I know it has been several months since I last wrote, but I’ve been busy, first, with my mother’s triple bypass surgery in March, which I took 1.5 months off from work for, then we got caught up with buying a house (a townhouse, really) and getting unpacked and settled.
Quite honestly, I didn’t think we’d be buying a place so soon. The plan was to buy three more investment properties before buying a primary residence for ourselves, but my husband was getting increasingly more paranoid with my son’s food allergies and wanted greater control over our environment. I also haven’t been able to find any good deals on investment properties. The markets that I’ve been looking at have been going up in price, so it is getting increasingly more difficult to find properties that meet the 1% rule. The properties that do meet the 1% rule are generally gone before my real estate agent can get over there to do a recorded video tour for me. There are other reasons, too, like the often reported housing shortage in California and high rental increases, that convinced us to try to hedge against rising housing costs. With how expensive homes are in California, it would actually make more financial sense to rent UNLESS you plan to live in that property for a long time since the upfront costs are spread out over many years. One of my all-time favorite (free) tool to determine whether it’s better to buy or rent is the New York Times Buy vs. Rent Calculator, which takes into account not only the usual rental costs compared to the cost of buying and selling a home, but also opportunity cost, inflation, and your tax rate, among other things. Our townhouse is a small 2 bedroom, 1.5 bathroom, 1,100 sq. ft. home in San Diego, but we plan to live there until we are old and grey. We’re pretty much limited to San Diego because both my family and my husband’s family are here (I have been trying to convince my husband to move to a lower cost of living area, but no luck). We are fortunate to still have both sets of parents, but they are getting older, and we want to be able to be there for them in case they need our help with doctor visits and interpreting paperwork. If we decide to go travel the U.S. and/or world one day, we could always rent out our property and have something to come back to.
After having gone through the home buying process four times (and the pre-approval process more than a dozen times), I thought I’d share some tips that I wish I had known when I closed on my first property. These tips are geared more towards buying your primary residence than an investment property. For tips on buying an investment property, check out my post 9 Steps I Took to Buy My First Out-of-State Rental Property.
1. Before you look at homes, get pre-approved and set a budget.
Unless you have 100% of the cash sitting in your bank account or brokerage account, get pre-approved first to determine how much you qualify for. This will ensure that you are only looking at homes in your budget. After you get pre-approved, get pre-approved again with two other lenders. As a contracting officer for the federal government, we usually strive to get three quotes to ensure that we are getting a fair and reasonable price. I’ve often applied this to my personal purchases, too. Once you are already pre-approved, it’s simply a matter of sending the same supporting documents to two other lenders to find out what their rate and closing costs are. They should be providing you with a Loan Estimate worksheet (this used to be called a Good Faith Estimate), which discloses important information, like the estimated interest rate, monthly payment, and total closing costs for the loan and will allow you to do an apple-to-apple comparison among the loan products. While this is an estimate, by law, they cannot deviate no more than the tolerance threshold, which could be zero tolerance, 10 percent cumulative tolerance, and no or unlimited tolerance depending on the cost categories.
Just because you qualify for X amount does not mean that you should find a house for that full amount. The general rule of thumb is to spend no more than 30% of your income on housing. If you are a dual income household, buy a place based on one income–the lower income. With my husband and my income, we qualify for a house that is close to a million dollars. It’s insane for me to think about committing our entire retirement savings into a property. The place we ended up getting was $416,000 (our max budget was $420,000). This was a number that we were comfortable with since we could pay it off in five years if we needed to.
2. The most stressful and important aspect about buying a home is the funding.
Having closed four times, I can tell you that the most stressful part about buying a home is the funding. In fact, I decided to make it as stress-free as possible by just putting myself on the loan this time around (my husband keeps terrible records, and when you’re on a tight deadline, waiting on someone to look for records is no fun). Deals die because of funding. Sellers know this (or at least their broker should be advising them of this), so they are always look for a strong buyer. On our second property, we almost lost the home because I opened up a brand new credit card during escrow in anticipation of using it to furnish the place (we didn’t even need the credit card, but I was getting ahead of the credit card churning game). It took a lot of phone calls and written explanations just to get through that one mistake.
So here’s the deal–once you have an accepted offer, don’t make any big purchases, don’t apply for any new credit cards or loans, and don’t do anything major with your finances. Before you do something, like apply for a car loan, check with your loan officer first. It may affect your ability to obtain the loan for your home purchase (a new car loan taken out during escrow will most likely put you at risk of not getting the loan approved). While loan officers want to fund the deal and get the commission, the underwriter doesn’t mess around if you suddenly become too risky in their eyes. Your loan is not approved until the bank wires the money to escrow, which is usually the day you get your keys. Remember that a pre-approval is not a loan approval, it’s only a preliminary assessment of your ability to get approved.
I worked with a great loan officer from a national lender on this deal, who got me a rate (4.375%) that was hard for local lenders to match (one lender tried to match but was only able to offer me 4.875%, which would be a $30,000+ difference over the life of the loan), and they got all the paperwork completed in record time. In fact, it only took them two weeks to get everything finalized–which to me, is the fastest that I’ve ever experienced. We could have probably closed escrow in 15 days instead of 30, but it’s good to have that extra time since I was still shopping around for rates after we got the accepted offer.
3. Everything is negotiable.
I’ve mentioned this in a previous post, but it’s worth mentioning again–everything is negotiable. From the loan to the property after you have an accepted offer. Once you obtain the inspection report, look for areas that you can negotiate. If you’re in a hot market like we are, it might be difficult to get the seller to pay for anything, but we were able to negotiate an additional $500 credit for the water heater and A/C, which were both working perfectly fine, but they were getting near the end of their useful life according to the inspection report. On my out-of-state rental property, I was about to negotiate a $3,500 credit.
One of the local loan officers offered to match the 4.375% rate at the very end (when I was nearing my loan contingency deadline) from the national lender that I ultimately ended up using. Although I would have preferred to deal with a local lender, I ended up not going with him because he was playing a lot of sales games. I used to work with salespeople (in financing, nonetheless). I know there our honest ways of making a sale. And this guy was not someone I could place my trust in.
4. Make it personal.
There are a lot of things that you can buy these days without ever meeting the seller, and real estate is one of them since all communication goes through the broker. For a lot of sellers, real estate can be both very transactional and emotional. Yes, they are trying to sell their property for top dollars but for some sellers (who aren’t in a distressed situation) they have lived in that home for many years and watched their kids grow up there or spent time with their parents there. They want to sell it to someone who will enjoy it as much as they did. When it comes to receiving offers, the buyer’s offer is actually very cut and dry. The purchase agreement has a bunch of fill-ins and when the seller’s broker presents the offer, it’s very much focused on the numbers and how it would affect the seller’s bottom line. One way to separate yourself from the competition is to include a cover letter. The property we purchased received 16 offers, and there was one offer that was even thousands of dollars higher than ours, but by including a cover letter and making it personal (we included details about our family, how we like to cook together, and how my husband and I look forward to walking our son to the neighborhood school), the seller ultimately selected our offer.
5. Don’t get emotional.
While it’s good for the seller to be emotional, it’s terrible as a buyer to get emotionally attached to a property. Selling a home is very circumstantial. Sellers sell for all sorts of reason. They might want to move up to a bigger house or leave the state. Don’t fall in love with a property and end up offering more money than you need to. If you don’t get the first property, there will be another one that will pop up on the market. My friend was able to negotiate almost $100,000 off of the million dollar house that he recently purchased because he was always willing to walk away (then again, he had walked away from a couple of homes before ultimately settling on the one that he ended up purchasing).
For those who have bought and sold homes before, do you have any other tips to share? If you’re currently in the market to buy, do you have any questions for a loan officer? (I know one personally and can interview her if there are enough questions.)