Well, it’s official: The Mustache Family is buying a new house.
We’re pretty excited, as this is a chance to put many of our favorite values into action. It is a significant downsizing, at 1000 square feet smaller than our current place. This brings the chance to live more efficiently, with less idle space. It’s a bit of a fixer-upper, meaning I get to crank out another thousand hours of good old-fashioned hard work. The size and condition mean that it is $160,000 less expensive than our current house, which will allow us to transfer more of our savings to productive investments (and pay lower property taxes) forever. And it is situated with ideal Southern exposure (free winter heat), backing onto a beautiful public park filled with wide open grass areas and shade trees. This setting will allow us to do less of our living and entertaining indoors, and more of it out in Nature where we belong.
There will be plenty to talk about after we close on this house later this month, do some quick renovations, rent it out for one year, and then move over and sell the main house next summer. But this enticing story is just an example to introduce the real theme of today’s lesson, which is how to buy a house in general.
House buying has been on my mind for most of the past year. We’ve been shopping for our own downsizing residence, making several offers on other places around the neighborhood. Several friends have coaxed Mrs. Money Mustache into using her real estate agent powers to help them buy their own houses. The Longmont property market has heated up to a frothy boil, with the nicer houses selling on the first day after listing. And I’ve watched it all with some interest, noting both the successes and failures on the part of buyers and sellers.
How to Buy a House
You might think that buying a house is just something you do, rather than a skill that must be learned. But the truth is quite the opposite: for the typical nonmillionaire, a house is the biggest purchase ever made, and thus the opportunities for both grand mistakes and massive scores are plentiful.
Mindset: You can start things off by giving yourself a great gift that will make the rest of the process go much more smoothly: a calm and rational mind. Repeat after me: “I am not buying a flowery pillowcase of emotions or a future of warm memories. I am conducting a business transaction to purchase a piece of land and an assembled collection of construction materials.”
Don’t worry, there will be plenty of time for the pillowcases and the memories after you buy the house, but don’t put the carriage in front of the horse. For now, you are a BusinessMan/BusinessWoman looking to conduct some business. The strength provided by this mindset is essential to get the results you want.
Location: Next you choose your location. You need to do this before you start looking at houses, because it is way more important than the details of the structure itself. Beginner buyers often say things like, “Oh, I’ll just live somewhere near the interstate, so that way it’s easy to get anywhere”. Instead, I suggest starting with the assumption that cars don’t exist, and designing a life around that assumption instead. You’ll still have your cars, of course. But your level of need for them, and thus the quantity of money and time you waste sitting on your ass in them, will be completely different.
With a bit of planning, it’s almost always possible to put work, grocery store, school, library, and anything else you need right within the area you live. By looking for public amenities, you can get many of the benefits of a country house right inside the city, as shown in the picture above. The more things you live near, the fewer things you need to own yourself.
Rent vs. Buy: There are a few bits of old folk wisdom that need to be put out of their misery. “Real estate is always a good investment, because it never goes down.” “They aren’t makin’ more land, so buy it now.” “Renting is just throwing your money away. You should buy, because you’re building your equity.”
In expensive areas (homes start at over $300,000), the math often comes out in favor of renting. In cheaper areas, especially with the currently-low interest rates, buyers usually win. In between, there are some considerations that tilt the balance: people who prefer not to maintain their own house should be renters (because the contractors will eat you for lunch if you do things like calling a plumber to fix a broken toilet). People who love customizing things to their own liking might still prioritize owning. But in either case, there are costs: if mortgage interest plus property taxes and insurance alone add up to more than rent for an equivalent house, you are throwing more money away by buying than you are renting.
Fixer-Upper or Fancy Luxury: much like the rent-vs-buy decision, this question often depends on how expensive the target area is. In pricey hotspots, everything sells at a premium – a renovated 3-bedroom house might be worth $200,000 more than the same thing in dated condition. Since it costs far less than 200 grand to renovate a house, you’re better off with the fixer-upper. But there are still many US towns where houses are selling at less than their construction cost*, even assuming a land value of zero. In this case, you might as well get all the quality you need while it’s on sale, since even DIY-renovation will cost more than purchasing an already-nice house.
Ignore the Fluff, and See Opportunity in the Bad: When touring houses with buyers, I’ll often hear things like, “Oh my god, I love this pantry!”, or “Daaayumn.. this place smells dingy.. let’s get out of here.”
Small details like a set of wooden shelves with gourmet spaghetti sauce on them, or an old carpet that has absorbed more than its share of bodily fluids tend to have a big impact on buying decisions, when really they should not. These represent things that can easily be changed, at a tiny fraction of the cost of the house itself. Would you make a car buying decision based on how full the gas tank or the wiper fluid reservoir is?
Pay More Attention to Big Details: For example, which part of the house faces the sun? My pet peeve is houses that have little windows peppered into their exterior with no regard for what sort of heat and light they will let in. If you live in an area where heating is a significant expense, you want a house oriented on the East-West axis with a large area with lots of windows facing the sun. If you are in a hot climate, you want something with large roof overhangs and some shade. How efficient is the furnace, air conditioning, insulation, and water heater? These things make a difference of thousands of dollars per year, which makes them more important than most other home features. And good solar exposure and window placement can make for a happier living environment in general.
An interesting question is whether size, or square footage, is really a big detail. According to traditional real estate agents, it is one of the biggest. Square footage, relative to other houses nearby, is the biggest factor that goes into setting a listing price and doing appraisals. But as a buyer, you can safely ignore it. More important is, “is there a large enough common room for my family and friends?”. This can happen in an 800 square foot house, or be oddly lacking in a 3500 square foot one. Our “new” smaller house, for example, will be almost as useful as our current place, because a big chunk of the missing space is stuff that isn’t really living space anyway (hallways, staircases, an overly-big master bedroom, etc.) The new house is all at ground level, which makes for an efficient layout.
Take your Time: For the past eight years, I’ve researched every listing and every eventual sale in my area, so I’ve soaked up the market on a fairly deep level. Within the span of any given year, I see houses sell at both ridiculously high, and ridiculously low prices, given their quality and size. The market is hot in summer, cool in winter. And there are frequent random events, like a bank dumping a foreclosure at $100,000 below market value or an estate sale with an out-of-town realtor setting the price way too low.
Given the large sums involved, it makes a lot of sense for a home buyer to plan to shop for six months or more, rather than rush to find a house during a brief window of a summer vacation or a weekend househunting tour. If you spend 50 hours researching houses, but save $50,000 on a purchase because of it, what is your hourly rate?**
Move Fast when the Time Comes: You found a great house, and you know it is underpriced. Do you go away for the weekend and think it over, then maybe try to set up a showing next week? No. You tour it within a few hours of its arrival on the market, and you make an offer before you eat dinner that night. Good deals go quickly, so if you want one yourself, you must be even faster. Earlier this year, we found one of these bargains and had our offer in within 8 hours of listing time. We lost it to another person who only took 6 hours.
And that’s it! Sure, there are plenty of meat-and-potatoes details missing, but you can get those from a real estate agent who is trained for your own city, state, and country. This guide just represents my idea of what seems to be missing in the process for most beginners.
House shopping is much like car shopping: as soon as you train yourself to look beneath the superficial veneer, you gain a huge advantage in the marketplace. So good luck.. and maybe I’ll see you at the party in the beautiful park that is my new back yard later this month!
* I find that building a house in the US costs between $100-$200 per square foot (in the average-cost Denver metro region), depending on quality level. So a 2000-square-foot house selling for $150,000 is an unsustainable bargain – the prices will have to rise on these someday assuming eventual demand, because nobody can make more at that price. Omaha and areas near Dallas seem to have these amazing sales, among other places.
**One shortcut to this is if you can find that rare ultra-sharp, patient, analytical real estate agent to provide the market intuition for you. But these are 1-in-100 in my experience, and unfortunately Mrs. MM is not looking for more business :-)
Another big shortcut is to strive to avoid wasting time: your own, the seller’s, and your realtor’s. So you start by getting all your information online – reviewing all available pictures, scoping out the area with Google Maps and Street View, and doing a walk-by inspection of any potential house.. all before setting up a showing. Only if you can still imagine buying the house at this point, do you bother committing to a tour, an act which involves consuming about 8 hours of other people’s time, and should thus be taken seriously.