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Rookie First-Time Home Buyer Questions Answered by Scott and Mindy

Rookie First-Time Home Buyer Questions Answered by Scott and Mindy

61 min read
Real Estate Rookie Podcast

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Starting out as a rookie investor means you most likely have a lot of questions that need to be answered before you dive in and buy your first home! Whether it’s a primary residence, a house hack, or an investment property, you’ll need to know about loans, agents, inspections, and more. With us today is Scott Trench and Mindy Jensen, co-hosts of the BiggerPockets Money Podcast and authors of the new book First-Time Home Buyer.

We’ve rounded up some of the most popular questions asked on the Real Estate Rookie Facebook group and asked the experts their opinions on them. Questions include:

  • Should I use an agent-referred lender or a mortgage broker?
  • Is more or less of a down payment better?
  • Does my agent need to find off-market deals?
  • How do I shop for loans?
  • Would you buy an as-is property as your first deal?
  • And more!

Scott and Mindy have definitive answers to each of the above questions and sprinkle in a bit of their own experience, so you don’t make the mistakes they did. If you’re about to purchase a house, getting into the planning phase, or just starting to learn about real estate investing, make sure you get a copy of First-Time Home Buyer!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is the Real Estate Rookie show, episode number 59.

Scott:
I would say if you’re buying your first home, you’re going to own or occupy it. And I’ve got, I don’t know, 50 grand. I’d rather put less down on the property and keep the rest available for that next investment.

Ashley:
My name is Ashley Kehr, and I am here with Tony Robinson. Tony, what episode is this?

Tony:
Fifty niner.

Ashley:
Yeah. Yay. Is everyone going to get sick of us doing that every episode that has a nine in it? What are you calling from, a walkie-talkie?

Tony:
What are we going to do for episode 99? That’s going to be the [crosstalk 00:00:43].

Ashley:
Oh my gosh, yeah. I’ll have to go back and watch the movie and pull what the actual number he’s saying, like the cellphone number he’s giving or the phone number he’s giving and see how that correlates. But today, Tony and I are super fan-girling, both of us, as we have Mindy Jensen and Scott Trench on the show.

Tony:
Yeah. For those of you that don’t know, Scott and Mindy are obviously the face of Bigger Pockets, especially Mindy. Even when I first joined Bigger Pockets, it was Mindy’s face all over the forums that you see, and she’s responding to everything. So to have them on the podcast today was a really cool and exciting experience. But they came on to talk about their new book, which is all about first time home buying, and we go really deep into all the different steps that go along with making that happen, which I think you guys are going to get a lot of value from.

Ashley:
Yeah, we’re going to talk about inspections. We’re going to talk about different kinds of loans, including the FHA, and we’re just go into what the process looks like for buying your first property. This can be your primary residence or this is applicable to an investment property. This book will actually be available March 8th on biggerpockets.com in the bookstore.

Tony:
All right, guys. We are super excited for today’s episode. We have two really, really, special guests joining us today. And honestly this is like a surreal moment for me because I’ve followed these guys a long time before actually joining the show, so to be able to interview you guys is an absolute pleasure. But today we’ve got Scott and Mindy, guys, thanks for joining us today.

Mindy:
Thanks for having us, this is a lot of fun. I’m excited to be on the Rookie show.

Scott:
Yeah, thanks for having us. We love what you guys are doing and thanks so much for joining us with BP and doing such a great job every week on the Rookie show.

Tony:
Oh, thank you, Scott. We appreciate that.

Ashley:
Mindy and Scott are the hosts of the Bigger Pockets Money podcast, and they do everything at Bigger Pockets, but why don’t you guys dive in a little bit of why you guys are actually here today. You are going to talk to everyone about what?

Mindy:
Well, Mindy and I have been working on a new book title called First Time Home Buyer, and we have a very creative naming convention with our book titles here at Bigger Pockets, so First Time Home Buyer is about getting your first home purchase, and we think it’s just a really important topic because it’s the largest financial decision that many people make in their lives. I think it can really have tremendous consequences on a real estate investing career in particular. If you buy the big house on the hill, use up all your cash and assume a big mortgage payment, it can be pretty difficult to get financing for that next rental property, let alone save up the cash for that down payment.
So there’s a spectrum of decisions around that. There’s a spectrum of strategies to think about with your first time home purchase. And then a lot of tactics to help you get a good deal on that, that we think are really important to get you off the ground in your investing or wealth-building journey.

Ashley:
Yeah. I think it’s important to note that this isn’t just for someone buying their primary, or buying their investment property. This is you could be doing a house hack, your first property purchase ever. For example, for me, I wish I would have had this book because when I married my husband, he already had a house and then we built a house. But when I actually went out and did my first transaction purchasing a property, it was an investment property, a duplex. And even though I owned two other houses with him, I’d never gone through that process, and it was life-changing for me, like wait, I have to go get preapproved? I don’t know what I’m doing here.
So, this is a great book for you guys to check out, but we really want to get into what it takes for a rookie investor to buy their first property. So, Mindy, I want to ask you, in your experience right now, what is it like for a first time buyer in the market, with today’s current market?

Mindy:
Oh my goodness. Frankly, it’s very frustrating right now for a buyer, and first time buyer or an experienced buyer, you are competing for one house with one million other people who want to buy that one house. Everything is going, right now, in my market at least, everything is going for over asking price. People are waiving the appraisal gap, or agreeing to cover the appraisal gap. They’re waiving inspection. They’re bringing all cash. They’re doing everything they can to sweeten the deal to the sellers so that they choose them over everybody else.
What that means to investors and especially first time investors is that people are paying stupid money for properties, and it’s very easy to get caught up in the hype. “Oh, I found this great house. It’s going to be so awesome. I’m going to put money on this house. Oh, they want highest invest. Hmm, what do you think we should do? 50,000 over? Well, my numbers don’t really work, but I have to have this house.” You don’t have to have that house. There’s another house. And there might not be another house this week, but there’s always another house. I’m a real estate agent in Colorado, we have a super, super hot market, and I have a 100% success rate for getting all of my clients into a house. I’m writing a lot of offers right now. I’m getting so good at writing offers.
But being super eager to get your first property can be a great way to pay too much for your first property. My advice to rookies right now is run your numbers, and make the offer that makes sense for you, and if you lose that property, it wasn’t meant to be.

Tony:
Now, Mindy, that’s really great advice, and one of the markets I invest in in the Smoky Mountains, we’re seeing very similar kind of price run-ups in that market as well, and no appraisal gaps and things like that. If I’m a first time home buyer, and I’m falling in love with all these properties that I’m seeing, how do I mentally not go down that path? How do I stay motivated during that process to make sure that I have the courage to say no to this deal, and know that another better deal will come later?

Mindy:
It is really hard to keep losing out on all these deals. I mean, I have no skin in the game, really, when I’m writing up these offers. I’m your agent, but I’m not buying the house, I’m not going to move in with you. I don’t want to say it doesn’t matter to me that you’re losing the house, it does, but I wasn’t going to live there anyway. It still is really difficult for me to keep writing these offers, and I get the phone call, “Sorry, we went with somebody else.” Ugh, again?
And it can be draining, but when you run your numbers and you know that making an offer at $127,000 is the absolute top that this property is going to make sense for you at, and then you see that it sold for $150,000, you made a smart decision by not chasing this property that isn’t going to be the numbers that you want it to be. Like I said before, I have a 100% success rate. And I’m not saying that like, “Please call me to be your agent,” but every agent has a 100% success rate eventually. I think the market will calm down. I think we’ve got COVID, we’ve got people who have to move. We’ve got people who don’t want to put their house on the market because there’s no place to move to. So, right now there’s this log jam of buyers, and nobody’s selling, but pretty soon people are going to be like, “Oh, you got 75,000 over asking? Oh, I’m going to put my house on the market.” And I think the inventory will slowly come up, and then it will be more of a level-ish playing field.

Scott:
Yeah. I just want to chime in that I agree with all the things that Mindy said there. I have a couple of other observations about the market for folks to think about. One is the payment matters more than the price in real estate. It matters more in the price for home buyers, and it matters more than the price for landlords. All these rules, like the 1% rule, and the 50% rule, and all those kinds of things. They kind of go out the window when your financing costs go down because if my mortgage payment was $1,000, and interest rates drop, and now it’s $800, well I can still afford a $1,000 payment, and I’m just going to be able to buy a 20% more expensive house.
So a lot of markets around the country are way overpriced if interest rates were at 5%. They might be underpriced still, and we might start seeing some of that catch-up in some of these markets at a 2.8% interest rate. I think that that’s the biggest lever to understand what’s going on in the real estate market, in a general sense.
All of the other levers still apply, supply, demand, those types of things. And we are seeing a shift of tenant demand. People don’t want to live in apartment complexes or condos right now. They want to live in single family homes. Last year, we saw apartment rents fall. We saw single family home rents climb modestly, and we saw single family home prices skyrocket across the country, due to that kind of demand-supply phenomenon.
We’re not seeing a lot of supply items coming in with lots of new construction. We’re seeing expensive labor, expensive materials, continue to have permitting issues in many cities around the country that constrain supply, and we’re not really seeing a fundamental change in demand, except for that mixed shift that I just mentioned earlier, where people are moving away from multi-family and into places with yards, where they can be alone, I guess.
Maybe there’s a COVID dynamic with that, but there’s also a potential longer-term demographic shift that’s just being accelerated by COVID. Just wanted to chime in there with a couple of those thoughts on the market that explain some of what’s going on, and I think bring some questions about whether we’re really at the end of anything right now, or if we’re going to see a big step up in prices, and then a flat-lining. Be interesting to see.

Tony:
Now, I think something that’s interesting is, yeah, there’re so many unknowns in the market right now. Really, there always is, no one has the crystal ball. But, I guess as you’re going into purchasing that first home, you should always be thinking about the future. In five years down the road from now, what is my plan with this property? Scott, I guess, what’s your take on exit strategies for your first home, and how listeners should go about handling that?

Scott:
No, you nailed it. That’s the word, is exit strategies. Most, I think, most is too strong, but perhaps many, perhaps most, people buying their first home have one exit strategy in mind. It’s called the buy and pray approach, and they buy the home, and then they hope it goes up in value over time, or that they live there forever. That is not good financial and home buying planning. That’s not the way to go about this. What you want to do is you want to think about what’s going to happen. What’s the typical outcome for these properties? Am I really going to live in this city? And buying a house in 2021, yes it’s a pandemic year, but going forward in the future that we have a highly mobile society, I could be moving in a different city, to a different place.
The average, I think, tenure in a home is five to seven years. The average time that a homeowner owns their home is somewhere between 7 and 10 years. Understand that you’re probably not going to be in this property forever. The biggest loser for a homeowner is short tenure, because you have these closing costs associated with buying and selling the property. So if I might pay 1 to 2% in buyer closing costs when I buy the property, I’ll pay 6, 7, 8% in seller closing costs when I sell the property. That means that if I put down 30 grand on a 300,000 property, and I assume I’m going to pay about 10% just in closing costs. All of that equity evaporates for the most part if you just buy a property and turn around and sell it tomorrow. You have to wait and let time to do its thing, and allow appreciation rates, inflation, and loan amortization to do their thing over a period of time for buying a home or owning a home to be profitable or even better than renting in a general sense
So, the good news is you don’t have to live in the property for a very long time, but you have to own the property for a long period of time, and that’s where the exit options become into play. If you can live in the property happily for a very long period of time, that is a viable exit strategy. It’s rare, and I think people overestimate that their likelihood for this to be their forever home, but know that if you buy a house you’re miserable in, you’re actually making a financial mistake and eliminating one viable exit option. So you have to buy something that you’re willing to hold or own or live in for a long period of time.
The second exit option is to sell your property at a profit. So you can either do that by benefiting from market appreciation, buy and pray, or you can try to take control of some of that appreciation by improving the property to a certain extent, something that Mindy has really mastered. Personally, I think she’s done like 150 live-and-flips, or something to that effect.
The third exit option is to keep the property as a cash-flowing rental, short term or long term. If you just underwrite your deal at the initial stages, trying to maximize the optionality and those three areas, the more those options are true. The happier you are to live in the place forever, the more profit you can make by selling it in the shortest amount of time, and the more cash flow you would generate from it as a rental, short or long term, the better off you’re going to be and the more life optionality you’re going to have, and the faster you’re going to be able to build wealth and achieve various forms of freedom.

Ashley:
I think what Scott just said there can cure a lot of analysis paralysis, and those worst case scenario fears. If you haven’t started yet, you haven’t bought your first property because you are afraid of something bad happening, he just gave you a whole bunch of options, a bunch of exit strategies that you can put into your business plan so that if that worst case scenario does happen, okay, you use that exit strategy to get out of it. So thank you for sharing that, Scott.
I want to turn now to, so, how do these rookies find a good eal so they don’t have to use any of these exit strategies? In today’s market, and using all the different programs for first time home buyers, what is something that our rookies should be looking for in a good deal?

Scott:
All right, so I’ve got one more two to three minute rant to answer that question. We outline a five-part process to finding a good deal in the book. This is for a first time home buyer, but it could apply to finding your first real estate deal as well. The first is an obvious one but we’d be remiss to not state it, which is begin the process from a position of financial strength. A position of financial strength involves having income that can easily qualify you for the amount of the mortgage, it involves having a down payment. That down payment involves having a cash position which is inclusive of your down payment, closing costs, anticipated repairs that you might make immediately after closing, and a $10,000 to $15,000 reserve. That might sound like a lot of money, and it is, but you don’t need to put down 25% necessarily. You can put down 3.5% and still fulfill the requirements of that strong cash position. That’s item one.
Item two is not compressing yourself into an artificial timeline to transact on a property. Don’t be making the biggest financial decision of your life in a big old hurry on the first time you’re doing this. A good example of ways that people put themselves into this position where they are making a decision in a hurry is, for example, my lease, it’s May 1st. And my lease expires on August 31st, therefore I need to buy a home between now and then, and I need to go under contract on August 1st. You’ve just said, “Hey, I’m not willing to call my landlord, and go month-to-month, or live in a short-term rental for a period of time, and therefore I’m going to rush a $200,000, $300,000, $400,000, $500,000 financial decision, and dramatically increase my odds of making a mistake to save a few hundred dollars.
That, I think, is a non-starter, and I think you have to put yourself in a position where you can go fishing rather than going to the market to buy a fish, which is an analogy we used earlier. I don’t have a good parallel analogy for, what’s the opposite of going fishing? Impatiently looking for your bite, but that’s best I can do. Okay, so that’s the second step.
The third step is to know what you want. This sounds, again, very basic, but for example, I should be able to put on two paragraphs on a page in 30 seconds to 2 minutes, and this will take you a few hours to figure this out, but it’s something like, “I want a three bed, two bath home in Denver, Colorado in one of these four, five neighborhoods. I’m looking for a 1950s build or later. I want a two car garage. I want this kind of yard. I want this school district. I want to make sure that,” I don’t know, I can list out a large number of details there. “I’m looking for an updated kitchen. I’m looking for a place with value add potential. I’m looking for opportunity to add an additional dwelling unit in the outback.” You got to list out all the criteria that you want, and get on the same page with your spouse about those same items, because this is your first time home or first investment property, you need to be able to do that, and you need to define that in crystal clear terms.
And this is a step that people miss, I think. They’re just looking like, “What’s a good deal?” Well, the good deal is a property at a good price that meets all of your criteria. That brings us to step four, which is actually determining what a good deal is in relation to your criteria. Cash flow would be an example. Rents and cash flow would be something that you would have an example of on a investment property.
And so how do you find a good deal? Well, what most people do is they look at the market and look at active listings, and they’re like, “Oh my God. The only properties that are listed on the market right now are properties that are way too expensive, have been sitting there for months, and have something horribly, horribly wrong with them. And this is a nightmare, I give up.” No. You don’t even begin your search with active listings. You look at the sold listings that have sold in the last 90 to 180 days, and look for properties that meet your criteria.
There’s a couple of possibilities that will happen when you look at this. This is something you can do on Zillow, you could do it on realtor.com, you could do it with your agent. I think it’s probably best to do it with your agent because you’ll get potentially listings that don’t make it onto some of those portals. But you say, “Okay, great. I want that property, and nothing to that effect has sold in the last 90 to 180 days.” Well, that tells you great news, you’re living in fantasy land, and so you can just stop your search right now because what you’re looking for does not exist.
On the other end of the spectrum, it might be that there are hundreds and hundreds of properties that have sold that meet your criteria. In that case, you can begin narrowing and saying, “No, I’m going to eliminate everything above this price, and above that price, and above that price.” And when you whittle it down to something like, let’s call it 10 properties in the last 180 days, that’s when you know you’ve got a pretty good idea of what a good deal is in your market. Because that’s a property, and that tells you another thing. That says a good property is coming on and selling in your market, on average, every 18 days. That’s every two and a half weeks. So at the moment in time you’re looking at the market, you’re not likely to see that deal, but you know it exists because it’s been selling in the last 180 days.
And then the last step here is to then set yourself up to go fishing. Now, you say, “Okay. I know what a good deal looks like.” I know what’s realistic in my market. I’ve pre-done my analysis, and I know that barring a huge problem in inspection like a roof that’s about to collapse or a foundation problem that I’m going to have to spend 50 grand repairing, I would buy these 10 properties. I talked to agent. I set up a drip campaign or feed. And when the property that meets my criteria comes on the market, I’ve already got my preapproval ready to go with my lender. My agent and I have already discussed that we’re going to offer it.
And if it comes on the market at 2:30 in the afternoon, I may not be leaving work early, but I’m certainly canceling my evening plans to go and look at the property, make sure that it passes the eyeball test with that kind of stuff, and it’s something I do want, there’s no gotchas that don’t show up on the listing. And I’m making an offer that night that’s competitive, firm, and fair. But I’m not chasing because I know there’s going to be another one, because I know my research and know what good looks like ahead of time. Rant over.

Tony:
Scott, that was so much good information, and I’ve actually never heard the concept of looking at sold listings to validate what your expectations are of that market. I have so many friends now, I live in southern California, which is a relatively expensive housing market, and have friends that say, “I want a five bedroom, five bath, on an acre with a pool.” And I’m like, “You’re paying $5,000,000 for that house.” They just don’t have a good sense of reality. So going back and looking at the sold listings I think does a really good job of that.
Now, I think one followup question I want to ask, and Scott and Mindy, this is for both of you. You hear a lot that people say, “Don’t buy real estate today because the market is going to crash.” I’m hearing that today. I heard people saying that to me. I bought my house back in 2018, and I had family members telling me, “Yeah, maybe you guys should wait because the market is going to crash.” We bought our house a little over two years ago, and we’ve gotten almost $100,000 in appreciation since then. They’re building the exact same floor plans of house that are selling for almost $100,000 more today. So had we waited, we’d be paying that much more for our house. So, what’s your advice to people who are looking for that first home, in terms of waiting for this pending market crash, or just going out and finding the right deal today?

Mindy:
There’s this saying that goes, “Don’t wait to buy real estate. Buy real estate and wait.” And I don’t know who said that, somebody famous. I have worked at Bigger Pockets since 2015, and I have been hearing that the market’s about to crash, the market’s about to crash since I started almost six years ago. I get what they’re saying. Because 2008 crash was so spectacular, I understand that you don’t want to buy now and then you’re underwater next month, and you have to wait until the values come back up.
But if you’re buying specifically an investment property, this goes back to my first comment, run your numbers and make the offer at what makes sense to your numbers, because hopefully, your numbers have built in a little bit of a cushion for, you know, “Do I have to drop rent a bit?” Or, “I’m making enough money that if I do have to drop rent, I’m not losing money on the property.” And you make the offer on the property that makes sense based on a lot of different factors. You don’t guess that you can get $800 a month for the rent. You go to do your research. Go to BPInsights, go to Craigslist, go to wherever you’re finding rentals right now, and see what other properties like that are renting for. And if everybody is renting for $750, why do you think they’re going to pay $800 for yours? Always run your numbers conservatively.
So I don’t want the market to crash because that’s mean to all the people that would lose a lot of money, but holy cow, I can’t wait for it to crash so I can buy some properties. But I’m not hoping for that. I would much rather be in this market, where it’s just insane, than in a market like 2008, 2009.

Scott:
And with the market thing, I was curious. When I started investing in 2013, 2014, everyone was talking about how the market was overpriced and it was going to crash, and that continued in 2015, 2016, 2017, 2018, 2019, 2020, and it’s continuing here today. So one of these days, they’re going to be right, and I actually wrote an article a while back, and I found headlines from every major business media outlet I could think of that in turn predicted, formally, the housing crash coming within 12 to 18 months. The housing crash, according to the pundits, is always exactly 12 to 18 months away from the current state, regardless of where you are.
They could be right. The housing crash could be coming in the next 12 to 18 months, next 6 months or whatever. But I fundamentally believe that real estate is a good long-term asset for me to hold. And that if I buy consistently, but not aggressively and conservatively capitalize, that’s fancy talk for having reserves, and underwriting for cash flow conservatively the way that Mindy just described, that I am going to build wealth over time, and no one deal, no one event can cripple my position. I’m always investing from a position of strength, and again, building my portfolio over time.
I think that’s the healthy approach. If this deal going bad or the market turning south right after you purchase your first property can ruin you, something’s wrong and you’re probably not ready to invest quite yet, and you need to continue working on fortifying the financial position and building up that framework. Each deal should accelerate and improve your financial position. None should be make-or-break-it, in my opinion.

Ashley:
To add on to that, for rookie investors, if you are analyzing a deal and ready to jump in, and you are afraid that the market might crash, something I like to recommend is running your numbers three different ways. You can use the Bigger Pockets calculator reports or whatever spreadsheet you use to analyze deals, and you’re going to run one as is. So, as you’re buying the property, whatever the numbers right now.
The second, you’re going to run them as worst case scenario. What is the worst case that this can happen? What would the lowest the rents be? If the market did crash, how much would rents go down? Run your numbers based on that. And then also run your numbers on expected, so especially if you’re doing a BRRRR, what would you expect to be able to increase your rents to? What do you think the new mortgage payment would be? So I like to do it as is, expected, and worst case scenario, and that gives you an overall idea of how your property can perform if there is a downturn. So even worst case scenario, I would be happy if I broke even on a property because I don’t expect that worst case scenario to happen, so at least everything is covered until the market starts coming back up. That’s just a little advice.
I want to ask you guys a whole bunch of questions that we actually pulled from the Real Estate Rookie group, and if you guys aren’t a member yet, make sure you guys go search Real Estate Rookie, and join the group. We have over 20,000 people in there, and a lot of times we pull questions from you guys, and will play them on the show. So we collected some of the questions from the group about buying a home for the first time, and we’re just going to run through these and get the answers from the experts, Mindy and Scott.
So, Tony, do you want to ask the first question there?

Tony:
Yeah. Absolutely. So the first question here is agent-referred lenders versus using a mortgage broker for conventional loans, what lending fees, closing costs should we be paying attention to or comparing?

Mindy:
Oh. I’m going to take this one because I work with lenders all the time. Agent-referred lenders versus using a mortgage broker. Yes. When you are searching for your first property, your first loan, you want to reach out and shop your rate around. What are all the rates? If your agent-referred lender is coming in at 9% and everybody’s at 2%, clearly you’re not going to use them. But if they are coming in really close to competitive to what the other loans are coming in, or the other lenders are coming in at, ask your agent, “Why did you refer this person to me?”
I think it’s illegal for lenders to give kickbacks to agents, so I don’t think they can do it for money. I have a lender that I use all the time, and the reason I refer him is because he’s amazing. He does this super fast close, he’s never missed a deadline for me. I’ve never had a deal fall apart because of him, and I can’t say that about other lenders that I’ve used. So, I have a great track record with him. When somebody asked me, “Why are you recommending him?” It’s because he’s so awesome. I did 10 closings in November, December last year. Eight of them were with him, and two of them were cash. He’s just amazing. So ask your agent why they’re recommending this person because if they’re really awesome, an extra 12th of an eighth of a quarter of a percent isn’t going to be a big deal, as opposed to losing the property because the lender dropped the ball.

Scott:
That works really well if you have a good agent.

Mindy:
Well, yeah. I’m a good agent. What lending fees and closing costs should you be paying to? Fees. Anything that says it’s a fee, an underwriting fee, an application fee, an origination fee. A rate lock fee. Anything that’s a fee is something that you should really look at and compare. If everybody is coming in at 2.25% on the interest rate, what are all the fees? I mean, your fees can add up. Frankly, a rate lock fee, this is a friendly family show so I’m not going to tell you my true thoughts about it, but I think it’s garbage. If you have-

Tony:
Mindy. Sorry, I want to pause there really quickly because I think maybe many guests, or listeners, I’m sorry, don’t know what a rate lock is, so can you quickly clarify that for us? What is a rate lock? How does it work?

Mindy:
Oh, sure. Sure. So right now you’re calling up all these different lenders. They’re saying the rate that I can give you is 2.25. That’s not locked in. The rates go up like this all the time. Right now they’re going up, actually. But rates are going up and down all the time, and until you say, “Okay, lender, I’m going to go with you. I want to lock in my rate.” Whatever the rate is when you lock it in is your rate. So when they quoted you 2.25, that’s basically for comparison purposes. When you go to get the loan, you don’t want to lock in your rate now in case they go down. You don’t want to lock in your rate until you have a property under contract. You didn’t use to be able to lock in your rates. It was whatever it was on the day of closing, and you could really screw up a real estate deal.
My parents owned a house in Oregon for, I think, 30 years because their buyer couldn’t lock in a rate, and this is, I’m dating myself, but this was in like 1980. The rate when they put the offer on the house was 14%, and it moved up to 17%. You couldn’t lock it in at 14, which was a steal at the time. Yeah, I know, all you guys are babies. You don’t know that rates used to be obscene. So yeah, that’s what a rate lock is. You’re just locking in the rate that they have quoted you. And it’s got a deadline, so you lock it in for 30 or 60 days, whatever your closing period is. But if you miss that closing window, you actually have to pay to extend the lock, or you just get whatever the new rate is. So, sorry about that.

Ashley:
Yeah, no, thank you for explaining that to us. To move on to our next question, for rookies that want to buy their first home, should they use an FHA loan with a low down payment, and then save the rest of their cash for a second investment property? Or should they put more money towards their down payment, say, 20%, and then use the equity they have in their house to purchase their second property, their investment property? What would be your advice on this?

Scott:
Yeah. So I think Mindy’s a little bit closer to the tactical reasons maybe to use a FHA versus conventional, those types of things with this. But at the highest level, thinking about it strategically, I would say if you’re buying your first home that you’re going to own or occupy it. I’ve got, I don’t know, 50 grand. I’d rather put less down on the property, and keep the rest available for that next investment as reserves. That’s a stronger financial position than putting it all into the property, in my opinion. Especially if my intent is to hold the property for a long period of time and recoup some of that.
Now, the cost of that is going to be mortgage insurance in some form or other, where I’m going to have additional fees in relation to that low down payment. But I think that the strength of the position will be a little better if you have that option. For many first time home buyers, it’s even simpler than that, though. It’s, “Okay. In order to put down 25%, I’m going to need 60 grand. That is not reasonable for me to accumulate within the next year, two, or three. Therefore, I’m going to put down 3.5%, which is 10 grand, which is much more reasonable for me.”
I think that if you have the luxury of making that option, it’s probably still better to use a lower down payment loan because it gives you more optionality downstream with the next investment, and a stronger overall financial position. I’d rather have a $240,000 mortgage with 40 grand sitting in my bank account than a 270 mortgage with 10. I just think that one is a lower risk position, especially with a 30 year fixed term.
But then I think that there’s nuances around FHA versus conventional that are also part of this question. Maybe, Mindy, you could have more help on the specifics of that.

Mindy:
I’m glad you mentioned that, Scott, because in the Bigger Pockets forums and in the Facebook groups, the 3.5% down FHA loan is put up on this pedestal. But what happens is people don’t realize you have to pay private mortgage insurance, call the MIP, mortgage insurance premium on an FHA loan for as long as you have that loan. You have to either pay off the loan, or refinance out of that loan into a different loan in order to get rid of that. Whereas with the conventional loan, you have private mortgage insurance, PMI, until you reach the point where you’ve paid down 20% of the purchase price. You can then request that they take it off, or when it gets to the point where you’ve paid 22% down, they have to take it off. That is a better choice. You don’t have the refinance fees.
I just said we had 14% and 17% mortgage rates in the ’80s. We’ve got 2.25, 3% mortgage rates right now. I said it when it was at 3.5%, you’re never going to get cheaper money. Honestly, if you can get cheaper money than this, then you have won the lottery. But if you can at all get a conventional loan, get a conventional loan because then you have the option to remove it. I do agree with Scott that you should have a healthy reserve fund.
Back around March of 2020, I think the government shut America down March 13th, and that whole weekend I was seeing people in the Bigger Pockets forums saying, “How am I going to pay my April mortgage payment?” You don’t have reserves for your April mortgage payment? It’s already March 13th. That should be in the bank along with May and June. You need reserves. You can’t predict a global pandemic. There’s probably not going to be one next year, but I’m not a scientist. I don’t know. Not having reserves is so detrimental to your wealth-building future, so I would say get in for what you feel comfortable with as a down payment, while also having a healthy reserve fund.

Scott:
Yeah, and one other thing to chime in on the FHA versus conventional. In addition to the advantages of PMI, my understanding is at the FHA appraiser can be a real stickler, and that this causes sellers to not like offers with FHA loans that are contingent on those. That appraisal, if it doesn’t come in, I think there’s rules that allow the buyer to back out. It’s kind of like, “You can’t waive this,” types of things. And so, all else equal, it appears to me that in the current time period that a bias towards low down payment conventional. A 3.5% down conventional loan will be a superior alternative to the FHA loan in many cases. There’s probably many exceptions to that, but that’s the way it seems to me from 30,000 feet here.

Ashley:
To give an example on that, when my sister purchased her house with an FHA, the inspector went through and she had to put in new hand railings on the stairwell, and just nitpick different things, had to touch-up paint in one area. All these little things that actually do add up, and then you have to go back to the seller. Are they going to take care of that, or do you as the buyer have to take care of that? Just to give an example of the hoops you have to jump through when you get an FHA loan.

Scott:
I might not put up with that as a seller.

Mindy:
In this market, sellers aren’t. If they’ve got more than one offer, and one of them is a conventional loan, they’re going to go with that person over the FHA. I had a listing in October. Our closing was delayed three times because of the FHA appraiser. And we use the word appraiser, I think it’s almost a misnomer because it’s also an inspection. They’re not just appraising the property, they’re inspecting for little things.
We had an outlet, a JFCI outlet that had been tripped. We pushed the button, it’s right there on the outlet. You push it and it now works. We plugged in a lamp, we turned it on. Like a video tape, turned it on, turned it off. They said, “No. You need to have an electrician come out and certify that that outlet works.” I’m like, “Where am I going to find an electrician to come out and certify one stupid outlet?” I mean, it’s really can be nitpicky, and so as a listing agent, I don’t love your FHA loans. Can I say that? I’m not breaking any rules, am I?

Scott:
Probably not, who cares? The FHA appraiser, [inaudible 00:35:13] the FHA stickler. If only, this is overwhelming. This is just on a loans piece, if only somebody wrote a book outlining all of this stuff so that we can be familiar with that… Jeez.

Mindy:
Boy, Scott, somebody really should sit down and write a book.

Scott:
Sorry, that’s some shameless self promotion right there.

Mindy:
For the first time home buyer.

Scott:
Yeah.

Tony:
Well, one thing I want to add as well, because there’s a lot of different ways you can play the loan type or the down payment. I’ve met some investors who go the conventional route, and they put 20% down or sometimes even more. And that’s the majority of their cash that they have available, but then they use a HELOC to then go out and use that to fund their real estate investing. I have a friend, he’s done now, gosh, I think eight or nine BRRRRs in Huntsville, Alabama by going with that method. He and his wife saved up a bunch of money. They put a big down payment on a house here in Southern California. They got immediate equity, and they used that to go out and fund their real estate investing. So, there’s some other options if you want to go down that path as well.

Scott:
I love that. And just, this is a side tangent, but on the BRRRR topic, I really think it’s a mistake to use a HELOC to finance a long-term rental. I also think it’s a huge mistake to use private money or hard money to finance a BRRRR when you could use a HELOC. A HELOC is a way better alternative for cash and getting into those types of deals. But you always want to make sure you’re refinancing at the end of that when you’re planning to hold the property with a long-term note, and here’s why.
A HELOC, I think you should think of it as a five-year loan. I think you should think of it as like a, “Hey, if I got a $50,000 HELOC, or 60,000.” You guys are all laughing at me for this. But if I got a $60,000 HELOC, that means that if I want to pay it back over five years, it’s a $1,000 a month. If that’s my down payment on a rental property, that can really deplete my cash flow, in addition to all the interest I’m going to be paying on it.
The way you described, Tony, is perfect. That’s how you generate a lot of wealth, and the cool kids are all talking about private money and hard money, but a HELOC is a way better source than private money or hard money because it’s a much lower interest. But it’s not a good long-term financing option in my opinion. For that, it’s refinance a 30 year note or something like that.

Mindy:
I have a really quick note about the HELOC. It is absolutely a great option when it’s available. I had a house, oh, I think it was 2003, I bought a house. I took out a HELOC, and we weren’t even in 2006 yet, and the bank called me up and said, “You can keep all the money that you’ve taken out of your HELOC. You can continue to make your payments or whatever. You can’t take anymore. We’ve closed your HELOC, so there’s no more money available to you, but you don’t have to rapid pay off what you’ve already got. You can continue to make your payments.” I was like, “Well, why? I didn’t lose my job. The market hasn’t changed. Why would you cancel this?” They said, “We’re just canceling some HELOCs.” I mean, it’s been like, I don’t know, 20 years, I can’t remember exactly why, but it was just so strange that they had canceled it when I had never missed a payment. I didn’t even have all the money out of it that I could have had out of it.
So, I would say it’s a great option, but know that it can be shut down on the bank’s whim. So it’s not a guarantee. But yeah, it’s a great option.

Scott:
Again, there’s exceptions to all these rules. In a general sense, I probably was too strong with my wording earlier, but in a general sense, think about it as more of like a short-term debt. It’s probably not as good of a tool for a down payment. It’s a really good tool for a rehab, where you’re going to refinance and pull that cash back out, and then pay off the short-term debt, the HELOC.

Tony:
We see a lot of folks do that. I want to jump into the next question here. The next question is does your agent need to be able to find off-market deals for you as well as what’s on the MLS? Or are you, the home buyer, supposed to work to find the off-market deals?

Scott:
In general, let’s be realistic. Most people buying their first primary residence aren’t doing this off-market. That’s the short answer. The longer answer is that regardless of whether you’re buying on or off market, you need to know what you want and know what a good deal looks like. And so, you get there by doing what we’ve talked about earlier, the process to determine what a good deal looks like and what’s realistic. From there, it doesn’t really matter if you get it on or off market. I think off-market can give you access to more opportunity and potentially a better deal, but I know that in some markets, there’s some skepticism about whether off-market is really, truly, that much different than on-market, and whether there’s not more problems maybe being masked than at off-market category.
In Denver, are you really getting a better deal if you go off-market right now? Everybody knows that if they go on-market and sell at a reasonable price, they’re going to sell quickly and for top dollar, so is that a reality? I think that that’s the question to be asking. I think all the deals should be flowing through your local MLS, so it’s not like you’re missing off-market deals if you just do the study and look at sold listings that we discussed earlier. I don’t know if that’s a helpful answer, but that’s what I got for that one.

Mindy:
I want to tag onto this because I am an agent, and I also have a full-time job at Bigger Pockets. I don’t really have time to be out there looking for off-market deals. There are other agents who are full-time agents. All they do is real estate, all day long, and they can have access to off-market deals. If your agent has an off-market deal, are they going to send it to you, the rookie, who’s done one or zero deals? Or are they going to send it to Tony, who has bought 57 houses from them last week? I think that expecting your agent to do all the work is not a realistic expectation. I think you should absolutely be prepared to do the work.
I mean, your agent doesn’t know exactly what is going to make your heart sing as much as you do. So I do think that you need to be able to do the work, and it’s just a bonus when you’re agent can find you an off-market deal. But to expect them to just sit there and pump off-market deals to you I think is unrealistic.

Ashley:
Mindy, the second part of that question was if you can dig into other types of loans besides FHA and conventional, like home-ready, home-possible loans, USDA, do you have any experience with that? I really don’t, myself.

Mindy:
I love this question. I’m super excited about this question. So the USDA loan is based on geography, and you can, I think you just google USDA loan map, and it’ll take you to the website.

Tony:
Sorry, Mindy. Is this the USDA, the same like beef? Like livestock that you buy?

Mindy:
Yeah.

Tony:
Yeah. Okay. All right.

Mindy:
But different. So, they want to make rural investing a thing. The thing is the government, I don’t know if any of you have any experience with the government, they’re not at the leading edge of technology, and their map lags. I have a friend who I helped buy a house two years ago in the Denver market. To the west is the mountains, to the east is nothing. So everybody is building east, and she was able to use a 0% down USDA loan in a neighborhood that is not rural, but according to the USDA map, it was rural. So she was able to use this loan.
So I say, if you want to get a 0% down loan and you’re still well-funded and have a reserve, look into the USDA map and see where those loans are applicable near you, or in whatever market you’re in. They could be really awesome to get in at 0%. However, that does not mean that you can have no money in your bank account and still buy a house, because there are things that need to be repaired.
Home-ready and home-possible are programs for lower income families, so there is an income limit. They don’t have a hard number, it’s like 80% of your median income in your area or something, so it’s all different. But they go down to a 620 credit score. FHA goes down to 580, so that might be a different option for you. But this one has a 3% down payment minimum, whereas FHA is 3.5%, and the FHA, they require your down payment to come from you. And the home-possible and home-ready loans, you can borrow that down payment or have it gifted to you 100%, which is a nice thing if you have rich parents or if your boss wants to give you a house.

Ashley:
Hey, or nice sisters. I gifted my sister her down payment. Don’t exclude siblings.

Mindy:
Or nice sisters, yes. Nice sisters. Hey, sis. You want to gift me some down payment money?

Ashley:
Yeah, but she had to make me 50% owner of the property, so I feel like in the end I won. Yeah, okay, any other things you wanted to add onto that before I cut you off?

Mindy:
I do want to say that if you don’t have the money for a down payment, how are you going to fix things if they break? So I really just see a lot of people in the groups that are saying things like, “Oh, I want to buy with no money.” And Brandon Turner wrote a book, the book on investing with no and low money down, and it’s no and low of your money down, but he couldn’t fit that in the headline, so he cut that part out. You have to have money to buy a house. You need to have money in a reserve fund just in case.

Scott:
Yeah. I think it could be really smart to buy with no and low money down, but it’s not smart to buy with no and low money down when your financial position is very weak, and that’s the reason you’re buying with no and low money down. I think that’s the big caveat for that.

Ashley:
Yeah, you want to have strong personal foundations, and that’s why you need to listen to the Bigger Pockets Money show if you need to get your finances in order before you start investing. But we didn’t mention this a little bit ago, and I wanted to bring it up so I’m glad you guys brought up reserves again. But, this is not only important for your investment property to have reserves. You should have reserves for your primary residence too, so make sure that all of those bases are covered. This isn’t just for investing that you need to have those reserves in case your tenant doesn’t pay rent, but if you lose your job, you need to have those reserves too on the personal side for your primary.

Scott:
In real estate, we call it, as investors we call it capital expenditures. Home buyers who are unprepared call them disasters, so that’s how motivated sellers come about, is because of those types of things and lack of a financial preparation.

Ashley:
So, our next question from the Facebook group is, “I have applied for a loan, and have not received and answer, and feel like they haven’t done anything but jerk me around. Is it going to penalize me to apply through somebody else, and will this affect my credit?”
That was one of the questions we received in the Facebook group, and I think that’s a great question. How do you shop loans and having your credit run so many times? Do you guys want to explain that for us please?

Mindy:
Yeah. You are considered shopping the rate when you apply to 200 different lenders within a 30 day window. The bank, the credit score people, the government doesn’t think that you’re trying to get 200 loans. They think you’re just shopping a rate. I would say apply to everybody, and in this specific situation, I would say make sure you red flag that person and never apply to them again, but go out to other people and apply within a 30 day window. I like to do it in a week, just to be super tight, then I’m not comparing rates from January 15th to rates from February 15th, I’m doing it all right in a real tight timeline. But yeah, if this guy’s not getting it done, find somebody who will, and there are lots of lenders out there. Yes, lending is taking longer. Yes, refinances are taking longer, but they’re still happening all the time. So this person is a jerk, and you need to kick them to the curb and find a good lender.

Ashley:
I just want to add to your point, Mindy, about doing them all in the same week, you’re basically giving the bank the same information, so you might as well just populate that email, send it to one, send it to the next, send it to another one. While you have it all together, go ahead and send it because even if you wait one more week, the next lender’s going to want that next week paste-up. And you have to gather that information, so I love that idea of just getting it in, giving yourself a week window and reaching out to those banks.

Mindy:
That’s a good point.

Scott:
And for this person, maybe it’s 30 days now past when they asked that question. Let’s not overthink it, it’s probably not that big a deal to just go and restart the process, even if it is twice in two different 30 day periods. Just do your next one, shop around, and you’ll have two inquiries. It’s not going to devastate your credit position or your credit score, but if you’re right on a bubble that you think is really important, like I don’t know, 640 versus 650, where there can be some cutoffs in some of these types of things with interest rates, maybe that makes a difference. But in general, it’s going to be only like a few points that are going to be hit temporarily for the credit inquiries. In most cases, just go ahead and just start the process again, but this time just do five, six lenders at once in that 30 day window so you’re not worrying about the multiple increase again.

Mindy:
And vary the type of people that you’re talking to. You want to talk to credit unions, you want to talk to local banks, you want to talk to big chains. You want to talk to mortgage brokers. I had a go-to lender for like 11 years, and he was a mortgage broker out of Kansas city, I don’t remember which Kansas city. Doesn’t matter. I’ve never lived there, but he was licensed in all 50 states and he had great rates.

Tony:
All right, so for the next question, I want to talk a little bit about the Zillow Zestimate and Redfin property evaluations because I know this comes up a lot for first time home buyers as well. This question is “I have my first property under contract as of last week. We are purchasing the house for below the Zillow and Redfin estimates. When the bank does the appraisal, do we have access to that information to better understand the equity we will have in the house, or do we need to have an appraisal of our own to better gauge this? The value of the property will determine our next moves.”

Mindy:
Okay, you are paying for the appraisal. It belongs to you, they will give you all that information, and it’s like a 10-page report. I want to make a note about appraisals because it used to be that you could just say, “Oh, I want Bob Jones to be my appraiser.” And then Bob Jones would come out, and lo and behold, the $657,000 actual house is worth 750 according to Bob Jones, and that’s how 2008 kind of started to crumble because appraisers were not being totally forthcoming.
So they have changed the laws, and now you can’t say, “I want Bob Jones.” You have to say, “Hey, lender, I want an appraisal,” for a lending… If you just want to go out and get your own appraisal, you can hire anybody you want, but if you want, for the purposes of getting a mortgage, you say to the lender, “Okay, go get the appraisal.” The lender reaches out to an appraisal management company and says, “Hey. I have an appraisal in this state,” and the appraisers grab it and go do the appraisal. So the bank actually can’t talk to the actual appraiser, they can only talk to the appraisal management company.
However, since you have paid for that appraisal, it is yours and you should get all of the information from it. If you don’t, I would pitch a fit with the bank.

Tony:
One followup question to that, what are your guys’ thoughts on the Zillow Zestimates, and the Redfin property values? Are those reliable numbers? Should I be using those to gauge my buying decisions, or is there a better way to do it?

Scott:
I’ll quote an anonymous source here who has a little joke that says, “The A in the Zestimate,” or, “The A in Zillow stands for accurate.” That’s a fun tease. I think the Zestimate is fine, but I don’t think that it is wise, and I don’t think Zillow would say this either, to use that Zestimate as a reflection of the value of the property. It’s an estimate, it’s based on an algorithm, and it’s only as good as the data in that neighborhood and the comps that are available to support it, and the data that’s available with that property. So, the value the property sells for can be dramatically different from the Zestimate or the Redfin estimate, and I would not base your investing decision on those estimates at all, and there can be huge inefficiencies from time to time. I know that many agents are not pleased with those estimates because they can throw off expectations for some folks.

Ashley:
I have an example for you guys. I actually just pulled it up to check that it was the same, but I got an email from Zillow for property that I had purchased in 2018. I bought it for $17,500. Over the years I’ve probably put maybe $15,000 into it. It’s maybe worth $40,000 now, and the Zestimate on it is $111,414. How I wish that was true.

Scott:
So somebody buys that for $100,000 from you, they’re getting robbed, yet they’re thinking they’re getting a good deal if they’re using Zestimates. That’s the caution.

Ashley:
Right. Exactly. Oh, so now you just gave away my sale strategy.

Scott:
There you go. Yeah.

Tony:
Sorry, one other thing to add to you is that even appraisals themselves aren’t always super accurate. The first property that I purchased got appraised for $230,000. When I actually went to go sell that property, I think I sold it for 2010, maybe a little less after some seller credits. So even the appraisals sometimes can be off from what you can actually get when you put that property on the market.

Scott:
I love this discussion because I own duplexes and quadplexes in Denver, and they’re just not selling at a frequent level. There’s just not a lot of the stuff that I like to buy out here. That can create huge inefficiencies because if there’s only six comps on the property in the last 180 days, and they have a big spread between them, they have a really inefficient market, and nobody has good data points on what things are actually worth. And that can be to your advantage as an investor, because it would allow you to get a really good deal, or it could be a dangerous game where you can be way off and have a lot of trouble selling downstream. So there’s advantages and disadvantages. Perfect information means you’re probably not going to get a smoking deal and create a lot of equity. Lousy information creates a lot more risk, but also opportunity.

Ashley:
Yeah, and I want to give some advice to rookies on the appraisal process. Do some of your own research too. So if you’ve had an appraisal done before, and you’re looking at purchasing another property and trying to figure out what that after-repair value is, that ARV, look at the template that is provided in the appraisal report, and look at how the appraiser actually determines the value of your property, because it will show you your property, comp one, comp two, comp three, and just look at how they’re analyzing it, and you can even build your own spreadsheet to look like that and to plug in to the numbers.
And then when you meet your appraiser, I’ve heard different stories on this, but some appraisers will actually accept information from you. Some will want nothing to do with you, won’t even want to talk to you. They just want to go in and do their work, but some will take a list of all of the repairs and the expenses you put in to the property, any capital improvements you did on the property. And then if you have any of your own comps, like a lot of times myself, I invest in the same town, so I have appraisals from properties that are right down the street. I will actually give those to the appraiser and say, “Hey, just so you know. This is the appraisal. This could be a comp from down the street.” So just giving as much information as you can, that will really help boost your appraisals, at least a tactic to try. They might not accept it, but there’s no harm in getting that information together.

Scott:
Yeah. You’re doing a good bit of this work if you buy into what I talked about earlier, where you do it looking at the sold listings first to having to find what you want. You’re doing a good bit of the appraisal work, at least that which you can do without actually touring the property and inspecting it, and looking at all the systems and those types of things prior to this by looking at sold comps. Because that’s like the 80-20 of what the appraiser’s going to do, and looking at comps anyways to come up with that value.
Ideally, if you’ve done your homework and are really clear on this, you shouldn’t be surprised by the appraisal. Doesn’t mean it won’t happen, but it just will lessen the odds of that being a nasty shock, good or bad.

Ashley:
Tony, you want to go ahead and take us through our last question, or do you want me?

Tony:
I guess I got one that I think might be good. This last question we got for you guys is in what situation would you consider buying an as-is property? What are the biggest red flags to look for before putting in an offer?

Mindy:
Okay. An as-is property is every single property on the planet. It is always as-is, but that does not mean that you can’t do an inspection. It actually does mean you can’t ask for repairs, but you can ask for a price reduction. If you go in, and you buy a property that says “as is,” and you walk through and you’re like, “Oh, look at that. It needs a new roof. It needs a new furnace. It needs a new air conditioner.” You can ask them, “Hey, based on my inspection, I need to reduce the price to $50,000 for all the things that are wrong. I didn’t know all of these things were wrong.”
If you’re going to take the property and gut it to the studs, and add a second story and do all these things, then an as-is property doesn’t really matter all that much. I am wondering why it’s as-is, and just because they say “as is” does not absolve them from disclosing material defects. And I believe it’s every single state, but I’m not sure, but you as the seller, you have the obligation to disclose any material defects known or think that you should have known, which I think is ambiguous. But if you know that the roof is bad, you have to disclose that. If you know that your last tenant cooked meth in the house, you have to disclose that. And not disclosing that can be a real problem down the road for you.
So, an as-is property is not scary, but you need to be extra diligent in your inspection, and I would absolutely never waive an inspection on a property that I was buy- I’ve been buying and selling houses since 1996, and I get an inspection on every property I buy, except that one. So I would say that if you are a rookie, you absolutely need to have an inspection on the property. And if they won’t let you inspect it, what are they hiding?

Scott:
I agree. The inspection and the ability to object in some capacity, I think, is critical for you on your first time home purchase especially, and your first investment as a rookie with that. Where it can be appropriate to completely waive the inspection is if I’m a developer, and I’m going to buy a property, and my intention is to demolish it regardless of the circumstances. Then I don’t really care. I’m buying it for the land value, and it doesn’t really matter. So you got to be careful because that might be who you’re competing with on an offer, and that might be why they’re giving it an as-is offer with that.
When I offer, at this point in my career, I kind of look at things like, okay. If I go into this place, and I walk in, and the window’s broken, or I can place a marble on the floor and it immediately begins gaining traction going off to the floor with a huge slant, and then I’m shocked by the foundation report in the inspection, or the fact that the window’s broken, and I’m objecting to that. That’s on me. Those are obvious things that even not as an inspector, I should be able to just pick up or look through with my agent on a walk-through.
But if I’m looking at a property that looks really fine on the outside, but there’s a leak on the roof, and it just hasn’t rained in a few weeks, and that’s discovered. Or there’s a big foundation issue that’s just not apparent from the outside or from things you can look at, or I go in and I say, “Hey. I can see that the marble’s rolling. If the house is about to collapse, I’m backing out, guy.” That comes up in the inspection.
So I look at it like, hey, I’m not going to ask for the outlet switch to be covered, to be placed on this thing in inspection. But I am going to look for high-ticket items like health and safety issues or very expensive things. And I wouldn’t even put the water heater in there. The water heater in this kind of market is too old. I’m buying properties that are $200,000 to $400,000. The water heater is an $800 item. I’m not going to, maybe a $1,500 reinstallation. That’s not an item for inspection for me to object to. The big systems, electrical systems, roof, foundation, major remodels that would be required to make the place habitable or rentable, those are items that I would be looking to object to in the inspection report. And those are things to think about with that, and consider making it clear you won’t object to minor issues in there.
But otherwise, this is the biggest financial decision of your life if you’re a rookie or a first time home buyer. You can’t assume the risk that a seasoned investor or developer would be willing to assume with a true as-is, I’m not going to object to anything, in my opinion.

Mindy:
Yeah. I wrote an article a hundred years ago called “Your 48 point DIY home inspection checklist.” And we can include that in the show notes. This is something you should take with you when you’re looking at a house. This is not a replacement for hiring an actual licensed home inspector. This is something you do before you make the offer. You go through, because you can walk in and be like, “Wow. This is such a great house,” and forget that the windows don’t open. My husband’s grandmother caulked all the windows shut in her house once she got air conditioning. She opened them up, put a bead of caulk around the windows, and closed them up. And not one window opened. Do you think to check to make sure every single window opens? Maybe, maybe not. If you’re a rookie, you probably lived in a house that had windows that opened all the time. It would never occur to you that somebody would caulk the windows shut. So, end rant.
So this is just a really quick walk-through the house, and go through this inspection. Then you place the offer, you get the home under contract, and then you hire an inspector, for every house, even if they say they’re as-is.

Ashley:
To add on that, once, my first couple properties were all, I did inspections on them. But then after I had a knowledgeable contractor that I liked, me and him would actually go through the properties, and I would use the binder that I had gotten from the previous inspector on a property, and I would use that as a template. “Okay. We have to check this. We have to check this.” And he would have the equipment to make sure the GFI was working, stuff like that, and that is how I eventually got away from inspections and just buying properties that are so bad that you just know you’re going to have to do a full rehab anyway, so there’s no point to inspection.

Scott:
That’s great, though. That’s because you’re a pro at this, and have your systems in place, and you are doing an inspection. You’re just the inspector now, alongside your contractor. And now you can ride that into the offer and say, “This is what I’m going to offer because I know exactly how much my rehab costs are going to be.” That’s awesome and really advanced. I don’t know, yeah, I think that’s fantastic.

Ashley:
Yeah. Getting rid of that contingency can be a huge benefit, but just as you guys said, as a rookie investor, don’t take that risk. Pay that money for the inspector. So a couple years when I helped my sister buy her house hack, since she was living in the property, and this was going to be her first investment, we still did the inspection. Even though I hadn’t been doing inspections on my own investment properties, we still did it so she could see the whole process, and she trusted the inspector more than me too, probably.

Mindy:
Yeah, and I do this with my, I have a go-to home inspector. He’s amazing. He’s got, I think, 180 points that he checks. I walk through his home inspections, and he’s like, “Look at that, look at that, look at that.” So now when we’re walking through the home, before we’ve even put it on the market, I can say, “Oh, my home inspector’s going to flag this. He’s going to flag this, he’s going to flag this.”
Because I am not licensed, and it’s not a home that I’m buying so I can’t act in that capacity, I’m not licensed as a home inspector, but I can certainly use that same template that he’s got and be like, “Hey, see that? That is terrible.” And that helps people when they’re looking at houses. “Oh, there’s a lot of stuff here I don’t want to deal with, then.” Or, “I don’t care. Let’s still make an offer.” So it’s really helpful to just be able to be well versed in that. But like Scott said, you are doing an inspection, it’s just you that is the inspector, which I love.

Ashley:
And I think you just saying that, having a realtor that knows how to read an inspection report is so valuable too because you can look at it, and you can be scared like, “Oh my gosh. This is a big deal.” Where you would know actually that’s just a $50 cost. I know a guy who can do that, it’s not a big deal.

Scott:
Yeah. The inspector will terrify you on your first purchase because it’s like a 50 page report of all the things that are wrong with your property, and it’s like “moderate risk.” What does moderate mean? Does moderate mean $5,000? $20? I don’t have to do anything? He’s just noting that this is, I don’t know. And so that’s where I think that good agent can really come into play and help out. They can’t tell you, “No. It’s not a big deal,” or not, but they can guide you through what to worry about no what not to worry about. And we also have a third of a book, if only someone wrote a book about this, devoted to describing some of the common things that can terrify people in these inspection reports.

Tony:
And Scott, one of the things that my partners and I are doing, especially for stuff that’s out of state is we’ll send our handyman or our contractor to the property on the day that the inspection’s being done, so that as the inspector’s pointing out all these things, our handyman is putting together what his repair estimates are. And then we submit that to the seller after we finish our due diligence, we say, “Hey. We need a reduction of this much.” So I think we just, like on our last property, we saved almost $10,000 by following that process.

Scott:
I love this, and I have a question here for both of you guys, because both of you guys have a similar approach, where you bring your professional to the inspection so you can get the bids out in real time. If I’m a first time home buyer or investor, and I want someone to do that for me, I believe that a good contractor is going to size me up and think that I am a huge risk of somebody just looking for free consulting, who’s not going to pull through that. How would I potentially put myself in a position to have a chance for that contractor to come along with me, who’s actually quality for that, and convince them?

Ashley:
It’s actually pretty easy. You just pay them. You offer to say-

Scott:
Okay.

Ashley:
“… How much is an hour or two hours of your time worth?” Even if it’s $100 or whatever. It’s better to get that estimate upfront and to know it than to wait until you’ve already got the deal, then have them come through when they know you’ve got the property and own it, and they have more of a chance of getting the deal, and the estimate can be way higher than you expected. It’s worth to spend that little bit of money upfront, having them come along.
Anytime a contractor comes with me, I am paying them for their time.

Scott:
Easy obvious answer that never occurred to me, thank you.

Mindy:
Yeah. So I have one more comment. We didn’t really cover this, but if you were buying a house, and you were paying an inspector to go through the house, you should be there with the inspector so that he or she can walk you through the property and tell you all the things they found. Because while they’re in the property, they remember that the flibberty gibbet on the top of the water heater is twisted funny. When they walk out the door, all their information leaves their head. They see so many houses, they’re not going to remember some weird little thing in two weeks when you call them up.
So be there and walk through it, and when they say, “This thing is at the end of its life.” Hey, let’s look at that. Why do you think that’s at the end of its life? How much does it cost to repair? Sometimes it’s a $10 fix, and sometimes it’s a $10,000 fix. And they probably can’t give you an exact quote on how much it’s going to cost, but they know the difference between a $10 and a $10,000 fix. And frankly, if they don’t, they’re a terrible home inspector. You should know that it costs $10 to replace a switch, and $10,000 to replace a roof.

Ashley:
Before we move on to our random question segment, I just wanted to mention that we do have the Rookie podcast, episode 11, we had Rose Buckley on, what is a home inspector. So if you guys want to learn more about home inspecting, go back and listen to episode 11. So, Mindy, I’m going to ask you a random question.
So since this is the Rookie show, and we usually really dig into a rookie deal, if you could share with us, just break down one of your first deals that you did, a live-and-flip, just give us the rundown on how that went, what the numbers were like.

Mindy:
Oh, these are, boy, we’re digging into the archives here. My very first property was purchased in 1996. It was a condo. Let’s see, I paid 499 for it. My mortgage payment was $400 a month because I had a 7% interest rate, and the HOA fee was $200 a month. It was $200 a month for the first month, and then the second month they sent a letter that said, “Hey. We need a boiler, and we don’t have anything in reserves, so everybody’s HOA fee is now double for the next four years.”

Ashley:
My God.

Mindy:
And I was like, “What? That was not in my budget at all.” And I bought the house because it was so ugly that I could get it for a lower price. I say house, I mean condo. It was horribly ugly. I painted every single wall. I replaced the flooring in the kitchen. I replaced the kitchen light, the dishwasher. The whole reason I bought the house, because Bigger Pockets wasn’t around then, and I didn’t know about investing. I just wanted to stop wasting my money on rent, so I bought it because it had a dishwasher, and the dishwasher was broken when I moved in. Thanks, home inspector. I did not have a good home inspector then.
So, I painted it. I house-hacked it with my brother, who was going to school down the street. Only back then it was called having a roommate, it wasn’t called house-hacking.

Ashley:
So he paid you rent to live in one of the rooms?

Mindy:
Yes. And then I sold it when I got married because my husband had a house, and I didn’t want to live in the condo anymore. I was tired of paying double HOA fees. And they had just stopped being double. I was back down to single HOA fees, and I was like, “I got to get out of here before they jack those up again.” So I moved into his house. I sold it for $75,000. I ended up paying off all of my little random debts and entered the marriage. Like, we signed the contract while I was on my honeymoon. My dad signed it for me. I came home and sold it, and I said, “Yeah. I want to do that again. That was a lot of fun making $25,000 just living in a house.”
It turned out that all of those double HOA fees, all of my mortgage payments, all of everything, it cost me a thousand dollars a year to live in that condo. So, yeah, I don’t buy condos anymore. I really don’t like condos. I don’t like having no control over the HOA fees, but that was a really good investment for me because it propelled me on this path.

Ashley:
And look at you thought that it was a bad investment once they jacked up those HOA fees, like you thought, “Oh no, this is not good. It’s eating into my budget. I’m spending too much money.” And then in the end, it turned out to be a good deal, and it started your real estate investing journey. That first deal is always crucial.

Mindy:
It is. It is. I mean, I had kind of a bad experience doing it but it turned out to be great.

Tony:
All right, so Scott, my question is for you. Now, in addition to the book that we’ve been talking about for the last hour or so, you’re also the author of another book, right? Set for life. And a lot of times throughout this conversation we’ve kind of mentioned that you want to start your real estate career, your home purchasing process by having a strong personal financial position. I guess what are some boxes that listeners should be checking from a personal financial standpoint before they go into buying that first home?

Scott:
Oh. Great question. I think that we already talked about the down payment, having the down payment, the closing costs, expected into repairs, and then an emergency reserve as kind of that checklist box of things. I’ll instead answer this question with a framework for thinking about wealth-building and financial freedom, generally speaking. You should understand that there are four levels that you can pull in building wealth. You can spend less money. You can earn more money. You can deploy your accumulated capital and invest it, or you can create assets.
I think that the journey comes down to where am I today, and what are my biggest levers? Most people who are full-time self employed are going to start with the spending less. That’s going to be the most immediately actionable lever. It’s hard to build a business if you’re working a full-time job. It’s hard to earn a great [inaudible 01:10:20] about investing if you have nothing to invest, and it’s hard to inflate your income if you’re working a salary.
That’s where it comes down to, and so I think it’s basic 101, where is my money going? Am I tracking it? Am I moving the big levers? The biggest levers being housing, transportation, and my food budget. That’s 66% of most Americans’ household spending, is just in those three categories. And am I making smart choices to keep those fixed costs low over time, and am I disciplined on a day-to-day basis? And from there, that should help you accumulate lots of liquidity, and make all of the rest of this journey that much easier, the development of that financial foundation being automatic with that mentality.

Tony:
Great answer, Scott. You obviously go into your whole framework of being financially smart in your book, Set For Life, so listeners, if you guys haven’t checked that one out, it’s another good book to add to the reading list. But, Scott, many of you guys have added a tremendous amount of value to the listeners today. I’m sure they gained a lot from this conversation.
But before we wrap up, I just want to give quick shout out to one of our Rookie rock stars. Now for those of you that are listening, if you want to be shouted out on the show, join the Real Estate Rookie Facebook group. I think there’s like 23,000 people in there last time I checked, which is absolutely insane. So we’re pulling folks from that group to give them a shout out on the podcast. Today’s Rookie rock star is Nolan Yamata. Nolan, he said, “I just sold a car that I love, and I will be driving a ’97 Tacoma in order to lower my DTI. One step closer to my first deal.” That is absolutely amazing. I love that mindset, Nolan. You guys are, maybe if you’re watching the video you can see Mindy and Scott kind of throwing their hands up in praise right now too. Well, what do you got, Scott?

Scott:
That’s right. That’s exactly what we just talked about, right? Like that car expense. After food, buying reasonable food from grocery stores, selling your car and making that decision, that is the kind of thing that will propel you forward on your financial journey. That will make everything else easier. That’s $20,000, $30,000, $40,000 over a 3, 5, 6 year period in not lost appreciation, lower payments, those kinds of things. That’s another rental property, so great job, Nolan. That’s awesome.

Mindy:
I was just going to say I think that’s awesome. One of the questions we ask all of our guests is what is your biggest financial mistake. And fully, what, 65% of people’s answer is, “I bought a car that was too expensive. I bought a brand new car.” So that’s great. Good job, Nolan. You can always buy that car back.

Scott:
In cash, downstream, after you’re rich.

Ashley:
And once you get rid of that car payment, you’ll never want to go back either. It’s a different feeling, I guess, once you have that car paid off, and you see what you can actually do with that money instead of letting it sit in a depreciating vehicle.

Scott:
Yep. Nothing wrong with a nice car, just an anchor and a first, sorry, I’m interrupting.

Ashley:
Thank you guys so much for joining us today. Can you let everyone know a little bit where they can find you, reach out to you, Instagram, Facebook, biggerpockets.com.

Scott:
Yeah, sure. You can find me at biggerpockets.com. You can just search in the search bar, the member search. And then I’m on Instagram at @Scott_Trench. Much less active on Instagram than both you guys, but there if you want to look at some old posts, I guess. Sold that real hard. And then our book, First Time Home Buyer, is available at biggerpockets.com/FTHB, or biggerpockets.com/homebuyerbook.

Mindy:
I am the community manager at Bigger Pockets, so I am all over the forums there. I am also in the Real Estate Rookie group, the official Bigger Pockets Facebook group, and the Bigger Pockets money group. So, if you need to connect with me, you can get me on all of these social medias at mindyatbp. That’s M-I-N-D-Y-A-T-B-P. But Bigger Pockets is the best way to get in touch with me. You can email me. [email protected]

Ashley:
Thank you guys so much for coming on the show, and if you guys took a lot of value from the show, make sure you check out their book. It will be available on March 8th. So if you haven’t already, make sure you guys join us on Facebook, the Real Estate Rookie Facebook group. Just search Real Estate Rookie, it should come right up. And if you like the show, please leave us a review on Apple Podcast, and today’s notes, all of the different things we talked about, articles we’ll link. You can find those at biggerpockets.com/rookie59.
Thank you guys so much again for being on the show.

Scott:
Thank you for having us. We had a great time. We really appreciate it, and thanks for the nice plug. We appreciate that too.

Mindy:
Yeah, this is a lot of fun. I enjoyed talking to you both again.

Ashley:
I am Ashley at Wealth From Rentals, and he’s Tony at Tony J. Robinson, and we will see you guys on this Saturday for our next Rookie Reply.

 

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In This Episode We Cover

  • How to find a lender and how to compare the ones you find
  • How loan applications affect your credit score
  • Getting inspections on your home and using them for price reductions
  • Buying an as-is property and what that means for your budget
  • Running your numbers 3 different ways
  • Keeping a healthy safety reserve, regardless of if your home is a primary residence or an investment
  • And So Much More!

Links from the Show

Books Mentioned in this Show:

Rookie Deal

  • Condo unit
  • Purchased in 1996
  • Purchase Price:  $49,900
  • Mortgage: $400/mo. at 7% interest
  • HOA fee: 200/mo (first month)
  • HOA fee: 400/mo. (next four years)
  • Sale Price: $75,ooo

Connect with Scott and Mindy: