House Hunting, part one: Setting the Stage

16 November 2012 · 25 comments

It’s been a year since Kris and I began the divorce process. For most of that time, I’ve been living alone in a 700-square-foot apartment in northeast Portland. It’s not a bad place, but it’s never felt like home. Plus, it’s noisy. It’s noisy from the neighbors (and their dogs!), but it’s also noisy from the traffic and from the donut shop outside my window.

This summer, I finally got the itch to move someplace more permanent. Mortgage rates were at all-time lows and I began to get the sense that the real-estate market in Portland might have bottomed out.

“I think I want to buy a condo,” I told Kim before I left for Turkey. During my last few days in town, I began to do some research. I found some places I liked, but prices still seemed pretty high, especially in downtown Portland.

While I was traveling, Kim did a little research of her own. “I think you might have missed the bottom,” she told me. “The market is really picking up.”

When I returned from Turkey, I met with a real estate agent (a Get Rich Slowly reader!) who confirmed what I’d already figured out. The real estate market in Portland had indeed bottomed out, and homes in the city were selling especially quickly. (One place that I really liked sold in just 24 hours. That’s just like at the start of the housing bubble!)

My real estate agent told me that there’s very strong demand in Portland itself, which has kept the prices inflated. But that also means that areas outside of Portland are cheaper because there’s less competition. Good ol’ supply and demand!

I met with my real-estate agent a month ago. We spent two hours talking about what I need in a home, and at the end of it all she seemed to have a pretty good feel for my lifestyle. “If we could find you a small little hobbit home somewhere with low maintenance, you’d be perfectly happy with that, wouldn’t you?” she asked. Yes, I would.

As I say, I met with her a month ago. I had hoped that now, a month later, I might be deep in my house hunt. Unfortunately, it hasn’t even started yet. I hit a snag.

You see, although I have enough money in the bank (or invested, actually) to purchase a home outright, I don’t actually have much of an income. As a result, I’m unable to qualify for a mortgage. Banks don’t care if you have the money in the bank to make the house payment; they want you to have the income to make a house payment. So, after a month of jumping through hoops, the conclusion I’ve come to is that I need to pay cash for a house or not buy at all.

That’s too bad. I had really hoped to take advantage of the low mortgage rates. It’s a perfect opportunity to exercise leverage — to borrow money at a low rate (my mortgage) and make money at a higher rate somewhere else (take your pick of any number of investments that ought to return more than 3% annually, including many dividend stocks).

I haven’t given up, though. I meet with my investment advisor on Monday to see if we can create some sort of income-like money stream. And in case that doesn’t work, I’m talking with Kris about getting my half of the equity out of our house. (We maintained joint ownership even after the divorce.) It’s possible that I could find enough cash to buy a modest place outright. I’m not sure that’s something I actually want to do…but it’s a possibility.

Meanwhile, I’m about to move to a month-to-month lease on this apartment, which isn’t something I really want to do. (It costs an extra $50 a month to do so.) But I feel like my living situation is in complete flux right now, so making firm decisions is tough. It’d be so much easier if the bank would just give me a mortgage!

1 Leigh November 16, 2012 at 08:37

An extra $50/month for month-to-month is nothing! My last two apartments charged $200-300/month to go month-to-month.

Why not just buy a house in cash? Then you don’t have the hassle of a mortgage and you’re done. Did you not enjoy the feeling of having yours and Kris’s house paid off after you sold GRS?

Good luck! Finding the right place can take a long time, so be patient and you’ll find your gem.

2 Financial Samurai November 16, 2012 at 08:50

The good thing is, it’s better to have cash to pay in full in your situation than get a mortgage just b/c rates are cheap!

What about looking for a nice house overlooking the Bay here in San Francisco? It’s nice down here!

The housing market has indeed picked up here too. Rents are up about 16% YoY, as are housing prices. Once neighbor is spending 500K on a remodel after just buying the place AFTER the old owner just spent 200K remodeling. I don’t know what they are thinking?!

Good luck on your hunt!

Sam

3 Stephen November 16, 2012 at 08:54

I’ve lived on a month to month lease for over three years now and the one thing that stands out is that I constantly feel like I’m moving. We originally went month to month to buy a house but for a number of different reasons, one still hasn’t come long. While initially it felt fine, the more the sense of limbo came.
The market over here is way more dysfunctional, but definitely something to keep in mind if your house hunt drags along. Also consider what might happen a year or two down the line with Kim…

4 JanS November 16, 2012 at 09:22

Have you shopped with locally owned mortgage companies (a brief search turned up Northwest Mortgage Group in Portland)? Sometimes they have more flexible rules about what mortgages they will finance. Good luck!

5 Lance@MoneyLife&More November 16, 2012 at 10:17

Could manual underwriting from a local bank be an option? I know people with no credit go that route but I don’t know if it would be the same with income. Just a thought.

6 Dylan November 16, 2012 at 11:23

AGHHHHH, J.D. You brought me out of the woodwork with this one.

:)

“The real estate market in Portland had indeed bottomed out.”
No one could possibly know that. The market prices are what they are because just as many believe it’s overvalued as it is undervalued. That how a market works.

“I had really hoped to take advantage of the low mortgage rates.”
There is no real advantage unless mortgage rates are below other “risk free” rates (e.g. Treasuries, FDIC insured CDs). The added return you may get from investments, also known as the risk premium, is a premium return above the “risk free” options also available. Avoiding mortgage interest at a rate higher than treasuries is not available to the entire market, but it would be for you. So you would essentially be taking disproportionally higher risk by borrowing money so that you can invest other money. It’s a bad deal. Investment’s are risky, this strategy leaves them just as risky, but for a lower net return. That’s just not fair.

“I meet with my investment advisor on Monday to see if we can create some sort of income-like money stream.”
DOUBLE AGHHHHH! Doing so only adds friction to the machine. So not only is having interest payments not efficient, you’d be making your investments less efficient to do make your overall finances more efficient.

“I think I want to buy a condo.”
Rent one first to find out. Don’t buy until you are saying, “I know I want to buy a condo,”

“I’m about to move to a month-to-month lease on this apartment, which isn’t something I really want to do. (It costs an extra $50 a month to do so.)”
Try to negotiate a six-month lease at a lower amount than month-to-month; I think you may still have a little more work worth doing.

J.D., my friend, if you can afford not to borrow, please don’t borrow! And If your going to by a home with cash, keep the cash in cash (i.e. FDIC or NCUA insured deposits) until you’re ready to buy. Investments are not a safe place for money you plan to spend soon.

Whatever you end up doing, I’m confident you will be the better for it (it will either work out financially or you will receive a valued life lesson that you could even write about.).

Best,
Dylan

7 Elizabeth November 16, 2012 at 13:13

I second the point about renting a condo before buying. If the noise of apartment living bothers you, an apartment style condo might not be much different. (Ditto for townhouse condos.) Many of the condos in my area are in busy, central locations so I haven’t noticed much difference in noise from where I currently live.

Also, if you buy into a condo building where there are a lot of renters, you lose the advantage of living among people who take more care for their living space and the condo community as a whole.

8 jdroth November 16, 2012 at 13:41

Thanks, Dylan, for the sanity check. I can always count on you for that!

You’re right that nobody can know whether prices have bottomed out. A better way to phrase that would have been that prices seem to have flattened — and have even begun to rise in places around here.

Also, I appreciate what you’re saying about buying with cash vs. financing. Actually, several folks are saying that. And it did feel good to pay off the house I owned with Kris. I think it’s time to re-evaluate my priorities here. Thank you, everyone, for nudging me in the right direction. :)

9 Pauline November 16, 2012 at 11:31

From what you said about liking to walk everywhere, it is probably a very central location that you will like, priced accordingly. There has to be a way for the bank to keep your investments as a collateral for the loan or something. In the UK there is an offset mortgage, if you borrow $500K but have $100K in the bank on a savings account, you only pay interest on $400K. Something similar could work maybe? good luck with the hunt!

10 Jenna November 16, 2012 at 12:21

Good luck with the house hunt. My parents had similar issues trying to get a house in Boston, while living in China. My mom actually sent in a 64 page (in Chinese) document to prove they lived there. Not sure how their bank took that…

11 Elizabeth November 16, 2012 at 13:18

Odd to think that banks will give people mortgages based on money they’ll earn in the future rather than money they have in the bank right now. I can understand why paying cash might not be preferable, though. It would make me nervous having so much of my net worth wrapped up in a single asset.

Good luck with the hunt! And read those condo rules very, very closely :)

12 Naomi November 17, 2012 at 14:17

In addition to the condo rules, ask for the most recent 12 months of board meeting minutes. We walked away from a condo deal after we read in the minutes that the building’s elevator pit was repeatedly filling with water, residents could smell their neighbors cigarette smoke, and other horrible things.

13 Hope November 18, 2012 at 07:53

Great idea, Naomi! If everyone had access to condo board minutes and was astute enough to ask for them, we would never have unloaded our condo. And I use the word unload advisedly. Be very careful where you buy a condo!

14 Holly@ClubThrifty November 16, 2012 at 13:38

Househunting!!! I am so jealous. I hope that you get to qualify for a mortgage afterall and are able to buy what you want at a good price.

15 bethh November 16, 2012 at 14:00

Oh boy, I hope you keep us posted on the house hunting process . I’ve been at it for a couple of months and it’s frustrating, but I’m not in the same situation you’re in. I agree with some of the advice above – choose the most simple and tidy path to follow, forget about creating income streams and getting a mortgage, just buy the dang thing already. And then have a party for all the strangers who read your blog! ;-)

16 Keith & Kinsey's Real Estate Update November 16, 2012 at 20:07

I’ll ask the question Dave Ramsey would ask you… If your house was paid for would you borrow money on it to invest??? Just pay cash and be done with it. Whatever income you have can be reinvested. Or have you ever thought about owning rental property? You could buy a couple rental properties for cash, and then you’d have an income stream.

17 amy November 17, 2012 at 06:33

I went through the same thing this past year. We sold our home in Michigan and moving south to South Carolina. My husband owned a graphic design business with 2 partners and was bought out. Since he was starting over as his own business freelance he had no income ( he had to show 2 years prior) except for the buyout so we were turned down instantly for a mortgage even though with all our assets and cash we could have paid the house off 2 times over. Then we were told we could apply for a portfolio loan. Since my husband had already received one month payment of his buyout ( 36 month agreement) we were not approved. We couldn’t believe they wouldn’t approve us even though the cash was there and our credit was outstanding. It seems sad that we approve people for mortgages they probably cannot afford on just having a paycheck every month. In the end we sat down at a park and decided screw this we will pay cash for the house and never think twice about it. We have been living in SC for 6 months now. We pretty much keep it to ourselves that the home is paid off. That really seems to make people upset when they hear you are not in debt.

Good luck with house hunt. It is super frustrating how people who can manage their money well get the raw end of the deal.

18 Kathy November 19, 2012 at 12:12

“seems to make people upset when they hear you are not in debt”

Amazing, isn’t it? People have a fit when we say we are working towards paying off our house. “What???!! That is so stupid, what will you write off on your taxes???” Ugh! Brainwashed into the debt mentality.

JD, buy in cash and never look back. Freedom!

19 Evan November 18, 2012 at 09:34

It’s certainly possible I’m seeing pain where there isn’t any, and I realize certainly none is intended. But, do you have to keep reminding people that you were the one who wanted out of the marriage to Kris? I’m sure it would be painful for her to read the first sentence.

You could have written the whole article without mentioning the failed marriage. I realize part of your popularity is that you bare your soul, but perhaps Kris would like a little less of that painful spotlight.

20 jdroth November 19, 2012 at 12:15

Fair enough, Evan. I know it bothers a lot of people when I phrase it that way. (Although I should point out that it was Kris who wanted me to say that originally — she wants it to be very clear that I’m the one who chose this.) I’ve altered the first sentence to something more neutral.

21 Joe @ Retire By 40 November 19, 2012 at 08:08

Have you looked at the area around PSU? The condos around there are much more affordable than other downtown neighborhoods. It’s very close to downtown and I think the price is still quite a bit lower than at the peak.
Good luck.

22 Martin November 19, 2012 at 20:52

Well this is awkward, but what about waiting a few months until you get serious with Kim to move in together? Just saying…

My buddy Roman bought a house while dating his girlfriend. Not sure he didn’t wait. Now she’s moving it after he’s been in the place for over a year. They don’t know how to approach everything.

23 Kathleen November 23, 2012 at 17:03

I’m having the opposite problem. I prequalified for a mortgage, and it’s so low that it’s Gresham or something with problems!

24 Mrs. Money Mustache November 27, 2012 at 13:38

Isn’t it strange how it works? We’ve had the same problem… a few years ago we couldn’t re-qualify for a mortgage that we already had in order to refinance and reduce our interest rate. So, we had to keep paying the high interest rate every month because our income indicated that we couldn’t afford the house. Ha! It was baffling indeed.

This was sort of an urgent situation that involved a business partner, so our only way out was to pay for the whole house in cash. It was hard to do, but it ended up being quite liberating. After that, we decided to pay off the mortgage on the home we live in as well.

We now have a “pay cash for all future houses” policy. Paying cash also allows you to get homes that a bank wouldn’t lend on (ex: a house with a bad roof or plumbing issues) and you save on settlement costs and an appraisal. In our case, we also ended up getting a line of credit on our paid off house, so we can still take money out of the house when needed.

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