Wednesday, January 27, 2016

The Joys(?) of Homeownership – Part 1

J Money over at recently blogged about selling his home that he considers the biggest financial mistake he's ever made. I've been thinking about this lately and it's caused me to think back on our real estate purchases and share some things I've learned that will hopefully help others.

In roughly ten years since graduating college and getting married, we've lived in three different houses in three states. Each time we've moved, we've avoided making the same mistakes we made with previous moves but still haven't made the perfect purchase and continue to learn ways to do it better. Given that we are big into DIY projects, we've also had our share of experience learning from home improvement projects. We actually enjoy doing projects around the house, though, so living in a rental where we'd have to ask permission to do little things like paint walls, re-do trim, or tear down walls would be stifling, don't you agree? Ok, maybe we're in the minority on this one.

Over the next couple of posts, I'll detail things we've learned from buying and selling our houses.

Buying Our First Home

Back in 2006, shortly after graduating college and starting our first 'real' jobs, and when housing prices seemed to be going nowhere but up-up-up, we were renting a small one bedroom apartment. The apartment was certainly adequate and we were saving more than we ever had been able to while we were in school, but weren't really focused on any specific financial goals or targets. I knew that I wanted to go back to school for an MBA in the next 3-5 years, likely in another part of the country, but at the same time we had caught a case of 'house-fever'. On evenings and weekends we would spend time driving around neighborhoods looking for things we liked, things we didn't like, and basically narrowing down the areas where we felt we wanted to live. Looking back, I even remember telling myself something to the effect of "we really should buy something while we can still afford to." Another way we rationalized buying a house is that we felt we'd be in the house long enough that appreciation would cover all of our selling costs down the road.

In January 2007, we closed on our first home, a cute but older 3br/2ba house on a cul-de-sac. We paid $225,000 and had to borrow $224,000 for it. We thought we were being SOOOO smart. Based on our income, we were 'pre-approved' for a $450,000 mortgage and we were spending only half of that! However, there were several things that should have tipped us off that we were making a bad move. For example:

  • We offered the full asking price for a house that was listed 'for sale by owner' and had already been on the market for a few weeks. Who does that? 2006 me with a raging case of house fever. That's who.

  • We didn't use a real-estate agent. As a buyer, there really is no reason to not have an experienced agent on your side. The reason we didn't use one was because the seller of this particular home was selling by owner and would have increased the price by 3% to cover our agents' commission.

  • During the due diligence period, the bank appraisal came in $5k lower than our offer and rather than try to re-negotiate the purchase price, we just came up with another $5k for the down-payment. Doh. Having an agent probably would have saved us this $5k.

  • Although it wasn't called this at the time, we definitely got a subprime mortgage. It was a 5/1 ARM at 6.75% interest. We figured we'd sell the house in less than 5 years so the fact that the rate could adjust after 5 years seemed irrelevant. Even though we could afford the payments (they were only about 30% of our take home pay), never once in the process were we asked to show any proof of our incomes. Because it was so easy to get this type of mortgage, we would not have even tried to get a non-subprime loan since the paperwork and documentation would have been more difficult, but at the same cost.

  • Our mortgage provider didn't require that we include taxes and insurance in our normal payment, so we were surprised with a tax bill shortly after moving in. Thankfully, it was less than a single mortgage payment and we could easily pay it. Clearly our budget wasn't as comprehensive as it is now.

  • After moving in, we also realized that there was a lot more stuff we had to buy that you don't need as a renter. These were things like a lawnmower, yard tools, hoses, appliances, etc. I knew that there were going to be things we needed, but something always seemed to pop up that we hadn't thought of.

  • When getting ready for closing, we learned about this thing called 'odd-days interest', which at the time only meant that we opted to have a closing date closer to the end of the month to reduce how much cash we had to bring to closing (if we were worried about paying less than one month's worth of interest just once…what were we thinking signing up to pay even more interest EVERY SINGLE MONTH?)

Once we moved in, the house fever transitioned to home renovation fever. Pretty much every weekend and spare moment we had was spent working on some type of upgrade to the house. Here's an example of some of the projects we did:

  • Painted most rooms.

  • Replaced wood veneer doors with white six-panel doors.

  • Replaced baseboards throughout house.

  • Installed built-in bookshelves in guest bedroom.

  • Installed crown molding in one bedroom.

  • Replaced old railroad ties with concrete blocks in a backyard retaining wall.

  • Planted several trees.

The list exhausts me just looking at it. The craziest part is that these projects all happened in less than 6 months. The list would be longer, but that same summer we came to the decision that rather than wait three more years to go to back to school, we wanted to start in one year. The only problem was, the school I had my heart set on was across the country. I had never visited the campus or even the state the school was in, I only knew that it was very highly rated, a mentor of mine had gone there, and there was the possibility that I could get a job with my same employer in the city the school was located and go through a part-time MBA program in the evenings.

In around October 2007, I reached out to the manager in the city where I was looking to go to school and let him know I was looking to transfer if a position ever became available so I could also pursue an MBA at the local University. I figured that this would be the first step in developing a relationship and dialogue that could allow me to transfer in a year or two, so imagine my surprise when, in our FIRST conversation, he told me he actually had a position opening up in the next few weeks that would be ideal for me. Before I knew it, I had received and accepted an offer to transfer across the country and start a new job.

So, less than 1 year after buying our first house, we needed to sell it. November 2007, we put the house up for sale, optimistically (and naïvely) asking $250,000. The only smart thing we had done financially to this point was that we had paid down the mortgage balance by $12k in that first year. I moved and started my new job in January and my wife joined in February. We ended up not selling the house until April 2008, and sold it for $225,000, exactly what we had paid the previous year. Realtor fees and closing costs consumed any equity that we had, but thankfully we were not underwater.

Some mistakes we made during the selling process:

  • We originally tried to sell the house ourselves, without the help of a real estate agent. We ended up listing with a real estate agent when we moved out of state, and should have listed with a professional much earlier. Had we done so, we probably would have had a more realistic asking price and would have sold much sooner.

  • When we were doing our house projects, some of the colors we chose for bedrooms were bolder than your average homeowner would want. Even though paint is the easiest thing to change in a house, I now know that buyers have a hard time seeing a space differently than it is presented. Not to say that it wasn't well done (definitely not cringe worthy like some of the neon pink/glow can be seen down the hall stories that you hear of), but deep blue or red can be polarizing.

  • We expected all of the price negotiations to have happened before going under contract, but our buyer was a more savvy buyer than we had been and some additional price reduction happened after a home inspection was conducted.

What were we thinking with that wall color…?

A few things we did right:

  • My wife worked in an industry where some of the company owners had frequent dealings with real estate agents, and when we did list with an agent we solicited their advice and got a good one. There are many agents out there, and, similar to the financial advisor industry, a great many of them are not fantastic at their jobs, and those new to the process generally don't know how to tell the difference.

  • Even though we packed up and shipped most of our household to our new state, we didn't leave the house bare. We left window treatments, art, etc., and that made a huge difference in how it looked to potential buyers.

  • We didn't attempt to be long-distance landlords. Even though we had ties to the area and still visit frequently, the thought never really crossed our minds to attempt to rent out the house.

Some things we lucked out on (through no skill or good decisions on our part):

  • We sold right before the housing market really tanked in that area. I still tremble to think of how much worse this story could have been.

  • The buyers came to the table with a large down payment so we didn't have any bank appraisal issues.

In the end, our first home was a huge learning experience. Even though we bought and sold the house for the same amount, we actually lost around $20,000 when considering realtor fees, closing costs, and cost of home projects. We were fortunate enough to be able to absorb the losses, but avoiding those losses would have made the next few months transitioning to a new state a lot easier. Having paid some tuition in the school of hard knocks, we approached our next home purchase with more experience and better expectations.

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