March 25, 2015

The Top Ten Things I Learned from Buying a House

Credit: smarnad at
Has it really been three weeks since my last post? What can I say? Time flies when you’re buying a house! Well now that you know what I’ve been up to, I’m back, and I’d like to share some tips with you based on what I learned from my recent experience.
  1. Try to live a “normal” financial life 2-3 months before you start the lending process. With all of the issues, regulations, and legislation in the mortgage industry, getting a loan is like birthing a porcupine! If grandma wrote you a "big" check for Christmas, you opened a new credit card, or you made all of your charitable donations in one month, you may have some explaining to do. Save yourself the forms and the back and forth, and try to minimize irregular deposits/withdrawals/credit inquiries a few months before you start looking at houses.
  2. Narrow the field. If you hop on one of the real estate search engines and check a few boxes narrowing down the number of bedrooms and set a not-so-narrow price range, I wish you well. There may be a shortage of houses in some areas, but believe me when I say there will not be a shortage of search results! Figure out your target school system, target zip code, price range, and must-have property features (basically check as many boxes as you can), and go at it. Fewer results are less overwhelming.
  3. Decide on a price limit and don’t budge (at least upward). I kid you not, when you’re looking at houses and you see a nice and shiny new one that is $15,000 more than you are willing to spend, the thought “What’s another $15,000?” may creep into your mind. Dump ice water on your head, and move on. You set a price limit for a reason, and well, see number four.
  4. Buy less house than you think you can. My checkbook is smoking, literally smoking. I’ve written checks to inspectors, appraisers, surveyors, plumbers, electricians, locksmiths, landscapers, utility companies, and my insurance company. It’s ridiculous! Any homeowner will tell you that homes cost more than their sticker price, so if you are having indigestion with the sticker price, step away while you still can!
  5. A picture may be worth a thousand words, but a visit is worth more. When we first started looking, one of my favorite houses online failed to mention it had a giant, six-foot-tall manhole cover in the center of its backyard. Another house we looked at failed to mention it had a self-made bomb shelter in the basement. Neither of those elements were pictured online, but this tip also cuts both ways. Two of the four houses that were finalists for my wife and I were in the bottom half of our "pre-visit" rankings based on pictures alone. In one case, a do-it-yourself photographer did not do justice to the property. The moral of the story: don’t fall in love with or completely dismiss a house solely based on the pictures online.
  6. Move rugs and pictures. Holy faded hardwood floors and nasty wall scratches, Batman! Hey, let he who hasn’t tried to hide an unfortunate wall scratch cast the first stone, but we saw some real cover-ups in our home visits. My father-in-law even tells a story where they moved a couch in a house they were looking at, and they found a gaping hole looking down to the floor below!
  7. Talk to neighbors. One of the things our realtor really pushed us to do was to talk to neighbors. We had a few awkward conversations, but we also found some “goldmines.” Look for the nosey neighbors, the “Chatty Cathy’s,” and the dog walkers. They observe all, and they are more than happy to tell all. Take everything with a grain of salt, but it turned out to be valuable intel (or at least amusing gossip) to us on several occasions.
  8. Discuss until you reach a stalemate or a decision. I love my wife dearly, but would you believe me if I told you we didn’t always like/dislike the same houses? There were some serious discussions through this life-altering and financially impactful process, but we were saved by the fact that we agreed before we looked at the first house that we would not buy a house unless we both genuinely liked it independently. If you are looking at real estate with someone else, there are going to be differences of opinion, but with a decision this big, you can’t just settle (neither of you). We joked with our friends that we had several potential houses that ended with “amicable irreconcilable differences.” Remember, in time, you will find a house that both of you like, and that sure beats one of you being secretly unhappy about your house for the next three decades!
  9. Be ready to take on a second job before you pull the trigger. There were days at work that I literally worked on our home purchase for a couple of hours. Don’t worry, I still took care of all of my clients, but it did mean I was at work for longer periods of time than normal to make up for my “inefficient” labor. Dealing with needy lenders is unbelievable, coordinating appointments with all parties involved is surprisingly challenging, and responding to the seller’s pushy real estate agent in a timely fashion is an extra-special, little joy. After you’ve made an offer and it’s been accepted, the due diligence period is not pleasant, but it's crucial that you can make the time to dot all of the i's and cross all of the t's. Be warned and learn to like coffee!
  10. Realize an inspector is a generalist. Our inspector did a pretty good job in my eyes, but he was not an electrician, a plumber, an architect, and a forester. As most homeowner’s do, we’ve discovered a few itches that need scratching since we shook hands with the sellers, and, unfortunately, that’s the joy of being a homeowner. This is another reason why you always need to have a rainy day fund – even immediately after you buy a house.
Those of you who have recently purchased a home can probably relate to some of what I just shared, but for those of you who are currently searching for a home or one day plan on buying a home, it is my hope that you will benefit from the top ten things I learned from going through the process. If you know someone who is looking at real estate, please pass this on to them because I wish I had known then what I know now.

March 03, 2015

Compounding – The Good, The Bad, and The Ugly

Credit: jscreationzs at
  • If you were to invest $5,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $332,000.
  • If you were to invest $5,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $395,000. 
  • If you were to invest $6,000 per year for 30 years in a portfolio that averaged 5% per year, you’d end up with around $399,000. 
  • If you were to invest $6,000 per year for 30 years in a portfolio that averaged 6% per year, you’d end up with around $474,000. 
That’s the “miracle” of compounding. Sure, investment returns matter a lot, but as you can see from the examples above, how much you save can matter even more! The good part about compounding savings and investment returns is that slow and steady really can win the asset accumulation race in a big way. You might not think you could ever save up $474,000, but do you think you could save $6,000 this year?
Recently my wife and I have been looking at houses, and nothing gives me more indigestion than looking at how much a house costs. I’m not talking about the sticker price; I’m talking about how much a house costs over the life of a mortgage. For those of you who have bought a house, this is usually the number that shows up in the top, right-hand corner of one of your loan documents indicating the total amount expected to be paid over the life of the loan. Once interest is baked in on a thirty-year loan, it’s horrifying to see the difference between the initial sales price and what you will actually end up paying. Interest payments alone could be in the hundreds of thousands of dollars! The bad part about compounding interest on a home loan, car loan, student loan, and certainly credit cards is that you keep trying to pay off principal, but you keep getting charged interest. It’s like you have a hole in your bucket. I’ve tried Pepcid, Pepto, and Tums, and the only thing that seems to work is paying off more debt at a faster pace.
The ugly part of compounding has to do with the relationship between money and purchasing power. If you have $100,000 in cash and you bury it in the backyard, when you dig it back up, what do you have? That’s right, $100,000. The problem is that while your money was safely hiding underground, there’s a pretty good chance that the cost of goods and services went up (inflation). Think groceries, health care, and education expenses. You might still have the same amount of money, but you are actually poorer than you were because you can no longer buy as many goods and services as you used to since they are now at a higher price. Said another way, your purchasing power has gone down. I don’t see a lot of people burying money in their backyards, but I do see people hold on to exorbitant amounts of cash or an alarming amount of low-interest CDs and bonds. I don’t ever want to take away someone’s “cash blanket,” and I firmly believe that bonds have a place in most people’s investment portfolios to help provide for short-term liquidity needs, reduce overall volatility, and act as an income-producing alternative to stocks. However, just like chocolate cake, too much can be a bad thing. If you have too much invested in cash, CDs, or bonds, your minimal investment returns can lag the rate of inflation, and, compounded over time, you can lose purchasing power even if your assets are slightly growing or staying about the same.
That’s the good, the bad, and the ugly truths about compounding.