Emerging from the Bubble

Over the last two weeks, ECs have had the opportunity to hear post-grad advice from popular HBS professors Clay Christensen, Michael Porter and Youngme Moon through the “Best of EC Year Speaker Series.” (There is one talk left from David Moss on Thursday, April 15 at 4 p.m. in the Spangler Auditorium, so don’t miss out!) In hour-long sessions these professors have proffered their suggestions for starting our careers on the right foot, prioritizing our family and friends, and finding the purpose of our lives. Basically, they’ve stolen all the good content for my column. So I’ve decided to tackle something more practical in the next few issues, starting this week with buying a home.

Some students have already gone through the home-buying process and are now pros. But for most of us, our first home purchase will be in the next few years, and the new lending rules mean the financing process will be more complex than before. My sectionmate Joanne Knight (OB) used Spring Break to go house-hunting in Minneapolis, where she will be moving to work for General Mills. I checked in with her last week to see what advice she had and what tools she used to make the process as easy as possible.

Step One: Finances
1. Check your credit score for free at Your credit score will directly affect the mortgage rate you can get and how much of a down-payment your lender might require. See if there are easy steps you can take in the next few months to pull your score above 700 like paying down revolving (credit card) debt. A few fractions of a point in your loan rate will make a big difference in total interest paid over the life of the loan.

2. Download your three free credit reports from Equifax, Experian and Transunion, and dispute any changes via the web. Former HBS student Alexa von Tobel started, a great website with all the tools to pull the reports (and more). Check it out.

3. Make a budget. Don’t forget to include taxes, home-owner’s insurance, and neighborhood association/condo maintenance fees. You’ll also want to set aside some cash to furnish the place or do minor renovations like replacing old carpet or updating the walls with a fresh coat of paint. Whatever your final budget, leave a little cushion – something always comes up.

4. See if your company offers any benefits like help with closing costs, down-payment loans, preferred lenders or relocation services.

5. Get pre-approved before you start looking at houses:
-Call more than one lender to get a feel for the market in terms of interest rates.
-Take all of the information you are going to need to your lender appointment: three years of employment history (including addresses and phone numbers as well as salary info), balances in all of your accounts (don’t forget 401k), and total debt load (student loans, car payments, credit card balances). If you have a partner and intend to put them on the mortgage and title, you’ll need to bring the same information for them.
-If you’re looking to purchase prior to starting, you may need to ask if there are any stipulations regarding start dates. Some lenders may require a paycheck prior to first mortgage payment.

Tip: You may be able to take advantage of the $8,000 first-time home buyer tax credit. Talk to your CPA or tax lawyer about the requirements to qualify (and get moving soon: you’ll need to be in contract on a property by April 30 and close by June 30)

Step Two: Narrow your search to 1 or 2 neighborhoods
1. What type of neighborhood are you looking for?

2. Do you like the urban feel of houses close together or do you prefer more space and bigger lots?

3. Do you want to be able to walk to dining/entertainment options? What about shopping?

4. Do people take care of their property?ÿÿÿÿÿÿÿÿÿ
-Remember a direct impact on your future sale price is how well your neighbors take care of their homes!

5. What are the schools like?
-You may not have children (yet), but this has a direct correlation with your property value and taxes!

6. What are the property values and how have they changed over time?

Tip: Ask for advice from co-workers/friends/family that live in the area.ÿIf you haven’t lived in that city before, drive around and look at the different neighborhoods (both in daylight and at night).

Step Three: Make an offer
1. First, look at the market history. What percentage of the offer price are homes selling for?

2. Know how much the seller paid for the home and what year he/she moved into the home along with what investments/improvements he/she has made.

3. Remember negotiation tactics: know your BATNA, create a ZOPA that is wide (but don’t bid so low that they don’t want to work with you), and consider non-monetary options like asking sellers to leave all appliances or closing on a later date.

4. Be prepared to counter-offer.

Tip: This is where it is most important to have a buyer’s agent that you trust. Ask co-workers or friends in the area for referrals and, when possible, aim for an agent who is licensed as a REALTORc. They will have their finger on the pulse of the market where you are buying and should have a strong instinct on how to structure your negotiation strategy.

Step Four: Inspections and Appraisals
1. Ask your agent for an inspector recommendation and set up the appointment. It is important to attend the inspection because you can learn a lot about your house, so be prepared for a last-minute trip back if you are buying in another geography.ÿ If you can’t attend, you will get a write-up, but you’ll miss out on asking questions as they arise.
– If the inspection goes poorly you can pull out or counter the sellers with requests for them to fix things prior to closing.

2. Lender appraisal – This is your second “out”: if the appraisal is for less than your agreed-upon purchase price, you can try to get the seller to come down or walk away.ÿ

Step Five: Closing

This typically happens within 60 days of contract. If you want to close a bit later consider offering additional earnest money to show your commitment to the deal (a small sum up front – often as little as 1% – as a sign of good faith).

So now that you understand the process, the only question remaining is should you buy now or rent for a while and buy later? The best resource I can suggest is the “buy vs. rent” calculator on the New York Times online:

Good luck and happy house hunting!

Author’s biography
Christina Wallace is an EC from Lansing, Michigan. While she is not an avid sports fan, she managed to finish atop her section’s March Madness pool thanks to a bracket built around the Michigan State Spartans. Yay Coach Izzo!

April 4, 2010
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