Living Below Your Means
Buying a LBYM House in a LAYM City

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By bookgrrrl
April 5, 2002

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Hi all. A while ago, I posted about our decision to "jump into the game," as DH is fond of saying, by purchasing our first home. Sadly, we just lost out on our dream two-flat - even though the sellers happily accepted our offer! - because of an error made by the seller's agent. So, we're back to the drawing board. Nonetheless, the last few weeks of house-hunting have been extremely instructive, and I thought I'd share a few of the LBYM house-hunting tips that we've accumulated:

1. Shop around until you find a real estate agent with whom you feel comfortable. After interviewing a number of agents, DH and I decided to go with someone who is from a small, local office (as opposed to a large corporate chain). We identified the characteristics that were important to us in an agent, and rigorous honesty was at the top of the list. Our agent is physically uncoordinated (I can't think of a property we've seen where she hasn't tripped on the stairs or smacked her head on the basement ceiling) and new to the field, but she is smart, savvy, picky, and incredibly honest. Similarly, I'd advise dealing with a mortgage broker who advertises themselves as an "Upfront Mortgage Broker" (UMB) - this means that they will disclose all aspects of the process to you, including the details of their compensation.

2. Don't enter into an exclusive arrangement with your agent. We were informed that agreeing to work with one agent exclusively was "local custom." Well, it wasn't our custom - particularly when we learned that entering into an exclusive relationship would require us to arrange for the agent to be paid fees on a property that we might potentially locate ourselves, with no assistance from the agent, even if it was being sold FSBO. No thanks. We kept interviewing until we found an agent who was willing to flout "local custom" for the opportunity to make a commission by bringing us good properties - and if we happen to stumble upon the perfect property ourselves some random Sunday, we will not be obligated to pay a commission to someone who was essentially not involved in the transaction.

3. Calculate how much house you can afford by working backwards from the monthly payment. When we were pre-approved for a mortgage, we were goggle-eyed at the amount of money we were permitted to borrow. We simply couldn't imagine borrowing that much money, and we couldn't fathom the lender's logic. So we completely disregarded the mortgage broker's formulas, and devised our own: we calculated our average monthly living expenses over the past five years, and added in the amount of money we would like to devote to school debt repayment and savings each month (we obviously revised our school debt repayment number downward from what our repayment schedule has been for the past few years, instead confining ourselves to doubling our minimum monthly payments). We then subtracted that amount from ONE monthly paycheck (albeit the larger one), and voila: our mortgage payment! We then calculated the purchase price of a home based on that projected monthly mortgage payment, with a 20% down payment in order to avoid PMI.

4. Carefully consider your tolerance for risk when evaluating your down payment and mortgage options. We are able to make a 20% down payment on a property, which we feel is less risky and more comforting to us. However, others may feel that - since making the 20% down payment will clean out our savings - we are actually choosing the riskier strategy (e.g. it is less risky to leave savings liquid and borrow up to 100% of the purchase price of a home - that way, in the event of job loss etc., we would have easily accessible savings available to pay the mortgage). We carefully considered all options, and went with the one that best reflects our temperaments.

5. Work backwards from your dream. When we closed our eyes and envisioned our home, we realized that location is perhaps our most important variable. Obviously, this preference will differ drastically from person to person - others will want more space and will care less about location, etc. However, as a die-hard urban chick, I really wanted to buy in one of my favorite areas of the city. Having made that threshold decision, our savviest financial option quickly became clear: a two-flat. An added bonus is that the stream of rental income will assist us in building our savings back up more quickly, which in turn will permit us to resume our aggressive school debt repayment schedule. To be certain that we were comfortable with our decision, we looked at two-flats in our favorite neighborhood, as well as single-family homes in our price range in other areas in and near the city. We both feel confident that the two-flat is more in tune with our desires, as well as with our current financial situation. Yes, DH wants more space. Yes, I want a front porch. These are not small things. All of our friends have large single-family homes, and we are essentially house-hunting for another small city apartment. But, with the extra storage space provided by our very own basement, we think that we can squeeze out another five years in a small two-flat and come out ahead financially.

6. Be creative in terms of what you think you can live with. I love to cook, and believe me, I would LOVE to have one of those brand-spanking-new, maple-and-granite kitchens that all my pals are getting. But the truth is, there's a trade-off between the new kitchen and my ability to sleep well at night, which I do when I have less debt. I'll get the kitchen when I can pay for it up-front, and not before. Some days that gets me to grumbling, but when I sat down and meticulously plotted out my kitchen "needs," I realized that what I need is ... counter space and sufficient shelving. Period. The two-flat we just lost (due to the seller's agent's idiocy - she must be punished!) had no dishwasher, 1950s cabinets, a bizarre black-and-white vinyl flooring, and very little space - but by adding a butcher's block and putting some large shelving out on the enclosed back porch, we could have swung it.

7. Remember that most decisions can be un-made. Barring a tanked housing market and a severe recession, the house that turns out to be not for you can be sold. A two-flat can always be converted into a single-family home a few years down the road. Far more important than where you'll be living is with whom you'll be living, and if you've gotten that part right, you'll weather the other stuff just fine.


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