First Time Home Buyer Should Look Beyond Incentives

Added January 19, 2009 by Ilyce R. Glink and Samuel J. Tamkin

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Summary: With the housing market in trouble, it may be tempting to buy a home solely on the basis of tax deductions and builder incentives. But a first time home buyer should look at factors beyond tax deductions and builder incentives including the neighborhood, whether the home will meet his needs and whether the home is in good repair. The incentives will then be an added bonus for the first time home buyer.

Q: My son is looking into purchasing a town home from a builder who has filed for bankruptcy. The development has not sold many units and therefore is not warranted. The development is in a great location with lots of amenities and upgrades. My son would like to take advantage of first-time home buyer incentives and the low real estate prices.

Should he buy? Your thoughts and comments on this situation would be greatly appreciated.

A: It's unclear from your email exactly where your son is looking to buy, but in this current market environment there are more homes for sale than there are buyers, and many builders are teetering on the edge of solvency.

Here's one piece of advice: Your son shouldn't buy a home solely for the tax incentives or the new $15,000 tax credit that has been recently announced by Congress. Instead, your son should buy a home that suits his needs, in a good neighborhood, and he should make sure the home is in good shape and will not cause him (too many) headaches in the future.

Just because the developer is in bankruptcy doesn't mean the home that the builder put up was poorly constructed. But what it does mean is that your son won't have a builder to back up the product in the future. If your son decides to move forward, he should hire a great home inspector to take a careful look at the interior and exterior of the home for construction problems. The last thing your son would want is to buy the home only to find out that there is a $50,000 problem with it.

Next, because your son is looking at a townhome in a development, he needs to decide how much pain he wants to live though in the future as the development is built out.

If he buys the home, and he and a couple of other owners are the only people living in the development, would he really want to live in an empty development? What happens if the developer or somebody else takes over the development and then sells the units at a price far lower than what your son paid for the home? That could eliminate your son's equity. Would he still want to buy if this were a possibility?

Also, if he is living in an unfinished development that is a construction site, it could be years before the build-out is completed. Once it is finished, if he wanted to sell and move, he would be competing against sellers with much newer properties, again limiting his upside.

When your son finds the right home, he can take advantage of today's low interest rates, deducting the interest he pays on his mortgage, deducting the cost of his real estate taxes, taking advantage of any first time buyer tax credits offered by the federal government and local municipalities and agencies.

But make sure he buys the right home at the right price, in the right place, and from the right seller.

Jan. 19, 2009.

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