Author Topic: DC Area First Time Home Buyer Questions  (Read 964 times)

FIREJD2B

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DC Area First Time Home Buyer Questions
« on: May 01, 2018, 11:36:27 AM »
Hello all, Im a longtime MMM reader (discovered MMM near the end of college, four years ago), but have mostly lurked on the forums rather than posting. I think this is the right sub-forum, but please let me know if it isn't. My spouse and I went to law school, which means were only now about to graduate and join the working world. I wanted to see if people had any advice for our situation given our housing plans.

My spouse and I have both accepted jobs at major firms in the DC market for after graduation. We currently live outside the DC area, although we spent ten weeks in our preferred neighborhood last summer when we were working at our firms as summer associates. Were planning to purchase a condo, rather than rent, when we move, which is the primary decision I was hoping people could provide advice regarding.

Financial Summary:
Future joint annual income (starting in September): $360,000, with lockstep bonuses and raises following the biglaw pay scale
Debt: approx. $250,000 in student loans; no other debt
Roth IRAs: $23k total (fully funded last year and this year not intending to pull from for any transactions, but including for completeness)
Down payment: conservatively, $50,000 to $60,000 in cash available for a down payment, after budgeting for all other expenses between now and September

Whether to Rent or Buy:
Living within walking distance to both of our firms is non-negotiable for us. We did that this summer, both strongly preferred that option, and its comfortably within our budget. Obviously that limits our potential real estate options substantially. I have built a fairly comprehensive spreadsheet to model the rent vs buy calculus in our particular situation, and we break even after 3-5 years, depending on whether we buy on the low or high end of our price range.
We are both strongly career-oriented. We arent having kids, so buying a home with room to grow isnt a concern. Biglaw is a more volatile career trajectory than Id like (up-or-out model), but our best projection is that at least one of us will stay at a firm at least long enough to break-even on buying. Staying in DC is also quite likely if/when we depart from our firms, so buying seems like a sound option for us, although Im interested to know if that seems right to others in similar situations.

What to Buy:
We have a fairly large potential price range. The upper end of our price range is around $800,000. That would represent increased consumption, but there are some properties we have seen on the market where the increased utility would be worth the additional expenditure. Otherwise, were primarily looking in the $550,000 to $680,000 range. Accounting for HOA fees, our PITI would give us a debt to income ratio of 15% to 18% ($680k and $800k mortgages, respectively), which seems very comfortable. Obviously what we actually end up buying will depend on the market several months from now.

When to Buy:
Our preference is to complete our home purchase and fully move in before starting work in September. I have spoken with several lenders who will extend financing based on non-contingent job offers, so it is possible for us to complete a transaction on our preferred timeline.
The bar exam is at the end of July. We are planning to take a bar trip (vacation) after the bar exam.* We can either purchase before the bar (mid-June to mid-July) or at some point in August or early September. Our current plan is to start looking seriously in early-June and buy once something we are happy with is available.

Buying Process:
We have paid attention to the market since last September, so we have a decent feel for whats available in the neighborhoods we are considering. Im generally skeptical of buyers agents given the principal-agent problems involved, but I have found an agent who rebates 2% of the commission (assuming a standard 3% buyers agent commission), which represents substantial savings for us.** Im intending to comparison shop title insurance, since Ive read that that is a highly variable charge where shopping around can save significant money. My presumption is that well independently retain an inspector when we get to that stage, rather than one recommended by our agent (again, because of the incentives misalignment), although Im unsure on how to select a good inspector; any advice on that point would be especially helpful.
Any other thoughts or recommendations? Were first-time homebuyers. We have family members who have purchased property more recently, and both of our sets of parents are willing to provide advice, but no one else in our familial or social circles is quite as diligent about optimizing all these sorts of financial details. Im trying to minimize how much we pay in transaction costs without shouldering an excessive amount of risk of missing something critical.



*I expect the natural reaction here is to ask why we are taking a vacation given our $250,000 in student loans (I can hear Dave Ramsey from here!). In August, we will be (relatively) cash-poor but time-rich. By October, we will have ample cash flow but little disposable time. Our plan is to pay down the student loans quickly (we may invest the free cash flow instead if our refinanced interest rate is sufficiently low, although thats a separate conversation), so were likely to end up in a situation where we have comparatively more money than time in the next few years. Weve made a conscious decision to time-shift some (moderate, intentional) vacation spending from 2022-us to August-2018-us. There are obviously tradeoffs (risk, interest payments, opportunity costs), but were willing to pay them for our planned vacation. I dont expect everyone to approve, but it is a considered decision. In any case, the trip provides a constraint for our home-purchasing process.

**I realize that the buyer's agent is functionally rebating our own money back to us, but I'm not confident in our ability to negotiate an equivalent price decrease if we proceed without a buyer's agent. I'm also (somewhat reluctantly) willing to pay a 1%, rather than 3%, commission for the use of the buyer's agent's services.
« Last Edit: May 01, 2018, 11:38:36 AM by FIREJD2B »

CNM

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Re: DC Area First Time Home Buyer Questions
« Reply #1 on: May 01, 2018, 12:24:10 PM »
I suggest waiting to purchase anything.  Many, many of law school friends who went into biglaw out of law school did not last long. 

AMandM

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Re: DC Area First Time Home Buyer Questions
« Reply #2 on: May 01, 2018, 12:40:49 PM »
Congrats on both getting jobs within walking distance of the same condo!

You didn't say whether DC, MD, or VA, but if in DC I assume you know there are tax credits for first-time homebuyers.

On a pickiness level similar to shopping title insurance, learn about how transfer/recording/stamp taxes are charged in your jurisdiction. It can make a difference depending on whether you pay X with a seller rebate of Y or pay X-Y with zero seller rebate. The agents always prefer X with a rebate of Y because their commission is calculated on the selling price.

I don't know anything about the law world, but what's your plan if things don't work out in biglaw for either of you? Could you afford to keep these condos if you both switched to different jobs? Would you stay in DC in that case and would you want to be owners at that point (at least for long enough to break even)?

FIREJD2B

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Re: DC Area First Time Home Buyer Questions
« Reply #3 on: May 01, 2018, 12:57:44 PM »
I suggest waiting to purchase anything.  Many, many of law school friends who went into biglaw out of law school did not last long.

Thanks for the comment. Yes, career volatility is my single largest concern at this point. That said, I hesitate to accept it as a decisive objection, since I think the reasoning implies a firm rule that we shouldn't buy at all until we both exit biglaw (or one of us reaches partner/special counsel).

The monthly real carrying costs of owning are cheaper than the monthly real carrying costs of renting a comparable unit (after accounting for tax deductions and building equity via principal payments). But buying incurs substantial transactional costs at the front and back end. Buying is therefore only advantageous if you hold the property long enough to spread out the transactional costs over a long enough time period for the lower monthly real carrying costs to win out.

Therefore, the right analysis for assessing whether career volatility should pose a barrier seems to be our expectation of how likely we are to spend the next X years in biglaw (where X is enough to absorb the transactional costs). My impression is that the likelihood of an associate remaining in biglaw decreases with each marginal year. I.e. in general, a second year associate is more likely to become a third year associate than is a first year associate (since the first year associate might be fired before becoming a second year), but the first year associate is more likely to remain with the firm for the next year than the second year associate. And so forth (with a higher percentage of third year associates remaining for a year than the percentage of fourth year associates remaining for a year, etc.). Since we care about the probability of staying with the firm for the next X marginal years, and the marginal probability drops each year until we depart, if the probability of departure is too high as incoming first year associates, then it will remain too high until we exit biglaw (or make partner/special counsel).

Maybe that's just a complicated way of agreeing with your point. But given that buying can come out ahead on a comparable unit after 3 years (or break even after 5 years on a superior home), I'm a bit hesitant to accept reasoning that suggests we shouldn't buy at all even if we remain in biglaw until we're senior associates.

FIREJD2B

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Re: DC Area First Time Home Buyer Questions
« Reply #4 on: May 01, 2018, 01:08:56 PM »
Congrats on both getting jobs within walking distance of the same condo!

You didn't say whether DC, MD, or VA, but if in DC I assume you know there are tax credits for first-time homebuyers.

On a pickiness level similar to shopping title insurance, learn about how transfer/recording/stamp taxes are charged in your jurisdiction. It can make a difference depending on whether you pay X with a seller rebate of Y or pay X-Y with zero seller rebate. The agents always prefer X with a rebate of Y because their commission is calculated on the selling price.

I don't know anything about the law world, but what's your plan if things don't work out in biglaw for either of you? Could you afford to keep these condos if you both switched to different jobs? Would you stay in DC in that case and would you want to be owners at that point (at least for long enough to break even)?

Thanks!

Yes, we are looking at DC. I've previously researched first time homebuyer tax credits, but I think we're well above the income phaseout limits. See, e.g., https://turbotax.intuit.com/tax-tips/home-ownership/what-is-irs-form-8859-carryforward-of-dc-first-time-homebuyer-credit/L5fSth1pc (income limitation of $130,000 for MFJ).

That's helpful to know about the calculation for transfer/recording/stamp taxes. I'll look into that more in the future for DC. I'm not sure how much play we can get on this point, but it's worth investigating, so thanks for mentioning it.

Our general planned career trajectory is to lateral into government after 3-5 years, assuming we aren't interested and able to remain at our firms (I try to plan around conservative assumptions about our firms' likelihood of inviting us to "seek new opportunities"). The condos we are looking at would remain affordable if we were both working for the government, although it might decrease some of our savings in tax-advantaged vehicles.

We plan to stay in DC long-term. We have family and friends in that area, and it's the best market for the type of legal work both of us are interested in. There are obviously many different potential government employers for us, but several of the more likely ones are quite close to the condos we are considering, so the same housing setup has a decent chance of remaining almost optimal in terms of location.

AMandM

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Re: DC Area First Time Home Buyer Questions
« Reply #5 on: May 02, 2018, 02:51:12 PM »
Yes, we are looking at DC. I've previously researched first time homebuyer tax credits, but I think we're well above the income phaseout limits.

Whoops, you're right.

If buying would really get you a condo you would stay in regardless of how your first jobs play out, I would go for it, if only to reduce the chance I'd ever have to move again. But I'd probably stay on teh low end of the price range.

DCChak

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Re: DC Area First Time Home Buyer Questions
« Reply #6 on: June 04, 2018, 09:34:40 AM »
What's the rush?

I strongly advise focusing on passing the bar this summer, renting for a year to allow time to learn about different neighborhoods and where you might like to buy, and then buying after you have become more knowledgeable about your options in DC.  Much of the city has rapidly and recently gentrified.  Neighborhoods people wouldn't consider a decade ago have become hot spots.  If you expand your range to include bikeable, and possibly Metro-accessible distances, you might find a much broader number of options.  Tons of new condos and apartments have been added in Navy Yard, along Massachusetts Avenue, near H Street NE, in Shaw, and up the 7th Street Corridor. 

You may also find that you prefer saving the additional 4% or so (of $360k, that's $14.4k annually) in local taxes in DC versus VA instead of burning it.

Take your time to get a feel for the place.  You have a full career to build real estate equity.

Mr. Green

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Re: DC Area First Time Home Buyer Questions
« Reply #7 on: June 04, 2018, 12:17:13 PM »
As a long time MD resident who has been involved in real estate, I would say a big thing the area has going for it is the lack of dramatic price appreciation. I don't know why certain specific markets have skyrocketed over the past few years and others haven't but the DC market has been very price stable. I know I would be really reluctant to invest in real estate in some of the markets where the prices have risen by housing bubble era percentages over these past few years.

DCChak

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Re: DC Area First Time Home Buyer Questions
« Reply #8 on: June 04, 2018, 07:57:17 PM »
DC has been flat in the 10s, but climbed nicely in the 00s.  Denver and Seattle were flat earlier, and are climbing strongly now.

DC data - https://fred.stlouisfed.org/series/WDXRSA
Denver data -  https://fred.stlouisfed.org/series/DNXRSA
Seattle data - https://fred.stlouisfed.org/series/SEXRSA