TL;DR
- Run your own numbers, do not expect the numbers that realtors or mortgage lenders tell you to reflect what you can comfortably afford
- Your monthly payment is more important than the asking (or selling) price
- Account for phantom and selling costs
- If you are viewing a home as an investment, make sure you are okay with that investment not working out (or not working out right away)
- Outline which compromises you’re willing to make and which compromises would make you unhappy in the long run
- Put together a great team (your realtor, mortgage lender, and any people advising you)
Our House Searching Experience
One of the biggest surprises I found when we tried to buy a condo, was that my thought process ended up being shockingly similar to the thought process I have when I’m shopping in expensive stores. You might recognize this too: you go in thinking you’ll be so rational, “I would never spend more than $X on [a house/clothes/housewares I didn’t know I needed],” you think, cool as a cucumber.
But then you start looking at all these beautiful, expensive houses/things, and your standards for what counts as expensive start to shift up and up. Plus you have people telling you, “Oh my gosh, this is such a great fit for you!” and “Look at this deal!” and suddenly you forget your original price point and are like, “Wow, yes, this is such a great fit for me and compared to the other things I’m seeing it is a great deal” (never mind that it’s way above the price you were originally comfortable with).
Like when I saw a condo with built-in bookshelves and butcher block counters, you better believe I forgot all about price points for enough time to bid that baby up.
Luckily for us, we lost the two condos we bid on and then got scared out of the market by the rising interest rates. That might sound weird to say we were lucky, but I’m truly so happy about it. Yes, I did cry for a few days about losing those built-in bookshelves, but we would have bought at the very tippy top of the market and it wouldn’t have been the best financial decision for us. Plus, we love our apartment.
But there were a ton of things I learned about the process and that I will absolutely do differently (and, in some cases, the same) in the future. Some of the things I learned the almost very hard way might be helpful for you as well.
The Most Important Numbers You Need to Know
First, for most of us plebeians, the monthly payment on your mortgage is going to be more important than the asking price. *Gasp* I know! Home prices are dropping in large part because the interest rate on mortgages has been skyrocketing. That means, unless you can pay for your house in full and not worry about paying interest on a mortgage loan, then yes, you’re paying less for the cost of that house, but you are paying way more to the banks for the privilege of getting a loan to buy that house. And no, house prices have not decreased enough yet to make up for the rise in interest rates (at least not in Seattle).
Side note, boomers will for sure be like, but interest rates aren’t as high as they were in the eighties! To which you can say, yeah, but home prices were more affordable relative to wages back then, get off my back! So if you are thinking of buying a home, research interest rates and figure out what your monthly payment would be across different house prices given those interest rates. Once you have that information, you can have a better sense of whether buying is affordable for you and whether the real cost you are paying for a home is actually going up or down.
Which brings me to a second really big learning point, it’s super important to understand the difference between what you can technically afford and what is financially responsible.
When you apply for a mortgage loan, you’ll learn what amount you can technically afford to pay for a home. If we had bought a home at the upper limits of what we qualified for, we would have been unable to save pretty much anything and would have been living an even more frugal lifestyle than we currently do (if you know us, you know we’re not big spenders already).
If we had kids to pay for, it would have been oatmeal all day er’ry day, which was a problem since we hoped to buy a place where we could raise kids for at least a couple of years before findings someplace new.
To get a better sense of what you can afford than whatever your mortgage lender will tell you, try NerdWallet’s Rent vs. Buy calculator. I recommend using tools like these as guideposts, but thinking critically about what you could afford and still sleep well at night. For me, I probably need to be on the more conservative side because I get really nervous if I’m not saving a decent percentage of my income each month. For personalized info for you, see these posts on how much you should save and creating a budget.
You might have different saving and spending preferences that influence how much you can comfortably spend on a mortgage payment each month. And if you’re planning on having kids soon and looking to buy a place (whew, good on you!), don’t forget to think about childcare costs so you’re not totally bowled over when all of a sudden you have thousands of dollars in payments you hadn’t had to think about before and that your mortgage lender definitely didn’t account for.
The Housing Costs You Don’t Hear About
Third, account for phantom costs. This is another thing mortgage lenders are not factoring in when they estimate how much you can afford for a home. Phantom costs include things like maintenance costs (if you’re thinking about condos this would also include assessment costs), the higher cost of utilities presuming you are buying a bigger space and/or a place that is less energy efficient than your little apartment, and the cost of furnishing a new space.
Financial advisors recommend that you budget at least 1% of the value of your home each year for maintenance (ugh, maybe renting does sound pretty good). Many of the condos we looked at were in the process of being sold because they had assessments on them. That meant that the building was in need of repairs in the shared spaces that everyone is responsible for paying for (think the roof, siding, amenities like pools, replacing carpets in the halls, etc.).
These repairs can mean that as a condo owner you are, all of a sudden, slapped with a heavy charge that you must pay unless you sell. Some of the condos we looked at were requiring owners to pay $10,000-$20,000 in maintenance costs on top of their HOA fees *oof*.
Fourth, if you are buying a home, in part, because you think it will be a good investment, I recommend only buying if you are okay with the investment not working out and you plan to be in the home for 7 or more years (some people say 5, some people say 10, but I’ve heard 7 the most). First, the housing market always goes up… until it doesn’t. It’s impossible to predict what the market will do, and a property ties up a heck of a lot of your money. It’s not like the stock market where you can change how much you’re contributing or sell some and keep some in, there aren’t a lot of half measures if you’re buying a primary property and viewing it as an investment.
Plus, we often think that if someone bought a home at, let’s say, $750,000 5 years ago and now it’s worth $900,000, that they’ll make $150,000 if they sell it. However, that calculation doesn’t account for any of the phantom costs mentioned above nor does it account for the costs of selling a house, which usually amounts to about 10% of the purchase price. So if you sell a house for $900,000, be prepared to say goodbye to $90,000 of that in selling costs.
Sure, you still make a profit (unless you had to do hella remodels), but that’s a much smaller payday. Plus, we’re also totally ignoring the non-quantifiable cost of the headache of buying and selling places and we’re ignoring the opportunity cost that you could have put the money for a house into the stock market (or other kinds of investments) instead and potentially earned returns some other way. And that’s also in an example where the housing market is doing super well and the cost of your house went up 20%!
If you have to sell a house for the same price you bought it for, then you’re actually losing a bunch of money in the end, and I don’t even need to talk about what happens if the market goes down when you’re trying to sell. So even if you’re a first-time home buyer, make sure you understand the costs of selling and factor that into the risk of buying something as an investment or shorter-term living situation.
Understanding When Compromises Are Necessary and When They Go Too Far
Next, outline which compromises you’re willing to make and which compromises are going too far. Unless you are a multi-millionaire, you will almost definitely have to make some compromises when you purchase a home. You may have to buy a smaller place than you would like or in a different neighborhood than you prefer, you may give up on that yard you wanted, or get a place *sigh* without built-in bookshelves.
It’s important to understand what compromises you are willing to make that will still leave you happy with the place you end up in and which compromises you might feel forced into that will end up leaving you unhappy that you ever bought this dumb, bookshelf-less property.
Jokes about bookshelves aside, we were willing to make some pretty substantial compromises when trying to find a place. First, we were looking at condos when we would have preferred a townhouse or single-family home, we were willing to only have 1 bathroom and 2 bedrooms, we were willing to live in a place that did not allow dogs (cries internally), and we were open to living in a place that was a little dated (though Andrew and I did not totally agree on how dated we were willing to go, he wanted someplace newer and I was fully ready to roll up my sleeves and This Old House that shit).
We were even open to letting the sellers remain in the condo we bought for a couple of months after we bought it. This option is called a rent-back agreement which helps sweeten the pot when you are making an offer on a place and the owners need to then turn around and find their own place to buy after selling.
However, we weren’t willing to compromise on the location (North Seattle neighborhoods that were proximate to safe running options), the presence of 2 bedrooms, and in-unit laundry. That may not sound like a lot to expect, but boy was it ever. We had to really stand firm on those preferences. When you get into the process of buying a home, many people tend to assume that the main goal is buying something, anything! So, just like dating, try not to get too desperate and settle for something you’ll be pretty sad about later.
Putting Together a Great Team
Finally, find a great team but also be aware that their motivations and perspectives are likely to differ from yours. It’s so important to find a good realtor and mortgage lender. We loved the people we worked with and they were so helpful and informative. That being said, it’s their job and hopefully their passion to help sell homes. They can have your best interests at heart but still advise you to buy when it may not be best for you because it might be what they would do.
I listened a lot to a podcast called “How to Buy a Home.” It was very informative, but I realized after awhile that the guy would basically advise you to buy a home no matter what. Not because he was predatory, he wasn’t making money off of most people listening, but because he was a passionate realtor who truly believed that buying a home is pretty much only ever a good decision no matter what your scenario. That’s his perspective, but I learned to take his advice with a grain of salt, run my own numbers, and do my own gut checks.
To bring this all together, make sure you’re clear on what you want, not just from a home but from a financial standpoint, and do a lot of research in advance to help clarify what you can (comfortably, responsibly) get for your money. Then stand by those preferences despite the pressure that will inevitably come up to raise your price points and lower your standards.
Because you don’t want to be left standing among a pile of moving boxes wondering how the heck you were allowed to buy this property in the first place. I’m about 98% sure that’s how I would have felt if we hadn’t been outbid on those two condos, though at least with one of them I could have stared at my built-in bookshelves and felt an eensy bit better.
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