When buying your home, you’re really buying a piece of real estate. It could be vacant land, condominium, apartment, duplex, house or even an entire building. Before buying your home, its important to understand some real estate basics. There are three basic categories of ownership.
1. Fee Simple. This means that if you buy it, you own the property and anything on the property until you, or your ancestors sell it. The only exception is some states don’t allow home owners to own minerals rights like the gold, silver or oil found on the property.
2. Lease Hold. This is where a corporation, individual or government owns the land and buildings. You just buy a “long-term lease” to use the property. Lease holds are common in places like Hawaii, industrial areas and ocean front properties. The good thing about a long-term lease is there may be positive tax implications, and they’re great if you’re only in an area for a specific time. The good thing is your usually the first person to renegotiate the lease when it expires.
3. Lease with an option to buy. This is the same as leasehold. But at a certain point in time, there is a clause for you to buy the property outright. This is more common in residential homes. Since the owner can get a larger deposit, which secures the lease. Then they still receive whatever rent you negotiate for. The buyer benefits, because they get to live in the house with the option to buy it in the future for a fixed price.
4 categories of real estate
When you buy, the government basically dictates what can be done on that property through zoning laws. Zoning requirements can be changed for development purposes. They can be mixed-use, which means various zoning requirements apply to just one property.
1. Residential: Most homes are in residential zoned areas. This includes any type of land or building that is primarily used as a living space. Residential zoning includes land or buildings designed for single family and multi-family living spaces (typically duplex or quads). Most often the height restriction is limited to 3 stories, though this might vary. Some areas let owners build a second house or out-structures depending on the lot size.
2. Commercial / Industrial: This includes land or buildings that can be used to sell, manufacture, or develop anything that is bought and sold. Commercial land and buildings can be grouped in a specific region, or scattered around residential areas and include stores, malls, shopping centers, offices, and wholesale/retail outlets. Industrial land and buildings are mostly found in a certain areas where larger manufacturing, processing, product development, and mining facilities are found.
3. Condominium / Apartment: These are also called multi-family zoning. This type of zoning has wider usage, but with numerous restrictions and regulations. For example there are rules for parking, landscaping, height requirements, egress/ingress and all the ADA, Fire, EPA, OSHA, DOH and other governing agencies get involved. As a condo/apt owner, you also have to pay extra fees, follow specific guidelines, and even attend board meetings (which is always a good idea). SInce you live in a sort of “closed community”, you’re not as free as your own personal home.
4. Agricultural: These include rural areas where you find farms, ranches, vineyards, orchards and other areas that have plants and animals used for consumption. When you buy an agricultural property, it’s important to find out what you can build on the property. Since most agricultural property must have residential/commercial clauses written into the zoning requirements for the building of a home to live in, or a place to sell your items.
Deciding on an area
1. How stable is the region? When buying a home, don’t believe everything that is told you, even by government officials. Before you enter into a contract, do extensive research. Look up regional statistics. Talk to people in area. Drive or walk the area in the morning, evening and night-time. You might just discover reasons why the property is still on the market.
2. Property Tax, Insurance and extra fees. Most taxes and property records are open to the public. These records are found in the county records, and may show the current tax rate, building records, lot, house size and even assessed value of the home. Insurance requirements are determined by banks. The extra fees may include condo fees, maintenance fees, sanitation, road upkeep etc. These may be small independently, but added together they may kill the deal. This means the property may sound like a great deal. But after you factor in taxes, insurance and legal obligations, it could be a very bad deal.
3 Location, Location, Location. It may sound like an overused cliché, but it is true none the less. For example, people love to own property that directly borders water. A property right on the beach or lake can go for many times more than one down the street, or even across the street. A house with an ocean or mountain-view could sell a bit higher than the next door property that doesn’t. Location is important, so remember to check school zones, water and electic sources, sewer systems, closeness to major roadways, areas famous for partying and nightlife, neighborhood animals, illegal dwellings, business run out of homes and other illegal or notorious dealings.
Before buying your home ask yourself
- Why would I want to live here? Before buying your home, answer these questions and focus on future goals, not just the present. For example: Are there children or extended family members that may need to live here? Do I plan to start a business or need to change from my current use of the home? Will there be animals, gardening, work shops or other future activities? Is it in the right school district? Is it close to areas I frequent? Does it really suit my lifestyle, or am I just living someone elses dream? Each one of these questions will help you decide what type of property you need.
- How much can I really afford. Here, banks use the 28/36 rule. Where not more than 28% of gross income goes to mortgage and 36% to other debt (like credit cards, autos, student loans etc.). I say, look at your current take-home pay and start there. Remember, if you don’t pay for 3 months they will start the foreclosure process. Over estimating your ability to pay, living in an area you hate, or filing for bankruptcy because you bit off more than you can chew is never a good thing. There would be nothing like buying your dream home, and having it turn into a nightmare.