Monday, July 27, 2015
When I was in High School, I can remember telling myself that I never wanted to be a renter, I wanted to be the homeowner and landlord. I never wanted a long-term relationship with a landlord, but rather a mortgage broker. Building wealth through real estate was something I could always see myself doing vs. handing my monthly income to someone else, my landlord.
I graduated college in 1993. It took me 5 years for my Bachelor’s degree, but I worked during college and had $30k in the bank when I graduated for the down payment on my first home. My wife and I were married in 1994, yes, we’re celebrating our 21st anniversary this year! In 1994, we bought our first house and excited to start our life together in our new home. It was a rental property for the prior 7 years, a true fixer-upper, but it’s all we could afford. I was willing to pour my sweat equity into the property to start building wealth through home ownership vs. making my landlord wealthy.
Thing is, there’s lots more at stake than just a change in status from renter to homeowner. Like so many (if not all!) first-time home buyers, my wife and I had no idea what we were doing. Of course, I can consult with my real estate agent and my mortgage broker. But if there’s one thing I keep hearing from those who’ve forged the path ahead of me, it’s that when you buy a home for the first time, you’re constantly faced with things you didn’t know you didn’t know.
So, I thought I would share my experiences with you and hope this helps prepare you for what lies ahead:
I thought our mortgage loan was approved and ready to go, but at the last minute the originating bank balked at the purchase price of our home—they thought it was too high. This was in 1994 in Silicon Valley—we thought we were getting a bargain! The bank was based somewhere in the Midwest, though. They assigned an assessor to come check it out and fortunately the assessment supported our purchase price. It was a suspenseful few days. I had no idea that if the appraisal came back lower than our purchase price, that the bank would require us to put a higher down payment to cover the difference between the purchase price and the assessed price.
Lesson Learned: Don’t count on your mortgage until it’s signed. And make sure you double-check your property assessment.
Lesson #2: Count your Costs
I might have experienced short-term memory loss during my loan approval process. All the closing costs were a mystery to me, and my loan officer or Realtor had to explain each expense every single time I saw them in updated loan docs. There are the appraisal fees, credit report fees, closing fees, processing fee, underwriting fee, survey fee, homeowners insurance, etc.
Lesson Learned: Go over the closing costs with your real estate agent *LENDER* and take notes on what to expect. You’ll see these costs itemized again and again, so best to get familiar fast.
Lesson #3: Budget Time and Money for Repairs
I was surprised and worried about the problems that the home inspector found. How serious are termites? How about mold? In 2 of the 3 bedrooms, there was evidence of mold on the walls/paint. Can these things be fixed and will the house be safe? Or will we regret buying a house with possible structural and health-related issues? And how much money will it cost for us to do roof repairs ourselves when the seller is selling “as-is” and it’s a competitive market where we lost out on two previous houses we bid on? Related question: How long could we put off doing roof repairs, since we were raiding our savings to fund the down payment for the house?
For us, the repairs were much more than we expected, but we addressed the critical items first and I did as much of the work as possible by myself with the help of my family and friends to keep costs low. Even with that, in order to save enough for the other repairs, my wife and I decided to rent out one of our bedrooms for $400/month to help save for home repairs/remodel costs. We had 3 bedrooms and only needed one for ourselves and found renting a room a great way to save money and reinvest it into our home. I was already a Landlord!
Lesson Learned: You can’t foresee problems that might arise during the inspection. You might be able to negotiate with the sellers, but you’ll want to have enough money left over after closing for any unexpected repairs. Be prepared to walk away from your dream home if needed or sacrifice for a year or two like we did with a roommate.
Lesson #4: Multiple Visits are OK!
When we were buying our first house, I didn’t know I could go back to look at the house again before we placed a bid. I was also shocked that I was able to meet the sellers, which ultimately put our bid over the edge and got us the house. We saw the house on a Saturday and bids were due on Monday. The open house was full of potential buyers and I felt like I hadn’t spent enough time really seeing the entire house. Our agent arranged for us to go see the house one more time on Sunday afternoon. I assumed the house would be empty, but the sellers were home and welcomed us in to take another look around.
They were so friendly and walked us through the house, explaining little nuances along the way. We submitted our bid the next day and found out the house was ours a few days later. Our agent told us there were seven bids and ours was the same price as another couple’s, but because the sellers met and remembered me, our bid won. I firmly believe it was meant to be, but I’m glad I went back for another look. At the end of the day, “people buy/sell with people they like”. Most people see their home as personal and want to make sure it goes to great owners next!
Lesson Learned: Look as many times as you need. This is the place you’ll call home, after all. Even in a competitive market, a second look could end up giving you the edge. (And while you certainly don’t want to harass the seller, don’t be afraid to personalize your offer with a letter describing any details about you, your family, and why you love their home. It could be enough to sway the seller in your favor.)
Lesson #5: Learn and Love Thy Neighbors
Maybe this is a very urban issue, but I didn’t realize how neighbors can make—or break—a home. When my wife and I moved to our first home in San Jose, CA, we knew we could get along with most families and knew the area. My wife went to high school about a mile down the road. It was a family oriented neighborhood with people regularly walking down the street with small children and visible play structures in the yards. We wanted to be part of a community we felt part of and one that we could see our future children growing up and enjoying. Driving around the neighborhood and different times of day and weekends will give you a good idea of the local atmosphere and vibe. Are people walking and/or biking? How busy are the local parks with families/kids playing?
Lesson Learned: Your community is often as important as the home you’re living in. Take a good look at the neighborhood, and don’t be afraid to ask the neighbors questions. These people could become your babysitters, your carpool buddies, and your closest friends over the years.