MANILA, Philippines – They may be real estate investors and brokers now, but couple Jay and Cherry Castillo, founders of foreclosurephilippines.com, also had their share of common mistakes first-time homebuyers and investors make.
Then newlyweds, the Castillos felt pressured to buy a property in Provident Village, Marikina City from a relative. Since they did not do their homework, they tried to get rid of the property the best and fastest way they could.
The Castillos survived tropical cyclone Ondoy (international code name Ketsana). The harrowing experience not only caused them their property, but also left their family traumatized as only their then 4-year-old son and his nanny were at home when massive flooding happened. That episode only heightened the so-called buyer’s remorse felt by the couple.
Despite such, the couple told audience at the Money Summit and Wealth Expo at SMX Convention Center, Pasay City on July 13 that real estate remains a good investment as it is a basic need and land is a finite source. It can also provide significant cash flow or passive income, capital gains, and time freedom. Real estate is also a tangible asset you have control of.
And as they learned from their home buying mistakes, the Castillos shared the following tips for first-time homebuyers and investors:
1. Shop around
Follow the 100-10-3-1 rule. “Shortlist 100 properties. You can do that by searching online. Then visit and inspect 10. Narrow to 3 properties to bid or submit letter of intent. And buy one. The more properties you look at, the better your choice will be and the less the probability of buyer’s remorse,” Jay advised.
Know what you want. Set criteria to help you determine what property you want. Where will your home be? Do you have plans to stay here or work or live overseas? What is your price range? Are you buying a single-detached, a mid-rise or a high-rise condominium unit, an office space, or an agricultural lot? Those and other factors must be considered carefully when home buying or investing, Cherry said.
Do not “over improve.” Your first home may not be your dream home yet. Thus, if you over extend yourself when buying your first home, you might end up staying in your job no matter how dissatisfying it is already so you can keep up with the costs related in maintaining or repairing your property, Jay warned.
2. Know what you can afford
Spend within your means. The monthly amortization is not the only thing you need to consider.
Stick to the banks/lending institutions’ guidelines. Keep in mind that the maximum monthly amortization should only be 40% of your take home pay.
Get pre-approved for a loan. Getting pre-approved will help you determine your budget. Also get the longest term possible but pay the maximum you can afford at the lowest fixed rate to help you save on the interest, Jay advised. Check also the sample computation and ask if the excess payments go directly to the principal. Check, too, for pre-penalty payments.
Shop around and compare different home loan rates. The Castillos said the Pag-Ibig Fund rates are only good for low-cost housing. Jay advised to collect leaflets or brochures of various banks and show them to your bank where you intend to loan. “The banks will match the rates of the other banks and try to give you the best offer possible. All you have to do is ask.”
3. Do the math
Focus on investment returns. Get comparables. Those rates you see online are mostly marked up from 10% to 20% thus factor such to avoid buying an overpriced property.
Negotiate for the best price. Cherry quoted America’s premier business negotiator Roger Dawson’s words: When you negotiate, the amount you negotiate downwards goes straight to your bottom line. “It’s not bad to negotiate for the best price,” Cherry emphasized. Also, do not rely on sales talk that use bloated figures. Again, find comparables offline and online to get the lowest rental rate possible.
Know how to compute for Return on Investment (ROI). Rental income and appreciation are two ways that real estate can create returns for you. Often, people simply use the purchase price and sale price thus ignoring factors such as rental or rent to own, annual estimates, and before taxes (either percentage tax or Value Added Tax if applicable).
Consider renting than buying. If the interest rate is too high, it is best to rent. Consider the following: The Castillos loaned P1.249 million, 20 years to pay, and at 12% annual interest rate. Paying Pag-Ibig Fund a monthly amortization of P15,189.37 in 65 months amounted to P987,308.78 and caused the Castillos to pay P779,103.27 of total interest, with total payment to principal of P114,813.50 and a remaining loan balance of P1.134 million. The Castillos shared that had they rented their property (which was financed through Pag-Ibig Fund), they could have saved significantly on the interest.
Buy an income-generating asset first. If you buy a property and have it rented to cover the amortization and monthly interest rates, then you can use the money to buy another property or get out of the rat race and get serious on real estate investing, Jay said.
Buy from banks. If you are ready for your first home buy, you may buy from auctions, sealed bidding or negotiated sale through banks which only need to recover their investment so they can lend money again. Banks can also finance your purchase and give you long payment terms and low interest rates. They can also ask for low downpayment, Jay shared. Also, banks are generally reputable sellers.
Buy from motivated sellers. Those who are facing foreclosures and those who need to liquidate their real estate assets immediately either because they are leaving the country or needing to pay for their or their sick relatives’ medical expenses are examples of motivated private sellers from whom you can buy a property. There are also sellers who inherited properties but do not know anything about estate taxes thus, they are not particular about the selling price since they did not work hard for the property. “They only want to get rid of the property,” Jay said. There are also sellers who are already based abroad or those with problems regarding legal, illegal occupants, or unpaid taxes, among others.
Buy from reputable developers. Make sure the developer and the project has a license to sell from the Housing and Land Use Regulatory Board.
Buy also from cities during tax delinquent sales or courts during sheriff sales.
4. Perform due diligence
Inspect the property. As part of physical due diligence, check the age, condition, safety and security, and vicinity and neighborhood of the property.
Bring a property inspection checklist covering all exterior (roof, gutters, walls, foundations, etc.) and interior (general, living room, dining room, kitchen, bedroom, etc.) Also, bring a foreman with you to determine what materials you need to buy to repair or maintain a particular area of concern in your home, Jay advised.
Check for natural hazards. Determine a property if it is in a flood-prone area or an earthquake-prone area.
Get the certified true copy of the Transfer Certificate of Title or Condominium Certificate of Title (TCT/CCT). As part of legal due diligence, you must secure the certified true copy of TCT/CCT and check for accuracy of the technical description. The tax declaration must also be transferred as well. Also acquire the clearance to ensure that the property has no arrears. Check also if there are no illegal occupants.
Consider all costs. As part of financial diligence, factor the downpayment, monthly amortization, taxes, repairs, maintenance, and arrears. “The advantage with most banks is that they usually pay for the arrears,” Jay said.
5. Protect your family and your investment
Insure your property and yourself by being covered through a life insurance and mortgage redemption insurance (MRI). “In case you or the breadwinner of the family dies, it is always good to have something liquid to cover the estate taxes,” Cherry said.
Like any other investments, investing in real estate has its disadvantages like it is not liquid and it has carrying costs. As such, if you are considering investing in real estate now, check the following:
6. Buy low and sell high
There is always a real estate property, which is sold lower than it is worth, Jay said.
7. Take advantage of very low interest rates
Banks give better interests than Pag-Ibig Fund since they are using market interest rates, Jay pointed out. Jay said go for the lock in and stick to the longest possible fixed rate mortgage loan, like 9.25% fixed for 25 years.
8. Deal with risks
If the buyers are not the users and they expect that rentals will be able to cover the amortization payments and such did not happen, then foreclosure is not far-fetched, the Castillos warned. Those who choose to have a loan of 20 or so years, but the interest rate is fixed for only a year, may also have a hard time when interest rates suddenly rise. “All interest rates are negotiable, even equity. You just need to ask,” Jay said.