How to find a starter home (before investors beat you to it)

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Buying a home is still a sought-after goal for many of us, with 79 percent of Americans believing owning a home is a major part of the American Dream, according to a Bankrate survey last year.

Wanting to buy a home, however, doesn’t always mean you’ll be able to afford one, especially as a first-time homebuyer. A starter home is the first home you’ll likely buy on what may be a multi-stop journey, but they’ve become harder to come by. While a starter home’s price and amenities vary based on location and demand, here are some tips to help you find the right one and navigate your market.

What is a starter home?

A starter home, sometimes called an entry-level home, is typically the first home a novice homebuyer purchases, and is in the lower price range of homes in the market. Many homeowners live in starter homes for several years before needing more space and “moving up,” but that’s not always the case.

The characteristics of a starter home might include:

  • Older property in need of repairs or updates
  • Smaller in size than higher-priced homes
  • Potentially less-desirable location
  • Fewer amenities than larger or newer homes

“A starter home, in my opinion, is defined as something affordable to a young professional within the first few years of starting their professional life,” says Mihal Gartenberg, a licensed real estate agent with Warburg Realty in New York City, adding that it’s a starter home because “the individual’s housing needs will change over time.”

However, “what’s considered a starter home differs [by] state and city,” says Louis Adler, principal and co-founder of REAL New York in New York City.

Why this affects first-time homebuyers

Finding a starter home can be difficult in some markets, especially as home values keep rising, demand continues to surge for affordably-priced homes and people stay in their homes longer.

“The number of starter homes within a reasonable price limit is decreasing,” Adler says. “Not only are there fewer homes on the market, but they’ve also become more costly.”

Investors are also putting more money and effort into scooping up starter homes that would otherwise be ideal for first-time homebuyers, according to CoreLogic.

Since investors have the cash to buy starter homes outright, it’s harder for cash-strapped first-time buyers to compete against those offers. It means you might be renting for longer and taking more time to save for a home in your price range. If you can’t find a home in your ideal neighborhood, you might have to expand your search to alternative areas.

Wherever you look, though, prepare for a competitive buying process. You might encounter bidding wars, so you’ll want to make sure you’re as prepared as possible to make an offer, including by being preapproved for a mortgage.

If you come up short looking for a starter home, you might need to put your search on hold and focus on saving more for a down payment. Meanwhile, find other ways to get familiar with properties you like, Adler advises.

“Look for rentals in your neighborhood of interest and maybe save some more money, so you can buy your dream house in a few more years,” Adler says.

Should you skip the starter home and wait?

With so much competition in the starter home market, it’s worth asking this question. There are benefits and drawbacks to delaying your search until you can afford more house, so here are some things to consider:

Pros

  • You’re more likely to wind up in your forever home if you can wait, which will save you the hassle and stress of going through a new home search and move again in a few years.
  • Historically low mortgage rates could make it easier to afford more house, because lower interest rates mean lower mortgage payments, and that lenders may let you borrow more. Interest rates are constantly changing, but they’re likely to remain low for the foreseeable future.
  • There may be less competition in higher price ranges. Because investors and many buyers are focused on starter homes, it’s undeniably a seller’s market in that price range. With more expensive properties, you may have a little more room to negotiate your offer, and fewer competing offers to worry about.

Cons

  • It’ll take you longer to start building home equity. Because you’re putting off your purchase, you’ll spend more time paying rent, which means you’ll have less home equity to tap for other purposes — like financing home renovations — later.
  • You’ll have to budget carefully. You don’t want to be burdened by more house than you can afford, and saving for a larger down payment on a more expensive home means possibly making other financial sacrifices during that time period, like skipping vacations or eating fewer meals out.
  • You never know what the market will do. It’s easy to say with current mortgage rates and market conditions that waiting to buy a more expensive home seems like a good idea, but if the coronavirus pandemic has taught us anything, it’s that there’s always some uncertainty about the future. The conditions today might not be present once you’ve saved up enough for a bigger home.

How to find starter homes for sale

Even with limited inventory, there are still a few ways you can take action now to find a starter home.

1. Adjust your expectations

Buying a home is rarely a sprint and almost always a marathon.

“The fewer priorities you set, the more achievable it becomes,” Adler says. “Be open-minded about location, size and amenities of the starter home.”

Being flexible doesn’t mean you should ignore potential problems, however. Even if you’re open to various locales, layouts and features, you’ll still want to make sure that you can afford the home you’re planning to buy, it meets your needs (e.g., now that we’re all working from home, does it have space for a desk?) and you’ve budgeted for any necessary repairs. If you’re only planning to paint and polish, you’ll want to make sure that major systems like plumbing and electric won’t need a complete overhaul.

Overall, though, finding a starter home is more achievable if you worry less about finding the perfect home and more about what works within your budget and needs.

For example, consider buying a townhouse or condo instead of a single-family home, or a smaller home that’s farther out from the city center. In other words, be prepared to make some trade-offs.

2. Widen your prospects

Maybe you’d prefer a larger space to accommodate more people or things, but you might be limiting your choices by doing so.

“Look for two-bedroom properties instead of one with three bedrooms,” Adler says, “or choose a one-bedroom property that has a small extra room instead of a true two-bedroom property.”

Don’t be afraid to search in neighborhoods that weren’t at the top of your list.

“You may need to look a bit [farther] from the center of town or buy something that needs work,” Gartenberg says. “If you need financing, you may need to think more creatively about what type of seller may consider you for the purchase of their home.”

3. Work with an experienced real estate agent

With starter homes in high demand, the guidance of an experienced real estate agent who knows the local market trends and your desired neighborhoods inside and out is critical to success.

“Make sure you find someone that will guide you towards a purchase that makes sense to you now and will make sense in the overall market when it comes time to sell,” Gartenberg says.

Agents not only have your best interest in mind, but also an idea of what the market looks like. Even if you live in a highly-competitive area, an agent should be able to help you find something that fits your needs and your budget. Your agent can also help you write a strong offer letter that stands out from the crowd.

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