Adventures in Home Buying

For those who know me, they know real estate is one of my favorite asset classes.  Over the long term it can be used as a hedge on inflation because market prices tend to follow yearly CPI increases, plus if you buy in a developing area you can accrue a windfall due to capital appreciation.  On top of that, if you have more than one property you can increase your monthly cash flows through rental income AND deduct business expenses for upkeep.  Those reasons, among an ocean of others, stand to make real estate a very powerful wealth builder for a young professional.  This will be the start of my journey into building wealth through home buying.

Home Buying Decisions

To Buy or Not to Buy

I have been looking at home buying for what feels like an eternity, although realistically it’s only been about six months, and I have finally put an offer in on a home.  Because it’s my first time buying property, I felt like the experiences I have could be useful for my readers who may be embarking on their own journey to buy in the near future.  In a series of posts I’ll outline what worked (and what didn’t) during the home buying process as well as my own observations about the overall market trends and what working with the banks and realtors involved.  I should be in for a topsy-turvy adventure!

On Your Marks. . .

In order to be considered “serious” by your realtor, you will need a pre-qualification letter from a lender.  This pre-qual will be a function of your income, money that you can currently access (like cash on hand, stocks, or retirement that you could pull from), credit score, debt to assets, and a few other fun tidbits.  It’s a quick and fairly painless process which many lenders allow you to do online and with a brief fifteen minute phone call.  This pre-qualification will have what your lender thinks (and thinks being the key word) they would be willing to give you on a loan and how much the interest rate might be.  Compare that to a pre-approval where you’ve actually filled out a mortgage application, you’ve had to supply more documents, get a credit inquiry, and talk a little more in-depth about your overall cash flow and ability to pay – this information will be used to create a credit rating.  Once all is said and done you are pre-approved for the mortgage and with what the lender thinks they will charge for an interest rate.  All things staying the same later on, you should know exactly what you’re getting.

With letter in hand, you should speak with a realtor and try to whittle down the necessities in a home: minimum square footage, minimum bedrooms, whether you want a pool.  You’re looking for the minimum to make you happy.  Knowing this, your realtor can compile a list of homes in your budget, and you’ll then have to decide which of those homes will make the short list to personally view.  The process of finding your short list and obtaining the pre-qual is a rather fluid stage.  Some realtors won’t show you anything without a pre-approval letter, but that’s bad business.  As long as you’re making a good-faith effort to get the the pre-qual or pre-approval, they should show you homes.  As a professional courtesy, do not waste their time.  If you have no intention to actually be in the real estate market, do not request realtors to show you homes.

Get Set. . .

My current realtor advised me of the 80/10/10 rule.  If a home meets 80% of the things you wanted, 10% of the home you could change to meet your needs, and 10% of the home is something you could live with, then it’s a serious contender for an offer.  I thought it was pretty sage advice.  We went house shopping one day and actually loved the first house we saw – a small starter home that was well within our budget – and decided over lunch that it was the one we wanted to offer on.

It was at this point that I started the process of getting my pre-approval letter.  In a hotter market, you may benefit by having the financing in stone before looking; however, given the icy temperature of my current market it wasn’t very high on the priority list.  Meanwhile, I was speaking with the realtor about the offer.  This is the point where you can make a conditional offer.  Some of these “conditions” would be things like the home appraising for offering value or higher, passing inspection, obtaining financing, various fixtures stay with the home (think a chandelier over a dinner table), and other like requests.  Essentially though, you could really require anything to be in this contract.  You then submit the offer through your realtor.  One of the other things you’re paying for in the realtor fees is their knowledge.  I had searched for a few first-time home buyer programs but none of them really piqued my interest because they wanted a capital appreciation on the home or some of the fine print didn’t suit my current needs.  My realtor still was able to recommend a lender to me who was certified for a program I hadn’t researched or known about and that program, if I can get into it, will be the one I use to finance my home.

Go!

But don’t actually.  It’s a waiting game.  You should be working with your mortgage broker on obtaining financing, but waiting for the offer to be decided on is a very stagnant process.  We added a two day period for the seller to decide, and yet a week later we’ve still not yet heard back.  It’s a messy situation and I foresaw this problem coming, but there wasn’t much to do about it because I want the house.  Granted, because there two day window has expired, I am free to negotiate with other people and completely back out.  By not accepting or presenting a counter-offer they’ve effectively made it an offer-at-will.  I can back out at any point, and if they accept now, I’ll still have to advise that I accept the original terms.  It’s hurry up and wait game.

 

That sums up the experience thus far.  I’m waiting to hear back on the offer and once that occurs it simply becomes an issue of getting ducks in a row.  Setting up the inspection, appraisal, title check, and a few other items, as well as paying the earnest money.  After that, once financing is officially secured I’ll go through the loan commitment which is where the bank will take a final look at my financial health to make sure I didn’t open up a bunch of home improvement credit cards or secret money off to the mob and then they will have to approve the house in question.  So long as you don’t lie the first time in getting the approval and keep on living life as is, you shouldn’t have a problem with the loan commitment.

It’s been an interesting process in home buying so far, and I know I’m still in the beginning stages.  However, it’s a home!  It shouldn’t be spur of the moment decision, so having all these things to do, even if streamlined, is still incredibly important.  They provide an important reflection period to weight the risk and reward

So readers, what questions do you have about home buying and what are your general recommendations for what you can afford?  Be sure to comment in the fields below and tell others your questions or experience when it comes to your first time home buying experience.

Cash Flow Celt

I'm just a local business and finance nerd looking to help people get educated about small business, marketing, and personal finance! I write about anything and everything that I can tie into those themes. I'm also Central Florida's only Kilted Realtor, so I write about Real Estate too! Check out my About Me page to see the origins of Cash Flow Celt.

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7 Responses

  1. Brendan Marks says:

    To help save money during the home buying process, consider dealing with a direct lender. Banks get away with charging an arm and a leg on all sorts of fees most people see as bogus: application fees, processing fees, lender fees, closing fees, etc. Banks make their their money over the long term by way of interest, so they would lose money up front by paying employees to process applications and investigate your credit worthiness. Direct lenders also have to investigate your credit worthiness, but they make their money in the short term by selling your mortgage. Therefore, it’s in their best interest to get this done quickly.

    When we bought our house, my wife worked for a bank. They offered a discount and reduced fees, but closing typically took 45 days. This is why most sellers prefer cash offers over bank loans. We went with a direct lender that offered a much lower interest rate and almost no fees. They also guaranteed a 10 closing process. One thing I knew to ask: who do you sell your mortgages to? Wells Fargo and Chase, was the answer. Both are reputable. However, banks are free to sell your mortgage, so it really matters little.

    I would highly recommend taking your preapproval letter and also get a Good Fairh Estimate of fees (GFE) and check out some local direct lenders.

    • Cash Flow Celt says:

      I actually got a quote from a credit union as well as a direct lender – I knew the lender would be cheaper, but decided to cost check anyway. It was a runaway. My lender (actually the other commenter, Becki, is who I was using and I can’t recommend her enough – should anyone else out there need a lender, I’ll happily give you her contact information) has a no closing cost option for a higher interest rate and that higher rate was still a full point below the credit union. And you’re right, the union was charging a $2500 flat fee plus other incidentals and the usual escrow fees; ridiculous.

      The program I’m hoping to use is also a direct lender that gets underwritten by the state of Florida to incentivize home buying. It’s an awesome program only eligible to first time buyers and you have to be purchasing in a specific area – Volusia County qualified. If for whatever reason I don’t get the program, I’m going to be using Becki.

  2. Becki says:

    Great insight to first time homebuying! Good luck with your search, I can’t wait to hear how it all turns out 🙂

    • Cash Flow Celt says:

      Thanks Becki! It’s been interesting to say the least; however, fun as well. It’s almost invigorating knowing you will purchase a piece of property. Hopefully your situation gets to where it needs to be so you too can purchase again.

  3. Catherine J Colangelo says:

    I’d like to hear more about the research process that led you to decide on the house in the first place. Location? Schools? Floor plan? Construction? How long did it take to decide that part and how confident are you that you know what you want? I’d also like to know what kind of credentials/experience/fees you were looking for in both the Realtor and the lender.

  4. Yetisaurus says:

    Congrats on the (almost) home purchase! It’s definitely a learning experience, and I hope yours goes well for you. Can’t wait to hear about the final process, and maybe see some photos!

    • Cash Flow Celt says:

      Thus far it hasn’t gone smoothly, but it hasn’t gotten too hairy yet. It’s a divorce settlement with one incredibly unhappy party involved. We’re still hopeful, and they just got a hearing calendared for both parties to try and resolve the matter – I’m not sure if it’s an arbitration or not though. Here’s hoping we hear back in about a week and a half!

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