Author Topic: First-time Homebuyer...Need General Mustachian Help  (Read 6296 times)

steevven1

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First-time Homebuyer...Need General Mustachian Help
« on: October 08, 2015, 05:15:33 AM »
Aloha! My wife and I are 25 years old, born and raised in Florida. We're taking a 6-month honeymoon/mini-retirement in Hawaii right now, but we are tentatively considering returning to our college town, Gainesville, FL, to buy a modest home. We chose Gainesville because we jive with the culture there, and real estate prices look low to my inexperienced eye. We'll get jobs and get back to stashing cash in FL once we're settled in.

I know NOTHING about real estate or buying a home, but our #1 purpose for buying a home is to improve our financial situation over the long run. Nothing more. We are prepared to pay $70k - $90k cash for a MODEST home. If we were to pay more than that, we'd be better off leaving the money in the stock/bond markets and renting. Cursory research on Zillow tells me that the median sale price for a 2-bedroom home in Alachua County, FL, is $80k, so it seems like we'll be able to make it happen at that price.

Basically, I am asking here for basic home-buying advice rather than reading random articles online because the MMM community tends to be more like-minded with me financially than others, and a lot of information I find focuses very heavily on mortgages, and I plan to pay cash, so all that advice is lost on me.

Thank you in advance for any and all advice! Assume that I know nothing, because when it comes to real estate, I really do!
« Last Edit: October 09, 2015, 01:58:17 AM by steevven1 »

ShoulderThingThatGoesUp

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #1 on: October 08, 2015, 06:18:41 AM »
Don't buy a house before you have a job.

You should plan for $20k in expenses to correct the previous owner's deferred maintenance after buying a house.

Shinplaster

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #2 on: October 08, 2015, 10:04:54 AM »
Don't be put off by bad decor.  Paint colors, wallpaper, etc. are easily, and cheaply, fixed.  Pay attention to things that are expensive to switch out - roof, windows, layout of the house, hvac, etc.   Pick the best location that gives you everything you need now, and try to see down the road a bit for future needs.   And yes, make sure you have extra funds after closing for repairs and issues that arise you didn't foresee.

We bought our current house for a $20,000 reduction because other buyers couldn't see past the horrible "Barnie" purple walls on the main floor, and cabbage rose wallpaper in the bathrooms.

Telecaster

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #3 on: October 08, 2015, 10:12:20 AM »
1.  Do not fall in love with something that cannot love you back.  If the deal doesn't make sense, walk away.

2. It is not always cheaper to buy.  If it is cheaper to rent, rent.

2a.  Generally speaking, housing is not a good investment, it is an expensive to be minimized

3. If you do get a mortgage, never pay points

3b.  Might be safer to get a mortgage.  Lots of threads on that.   Something to think about. 

4. As Shinplaster says, pay attention to the bones.  Paint and wallpaper are cheap.

5.  Enjoy!  And good luck. 

dess1313

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #4 on: October 08, 2015, 07:34:30 PM »
-Get a guaranteed job before buying.  if you have to rent a few months as you hunt for a house later do it.  Otherwise you've painted yourself into a corner and may not be able to find what is right or the right price
-Get an inspection done or bring a friend who is handy to help you look it over
-Ignore the paint and wallpaper, its easy to change with a weekend of elbow grease.  Look for the important part of the house.  walls, foundation, roof, furnace/AC.
-Beware of houses that have been quickly fixed and flipped.  Sometimes people are trying to do it cheap as possible and cut major corners that you'll have to fix later.  Improper electrical, bad plumbing, cheap components all could come back to haunt you even though it looks pretty now
-Make a list of necessary things.  garages, bedrooms, etc.  don't fall in love with a certain feature and sacrifice other necessary stuff.

Goldielocks

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #5 on: October 08, 2015, 09:26:43 PM »
Location!  Lots of walk tos.

Don't buy more than 1 mile from grocery or a school if you can find it.

steevven1

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #6 on: October 08, 2015, 10:33:04 PM »
Thank you all for the helpful replies. Please do keep the general advice coming! Here are a couple of questions:

1) What exactly is meant by the idea that it may be "safer" to get a mortgage?

2) Many people have told me that I may be able to negotiate a better price as a cash buyer. Any advice on how to actually use this to my advantage?

3) I understand the part about ignoring decor. Regarding the important things, what are the biggest things to inspect thoroughly, and how can I inspect them myself (if possible)? Note that we are talking about Florida homes, if that makes a difference.

Thanks again!

Argyle

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #7 on: October 09, 2015, 02:42:39 AM »
Don't inspect things yourself.  Get an experienced and well-recommended professional inspector.  They know things you'd never think of ó things about electrical set-up and drainage and termites and flashings and mortar and windows and hvac and underfloors and every kind of thing.  They can save you tens of thousands.  This is one area not to skimp on.

Shinplaster

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #8 on: October 09, 2015, 09:08:08 AM »
Don't inspect things yourself.  Get an experienced and well-recommended professional inspector.  They know things you'd never think of ó things about electrical set-up and drainage and termites and flashings and mortar and windows and hvac and underfloors and every kind of thing.  They can save you tens of thousands.  This is one area not to skimp on.

+1

Also, go with the inspector while he does it.  Get him/her to explain the issues that are visible, and those that may not be visible, but have warning signs (too many junction boxes, handyman electrical, etc.).   You should get a written inspection report to keep, but it really helps to talk to the inspector and get the explanations while you can still ask follow-up questions.

If there have been additions, etc., ask to see permits.  If the sellers don't have them, call the appropriate municipal office to make sure they were pulled, and all inspections passed.

If you find a place you love, try and see it at least twice at different times of the day.  It may be peaceful and quiet while everyone is at work, but a whole other story in the evening/weekend.

Jack

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #9 on: October 09, 2015, 10:32:29 AM »
1) What exactly is meant by the idea that it may be "safer" to get a mortgage?

2) Many people have told me that I may be able to negotiate a better price as a cash buyer. Any advice on how to actually use this to my advantage?
  • It's safer to get a mortgage for several reasons:
    • Preserving liquid capital means you have much more flexibility if unexpected expenses come up (e.g. HVAC dies two months after moving in, you and your wife simultaneously get laid off, you find a screaming great deal on an investment, etc.)
    • With interest rates this low, mortgages are cheap enough to be considered leverage. Why spend $90K on a house when that same $90K could get you a house and $72K worth of VTSAX?
    • Fixed-interest, low-interest, long-term debt is a hedge against inflation.
  • When you go to make an offer on a house, make it for a relatively low price and don't put a financing contingency in it. The seller's agent will most likely advise them to prefer such an offer over one with a contingency because it's lower risk, even if the competing offer is for a higher price. Then go back and get a mortgage after closing (for the reasons above).

steevven1

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #10 on: October 10, 2015, 12:08:26 AM »
1) What exactly is meant by the idea that it may be "safer" to get a mortgage?

2) Many people have told me that I may be able to negotiate a better price as a cash buyer. Any advice on how to actually use this to my advantage?
  • It's safer to get a mortgage for several reasons:
    • Preserving liquid capital means you have much more flexibility if unexpected expenses come up (e.g. HVAC dies two months after moving in, you and your wife simultaneously get laid off, you find a screaming great deal on an investment, etc.)
    • With interest rates this low, mortgages are cheap enough to be considered leverage. Why spend $90K on a house when that same $90K could get you a house and $72K worth of VTSAX?
    • Fixed-interest, low-interest, long-term debt is a hedge against inflation.
  • When you go to make an offer on a house, make it for a relatively low price and don't put a financing contingency in it. The seller's agent will most likely advise them to prefer such an offer over one with a contingency because it's lower risk, even if the competing offer is for a higher price. Then go back and get a mortgage after closing (for the reasons above).

Thanks Jack. I was aware of those reasons for getting a mortgage. I will have significant liquid capital left over after this purchase, and I don't have the risk tolerance for leveraged investing. I just wasn't sure if I was missing something else.

Thanks for the tip on the cash offer. It makes sense!

naners

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #11 on: October 10, 2015, 06:32:31 AM »
Check out the NYtimes rent vs buy calculator to make sure it makes financial sense for you:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

fishnfool

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #12 on: October 10, 2015, 01:53:23 PM »
Florida homes are prone to have mold issues, something to beware if besides all of the structural things to inspect.

Spend some time in the potential neighborhoods your buying in. Get a feel for the traffic noise, barking dogs, etc. Check the local crime reports too.

I think it's better to use OPM and get a low interest mortgage. If the market were to fall out, you don't have all your eggs in that basket. If you were retired and going to spend the rest of your life in this home then maybe I'd pay cash. But that's my $.02,   good luck!

Jack

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #13 on: October 10, 2015, 05:14:14 PM »
I don't have the risk tolerance for leveraged investing.

Paying cash for a house isn't risk-free; it just exposes you to a different kind of risk.

steevven1

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #14 on: October 11, 2015, 05:09:46 AM »
I don't have the risk tolerance for leveraged investing.

Paying cash for a house isn't risk-free; it just exposes you to a different kind of risk.

Having a low-interest mortgage when you don't "need" one and investing the proceeds is leveraging. Leveraged investing is strictly riskier (higher volatility) than non-leveraged investing.

If you own a $100,000 home with no mortgage and have no other investments, your portfolio's value is $100,000 and swings by however much the home's value swings by. This is a low/medium-risk scenario with a low/medium reward.

If you own a $100,000 home with a $100,000 mortgage (just to keep the math simple) and also have another $100,000 in stock, your portfolio's value is still just $100,000, but it swings due to both to fluctuations in the home's value and swings in the stock market. Assuming the mortgage interest rate is low, this is a high-risk, high-reward scenario.

catccc

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #15 on: October 23, 2015, 07:15:06 AM »
Why never pay points?  What if you are pretty certain you are going to be in the house for a long enough to ride out the break even point?

And what do you guys typically use for the return on investment % for the rent v. buy calculators?  Is 7% unreasonably high?


CmFtns

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #16 on: October 23, 2015, 09:06:15 AM »
Gainesville is great... I actually just moved from there when I got a job...love the town and I agree with you that housing prices are cheap there but there weren't a lot of job prospects for me.

What field are you in? because It might be easier to look for a job first then choose where to live based on where you can get employment... I also agree with people above that depending on your financial situation you should probably not buy a house before you are employed. It could be a dangerous setback as you are locking in your living arrangements therefore lowering your job prospects.

I am also buying a house right now and even if I had the money to purchase with cash (which unfortunately I don't right now) I would still choose to keep that money in investments and get a mortgage to take advantage of current low rates. I'm pretty sure the market will beat 4% over a 30 year time period... Also, another way I think about it is that with a sub 4% mortgage your rate is very close to historical inflation rates... so when you look at the cost of your home in inflation adjusted dollars over 30 years, your rate will most likely actually be less that 1%
« Last Edit: October 23, 2015, 09:10:36 AM by comfyfutons »

Telecaster

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #17 on: October 23, 2015, 10:33:55 AM »
Why never pay points?  What if you are pretty certain you are going to be in the house for a long enough to ride out the break even point?


Points are just pre-paid interest.   The break even point is usually pretty far out, like seven years or something.  Plans can change a lot in seven years.   Even if you are in the same house, you might not have the same mortgage.    Even then, the monthly savings are pretty small.  So you are exchanging a big wad of cash that you could put to some other use for a small monthly savings that won't have much impact on your budget or lifestyle.   


Goldielocks

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #18 on: October 23, 2015, 09:07:34 PM »
Can't you get a portable mortgage?  Then you could reduce risk to f ending before 7 years, as you could transfer it to a new place...

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #19 on: October 26, 2015, 04:56:28 AM »
Thank you all for the helpful replies. Please do keep the general advice coming! Here are a couple of questions:

1) What exactly is meant by the idea that it may be "safer" to get a mortgage?    It means you are using OPM (Other People's Money).  They (the institution) carries some of the risk.  If using cash would exhaust your supply of cash, don't.
2) Many people have told me that I may be able to negotiate a better price as a cash buyer. Any advice on how to actually use this to my advantage?  It won't make a difference.  The sellers don't really get "cash" as most closing agencies will insist on a bank check.  Not requiring a mortgage might make you a better "prospect" if there are multiple offers but otherwise, not really.
3) I understand the part about ignoring decor. Regarding the important things, what are the biggest things to inspect thoroughly, and how can I inspect them myself (if possible)? Note that we are talking about Florida homes, if that makes a difference.  Get a home inspection.  More eyes are better and you will be surprised at the things you will miss.  Condition.  Roof (how much life does it have left), water damage, termites, electrical service (breakers or screw in fuses), leaks, smell (does it smell funky like mold, leaks, etc).  Windows: newer or older.  Easy to open and close or what?  Public or septic?  General look of the neighborhood.  You aren't just buying a house, you are buying into a neighborhood.  Bad neighborhoods will loser the value of your house.
Thanks again!

Jack

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #20 on: October 26, 2015, 08:57:45 AM »
Can't you get a portable mortgage?  Then you could reduce risk to f ending before 7 years, as you could transfer it to a new place...

I don't think that's a thing in the US.

LiveLean

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #21 on: October 26, 2015, 09:26:41 AM »

You live in Florida, where the two biggest COL expenses are property taxes and especially homeowners insurance. Even in Alachua County, which hasn't been hit by a hurricane in forever -- if ever -- you'll still pay a premium because it's in Florida.

I'd keep renting.

Axecleaver

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #22 on: October 27, 2015, 07:50:33 AM »
1. Work hard to take your emotions out of the purchase. Realize that you are buying a commodity. Everything about the sale process is geared to emotionally invest you in the property. For every home you don't get, there will be another like it you can buy instead. The first rule of negotiation is that you don't come to the table unless you're willing to walk away. Always be willing to walk away from a real estate transaction.

2. Real estate agents (even buyer's agents) are not your advocates. They want to make a sale. They don't make money if a sale doesn't happen, so don't ask them for advice. Or if you do, make sure you view that advice through a filter of skepticism. Don't ask them what a reasonable offer is.

3. When you make an offer, put an expiration date on it (usually 24-72 hours). This forces the seller to make a decision, instead of sitting on your offer hoping for a better one. Especially important in fast moving seller's markets.

4. Make sure you don't buy too much house - referred to as "house poor" - you'll need a bunch of money to catch up deferred maintenance, put furniture in it, and make changes that you want.

5. Some stuff is a lot easier to do before you move in - painting, wood floor refinishing, major remodeling (like bathrooms if there's only one) come to mind.

MgoSam

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Re: First-time Homebuyer...Need General Mustachian Help
« Reply #23 on: October 27, 2015, 07:34:00 PM »

    [/list][/li]
    [li]When you go to make an offer on a house, make it for a relatively low price and don't put a financing contingency in it. The seller's agent will most likely advise them to prefer such an offer over one with a contingency because it's lower risk, even if the competing offer is for a higher price. Then go back and get a mortgage after closing (for the reasons above).[/li]
    [/list]

    Yeah, I was preapproved for my house, was willing to put 20% down, and had a quick closing offer and so my offer was accepted over an offer that was 4% higher, mostly because it was contingent on them selling their house.

    Roots&Wings

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    Re: First-time Homebuyer...Need General Mustachian Help
    « Reply #24 on: October 28, 2015, 07:53:19 AM »
    I recently paid cash for a house in Florida in a Ďhotí sellers market. The house passed the NY Times rent vs buy test, met the 1% rental rule, will let me maintain my target minimum savings rate, has a layout conducive to renting out a room if needed, and is in a great walkable location.

    Paying cash was the only reason I got the house for under market value (10% off an already competitive list price) because I could close fast (2.5 weeks, instead of 1.5 months+ for mortgage) which was attractive to the seller and paid no closing costs. In my area of Florida a lot of mortgages fall through and cash is a sure thing.

    Vanguard charged no wire transfer fees to send the money to the settlement escrow account, which was great.

    I could have done a purchase money mortgage/cash out refinance immediately after closing to get the benefits of fast cash purchase and long-term investment gains, but ended up doing a private family loan, which meant I didnít have to liquidate 1/4 of my Vanguard account (or pay for appraisal/closing costs or new title insurance policy).

    It sounds like you know the area well, but consider checking city-data.com for the registered sex offenders map and crime.

    Highly recommend doing all your inspections (home/termite, survey, septic if applicable) and due diligence for property taxes, insurance, utilities, etc. I cringed paying for each inspection (totaled $975 for home/termite, insurance 4-point, septic, and survey), but ended up with a credit of over $6k due to the unexpected surprises. You can also ask for a home warranty especially if itís an older house. If youíre not getting a mortgage you wonít need a formal termite report and some inspectors will just do the termite inspection with the normal home inspection.

    Good luck!