographics, employers, natural/built features, crime, traffic, etc.), inspecting the site (dimensions, zoning, flood hazard, utilities, etc.), conducting an extensive evaluation of the structure, assessing supply and demand, including a comparable analysis of like properties.
The smart buyer will ask the property owner for the appraisal, but is smart to validate that appraisal with an independent appraiser. If the buyer is financing the purchase of the property, the bank will also have the property independently appraised.
Affordability
Affordability is perhaps the first and most important criteria that determines the type of property and the location. And with Denver ranking #1 in Forbes Best Places for Business and Careers (twice in the last two years), the cost of housing is expected to increase even more. The closer to downtown, the more expensive the property. This means that buyers are more likely to find less costly properties on the outskirts of Denver.
Affordability is the “reality check” of what your next investment will likely be. Eventually, we are all forced to consider our finances—our living situation, available capital, or potential lending sources. Many lending institutions, realtors, and online real estate or mortgage websites offer an “affordability calculator” which allows you to plug in the details of your financial situation and derive a quick conclusion on your potential to afford buying a home.
The affordability calculator generally considers income, expenses, money available (for down payment) and your credit score. If you are able to put up 20% of the finance cost, then no extra funds will be needed for a private mortgage insurance (PMI). But there may be other fees or points you will have to pay. Depending on the lender, fees, points, or discounts will vary. It’s best to shop around for the right lender.
Location
You’ve learned that the closer to downtown, the more expensive the property, which means that you will go smaller or go outside of Denver for the more affordable properties. Yet, choosing the right location will have a major impact on your lifestyle. If your purchase is a long term investment, then you will want to think carefully about the location. A single person will have more flexibility in choosing a single family home or condominium with recreation facilities. Your criteria of proximity may consist of work, shopping, and leisure activities. If you have children, then other criteria may be more important, such as school districts, safe neighborhoods, proximity to work, and other amenities for the family. There are some really cool online sources to check out a location’s convenience and its accessibility, such as WalkScore. You can also check out our Communities section.
When you think like an investor, location moves very high on your list of criteria, as you will want to maintain or preferably increase the value of your property investment. Most people are not aware of zoning, but it is important that you know if the location is in a flood or fire zone, or residential vs commercial zone. For example, choosing an older home in which the zoning has changed, may lead you to find that its highest and best use may well be retail rather than residential. Other factors to consider are the principles of conformity, progression and regression.
• The principle of conformity holds that a property’s maximal value is attained when its form and use are in sync with the surrounding properties and uses. If you find a home with a two-bedroom, one bathroom surrounded by four-bedroom, three bathroom homes, you could potentially offer a reduced price, and make improvements that add bedrooms and bathrooms that would increase its value.
• The principle of progression and regression holds that the value of a property influences, and is influenced by, the values of surrounding properties. If your single story home is surrounded by two-story homes, its value will tend to rise (progression); if it is surrounded by lower valued properties, its value will tend to fall (regression).
Other location issues to consider are traffic volumes in the area, crime incidents, and proximity to other land uses.
• Traffic volumes are derived from the regional planning agency that collects all-day, total traffic volumes on roads throughout the region. They use these data to forecast for roadways to plan into the future. This information can give you an idea of what the roadways look like, in terms of congestion or accidents, near your potential location.
• Crime incidents are a good measure for safety in a potential location. The Denver Police Department provides the latest crime statistics and maps that provides the latest offenses including, murder, rape, robbery, aggravated assault, burglary, theft, auto theft and arson. This information is available by neighborhood.
• Proximity to other land uses will help you identify possible conflicts of incompatible uses surrounding your potential location. This could happen near municipal boundaries, where one jurisdiction identifies a use that may be incompatible with an adjacent municipal land use. For example, you may desire a less dense neighborhood of 1 acre parcels in your desired neighborhood, but the neighborhood is adjacent to a municipal boundary that calls for high density housing—apartments and condos. It’s best to check out the location’s zoning and land use with the City.
Property land and improvements
When assessing the site of your potential property, you are interested not only in its zoning but also in the condition of the land, and the improvement—the building itself. If the house has been there awhile, you will want to check soil conditions and the slope of drainage on and around the property. Most properties that were developed within a planned unit development or other developments approved by the city, have followed development criteria that includes access, drainage and soil structure integrity. But time may have led to changes in the condition of the site, including improper uses that may lead to soil contamination, or erosion that may change drainage and water runoff.
The improvement or building itself can have many possible issues that may not be seen with the naked eye. And as the buildings ages, other problems may arise. A house consists of several layers that include the basics of:
• Foundation and basement
• Frame footings and supports
• Flooring
• Siding and walls
• Insulation
• Utilities: electrical and gas
• Plumbing: water and sewer
• Heating and air conditioning
It is difficult to assess all the layers of a home, but a good home inspector will help reveal the condition of the structure. If water is getting into the structure, an inspector will find telltale signs that appear to may have warped the ridge or fascia board lines. Thick layers of paint may also be an indication of something gone wrong underneath. Drafts and breezeways may be an indication of a poorly insulated home. Looking at windows and doorframes to ensure that they look squared with minimal draft is a good sign. The appearance of cracks in walls, ceiling and floors may indicate a poor foundation or other issues.
A good home inspector will be able to identify a number of these issues, including the condition of the plumbing, electrical and gas, and the heating/cooling system. Make sure that you get a checklist of all the various parts of the home, and check off items that are in good condition, and make notes of those that are not.
Costs of property ownership
If you are successful in finally purchasing the home you wanted, you will soon learn of the hidden costs associated with the home. The most obvious are property taxes, insurance, and utilities. Property taxes and insurance are considered fixed costs, as they do not change from month to month, as where utilities may vary depending on the seasonal uses. The average annual property taxes in Colorado happens to be one of the lowest at 0.63%, compared to other states. This means the typical homeowner pays less than 1% of the home’s value in taxes each year. The average monthly cost of homeowner’s insurance in Colorado is about $82.48, which is 4% more expensive than the average state.
If you are like most homeowners, you will want to keep up comfort and appearances, which come with cost. Outside features like landscaping, patio furniture, fencing and other items will quickly add to the unanticipated costs of homeownership, easily exceeding hundreds to thousands of dollars. Maintenance and cleaning could also be a factor in time (if you’re a do-it-yourself person) or money (if you hire outside help). The cost of outside help could easily surpass $100 per month. The cost of system maintenance and repairs also has to be factored into the hidden cost of ownership. Other costs may include: pest control, security, or cable / internet connection and services.
It’s best to be aware of those discretionary versus non-discretionary items in the first few years. If you plan well, take into account the extra funds that you may want to allocate to those discretionary items that you may not want to do without.