Buying your first home—either as an investment or a primary residence—can be scary. It is a HUGE purchase, and no one wants to mess it up. But it’s entirely possible to eliminate some of the fear associated with the house-buying process if you’re properly prepared.
They also talk about different funding options, different purchasing strategies, and even different ways to hack your housing and live for free—or make big money when you sell.
If you’re in the market for your first property (or second or third) or you’re just starting to think about buying a house for yourself, this is an episode you cannot miss!
Scott: Welcome to the BiggerPockets Money Podcast Show, number 83, where Mindy and I talk about buying your first property.
How’s it going everybody? I am Scott, and I am here with my cohost, Ms. Mindy. How are you doing today, Mindy?
Mindy: Scott, I am doing great today. How are you doing?
Scott: I am doing fantastic. I’m very excited for today’s show because it’ll just be us getting to monologue about a property. Well, a topic around finance today. So [crosstalk 00:01:44]
Mindy: Yeah. You know I’m super excited. I love talking about money, but I really, really love talking about real estate. That’s been a passion of mine for about 25 years. I’ve been investing since you were in diapers, literally. And back then, I was fearless. I knew everything because when you’re 20-something-years-old, you totally know everything that you’re doing.
I jumped into live-in flipping with both feet. It started off I didn’t have a lot of money, so I bought an ugly property. Oh, I can put in new carpet. I can paint the walls. And then, it looks a billion percent better. And I’m really glad I got started back then because if I had waited to start investing now, I have figured out that I don’t know everything and there’s a lot more hesitation involved in investing, when you don’t know everything.
So for those of you who have not started investing when you were in your early 20s, when you knew everything, fear not. You can still start investing in real estate.
I spend a lot of time in the BiggerPockets forums as the community manager and I see so many people who are afraid to jump in and start investing because they’re scared to make a mistake. And this is a huge purchase. I totally get the hesitation. Today’s show is designed to help educate you about the general process. And conveniently enough, today, this morning, I saw a tweet from a friend who said, “Hey, does anybody know anything about buying property? It’s not really an investment. I just want to buy a house.”
So the information today is going to help you with the process of buying a home, the pre-process of buying a home. You still have to have a lender and know how much money you can afford to spend on the house, and figure out what you want in a house, what you don’t want in a house, et cetera, et cetera.
But before we dive into today’s show, let’s hear a note from today’s show sponsor.
Scott: One of the things we’re going to talk about today, before we get into the discussion about buying a house is the selection of an agent. And we believe that in a lot of cases, it’s a little difficult to find an agent who’s actually going to understand your needs as either an investor or someone looking to make a slow, patient, smart first home purchase decision that’s well within your means.
BiggerPockets is working on creating a directory of agents that can help you with exactly that. The idea is that an agent can sign up for the directory and then they can show off the amount of posts they have in the BiggerPockets forums, the amount of votes they’ve gotten from those posts, the number of investment or similar, or house hack, or whatever similar type deals that they’ve done with other BiggerPockets investors and the references that they’ve received from other BiggerPockets investors, ranked in order of that investor’s experience. So for example, someone who’s done 20 deals as an investor and worked with an agent, their reference and credentials will rank much more highly in the reviews for that agent than someone maybe who doesn’t have their profile picture or just joined yesterday and has never done a deal for obvious reasons.
So we think this is a much better way or can be a much better way to help you find a quality real estate agent to help you with your home selection process or next investment purchase. So if you haven’t already, go ahead and check out our agent director at BiggerPockets. You can go to biggerpockets.com and look in the nav bar. Go to Network, and then click Real Estate Agents. Or if you’re an agent, feel free to sign up for the directory. Yes, BiggerPockets will make money from this feature. Agents can pay a fee to be listed as a premium agent for the opportunity to show off the deals they’ve done and the references they have received at our biggerpockets.com/bppremium, where you can sign up for that account and begin showing off those credentials, and begin getting the chance to work with the investors and first-time home buyers on our platform.
Scott: I’ll just add in this service is completely free for anyone, whether you’re a BiggerPockets member or not. You don’t have to join BiggerPockets to begin looking at some of what the agents have to offer. But the agent, an agent does need to pay a fee in order to advertise their presence in our directory and listing marketplace. And that fee is $99 a month and comes with all the privileges of a pro membership as well. So if you’re an agent looking to work with investors, go ahead and sign up at biggerpockets.com/bppremium. But if you’re just looking for an agent, you can browse hundreds and hundreds of agents in most of the major metro areas in the country at biggerpockets.com/companies.
Mindy: Yeah. This is a great way for buyers to find agents who really understand investment properties. And if a property, like we talked about with the exit strategies of a property is a good investment, it’s going to be a good place to live too. And this is a great place for agents to find high-quality leads for people who are really, really on the path to purchasing their next property.
Scott: Love it. Big shout out to BiggerPockets Premium, one of our new things that we’re building here. Very exciting. With that, let’s go ahead and dive into buying your first home.
Oh, and by the way, guys, we’re… At the end of today’s episode, instead of doing the Famous Four, we’re going to give you a action checklist. A checklist of items that you can complete in order to buy your first home. These are things that I and Mindy would recommend that you undergo to increase the odds of making a great decision on your first home purchase.
Mindy: But we’ll still have a terrible joke.
Scott: Yes, always the terrible jokes.
Scott: I’ve actually got a continuation of the bell tower joke from last week.
Mindy: Oh, good. I am so pleased. I can’t wait for that. I am waiting with bated breath.
Okay. Scott, there are a lot of things that you need to do, before you start looking for a property and I was thinking of this, this weekend. You have to connect with a real estate agent. You have to get a feel for the market, knowing how much you can afford, getting pre-approved for a loan, having a down payment, yada, yada, yada.
What is the first step that you recommend someone takes once they decide they want to purchase a home? Either as an investment property, or as their primary residence, what does Scott say, number one thing you should do? Because there’s like 27 things that I think you should do, all tied for first place.
Scott: Well, and this may be a shock to our listeners, but I think that the first thing you need to do is you need to understand that regardless of whether you intend to live in the property or not, this is an investment and needs to be treated as an investment decision.
When you buy your first home, you are deploying… You’re likely making the largest financial decision of your life to this point. An even larger decision than going to college and taking on student loan debt, even if you maximize student loan debt at a private university. This is the biggest decision so far, and what it’s going to do is it’s going to likely eradicate or consume the cast majority of your liquidity, the cash on hand. And it’s going to put you in a position, where you have a long-term debt in the form of a mortgage payment, principal, interest, taxes, insurance, that’s going to be coming out, every single month thereafter.
So kind of just understanding what you want out of that decision and understanding that in today’s economy, most people are moving within seven years of purchasing their first home. So this is not that forever home for the vast majority of those of you who are listening, when you’re buying your first property. So understand those dynamics, and then use that and apply that information into making the best decision for you and your family long-term with this first home purchase.
Mindy: Okay. And now that you have taken all of that information and figure out that this isn’t my forever home, this is a maybe seven-year home, what’s the first thing you do? Do you figure out a city? Do you figure out which real estate agent you want to work with? Do you get funding? Do you start saving up for you… Hopefully, you’ve already saved up for your down payment. And like I said, there’s like 27 things you have to do that are all tied for first place after that. What’s second?
Scott: Well, I’ll say that the second step is to consider your exit options as a…
Scott: Right? So the second step is the exit options, right? What is going to happen if I know that I’m going to be here on average for seven years or less in this house? What am I going to do when I need to exit, right? So if I’m buying right now, when I think the market is high, am I going to be able to exit if the market is low, right? What does that mean?
In my opinion, a great first home purchase should at the very minimum have three possible exit options. One, you can continue living in there, happily, forever after. That’s an exit option. It’s just one of several. Two, you should be able to sell the property for more than you purchased it for, and recoup your initial equity investment and then some. And then, third, you should be able to keep the property as a cash-flowing rental.
And if you have all three of those as exit options, I think you’re going to have a much more rewarding long experience with your first home purchase that’s going to help you move toward financial freedom. Or just generally, give you more life options.
Mindy: So I just celebrated my sixth year in my current home, which is a milestone for me because I’ve never in my entire life lived in a house for more than five years. And because I’ve never lived in a house for more than five years, I am always considering how am I going to sell this property, even before I buy it? But what is that thing, where information bias or something, you already know, so you don’t even think about it because it’s just so ingrained in you? That is the best second step that that’s why I asked you, Scott, because you’re so smart.
That’s the best second step to consider because… And I was saying this to my friend, who was like, “What am I going to do?” My personal opinion, don’t ever buy on a busy street. This is the hottest real estate market that Colorado has ever seen, and there is a home in my town that has been on the market for something like three years. It is on the busiest street in town aside from the expressway and nobody wants this house. They started off, I think at 365 list price, and now it’s down to 299. It’s hideously ugly. It is really. It’s got these weird dormers on the top. It’s just hideously ugly and located on the busiest street in town, so nobody wants to buy this.
I don’t know if you’ve read Pet Sematary by Stephen King?
Scott: No, I haven’t.
Mindy: Okay. The premise, spoiler alert. It was written in like 1983 or something, so you should read it. It’s a weird movie. It’s a great book because Stephen King is amazing.
Basically, this family buys a house on a busy street and their cat gets killed, and then they bury it in the pet cemetery and the cat comes back to life because it’s a secret Indian burial ground or something. And then, the little boy runs across the road and he gets killed, so the dad buries him and he comes back and he’s evil because it’s a Stephen King book and there’s no shiny happy things.
But anyway, so living on a busy street is a bad choice. Families don’t buy on a busy street, and it is almost impossible to sell. So that is my number one tip, don’t buy on a busy street.
Scott: Yeah, I think that like among these other things, that’s going to limit your exit options, as we just discussed. I hope that they’re able to rent the place, if they’re not going to be able to sell it.
Mindy: I do too, but…
Scott: Or I hope they bought it at a huge discount.
Mindy: I… And I’m looking at it, thinking, gosh, it’s got a nice layout on the inside. It’s just horribly ugly on the outside. It’s got a nice yard. I wonder what they could do. Could I buy it as a rental? And I’m thinking to myself, you know what? I don’t think that it’s even a good rental. It is on such a busy street, you can’t get out of the driveway. There’s no backing out into this street. So considering all your exit options, if it’s not going to make a good rental, if it’s on a busy street, if it’s you’re not going to be able to live there forever anyway, don’t buy the house.
Scott: All right. I’ve got another tip.
Scott: All right. So after you’ve considered your exit options, don’t put yourself in a position of where an artificial sense of urgency is created in buying your first house. And what do I mean by this? Many of my friends and many a people I know are going into the home buying decision process, where they’re like my lease is ending in July 31st. I need to buy another property, and close on August 1st, so I can move in because of those types of things, right?
And this, I think is putting people in a position, where they feel the need to rush into. What, again, we just described as the biggest financial decision of their lives. And it’s such an avoidable set of circumstances to put yourself in those, right?
So let’s say that you’re considering buying a home and your lease is coming up at the end of July, what do you do if you’re thinking about buying a home? Well, you call up the landlord and you ask to move to month-to-month, and the landlord might rightfully say, “Yes, you could do that. I’m going to charge you an extra $100, $150 a month for the privilege of now having a short-term lease.” If that landlord won’t do it, somebody else will. Move into a hotel. I don’t care what it is. Don’t make a $300,000, $400,000, $500,000 decision in a rushed state of panic or haste, when you can solve and reduce that risk, reduce that sense of urgency for a mere hundreds of dollars a month. Probably much less, right?
Mindy: Yeah, that’s another excellent tip, Scott. You really are very smart. Yeah.
No, you don’t want to rush into this purchase. And if you have to sign another yearlong lease, maybe that’s not the best choice. Like you said, ask your landlord if he’ll go month-to-month. Ask him if you can sign a shorter term lease. You know, three months long. A lot of times, a landlord doesn’t want their property to come up for rent in October, November, December, especially if you’re in the northern states, where there’s snow. That’s not when there’s a lot of people moving. There are people moving every single month, but it’s a lot harder to fill those vacancies, especially during the holiday season.
So you can work something out with them, talk to them. They want the property rented. If you’ve been a good tenant, they’re going to know that you are better than nothing. Better than the unknown, so they will try to work with you. You just have to ask. They can’t read your mind.
Scott: Yes. I just feel like for whatever reason, this is a frustrating thing to me, when people are talking about buying their first place because they’re just like, “Yeah. Well, my lease is going to end, so I have to make a decision by this date.” I’m like you know you’re going to make this decision that is going to have major consequences for your whole life in a one-month time period because you didn’t set up a situation where you can have some flexibility around that decision. I think it just drastically increases your odds of making a quality decision, when buying your first home, if you’re not doing it from a state of like, oh, I have a deadline, I’ve got to buy it by this time.
Mindy: And now, let’s talk about people who are selling a property to buy a new property. This is also kind of a crunch time. You have to coordinate a lot of things. I’m a real estate agent, as you are too, and I have a client who is not selling his current property, but buying a new property. So that was a lot easier for him to figure out the transition. But when you’re selling your current property and buying a new property, there’s a lot of give and take. We currently are in a super-hot market, so houses sell almost instantly, over asking price, no contingencies, yada, yada, yada.
And what I’m seeing now is a lot of sellers will say, “I need to find a new house. I am going to rent back from you until I find my new house.” And that’s another great option. It does knock out some buyers who need immediate occupancy, but having that in your contract really makes the transition a lot smoother as well.
Scott: Yeah, absolutely. I think that’s where it comes back down to the exit options, right? So where I could see this being a real problem is for somebody who maybe doesn’t have very much liquidity and most of their wealth is in their home equity or their 401(k), or something like that. And then, when they go to sell their property, the first, their home, which has most of their equity, they can’t really buy the next place until they have cashed in and received that in the form of a check and that’s sitting in their bank account.
If you’ve put yourself in that position, then that’s going to limit your ability to get a great deal on the next. It’s going to cost you in some manner on either the sell side in this instance, where [inaudible 00:16:17] back because some buyers aren’t going to want to do that, and/or it’s going to cost you on the buy side because you’re going to be, again, forced to make a rushed hasty decision and maybe overpay.
Mindy: Yeah, I like that comment. It hinders your ability to get a great deal.
Scott: Mm-hmm (affirmative).
Mindy: As a buyer, your ability to make the transaction easy for the seller is…
I like that you said get a great deal. Your ability as a buyer to make the transaction as easy as possible for the seller, greatly increases your chances of getting a great deal. If you have all these contingencies, oh, first I have to sell my house and I have to get qualified for a mortgage, and it has to appraise, and it has to, and, and, and. The seller is going to look at that offer and say, “You know what? I’ve got another offer for $1,000 less that doesn’t have any of this garbage in it.”
So I have to qualify for a loan. Most people have to qualify for a loan, that’s definitely not a deal-breaker for most home purchases. But I have to sell my house in this market, where everything is going for top-dollar, a lot of sellers aren’t even going to consider your offer that says I have to sell my house too.
Scott: Mm-hmm (affirmative). All right. Should we go on to another tip?
Mindy: Yes. I am going to bring up this one now. Don’t spend every dime you have on your down payment.
Scott: Love it. And I’ll throw in there that don’t use the entire amount your mortgage broker pre-qualifies you for on your loan, right? Because those often go hand-in-hand.
Mindy: Yes. Yes, they do. You can… I like to use three to four times your annual salary as the amount of money you can qualify for. You make $100,000. You can qualify for between $300,000 and $400,000. Of course, if you have massive student loan debt, and a car payment, and credit card debt, and all this other stuff, you’re going to be lower. And if you don’t have any of that and a huge down payment, you’re going to be higher. But generally, it’s three to four times your salary and the mortgage broker makes the most money when you get the biggest loan.
So when you want to have… You should figure out what payment you are comfortable with. I am comfortable with $1,000 a month and that equates to a $200,000 purchase, or whatever your numbers are. Then, go with that. Use those numbers. But I want to say be realistic, so hand-in-hand with how much can you afford is what is the market price of properties in general?
We had a post in the forums on biggerpockets.com/forums, where the person said, “I want to move to Boulder, Colorado, and I am looking for a four-plex for $100,000.” And for anybody who is not familiar with the BOUlder, Colorado market, oh, okay, maybe that’s not realistic, 50 years ago. Boulder is an extremely expensive city and I think four-plexes are going for what, like two or $3 million?
Scott: [crosstalk 00:19:47] somewhere in that ballpark, yeah.
Mindy: They’re really, really expensive in Boulder. Know what you can afford and know what the prices cost. Because if it’s not realistic for you to find a four-plex for $100,000 in City A, maybe City B or City C will be more affordable or more realistic, and it’s much better to live in a town, live in City B and be able to afford your property than live in City A and scrape by every month.
Scott: Yeah. I think that’s another a part of this is going to be understanding what that can get you because I think it’s no surprise that the two of us are going to be recommending that you do this well within your means, which means not putting every last penny towards a down payment and qualifying for the largest mortgage that you can qualify for. Now, your mortgage broker and your real estate agent are heavily incentivized for you to do exactly that.
So your mortgage broker is going to tell you the maximum you can qualify for and your broker is going to show you what that would get you in terms of those properties, and there’s going to be a dramatic difference. Maybe not dramatic, but there’s going to be a difference between the maximum property that you can qualify for and the property that gives you exit options and real chance to continue moving towards this thing we call financial freedom, right?
I was reading a book, I think it was The Millionaire Next Door, and it got a quote around here along the lines of this. And it’s something like, of course, the mortgage broker is going to tell you you can qualify for $300,000, $400,000 for a mortgage, but that’s like asking a fox to estimate the number of chickens in your coop. And I think that’s like a good way to kind of summarize that, right? It’s without kind of using our words. Those incentives are in place and you need to understand that that is the incentive of your agent, or your mortgage broker is to put you into a house that stretches you to the limits of your purchasing power.
Mindy: Yeah. And I don’t know that it necessarily they’re looking to stretch your limits, but you are the one who is making the purchase, so you need to be comfortable with your mortgage payment. My husband and I bought our house in 2013, when the market was still pretty low. We got a house that we could afford, even if we… Well, I wasn’t working at the time, but if he lost his job, one of us could go get a job at McDonald’s and still afford the payments. And now, even more so, now that what’s the minimum wage? Like $15 or something?
And now, our house has appreciated at least to probably close to three times what we paid for it, which is awesome. But then, now when we sell this house and go to buy a house, we’re going to be making a huge down payment and purchasing at a higher price because you can’t get houses for what we paid for it anymore. Just reiterating that you don’t have to pay every dime.
Scott: Well, let’s get into that. Let’s talk about because I brought it up, let’s talk about how real estate agents and mortgage brokers are incentivized because I think that will be helpful information. Those are the two places where I think many home buyers are getting basically all of their information about making their first decision. And so, I think it’s important to understand the dynamics and how those folks make money.
Mindy: Okay. So a real estate agent is incentivized by a percentage of the purchase price in most cases. Of course, everything is negotiable. There are some agents, who work for flat fees. But for the most part, when you buy or sell a property, your real estate agent is getting compensated between 2.5% and 3% of the purchase price. So when they help you buy a $100,000 house, they’re getting $2,500 to $3,000. But when they help you buy a $300,000 house, they’re now getting like up to $9,000 to help you buy that same house. As a real estate agent with another job, I’ll help you buy whatever house you want. But as a real estate agent with no other job, I want to work with clients who are spending the higher dollars. Because then for basically the same amount of work, I’m getting a lot more money.
Scott: So and let’s dive into this, another factor that’s going to be on the agent’s mind, when thinking about which clients to represent is not only going to be who is buying the biggest and most expensive properties, but who is going into that purchase process with a high degree of urgency, right? As we discussed earlier, somebody who, hey, I’m buying an agent. I’ve got $50,000. I have a prequalification for a loan up to $400,000. Therefore, my purchasing power is $450,000. I need to buy a house by the time my lease expires in 60 days. Can you help me? Right?
Mindy: Yes, I can. Let me clear my calendar.
Scott: That’s when, per The Millionaire Next Door, asking a fox to estimate the number of chickens in your coop, right? Like that is going to be the goldmine for a real estate agent. They know they have a very high probability of getting your business and doing it get quickly. And so, what defines a top real estate agent in a city?
Mindy: The amount of… Is it the number of closings, or the total dollar amount? I think it’s the total dollar amount of sales over the last X period of time.
Scott: Yes, so the top. If you look around and like who is the top agent in Denver, right? Not always, but most of the time, people are going to refer you to the person who has done the largest number of total transactions at the highest dollar amount. It’s going to be a combination of those two things. Usually, the total dollar amount.
So if someone’s done $60 million in sales, that would be a very top agent in a market, right? That would mean that they’ve closed $60 million worth of homes. That’s probably what, like every home is $500,000. You’re looking at…
Scott: 120 closings in that year with them and their team. So is that the agent that you want to work with? Well, I don’t know. That agent is a master at finding folks who are going to purchase a nice home in a nice neighborhood at the upper limits of their purchasing power, and have a very specific timeline for doing so, right? And if you come into that process with… And I’m not saying this is the case, but just understand that this may be you may find a different agent is suitable to your purposes. If you come in saying I’m going to buy a house at some point in the next six to 12 months, I’m in no hurry. I’m looking for a great deal. I’m going to buy well within my means, and buy a property that has multiple exit options, you might have a different discussion with your agent and decide on a different agent than the “top agent” in your market.
Mindy: I agree. I want as a buyer, I want to purchase on my own timeline. I want to choose the property that I like best, not the one that my agent is pushing me towards. I want to take my time and do my research. And mostly, I don’t want to be pushed into something. Because when you get yourself pushed into something, chances are good that’s not the best thing for you.
Scott: Mm-hmm (affirmative).
Mindy: Okay. Let’s talk more about real estate agents in a little bit. But first, I want to talk about funding, and let’s talk about where you’re getting your loan. Traditionally, if you are buying a property to live in, you are getting a loan from a financial institution, ultimately. But there’s different ways to go about that. You can call up Bank of America, Citigroup, Chase, whatever, and say, “Hey, can I have a mortgage?” And they’ll say, “Sure. Here’s our rates.” Or you could call up a mortgage broker, somebody who will take all of your information and then shop around to all the lenders that they have relationships with and find you the best price, the best closing costs, the best interest rate, the best everything for your specific situation.
I have an incredibly high credit score because I pay my bills on time. For somebody who maybe has more debt, or maybe had a a bout of not paying their bills on time, they may have a lower credit score. They may not get the best rate that I will get because I have a better credit score. But the mortgage broker will take that and say, “Oh, okay. So I know that Bank of America is best for people with great credit scores, and Chase is better for people who have this level of credit score, or this much debt, or whatever the situation is.” They know. They work with all these people, and they shop around for the best rate.
I recommend going to a mortgage broker. I recommend going to your local credit union. I recommend contacting a lot of different lenders in general in a very short time span, so you can find your own best rate
So it used to be that if you went and got a… You contacted a lender or a mortgage broker and said, “Hey, I want to get a loan.” They would pull your credit. They want to know what kind of credit score you have. They would pull what’s called a hard inquiry, which dings your credit score like three or five points. It’s not a huge deal. But when you have a very low credit score, it actually harms you.
What the credit scoring agency has done in recent years is changed that so that every credit pull from a mortgage broker or a lender in a very short amount of time, like one or two weeks is considered one pull. So you can go and shop around your own self plus go to mortgage brokers and have them shop you around as well, and you’re only getting one hard inquiry on this. It’s considered shopping for the best rate instead of trying to get a bunch of loans at the same time.
So I recommend doing that. Sit down. Decide today I’m going to contact 25 people. I want a loan. I want this much, or here’s my credit score. Here’s my income. How much can you approve me for? What is your rate? What is your closing costs? All that stuff. And then, you can sit down and compare apples to apples.
Scott: I love it. I think this is a great approach to doing this and there’s no reason not to do all the shopping and save yourself some money. Some money that can compound pretty dramatically over the long term.
Mindy: Oh, right.
Scott: So I’ve got some questions for you. Do you recommend in that process… So one of the things that I’m sure people who are looking to buy their first home will be thinking about is should I get an adjustable or fixed-rate mortgage?
Mindy: Ooh, this is a good question. I don’t have a crystal ball. I’m not on the Federal Reserve, so I can’t say that they’re going to raise rates in a week, or three months, or next year, or whatever. We are at historically low rates. I think they’re like 4.5%-ish. Don’t quite me. This changes all the time. But right now on the day that we’re recording, they hover around 4.5%.
My first mortgage a couple of years ago, I got a 7% rate and thought that I was the best negotiator on the planet. I thought that was just the best deal ever. And now, they’re down to 4.5%. They actually dipped down almost to two, and they’ve popped back up a little bit. But historically, these are some of the lowest rates ever.
If you’re going to be in that property for more than three or five years, I would say get a fixed-rate loan. A fixed-rate loan means that your interest rate will not change. An adjustable rate loan means that your interest rate will change. And you’ve heard called an ARM, adjustable rate mortgage, or a five-year ARM, a seven-year ARM. The number before the word “ARM” indicates how many years your rate is fixed. So you buy a property with a seven-year ARM. Traditionally, an ARM loan is going to have a slightly lower initial rate than the going rate because it could go up, it could go down. It’s probably going to go up.
So if you’re not going to be there for seven years, you could look at a seven-year ARM and say, okay, that might work for me. The issue comes when you are there for seven years and then your rate changes. Now, your rate could go down. I believe it can only go up or down, up to two percentage points or down two percentage points per year. But there’s always the possibility that it goes up and it’s more of a probability that it goes up.
So I personally only get fixed-rate loans, even though, like I said, I’ve never lived in a house for more than six years now. It just… The uncertainty really gives me the heebie-jeebies
Scott: Yeah. So on that note, I also personally have only used fixed-rate mortgages and taken the higher interest rate rather than the lower ARM with the longer term risk that it could rise.
On my first property, that was a mistake as it turns out because like the average person, I was not in that property for more than seven years. In fact, I was only in there for two years, and I should’ve known going into this that I was likely to not be in that property for more than seven years. And in that case, it might’ve been wise for me looking back to use an adjustable rate mortgage, save myself some money.
Give my shout out to my dad. He recommended that I do that. I did not listen to him and went my own way, and it cost me probably a couple thousand bucks that I could’ve saved over the course of a year-and-a-half, two years.
But anyways, that is one of the trade-offs I think that goes along with this decision. So understand if you’re going to refinance your mortgage, you don’t even have to sell your property. You might just move out and decide you want to refinance to get out of, for example, mortgage insurance, to save you some money. So on that note, since I just used this term.
Mindy, can you kind of let us know what the term “Mortgage insurance” means, and where you might incur that?
Mindy: You will incur mortgage insurance on any mortgage that you take out, where you put down less than 20% of the purchase price. There’s two different kinds of mortgage insurance. There’s… Well, okay. So there’s PMI. Private mortgage insurance. This comes with your conventional loan and you can have that removed once you hit the 20% equity, 20% of the purchase price, once you’ve paid down so that you have the equivalent of 20% down. You can request it be removed when you hit 20% and they are required to remove it when you hit to 22%.
Now, on an FHA loan, it’s called MIP, or mortgage insurance premium. You pay an upfront, and then there’s also a monthly and that sticks with the life of the loan. It doesn’t matter how much you get to the down payment, you will always have MIP until you refinance or pay off that loan.
Scott: So if I’m buying a property with an FHA or low down payment conventional loan, and this in my experience, I’m thinking what do I need to do to rapidly get to a position where I can remove that mortgage insurance premium? To give you some context on how significant this insurance premium could be, when I purchased my first property, it was a duplex for $240,000. I put down $12,000.
Mindy is laughing because that price is absurdly low. Current property rates today. So that was a winner, yes. But I put down $12,000, or 5%, and I assumed a mortgage of $1,550, including my principal, interest, taxes, insurance. And because it was an FHA loan, MIP, mortgage insurance premium. That mortgage insurance premium was $250 per month. That’s a huge chunk of that overall monthly payment.
So the incentive for me to buy a property that I could rehab and improve, and in an area that was appreciating, such that I could get to that 20-22%, it was very important to me because that was a big, big milestone in my journey because I removed such a massive amount of monthly cashflow out of my life.
Mindy: Yes. So when presented with the two options, hey, FHA, the mortgage insurance stays for the life of the loan, and conventional, the mortgage insurance can be taken away without refinancing. Why would anybody get an FHA loan versus the conventional? Well, it’s because FHA loans come with more relaxed qualifications. They will go down to, I think, a 580 credit score? Whereas, a conventional will not.
You can have some outstanding debt and some weird stuff in your credit history, and still qualify for an FHA loan. Whereas, a conventional loan, they really, really, really want qualified people borrowing for them. So it’s a little more… I don’t want to say it’s a little more difficult, but you have to have better credit in order to qualify for a conventional and FHA will still allow you to get into home ownership.
Now, what was your rent prior to buying this property, and then did you say your mortgage was $1,000 a month?
Scott: It was $1,550.
Mindy: Oh, okay. 1,550, that makes a lot more sense. So what was your rent before you bought that property?
Scott: I was paying $600 plus utilities for my rent in the previous apartment.
Mindy: And was that a whole apartment, all to yourself?
Scott: That was half of an apartment. A two-bed, I split with a roommate.
Mindy: Okay. So half an apartment cost you $600 a month. A whole apartment then would be $1,200 a month. And now, for a two-unit building, you’re paying $1,500 a month. Hey, Scott. What did you do with the other side of that duplex?
Scott: Rented it out and I continued to have a roommate in my side.
Mindy: Okay. So how much did you rent out the other half of that duplex for?
Scott: 1,150. Well, 1,100 plus $50 in cat rent.
Mindy: So almost… What is that? Like 80% of your mortgage is now covered by one person next door?
Scott: That’s right.
Mindy: And then, what did you rent out your other bedroom for?
Mindy: So your entire mortgage, you went from paying $600 to paying zero dollars.
Scott: Yeah. I mean, I certainly probably didn’t. I probably came out close to zero or maybe spent a little bit after the utilities and maintenance on an ongoing basis for that property, but that was that massive forward versus renting from a cash out my pocket every month perspective. And this, of course, is one way to buy the house. This was an extreme, I think… Not extreme, but fairly far along on the spectrum of optimizing my housing for my investment portfolio decision, right? Because I bought a duplex that needed a lot of work in an up-and-coming part of town in order to make this situation work.
These numbers would probably be… You have to adjust downward to get a more luxury existence for the first couple years, if you were to kind of repeat that journey. But this could be a great option for someone right out of college, and then another good option might be a slightly more luxurious duplex in a slightly better part of town, where maybe you’re paying something and not breaking even, but still doing fairly well.
Mindy: You know, I’m glad you brought that up. Okay. Scott is a big guy. He’s like… What are you? 6′, 6’1″, 6’2″?
Scott: Yeah, just about 6’1″.
Mindy: Okay. He is a big… He played rugby. He’s got big… Show them your muscles. Scott’s got big muscles. Yeah. Woo! Oh, he’s got his shirt on, that you can’t see muscles.
And this is important. I’m not trying to auction off Scott, but I am trying to say that this is a young fit guy. Scott could take you in a fight, probably. He is not going to, he’s not a fighter. Scott rolls his eyes. You should watch this on the video.
But Scott could walk in this neighborhood at night and not feel afraid. I would not feel comfortable walking in this neighborhood at the time that you purchased it because it was up and coming, had not yet come up and I am not as big as Scott, despite that picture that we have on our podcast. I was standing on a stepstool because I am not 6’1″ or anything close to it, and I don’t have big muscles. So that is yet another tool in Scott’s arsenal is that he could buy in a neighborhood that wasn’t so amazing because he looked at the map of Denver and he’s like, oh, the path of progress is going to catch up to this neighborhood. I’m willing to gamble that it’s going to get here.
Scott: Yeah. There certainly were some advantages to my life circumstances that made this a practical choice for me. One, yes, I’m a fairly big guy. Two, I don’t have a very large clothing or accessories, or luxury budget. So me bicycling around in a poncho with my backpack full of my lunch and those types of things. I’m not a very desirable target for a robber [crosstalk 00:43:26]
Scott: [inaudible 00:43:27] that are going around. So yes, that said, the area is fine. It is right near an elementary school. There’s a lot of good things about the area. But yes, it might not have been an area, where a young woman would have been comfortable walking around at night.
Mindy: Yeah. So you take advantage of the circumstances that life throws at you, and life threw at you a rugby-playing background and big tall muscles.
Scott: And by the way, just to throw this out there. Going into that purchase, I set myself up so I had month-to-month rent. I found an agent and told that agent what I wanted, six months before I ever bought the property. I was pre-qualified for a mortgage going into that purchase. So all these things that we just talked about, I was looking for a property that I could turn into a rental after I moved out. I knew this wasn’t going to be a forever home. So these are all different things that we just discussed that I was going in with, that are not just applicable to your first kind of crappy duplex in an up and coming part of town but to, I think, any first home purchase or next home purchase.
Mindy: You just used a word that we haven’t discussed yet. You said, “I was pre-qualified.” What does that mean?
Scott: So that means that I talked to a lender and basically told them the high level details about my financial situation, my credit score based on Credit Karma. My income, my savings, all those different types of things. And they kind of gave me a ballpark, remember the fox estimating the chickens of the total highest possible dollar amount that I could qualify for, for a mortgage based on that information.
Mindy: Okay. Now, you just said another thing. Credit score on Credit Karma. I want to just let everybody know that Credit Karma is a great place. Credit Karma, Credit Sesame, great places to go and check your credit score. It’s going to be ish. My credit score on Credit Karma or Credit Sesame is 814-ish. Now, when I go to a lender, they might pull my credit score and it’s only 780. They have their own scoring mechanism. Don’t take the Credit Karma or Credit Sesame score as set in stone, this is what the lender is going to see, but it’s a great way to estimate.
The best mortgage rates go to people with a 740? 760 credit score?
Scott: [crosstalk 00:46:03] it was 720.
Mindy: 720, 740 credit score. So if you go to Credit Karma and you’ve got a 500 credit score, the bank isn’t going to credit score you at 720. That’s a great estimation of what your credit score is. And frankly, if you have a 500 credit score, you need to concentrate on increasing your credit score because the… Because the fact of the matter is you aren’t going to qualify, or no, no, no, no.
What it comes down to is that the banks aren’t going to give you money, unless they like what your credit score says. So if you want to buy a house, unless you’re going to save up for cash, you need to have a good credit score.
Scott: Yep. [crosstalk 00:46:51] What’s the difference between prequalification and preapproval?
Mindy: So prequalification, I always screw these up too. Prequalification means the bank, you call up the bank and you say, “Hey, I want to get a loan.” And they’re like, “How much money do you make?” You’re like, “I make $1,000 a week.” And they’re like, “Great, you can get a $100,000 loan.” They haven’t run your credit score. They haven’t verified your income. They haven’t done any of that stuff. They’re taking for face value. It’s a great way to get the information that you need, but it doesn’t mean anything. Preapproval means they have run your credit score, they have verified your income, they have verified that you have a job. They’ve verified your outstanding credit and debt, and all of that. And based on that information, they’re giving you a much more realistic dollar amount that you can qualify for.
Neither one of them… I think it’s really important to note that neither one of these is a guarantee that you’re going to get a loan. When you’re going through the loan process, you find the house. You go. Blah, blah, blah. You’re about ready to close. They’re going to call up your employer. I think it’s within the week before you close, just to make sure that you haven’t lost your job, got demoted, whatever.
I have a client right now, I’m helping him buy a house and he actually moved in early with the seller’s permission. And I’m like, “Now, don’t go losing your job, or you’re going to have to leave the house,” because the bank will still verify credit right before closing. So that’s very important.
Scott: Yeah. In my mind, and I think in the seller’s mind, and the reason why you would do these things, the prequalification is literally just a phone call, right?
Scott: You could hop on the phone and in five minutes, tell a lender what they need to know to send you a prequalification letter. It’s a fairly informal process, right? Just on that note, if you’re looking for a first step towards the home-buying process, that’s a good one. Just pick any mortgage broker and ask them about that. Ask them for a prequalification on a phone screen. You’re not giving away the farm. There’s no hard credit pull. There’s really no consequences to doing this, yet it’s a kind of huge psychological step for a lot of people to overcome in the process towards buying their first property.
The preapproval process is basically almost as intense as getting the loan itself. You have to go through and get all the tax returns, and the documents, and your pay stubs, and they pull a credit report and all that kind of stuff. So while it’s not a guarantee, like Mindy said, it really demonstrates a significant step towards actually having the means to purchase a property. And so, that can go a long way in a competitive market. For example, when we’re submitting bids and a seller’s got two $300,000 offers, one’s got a prequalification, one’s got a preapproval. Well, the one with the preapproval is probably more likely to close. And so, that’s why a lot of folks will go and get that preapproval before they even buy the house.
Mindy: Yes. So I am going to give you a little bit more about that. So the prequalification, I think that’s an excellent first step. Call up. When you’ve decided I’m ready, I’m going to buy a house, call up a lender. It can be your local credit union. It could be where you bank, whatever. Just call up and say, “I would like to get a prequalification letter.” Give them your information. They don’t pull the credit, like Scott said.
Then, when you get your total that they have pre-qualified you for, then you can call a real estate agent and ask them, “Can you send me all the listings in this neighborhood with this many beds, or this many baths, up to this price?” It’s a very easy process to do that. They’ll send you the list, and you can go through and you’re like, oh wow, there is nothing in my price range, or there’s 10,000 things in my price range. Then, you can start to get a feel for how nitpicky you can be about what your property looks like, how many properties are in your market. If there’s nothing in your price range, then you need to take a hard look at what you’re asking for. But that’s a great way to just start the process. I love that, Scott.
Scott: Mm-hmm (affirmative). Yeah, so on that note, let’s talk about the nitty-gritty of like we’ve got pre-qualified. We know what we’re looking for. We found an agent who’s willing to be patient with us, and we set ourselves up for a long-term decision rather than having to make a decision by July 31st, 2000 whatever because that’s when my lease ends, right?
So we’re in this position. What does that process look like? Do we want to talk about that for a little bit?
Mindy: I would love to. Okay. So let’s talk about finding a real estate agent, really quick.
Scott: Mm-hmm (affirmative).
Mindy: In my city, there are probably four or five agents whose name I see on a regular basis. Any time I drive past a house, there’s a sign in the yard. That’s an 8z property. I know Krista Koth is listing that. Oh, look. I’m right. That’s a RE/MAX property, that’s Steve Condon. Oh, look. I’m right. Those are agents that are selling lots of properties. When you’re selling a lot of properties in a small area, that means that you know that market. You know what houses are selling for. You know what houses are being list at. You know what houses are coming up on the market because you’ve already been to that house and done a listing appointment. They’re a great place to start. However, just randomly driving by a sign and taking a name off the sign isn’t always the best option for you.
So talk to people that you know in the area and ask them who they used. “Oh, I used Bob Jones, and he was horrible. He never called me back.” Great. I don’t want to use Bob Jones. Or “I used Bob Jones, and he called me every day with listings, and ‘Hey, do you want to go see these?”, and that’s fantastic. It depends on what you want in an agent, but know what you want. Do you want somebody who answers the phone, when you call them? Then, make sure that they answer the phone, when you call them the first time.
That’s a huge pet peeve of mine is agents who don’t answer the phone. Everybody has cell phones now. Everybody has caller ID. They can get your phone number. They don’t need you to leave a message, so they can call you back right away instantly. That drives me nuts.
So find an agent, and then interview that agent. Just because your friend said Bob Jones was great, doesn’t mean that Bob Jones is going to be great for you. If you’re not comfortable with that agent, there’s a thousand other agents that can help you out just as well. Another thing that I think is really, really important when you’re finding an agent is somebody who communicates the way you want to be communicated with. A lot of younger agents prefer to send text messages. A lot of older agents will prefer to talk on the phone, and I’m totally being stereotypical in generalities. Speaking in generalities. But if you want to talk on the phone and your agent only wants to send you text messages, maybe that’s not the best agent for you. So figure out how they communicate and go with the people that communicate the way you want to get your information.
Scott, how do you find an agent?
Scott: So like you, I am a licensed real estate broker.
Mindy: But you haven’t always been.
Scott: I don’t call myself an agent so much because I don’t really represent clients. There’s a lot of technicalities in that statement. Let’s just move away from that.
I have used agents on each of my purchases, even though I am a licensed broker. And why have I done that? Well, because I’ll kind of tell people exactly what I’m looking for. And typically, they’ll bring me deals. Sometimes they’re on market. Sometimes I could’ve found them anyways. But the fact that they alerted me to them and I clearly would’ve missed it without their assistance, means that I’ll use them. And sometimes the deals are off-market, which as an investor, which means that I’m getting access to something I wouldn’t have gotten without the agent’s help.
I think the process by which I find a property kind of backs me into how I end up using a real estate agent. So when I’m looking for a property and I think this will apply whenever I buy that forever home, that home I will stay in for an average of seven years, I will probably go through this same process for that too. But when I look at the listings in Denver, Colorado, and perhaps listeners can empathize with this, Colorado and Denver specifically are very competitive markets for buyers. There’s very few listings and there’s very little inventory. And properties that are good deals that make sense for the criteria that I’m looking for and that many homeowners are looking for tend to go very quickly. They get multiple offers within a very short window of time and they tend to go for at or above asking price. Not always, but often that’s the case.
So that can discourage a lot of competition and it can force a lot of people to move up their price point. I get around that by going through a process, where I look at every property that has sold. Not the ones that are listed. If you look at the listings, the currently for sale properties, I find that a lot of people get discouraged and a lot of my competition leaves before they even ever begin entering the game.
But if you look at everything that’s sold, actually sold in the last 180 days, you will find, I believe, a lot of properties that might make sense. That might give you that, hey, this is a great place to live. This a great place that there’s good schools. There’s whatever the criteria I’m looking for are, and I’ve got those three exit options that would make sense as a rental property, if I were to move out. There’s good prospects for long-term appreciation or ways for me to add value to the property in ways that are within my means, or I would be happy living there indefinitely that have, again, sold in the last 180 days.
And from there, if I’ve got five to 10, I know that I’ve got a very realistic chance of getting another similar property, whenever it comes on the market. So it’s kind of a different way of shopping for properties because I’m literally driving past properties that have already sold, and then waiting for the next similar property to hit the market, so that I can react instantly and have a chance to get that deal.
Mindy: That’s a very interesting way to look at that. I have a friend/client who is looking for an investment property in my town, and I have only looked at things that are currently for sale but that have a long market time.
Scott: Mm-hmm (affirmative).
Mindy: That’s another way to get a good deal is sometimes a property will come on the market and it for some reason doesn’t sell. Typically, that’s because it’s overpriced, so it’ll sit on the market. And in a market so hot as ours, when a market sits on the market, it makes it look like there is something wrong with the property. The listing becomes stale.
So as it sits for a long time, they start to drop the price, and they start to drop the price more, and they drop the price more. And then, like I said with this hideous house on the big main street, they’ve dropped the price something like $65,000, and it still isn’t selling because it’s on the busy street. It’s ugly as sin, and it’s been sitting there forever. It was on the market last year and nobody bought it, so they took it off and then put it back on again, seemingly not doing any work to it.
So that’s another way to find a deal is to ask your agent, once you’ve decided on an agent, ask them for listings that are more than 30 days old. This house has been sitting there for a really long time.
Scott: I love that tip. Yeah.
Mindy: And hand-in-hand with the houses that have been sitting for a long time and look like there’s something wrong with it, get yourself a home inspector. Talk to people who are in your market, who have bought recently, who have a great experience with their home inspector, who will say, “Oh, I used this guy and we canceled the deal because he found these issues.” You don’t want somebody who’s, “Oh, it was great and then we discovered there was something wrong after we closed.” That’s not the home inspector you want to use
Scott: Yes. So let’s go into that, right? So we’ve found the property and we have a realistic understanding that there is no wonderful property sitting atop the hill on the quiet street that you’re going to get for $100,000 below market value because nobody sells a perfect, wonderful, pristine forever home at a big discount. If you’re going to get a big discount on your property, you understand going in that you’re solving some huge problem. Some important problem that whatever it’s the yard, the foundation, the roof, the ugly color, the busy street. Some sort of problem is going to be solved if you’re going to get a great deal in almost every case. Not always, but almost every case, right?
So with that understanding, let’s say I go into a property, what are some things that your typical buyers or the many first-home buyers should be comfortable accepting as challenges with their first home investment? And what are some things that inspection should scare them away from property?
Mindy: Okay. So dirty is great. I am helping a client buy a house that is, I think, 30,000 below what… It’s in a cookie-cutter subdivision. So other houses with this exact same layout are selling for $30,000 more because this house was filthy. Like I bet people opened the door and then closed it again, and walked away. But they spent a weekend cleaning it with the seller’s permission. The seller has moved on.
They spent a weekend cleaning this property and it looks perfect. It’s just dirty. Dirt is not anything to be afraid of. There were some disgusting stains on the walls. Gloves and bleach. And look at that, it’s all perfect, and they were going to paint it anyway, so what does it matter if they bleached off a little bit of the paint? There’s just… Dirty is nothing.
Ugly paint. This house conveniently had this mustard yellow wall. Nobody wants a mustard yellow wall, except whoever painted that one. But you know how easy it is to paint? It’s like a gallon of paint. The good paint at Home Depot is like $35 or $45 a gallon. So let’s call it $50. $50 and three hours, and now that yellow is gone, or it will be once they move in.
Let’s see. When you walk into a house and you’re like, oh, the seller has cats. That can be an easy correction and that can be a very difficult correction. Cats spray. Typically, they don’t spray in one spot. They spray in a lot of spots. They spray the wall, so it soaks into the drywall, which is a porous surface. They spray the carpet, which soaks into the subfloor, which needs to be replaced or covered up, or whatever. So cats can be an issue, but you can also… I mean, if you’re getting a smoking hot deal, you can replace drywall or cover it up with there’s a paint called KILZ on the market. K-I-L-Z that kind of encapsulates all the stink.
Something I think is great is an ugly kitchen. It doesn’t take a lot of money to replace a kitchen. You can go to Ikea and get cabinets for super cheap. You can go to Home Depot and get like… They’re called off-the-shelf cabinets, which I have in my house, but they still look really nice. I don’t like oak. Oak is falling out of favor as far as cabinet materials, so there’s a lot of oak cabinet kitchens that are sitting on the market because nobody wants that kitchen. Well, tear it out and put in a new one. I mean, hanging cabinets is not that hard.
Ugly flooring. Again, you could just rip that out. Oh, there’s gross old carpet. Well, rip that out and have somebody install new carpet, or put in hardwood floors, or things you can’t fix are weird layouts, odd locations. Like you don’t want to have the house next to the gas station. You don’t want to have the house on the busy street. You don’t want to have the house that is next to the train tracks.
In my town, there is actually a street where it’s there’s the east side of the street, a train track running through the middle of the street, and then the west side of the street. I’m like I would never live on that street ever.
What is the old adage? Location, location, location? That you can’t move the location, so make sure the location isn’t offensive.
Scott: What about some of the scary ones that really were frightening to me, after thinking back to my first purchase, the roof and the foundation. How do you make sure you’re avoiding a problem with those two things? Because those are the things that really can blow out people’s budgets, right? Or force them to spend a lot of money [crosstalk 01:05:05]
Mindy: Yes. Yes. So your home inspector should be able to tell you, “This roof looks questionable.” They go into the attic and they look underneath, what is that called? The rafters? Like the whatever board that is. They can see past evidence of stains, water stains, which means that there used to be a leak or there currently is a leak. Let’s call a roof $5,000 to $10,000. It’s not that scary to me but you get a quality roofer out there to come and rip the whole shingles off, look at the underlayment and make sure that’s all good and the boards, and all of that. Fix anything that’s going wrong, and then put a new roof on. It’s not a huge deal. It’s a pretty easy fix. It just takes money.
Foundation repairs are more scary. A cracked foundation can be a little problem or it could be a huge problem, so you definitely want to get a structural engineer out there if your home inspection turns up foundation issues. Something to be careful about when you’re going through a house that has a basement or a crawlspace and you’re in there and you’re looking around, if there’s a lot of stuff stacked up against the walls, that can be an issue. I would say they could be hiding a cracked foundation with just a giant bunch of boxes.
While sellers are required by law to disclose any material defects, I know cracked foundation is a material defect, not everybody is honest. They might think, oh well, if I don’t disclose it, then I can sell the house and everything will be fine, and that’s not the best option. I think that they should disclose it, and I think you should ask about things like that. “Hey, there’s a lot of boxes in the basement. Can you pull them away from the walls for when we have our home inspection, so that we can view the walls?” And if they say no, you know, take that as a big red flag.
My personal deal-breakers are methamphetamine houses. I don’t mind mold so much, but a meth house is usually well-known to the neighbors. If you go in and you have a meth test and it wasn’t well-known to the neighbors, chances are really good the neighbors are going to find out. And meth…
Mindy: Yeah. So you don’t want a home that has had methamphetamine contamination. The process of pulling the meth out of the house is pretty arduous. It’s very expensive and people are going to know that there was meth in that house. I would not buy a meth house that wasn’t remediated and I wouldn’t buy one that was because meth is kind of like a newish drug, and you don’t know what the side effects are, 30 years after meth exposure because it hasn’t been around for 30 years. I don’t think. I don’t know. I’m not all that up on drugs.
But meth most affects small brains, like kids that are growing up. I have kids. I’m not going to put them in a meth house. Animals. I don’t have any pets, but animals are also really affected by it, so that’s not something that I would do.
I don’t want to deal a septic system. I don’t know anything about it, other than it just sounds really scary and I would rather live in town. And I don’t want to deal with a well because we live in Colorado, which is considered a desert. And when there’s no snow pack, this year was a great snow year. But when there’s no snow, there’s no water for you well. And please don’t send me a note that says that wells will never ever run dry or whatever, I don’t have any experience with that, so I just choose not to deal with it. If you know a lot about wells and you know about drilling and all of that, maybe that’s not a deal-breaker for you.
Scott: I think that would be a minority of listeners. Okay.
Scott: Well, I think those are some fantastic tips and I think it’s also kind of sad that some of the things that are so easy to work with, like dirt and smell, at least in places where that is an easy thing to deal with, that the seller’s agent isn’t already taking care of those, but that’s another whole story.
Mindy: I have an extreme no comment about this. I mean, this seller could have thrown, what? I don’t know how much it costs to get a cleaning person to come into your house, but…
Scott: You can get even the dirtiest of tenant-destroyed properties cleaned for about $200.
Mindy: Okay. So $200 would have netted this guy $30,000 more.
Mindy: But when he is not willing to spend that money and the agent has already given up some of his commission in order to help the deal go through, why would I put any more money into this property?
Scott: For $1,000, you can get the ugly color and you can get the smell, the place cleaned, and you can get the walls that are terrible or have a bunch of holes and stuff painted.
Mindy: Yeah. Yeah, it was a smoking deal because it had been sitting there forever.
Scott: Yeah. All right. Well, do we have anything else that we want to touch on, before we kind of move in and go into our action checklist for buying your first home?
Mindy: I think that’s a good first start. I mean, there’s a lot of other steps, obviously, that go into buying a house. I do want to say I don’t think we talked about the timing for your preapproval letter. A preapproval letter is only good for I want to say 90 or 120 days. So you don’t want to get that right at the beginning of your decision to buy a house. When you’ve connected with an agent, when you’ve started seeing houses that you really like, you’ve got a handle on the market, and all of that. That’s a good time to get your preapproval letter.
Scott: Got it.All right. And instead of the Famous Four today, we’re going to be talking about a checklist for buying your first home. This is a seven-step checklist that we think will help you drastically increase your odds of making a decision that will be great today and great tomorrow down the line as you move toward this thing we call financial freedom.
All right. So step number one, step one is think about your exit strategy. And if you’re following our advice, put purchase property that will enable you to either have the option to live there happily forever after, sell at a price that’s greater than what you bought it and recoup your equity, or rent it as a cash-flowing rental property after you were to move out.
Mindy: Yep. Having multiple exit strategies just makes you that much more flexible and increases your odds of success.
Mindy: Okay. Number two is know what you want. Sit down and make a list of things that you absolutely must have. A list. A separate list that are this would be nice in a perfect property and a list of things that you absolutely cannot have. My must-haves, I have two kids and a husband. Any house that I buy must have at least two toilets. It can have five toilets, but it must have at least two toilets.
Nice-to-haves. I would really love a pantry. I’ve never lived in a house with a pantry in the kitchen, so that would be delightful.
And deal-breakers, I refuse to live on a busy street. I refuse to live next door to a gas station. I refuse to live by train tracks. Anywhere near train tracks because I have already done that and I am too old for that crap.
Scott: And meth houses. Don’t forget the meth house.
Mindy: And no meth houses. Yes, no meth houses. Okay. Number three is get a prequalification. Call up your local lender. Call up your mortgage broker, whatever, and just talk to them about what they think you can afford based on your general qualifications. You want to understand your purchasing power and you want to be able to start looking in a realistic price range. You also want to consider a preapproval, once you’re ready to start looking at properties seriously. That just strengthens the offer, when you go to make it.
Scott: Nice. All right. Step four is put yourself in a position, where you don’t have to make a hasty or urgent decision in buying this property. As you mentioned early in the show, this is going to be the biggest financial decision potentially of your life to this point. Putting yourself in a situation of artificial urgency that is completely within your control to avoid can drastically reduce the odds of making a quality decision and making a purchase that you’re both happy with and that will serve your financial goals downstream as well.
Mindy: Yep. That is a really, really great piece of advice, Scott. I love that one.
Number five is find a real estate agent who understands your goals. Not every agent will work well with you. So find somebody who knows that you want to make a purchase that has multiple exit strategies and you want to make a purchase in your time frame. You don’t want somebody who rushes you through the decision. I’ve heard agents that say, or people will come to me and say, “I talked to this agent and they said that they would only show me 10 properties.” Wow, I wouldn’t work with that agent either. Maybe I’ll find the first property I look at, I’d buy. But that’s a pushy person, and…
Scott: That’s probably a top agent, huh?
Mindy: Oh, I bet. I bet, or somebody who’s never done it before because that is a pretty crappy thing to say.
Scott: Love it. And along that note, understand the incentives. We had a whole discussion about this early in the show, but understand the incentives with the agent. Yes, they’re supposed to be acting in a fiduciary duty to serve your best interests. But also yes, their incentive is to sell you a home that stretches you to the absolutely limits of your purchasing power in that process.
All right. Step number six. Be ready to react immediately, when a winning deal presents itself. This advice is a little bit… All the rest of this advice, I think is applicable to basically any market decision. But this advice, I think is particularly specific to 2019, where we’re in a buyer’s market in many cities around the country. If a good deal presents itself, you’re going to have to react very quickly to it and that means being pre-approved. That means having all your ducks in a row, and knowing what you want, and having all these things in place, so that you can pounce and close on that first or next home.
Mindy: Scott, you said we’re in a buyer’s market. We’re actually in a seller’s market.
Scott: Sorry. Yes, seller’s market.
Mindy: Yeah. I just want to clarify that a seller’s market is when there’s fewer houses on the market than buyers. So there’s buyers that are competing for multiple properties. A buyer’s market is when there’s a lot of sellers competing for the buyers.
Scott: Yeah. [crosstalk 01:22:46] going to have 50 good chances to buy a great home. Right now, you’re going to have one to three, and that means you have to be ready to react immediately.
Mindy: Yep. Okay. And tip number seven is be prepared for due diligence. Know what you can tackle and what will force you to walk away. So I can tackle ugly carpet, I can tackle paint, or I can’t tackle ugly carpet. I can’t tackle this roof that needs to be repaired. I don’t want to deal with those. If you want a perfect house, there’s nothing wrong with that. Just know that that’s going to be… You know, everybody wants a perfect house, so you’ll be competing with more people. Know what you can take on.
Scott: Love it.
Mindy: Okay. Scott, I would like to add two more bonus tips because these are the things that most people don’t really talk about, most agents don’t talk about, but can really knock out your ability to buy a house.
The first one is once you’ve decided that you are going to buy a house, don’t make any big purchases before you buy it. It can alter your debt to income ratio if you go out and buy a brand new car. Maybe you need a car, but maybe you can push that purchase off I’ll after you buy the house. I’ve known people that they went out the week before they buy the house, they go and they buy $10,000 worth of furniture, screw up their debt to income ratio, and now they can’t buy the house that they just bought all this furniture for. So don’t make any big purchases before you purchase your house. Or if you have to, like your car dies and you need a new car, talk to your lender and see what they can do with that.
Scott: Yeah. This reminds me of a post a couple years ago on BiggerPockets, where someone was like, “I am looking to become a full-time real estate investor, so I just quit my job. And now, I can’t get a mortgage.” Don’t quit your job. Don’t make a big purchase. Don’t blow your ability to get a loan to buy your first property, before you buy the property, right? At the time, if you want to make that big purchase or change careers or whatever, the time to do that is after you have purchased your home. But also, you can’t just intend to quit your job the day after you close your loan. It’s got to be after a reasonable period of time, all that good stuff.
Mindy: Yeah. Just be smart. Be smart with your purchases. And the last one is something that I really hold near and dear to my heart because I had a friend who fell victim to this is go into the title company where you are doing the transaction and get the wire instructions directly from the title company. The title companies, the receptionist will have just a big stack of these papers printed out with the bank account number and the bank number and the routing, all this other stuff that you need to know to send the wire transfer to them. This information will not change. They’ve had that same bank account open since dirt was invented and they will not send you an email in the middle of the night, “Oh, we made a mistake. Here’s the real routing number.” That’s not going to happen.
And my friend, Shannon, was actually scammed by literally the stupidest person on the planet, who sent her the email. She sent the wire transfer to the different bank account, and then they left the money in the American bank long enough for her to realize it was a scam and place a hold on that. She did eventually get her money back, but I think she is the only person who ever got her money back from a wire transfer scam.
So don’t read the email that your title company may send right before closing. Get the instructions from them in-person and only use those instructions to send the wire.
Scott: Yeah, that’s right. You think about things, like this is like insurance or one of these things that there might be a very low, less than 1% chance that you get scammed and lose all your money in a wire, but this will completely wipe you out. This is the way to completely blow it and lose everything, and just by taking a couple of simple precautions, you can reduce that risk to zero.
Mindy: Yeah. Yeah. It’s not a very… Well, it’s more common than it should be, but it was devastating to read her note. I saw her write it in Facebook. “Oh, I’m so glad I got this email. Boy, good thing I checked my email.” I’m like no, and then I see the post, eight hours ago. I’m like, oh my God, she’s lost her money and she was able to get it back. But if it happens to you, you’re going to lose it and I don’t want to lose a dollar. I certainly don’t want to lose 50,000 of them.
Okay. Scott, it is now time for the joke section of our show.
Scott: Oh, what is my favorite joke to tell at parties?
Mindy: What is your favorite joke to tell at parties? I don’t actually have any jokes. All my kids’ jokes have been used up in the last few weeks.
Scott: All right. Well, I’ve got a continuation of last week’s bell tower story. It’s not really a joke. That was a story.
So anyways, as we recall, the townspeople had just walked away from the dead bell ringer on the ground with no arms.
Scott: And the priest is still looking for a bell ringer. So he puts out… He restarts his whole process and puts out a couple more ads. And a couple weeks go by, and finally, another guy with no arms, who looks very similar. Like maybe kind of like familial resemblance comes in and says, “I would like to apply for the job of bell ringer.” And the Father goes, “Oh, no. Not this again. I have had my fill of this. That was a disaster last time. It disrupted the whole town. Not to mention, the guy is dead. No, we’re not going to do that.” And this man says, “Well, no, no, no. Don’t worry. That guy was my brother, and he’s an idiot. I, obviously, won’t be bashing my face into the bell and risking harm and more problems for your town, but I do want to the job.”
And the priest was like still this job is very undesirable as a bell ringer. You have to wake up before everybody. Go to bed after everybody. You don’t get to eat with anybody. You have to climb steps all day. So he’s still in the market and this was the only applicant, so he decides against his better judgment to give this fellow a shot at the bell ringing job.
So they go to the top of the bell town. And again, it’s a little square, 10-foot by 10-foot room with the bell in the middle. And the Father says, “There is the bell. There is the rope. I don’t see how you’re going to do this. You’re not allowed to bash your face into the bell. What do you got?” So the guy runs into the corner. The same corner as his brother from a couple weeks previously. Takes a running start, jumps. Grabs the rope with his teeth. You know, you can see my teeth expression if you’re watching the video here, and the rope goes down because he drags it down with his body weight. The bell goes up, bong, and there we have it.
The Father is looking away in complete shock. The bell comes back down. The rope goes up and the guy’s teeth are stuck in the rope and it flings him out of the bell tower, flies 100 feet down into the middle of the town square. Dead as a doornail.
Once again, the Father runs down the stairs. Once again, the bell is ringing. The townspeople have all gathered around and they’re going, “Father! Father! What’s going on? Didn’t we just go through this? Why is there another guy that is dead with no arms, and why is the bell ringing?” And the Father can only think to say, “I don’t know who this guy is either, but he sure is a dead-ringer for his brother.”
Mindy: Ugh. All of that for that.
Scott: All right. There you have it.
Scott: Later, a third. No.
Mindy: A few weeks later, I’ll get a new podcast host who doesn’t tell such terrible [inaudible 01:30:30] joke.
Okay. Claire did this to me the other day and I thought this was hilarious too. So think of a number.
Scott: Got it.
Mindy: Multiply it by two.
Scott: Mm-hmm (affirmative).
Mindy: Add 15.
Scott: Got it.
Mindy: Divide by three.
Scott: Oh, boy. Sure.
Mindy: Okay, thanks.
Scott: Ah. No.
Mindy: I know, I was like doing this in my head, like I can’t divide by three.
Mindy: Okay. Scott, I loved this episode. I hope that people are getting a better sense of how to buy a house, and that it really isn’t that scary to do.
Scott: Yeah, absolutely. And if you enjoyed this episode, let us know at [email protected], or [email protected] And we can do more of these types of episodes on other large tactical decisions in the journey to [inaudible 01:31:38] [crosstalk 01:31:39] purchases. How to set up a 4-0, I don’t know. Those types of things, we can go through.
Mindy: Yeah, I would love that. Ooh, how to set up a 401(k). Ooh, okay. Future episodes.
Scott: [crosstalk 01:31:49]
Mindy: Okay, great. Shall we get out of here, Scott?
Scott: Let’s do it.
Mindy: From episode 83 of the BiggerPockets Money Podcast, I am Mindy and he is Scott. And what are we going to say today?
Scott: Peace out, yo.
Mindy: Peace out, yo. Again. I got that from my old neighbor.
Okay. Have a lovely day. And if you have any questions about the buying process, please reach out to Scott or I, [email protected], [email protected], or [email protected] And have a great day.
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