Home buying for smarties

I have been pretty lucky with how my house decision turned out, but I realize now that it could have been disastrous. When I signed the mortgage papers I was 22 years old and only a few months removed from college. My lenses were still clouded with visions of beer pong (actually I was too nerdy to play, but sometimes I peered out my window at the games going on with the fraternity gentlemen across the street) and I had no idea how long I would be in my new job or city.

Even before college ended, I felt in a hurry to get started with life, maybe from watching too many frat boys play beer pong. I wanted a job, a dog, a house, and a girlfriend. Amazingly, within a few months after graduation, I had all of those things. Even more amazingly, the decisions didn’t suck.

Why did I want a house? For the classic [and terrible] belief that rent was “throwing away money”. What was I looking for in a house? No idea, but it’d be really cool if one of the rooms was big enough to hold a ping pong table. (Yes, I was really thinking that.)

I remember picking up a vibe of slight discomfort from the realtors and lawyers and sellers, maybe a twinge of concern wondering whether their dealings with this obviously clueless shaggy-haired kid passed the test of ethics. I’m not sure it did. I think the only thing that kept them believing that this wasn’t some big practical joke was the note I had from a banker saying it wasn’t.

I’m not sure how I made it out with any money left, but I suspect it had something to do with my eminent frugality, or more likely the fact that my always-supportive parents were by my side to make sure I didn’t do anything really stupid.

I am now approaching four years in my house. It has its faults like anything else, of course, but on the whole, I am an absurdly lucky guy. Recognizing the potential disaster that it could have been, I felt compelled to share my thoughts -- some philosophical, some practical -- with my sister Meg who is now shopping for houses with her fiancé. She is older and wiser than I was, but I think any first-time home-shopper could benefit from a good, stern talking-to.

The thoughts I shared with her are below the fold. Would like to hear what you think I'm missing or what you think I got wrong.

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Decision in Perspective

-- I heard somewhere that the three most important decisions you will make in your life are where to live, whom to marry, and what to do. From my perspective, included in the where-to-live decision is the general geographic area you choose, but also the specific neighborhood and house.

-- Your house will be by far your largest expense. Financially, this decision is probably at least 10x more important than buying a car. The time you spend in the grocery store ruminating over which box of cereal to buy will seem absurd compared to the magnitude of this decision. The home purchase is where you want to concentrate all your energies on saving money. Seriously, all of your energies. In comparison, the only other financial decisions worthy of your deliberation are a car purchase or maybe vacation or laptop purchases. But those pale. I cannot emphasize this enough: Now is when you should be a tightwad. And I don’t just mean finding a great house and then being a tightwad in the bidding; I mean searching for a house based on your tightwadness.

-- DO NOT TREAT A HOUSE AS AN INVESTMENT. IT IS NOT.

-- Be pretty sure that you want to be in this city, neighborhood, and house for at least 7 years. Changing houses has a Large financial penalty and the rule of thumb is that to break even (compared to renting) you need to stay in the house for at least 7 years. That's a long time. Remember what your life was like 7 years ago, and imagine what your life might be like in 7 years.

-- I think a common mistake in home-buying is stressing over the details of the mortgage rather than the details of the house. The mortgage decision is extremely complicated even for PhD’s in economics, and because of that we tend to give it more of our attention than it deserves. The way to save money is by adjusting the houses you look at, not the mortgage options you consider.


Choosing a House

-- I worry that the following advice is going to make me lose all authority on this topic in your eyes, but I genuinely believe this is the best way to approach the decision: Find a well-located neighborhood that is fine but not great and then look for one of the worst (= least expensive) houses in that neighborhood. Almost all of the features that attract you to a house now will lose their effect after 3 months of living there. Save your money for better things.

-- I bet that if you go with a house that seems slightly smaller than you suspect you would be comfortable with, you will end up pleased with that decision. Having a small house is nice when it comes to cleaning, finding things, and just generally moving around (like to let Daisy out).

-- When considering a house, it’d be wise to knock on the doors of some neighbors and ask them about the 'hood.

-- Factors worth paying attention to:
• Location (particularly in relation to your workplace)
• Size of house (go smallish)
• Window size and quality
• Age and quality of HVAC

-- Factors to pay less attention to:
• Features (porch, fireplace, closet space, kitchen appliances, distance to walking trails, even # of bathrooms)
• A wooded, green area is a big bonus but the particulars of the landscaping should be ignored

-- Factors harder to observe, but important:
• Noise (both of the house’s “plumbing” and of the street and surrounding area)
• Neighbors

-- When we are faced with a decision as difficult as buying a house, we tend to focus on the distinguishing features (e.g. House A and B are basically the same, but House A is close to walking trails) – try not to do that. Catch yourself whenever you are fixating on a feature because in the grand scheme they matter much less than we think. It’s long been known in psychology that the only two things that have a lasting effect on your “happiness” (as much as I despise that concept) are (1) the length of your commute and (2) noise. We can’t get used to either. On the other hand, we can and do get used to pretty much everything else, including shitty kitchen appliances.



Bidding

-- To the extent possible, avoid becoming attached to a house, even/especially one that you are ready to bid on. If you feel “in love” with a house, a better decision might be to go find one that you’re not as attached to. House prices have lots of wiggle room, and it’s important that you put yourself in a good position to negotiate.

-- A note on negotiation: Get the inspection done first and use that as a starting point for negotiations.

-- I was clueless about negotiation when I bought the house, but I was still able to get a few thousand off the listing price, a fair amount of work/repairs done around the property, and a few thousand dollars in escrow for further repairs (like the roof).

-- Another note on negotiation: Negotiation does not mean getting them to accept the lowest price possible. It means identifying one another’s needs & wants and seeing what arrangements can be mutually beneficial.


Closing Remarks

-- I know it can be hard to take my advice seriously being your little brother, and especially being the weirdo I am, but I write this because I care about you and because this decision matters. A lot. Much more than I realized when I was buying my house.

-- That said, I will not be offended if you ignore all of my advice. I just hope I’ve presented it well enough that you will seriously consider it.


-- One last piece of advice: Get a rug. It really ties the room together.