First time home buyer and Rookie investor looking for advice on home buying process [Updated]

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mimn15
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First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by mimn15 » Tue Sep 25, 2018 7:09 am

Hello everyone,

Found out Bogleheads via Four Pillars of Investing book and podcasts. Thank you for sharing valuable information on these forums. Very helpful for us.

Problem:
We are in the process of buying our first home. The home we are interested in is around 40 years old 3BR 2.5 bath 1780 sqft and has been very well maintained by the current owner with a lot of updates. The inspection came out squeaky clean and the house in move in ready. The home appraisal came back $6,000 (home price: $312,000 and appraisal $306,000) lower than the agreed purchase price. We found out Radon abatement system has to be installed and the seller is paying 50% of the cost. We also need to look for a refrigerator and the models we looked at are in the range of $1,200 to $1,500. So there is additional cost of $1,500 for refrigerator and $400 for Radon abatement system (50%). We have not heard back from the sellers yet regarding the lower appraisal and wanted to get a better hang of decision making process as this is one of the biggest decisions of our financial life. Hence, wanted to run it by the forum to get a better understanding.

We both love the house and setup. We are putting down 20% and got an interest rate of 4.375% locked in for 30 year fixed. The Principle and interest comes down to $1,250/month, Home Insurance $65/month and property taxes of $400/month. Total $1,715/month. This is for the purchase price of $312,000.

Household income: Base $15,200/month. Pay over 4 weeks after 401k deductions ($18,500/year): $8,300.

Background Financial Picture:
Him 33 Her 29. No kids, but hoping to grow our family in the next year or two.
No debt
EF: 4 months of spencing in Money Market account(excluding down payment and closing costs)
Maxing out IRAs and 401k. Currently at $72K in total. (IRAs with Vanguard in Target Retirement fund, 401k in low cost index funds via employer retirement plan)

Household income (including bonus for 2017): $190,000/year . DW has joined the work force over the past few months. DW on ~ $75,000/year and rest is my income.

Monthly spending: We are frugal and spend close to $36,000/year including all expenses. This will go up if we move into a home as our current living arrangement is at $1,100/month in 1 BR+den/1 Bath apartment. Our graduate educational background limited our income in 20s and we just found out personal finance a year or two ago.

Help needed:
Because the appraisal is off by close to 2% and on top of the additional required updates needed one part of me says we need to negotiate down closer to $306,000. As we will lose a good few years of appreciation on the house (I understand we don't know the future it will appreciate) so thinking overpaying on a house is not a good idea.

Another part of me says as we are in a relatively strong position financially and this will be a small hiccup over our lifespans. It will not matter in the long run.

If you could share any ideas/suggestions/advice on how to arrive at a decision, it will be very helpful for us. Thank you in advance for your time and thoughts.

Update: Seller not budging on price. We either have to pay out of pocket an extra $5,600 or we have to walk.

Final update, the seller is willing to leave the refrigerator (it is relatively new $2,500 in value) and install a Radon Abatement system. We are very happy with the resolution and looking forward to closing day. All of the opinions here, from our Realtor and from our family friends helped us reassess the situation better. Thank you for your contributions.
Last edited by mimn15 on Wed Sep 26, 2018 10:24 am, edited 1 time in total.

adamthesmythe
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by adamthesmythe » Tue Sep 25, 2018 11:27 pm

Your refrigerator is not his problem. So the issue is the 6K difference between assessed and agreed.

Buyer has a very clean house with only one issue (radon). He has agreed to participate in mitigating that. Clearly he thinks either you will cough up the extra money OR he will have an easy time selling to another buyer.

Time to fish or cut bait.

riverguy
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by riverguy » Wed Sep 26, 2018 5:14 am

If less than 2% is stopping you from buying the house because of one random appraisers opinion, then you don’t really want the house. Paying 2% over is not “overpaying”.

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jfn111
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by jfn111 » Wed Sep 26, 2018 6:16 am

Nothing wrong with trying to negotiate the $6,000. Once your that far along in the process most home owners don't want to start over and would be willing to at least split it. YMMV

Jags4186
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by Jags4186 » Wed Sep 26, 2018 6:51 am

It’s a a simple, albiet emotional decision.

If you don’t want to buy the house for more than it appraised, you can tell the seller either he matches the appraisal or you are cancelling the contract based on the appraisal contingency. If the house needs radon mitigation that means the house tested high for radon. Usually you can cancel the contract for radon levels over 4.

Your only power in this situation is to walk away. That of course means you don’t get the house. Decide whats more important to you—the house or the $6000.

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Watty
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by Watty » Wed Sep 26, 2018 6:58 am

All real estate is local and it really depends on your local market.

In a rapidly increasing market it is not unusual for the appraisal to come out a bit below what is a fair price since the appraisal is based on sales that were made months ago.

The appraisals often include very little in the way of adjustments for the updates since they don't have access to the comparable houses to see the details of what updates so the appraisal could be a bit low for that reason too.

With the appraisal and inspection you probably have at least a thousand dollars tied up in this house that you will have to spend again if you buy some other house so I would look at the difference as being more like $5000.

How much is your share of the radon mitigation? That could be many thousands of dollars or just a couple of hundred.

You probably also did not offer the full asking price so the seller may feel they have already made thousands of dollars in concessions already so you need to consider that too.
mimn15 wrote:
Tue Sep 25, 2018 7:09 am
and got an interest rate of 4.375% locked in for 30 year fixed.
I think that this is the key since if you bought the identical house next door for $6K less next month you would lose that lock and might pay a higher interest rate and actually end up paying more in the long run.

I have not been following mortgage rates but isn't that a pretty good rate right now?

I think the deal sounds doable but I don't know your local market.

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Watty
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by Watty » Wed Sep 26, 2018 7:10 am

One more thought.

If you are ready to walk away from the deal then one more option would be to come up with a final offer that is maybe $1,500 higher and say that is your final offer.

At that point the buyer might agree, or the real estate agents might agree to take a reduced commission to make the deal work since they do not get any commision if the deal falls apart. There could also be some combination where you, the buyer, and each of the real estate agents all give up $1,500 to make the deal work.

There is a chance that you might lose the house but if you had decided to walk aways from the deal anyway that might be worth one final try.

Rus In Urbe
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by Rus In Urbe » Wed Sep 26, 2018 7:21 am

Your situation sounds financially ready and secure. And the 2% is just a hiccup.

At this point, it's a gut decision---will this be a house you will enjoy living in (and paying for) for many years to come? (I'm not of the 'starter home' school that says buy something and flip it later----too many risks and costs.)

But, if you decide to go for it, be prepared for the BUYER'S REMORSE. It always sets in, in my experience, when suddenly you find out some more stuff needs fixing and the extra money in the system is going into the house and making you feel poorer, even if it's the RIGHT decision! Owning a house is more expensive than one can first imagine, though I personally love my house and have poured a lot into it quite happily: it's our HOME.

So, just keep doing the serious analysis it sounds like you have done, pull the trigger either way, and then if you start second-guessing yourself, review why you made the decision in the first place.

Making sound decisions and sticking with them is rather like "staying the course" in investments.
I'd like to live as a poor man with lots of money. ~Pablo Picasso

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mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by mimn15 » Wed Sep 26, 2018 7:47 am

OP here, thank you everyone for your thoughts. The seller is not budging on the purchase price.

Me and my DW decided to match the purchase price. Our seller is asking for refrigerator and/or radon mitigation system installed before we close as one final negotiation tactic. As some of you have pointed out, as we have a good interest rate (the rates have gone up by 0.5 % to 0.75 %), the appraisal is within 2% of the purchase price, we are in a strong position financially and the market supply is low (we have been looking for a year or two) were the key aspects we looked at. All the process has been quite intimidating as a first time home buyer and wanted some thoughtful independent opinions on it. Thank you. Hope everything goes smoothly from here on.

barnaclebob
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by barnaclebob » Wed Sep 26, 2018 8:55 am

Do not install the fridge or pay for the radon system before closing, have the radon system payment come out of the closing funds. If the deal falls through it will be a mess to get your money back. There is absolutely zero reason for you to do this because its not your house yet.

GT99
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by GT99 » Wed Sep 26, 2018 9:15 am

mimn15 wrote:
Tue Sep 25, 2018 7:09 am
As we will lose a good few years of appreciation on the house (I understand we don't know the future it will appreciate) so thinking overpaying on a house is not a good idea.
This is the wrong way to look at it. Appraisals are guidelines, not not otherwise very meaningful other than the fact that banks have to use them as a basis for loans. And because of that, bank appraisals err on the low side. So from the perspective of valuing an investment, the fact that it appraised very close to purchase price is actually a good thing.
If you got 3 different appraisers to appraise the house, you'd probably get a $15-20k spread in their appraisals. On my last home, we happened to have 2 different appraisals less than a year apart. The 2nd appraisal was 20% higher than the first (we had made some improvements and the market had gone up, but no way it had truly increased in value by 20%).

Topic Author
mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by mimn15 » Wed Sep 26, 2018 9:40 am

Thank you for your thoughts.

@barnaclebob, the refrigerator is already present and the seller had excluded it from sale. Currently 50% cost of a Radon mitigation system is funded via closing credits by the seller. Thank you for pointing out.

@GT99, thank you for your viewpoint. It gives a different perspective as appraisals can change based on the appraiser. We are within 2% of the purchase price as you pointed out.

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Watty
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by Watty » Wed Sep 26, 2018 9:52 am

mimn15 wrote:
Wed Sep 26, 2018 9:40 am
@barnaclebob, the refrigerator is already present and the seller had excluded it from sale. Currently 50% cost of a Radon mitigation system is funded via closing credits by the seller. Thank you for pointing out.
So what is the deal with the refrigerator? Their moving company will move out the old refrigerator and when you move in there will be an empty space. You get yours delivered a few days later.


It sounds like the radon work will be done after you move in to.

I don't understand what the hangup is.

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wabbajack
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by wabbajack » Wed Sep 26, 2018 10:02 am

Congratulations on your house! If you both love the house, $5k is nothing to lose sleep over.
Sorry about the $400/month property tax.
Start putting away 1% of the house price in a separate fund for the inevitable maintenance and repairs. (That's $3k for you)
Don't get stressed out about not saving money for the next few months. Movers are expensive. You will buy more furniture.

Overall, it's good you acknowledge that you will be upsizing your life with the house purchase. All the best!

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djpeteski
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by djpeteski » Wed Sep 26, 2018 10:19 am

mimn15 wrote:
Tue Sep 25, 2018 7:09 am
Help needed:
Because the appraisal is off by close to 2% and on top of the additional required updates needed one part of me says we need to negotiate down closer to $306,000. As we will lose a good few years of appreciation on the house (I understand we don't know the future it will appreciate) so thinking overpaying on a house is not a good idea.

Another part of me says as we are in a relatively strong position financially and this will be a small hiccup over our lifespans. It will not matter in the long run.

If you could share any ideas/suggestions/advice on how to arrive at a decision, it will be very helpful for us. Thank you in advance for your time and thoughts.

Update: Seller not budging on price. We either have to pay out of pocket an extra $5,600 or we have to walk.
To me the question is how much you like the house, and the neighborhood in which it sits. Given that you are looking to start a family are the schools pretty good? If so buy it. If not don't. You guys are in a great position financially, and no one would have a problem with you spending 6k on a vacation that lasts one week. If you really like the house, well that 6k will be well worth the money spent and you will be happy to do so.

If you just kind of like the house, or have more of a whatever attitude, then it will be like a burr in your shoe, and you might as well avoid the aggravation.

Also I would encourage you to start a family sooner rather than later.

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mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process

Post by mimn15 » Wed Sep 26, 2018 10:21 am

@ Watty, it was initial sticker shock of having to put out close to $6,000 in extra cash. We have never experienced (home buying) this before so our initial reactions were way off the mark. All of the opinions here, from our Realtor and from our family friends helped us reassess the situation better.

@wabbajack, thank you for your thoughts. We are hoping to take it slow and steady.

Final update, the seller is willing to leave the refrigerator (it is relatively new $2,500 in value) and install a Radon Abatement system. We are very happy with the resolution and looking forward to closing day.

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mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by mimn15 » Wed Sep 26, 2018 10:28 am

@djpeteski, thank you for your thoughts. The school district is great and we have been renting near the neighborhood and love living around here. We went for it. We hope to add to our family soon. Fingers crossed.

squirm
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Re: First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by squirm » Wed Sep 26, 2018 10:43 am

Is DW going to work after the kids come?

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mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by mimn15 » Wed Sep 26, 2018 11:11 am

Yes, she plans to.

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Watty
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Re: First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by Watty » Wed Sep 26, 2018 1:00 pm

Congratulations on the house. For a house to live in I have always found that it is better to buy a really good house at a OK price than to get a just OK house at a really good price. It sounds that house will be pretty good for you.

We all have a learning curve when it comes to buying a home. About 18 months after I bought my first house I was walking through a store and saw furnace air filters on the shelf. The little cartoon light bulb went on over my head and I thought, "I bet I have some of those in my house!". :oops:

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mimn15
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Re: First time home buyer and Rookie investor looking for advice on home buying process [Updated]

Post by mimn15 » Wed Sep 26, 2018 1:37 pm

Thank you, Watty.

The number of things to keep track of is really big. Like you said, will be a steep learning curve for us from going from 900 sq ft apartment to 3BR 1780 sq ft. Hoping to set automatic calendar reminders and checklists for different maintenance tasks.

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