For my nine loyal readers, you probably noticed that I’ve been hinting at the prospect of an imminent home purchase in my net worth updates for the past six or so months.
I’ve delayed sharing the details until now because we hadn’t actually signed any legally binding contracts, and I wanted to make sure the deal went through.
I’m proud to say that we’re now under contract: we finally bought a home!
If you’re interested in our experience and how we were able to buy a nice home at a reasonable price during this insane pandemic-driven housing market, then continue reading.
Background – My Home Buying Track Record
For those of you who don’t know, our family packed up and moved from Connecticut to Virginia in December 2020. We had been thinking about moving for a few years, and the pandemic was the catalyst we needed to make the move.
Whilst planning our move, we knew we didn’t want to purchase immediately upon relocating to VA. Rather, we wanted to get settled first, and begin to familiarize ourselves with the area. The general idea of making the largest purchase in our life sight-unseen seems kind of nuts. Especially considering the fact that I’ve made less-than-stellar home buying decisions in the past.
A little history on my home buying prowess (or lack thereof)
I consider my decision making process for large purchases (such as a home) as a continual improvement project. It would have to be continual improvement, because I made some really shitty decisions early on.
I bought my first property in 2007. If that year didn’t cause an involuntary cringe, then maybe this graphic will:
Yeah, that happened. I bought exactly at the height of the most inflated housing market in history.
I wrote extensively about this ill-timed investment in my post How Not to Buy a Home. The silver lining of the story is that the purchase was a multi-family property that I held for 13 years. I certainly didn’t earn anything from this investment, but I gained reliable, affordable housing for the nine years I lived there, and was able to finally sell for a minor loss. It could have been worse.
In 2015, the soon-to-be Mrs. BF and I bought our first home together. This time, we did a much better job.
I employed a methodology in my decision-making process, and spent a ton of time researching every aspect of our house hunt. We narrowed down which towns we would consider, listed the ‘must-haves’ of the property, and then started searching in earnest. Most importantly, we took our time. After about six months, we settled on a property that ticked all the boxes. We negotiated a good price for an ideal home (at the time), and in retrospect it wasn’t a bad deal.
Still, there were a few drawbacks. Namely, the property taxes and insurance totaled more than $10,000 a year at the time we sold. This is mostly a result of living in Connecticut, and part of the reason we ultimately left.
But this home also had a silver lining: in 2017, we decided to finish the basement ourselves and convert it into a short-term rental. Our Basement Bungalow covered most of the mortgage for the last 3 years we lived there. All in all, we did a decent job with our second property.
This time around, we were hoping to build on our progress. We went in to the process looking to maximize our dollar, make the best choice for our family and inch closer to our Coast FI plans.
We figured moving to a suburb of Richmond, VA would make it relatively easy to find a nice home for a lower cost than we had experienced up north. Then the pandemic hit, and housing supply cratered as demand soared.
So much for a smooth home buying process.
March 2021 – The House Hunt Begins
By late winter, we felt sufficiently settled in our new area and were ready to start the house hunting process again. We began casually looking at new listings in the vicinity of our current rental, as we liked the area.
Pretty quickly we realized this would not be a ‘casual’ process. There didn’t seem to be many houses listed, and even the crappy ones were selling in 2-3 days. Every week it felt like the prices went up again. Probably because they did.
I don’t have to tell you what’s been going on with real estate since the pandemic. The Work From Home revolution, the Great Resignation, NIMBYism, and an already existing lack of housing converged to cause the equivalent of a short squeeze in housing prices.
Here’s the average selling price of a 4 bedroom home in our current zip code since 2015, courtesy of Zillow Research.
Please, Take My Money!
When we started seriously scouting new homes, we were very selective about which houses we actually toured. Once we finally start seeing some nice houses in the neighborhoods we liked, we wasted no time and began setting up appointments.
The first house was pending by the time we could see it, and was rumored to be going for $50k over asking.
The next house was sold before we could even view it, a mere 24 hours after listing.
This continued to happen. The houses we were interested in were only on the market for a few days, and they were selling way over asking. Buyers were waiving inspections and appraisal contingencies, which seems kind of crazy to me.
The last straw came shortly thereafter. A house was listed in a neighborhood we really liked, and looked to be in great shape. It had a three season porch, a nice little yard, and an awesome garage that could be our workshop/nano-brewery. We booked a viewing ASAP, and knew we would be making an offer. After talking it over, we offered $40,000 over the asking price, and agreed to the sellers’ request to rent-back for 2 months. We felt good about our prospects, and anxiously awaited the response.
We didn’t have to wait long. The same evening, we were notified that our offer was not accepted. Someone had apparently made an all-cash offer at a higher price, and waived the inspection/appraisal.
This one was really deflating. I felt like we were waving fistfuls of cash at anyone with a house, and getting nowhere. I knew this was the path to another regrettable home-buying decision.
So we took a step back to regroup.
Employing the Triple Constraint Model for Home Buying
Those of you familiar with Project Management are probably aware of the triple constraint, also known as the project management triangle. It looks like this:
The triple constraint posits that the quality (outcome, success) of a project is constrained by its scope, budget/cost, and time. In order to achieve your goal, you will need to trade off among the different constraints. In other words, you can’t have it all.
I applied the triple constraint model to our home search, and this is what our situation looked like.
Budget – Constrained.
As you could guess from the 3+ years of me writing about our finances, I’m obsessed with making sound money decisions. Even though we could qualify for a seven-figure mortgage, we never asked “how much home can we afford?” because that’s just plain stupid and is the antithesis of financial independence.
When we initially sold our house in CT, we hoped to buy our VA home for a lower price (and invest the difference). Our home sold for $400,000, and so this was our initial budget. However, by the time spring rolled around, the $350k houses from 2020 were now selling for well over $400k, so we had to adjust.
We finally settled on spending no more than $500,000, and were really hoping to find something in the $450,000 range.
Time – Unconstrained
A lot of people screw up their real estate transactions because of timing. They take a job in a new city, and decide that they need to both sell their current home and buy a home in their new destination immediately. They often don’t commit adequate time or thought to their decision, and end up paying for it.
For us, time is of no concern. As I mentioned earlier, we decided to rent first when we moved to Richmond. We signed a one year lease, and we still had roughly 8 months left on our lease when our home search began.
This essentially gave us the freedom to resist the feeling of urgency, take our time, and walk away from situations that didn’t look right. It gave us the ability to pause our house hunt when we realized we kept finding ourselves in the center of bidding wars.
Side note: Richmond was recently named as the most competitive housing market in the country. I don’t doubt it. All those DC/NOVA yuppies are moving down here for less traffic, more yard, and a relatively cheaper life.
Narrowing the Scope
Our budget was set. Our time was virtually unbounded. Now, we needed to define the scope. What does our ideal home look like? What are the ‘must haves,’ and what can we do without?
Actually, it’s not that complicated, but it’s very specific. We wanted a 4 bedroom home, which is not hard to come by in suburban America. I wanted a garage space for setting up a workshop for our various hobbies (woodworking, brewing, glassblowing). Also not too difficult to find.
Here’s the difficult part- we really wanted to buy in a specific neighborhood. We have adored this neighborhood, which is adjacent to our rental home’s location, since we moved here a year ago. It has a mature tree canopy, houses set back from the street, just enough acreage, and is very quiet. Most importantly, it’s set in a trio of school districts (elementary/middle/high) that are arguably the best in the county. In fact, our kids will be able to walk to their elementary school as it borders the neighborhood.
Over the few months of searching properties, we just kept coming back to this particular location. I would always harbor some regret if we ended up buying elsewhere.
So now we’ve defined our scope, and completed our project management triangle for finding our perfect home.
The only problem? There are barely any properties selling in our desired area. In fact, only fourteen houses have sold in this neighborhood over the past 12 months (and a few of these didn’t meet our criteria for cost or scope).
So there we were, back in April. We knew what we wanted, it just wasn’t available. By limiting ourselves to the houses that go on the market, we were guaranteeing a dogfight with other buyers over every newly-listed home. This would be particularly difficult in this neighborhood, as it has a reputation as being a desirable landing spot for young families.
We had to rethink the calculus. Find the unlisted homes.
It was time to step up our game, with networking.
Networking For the Win
It’s commonly known in the job market that merely submitting your resume for an open position is not enough. When you apply for a job via the traditional method, your application lands on a (digital) pile of similar candidates, and likely will never even be seen. If it is seen, another candidate will probably outshine you, and you won’t get the chance to prove your worth to the company.
These days, job search professionals will tell you that you need to proactively seek out the role you want. Research the organization thoroughly. Stalk your potential coworkers on LinkedIn. Find out if you have any common connections, and use these links to get your foot in the door. In other words, network, or lose.
With our house search, we found ourselves in the position of knowing exactly what we wanted, but facing fierce competition to win. Due to our frugal foundation, there was no way I was going to overpay by $50-100k to get the house. And honestly, that may not even be enough. I needed to find another path.
We started by networking within our own neighborhood. Getting to know people who’ve lived in the area, find out what they know about our target subdivision, see if they have any tips or “ins”. Surprisingly, we had a few hits within weeks. A couple families that we had made acquaintances with shared contact details with other people in the neighborhood that might know who’s coming and going. We followed these leads, and had a couple potential prospects. We heard about a couple that planned to sell later in the year, and tabled this fact.
The Couple ‘Nextdoor’
Some time went by with no new listings, and I grew impatient. I conjured up this plan to cross-reference voting records with MLS data to compile a list of residents of a certain age who may be looking to move out soon. We wanted to fashion custom letters and put them in the prospective mailboxes. I even started doing the background research. Creepy, right??
Thankfully before I started sending out pleas to buy strangers’ houses, another one of our approaches returned a hit. Ironically, our breakthrough came via Nextdoor. For the uninitiated, Nextdoor is a social network that combines the vitriol of Facebook and the location-based rage of town hall (or PTA) meetings. It’s basically neighbors screaming in each other’s faces.
I had recently noticed that everyone around here uses Nextdoor, for whatever reason. So I asked Mrs. BF to make a post in our local Nextdoor group, introducing our family and asking whether anyone was planning to sell in the target neighborhood.
She did. A few days later we got an email back from an middle-aged couple who were planning to move sometime in the next year. It turned out to be the same people we heard about through our previous networking efforts. A few emails led to a phone call, which led to a visit. Fast forward to May, and we had a verbal agreement in place to purchase a great house, exactly where we were looking, and well within our budget.
My ridiculous tactic of buying an unlisted property actually succeeded!
Creating a Win-Win
It was the circumstances of the sale that made it work. The couple we were talking with were building a new construction a little further outside of the city. They had a tentative construction timeline, but not a firm date for completion. They were wary of listing the house in the middle of the pandemic, and didn’t really want dozens of strangers wandering through their abode. Additionally, they likely would have to move to a temporary residence while waiting for their house to be completed.
They were hoping for a simpler transaction. Fortunately, we could accommodate them in every way.
We had the flexibility to follow the ebbs and flows of their construction timeline, and were in no hurry to move. We agreed to rent the property back to them after we close, so they would only have to move once. They could sell to us privately, avoid the pandemic real estate circus, and also not worry about prepping the house for showings.
In return, the sellers offered the home to us at a discount to current market rates. They would save 6% on real estate commissions by completing a private sale, and they passed on some of that savings to us. They also took into consideration our flexibility with their schedule when naming their price. The couple obviously loved their home, cared for it very much, and seemed excited to be passing it along to conscientious people such as ourselves.
It was a true win-win. Both parties were able to solve their respective problems, and get what they wanted. Which is pretty impressive in this current market.
I can’t wrap up the story without going into some of the financial details, and I assume many of you money voyeurs were waiting for this part. If not, feel free to skip to the end.
As I just mentioned, the complementary circumstances of our respective situations were the foundation of our deal. But of course, the numbers needed to work out as well.
We all know that real estate prices have risen dramatically since the summer of 2020. Richmond has been no different, as the average selling price for most homes is roughly 25% higher than it was last year (see chart above).
However, there’s another side to the story. While home values have steadily risen in recent years, interest rates have dropped, and have been hovering around all-time lows.
The net effect for someone seeking a mortgage is that prices in terms of monthly mortgage payments are still attractive versus historical costs, although they’ve crept up in the past few months as interest rates rise. The following chart uses average 30-year mortgage rates to calculate the monthly mortgage payment based on the home sale value cited before.
As you can see, there was an ideal buying period between the beginning of the pandemic and the end of 2020. And even though housing prices have continued to rise, the actual mortgage cost is still reasonable when looking at historical borrowing costs. In other words, a 25% housing price increase has not led to 25% higher mortgage costs. This fact is probably lost on many people frantically trying to buy a home ‘before they are even more expensive!!’ and this is partly the cause of my own haste in the past. Ben Carlson recently made the same point, with better charts.
Our Hyper-Local Comps
I’ve been observing (and charting) the real estate values in our area since even before we moved here. Of course, real estate varies by locality, sometimes significantly. So here are some details on our specific neighborhood.
As I mentioned earlier, less than 15 houses have sold in the neighborhood we were looking at in 2021. That’s a pretty low turnover rate, and it was much worse in 2020, when many people were petrified in their homes and didn’t want to move. Nonetheless, the following chart shows the average selling price per square foot in this neighborhood since the spring of 2020.
That green dot is our negotiated price and agreement date. We took a bit of a gamble by agreeing to a purchase price many months before the expected settlement. However, I was pretty confident that the price would prove a bargain, and I was right. Markets would have had to recede significantly for me to feel bad about our agreement.
In terms of actual dollars, we agreed to pay $434,000 for the home, which has 4 bedrooms, 2.5 baths, and 2700 square feet. When we moved down here last year, I was really hoping to find a place sub-$400k, but the market had different plans. All-in-all, our annual housing costs (including tax and insurance) will be $2000-3000 less than they were in Connecticut, so I’m still pleased with the move, financially.
So that’s our story. I apologize for the long-winded nature of it. I wanted to share our whole experience, because I think a lot of people are dealing with some variant of our struggle.
Also, I wanted to highlight the benefits of taking a methodical approach. Home buying for many becomes an emotional process, and I have fallen into this trap myself during past home searches. Even this time, we started to get antsy and considered bidding on less-than-desirable homes because of our frustration with the search.
In the end, we succeeded because of our patience. We knew what we wanted in terms of scope and cost, and we knew what we could give up: time. If we chose to overpay, we could have found something faster, but I worry about our long-term satisfaction with such a decision.
We also benefited from taking an unconventional approach to home buying. Most people would just keep bidding on homes, competing with cash buyers relocating from a large city, and eventually give up or massively over-pay. In contrast, we decided to cultivate back-channels and network in our target neighborhood, and this ultimately led to us finding our home. I’m still kind of surprised how easy it was.
What’s next? The contract is signed, and the inspection was actually completed back in August. We plan to close by the end of January, and rent back to the buyers until at least March. We’re hoping to be settling into our new home in early spring, making the whole process roughly 12 months. It took a while to develop, but sometimes big moves take time.
We’re happy to be closing in on the next chapter of our lives.