Monday, July 18, 2005

Important step in my journey


There is a very important step in this journey that I almost left out. It is funny, this is really supposed to be almost a step by step of how I got to where I am at, and I almost left out the first real step in the process. Without these parts, this would really be just about my ego. Well, I did not forget, and here it is...My wife and I bought a house. I briefly touched on this in the previous post, but it is a very important step, and it needs to be covered in some detail.

Before people start telling me what a bad idea it is to buy a house in this market (and remember, I am in the bay area, Original Home of the over priced house) this was a very important step. I can tell you that we thought we were buying at the peak. This was the end of 2000 and everyone had been speculating that there was a real estate bubble and it was going to pop even back then. To be honest, I believed it. There are reasons for doing what we did though...

I had a professor in college who emphasized home ownership in one of his classes (he was a finance teacher). He had over 100 properties (both commercial and residential) around town and he did not need to work. This impressed me then (and it still does today) and I decided that I was going to own some properties. My home was going to be one of them.

My professor was emphatic about buying as much home as your could afford. Historically, the numbers point to CA property rising at 10-12% he would tell us. If you buy the most expensive house you can afford now, it will hurt for a few years, but then with pay increases, you will be able to afford it easily, and you will being growing your networth at 10-12% of a higher number. Theoretically, it makes perfect sense...

These were slightly strange times though, I was making too much money. I knew that, and I did not believe it would last. I had talked to some lenders and they were all willing to lend me a lot of money...more than my wife and I were comfortable borrowing. We ended up scaling back about 20-25 percent so the loan we ended up getting was almost 80% of what the banks were willing to lend us with a small down payment.

Getting the loan was a pain. I am not sure why it was so difficult, but it was. Actually, all of the loans I have gotten to date have been painful in one way or another. I will talk more about these later, but to emphasis, getting this loan was difficult.

Before we get into the loan, let's cover the house/house hunt itself. My wife and I had decided on a few neighborhoods that we wanted to live in but only one of them was really financially feasible at the pricing target we had set. After picking this neighborhood, we started to scour the internet and to drive through looking for homes. We had not contacted a real estate agent at this point in time. We were just checking things out. It was a casual affair, until I called the bank to get our pre-approval.

I believe it was within a week of getting this piece of paper that we made our first offer. We were on a mission from that point on. We were checking out houses with a vengeance (still without the aid of an agent) and getting excited about homes that were not right for us at all. We were about to make a big mistake. Luckily, we had our folks (both sets) around who were able to keep us reasonably level headed (Do you really want to spend this much money on a house only to have to basically gut the entire thing and start over? Also, what about that dungeon/wine cellar in the garage...that is scary).

EVENTUALLY we ended up purchasing a place (actually the first one we made our offer on). I would not recommend doing this the way that we did, but it worked out OK for us. We still had not enlisted the help of an agent, but we saw a sign on a house that we liked so we called the number. The agent let us into the house and we liked what we saw. We explained to the agent that we did not have an agent of our own to write up the paperwork and he offered to take care of it.

(Looking back now, it was a bad idea for us to use their agent. He has conflicting interests. he is being paid by the seller and therefore should be working with the seller to get the highest price. While an agent that we would hire would also be paid by the seller, his interest should be in making us happy, not the seller. I will say that though the negotiations, it ended up working well for us because there was another offer on the table, at the same price. Our agent ended up giving up some of his fee (as he was receiving both buying and selling commissions) to make sure we ended up with the deal. Again though, this is not the way I would recommend doing this. Every other house we have purchased, we have used our own agent.)

Well, we bought at what was thought to be the peak of the market. It was December of 2000. We were OK with that though. We had a house that we could afford, and if the prices did drop, we would still be able to make the payments. We purchased a house first, and an investment second. It was this concept that allowed us to make this purchase. If we had thought about it as an investment first, we would still not be home owners today.

As it turned out, December of 2000 was not the peak of the market. I am not sure we have seen that yet. Due to the fact that we bought the house as a home though, we are not too worried about it. A nice bonus though is that our place has appreciated about 50% since we bought it. This tied in with our down payment, and some extra payments along the way, and we have about $375K in home equity. Not a bad start to hitting my financial goals...

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