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Long a housing bear, Frank buys his first home

Posted by Scott Van Voorhis December 7, 2012 06:49 AM

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Here's a dispatch from the home buying front from "Frank," a long-time reader and contributor to the comments section of this blog.

After a couple years of tire kicking and trying to convince sellers to come down on price, Frank, a techie who had been renting a condo in Woburn, decided to shift gears and "go for it" this past September. While he now feels he has found his "dream house," he had some hard lessons to learn along the way. He also ended up paying more than he thought he would, but it is with the knowledge that he found a house worthy of his hard-earned dollars.

Here's Frank's account of how he found the right home for his family. It's a bit on the long side, but worth sinking your teeth into.

                                              Lessons learned

Ok, so I have been meaning to write this piece for the BREN Blog for a while now, ever since we made the fateful decision in September, to 'go for it" on what has now become our home and dream house.

I approached our offer on this property with the benefit of some hard lessons on the cost of doing renovations and updates on a house. I had previously made a serious (but reasonable, considering the updates it needed) offer on a house that needed work that was (stupidly) turned down by owners.

That property was listed originally for $440k, then lowered $430k, and my final serious offer of $395k (up from my "lowball" of $375k) was turned down. It did later in the fall get an "accepted offer" that the owners found acceptable, probably close to $415k, BUT that offer apparently fell thru, my guess because of all the issues/costs/repairs found during inspection, and the house has now been taken off the market/delisted. Let's see if it gets relisted in the spring???..

So suddenly I was back to the drawing board. I looked again at my goals - what I was seeking in a house. For starters, I view housing as "consumption", not "investment", so viewed the purchase of my biggest consumption item, with care and prudent financial calculation. And I viewed my purchase from the mind-set that you have to compare your realistic options. Since we really needed to "consume" more space, I had to weigh the options I had. To me, they were:

a) Keep renting our very nice (but now getting cramped) 2BR/2B Condo in Woburn, for a total OOP (Out of Pocket) cost for $1800/month ($1750 Rent + $50 for a storage unit), and basically have $0 to show for it at the end of the month/year.
b) Expand to a slightly larger 2BR/Den/2B Condo down the hall, which would give us another "room" and thereby some breathing space, for OOP $2050 ($2000 Rent + $50 for Storage), and again have nothing to show for it at the end of the month/year.
c) Buy something that kept my OOP about the same as the larger rental condo, but that gave us additional space and hopefully some equity built up, over time, while fixing our base costs for decades to come.

                                Right house, right time

Then, this past September, things started to happen. The house I ended up buying came on the market at $475k, early in the week of Sept 10th with the 1st Open House scheduled for Sept 16th. The day the house hit MLS, my wife wanted to schedule a showing asap, since it was a top-of-the-line 4BR, 2.5B, 2 Car Garage house, completely renovated studs in, in 2009 (basically all new construction, on the inside), and move-in-ready, with no renovations/remodels needed in a very good town (she wasn't thrilled about my earlier offers, on the fixer-upper). Since it was mid-week and above my max budget of $450k, I told her "let's wait and we can just go see it at the open house." She replied to me, "With this kind of house, in this shape, it wont last till the Open House. Lets see it now." So we did, and really really liked the house but I still wasn't sure I wanted to pull the trigger, since it was a) above our Max budget, and b) I wasn't sure what the **** was going to happen with the housing market "once the Government/Federal Reserve removed the props" (paraphrasing GCBMA).

BUT then Sept 13th happened. For those of you who don't remember that date, it's the date that Ben Bernanke/the Federal Reserve announced Q3-TO INFINITY, basically promising to keep printing money and buying mortgages, till the cows come home or unemployment drops to 6%. I remember coming home from our 2nd showing of the house that day, seeing the news and basically saying "Ok, that's it, I'm done trying to fight the machine. They are not going to let housing fall any more, no matter what." So I told my Redfin broker/agent to offer our "max," which was $450k, and to let them know that. They countered with $460k, and after some back and forth, we/they finally agreed on $455k on Saturday evening (by email), with the condition that our offer expires 1hr before the Open House on Sunday. We e-signed (great idea, which Redfin uses) our offer that evening, and the Seller was supposed to sign their portion Sunday morning.

                       Close call at open house

Sunday morning comes around and since we had only agreed on terms the previous evening, we hadn't had a chance to deliver a "hard" check, with the accepted offer (only photos of the checks, along with our previous offers). So we are told that the seller has agreed to meet us at the house at 1230pm (Open House starts at 1pm) and sign the offer (and their agent will be there to accept the check etc).

So we (along with my parents, since I wanted them to see the house we just "bought") get there at 1230pm, and there is no seller around, but the agent is starting to set up for the open house. So I'm like "Hey, where's the seller?. The agent tells me "Oh, she is just out running some errands and is running late. She will be back any minute." In the meanwhile, she is still setting up for the Open House. So I clarify with the agent "Hey, we have an accepted offer, right??. The sellers agent replies back "Yes, yes. No worries." But by now, my suspicions are raised that they (the sellers agents) are trying to use my offer to drum up higher offers at the Open House. So I tell the agent, "then please make sure that you tell everyone that enters this house that we already have an ACCEPTED Offer on the table, and are only taking backup offers. And if you don't, I WILL!" The agent was clearly perturbed by this, but kinda mumbled "sure, no problem," and went about with the Open House.

Once the Open House started at 1pm, a few minutes later, we (my parents, wife and I) parked ourselves at the kitchen/sign-in table, and watched the folks come in. And ANYONE that came in, we made sure that Agent told them that there was already an Accepted Offer on the table (and that they were only taking backups), or clarified to the attendees that there was already an ACCEPTED Offer on the table (the agent "forgot" to include the word "Accepted" with a couple of attendees so we made sure to "help" and "clarified" the situation with those attendees, and also "helped" to tell some attendees who walked in while the agent wasn't there that there was already an Accepted Offer on the table.

By 2pm, my Redfin agent had arrived, and I explained the situation to him (ie, that the seller still hadn't signed the offer). Luckily my mum is a (non-practicing) Lawyer, and knowing McCarty v. Tobin (Mass Law, on binding accepted offers to sell), and recent Mass Law that emails constitute a binding contract, we basically told him to tell the other agent that we have their emails accepting our offer, and that if they tried to back out now, we would sue and get a Lis Pendens (basically a Lien/Injunction against the property, preventing its sale, and its easy/cheap to file/get. And the seller/their agent has to tell that to any potential buyer, basically screwing any chance of its sale). He then conveyed this to the sellers agent.

At 230pm, we finally got word that the seller was going to her agent's office, to sign the offer. And by 3pm, we had the signed offer in our hands. We had gone $5k over our "max," but IMHO, had gotten an almost brand new house (completely renovated in 2009 with high end everything, at a significant discount over what "new construction" would have cost us (in the top 20% of MA school district town we bought in), where new construction of similar square footage goes for around $550k+. I basically agreed to do so because if someone was going to loan me $$$ for 30 Yrs at 3.75% (the rate we had gotten quoted a few weeks earlier, given our excellent credit), I was willing to go a little higher, since I didn't have to take cash out of "the bank" to pay for it now.

                       Thanks Ben - a boost from low rates

Sometimes timing is everything, and in this case, it worked in our favor. Between the time the offer was accepted, inspections were scheduled/completed, and P&S negotiated, agreed to and signed, about two weeks had passed, but my rate dropped from 3.75% to 3.25% by the time I went in for locking my mortgage in and aiming to get my financing commitment letters by the deadline imposed by the P&S (or lose my $20k+ deposit, if I couldn't get financing). Basically, in 2 weeks, my "cost" on the house dropped almost 7.5%.(On a side note, all you 1st time Home Buyers out there, GET A LAWYER the moment you have an accepted offer. Mine helped me negotiate the P&S favorably, was "on call" to threaten the seller/agents when they tried to back out of something they had previously agreed to do as part of the P&S etc. The cost for me was only $375, as my bank covered the other $375 that he would have also charged, if he didn't do the "bank work" as well. WELL worth it.)

With 10% down, I am now left with a monthly PITI of $1800 + 500 + 50 = $2350. THAT is higher by about 10% then the $2050 that I would have paid for the 2BR/Den condo BUT now come the DEDUCTIONS. (again, the government subsidizing home ownership, which I am now partaking of).

Every married couple gets a Standardized Deduction of about $1000 a month, so you have to "wash" that from the equation. My "Interest" is $1100 a month, to $100+ there, Property Taxes adds another ~$500, and State Income Tax adds another ~$400 a month (and now I can take other marginal deductions as well). Total additional deductions come to over $1000/month. At a margin tax rate of 25%, that?s $250-300/month.

Take the $2350 PITI and minus the deductions savings, and I am pretty much left with a PITI payment of $2100. That?s $50 a month more, for a 4BR, 2.5B, 2 Car Garage house in a great town, than what I would have paid for a 2BR/Den Condo in WOBURN (where, lets face it, the schools are not that great).

BUT wait, there's more. In addition, at that interest rate, my yearly equity build/mortgage paydown is about $8000+ (about $700 a month) in the property. That's almost 2% a year, in the 1st years of the mortgage. So if I stay in the house for 2yrs+, and then have to sell it, assuming no appreciation, I'm even assuming I have to pay a 4% commission to sell the house.

But wait, there's still more ... Closing costs and all that crap was about $3000, BUT because I went with Redfin.com as my buyer broker, I got $3500 BACK in "Commission Refund" from Redfin after closing, helping to defray that "cost" of buying. (I cant say enough good things about the Redfin model of representing buyers. Sooo much better than a Commission Driven agent, who needs you to buy to eat. Their "field agents" are paid on a per-house visit basis, when you see the house, and are nice/polite folks with maybe not that much experience, who have zero vested interest in seeing you buy something in a hurry. Once you are ready to make an offer, their "Broker" (ie, the experienced guy) takes over and guides you thru the process. The "broker" is a salaried employee of Redfin, who gets a bonus based on (imagine this) the customer satisfaction rating that he/she gets, after a deal closes (or falls thru). My "broker," Charles Vallis, was instrumental in helping me get this deal done, especially when it came to dealing with the seller/the other agents.

                                    Happy ending

I'm going to end this by saying, I have NO idea what will happen to the housing market in 2013. I suspect the Spring Market is going to be a hot one, based on the interest rates available, and all the construction I see happening. But either way, I don't really care. This house is a consumption for me, and thanks to the Fed, I can "consume" a 4BR/2.5B/2 Car Garage house in a great town, for about the cost of renting a 2BR/Den condo that's HALF the size in Woburn, all while building up/paying down about 2% equity a year.

This blog is not written or edited by Boston.com or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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