10 first time buyer mistakes and how to avoid them

Jennifer DukeSeptember 11, 2014

First time buyers are, by definition, less experienced than those purchasing around them.

Competition is rife, the financial consequences are significant and every purchaser wants to buy well and make good decisions.

Despite this, there are mistakes that Property Observer hears first time buyers making regularly that are all avoidable. Here are our top 10.

Overextending yourself

There’s nothing more painful than diving in, thinking that you’re going to handle your repayments well, and then struggling each time your mortgage needs paying.

Property requires some hefty upfront costs, even if you’re getting a first home owner’s grant, and selling too soon because you aren’t prepared for the financial commitment can cause you to lose money in the long run, or living off of tinned baked beans.

Think this isn’t common? In October 2013, a Mortgage Choice survey saw almost 50% of new buyers concerned about being able to afford their repayments. Ensure you aren’t one of them.

Solution: Prepare yourself in advance and get honest about what you can afford. This means knowing about the process of getting your first loan, the implications and ensuring you know what you can and cannot put aside in the way of funds.

Purchasing for the wrong reasons

There are many reasons to consider home ownership and there are many reasons people opt to continue renting or to push back their property buying goals. These are individual circumstances and no one, other than yourself, can decide Whether or not entering into a long-term mortgage and financial commitment is going to be right.

Unfortunately, many home buyers buy for the wrong reasons – this could be due to familial or peer expectations, “fear of missing out” or any number of reasons. You do not want to resent your decision.

Solution: Make sure you buy when you’re ready, and you know the reasons why home ownership is important to you. This is no small decision, and should be looked at logically and carefully.

Think about your ‘pros’ and ‘cons’ and always try to be your own devil’s advocate.

Finally, ask yourself: Why do I want to buy a property? Never feel rushed into a purchase.

Not researching an area properly

It's easy to get swept up in buying the perfect home and not thinking about whether it's in the perfect area.

Big backyards, high ceilings and nice furnishings are all fun - considering whether the suburb is well serviced by public transport, serves as an employment hub, has good schools or houses unattractive factories is not so fun.

But the suburb of your prospective purchase is one of the main determinants of its future (and current) value, so pay attention.

Even if the house is perfect, many people search for properties by area, not house type, so it could go unnoticed when you're trying to sell the home.

Solution: Check out suburbs' median prices and historical price growth. See if it offers amenities that attract other buyers, and keep an eye on any news (like future infrastructure developments) that could affect its future value.

Not getting the right insurance

Insurance is another part of a home purchase that often goes overlooked - it's hardly as exciting as the other parts of a house hunt.

If you're purchasing your first home with a deposit under 20%, you'll often need lenders mortgage insurance, to protect the lenders against a default. It's worth investigating this option as it could affect how you buy your home. But once you purchase your home, you'll need to protect yourself against natural disaster, vandalism or theft, which can all cost you a lot of money at unexpected times.

You also might find yourself in financial hardship if you are injured or suffer an illness down the line.

Solution: Home and contents insurance will protect your assets, and personal insurance will protect you (don't think you're too young to need it). Income insurance will help cover you if your income is ever threatened by illness or injury and you find it hard to keep up with your mortgage payments or bills.

Taking “bad” advice

"Spruikers", "property sharks"; you’ve probably heard all the names given to the charlatans of the property industry.

However, bad advice comes from all quarters – family, paid advisers and members of the industry. Many property buyers have bought in areas on bad advice, even from well-meaning uncles and aunts at a barbecue, and have paid for it in opportunity cost and often more.

Solution: Do your due diligence on all the advice you’re given. This may mean double checking the reasons someone thinks an area is a hotspot and doing research on the area yourself. It could be checking to see whether that person is really looking out for your best interests.

Bad advice takes many forms, even masquerading as news on occasion, and you must always be careful about the information you take onboard.

The property investment pandemic: How to avoid spruikers and bad advice
Free advice: Five experts you can go to for information

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Not getting a building inspection

While it's easy to tumble into the purchase process, you need to know that the house you're hoping to buy is stable and sound - especially if you're not familiar with properties. If you don't carry out a building inspection before purchasing a home, you could be saddled with an unsafe house with structural problems or asbestos.

Those problems will end up costing you a lot of money to fix up further down the line.

If you're intending to carry out renovations or alterations in the future you need to know what is possible with the existing house.

Solution: Before you sign a contract, have a reputable independent builder carry out a building inspection. While they may not be able to catch every problem, they can save you from making a bad purchase.

Being unwilling to compromise

Buying your first house is a big decision, and one you want to get right. But know now: there's no such thing as the perfect property. If you're operating on a tight budget, don't expect to get a perfect home, with the perfect aspect, in your dream suburb, down the road from your favourite cafe. You're at the beginning of your property buying journey, not the end of it.

Waiting too long for the perfect home may leave you downwind of a market that's long left you behind. You may realise that the three bedroom house that was 10 minutes further out than you had hoped for is now well out of your budget, even though you could have purchased it six months ago.

Solution: To know when to compromise and when to stick to your guns, think about the fundamentals that affect property values - location, land size and aspect, among others - and think about much they matter to you and to potential buyers further down the track.

Remember to consider your wants in the future - will you want to stay in this home for more than 10 years, or are you planning to move overseas or to a more familiy-friendly house later on?

The best house you can afford now might not be the best house for you in the future, and that's alright.

Not getting pre-approval

It’s a simple step, but one that many don’t consider: the simple pre-approval.

Not obtaining this piece of assurance, even with the limitations it has, can leave you unsure about what you can afford to purchase and subsequently nervous in an auction situation.

It may cause you to bid beyond your means and put you in substantial strife, particularly when buying at auction where cooling off periods and other conditions do not apply. Consider pre-approval a little added boost of confidence.

Solution: Get home loan pre-approval!

Understand the restrictions around the approval, and know how regularly you need to have it updated, however going through this process is one of the most powerful pre-auction and pre-property searching steps you have available.

It will also let you know what property is and is not within your purchasing range, allowing you to rule out some of the pricier options you’ve been looking at earlier on – before you get too attached.

Buying with the wrong person

It could be your best friend, your sibling, or even your spouse - no matter who it is, it only takes one person in a property buying duo to sink the ship.

As soon as you purchase with another person, you'll realise that their financial woes are your financial woes. Suddenly, you'll be very interested in their employment status, their spending habits and their ability to make mortgage payments.

Solution: If you're buying with another person, make sure you have clear and simple financing arrangements, with a contingency plan. Also consider your future investment plans - if you decide you want to sell the house when the market is hot in five years but your friend wants to stay on, or she decides to move overseas, you'll be faced with some difficult decisions.

Make sure you go into any buying decisions with open eyes, and think about having a lawyer go over any joint financing agreements you make.

Ask Margaret: Should I buy a property with a friend?

Buying when it’s too “hot”

A hot market, where everyone is rushing in to buy buy buy, is not always going to be the most prudent place for a first home buyer to look.

Investors regularly rush in and lose money by seeking to make a quick buck in a hotspot. It’s commonly said that when you’re buying with the crowd, you’ve missed most of the growth already.

First time buyers are especially vulnerable to the market’s heat and inexperience. At a busy auction, it can be much easier to overpay if bids are busy and emotions are running high. If you can’t stick to your guns on what you’re prepared to pay, then you should not be considering a market that’s running too hot.

Solution: Know how to identify a market that is hot, the reasons behind it, and determine whether the prices are still reflecting market value.

By this stage, you should know the markets that it would be prudent to take a step back from or to enter with caution.

And if you are going to consider it? Here are some tips for buying in a hot market.