During the time that we have been stuck at home due to the nation-wide lockdown, many of us have become painfully aware of the severe limitations and disadvantages our houses and apartments present.
In Madrid, Spain, there is a higher percentage of dark, interior-facing apartments than in other capitals in Europe, and, on average, smaller sizes. If the place where you live is small and lacks natural light, or for whatever reason you have realized that your needs are not met, it is likely that in these past few months you have considered the need to change or upgrade your dwelling. But you may not be certain about where to start, or even if you can afford it!
This is the matter I would like to address in this post.
When I start working with a new client, helping him or her find and buy the best home at the best possible price, I always start by doing an analysis of the needs, wishes, and financial possibilities. The steps I recommend following are the following:
Maximum purchase budget
Although it’s very tempting to dive right into idealista or fotocasa to start looking at apartments we like, it is much more important to be very –VERY- clear about our budget before we even start. Ask yourself the following questions: How much do I have in savings for the deposit and non-financeable expenses? Consider only the money that you have readily available, or which you could turn into cash quickly. Never use up all your savings, as it is important to always have a safety net for emergencies or unforeseen expenses. When you arrive at the amount you can use for the purchase, bear in mind that this amount will have to cover the following concepts:
- Down payment for the purchase of the home.
- Taxes and expenses associated with the purchase.
- Any possible renovations.
Although there may be exceptions (mainly depending on your financial profile), and some banks have innovative mortgage options that allow you to include the renovation into the mortgaged amount, the general rule of thumb nowadays is that banks finance up to 80% of the value of the home purchase. So your deposit will have to cover at least 20% of the purchase price.
As for taxes and expenses that you have to pay as a buyer in a real estate transaction, in this blog post I describe in detail what they are. In general, being conservative, reckon a 10% of the purchase price for this concept (in Madrid).
The cost of the renovations is difficult to know in advance, because it depends on the amount of work to be done, the size of the apartment, and the qualities of the materials you choose. I have seen perfectly good full renovations done with less than 500€ / m2, up to luxury reforms with budgets well over 1.500€ / m2.
Let’s take an example: if you have 120.000€ in available savings, theoretically you could buy an apartment costing up to 400.000€ if it is refurbished (80.000€ deposit, 40.000€ taxes and expenses), or about 310.000€ – 315.000€ is it needs to be renovated (63.000€ deposit, 31.500€ taxes and expenses, and about 25.000€ for the renovations.)
Another question that you might have to ask yourself is: Do I need to sell before I buy? Depending on your financial situation, it may be more interesting to rent out your current home and move into the one you are buying; but if that is not possible, calculate carefully how much money you will have left from the sale taking into account:
- The (realistic) market value of your current home
- Possible real estate agency commissions
- Any outstanding mortgage debt, and any cancellation expenses or commissions
- Municipal capital gains tax (IIVTNU, more commonly known as “plusvalía municipal”)
Last but not least, in this first step towards finding and buying you home, you must also make sure that you will be able to access a mortgage for the amount you need to finance. Keep in mind that the bank will allow you to bear monthly payments up to a maximum of 35% of your monthly income (as a general rule). That is, if the total income in your family unit is 4.000€ per month, your monthly mortgage payment must not exceed 1.400€.
Just to give you an idea, a monthly mortgage fee of 1.400€ could correspond to a 1.5% fixed-rate 30 year long mortgage, for a total loan amount of 405.000€, or one of 379.000€ if the fixed interest rate is 2%.
So you have to find the balance between how much money you will be allowed to borrow, and your available savings: the bottleneck is always going to be one of those two factors.
But don’t just do a couple of online simulations and run with that! I know too many cases of buyers who, after having spent time searching, having found the ideal apartment, and even having paid the down payment, have subsequently failed to obtain adequate financing. A bank can tell you how much it could lend you theoretically, but if they don’t analyse your financial documentation, it is not reliable information.
When I start working with a buyer, the first thing I do is ask them to gather their financial documentation, and then I request mortgage offers from various banks. It is always safer to look for a property once you have the certainty of knowing that you will get a mortgage, with what conditions, and up to how much.
In short, the first step in buying a property is defining your maximum budget very carefully.
Features of your new home
The next step is to do an introspective analysis of your needs and wishes. What are the must-haves that your absolutely cannot forego? How much space do you realistically need? What features are you willing to give up? Keep in mind that there are certain factors that make a property relatively more expensive or relatively cheaper, and if you are flexible, you can play with that. For example, ground floor apartments, interior-facing apartments, or those that are in a building with no lift/elevator are usually cheaper. Maybe you don’t mind giving up the lift for more square meters or more light. Factors that make a house more expensive tend to be: being between a third and a sixth floor (the most sought-after heights), south orientation, modern construction, balconies / terraces / patios, and obviously other add-ons such as a storage unit, a garage, or a pool.
Be clear about your absolute minimum must-haves, and be flexible with the rest.
Areas and neighbourhoods
The million-dollar question is: WHERE do you want to live? This factor is just as important if not more than the actual features of your new home. Some people have a very clear idea about where they want to live, and are more willing to be flexible in terms of size or characteristics. On the other hand, others would be willing to consider different neighbourhoods, if that would allow them to buy more space, for example. If you are considering an area that you don’t know much about, do some research: population, services, transportation, etc. Try to talk to someone who lives there or knows the area well.
In my experience, living in a neighbourhood where you feel comfortable is just as important as being comfortable inside your apartment.
What I usually do when I start the preliminary analysis needs and budget for a new client, is to first determine the budget (it is usually the least changeable factor), then ask for the must haves (desired features and size), then based on these two factors I recommend areas where I know that what you want to buy exists at the current market prices.
Or if the client is very clear about the desired area, I advise them on the type of apartment that can be purchased in the given area with the given budget. If the result does not meet the minimum must-haves, there are only two solutions: increase the budget or look in a different area!
Well, actually there’s a third solution, which would be to try to find cheaper sub-zones within the desired neighbourhood. In Madrid there is a lot of variation in prices and types of houses almost from one street to the next. Within the same neighbourhood, two similar apartments can have a 50% price difference, depending on whether they are located on a popular street or not.
So if what really matters to you is staying in or near your “area of influence” (work / school / family), maybe you can find cheaper streets while still keeping your minimum requirements.
One last tip: keep an open mind, because the perfect apartment does not exist. Even the most suitable apartment in the most ideal area will have defects if you look for them. The only important thing is that you have a clear idea of what features you absolutely must have or must not have, and learn to be flexible with the rest.
If you have made the decision to change or upgrade your home, or go from renting to owning your own house, I recommend starting by having a very clear idea about your total budget, your essential minimums and your favourite area or areas before ever starting to look at listings and ads on idealista or fotocasa.
And if you are not really sure about some aspect, or all this just sounds too overwhelming, you can always contact me and let me help you. As a real estate personal shopper, my job is to make this whole process EASY AND STREE-FREE.
And remember that you can contact me for a free consultation during which you can ask me anything – including areas, prices, financing options, etc.
Shall we talk?