Buying a Starter Home

Starter Homes Make Sense for a First Time Home Buyer

Couple playing on the couch while unpacking
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If you believed everything on cable TV shows about real estate, you'd never believe that a first-time home buyer is typically better off buying a starter home over any other kind of home. Starter homes don't always possess all of the pizazz and glamour that you find in more expensive homes, so the notion of buying a starter home doesn't hold the same kind of appeal for TV viewers. If you want to guess, for example, which home a buyer purchased on House Hunters, just choose the home with the highest price tag, and you'll be right most of the time.

Back in the real world, first-time home buyers start out house hunting by putting together a list of amenities and nailing down a few locations where they want to look. A standard choice for a starter home in the suburbs is often a 3 bedroom, 2 bath. A standard choice for a starter home in a high-cost urban area might be a two bedroom, one bath or maybe even a studio condo.

Benefits of a Starter Home

  • Strong Demand for Starter Homes: Whatever type of home a buyer chooses as a starter home, that home is generally priced at an entry-level price point. The good thing about buying an entry-level home as a starter home is the fact the demand for entry-level homes tends to remain constant. There is almost always upward pressure on prices for entry-level homes because that's the biggest market for newer home buyers. People might not necessarily need to buy a spacious two-story with 5 bedrooms, but almost everybody at some point in life needs an entry-level home.
  • Faster Appreciation: A starter home will probably better protect your investment and most likely appreciate much faster than a move-up home. For buyers who are a little bit cautious, this benefit offers added assurance that the buyer is making the right decision. Most people recall the market crash of 2008 and the resulting downfall of the real estate market, which caused home values to decline by 8.4% by the end of the year. When home sales rebounded in 2012, it was the starter homes that emerged first from underwater status.
  • Lower Expenses: It's not just your mortgage payment that will be lower because the sales price is less. Your property taxes, if based on the sales price, will be more manageable. But other expenses that you might not consider such as gas and electricity will be less as well. It costs much less to heat or air condition a two-bedroom home than it does to pay for adequate climate control of a home twice that size.

Tips for Buying a Starter Home

  1. Don't Get Carried Away: Start out by affirming that you want to live below your means, and you won't end up spending more than you can afford. Most starter homes are purchased by first-time home buyers on an emotional level. It's easy to fall in love with a home. However, when you're spending your first tens of thousands or hundreds of thousands of dollars, you want to do it based on logic and common sense. Don't get carried away by amenities you see in more expensive homes -- those things are probably not as expensive to put in as you might think.
  2. Line up Your Financing: Use a pre-approval letter from a recognized mortgage lender in your town. You might be tempted to go online to find a good rate, but the truth is any lender in your town can offer competitive rates, and those people are local. You would be wise to try to keep money in your local community and to support your local businesses. Not to mention, when your agent presents your offer, you will have an edge with the seller and the listing agent, if they know your lending institution or loan officer, because it will assure them you can perform. Internet lenders, not so much.
  3. Be Willing to Bend: You might not find the perfect home, but if you do, you will know it immediately when you see it. There will be no doubt in your mind. If a home fits all of your parameters, but you do not want to buy it, there is something wrong; something is off kilter. However, some buyers do not find that "perfect" home, particularly during times of limited inventory. In that event, be willing to give up one of your priorities such as a garage, for example. You can always build a garage. Add a deck. Beautify your landscaping.

Of course, remember the adage "location, location, location". It's repeated three times by real estate agents because it's the three most important things you need to know. You can do everything else wrong, but if you buy in the right location and are patient, you'll make out OK.

At the time of writing, Elizabeth Weintraub, BRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.