Putting Yourself in the Best Financial Position as a First Time Home Buyer

Mindy:
Welcome to the BiggerPockets Money Podcast show number 177, where Scott and I talk about how to make the smartest financial decision when buying your home.

Scott:
So that’s where you need to think about from a wealth building perspective here is it’s like, “Come on. You can’t go all out on your first purchase and destroy all of your life options and assume a huge, fixed cost and put all your liquidity into it, but you also may not be able in a position where you’re willing to make the lifestyle sacrifice, frankly, that I made.”

Mindy:
Hello, hello, hello. My name is Mindy Jensen. With me as always is my everything as a spectrum co-host Scott Trench.

Scott:
Glad to see we’re on the same wavelength today, Mindy. Shout out to our podcast team and Eric. I was stumped by a pun for spectrum and they just shot that back immediately. Thank you.

Mindy:
I’m outnumbered. Scott and I are here to make financial independence less scary, just for somebody else, to introduce you to every money story, because we truly believe that financial freedom is attainable for everyone no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way. So, you can launch yourself towards those dreams.

Mindy:
Today, Scott and I are talking about buying a home and dispelling some of the myths surrounding a home purchase.

Scott:
That’s right. We’re going to be doing a little shameless self-promotion because we have an exciting announcement, Mindy and I, that we have a new book out called the First-Time Home Buyer. We’ve been hard at work on for the last year or so. We couldn’t be more excited about this. We’ve talked about home buying a few times on this. We think it’s just one of the biggest financial steps that you can take in your wealth building journey. We’re excited to talk about that today.

Mindy:
The most beneficial financial steps if you do it right, but this can set you back a number of years if you do it wrong. So, we wanted to help you make a smart financial decision when you’re buying your house. Some of the myths surrounding home buying, Scott, is that it’s a great investment.

Scott:
It’s not necessarily a great investment, but it could be. Another myth is that renting is throwing away your money.

Mindy:
Sometimes yes, sometimes no. It depends on where you live. Buy the most house you can afford.

Scott:
Yeah, I think, seriously, guys, if you ever listened to this show, that’s not going to be our advice.

Mindy:
You deserve it.

Scott:
I don’t think you deserve anything when it comes to this stuff. You earn it. We’re going to talk about how that home purchase can really offset a lot of the hard work you’re doing in the wealth accumulation front in other areas.

Mindy:
Scott, that sounds like a bad thing.

Scott:
Yeah, by the way, spoiler alert, I don’t own my own home right now. I rent and we’ll talk about that in a little bit as well, because it’s the right financial decision and the right lifestyle decision for me at this moment in time. I have owned in the past, of course.

Mindy:
And still own, you just choose not to live there right now, which is fine. You have made an intelligent financial decision, because you have all the information to make a smart choice. Scott, let me ask you a question. What do you think the number one thing that people think of when they’re about to buy their house, when they’re going to start on the journey?

Scott:
Yeah, sadly, I think it’s, “How much house can I buy?”

Mindy:
That is such a wrong question. That’s the right answer to my question, but it’s the wrong way to phrase that question, because the way that phrases, “What is my ceiling? How much can I spend? What’s the most money I can part with?” That’s not the right way to enter homeownership when you want it to be an investment, when you want it to be a smart choice. Scott, what is a better way to phrase this question?

Scott:
What is the least amount I can spend to attain my lifestyle goals or investment and wealth building goals? What’s the best value that I can get with my home purchase, I think? Because when we talk about the core, the first element of the home buying strategy, the strategy of whether to buy or rent or what kind of housing to live in is to understand that your home is not an investment, at least not in the way that the typical middle class American family buys their first home. Housing is a cost. Your options are either to buy or rent.
The more that you buy or the more that you rent, the less wealth you’re going to build. It’s just as simple as that. There’s a lot of nuance behind that next layer of question of, “Is it less expensive to buy a home or to rent?” That’s, I think, a really interesting and dynamic discussion. There’s a little bit of art. There’s a whole bunch of things that go into that. Maybe that’s a good place to start our discussion. I don’t know. But it comes to the core understanding of home is not an investment. Housing is not an investment. It’s a cost. You’re paying for that either by buying or by renting. The more that you pay, the less wealth you build.

Mindy:
So, your house isn’t automatically an investment, but your house can be an investment. The first time I heard somebody say, “Your home is not an investment,” I thought, “Well, that’s the stupidest thing ever, because of course, it’s an investment.” I have made money on every house that I’ve ever bought and sold. But the reason that I have made money is because I’m not buying at the top of my price range. I’m not buying a beautiful house. I’m buying quite the opposite actually. That’s always the way that I bought.
In the beginning, it was the only way I could get it. I couldn’t afford anything nice. So, I bought the ugly thing and I made it look pretty, because I didn’t want to live in an ugly house. So, what I’m doing is forcing appreciation. I’ve heard you say several times that you talked about the concept of appreciation. I’m wondering how you can gauge appreciation. How can I predict depreciation?

Scott:
Yeah. Well, first of all, I just want to acknowledge that you’re completely right. Housing can be an investment. However, in the context that most people approach the first-time homebuyer decision, it is not an investment. It’s from a cost perspective. If you go into the purchase with exit options, like what you’ve done, living and flipping and fixing it up and increasing the value, then you can turn it into an investment.
If you go into it the way that I went into my first property in the context of a house hacked duplex, that is an investment. I intended to exit the property by leaving it and keeping it as a profitable cash flowing rental property. So, it can be an investment, but the first thing to understand is that your housing in and of itself in the context of the normal American first-time home purchase is not an investment. Now, I’ve already forgotten your question, Mindy. What was it again?

Mindy:
How do you predict depreciation?

Scott:
Yeah, I think it’s a great question. There’s three frameworks that I’ll zoom in and back in from. The first is just national inflation and the average costs across the United States, right? If we look at a Case-Shiller index… Wow, I’m getting really jargony all immediately.

Mindy:
That’s your superpower.

Scott:
Home prices tend to increase in value over time. There’s two things you need to separate when you’re thinking about home prices. One is the value of new properties that are being constructed in a current year. Those properties tend to be bigger, newer, have better amenities, or whatever. Those appreciate faster than properties that are on the existing home market or resale market, right? So, those might appreciate at 4 or 5 or 6% per year in price nationwide. The new homes cost 4 or 5 or 6% more each year if you’re buying a brand new house. We don’t care about that in the context of estimating appreciation of what our property will be if we go buy it, live in it, and resell it downstream.
So, that’s where an index called the Case-Shiller index becomes very valuable. It shows what the average appreciation of existing homes on the resale market is. That’s about 3.4% over the very, very, very long term. What’s going to happen in the long term future? I don’t know, but I like to use long term historical averages to guess at what long term future returns will be. So, I like to start, “Okay, nationwide, it’s going to be 3.4%.” That again can be completely wrong, but that’s where I start my assumptions with appreciation. Then you have regional factors that impact appreciation.
Is Denver, Colorado going to see a different appreciation rate than the national average over the next 30 years? I certainly think so. That’s why I buy in Denver and buy rental properties and those types of things and have bought house hack investments here, because I think I’m going to get more than that 3.4%, than average. I think I would assume less than that 3.4% average if I lived in a city that was not seeing net migration trends, perhaps a San Francisco or a Midwestern city that maybe wasn’t seeing a lot of net migration into it.
And then the third, you boil down, is you say, “What’s the hyper local factors that are going to affect my property’s value? Am I in an up and coming neighborhood? Is the government investing? Are new parks or public transit being improved and being put in place nearby where I live? Am I in an area that historically has maybe had some not attractive commercial businesses? There’s old dry cleaners or those types of things that are not so nice. Is that impacting my stuff there? So, am I then going to get a better or worse average appreciation rate than that of my local region?”
So, I try to maximize all three by saying, “Great, long term, I think that property values are going to increase nationwide. I also believe that Denver, Colorado, which is where I happen to live, is going to be among those cities that have the highest appreciation potential. And then I attempt to buy properties in areas that I think are likely to experience even faster than Denver average appreciation by understanding my local market intimately.”

Mindy:
So, it sounds like you don’t just wake up one morning and say, “I want to buy a house,” and then go and put an offer on a house. It sounds like you do a bit of research. I love that, because when I was a first-time homebuyer, that is precisely not what I did. I was renting. My lease was coming up. I didn’t like the fact that my rental unit didn’t have a dishwasher. So, my criteria was, “I want a property that has a dishwasher.” Honest to God, that’s what I said to my real estate agent who I found… God, I think I found him on a sign. I drove past a sign or something.

Scott:
Those signs really work.

Mindy:
They work. Wow, that was not the best experience I’ve ever had as a client. My real estate agent didn’t even show up to closing. I was like, “Wait, I’m doing this huge thing. You’re not even here to explain stuff to me.”

Scott:
My agent gave me a bottle of champagne. It was great.

Mindy:
My agent didn’t give me squat, but that property with all the mistakes that I made on it taught me so much. Wow, did I learn a lot from that property. I really like what you said. I look at my hyper local market. I live in Longmont. I’ve lived here now for long enough time. I know where the neighborhoods are that other people want to live in. I don’t want to call them the better neighborhoods, because it’s Longmont. There’s not any bad neighborhoods, but the neighborhoods where it is more desirable for people to live in. It’s called Old Town. Everybody wants to move to Old Town. You put your house on the market. It all sells instantly. You have to figure out which of the 27 offers you want to take.
But buying a house in Old Town is going to be a better purchase than a house a little bit farther North, because it’s not as desirable. It’s still desirable. It’s just not as desirable. But then is Longmont more desirable than Loveland? Currently, it is right now, because you can commute to Boulder, which is a rather expensive city. So, there’s a lot of things that can make a little bit of a difference now and have a huge difference down the road if you just think about your purchase. When you bought your first house, did you fall in love with it?

Scott:
Oh, no.

Mindy:
It’s a bit misleading.

Scott:
I fell in love with the numbers behind it.

Mindy:
The numbers, yes, yes. So, maybe that’s not the most fair question, because you’re not the most emotional guy.

Scott:
But I think that’s the key here, right? If you’re buying your first home and you’re looking to go all out aggressive, then you’re going to have a clear answer. You’re going to probably buy a dumpy fix and flip or a fixer upper house hacker and go all out and improve it, right? But that’s a small minority of, I think, people that are going to be willing to go on that end of this the wealth building spectrum. We’re certainly going to talk about that in the book, but that’s not really what we think the meat of you, you guys, the listeners, the folks that might benefit from this are going to be doing.
It’s going to be a spectrum where it’s going to be like, “Hey, if that’s the optimal way to build wealth, but you’re going to be living in the dumpy duplex with no blinds the first day and that’s going to be a system shock to you or having to paint the cabinets and stain them while you live in the property, maybe you don’t want that.” But you also know, “Hey, if I just buy the maximum, the best property in the nicest neighborhood that I can possibly qualify for, dump all of my liquidity into it and assume the highest possible mortgage payment, that’s going to destroy a lot of wealth.” So, there’s a spectrum here.
It’s, “How do I find that sweet spot on the spectrum that’s going to meet my lifestyle and wealth building goals and appease my spouse, for example, if my spouse is not on board with going all out in dumpy duplex in the upcoming neighborhood in town, right?” So, that’s where you need to think about from a wealth building perspective here is it’s like, “Come on. You can’t go all out on your first purchase and destroy all of your life options and assume a huge, fixed cost and put all your liquidity into it, but you also may not be able in a position where you’re willing to make the lifestyle sacrifice, frankly, that I made.” That maybe Craig curled up living behind the curtain in his first duplex, renting out the main room.
So, I think that’s where the spectrum comes into play. It’s just all about understanding, again, housing is a cost, not an investment as most people purchase it. You can turn it into an investment. That’s great. We want to expose people to that option. But then when we’re thinking about the first-time home purchase in the context of that cost, it’s about making the best overall decision there. I think that’s where we come back to those exit options.
Appreciation and making that as a smart choice and thinking through all those things and buying in the area that is most likely to benefit from appreciation in your local market is one factor that gives you a slightly better odds of having the exit option of selling your home at a profit after you move out a little bit more freely, but I still think that if you’re buying for market appreciation and not improving your property or doing other types of things, that you’re still in what we would call the buy and pray mentality when buying the house, right? You’re buying the property and praying it goes up.
So, all of my jargony stuff around the Case-Shiller and national appreciation averages, all that goes out the window in the recession and you’re stuck. You can’t sell the property at a profit if you don’t have other exit options. So, let’s talk about those exit options real quick, Mindy. What do you think the three exit options are for the first-time homebuyer?

Mindy:
You can sell it hopefully for a profit, but you can just sell it and then you’re done with the property. You can rent it out if the numbers work. I mean, you can rent it out if the numbers don’t work. You’re just buying yourself a job or coming out of [crosstalk 00:15:54].

Scott:
Subsidizing somebody else’s lifestyle. Yeah.

Mindy:
What’s the third exit option?

Scott:
You live in the property forever, right?

Mindy:
Oh, well, yeah, that might not be what somebody considers an exit option, because you’re not really exiting the property.

Scott:
Yes, but that, sadly, is what I think most people, when they go into their first purchase, are really considering. They’re like, “Oh, this is my forever home. I’m going to live here.”

Mindy:
Let’s talk about that, the forever home, the dream home. I just sold on Friday. I just closed on the house that I owned for almost seven years. I’ve never owned a house for more than now, seven years. Before that, my limit was five. I’ve never in my whole life owned a house or lived in a house for more than five years. I have a different strategy. I do a live and flip. So, I move a lot. But the average people move every five to seven years.

Scott:
I think it’s moving every five to seven years. It’s owning a house for 7 to 10 years.

Mindy:
Yeah. So, you’re not in your forever home. You might be in your dream home, but you’re not in your forever home most likely. You are in a home that happens to be your house right now. So, when you’re looking for your house, I think it’s really important to make a list of things that you want to have. What you want to have should also be things that appeal to other people. So, I don’t want a house that has one toilet. I want my house to have at least two toilets. There are four of us living here. I want at least two toilets. So, that’s at least a bath and a half, but I like to have three.

Scott:
Oh, it’s highly beneficial to your relationship to have two bathrooms rather than one. I’ve learned this in the past year as well. But I want to point out something here. We’re joking about this, right? But there’s a real thing here, right? The living in the property indefinitely option is an exit strategy and is one that you need to consider, right? It’s something like if you’re going to buy a home to go too far along the spectrum on giving you the exit options of keeping it as a rental or selling it at a profit and those options for whatever reason don’t materialize and you’re miserable living in that property within a couple of years, you have done something wrong. You are eliminating a viable exit option.
So, it’s important to be rational and think through, “What is it that you want? What are the deal breakers for you? Where can you be happy?” Because there can be real lifestyle and financial consequences to not thinking through these types of things. The two bathroom thing, we’re joking about it, but it can be a big deal with that stuff if you’re going to buy that house.

Mindy:
Especially if you’re buying it as a newlywed or as a couple who is planning on having children, the more people that need to use that bathroom, the more bathrooms you need to have available. We are talking about the American market. It’s totally a first world problem. I get that. But if you are buying and selling in America, two or more toilets is more appealing to more people than simply having one. Along the same lines is the weird house. You don’t want to buy a weird house. I once saw this house. Do you know what a geodesic dome is?

Scott:
No, that sounds like [crosstalk 00:19:15].

Mindy:
It’s like half a ball. It’s horrible. Buckminster Fuller invented it. It’s interesting, but it’s hideous. There’s a lot of open space inside, but it’s weird. If you buy a geodesic dome, plan on living there forever, because there’s three more weirdos in the world that want to live in your house too. The rest of the people will drive past and be like, “Wow, look at that house. I would never live there,” and keep moving. It is a strange house. Strange is a four-letter word. Unique is a four-letter word. You want as close to cookie cutter as you can find, because having a normal house is more appealing to more people.

Scott:
I think that’s exactly right. I think that that goes to the next exit strategy, which is selling your home ideally at a profit, right? You want to have the option. Why is that important? Because for example, let’s suppose that your career, your spouse’s career advances and there’s an opportunity in another city, right? If that opportunity is substantially better, you may not be able to move. We find people and they put all of their downpayment into a house. They assume a large mortgage payment. They’re strapped for cash, and they have none of those exit options.
If there’s a recession or a challenge or there’s a reason why you can’t sell that property quickly, that can limit options, you taking advantage of options and life opportunities like that move, like that next bit of flexibility in your life. You can’t go down an income if you buy too much of that property or whatever. So, bringing this back, the exit option is selling your property at a gain ideally, right? I think there’s three points to consider as we’re going through this. One is, “Is my property appreciating?” We’ve already covered that and talked about, “Hey, here’s the national average. Here’s my regional average. Here’s how to pick hyper local factors that will bring market appreciation and boost the value of my property over time.”
That’s an art and a science, but probably more on the art side in guessing at what that appreciation is going to be. Although that can prove very valuable. Location, location, location is a thing in this real estate investing space and especially in the context of first home buying. The second option, though, which gives you a little bit more control is to force appreciation. This is something that Mindy is an expert on. I’ll let her talk about a little bit more in detail than me, because she’s done this multiple times, improving properties and realizing substantial gains. There are huge tax benefits to doing this within the context of your first home purchase, by the way, which again, she’ll get to in a second.
The third thing you can do is just wait it out, right? I mean, I think most people know this when they’re coming into the first-time home purchase. But when you buy a home and you own a home, you’re experiencing both long term average appreciation in most markets and you’re typically amortizing your debt. You’re paying down the mortgage with each monthly installment of your mortgage payment. Those do compound over time. But what most people forget about is the closing costs associated with both buying and selling a property.
When you buy the property, you’re probably assuming paying 1 to 3% depending on your market of the property’s value in closing costs on the buy side. On the sell side, you’re probably assuming more like 7 to 8% in closing costs. You’re paying both the buyers and the seller’s agents. That means that if you have a $300,000 home, you’re going to spend between $21,000 and $24,000, 7 and 8% of that property’s value in closing costs to sell it. So, if you put down 20 grand to buy that property, you’re in the red if you turn around and sell it the next day. You have to wait a number of years for that to undergo. That’s why it’s important to understand.
That breakeven point is five, six, seven years depending on your market and various assumptions that you’re making between it being better to buy than to rent because of this dynamic of closing costs in most markets. So, anyways, the three ways again, to give yourself the best options of selling your property for a gain are going to be experiencing market appreciation and putting yourself in position to do that, forcing appreciation, which Mindy will talk about in a second, and then just waiting it out and allowing the long term averages to work in your favor and your loan to amortize. That’s why that exit option of being willing to live there for a long time or willing to own it for a long time, we’ll get to that in a second, as a rental can be so powerful in the financials related to this decision.

Mindy:
So, let’s talk a little bit about forcing appreciation. I just sold this house on Friday. So, this is actually real time numbers here. In 2013, I bought a house that had two bedrooms and one bathroom, just the one bathroom with this random space that somebody had added on. They got a permit to start, but they never closed out the permit. I did not get a home inspection. I mean, we did our own home inspection, but I did not get one formally. I didn’t check permits to see if the obvious addition had been permitted. I paid $176,000 for this house. I was one of three offers on this property, because this was just coming out of the housing crash and the market was starting to heat up again. So, I paid $176,000 for it.
Over the course of two or three years, we put in about $100,000. We added a second storey, which had a bedroom, a bathroom, and the living space up there. We took the unpermitted addition and turned it into a dining room, bathroom, laundry room and bedroom. This was a lot of work to do. I don’t recommend doing this for your very, very first-time home purchase. I think there’s one wall we didn’t touch in this whole house. I closed on it on Friday for $591,000 after some concessions for radon, but we were under contract for $598,000.
It appraised at $623,000. It appraised so much, because we made it very nice. We put in a brand new kitchen. We redid the one bathroom and added two more bathrooms. We did a lot of landscaping. We made this house look beautiful. It was a lot, a lot of work, but now I have… Let’s see, 276 to 598. That’s what? $300,000. How much tax do you think I paid on that, Scott?

Scott:
Zero.

Mindy:
Zero, I put $300,000 in my pocket. Sorry, Uncle Sam, you get none. The reason I was able to do that is because it was my primary residence for two of the last five years. So, that is an option. You don’t have to go whole hog like I did. You can buy a house that’s really gross and replace the carpet, paint the walls, change them from brilliant green to gray. Agreeable gray is like the color right now or even just white. The house looks very different.
There are people who will walk into a fixer upper and say, “No way,” or they won’t even walk in because they say, “No way. I can’t do that.” Anybody can paint. Anybody can lay flooring. I’ve seen it done. I’ve done it myself. It’s very easy. If you can swing a hammer, you can install flooring. There’s a lot of ways to force appreciation without moving walls, without changing plumbing, without doing electrical, but there’s ways to force even more appreciation by doing that too.

Scott:
Mindy, what was the timeline again for this property? How long did you hold it, seven years?

Mindy:
We bought it in June of 2013. It’s February of 2021.

Scott:
Seven and a half years and $300,000 in profit, that’s annualized $30,000, $35,000 a year in profit after tax that you’re getting. That’s like a $50,000 a year income that you’re getting. So, that’s one way to think about this in the context of the first home is that if you can do it right and you can find these options to improve properties, it can be another full time job added on to your income with only part time effort to a certain extent.
Again, what I’m trying to solve for fundamentally in my career, I guess, in general, is how do you help a middle class person, starting with little few assets, get over the hump to the point where they’re automatically generating large amounts of wealth, have large amounts of liquidity to invest in things like real estate or small businesses. There are really only a few ways to do it. One is to grind it out and save more and more each month for several years until that liquidity is achieved and to do that with proper asset allocation.
Another way is to start a business or moonlight and figure out a way to generate, come into a large amount of money. I think a third is to leverage your housing decision to affect a huge liquidity event downstream in the form of the appreciation that you’re getting or to house hack or something like that and drive down those costs. If nothing else, making a lower cost housing decision will be less of an anchor or less of a drag in your ability to accumulate wealth and create real liquidity and access to investments that can move you towards financial freedom.

Mindy:
I completely agree, Scott. I want to stress to people who are listening saying, “Oh, I could never do that,” you can do it. Maybe not right now, but there are a lot of undesirable houses on the market that are still habitable and easily updated. I mean, painting cabinets can be a great way to update your kitchen without actually changing the entire cabinetry. Getting new countertops can be a really great way to give it a fresh look without ripping out your kitchen and trying to figure out how to eat for the next month while you’re putting it back together again. There’s just so many opportunities to think outside the box and make your house better.
My house is worth a lot more because of the work that I put into it, but also, I was living there anyway. I needed a place to live anyway. Right now, we are in a very favorable seller’s market. If the market had changed, I would have simply stayed there. I could have afforded to stay there because I had so little into it. I think my mortgage payment was like $1,100 a month.

Scott:
Again, we’re still talking about the second exit option. The first one being live there indefinitely and happily. The second is sell it ideally at a profit and to exit the property. The two ways to do that are to benefit from market appreciation or appreciation forces outside, which you can, I think, increase your odds at that guess being effective. I certainly attempted to do that to the best of my ability when I bought each of my properties. I believe you have as well. But it’s still fundamentally the buy and pray approach that we’re doing when we talk about market appreciation.
And then there’s the forced appreciation mechanic, which is you improving the property and making it more desirable, which is something that you can control. That’s the opposite of the buy and pray strategy that many people are applying, right? So, that’s, I think, where I really love what you’ve done and mastered, Mindy. Again, the more value you can stack into your private home earlier, the better off you’re going to be, because you can sell it without paying any tax in most cases if you’ve lived there for more than two years, right? That’s something to talk to your CPA about at the end of it to make sure you don’t bungle anything up, but that’s a real advantage.
Let’s go to the third exit strategy here, which is to keep your property as a rental. That one, I think, is the option that I have opted for versus you over the years. This is basically landlording, right? You buy a property. You say, “What will happen if I rent this property out either as a short term or a long term rental downstream after I move out?” If you can buy a property that on day one would make sense as a rental while you’re living in it, you give yourself that option immediately. Now, you don’t have to worry about living in the property for the five, seven years, that’s necessary to…
Again, we talked about how renting or buying can be a better option. Those closing costs really make it so that if you’re going to live in a property as the typical American family does in the very short term for year two, three, that renting is better than buying, which is exactly what I’m doing. I’ve done that, because my personal situation calls for me to want to rent rather than buy right now given the lifestyle and other options that I have, that I’m looking into. Yes, you run the numbers as a rental before you buy it. If it makes sense on day one, you’ve got that option immediately.
You can hold the property for 5, 7, 10, 15 years as a rental and be putting money in your pocket every month in a really advantageous way. So, I think that’s where it comes down to. Look, this is landlording 101. There’s a lot of stuff on BiggerPockets. We can talk about this in much more detail, but fundamentally, it boils down to I’m going to run the numbers as if it were a rental. That’s going to include my rent assumption, a vacancy allowance, a CAPEX and maintenance allowance, a property management allowance.

Mindy:
Even if you’re going to rent it yourself or manage it yourself, you’re going to want to make sure-

Scott:
Even if manage it yourself, you want to make sure it’s still cash flows as a rental. Hey, the answer might be there are no properties that you would live in, which would make sense as a rental. You will lose $100, $200 a month on the property. Even if you were to rent it out, using realistic assumptions around all those numbers. That’s okay. The less negative you are, the less bad that exit option is, right? So, understand that.
Just go in with your eyes wide open and run the numbers and say, “Okay, great, I would lose $1,000 a month on this property. That’s going to have a major freedom impact on me over the years. I’m going to be stuck in this property. I have to be able to sell it or live there happily, because that exit option’s close to me,” or “I’m going to lose $100 a month. That’s not so bad. Maybe the appreciation and amortization will actually offset that, even though I’ll be cash flowing negative on average over some time. That’s at least making that exit option a little bit more accessible to me,” or “Maybe I’ll lose $100 a month if I analyze it as a long term rental, but it’d actually be profitable under a short term rental assumption.”
So, there are lots of ways to think about this. We go into more detail around that in the book, but that’s something to think about. If you can make that option accessible, and positive, you give yourself a great exit option that most people don’t think through.
So, if you can go into that first term home purchase saying, “I’d be happy to live in this property for 10 years or more, if that’s what ends up happening in my life, I would be able to cashflow positive if I’ve moved out and rented the place. I believe that within just a few years, I’ll be able to sell this property at a hefty profit, perhaps after making improvements or benefiting from market appreciation,” you’re in the most powerful position as a homebuyer. The less of those things, the fewer of those things that are true, the weaker your position. So, strategically, it’s all about setting up your purchase to maximize your options on those three exit fronts.

Mindy:
I have nothing to add, Scott, because that’s perfect. Just because a property doesn’t work as a rental doesn’t necessarily mean you shouldn’t buy it, but I think a lot of people purchase a house and then they say, “Oh, well, if it doesn’t work out, I’ll just rent it.” Sometimes that’s a terrible idea. You have to know that going in, so you can make the most financially intelligent purchase as possible. Just because this house doesn’t make sense doesn’t mean that one down the street wouldn’t make more sense or one in a different city wouldn’t make more sense.
Like I alluded to earlier, Loveland has not seen the appreciation that Longmont has. That doesn’t mean that Loveland is a bad choice. It means that Loveland and Longmont five years ago, when they were about the same price, Longmont would have been a better choice simply because of its proximity. So, look around, you don’t have to be married to one city if another city might make more financial sense.

Scott:
Yeah, you used the word ‘married’. I want to go into the relationship piece of this as well. In many relationships, I’m sure there’s going to be one person listening to this like, “Oh, we should go all out and maximize the numbers.” The other spouse might be like, “Oh, we should really get a house that’s going to be good for us and our family and that we’re going to like living in with those kinds of things.” I think they’re both right in that. They’re both talking to specific exit options that I think really need to be thoughtfully considered with this. I think there’s some give and take necessary to make this decision correctly. I don’t know. That’s a stretch for a transition with the married thing.

Mindy:
I do think that there is a house out there that will fit everybody’s needs in the relationship. So, you want a certain house and Virginia wants a different house. Great. There’s a house out there that will fit both of your needs. Carl and I have been buying houses together for 20 years. We will frequently go into a house that I love and he’s like, “No way,” or he loves and I’m like, “No way.” We just continue looking.
There is a house that you can both agree on. It doesn’t have to be a big fight. It doesn’t have to be this contentious thing, but you need to communicate with your spouse, with your partner who’s buying the house with you what it is you’re looking for and why this home makes sense. In many cases, Carl just likes a really gross house. So, let’s talk about preparing to buy and getting a good deal. What are some steps to take? What’s the first thing that somebody should do when they’re thinking about buying a house?

Scott:
Yeah. So, we just finished talking about the strategy, right? Your home is a cost as most people buy it. It can be an investment, especially if you create those exit options that we just talked about. But for most or for many, it is a liability. It’s a cost. Buying more costs you more and builds less wealth, so does renting more, right? The more you buy, the more you pay in rent, the less wealth you’re going to build. And then understand those exit options, live in the property indefinitely, keep it as a cash flow generator or sell it for appreciation. Now, it’s about, like Mindy said, putting yourself in position to actually buy a deal on the mechanical side of things and getting a good deal, whatever the heck that means. We’ll talk about that in a second.
All right. I think there’s five steps to preparing to buy and getting a good deal. Those are creating a good financial position, a strong financial foundation, putting yourself on an appropriate timeline, knowing what you want, defining what a good deal actually is, and then what I call preparing calmly to act aggressively, which we’ll get into as well on that. So, Mindy, do you want to start walking through some of these? What do you think is a good financial position to buy a home?

Mindy:
Borrowing every dime. No, you need to have enough money for your down payment. Your down payment doesn’t necessarily have to be 20% down, which is the amount that your bank will require in order to waive PMI or private mortgage insurance, but you can get into a home with as little as 3.5% down for an FHA. I think conventional goes down to 3%, 0% down for VA and USDA loans. So, there are really, really low downpayment options. That’s not necessarily the smartest choice for you. Private mortgage insurance can be quite expensive and can eat up a huge chunk of your monthly payment every month. However, it doesn’t have to be.
My friend, Jake put 10% down on his house instead of 20%, because in order to do 20%, he would have had to sell some stocks. When he got the quote from his mortgage lender, I want to say it was like $50 a month and he said, “Oh, for $50 a month, I’m not selling any stocks.” And then I think he even refinanced it down lower, maybe $37 a month. So, PMI doesn’t have to be enormously expensive, but it can be. So, talk to a lender, see what your payment would be, see what your PMI payment would be, and put yourself in a good financial position to make an intelligent choice.
We keep saying intelligent purchase or I do anyway. It’s because there’s no one size fits all. Yes, you want to buy the perfect house and the perfect lot for $1.50 and pay no mortgage insurance, but that house doesn’t exist. So, have enough money to make a good downpayment. So, that you’re either waiving PMI or you’re paying a low amount of PMI. And then have money for all the closing costs and have money for something that’s going to break because something’s going to break.

Scott:
Yeah. Just to add into that, that there’s a stable income component to this. There’s good credit. There’s having cash not just for your down payment, but for closing costs that you’ll pay as the buyer with that transaction. And then there’s, I think, having access to liquidity or cash in reserve for that. Mindy likes to say that the amount of problems you’re going to experience after buying a home is inversely correlated with the amount of reserves that you’ve accumulated.
So, if you buy a property and you put down $40,000 and that’s all you have and you have nothing left in the bank and you’re going to have $15,000 in repairs to make in the first three months, it’s going to be a huge stressor for you. If you’ve got $15,000 in the bank, you’re going to have no repairs, and everything’s going to be smooth sailing. So, I don’t know. That’s Murphy’s Law. That’s not a real truth, but that’s the way to think about it with this is make sure that after the downpayment, you’ve got those reserves. I would say you’re in a stronger position.
The person that puts 0% down and got a VA loan on a property or 3.5% down and has $10,000, $15,000 in the bank in reserves to cover unexpected emergencies, I think they’re in a stronger position than the person who puts $40,000 down and has no reserves, right? So, I think the downpayment is important, because it can affect your financing options like Mindy says. PMI can be very expensive. That’s private mortgage insurance. You pay an extra fee if you put down 3.5% or a very low down payment on a property compared to somebody putting down 15, 20, 25% on a property. They might pay little or no PMI, mortgage insurance on that, because they’re putting down more. They have more equity in the property. So, those can all be considerations.
For me, I put down 5% on my first property. Why did I put down 5%? Because the property was one of the cheapest I could find, $240,000. I only had $20,000. I was saving at a rate of about $1,000 a month. So, it would have taken me about four or five more years to save up enough to buy a property, to buy my first duplex than to avoid the PMI. So, I put down 5% earlier. I had some reserves. That was the right move for me. But I think it’s just understanding those costs and those types of things when you’re thinking through.

Mindy:
I want to highlight what you said right there, Scott. You said, “I had some reserves.” I don’t want to kick a dead horse, but I really think that you can’t stress that enough. You need to have some money in the bank that you don’t touch. It’s not invested in stocks. It’s easily liquidatable. Because something will break and the person who is responsible for fixing the house when you own the house is you.
Your landlord’s not going to come and change anything. You don’t want to go without hot water. You don’t want to go without heat or air conditioning or whatever it is that just broke. You don’t want to have a leaky roof, because that leads to mold, which leads to some really big problems. You are responsible for making these repairs. So, have the money to do it. So, you’re not putting yourself in a financially disadvantageous position. Was that enough, Scott speak?

Scott:
Absolutely, I think that’s great Scott jargon as well. All right. So, the second step… So, remember, we have five steps before you prepare to buy and to put yourself in position to get a good deal. That is create a healthy timeline to purchase, right? What many people do is they’ll be like, “Hey, it is April 1st, and my lease is expiring on July 31st. Therefore, I need to buy a property in the next three months. I really need to go under contract in two months, because if I don’t, then I’m going to be with nowhere to live. Uh-oh.” So, they’ve created this artificial timeline where they have to transact in a fast manner. So, now I’m compressing.
Let’s say I make $80,000 a year. I’m looking to buy a $300,000 or $400,000 property, right? I am now making the largest financial decision of my life, $300,000 or $400,000 decision in a hurry. That is going to compound your odds of making a big mistake or rushing into a bad deal dramatically. So, the first and most simple, stupid obvious point that I can make that I think is a non-negotiable for me, you can obviously take it or leave it, because you’re just listening.
But if you’re asking me, I would say, absolutely not, you cannot create the artificial timeline and force yourself into making a decision on somebody else’s terms. Go call your landlord if you’re renting and go month to month on the lease. Pay the extra $200 a month or $100 a month to go month to month through the timeline of buying the property.
No landlord in the country is going to say no to a certain amount. Maybe it’s higher or lower for you to do that, but they’re going to give you that flexibility most likely. If they don’t, go rent on a short term basis or find a month-to-month lease somewhere else with this, but figure out a way to make sure that you’re able to buy on a calm and patient timeline. So, that you can buy the property that’s right for you and you’re not rushing at several hundred thousand dollar decision. Yes, you’re paying more, $100, $200 extra per month or whatever it is, but you’re probably going to reap that in the form of tens of thousands of dollars in value by making that much of a better decision on the purchase front.

Mindy:
Yeah, the calm decision and the calm whenever it happens timeline is the best choice. I was going to suggest, hey, Scott, if I’m your tenant and I have always paid on time and I’ve been a delight to rent to because I am a delight to rent to. I called you up and said, “Hey, Scott, I’m thinking about buying a house, but I’m not sure when I’m going to find one. My lease is up in July. If I don’t find something, can I go month to month on my lease?” Of course, you’re going to say yes. I think one of the caveats is if your lease comes up in November or December, maybe offer to extend it three months, instead of leaving in January when it’s typically a little bit more difficult to find the tenant.

Scott:
Or sublet it or plan a year in advance for this stuff, right? But just don’t put yourself in a position where you’re buying a house in a hurry, because you’re making a $400,000 decision. Again, especially if you’re buying your first home and you have a pretty low net worth. You’re just going to get started on the wealth building journey. I mean, this is multiple times. My first duplex was multiple times my net worth at the time. So, I went month to month at my apartment. I ended up probably having to pay a month of rent overlapping where I owned the property and paid double duty on the rent for my apartment, but that is small potatoes in the context of your several hundred thousand dollar asset that you’re about to assume.

Mindy:
Yup, incredibly small potatoes.

Scott:
It seems like a lot. It is a lot, but it’s tiny in perspective. The odds of making that decision, again, are going to create value to you in the form of thousands or tens of thousands of dollars, I believe, over the course of two, three purchases. Probably right on there on your very first one.

Mindy:
Yup. Okay, the third point is know what you want. Like I said earlier, having two toilets is far more desirable than having one toilet. What else do you want? Do you need a garage space? Is parking in the area really difficult and you need a garage space? Don’t look at properties that don’t have a garage space. How many bedrooms do you need? Right now, people are working from home. I think a lot of people are moving because they realize that the house that they’re living in doesn’t cut it when they need extra space.
On the other hand, if you’ve got a job like you’re a doctor, you’re not going to be working from home. You don’t need to buy a house that has a home office for you and a home office for your partner and all the things. What you want might not be your forever home. In fact, it most likely will not be your forever home. But if there’s two of you and you’re planning on having kids, don’t buy a one-bedroom condo and think, “Oh, I’ll just move in a year.” Plan ahead a little bit, but know that this is probably not going to be your forever house. So, know what you want. Know what’s also really hot in the market. So, that when it is time to sell, you’re not selling some weird property that nobody else wants.

Scott:
Yeah. So, what does done here look like? Well, here’s an example, right? I’m looking for a duplex, triplex, or quadplex in these two or three specific neighborhoods. On the East end of this neighborhood, I’m willing to go a little lower in price, because I believe it’s more likely to experience appreciation. On the West end of the neighborhood, I’m going to need a lower price, because I believe it’s less desirable and less likely to experience appreciation. I’m looking for a 1950s build or later because the specifics of those properties built in that time period tend to be items that I’m familiar with as an investor or have dealt with in the past or I’m comfortable with.
I’m looking for at least two beds, one bath as an investment property or two beds, two baths for a property that I would live in. I’m looking for properties with a certain amount of square footage, 700 to 800 square foot as a rental, 1,500 to 2,000 square foot for a primary residence. I’m looking for properties that have a garage and a little bit of a yard or a fenced in area that would be amenable to pets, because I both want to get a future pet. My future tenants may also want future pets which increases my applicant pool for those types of properties. You go down the list like that. You can rattle that off. Now you know what you want.
You can say, “Okay, I’ve got a concrete, crystallized vision of what I’m looking for. Me and my spouse are on the same page with that.” That gives you a clarity around what you’re looking for. So, that you’re not just reacting and falling in love with the first property that comes in the market. Falling in love with a property can cost you tens or hundreds of thousands of dollars. You don’t want to do that. You want to know what you want.
And then it’s great to fall in love with the property that exactly meets the criteria you’ve written out previously. That’s a healthy emotional relationship with the piece of land and structure. The unhealthy one is just being shown a property and being like, “That’s it. I love it.” Now, you’re in trouble and you’re going to make a rash decision, right? So, anyway, defining what you want. There’s some examples in the book of, “Here’s a clearly defined specific item of what I would want in the Denver market,” for example.

Mindy:
Think about what your current housing situation has that you like and what do they have that you don’t like or what does it not have that you wish it had. I think it’s really important to make a list of wants and needs. I need more than one toilet. I want a house without carpet. Well, I could rip out the carpet. That’s easy. It’s a lot more difficult to add a second toilet. It’s not impossible, but it is a little more difficult.
So, look at what it is that you have to have and look at the nice to haves and make sure that all of your have-to haves are conveyed to your agent. Yeah, know what you want and do not fall in love with the house because there’s always another house. I don’t even know how many houses there on the US, but there’s a lot. There’s another one for you. [inaudible 00:51:51] with this is to finding a good deal. You alluded to this a little bit, Scott. What is a good deal?

Scott:
Okay. So, when most people start their housing search, the first thing they do is they go on Zillow or Redfin or wherever or talk to their agent. They see listings that are live on the market. They’re immediately like, “Oh, there’s nothing on the market. It’s terrible. The only properties that are on the market are incredibly overpriced or have something horribly wrong with them. This is terrible. There’s nothing in the market.” Well, yes, the reason for that is because we’re in a hot seller’s market and have been in for several years, for many years. What happens there is when you look at the active listings in a seller’s market, where properties are going quickly, the good ones especially, you’re only seeing the bad deals live.
So, the way to avoid this trap that all these first-time homebuyers are falling into is to instead not look at the active listings at all in the initial stages of your search. You look at the sold listings. You look at everything that has sold in the last 180 days, not what is live first. You say, “Here are the properties that I’ve defined, according to my vision before.” You know what you want. And then you look, “What properties that meet those criteria have sold in the last 180 days or last 90 days, right?” If there’s a big event that has happened, like COVID, you need to reset your search, because when the country’s set down, the properties that sold between January and March 15th no longer were relevant in the context of the new market, right?
You had to reset those things, but that’s infrequently. That’s probably not applying to people that are listening right now, unless another big event happens in the next couple of months. But you say, “Okay, great, in the last 90 to 180 days, 10 properties that met my criteria and that were generally in my price range have sold. Here are the values of those properties, $375,000, $380,000, $385,000, $390,000, $395,000, $400,00, $405,000, $410,000, $415,000, so on and so forth.” Well, guess what? When you look at those properties, you’re going to see that six of them, the ones that were below $400,000 all sold immediately and went under contract or sold off market or whatever.
The four that are over $400,000, for example, might still be on the market. So, when you look at the live listings, you’re like, “Oh, a good deal is $400,00, $405,000, $410,000, $415,000 for the property I want.” No, a good deal is $375,000, $380,000, $385,000 for the property that you want. It’s a simple mechanism. It’ll take you a few hours to look through it.
You can start to search yourself on Zillow, but I recommend that you talk to an agent and sit down with them to look at sold listings and figure out, “Okay, great, these are the ones I would have bought.” Drive past them. Take a look. Confirm that those are properties that you would have liked to buy at that price point. Now, you’re armed with what those properties are, what you want and what it should cost, what good looks like. That is a powerful piece of information. Combined with your timeline, now we can get to step five, which is prepare calmly to act aggressively. So, should I continue my rant here, Mindy?

Mindy:
I think you’ve explained it very well. I think that is a framework I’ve never heard anybody suggest until you suggested it. Look at what has sold recently, because you’re right. Right now, there’s nothing on the market, but a month ago, 15 sold between this tiny price range. That’s what a good deal looks like. Preparing calmly to act aggressively means you are taking your emotions out of it. I know that I want a two bed, two bath house in this neighborhood. I know I want to spend $350,000. Oh, look, one’s on the market for $400,000. That doesn’t fit my criteria. Another one came on the market for $385,000. Whoa. Then there’s one that comes on the market for $355,000. I know I can make an offer now. Boom, let’s go. Let’s get this under contract before somebody else finds it too.

Scott:
That’s the key is acting aggressively. This is what I think causes so many first-time homebuyers or first-time investors to not get a good deal, right? Because what’s happening here is we’ve now defined that a good deal is $350,000. That’s what you want. That’s a good deal. Maybe only five properties in the last 90 days have sold that were good deals according to what your research tells you. That says one property is going to come on the market every two and a half weeks on average. Sometimes longer periods will go between those properties come in the market, and sometimes shorter periods.
So, what that means is you need to be able to again, calmly act aggressively. You’ve made a decision now. You said, “I will buy the next property that meets my good definition,” or “I will offer on it at the very least.” You have to in a seller’s market like the current one, be ready to do that aggressively. That property comes on that market at 2:30 in the afternoon on Thursday. You don’t have to drop whatever you’re doing at work and take off the afternoon, but you better cancel your evening plans and get over there, take a look, drive around if you can’t get into the property and be ready to make an offer that night or the next day or whenever the listing agent is accepting those offers.
You better be able to make a firm competitive offer that you think is going to win that property. You got to do that on a very, very short timeline. That’s terrifying. That’s terrifying if you don’t know what you want and you haven’t done all the things we just described earlier, because you’re making the largest financial decision of your life in a big old hurry. But you’re not because you’ve spent all that time thinking about what you want, knowing what it is, knowing what a good deal is. You recognize it. You spot it. You transact, and you’re good to go. That, I think, is how you get a good deal or a relatively good deal in a seller’s market, at least one that’s on market with this.

Mindy:
You’re acting quickly, but you’re not making a rash decision. You’ve done the work already. You’re making the intelligent decision once the property comes on the market that you know you want. I think that’s really, really powerful. That will give you the most advantages to make a financially intelligent decision and a confident purchase. Especially if this is your first time, it can feel rash, that you’ve seen a house once and you’re making an offer.
I do recommend that you go in and put your eyeballs on that property. But when you go in to see it, you can say, “This is what I thought it would be, I want it,” or “This isn’t what I thought it would be. I’m going to wait another couple of weeks for the next one to come on the market at the good price and make a decision then.” I alluded to this. I want to jump in here and say there are some people who think that you can just buy a house sight unseen. If you are buying your first property, you should be in it. Your eyeballs need to be in it and your nose needs to be in it, because you cannot smell a picture. Have you ever smelled a cat house, Scott?

Scott:
I have not.

Mindy:
Picture if you will, the smell of ammonia all over.

Scott:
Yes, I’ve smelled cat houses. Yes.

Mindy:
I’m like, “What are you talking about? Of course, you’ve smelled.”

Scott:
Yeah.

Mindy:
Smells like money. Maybe you don’t want to smell that money. You can get rid of that smell but that’s a much bigger problem. You definitely don’t want to buy a house sight unseen if you’re a first or second time homebuyer.

Scott:
You certainly don’t want to be surprised by that, right? You want to go in with your eyes wide open with those kinds of things.

Mindy:
Yes, and your nose wide open too. Right now, you have to wear a mask. I’ve been in houses and I can smell that through my mask. This is not a good house.

Scott:
Well, let’s talk about something here, because we’re in an extreme part of the seller’s market, I think, right now in general. Who knows how long it’s going to continue? This seller’s market could continue for 10 more years. It could be over tomorrow, right? So, it doesn’t mean necessarily mean that it’s not a time to buy. The market stuff, we can get into a whole thing around that. But in the current reality, there are some listings that are getting offers that say, “Hey, I’m even going to inspect the property. I’m going to buy it exactly as is,” or “I’m going to buy with all cash and those types of things.”
To me, what that says for a first-time homebuyer is, “Hey, if a good deal in your market to you is the one property that sold the last 180 days that meets your criteria, you might be waiting a long time before you buy your first home. Then you better be prepared to wait a few years, because you might get outbid on those types of things.” If you’ve got 5 to 10 in the last 180 days, you might lose on 1, 2, 3 of those properties. But within the next six months, you’d probably hit your winner and find it and get it.
So, it’s just understanding those odds and those types of things and knowing that hey, no, Mindy and I are not going to sit here and allow or advise you to buy your first home, the biggest financial decision of your life without inspecting the property or having the ability to object to material problems in that property. You could certainly write an offer that says, “I’m not going to object to the light switch covering not being replaced or whatever.”
But if there’s a foundational or major system’s up or problem or those types of things, you have to be able to object and inspect those things and know about those, especially on your first purchase. That can mean that you might have to just expand your pool a little bit, the definition of a good deal. One good deal in the last 180 days or none, you’re living in fantasy land and you may not be buying anytime soon. If you can create a pool, where there’s, again, 5 to 10 at least in the last 90 to 180 days of properties you would have purchased, you’re probably in reasonable shape.

Mindy:
I want to jump in here and say as an agent, your agent needs to be on your side. When I am representing somebody, I don’t allow them to make an offer on a property where they are waiving their home inspection and agreeing to cover the gap between what the house appraises at and what they offered on the property. When I say, “I don’t allow them,” the people that I work with are in the financial independence space or have certainly heard of it and are trying to lead a financially intelligent life. I don’t really tend to work with people who don’t understand that concept, but also, I am explaining to them exactly what that means.
So, since I’m not going to work with everybody who’s listening, I will explain to them what that means. When you have a property under contract, it is traditional and not an out-of-the-wall request to have it inspected by a licensed home inspector. My go-to home inspector, Rick, shout out to Rick, he goes through the property. He has a list of 180 things that he’s looking at. What about this? What about this? What about this? He goes through every single one. It takes him three or four hours to go through the house.
At the end, we come in. We walk through the property and he shows us all the things that he found. He doesn’t find a lot of things or he finds a ton of things. He doesn’t care about making the sale go through. His job is to make sure that my clients know the condition the home is in at the time that he inspected it. So, he’ll walk around and he’ll say, “This will probably fail in 5 years,” or “This is going to be great for the next 15 years.” He can’t guarantee all these things, but he’s giving you something to look at that you as a first-time homebuyer probably have no idea about. It’s okay that you don’t know about it, but for you to buy the house without knowing about it is putting yourself in a financially disadvantageous position.
We’re talking about financially intelligent purchases here, and you need to know the condition of the house. A furnace lasts between 12 to 20 years. If you’ve got a 23-year-old furnace, chances are really good, it’s probably going to go out soon. A furnace is $3,000, $4,000, or $5,000. You need to know that so you can prepare. If the furnace is on its last legs now, you might want to get a concession from the seller or walk away from the house. In my area, a roof is $15,000 to start. That’s a lot of money when all you have is $10,000 in your emergency reserves. You’re already at a $5,000 hole and you haven’t even bought the property yet. So, you need to know these things.
You can write an offer that says, “I’m only going to inspect for health and safety,” which means you’re only going to ask for repairs for health and safety. You’re still going to inspect the whole house. But if the roof is about to fall in, you want to know that and you can exit the property. The gap between the appraisal and the purchase price, if you offer $400,00 and the appraisal comes in at $385,000, your loan is now only approved at $385,000. That’s $50,000 that you are going to have to bring to closing if you agree to cover the appraisal gap.
Now, you might be up against other people who are willing to forego the inspection and willing to cover the appraisal gap. Let them buy the house. Let them waive these inspections. Let them win the property. Your agent isn’t going to be making your mortgage payments for you. They’re not going to bring that $15,000 to closing for you. So, if you don’t have the money to cover the appraisal gap, don’t say that you’ll cover it.

Scott:
Yeah, I think that that’s the key is it comes back down to yes, people are doing that in many markets around the country where they’re doing these, in my opinion, very silly things here, where they’re waiving inspections and assuming risks that are, I think, inappropriate to somebody buying their first home right in that bubble where they’ve maybe just put themselves in that good financial position we described earlier. I think that’s inappropriate risk for that first-time homebuyer to take in waiving the inspection or the appraisal buffer with those types of things.
If your financial position is much stronger or this is your second, third, fifth deal that you’re comfortable with and you’re able to effectively do most of that inspection yourself, because you’ve been doing this for a while, that’s a completely different story. Now, you can go toward the property. You’ve already inspected it, because you know what to look for. Okay, great.
Now, you can maybe waive inspection or cover the appraisal gap, because you know what you’re looking for and that’s in your good wheelhouse. But the first-time home purchase, I think you just need to expand that pool a little bit. So, that you have more options on the table that you would call good deals and that you’re not waiting for that one best deal on the market that you’re going to get heavy competition from inevitably when it comes on. You have a couple of options to choose from and be okay with losing a few.

Mindy:
Absolutely. Be okay with losing a few properties because there’s always another property. You never have to fall in love with a property. That will be the only one that works. There’s a property for everybody. But also understand that you aren’t competing with the same type of person that you are. You could be competing with these people who are going to get it to the studs and going to do something else. I just discovered that one of the houses that I rehabbed was scraped completely. They paid full price to scrape the house and build a brand new house on top of it. I’m never going to be able to compete with somebody who has that much money that they can get rid of a perfectly good solid house and build a brand new one.

Scott:
100%. Yeah, you don’t even know what game your competition is trying to play is the point. I think that’s awesome. All right. So, to recap what we’ve talked about, we talked about the strategy component of this and putting yourself in position to buy that good deal. Our book is structured into basically three sections. Again, we talked about strategy of buying home, preparing to buy and getting a good deal, and then the nuts and bolts of the inspection and offer process and what to expect there, how to meet your lender or agent, put key timelines and the offer and closing process.
The inspector that Mindy mentioned is going to give you a terrifying inspection report. Some of that is going to be legit to worry about. Some of it’s probably not too big a deal. Hopefully, some of the detail we have there will be helpful to some in thinking through how to react reasonably to that terrifying inspection report where the person tells you your house is about to collapse. But basically, that’s how the book is structured.
To recap what we discussed today, again, the strategy component is the first piece. This is the several hundred thousand dollar stakes item, where I say, the less house I buy, the less wealth I’m destroying. The less money I spend in rent, the less wealth I’m destroying. Housing is a cost as most people use it. It can be an investment, but for most people, it’s a cost. The less you buy or the less housing you occupy, the better more wealth you’re going to build on average. Then it’s about understanding exit options going into your home buying process.
The person who is able to happily live in the property indefinitely, keep the property as a cash flowing rental, either short or long term rental, and the person who is able to either force appreciation or benefit from market appreciation, that person with the more of those options or all three of those is going to be in a far stronger position than the person without those exit options.
When we go to buy a deal, in contrast to the average person or the person that’s doing this in maybe Mindy and I’s opinion the wrong way, you want to create a good financial position with lots of liquidity, good credit, those types of things, and a solid reserve after your down payment, closing costs, and any repairs that you’re expected to make on the property. Then you want to create a timeline that does not artificially constructed deadline based on when your lease expires or your last home is selling or whatever it is. You want to buy on your terms.
Define what you want. Understand what good looks like. Am I living in fantasy land? I would like the quad plex in Downtown Denver that’s $100,000 that rents each unit for $4,000 a month. It doesn’t exist, right? Do your research on the sold properties. Understand what’s realistic in your market, but don’t get scared off by the active listings that might look really bad there. And then go fishing, right? You’re waiting calmly for that winner deal to come on the market and acting aggressively when it does to go in and make a firm fair offer, but keeping your rights for inspection and those types of things. Okay, I just recapped a lot there.
What is the average person doing, right? The average person is buying to the extent of their purchasing power, right? If I make $80,000 a year and have $40,000 lifetime savings, I’m putting all $40,000 down and buying up to my maximum approved limit from a lender. I’m doing it. I’m meeting my real estate agent who I found on a bench sign… Sorry, Mindy. … to buy my first property. They are directing me towards a property at the top of my price range. I’m forced to close 30 days before my lease expires, and I have to buy the deal that comes up in the week or two prior to that event happening.
I fall in love with the first property or one of the properties that I happened to tour. And then I don’t think through these exit options. I use up all my liquidity. I assume a higher monthly mortgage payment. I’m stuck in the property. Compare and contrast that to the approach that we just outlined today. I think you’ll have a tremendous amount more life flexibility and options and a similarly happy lifestyle to that person if you follow this process.

Mindy:
You’re right, Scott. You will. You’re making a financially intelligent purchase. I think that most people don’t even think about anything other than, “Can I find a house? Can I afford this house? How much can I afford? How much can I throw down on it?”

Scott:
All right. Mindy, where can people find out more about our book or buy the book if they liked what they heard today?

Mindy:
This book, this First-Time Home Buyer book, you can find this book wherever books are sold. However, you can also find it on biggerpockets.com/fthb for First-Time Home Buyer. This book and all of the bonus content that comes with it is available on March 8th.

Scott:
All right. We certainly are big fans of our book and hope that you enjoy it. If you do buy the book and like it, give us a ping, tell us about it on Facebook, or leave us a review on our site or on Amazon if you buy it there. We’d love to get your feedback and understand if you like it. We’ll also be happy to take questions about the process at a future date, perhaps in the format of a Facebook Live or something like that.

Mindy:
Scott, we didn’t do a joke today. I have a joke for you.

Scott:
All right. What is it?

Mindy:
What does a house wear?

Scott:
Rough…

Mindy:
Address. Now, you know how I feel.

Scott:
Yeah. That’s amazing.

Mindy:
Scott, I had a good time talking to you today. I really love the concept of real estate investing and making your home an investment. I think just like your financial independence strategy, small tweaks now can have huge impacts down the road. Small tweaks to your thought process and your buying process of your home can make your home actually be an investment.

Scott:
Also, a few other things about the book, the book can be found at biggerpockets.com/homebuyerbook. The title of the book is First-Time Home Buyer. It launches to the BiggerPockets Bookstore. You can buy it on BiggerPockets on March 8th. It will be available wherever books are sold, including places other than BiggerPockets on March 23rd. Those places could include Amazon, Audible, Barnes and Noble, all that good stuff. Mindy and I did not record the book. You’ll be listening to somebody else’s soothing baritone, not ours on the Audible audio book.
If you can’t get enough of us talking about the first-time homebuyer purchase, we’re going to be on The Real Estate Show on episode 450 and the Real Estate Rookie Podcast episode 59. We’ll go into some other things, probably focus a little bit more on the specifics around the exit options for a first-time homebuyer and how that really sets you up to make or break an investing career on The Real Estate Show. We’ll probably do more of a Q&A style for the Rookie Podcast.

Mindy:
Bummer. Okay, Scott, should we get out of here today?

Scott:
Let’s do it.

Mindy:
From Episode 177 of the BiggerPockets Money Podcast, he is Scott Trench. I am Mindy Jensen saying, “Got to go, buffalo.”