Step One: Cut a Hole in the Box – Things Learned Along the Way

by brandt

Note – I’m not a home-buying expert. I just play one on TV. All advice that is given is my opinion only, and should be taken as such. Please consult with a loan officer and real estate agent before making any decisions. I’m just giving you a little taste of what my experiences have been. Information on this website is provided “as is,” with no warranty, because I’m cheap. You know the rest of the legal mumbo jumbo. To quote one of my college roommates when I asked him a question he didn’t agree with, “Dude….don’t be dumb.”

This whole first time homebuyer process can get frustrating.  Many of the emails that we’ve received thus far come from people who have had the same questions and want the same things from buying a house; namely, to snag a good deal at a great price and have a fabulous resale value. The market is good right now, and people know it, and many of our friends want to make the jump before the real estate market gets turned around. Heck, that’s the reason Ashley and I are doing it. But there’s a lot of little tidbit’s and facts we’ve learned along the way (and we’re still not done).

1. Get Your Act Together
This means a lot of things. First, decide if it would be better to buy vs. rent. We had to decide if buying was even possible. We sat down and looked at the price they would charge us for rent at our current apartment (and increase of 20%), other apartments in the area (which would have been about the same as the increase at our place), and houses for rent (which were going for about $1,100 to $1,200 per month). They were all extremely high. Then, after we examined a lot of the sale prices for houses that I saw at the mortgage company I used to work at plus their monthly payment, we had this “aha” moment of “We could do this…”. ONLY THEN did we go down the road of getting an agent, getting a pre-approval, and looking at houses. I’ve known some people who don’t follow those steps and end up frustrated because they thought they could get a more expensive house then the bank would lend them for, or weren’t prepared for the long haul of looking, or just didn’t want to make the jump just yet.

The next thing we did was purge debt and stockpile cash. We were fortunate enough to come out of school with $0.00 in student loans. We had $0.00 in credit card debt, something we’ve been able to keep up since being in college. I knew that our pre-approval amount would be based in large part on our credit score, so I dumped a lot of extraneous things. I love my Sirius/XM radio, which cost less than $15.00/month. Goodbye. We had a gym membership to one of the few places around that had a pool. Sayonara. And the list could go on and on. Any extra debt or anything that would put our name on a “collection” agency, we dumped. Granted, a few things we kept – such as TV/Internet, cell phones, and obviously our rent. But I wanted to make sure that our credit score wasn’t going to be a factor in our pre-approval. We also began a very aggressive savings plan in order to offset the inevitable costs of getting into a house – such as furniture, appliances, closing costs, and anything else that might come up. While we’re not perfect, we’ve been able to stockpile about $3,000 over the last 4-5 months, which will no doubt help us when we get ready to close on whatever house we find.

Next was taking a look at our income situation and our employment situation. The general rule of thumb is that your housing expenses – mortgage payment, homeowners insurance and property taxes – don’t exceed a certain percentage of your income. I’ve heard anywhere from 25% to 33%. So we had to look at how much we were taking in per month, and adjust our budget to make sure that we wouldn’t be strapped for cash at the end of the month. Whether that meant we had to look for a house that was a little lower than what we wanted, or we would have to put a larger down payment on the house, we weren’t sure. That’s where mortgage professionals can come into play, and why you should talk to a realtor to get a feel of what you can afford, and a loan officer to get your pre-approval letter. I could probably post 10 pages on budgets and what they’ve done for my life (from going through over $400.00 in one month when I was 16 to now having my entire life and budget based on a few spreadsheets), but needless to say, getting on a budget and having a pattern of saving isn’t just good financial advice, but it’s something that underwriters look for. If they see NSF (Non-Sufficient Funds), you’re going to have to do a lot of explaining, and it could hurt you. If they see bank statements constantly going dramatically down per month, it will hurt you. There’s lots of tools out there, from finding a professional financial planner to using websites like Mint.com (which is excellent) to doing what I do and keeping a very detailed spreadsheet budget.

2. Nuts and Bolts
After you’ve gotten past the planning and discussion point, you need to get down to the nitty gritty nuts and bolts of houses. I recommend making lists. Lots of lists. What do you want in a house? How many bedrooms? Bathrooms? What school district? Location? Subdivision or out in the country? Lots of land, or no? Finished basement? Big kitchen? Swing set? Pool? Fixer-Upper or ready to move in? These types of questions should become second nature and should be something you’re constantly thinking about. And you should almost attach a dollar amount to many of the amenities. We sat down and talked about bare-minimum requirements, and came up with the following list:

3 Bedrooms
2 Bathrooms
School District
Location to Work
Big kitchen

Other than that, we told our agent that were open to anything, It wasn’t until we got to looking at houses that we really started finding what we were looking for, and what we really wanted, which I’ll get into once we hit point #3.

There are other nuts and bolts things to consider – such as whether to get an FHA or conventional loan, which a loan officer would be best to talk to about. There’s also the decision to try a short sale vs. a bank owned foreclosure vs. a REO vs. a private sale. There are benefits and drawbacks to each, but here’s my information that I’ve gathered

Private Sale – More “move in” ready, not a lot of negotiating room, not a lot of fixing up
Short Sale – I talked about our experience here, which is still going on, but be aware that you could be waiting up to 4 months to get a response from the bank, and that response could be “no,” which means you’ve lost 4 months of potential houses. Condition of the home could be excellent down to disgusting.
Foreclosure: There are good prices, but sometimes they’re not as good as you think. Be prepared for multiple offer situations. Sometimes the quality of the house can be great, sometimes not so much. Decent amount of negotiating room. The good houses usually go off the market very quickly, so be prepared to act fast. Working mostly with bank
REO – Similar to a foreclosure, but the property goes back to the mortgage company after an unsuccessful foreclosure auction.

Again, talk to a realtor. They would be best to get into the details and pros and cons behind each of these. Decide if you want a house that’s move in ready that you’ll pay more for, or a house that you might have to do some work (and it might look gross) but you can get at a good deal. Some people (such as my parents) salivate over the thought of getting a great deal and putting their own flair on it, all the hard work included. But there are some people (such as younger families) that just want a nice place to live without the hassle of hardcore renovations. It’s something that needs to be well thought out before you go look.

Finally, get an education. Read everything you can about the real estate industry, the trends of home sales, and the types of home sales, home renos (renovations), and the like. Get with an agent, and USE them. Ask them every kind of conceivable question, because most times they’ve been in the business long enough to at minimum know someone who has been through it. My agent has answered just about every question out there 5 times over because I keep asking the same ones, but that’s the only way that I’ve learned anything about this wonky real estate market.

3. Make Like a Tree, and Get Outta Here
The last step is to actually get out there and look. I asked Ashley over Google Talk one afternoon during my lunch break what would be the thing she’s learned the most. This is what she said:

Ashley: look, look, look
you don’t know until you look
keep looking
and look at mags and books to get ideas
that’s what helped me see

What does she mean by that? When we first started looking at houses, we went on Zillow.com and Realtor.com and thought we knew what we wanted. We would go look at houses, and be very underwhelmed. Not because we were overly picky, but because we just didn’t know what we wanted. For example, I was originally anti-ranch style houses (all on one floor), because all I remembered was my grandfather’s dated house. However, we looked at some great ranches with finished basements that looked just as big, if not bigger, than some normal colonials. Another example: I thought I wanted a fixer-upper; Ashley thought she wanted something that was move-in ready. We’ve found that we’ve been drifting towards a middle ground of finding a livable house that’s not going to be condemned, but needs some TLC. Watch HGTV, lots and lots of HGTV, to get a feel for not only what people are doing as far as DIY projects, but what houses look like, and document all that inspiration.

A note about websites – the MLS (multiple listing service) is the method by which real estate agents know which houses are on the market. Get with an agent who can include you on this listing. I live and die by these listings, which I get just about every morning from my agent (there’s been about 3 days out of the entire 4 month process I havent’ gotten a listing, and that’s because there weren’t any updates). I’m not sure if our area is unique, but every Monday we get the big listings, that take all the properties on the market within our range and send them out (usually over 75 properties). Realtor.com is a good website to use, especially in conjunction with the MLS listings. They can give some additional information, such as how long the house has been on the market and what are some potential comparables.

Zillow is an interesting site – there is some good to it, such as viewing how many page views a certain house has had and viewing houses in the area that are for sale. But use this site with caution. The “Zestimate” they use is their valuation of the house, which isn’t accurate unless there has been a full blow appraisal (which the website doesn’t do). There’s just a lot of problems with it. Second, not all their listings are fully accurate. MLS will always have accurate listings, and will always make note of properties that are either off the market or already have offers in. There’s been a few times that I’ve contacted my agent about properties on Zillow, and she’s told me “Brandt, that’s been off the market for about 6 months now.” Use Zillow with caution.

Wow, its’ been over 2,000 words and I still feel like I’ve scratched the surface. But in this whole house buying process, we’ve found that the more knowledge that we were armed with, the easier it’s been to stay in the loop of what’s going on in the market. Now if we could only land that house…..

Image from liquidmatrix.org

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One Comment to “Step One: Cut a Hole in the Box – Things Learned Along the Way”

  1. I feel like buying a home for us is at least a few years away. ALthough home prices are awesome right now, they’re still incredibly high in southern califorinia, for two broke newlyweds such as us : )

    i like your comment though about having separate savings accounts for different goals…i LOVE this. we already have an ing savings account…so…i may just start creating some other ones–one for vacation, one for emergencies and one for the HOME. ooo i’m getting giddy already!!

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