Friday, August 29, 2008

Interview With A Buyer

Property owners and potential buyers have emailed to say they’re glad we’re on the ‘net discussing local real estate and the Bubble, particularly when we emphasize that there are “other” reasons to buy a house besides making a financial killing or using the house as an ATM machine through a HELOC (Home Equity Line of Credit). As we’ve said, we believe a house should reflect the habits, tastes, and predilections of its owners, and offer security, comfort, and a sense of belonging to the community—things that are more important, IOHO, than money.

One new owner, and a new email friend, is profiled below. He wrote to us after completing his purchase. The Bubble Blog didn’t exist while he was looking, or we would have cheered him on in his perfectly reasonable lowball offers. Now that he’s been on the hunt he remains, like us, deeply interested in the local market. We suspect he’ll be buying again in a few years.

We asked thoroughly intrusive questions about his background, ownership history, job, family life, and how he went about looking for a house, getting a mortgage, and becoming a happy resident of C’ville.

This search, and the completion of the sale, happened while the nation was already in the grips of the “credit crisis,” but before things started “really” getting bad, from March onward (Bear Stearns bailout, IndyMac Bank failure, Fannie Mae & Freddie Mac crisis, rising unemployment, inflation, etc.).

The deflation of the housing bubble has been going on in some places since 2006. It’s our observation that in C’ville/Albemarle the pace of sales might have been slowing, but pricing often continued to rise through 2007 and even into 2008, especially in certain neighborhoods.

This homeowner's search began around Labor Day 2007, and concluded in January, 2008, and the buyer notes that as the credit crisis grew, it did have an impact on his process.

The environment a buyer finds him/herself in this Fall might be different, but there’s a lot to learn from this particular experience.

Note on the text: We added the links and the bolding.

BUYER PROFILE:

I'm 31, married with 3 kids age 3, 2, and almost 1. My wife stays home with the kids. I make about $60K/year and am on track to make more in the future due to previous experience and future job opportunities.

I grew up in the Commonwealth, but I spent a long time (1994-2006) in the military. When I got out in 2006 and returned to Virginia from Abroad, we settled in Northern Virginia. My wife and I were very discouraged to learn that we couldn't afford even the crummiest NOVA townhouse on a $70k annual salary. So we sucked it up and rented a place, and kept saving.

In January, 2007 we bought our first house in Loudoun County. During the move I realized I hated my job, and found one down here. I put the first house on the market and thanks to a combination of "well bought is half sold," a good agent and pure good fortune, we sold it in three months and even made a few grand. I may be the only person who flipped a home in Northern Va and made a profit that year. I wasn't trying to, either.

I started working (and house-hunting) in C-ville in July, 2007. We made one offer on a house in Johnson Village around Labor Day, which was turned down, so we rented a place near UVA. We house-hunted nonstop for six months while renting, which was a smart move and gave us time to get to know the area.

We made two more offers that were turned down (due to "I need more than that to break even") before finding a place in Fry’s Spring in January, 2008. We closed March 20th, 2008.

DID YOU FIND C'VILLE "UNAFFORDABLE?"

NOVA definitely desensitized me to high prices. They are better here, although there were very few homes we deemed suitable in our price range, $330K or below--even at $100k above our range. This is determined first by size we needed three bedrooms and something we could use as a fourth, which ruled out the brick ramblers everywhere. There is really not much to choose from for a family larger than four. It seems city houses that size are only in tony neighborhoods that fall in the Venable school district, which made us majorly priced out.

As to houses being unaffordable, I agree. This fact has been the greatest source of stress in my life since I left active duty in June, 2006 (I basically finished college, got married, did my Army training, and we went Abroad in 2002--we stayed there until June 06 and moved to NOVA where I got a miserable job in corporate strategy. I feel for anyone with a pair of $30k incomes and kids, because a house payment is killer.

I make $60k and we would rather have my wife home with the kids and spend carefully--nothing drastic, but no cable, no home phone, stuff that's sensible anyway. Prices must and will go down. I love this "affordable again" BS from CAAR--a 10% price drop and it's suddenly affordable again, in spite of 100% increases from 00-06? [BB: or more, sometimes. See blog.]

What is silly too is the 'burbs like Hollymead show no discount relative to places in the city. If I may reassure myself again, I think there's a premium to having a really short commute. Most people wouldn't mind the 25 lights between Hollymead and the city, but it would drive me nuts. That is one of the major reasons we left NOVA. That 29 North is ugly and awful, although there are nice homes.

DID YOU CHANGE YOUR PRICE POINT FOR THE CURRENT HOUSE?

Our price point did not really change while we looked, although as the market got worse we did get bolder in making low offers on homes just out of reach (we started out with $260k for $320k asking prices on a couple).

DID THE CREDIT CRISIS HAVE ANY IMPACT ON YOUR HUNT OR PURCHASE?

For a while it muted our house hunting, but the urge to own was too great, in both me and my wife. Realtors shill and exaggerate a lot about the "pride of owning your own place" but there is truth in it. Plus with 3 kids renting and moving is such a pain in the ass. We moved in June 06, Jan 07, Sep 07, and now March 08- we're done. When I remember all those moves--most of which were do-it-yourself--I hope I die an old man in this house.


WHAT KIND OF ONLINE TOOLS DID YOU USE?

Mostly MyCAAR, which is fantastic. We looked at the FSBO (For Sale By Owner) sites that don't mirror MYCAAR (cvillebyowner.com, others) but there is not much there. Craigslist is overrun with ads so we didn't bother with it very much.

We definitely used the City and County tax records and assessments, especially after our first contract was turned down due to the seller's "I have to make this to break even" phenomenon. The one thing it doesn't tell you about is HELOCs, which I did not realize were so pervasive. In addition to the sales, assessments, and sizes, the County site is great with floorplans.

WHAT ABOUT LOOKING AT HOUSES IN PERSON?

We didn't go to many open houses. After a couple weeks online and viewing 10-15 houses with our agent, we knew enough in general about the area. If we liked a place enough we just asked the agent to show it to us. My last seller's agent believes open houses are just a means for seller's agents to get buyer clients and I agree. We have been to most of the open houses in our area, just as nosy neighbors and folks looking for ideas for our own home (decks, basement, etc).

We looked as far out as Lake Monticello, Zion Crossroads, and Waynesboro before deciding it was just too far to drive. After commuting from NOVA for 3 months I had no desire to live up 29 (Hollymead, etc.) and fight that senseless traffic, but we did look at a few places up there, as well as some places closer in (near Rio and Hydraulic, for instance).
We looked south of 64 also but those neighborhoods were too expensive and/or overpriced (Lake Reynovia, et al). I really liked Willoughby but we never could find a house with a level enough lot.

When we decided to make offers, we'd been to see the outside of the house a couple times, check out the neighborhood (although rarely talking to neighbors), and had the agent take us through 2-3 times. I would walk the neighborhood, check out the house in back of it, and look for trashy neighbors (extra non-running cars, porches overflowing with stuff).

DID YOU LOOK AT FUTURE PLANS FOR THE AREAS WHERE YOU WERE INTERESTED IN BUYING?

Not so much. [We heard about the future development in So. Charlottesville] Biscuit Run, but I didn't give it much thought. It does seem like the County doesn't care about there being thousands of cars on Old Lynchburg Rd with all the condo complexes.

We didn't really think about schools. I hear Jackson-Via is good but has a lot of poor kids. My oldest son will start K in 2 years so we'll probably send him there.

THE OFFERS

#1 – Our first offer was around Labor Day 2007, for a tri-level in Johnson Village, around 1800 sf, 4 bedrooms, built late 1960s, small level backyard, steep small front yard, Asking $315,000.00. We heard that the seller later took less than his "break-even," and sold for about $277,00.00. They came back to us a week after turning us down and tried for something similar to our original offer, so I guess they/their agent had not run into buyers willing to walk away. Our agent helped put steel in our spine for this, but this time around we also were adamant about not "falling in love" with a house to the point where we had to have it at any price.

#2 - We made an offer on one fixer-upper (Greenleaf neighborhood) but the owner held out (and got!) closer to his asking. That place was trashed, though--needed $75k of work. We were ready to offer $250k but someone else valued the neighborhood enough to pay the owner (a semi-retired agent) around $300k. [BB: the house was on the block for months, b/c the owner didn't, apparently, "need" to sell. The asking was $319K. It went for $292,349.00 in January '08.]

#3 - We made an offer on a small house on JPA, 3.5 bedrooms, but only 1200 sf. Asking, $315K, but then we saw later that it went down to $285K. This is a doozy, a "late flip" just like our current home [BB: "late flip" as in was bought even after the Bubble was popping, because there was still momentum in our area]. You know...granite counters, stainless steel appliances...all the superficial stuff that used to work on HGTV. They were asking $315k, we offered $260 and would have walked it up to $280k. Maybe they rented it, b/c the inevitable "for rent" sign popped up [BB: Accidental Landlords!] in the yard after a year on the market. I am really relieved we didn't get it because it was so small.

#4 - Fry's Spring Area House, the one that was ultimately purchased: 3 bed, 2 bath, 1840 finished sq ft, farmhouse style, ca. 1920. Thanks to some good negotiating, we paid $305k, put 10% down, and still are paying around $1,900 a month, which is one of my two monthly paychecks. [BB: ie, about 50% of take-home pay goes to housing.]

It has been tough, too--we have been dipping into savings every month. I had intended to do this anyway, but financial pressures also influenced me to sell my car and bike the 1.5 miles to work. I might buy a cheaper car in a few months, but for now we just have our minivan. I wanted to be in bike or bus range of work. I really don't give a you-know-what about the "environment" or the so-called global warming crisis, I'm just thrifty. $4 gas has made me feel better about my decision. I knew I was buying on a decline, but hopefully we got a good enough deal for it not to hurt if/when we move in 4-6 years. [BB: as long as buyer knows what he's getting into, then more power to him in this market. Problems arise when potential buyers haven't educated themselves on the economy, the national real estate picture, and the local real estate picture—all of which indicate prices, and equity, are going down…and that a "short term" owner could lose $ or be "underwater"—owe more on mortgage than house is worth—in a short amount of time.]

BB: The previous owners bought the house in 2005 for 220K, so they would have made a nearly 30% profit in just three years. Except during a housing bubble, this is unheard of profit. But there was no profit, apparently, because it was a “flip.” The buyer says,

No profit there. According to their agent they lost money on the house, which I believe is true. He said they had done over $150k in renovations (which may be an exaggeration), but there were substantial things done like:

-replace (or install for the first time) HVAC
-replace all windows
-replace 2 bathrooms- tubs, sinks, tile, toilets, everything
-replace entire kitchen- stainless steel high-end appliances, granite counters, complete HGTV-style kitchen
-replace all lighting fixtures
-replace the (vinyl) siding and (steel) roof
-repaint entire interior
-rip up carpet and refinish hardwoods
-a lot of (but not complete, unfortunately) re-wiring and re-plumbing

When you add that up, I'm sure they didn't make any money. I think I noticed in my closing that they were bringing money to their own closing. If they didn't. the only reason was that they had put a lot of cash into either the purchase or renovations.

Our agent said he saw this place when it was for sale in 2005 and it was "trashed." From talking to neighbors and looking at toilet manufacture dates, I suspect they bought in Spring 05, probably didn't begin renovations until 06 (presumably the contractors were all pretty busy), and didn't go on the market until Spring 07, well past the Bubble's peak.

And finally, the sellers never lived here. I think it was done purely for profit. Oops.

MORTGAGE

We used a mortgage broker recommended by our real estate agent. The VA [BB: Veteran’s Administration] loan guarantee is not a great deal, really, there's a 2.3% or so "funding fee" which can be rolled into the loan, but is basically PMI [BB: Private Mortgage Insurance]. So VA is not a good deal UNLESS you want to do zero down. On my first we used a VA guarantee in conjunction with a VHDA first time homebuyer loan [BB: Virginia Housing Development Authority, which encourages first time buyers and has loan limits], which got us a really good rate. We put 10% down (5% savings, and 5% my dad was kind enough to loan us interest-free and only due when we sell the house). We have two mortgages: the first was a 7-year ARM [BB: Adjustable Rate Mortgage] for 80%, and we bought a point so the rate is 5.25%. Our second mortgage is for the remaining 10% and is also an ARM at 7.25%.

I am not wild about ARMs (my first home was a 30-year fixed) but if we still have the place in 7 years I will refi if needed. And we pay $250 on the 2nd even though the payment is $210 because that rate sucks. At the time ,30-year fixed rates were in the mid-sixes [BB: percentage points of interest. They’ve risen recently, until just a few days ago (Aug. 260 when they started declining again.] I believe I can handle an ARM, but I know 90% of people who got them from 2002-2007 cannot. [BB: Many people are now familiar with Adjustable Rate Mortgage due to the subprime crisis—when these loans reset higher, typically in 3-5 years, the owners could no longer afford the house.]

The subprime crisis narrowed the # of banks willing to give me a loan, and during closing our broker mentioned that the 80/10 we had gotten was no longer available. In between late January (the date of our offer) and late March (when we closed) credit tightened a lot. [BB: even more so now, nearly six months later.]

ANY FINAL THOUGHTS?

If we were looking right now, we would go ahead and buy. In fact, if I had the cash there are a few places I'd try and buy as some places could almost be cashflow-positive as rentals. Maybe not at price they're asking, but at what they'd take. Especially in the city—there’s a Cape Cod nearby that is $265k and seems like a good deal. If I sound like a jackass "Housing Head" feel free to ridicule me. [BB: not us!]

Many thanks to the Buyer for taking time to answer our questions. He'll be checking the Comments section, so if you have a question, please add it there.

15 comments:

cvillewords.com said...

Great post. Confirms my belief that we were incredibly fortunate to leave Loudoun Co. for Cville in 2005. Whew.

Montpellier said...

Congratulations to this fellow on his Fry's Spring purchase - it's a neat neighborhood with a lot of character and charm. There are a lot of families there - as well as single students and older folks - no monoculture, which can really add to a place. The Fry's Spring Beach Club is there as well, and as the subject noted: it's possible to get out of the car and use a lighter-weight mode of transportation.

I do want to re-emphasize this point from the interview: even with a significantly reduced price and with a loan program not open to most folks, 50% of this gentleman's income is servicing just housing. That is not "affordable housing" by any stretch of the imagination.

For anyone who is still really wondering if we've reached some kind of "bottom" in housing - look at those numbers. Recognize that "sustainable" prices will be lower.

Anonymous said...

I'm wondering how Buyer came up with offer prices? Was it a certain percentage below the asking prices? Or was it individualized per property? And did the agent have any say in how much lower the offer should be than the asking price?

George H said...

Montpelier has the perfect point. The post mentions that the guy wanted to buy because he has a family and to some people, owning makes a big psychological difference. But many people couldn't fork over 50% of income to a house (let alone when the other 50% supports so many people!) Prices here will continue to fall because there's so much inventory. AND because now that there's a "credit crisis" more people are waking up to how ridiculous the inflated prices are.

The Buyer said...

cvillewords- the traffic alone is a good enough reason to leave Northern Va, aka hell. The rest is just gravy.

anonymous- my agent advocated the aggressive offers. Those were based at least in part on the CMA (comparative market analysis) or comps, in which recent sales. In other words, it wasn't a "this is what we're willing to pay" lowball per se- for each of the offers he sent he gave the other agent a rationale and justification for the offer in realtor-speak ($/sf, etc.). The opposing seller's agents could only counter with "my client needs X to break even," revealing the poverty of their negotiating position.

The Johnson Village house had been owned for just a year, and it sold for about $8k less in 2007. The Greenleaf place, I'm sure, was paid for long ago. The JPA place, as discussed, was bought in 2005 or 06, probably for too much, then they poured a lot of money in renovations. The question is, how many owners are upside down in this area? That will determine how much more prices fall around here.

In general, I can see how 50% of one's take-home income is high, especially to an underwriter. But I don't know how other people live. "Need" is a fungible word these days. I would try to list the things we don't need/have but my imagination is failing me- I really have no clue why people with two incomes and/or fewer or no kids have trouble making ends meet. All I know is if housing was 25% of income like it used to be (and still is in many parts of the country, let's not be Cville-centric) I would be retiring at age 45.

As it is, groceries are a bitch but everything else is pretty manageable, especially now that the 2nd car is gone. And I didn't need that car. Were I a true C-ville communist, I would take the bus, but due to connections the bike is quicker.

Of course, sitting on a bike seat increases a man's risk of prostate cancer. EVERYTHING is a trade-off; I wish more people realized this.

Real C'ville - The Bubble Blog said...

Re: "Lowball Offers"--we had a post that discussed the rise of the lowball offer and reproduced a "Letter to Seller Explaining Your Lowball Offer."

The letter, from the NYTimes, is a model. You modify it to fit the current market and particular property. The buying agent delivers it to seller/seller's agent. It's supposed to help explain not only practical issues, but also to take away the emotional sting for a seller who can't believe his/her property is no longer worth what it was one or two or three years ago....

http://tinyurl.com/6zabje

Plapdip's Blog said...

Thanks for posting this, and for the buyer being so candid. Fry's Spring is an interesting neighborhood, that was a new term for me, "monoculture," in the second comment, but it definitely doesn't fit Fry's Spring.

I'm currently looking, taking it slow, though, because of the economy and fear of the house losing value. I've been interested in some houses in the Fry's Spring area at different price points. But it seems like there's a lot of turnover there. On Mobile Lane/Middleton/JPA/Monte Vista? Does Buyer, or anybody else, have a comment on this? Is it just because there were older houses that people rehabbed and are now flipping...or is it actually transient because it's convenient to the University?

Montpellier said...

Were I a true C-ville communist, I would take the bus,

Hah...no body but a true masochist or the idle (and bored) guy/gal-of-leisure is that good a c'ville communist! I can't imagine how our bus service could actually be worse.

but due to connections the bike is quicker.

Half the time, walking is quicker. I am a foot or bicycle commuter as well, and was recently comparing notes with a sibling who lives in "metro" Atlanta - an hour-and-a-half commute each way through strip-mall-zone after strip-mall-zone - think NoVa, only bigger. The difference in quality of life is phenomenal - phenomenally better without all that car-cocoon time - and I've always taken delight in the opportunity to 'stop and smell the roses' - to really look at the places I'm passing through - often it truly is someone's rosebush.

The Buyer said...

Plapdip,

Not sure about the reasons for the turnover around here. A couple are recently renovated, a couple are teardown-rebuilds...this area is popular for UVA hospital residents fresh out of med school (like the guys in Scrubs), who only stay 2-3 years. This post explains it quite well: http://www.realcentralva.com/2008/01/28/uva-match-day-is-march-20-2008/

I would be glad to talk offline about the area: needcar@gmail.com

I don't know much about people's reasons for selling but I can offer a driving tour of homes currently and recently for sale in the area.

Let's start at the chicken place and head south.

JPA between Fontaine and Old Lynchburg Rd: none for sale right now (I think?)
- I believe 2408 JPA (yellow house) sold a few month ago. It was overpriced IMO, maybe it rented, but it's hard to tell b/c C-ville has a big lag time in posting sales to its website.

Stop at the beach club, and continue on JPA b/w Old Lynch. and Harris, going west:
- white house on right, on the corner of Monte Vista: sold in 2-3 months (somewhere under $400k?). Agent was Sonja Casero, who has two other listings very close by.
- the big painted (latte color) brick place on the left; $579, really high. The owner has had it a long time, and may have a HELOC. Looks really nice inside.
- two doors down, 2622 JPA I think (brick arts & crafts)- was a foreclosure (bought in Oct 06 for damn near $450k!!!). Was listed at $285, and it's now under contract. Is the bank really eating $165k? Amazing.
- big green reno on the left as you're going toward Harris- doesn't even look finished, but it's for sale by the builder and has been for several months.
- Actually on Harris but worth mentioning: Big funny looking adobe house on the right, newly built, open house every weekend. Asking $599k, I believe, based on sf which no doubt includes the basement...good luck buddy! Sticks out like a sore thumb.
2715 JPA...mentioned in the article...appears the flipper owners have given up (~ 2 years on the market) and rented it.
I know there are one or two more but they don't stick out in memory.

Old Lynch: one place on the corner for sale, has been for a while. Not sure how much, but i would never wand to live near a 3-way stop sign and hear cars accelerate from zero all day and night.

Monte Vista:
-big white arts & crafts went under contract in about 3 weeks. Ask was $399k, slightly more than the $385ish the owners paid a year or two ago.
- white house about 2 doors down, neat-looking place but may be overpriced at $339k
- big rental (5 apartments?) has been for sale forever.

Mobile/Middleton:
- boring-looking blue house has been for sale for a long time.
- brick Cape Cod on the corner, asking $265k. Neat place, I really like Cape Cods, although it is on the corner. Relatively cheap and looks pretty nice inside. If we had one kid fewer I would buy it.

I think that's it for this area. There's a big place behind the JP Baptist Church asking $995k or so...keep dreaming! It's close but not on JP Circle, where there are a couple million-dollar homes tucked away on the nice one-way loop.

Marley said...

Question about buyer's finances if he doesn't mind.

There's the 50% monthly paycheck for a mortgage payment. Wondering what your "debt to income ratio" is otherwise? Did anybody calculate this? (it's recurring monthly debt that's not going away in the next year)

http://tinyurl.com/5t9ups

In reading about what you need to know or do to buy a house, I thought there was a certain percentage lenders wouldn't go above.

No college loans? No credit card debt? (You sound like the kind of guy who wouldn't have credit card debt, fwiw)

The Buyer said...

Debt to income is about 41% of gross income...I have the house payment and a car payment.

I can't recall exactly what the mortgage broker told me but I think 50% was the absolute ceiling.

No credit card debt*- that is a real killer for a lot of people.
I had a full ride to college, and we paid off my wife's school loans several years ago.

*re: credit card debt- I do currently have $13,000 on a card at 0% for one year, but I have $13,000 in online savings at 3.5% and will pay it off before it bears any interest.

Advice wanted: should I get a HELOC and pay down the mortgage if the rate's better? Not too concerned about tax writeoffs, b/c with 3 kids and our income we probably won't pay anything this year.

One piece of advice: adjust your W-4 so you minimize federal taxes withheld (based upon # of kids, expected mortgage interest, etc.). The Fed gets nothing from me which is an extra $100 a paycheck- sure beats waiting a year for a "refund" of my own money. The state, unfortunately, is less flexible in its withholdings, but I get a decent refund from them.

I am not super frugal, either- I saved a lot in the military: in addition to a decent base salary, they pay a housing allowance, a cost of living adjustment if you live overseas, and health care is free. 30 days paid vacation, too. Don't believe the politicians who say our military members are not paid enough.

And any financial pain is a choice, too- my wife could work and we'd be an $85k-90k family. But we believe our kids are better raised by their mom than by a day care worker, and we have that luxury. I sympathize with lower- paid families in this are with less of a choice.

We're not blaming society or anyone for our tight financial situation, such as it is. There is/was a bubble that made housing too expensive, and that sucks, but it's the cost of living in a free economy: people do stupid shit with their money. What does gall me is that we the savers have to bail out greedy slimeballs who got a bigger house than they could afford, just so politicians can appear sympathetic and their bank/builder donors can stay in business.

See http://www.theonion.com/content/news/recession_plagued_nation_demands for a funny but close-to-true look at the situation.

Stefan said...

sounds like you're familiar with houses around here even though you're new. you already had experience buying one house. did your real estate agent do anything or could you have done this on your own without paying the fees

Plapdip's Blog said...

buyer, thanks for all the great info. going to drive around. like i say, taking it slow. keeping your email address, though, so thanks. maybe i'll see you at that open house today on monte vista!

Anonymous said...

to buyer
Would you pls name you RE agent; i failed twice to find one who is comfortable with aggressive offers.

Real C'ville - The Bubble Blog said...

anonymous,

would you please write to us via email and we'll give you the agent's contact info.

real.cvilleATgmailDOTcom

we left his name out of the interview in case for some reason he wanted to be anon himself.

thanks.