Wednesday, February 17, 2016

The Joys(?) of Homeownership – Part 2a

Blank Slate

In the early part of 2008, we sold our first home and narrowly escaped being one of the millions of Americans who couldn't afford to sell their underwater house. We found ourselves living in a crappy apartment across the country with a completely blank slate. Our plan from the outset of our move was to rent as cheaply as we could to reduce the financial burden of paying rent and a mortgage and to buy another house as soon as we sold our first home, which ended up being just about three months after the cross-country move. I was planning to start my MBA part-time later that year and we anticipated being in the area for 5 years or so.

Looking back, I find it almost comical that even though we barely avoided losing tens of thousands of dollars in value on our first home we still had a mild case of house fever. In our new city, housing was much less expensive and even though my wife hadn't yet found a new job to fully replace her previous income, we found that we could still qualify for way more house than we really felt we needed.

We began looking at housing in the $150-200k range and found several homes in our price range, but most of them had long laundry lists of things to fix to get the house to be what we wanted.

Along those lines, am I the only one who hates watching people on HGTV shows walk through houses making crazy comments like 'oh, that whole kitchen just has to go', or 'blech, this is a complete teardown' even though the house they are looking at is already at the top of their max budget? I hope that we weren't that obnoxious when we were going through houses, but what differentiated us from most other people is that we had a budget where our max price included the purchase price plus desired upgrades. Also, unlike most people, we were willing and able to do home improvement projects ourselves. I've seen many instances where people buy houses with the intention of doing all sorts of projects but end up just settling for what they originally purchased because of the expense and difficulty of dealing with renovations. Not here.

We quickly realized that, for about the same price as many of the houses we were looking at, we could build a brand new house exactly the way we wanted. We came across a neighborhood that was mostly developed but still had a few lots left and within the next few days signed a contract to have a new home built. The entire process would take about 6 months, time that we needed in order to build up a down payment since we didn't have much to show from the last house we had sold. Some of the mistakes we made in buying our first home were not repeated, but we still made mistakes.

Lessons Learned

Know the Neighborhood

When we decided to build our house, we had only lived in the state for a few short months and naturally didn't know the area extremely well. I'm not sure it would have changed our decision to build where we did, but there were a few things about the neighborhood I felt dumb for not considering. Since we didn't have kids yet, we didn't consider school districts. Only after we had lived in the house for a while did we realize how bad the schools were that our neighborhood was assigned to (I'm talking really bad – the school actually lost their accreditation). Again, it didn't affect us immediately, but certainly had an impact on the property value and may have made it slightly harder to sell. I also would have liked to have noticed how close we were to another neighborhood that had high crime rates (the road leading to the neighborhood entrance we used was beautifully rural, not so on the other side).

Know what you can afford

We ended up paying $168,000 for this house and had saved up enough for a 10% down payment by the time we closed. Our household income wasn't quite as high as it was before we moved, but our mortgage payment was easily manageable at between 15-20% of our take home pay. This was especially important because the whole reason for the move was for me to go back to grad school. We had developed a plan to go through school without any student loans, something that would have been impossible had we borrowed as much as banks told us we could 'afford' on a new home. It's been said that you can afford anything, but you can't afford everything. This was just one of several instances where we had to prioritize and chose to spend less on housing to avoid debt for education.

Know what your neighbors can afford

How do you know what your neighbors can afford? A friend once told me that his rule of thumb is that in any neighborhood, 1/3 of the residents can easily afford their home, 1/3 of the residents are treading water, and the last 1/3 truly can't afford their homes. In our neighborhood, I think the numbers were more like 10%, 50%, and 40%.

I haven't come up with a surefire way to tell how a neighborhood rates on this metric, but one of my hypotheses is that when it's easy for basically anyone with a pulse to qualify for a mortgage, neighborhoods with a higher percentage of first-time home buyers are more likely to have homeowners that are in over their heads. When too many homeowners are in over their heads, HOA dues don't get paid, more houses get foreclosed, and more short-sales occur. Since people don't have as much money to upkeep and upgrade their homes, the entire neighborhood can lose its 'curb appeal'.

Shop for Insurance

I'll never know if we had a good rate or not for our homeowners insurance because we simply went with the insurance provider the homebuilder partnered with. I had never heard of the company before or since having a policy with them, and because they were paid from our escrow account I never had to write them a check. If nothing else, I'm sure we missed out on some savings by not bundling our homeowners insurance with auto insurance. Insurance companies tend to get more policies renewed when they are automatically paid, and I am proof of this. We have since learned and now shop around for insurance periodically to make sure our rate is competitive.

Negotiate and Investigate

A mistake we made with our first house was that we didn't negotiate on price very hard at all. When building a new house, it felt like buying something at a store where there is a price tag. I'm not the type to haggle at Wal-Mart or Home Depot, and adopted a similar approach with the home builder. Strike 2.

Even though we may not have been master hagglers on the total price, we did recognize that where builders really make their money is on options and upgrades. Since we know how to do most things around the house, we were able to analyze and evaluate each option we were considering and only have the builder include the ones we wanted that we couldn't do ourselves for cheaper. For example, our house came with a fireplace but if we wanted a nicer (still mediocre) mantle the builder wanted an extra $800. Instead we took the basic fireplace built into the price and spent $100 on trim and a few hours later had an even nicer mantle than what the builder would have done. Other things saved us even more, like building our own deck and putting in our own yard. Things we did have them do were things like electrical upgrades, sub-plumbing for a basement bathroom, and a higher efficiency heater.

Home sweet home, for a time.

Looking back, I think we can all agree that buying our first house was a mistake. We knew we weren't going to be there for a while, and we really weren't ready for it financially. As for our second house, I'm still undecided. We learned a lot and enjoyed it while we were there, but it wasn't exactly a stellar investment. I'll discuss later selling this house and buying our next (and current) home and you can judge for yourself. We've learned from our successes and failures, and hopefully you can too.

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