Real Estate Experience - Part 1: Our First Home
I've bought two homes and sold one in the past four years now. The first experience occurred so rapidly that I didn't even have a chance to breath. This time, though, things were a little more reasonably paced. I'm writing these three posts as a reminder to me, in the future, of what it takes to play this little game and possibly to assist those who are coming to this venture in the near future.
As a little more background, the first house I bought I did without any representation. No Realtor. This was also a FSBO (for sale by owner -- can be pronounced Fizbow) situation. So between the two of us we had two professionals involved: the mortgage company and the title company (more on that in a moment).
Like I said, the first experience was a whirlwind. My wife and I were looking for a new place to live. We had intended on renting and we were just going through the paper and going to places that were in our price range. The first house we looked at we were thoroughly impressed by. The landlord mentioned that he'd only be able to give us a nine month lease because at that time he'd be putting it on the market. We left the house and looked around at other places on our list and then decided that yes, we would like to live in that house, but instead of renting it we'd make an offer to buy it.
We had no idea what we were walking into. So instead of doing research and all of that important stuff, I called the landlord and asked if he'd be interested in selling his house. I was initially surprised to find out that another couple had made the same request. We were lucky though, he liked us more. So he agreed to start working on the sale of his house.
The next step was to start getting pre-qualified for a mortgage (death pledge). Since my wife's a teacher we thought we might be able to get a teacher mortgage. A teacher mortgage, or something like a lower income mortgage assistance, is typically something with a very low down payment or sometimes the government loans you money for your down payment. No dice. In Santa Fe, at that time, there was no such thing as a teacher mortgage. So instead we got pre-qualified for an FHA (Federal Housing Administration insured) mortgage. This is the same mortgage that we got this time around. There are benefits and detriments to an FHA mortgage. The major benefit is that it allows for a low down payment and it also prevents you from buying a completely messed up home. The downside to an FHA mortgage is that it prevents you from buying a real fixer upper and that can mean that you need to pay more for a house than you necessarily want. FHA mortgages also come with some closing restrictions and you have to use the house as your primary residence, meaning you can't use an FHA mortgage to buy an investment property. The FHA inspections and appraisals are also quite rigorous.
For us, none of this mattered. We were buying the house to live in and having that additional assistance to make sure we weren't buying a lemon was a plus.
So with the pre-qualification out of the way, which is actually a very simple process, very similar to when you buy a car from a dealership (which is a little scary when you think about it), I went back to the seller with our offer. We sat down in the living room and I made mine, he countered with a five thousand dollar increase and we agreed. Even with my little knowledge of the market in Santa Fe at that time I knew that the house was worth every penny that we were paying for it.
From that point on things got nuts. I handed over around a thousand dollars in earnest money (also known as good faith money) to the seller who then took it to the title company that was also acting as an escrow company. This money would be given to the seller if we backed out of the deal, although technically he'd be crazy to do so. The reason for this is that we could sue for the money and as soon as earnest money is put down the buyer owns part of the property. Furthermore, while the litigation took place he wouldn't be able sell his house. And, as we all know, dealing with a law suit over this money would cost considerably more than a thousand dollars. So, more often than not, if something goes bad the earnest money goes back to the buyer no matter how egregious their behavior is.
I'd be remiss if I didn't say that there was a lot of creative financing that took place for us to make this deal work. This is where most of the nuttiness came from. We got a "gift" from my wife's grandfather (which I promptly paid back to him with a loan from someone else after the closing) that we had to get in order to have enough money for the down payment. Keep in mind that I had just graduated from college and was just married. We didn't have much money at all in savings, but we did know that we could pay the mortgage every month without a problem and this was considerably better than rent. We used our honeymoon money to partially fund our closing costs. It was an investment and we knew that the market was appreciating, not depreciating.
The majority of my time was spent with the mortgage company and dealing with working out the financing of the closing (when the final paper work is signed and keys are handed over). An inspection was done by a certified FHA inspector. He found out that the roof needed to be replaced and I had to negotiate with the seller over that. Technically with an FHA the buyer can't pay for many repairs to the house. A $2000 roof was way beyond the call for our mortgage. But through some creative work we were able to have the seller pay for half and we paid for the other half of the roof. Not too bad since one of the selling points of the house was that we could say we had put a 20 year guaranteed roof on the house within the last four years.
Once the repairs to the roof were done then the appraiser came in to make sure it was valued at the market price. It came in about ten thousand more than what we were buying for. Obviously this made me nearly ecstatic. Nothing like being told that something you are buying today could be sold at a profit tomorrow.
Once all the preliminary work was done we went into closing. The closing was taking place on the Friday before Thanksgiving weekend. This was a horrible time to close because a) it was on a Friday and b) because if the money didn't come through we'd have to wait until after the long weekend before we could move in. Keys are typically given to the buyer at the time of funding. Meaning only after the seller has received their payment does the title company give the keys to the buyer. But to make matters worse for us our lease ran out in the place we were staying that weekend so if things didn't fund we would have been skunked! Yes, there were many things that we could have done differently.
Fortunately we were funded, even though the seller didn't receive the funding until the end of the long weekend. Funny thing about that funding clause. As long as the lending bank has sent the money to the seller's account it is considered funded. It doesn't matter if the seller can't gain access to that money.
We stayed in the house for nearly four years. This was important because we avoided all capital gains tax because of this. Meaning that with the sale of our house all profits came to us and not Uncle Sam.
My next post on this topic will be about how we sold our house and what it took to get it in "sellable" shape.
As a little more background, the first house I bought I did without any representation. No Realtor. This was also a FSBO (for sale by owner -- can be pronounced Fizbow) situation. So between the two of us we had two professionals involved: the mortgage company and the title company (more on that in a moment).
Like I said, the first experience was a whirlwind. My wife and I were looking for a new place to live. We had intended on renting and we were just going through the paper and going to places that were in our price range. The first house we looked at we were thoroughly impressed by. The landlord mentioned that he'd only be able to give us a nine month lease because at that time he'd be putting it on the market. We left the house and looked around at other places on our list and then decided that yes, we would like to live in that house, but instead of renting it we'd make an offer to buy it.
We had no idea what we were walking into. So instead of doing research and all of that important stuff, I called the landlord and asked if he'd be interested in selling his house. I was initially surprised to find out that another couple had made the same request. We were lucky though, he liked us more. So he agreed to start working on the sale of his house.
The next step was to start getting pre-qualified for a mortgage (death pledge). Since my wife's a teacher we thought we might be able to get a teacher mortgage. A teacher mortgage, or something like a lower income mortgage assistance, is typically something with a very low down payment or sometimes the government loans you money for your down payment. No dice. In Santa Fe, at that time, there was no such thing as a teacher mortgage. So instead we got pre-qualified for an FHA (Federal Housing Administration insured) mortgage. This is the same mortgage that we got this time around. There are benefits and detriments to an FHA mortgage. The major benefit is that it allows for a low down payment and it also prevents you from buying a completely messed up home. The downside to an FHA mortgage is that it prevents you from buying a real fixer upper and that can mean that you need to pay more for a house than you necessarily want. FHA mortgages also come with some closing restrictions and you have to use the house as your primary residence, meaning you can't use an FHA mortgage to buy an investment property. The FHA inspections and appraisals are also quite rigorous.
For us, none of this mattered. We were buying the house to live in and having that additional assistance to make sure we weren't buying a lemon was a plus.
So with the pre-qualification out of the way, which is actually a very simple process, very similar to when you buy a car from a dealership (which is a little scary when you think about it), I went back to the seller with our offer. We sat down in the living room and I made mine, he countered with a five thousand dollar increase and we agreed. Even with my little knowledge of the market in Santa Fe at that time I knew that the house was worth every penny that we were paying for it.
From that point on things got nuts. I handed over around a thousand dollars in earnest money (also known as good faith money) to the seller who then took it to the title company that was also acting as an escrow company. This money would be given to the seller if we backed out of the deal, although technically he'd be crazy to do so. The reason for this is that we could sue for the money and as soon as earnest money is put down the buyer owns part of the property. Furthermore, while the litigation took place he wouldn't be able sell his house. And, as we all know, dealing with a law suit over this money would cost considerably more than a thousand dollars. So, more often than not, if something goes bad the earnest money goes back to the buyer no matter how egregious their behavior is.
I'd be remiss if I didn't say that there was a lot of creative financing that took place for us to make this deal work. This is where most of the nuttiness came from. We got a "gift" from my wife's grandfather (which I promptly paid back to him with a loan from someone else after the closing) that we had to get in order to have enough money for the down payment. Keep in mind that I had just graduated from college and was just married. We didn't have much money at all in savings, but we did know that we could pay the mortgage every month without a problem and this was considerably better than rent. We used our honeymoon money to partially fund our closing costs. It was an investment and we knew that the market was appreciating, not depreciating.
The majority of my time was spent with the mortgage company and dealing with working out the financing of the closing (when the final paper work is signed and keys are handed over). An inspection was done by a certified FHA inspector. He found out that the roof needed to be replaced and I had to negotiate with the seller over that. Technically with an FHA the buyer can't pay for many repairs to the house. A $2000 roof was way beyond the call for our mortgage. But through some creative work we were able to have the seller pay for half and we paid for the other half of the roof. Not too bad since one of the selling points of the house was that we could say we had put a 20 year guaranteed roof on the house within the last four years.
Once the repairs to the roof were done then the appraiser came in to make sure it was valued at the market price. It came in about ten thousand more than what we were buying for. Obviously this made me nearly ecstatic. Nothing like being told that something you are buying today could be sold at a profit tomorrow.
Once all the preliminary work was done we went into closing. The closing was taking place on the Friday before Thanksgiving weekend. This was a horrible time to close because a) it was on a Friday and b) because if the money didn't come through we'd have to wait until after the long weekend before we could move in. Keys are typically given to the buyer at the time of funding. Meaning only after the seller has received their payment does the title company give the keys to the buyer. But to make matters worse for us our lease ran out in the place we were staying that weekend so if things didn't fund we would have been skunked! Yes, there were many things that we could have done differently.
Fortunately we were funded, even though the seller didn't receive the funding until the end of the long weekend. Funny thing about that funding clause. As long as the lending bank has sent the money to the seller's account it is considered funded. It doesn't matter if the seller can't gain access to that money.
We stayed in the house for nearly four years. This was important because we avoided all capital gains tax because of this. Meaning that with the sale of our house all profits came to us and not Uncle Sam.
My next post on this topic will be about how we sold our house and what it took to get it in "sellable" shape.