Buying A House Part 2: Things Get Real
Welcome to Saving Money with Andrew!
By late August, we were ready to begin our home search in earnest. As discussed last week, we had a broker, a budget, and a list of desired neighborhoods. What did we do next?
Alerts
To track everything coming on the market, we set up Zillow alerts. Wwe created searches by neighborhood, budget range, and desired home size, and then clicked “Save Search” and set it to email us whenever anything new was posted or updated. This gave us a consistent flow of new homes, price cuts, and completed sales to stay on top of the market.
Finding a Lender/Obtaining Preapproval
One of the most important things we learned early on is that if you want to be taken seriously when shopping for a home, you must have a mortgage preapproval. What this means, generally, is submitting information about your finances to a lender, who will then provide you a letter saying you are “preapproved” for a mortgage of up to a certain amount (make sure to get approved for an amount at least at the top of your budget).
This is a critical step, not only because you need the preapproval to be taken seriously, but also because it is likely you will end up using this lender for your mortgage. Surprisingly, mortgage rates can vary significantly by lender, so it’s important to shop around.
We started with Bankrate’s rate finder but many lenders, particularly local banks and credit unions, are not included in it. So you should also contact local banks and, if there is one nearby, your local credit union.[1] In our case, we found the best rate for our loan (3% for a 30-year jumbo fixed) at a nearby credit union that did not come up in our initial searches.
Once you have your preapproval, it’s time to start seriously looking at homes and, when you’re ready, making offers.
Submitting Offers
During our two-month search, we saw around 10 houses (in normal times we would have seen more) and put offers in on two of them, with one accepted. We are now in contract, and working toward closing. Some important things we learned during the offer process:
Make sure to understand the bidding rules
In normal times, buyers make offers and sellers counteroffer, etc. But for both houses we bid on, there were two rounds of bidding, which took us by surprise. In round one, we submitted our offer. In round two, the selling broker asked for our “highest and best offer”. In this situation, you may not have any insight on how much higher your offer needs to be, if at all, though your broker might be able to find out if the highest bid is at or above the ask. Unfortunately, you are (kind of) bidding against yourself. When confronted with this, it’s generally best to leave plenty of room in your first offer to increase it in round two.
Make sure not to fall in love with a house and get carried away. For the house we bid on unsuccessfully, bidding went crazy and we were told at the end of round one that we needed to raise our bid above ask (our first bid was about 3% below ask) to be seriously considered. Ultimately, the house sold 5% above ask, 13% higher than what it sold for four years ago (with minimal work put into it). This is in a market that had been soft until COVID, and is out of whack even relative to other homes that have sold recently.
Think hard and methodically about how much you are going to bid (and use a spreadsheet!)
In some cases, relatively little quantitative rigor or analysis that goes into deciding how much to offer. Rather, many people find a house they want, and then try to figure out how much they have to pay to outbid others (sometimes constrained by budget), instead of how much the house is actually worth.
In our case, I created a spreadsheet (Excel is fine, but Google Sheets is free) where I entered every home that had sold in the neighborhood in the past year or so, including price, square feet of home, square feet of lot, and a few other relevant metrics, all data easily obtainable on Zillow—just search sold listings in a given area.[2] We also accounted for how nice/updated the home was inside and out. We specifically looked at homes that were similarly updated and what their price per square foot was relative to the one we were considering.[3]
Between that and the historical data in the Redfin Data Center, I could very easily see whether a home’s asking price fit into the recent range of home sale prices per square foot for the neighborhood (with a focus on post-COVID sales) and, if not, could ask our broker to dig into the tough questions about why a home was potentially mispriced. This work led us to hold back from getting caught up in a bidding frenzy on our first house, and to bid appropriately on our second. It probably saved us well over $10,000.
Contingencies, contingencies
Our broker urged us to drop the “financing contingency” to make our offer more attractive to the seller.[4] Dropping this contingency is risky, because if you are unable to obtain a mortgage, you are still obligated to “close” and purchase the house, or lose your entire deposit.[5] For the second house we bid on, we decided to take this risk because we were highly confident that we could obtain a mortgage, and felt we were unlikely to win the house otherwise. We later found out that the sellers took our offer over another offer that was almost 2% higher (that had a financing contingency) because they wanted a “sure thing”. It’s a calculated risk, and it’s important to think long and hard about whether to do it, preferably with the help of your real estate lawyer or financial advisor, because the downside of failing to obtain a mortgage can be severe and the consequences can vary depending on your contract.[6]
Next week, we’ll talk about inspections, going to contract, and preparing for closing.
But first…Andrew’s pick of the week:
Amazon Smile
I’ve discussed Amazon several times in the past year, including my thoughts on the company (and reader responses), along with various ways to Save Money on Amazon. And since the pandemic, Amazon’s position in our economy has continued to grow, as this great NYT article discusses. It’s sad but true that in a year in which it felt almost every public institution—federal, state, and local governments—failed us in some way, Amazon dramatically scaled up and kept on going, at worst experiencing some delays and supply shortages. It has been, and continues to be, a lifeline for us.
As we go into holiday shopping season (and today is Cyber Monday after all), I urge you to start using Amazon Smile rather than regular Amazon for all of your purchases.[7] It’s exactly the same as the regular Amazon site, except that you can designate 0.5% of all of your purchases to go to any charity. We and several other families recently designated our kids’ preschool as our Amazon Smile charity, and in only a few weeks it has received $650 in donations through the program. In total, charities have received $217 million through this program to date, and if every Amazon purchase were done through Smile, Amazon would donate over $1 billion every year to US charities. If Amazon is going to consume an ever-increasing share of our retail spending, a small piece of it might as well go to a good cause.
I hope this has been helpful. If you liked it, please share it with a friend! Also, please send me your feedback, requests, and success stories.
[1] And make sure that you are comparing quotes with no upfront charges (“points”). Points, with few exceptions, are not a good deal.
[2] If you and your significant other aren’t good with spreadsheets, find a trusted friend or family member who is.
[3] This process is similar to how an appraiser would value a home. When we reviewed our lender’s appraisal for the house we’re buying, we saw they reviewed several recent comparable home sales in the area, made adjustments for square footage and a few qualitative differences, and used that to determine a fair value for the home.
[4] A “financing contingency” is a provision that allows a buyer to walk away without penalty if they are unable to obtain a mortgage.
[5] In practice, you may be able to negotiate a smaller penalty or additional time to obtain a mortgage, but this is not a good place to be in.
[6] A small detour on real estate lawyers: we live in a state where it is almost essential to hire one, and we’ve found it to be an extremely good value. We are paying a flat fee of less than $2000 to have someone to consult on tough questions, and to take care of the more complex parts of the buying process. Even in a state in which people routinely transact without a lawyer, it may be worthwhile to hire one for such a large and important purchase.
[7] And if you use a bookmark, just edit it to go to smile.amazon.com rather than amazon.com.