Sunday evening, Kim and I made an offer on a house. The Greenwood Place (as we’ll call it) was listed at $649,000. We offered $677,777 escalating to $777,777; no repairs required; and a $50,000 appraisal gap waiver.
Our offer was not accepted.
That’s right: Two months after selling our home — and three months after beginning to search for the next place — Kim and I have waded back into this crazy housing market. We’re not sure how long this process will last (or what the outcome will be) but we’re prepared to be searching for many weeks, if not months.
Both our mortgage broker (Michael S.) and our real-estate agent (Michael K.) tell us we’re doing things exactly right for this market.
- Kim and I both have credit scores over 800. “Everything looks unbelievably perfect here,” Michael S. told us in June. “That’s amazing. Perfect credit.”
- We’ve sold our previous house and are currently renting a place while we search for another. This allows us to make offers without home sale contingencies.
- We’re willing to take calculated risks to increase the strength of our offers, but we’re not willing to compromise our financial health in doing so. “You can borrow $850,000 all day long,” Michael S. told us. “You’d probably have zero difficulty qualifying for $1 million.” We don’t want to borrow a million dollars though because doing so would severely compromise our other goals.
All the same, there aren’t many homes on the market right now. Demand far outpaces supply, which is driving prices up and creating insanely competitive situations. It doesn’t matter whether we’re doing everything right. We’re still going to run into folks who can make cash offers at more than $128,000 over a $649,000 asking price.
Our plan? Be patient. Remain vigilant. We don’t need to buy a home at the moment — and, in fact, perhaps it would be best if we didn’t — but we want to be prepared to pounce if/when we find the right place.
Today, I want to share a bit of our thought process as we attempt to buy a home in 2021.
Where We’re Starting From
Currently, Kim and I are paying $2300 to rent a 1000-square-foot home in a nice, walkable neighborhood on the south side of Portland. We like it. (True story: Two days ago as I was walking the dog, a neighbor stopped me. “Is your name J.D.?” he asked. “I’ve been watching your YouTube videos!” First time somebody has recognized me from my tiny YouTube channel haha.)
This $2300/month rent payment is comfortable for both of us. Kim doesn’t have the extensive retirement savings that I do, but she’s in good shape compared to most people. She can afford $1150 per month for housing. And while she (and I) would love to have a lower housing payment, she’s willing to go as high as $1200 per month.
Our current housing situation leaves me swimming in money. That’s the way it feels, anyhow.
You see, one of the reasons I wanted to move was because I’d managed to cripple my monthly cash flow. I had too much invested in our house. I owned it outright. One-third of my net worth was locked into the home and couldn’t be used for other things — such as buying food.
When we owned the home on Wisteria, my monthly housing expenses were $377 for taxes and insurance. (Kim had no housing expenses. The home was mine.) Based on my non-retirement investments and savings, I had a monthly budget of $2059 to get me to age 59-1/2 (at which time I could access retirement accounts). That $2059/month budget was far below my actual spending, which averaged about $4200/month.
By selling the home and moving into this rental, an amazing thing happened. Even though my monthly housing expenses jumped from $377 to $1150, my after-housing monthly budget increased from $2059 to $7588 — all because I now have a pile of cash in my bank account.
This improved cash flow is 100% because we I no longer have $500,000+ locked up on home equity. It’s in my bank account. Yes, some of it will soon be in home equity once again (we hope) because we’ll use it for a down payment on the next place. But I’ll retain a sizable chunk of that to bridge the gap between today and 25 September 2028, when I turn 59-1/2.
So, today I feel like I’m swimming in money. Instead of running a $2100 monthly budget deficit, I have a $3300 surplus. I am, once again, financially independent.
This is our starting point. As we hunt for homes, I maintain a running spreadsheet that (among other things) tracks my projected monthly budget for each home. In fact, this monthly budget is my number-one consideration in purchasing a home.
Selecting a City
I am fifty-two years old. In the past thirty years, I’ve purchased four homes — and I’m about to buy a fifth. My homebuying habits are almost perfectly aligned with the American average. Homeowners tend to stay in one place for about seven or eight years, on average.
In other ways too, my homebuying habits have been typical. If I’m not careful, for instance, I can get wrapped up in the emotional side of the process.
When my ex-wife and I bought our hundred-year-old farmhouse in 2004, I was 100% motivated by emotion. There was nothing logical about the decision. When Kim and I purchased our most recent home in 2017, we allowed emotion to over-ride logic to our detriment.
This time around, I’m trying to be logical and deliberate. After four years in a house that proved problematic, and in the midst of a housing market that seems to have gone mad, I want to make a smart decision.
So, my full-time “job” for the past couple of months has been house-hunting. I’m not saying that my process is perfect (nor applicable to everyone) but it’s a hell of a lot more logical than any of my past home purchases.
To begin with, Kim and I spent twelve full days during the last three months driving all over western Oregon and western Washington in search of a place to live. We’d frequently devote weekends to driving all over both states (with the dog in our laps), exploring small towns and asking ourselves, “Could we live here?”
We love Portland — despite what some media outlets would have you believe, it has not become a wretched hive of scum and villainy — but the place has grown too big for us. Both of us grew up in small towns. We want a slower-paced lifestyle without all of the chaos of a big city.
While there are several cities that appeal to us, ultimately we’ve decided to move to Corvallis. Corvallis is a town of roughly 60,000 at the base of Oregon’s coastal mountain range. It’s an hour from the Pacific but still very much of the Willamette Valley, the agricultural region where I grew up. It’s home to Oregon State University. It’s the #1 biking town in the state (even ahead of Portland!) and has just enough stuff to do to keep us happy.
After we decided on Corvallis, we made an effort to spend some time there. We’d pack up the dog on Saturday mornings, drive ninety minutes south, then spend a few hours exploring the city. We liked it — a lot. Even so, we were having a tough time getting a feel for the neighborhoods.
Enter our real-estate agent, Michael K. One day it occurred to me that maybe I could “outsource” learning Corvallis neighborhoods. Searching YouTube, I stumbled upon this video of a Realtor narrating a driving tour of the town.
This helped us both so much that we contacted the narrator to ask if he’d take us on as clients. He agreed. For the past two weeks now, we’ve been working together to find a suitable location.
Crunching the Numbers
As you’ve probably heard, there aren’t many houses for sale right now. I don’t have the exact figures, but my memory tells me that the U.S. housing inventory is about half what it typically is. That means pickings are slim. And when you’re searching for a place in a smaller city like Corvallis, pickings are even slimmer.
Still, there are maybe a dozen new listings each week that meet our criteria. Michael K. has set us up with an automated tool that emails us when homes come on the market that match what we’re looking for. Plus, I spend hours each day on Zillow looking at the other homes that come up for sale — just in case, you know?
What sort of filter are we using? Well, we’ve set an upper limit of $800,000 — remember that our mortgage broker told us we could borrow $850,000 “all day long” — and we’re looking for places larger than 1500 square feet on at least one-tenth of an acre. Like I said, I use Zillow to find possible fits that slip through this net.
Of the homes that come to market and make it through our filter, maybe half of them are places we’re actually interested in: the price is acceptable, the house and yard look well-suited for our lifestyle, and so on.
I put all of these matches into a spreadsheet that looks something like this [click for larger view]:
As you can see, my spreadsheet only tracks a handful of stats, but those are the stats that are most important to me. I don’t track bedrooms and bathrooms, for instance, because our filter already screens for these. (Plus, I figure square footage is a reasonable proxy for beds and baths.)
Here are the variables that matter most to me when hunting for a house:
- Price, of course. But price isn’t the only financial consideration, nor the most important. I don’t want to overpay for a place, of course, but I look at the down payment (and eventual equity) as a transfer of assets. I’m not spending $300,000 if I buy a $300,000 house. I’m simply transferring money from cash to real estate. (The money lost to interest, however, is indeed an expense.)
- Size of the home. Again, this serves as a proxy for other things, such as the number of bedrooms and bathrooms.
- Lot size. Kim and I like a large yard. We recognize, however, that we’re not going to find an acre of land in the middle of a city. Still, it’s nice to have this number handy.
- Year the home was built. I want to know when a home was built for a variety of reasons. The building date can give me a rough idea of possible maintenance concerns. Plus, it’s also a good guide for the style and layout of the house.
- I have three columns of numbers related to the monthly cost of the house. The “Each” column is most important to Kim. This shows her share of the housing payment each month. The “J.D. budget” column is most important to me. The “J.D. budget” number assumes that I’m using my savings to make a 50% down payment, then calculates what my monthly budget would be after my share of the housing payment. (Remember: this number is $7588 in our current rental and it was $2059 at our last house.)
- Walk Score. I like a walkable neighborhood. Walk Score isn’t perfect for my situation — I don’t care if I’m close to a school — but it’s close enough. My main concern is that I’m within an easy walk of a grocery store. This is a huge deal to me. Walking distance to a park would be good too.
- Location. In which neighborhood is the house located?
- Notes. This is a catch-all for info like apparent condition of the home, HOA fees, and so on.
In practice, the most important item in the spreadsheet is the “J.D. budget” column. No joke: I tend to remember all of the other details about the various houses. Given my notoriously poor memory, this is something of a shock.
As you can see, I’ve color-coded everything too. I’m using good ol’ ROYGBIV, with red being the “bad” end of the spectrum and violet being the “good” end. This allows me to glance at the spreadsheet and know, say, that the Grant Circle house gives me an amazing budget but the Clarence house would put me in almost the same financial predicament as the home we just sold. (That Grant Circle house looks perfect on paper, doesn’t it? It’s not. It’s a rental that’s seen some tough love in the past.)
A few other quick notes: Homes listed in bold are homes we’ve viewed in person. Shaded lines represent homes that are under contract, so are no longer available. And that one green line? Well, that’s the home we made an offer on.
Making an Offer
Kim and I have viewed eleven homes now. A couple of these seemed fine in photos but were not good matches in person. Most were average. But one — the Greenwood house — was amazing. it was an almost perfect fit. (Why almost perfect? First of all, price. Second, walkability was marginal.)
We toured the Greenwood house on Saturday afternoon. We loved it. As we drove around Corvallis the rest of the day, we discussed whether or not we should make an offer. “I think it’s going to be out of our price range,” I said. “It’s not going to sell for $649,000. You heard Michael. He called it an ‘atomic potato’. He thinks it’ll go for much, much more.”
“I know,” Kim said. “But don’t you think we’d regret it if we didn’t at least try to make an offer?”
“Yes,” I said. “We’d regret it very much.”
That evening, we met with Michael to go over paperwork. Then I spent most of Sunday running the numbers through other spreadsheets. (What? You thought I had only one?!?)
While I have my personal spreadsheet for tracking properties, the spreadsheet that actually matters most is the one from Michael S., our mortgage broker. This file allows us to make projections using actual numbers such as down payment, property taxes, and current interest rates.
If we alter any one of the variables in the mortgage worksheet, we alter our projected financial obligations. As you can imagine, this can lead to many, many permutations of monthly payments and down payments.
Generally speaking, Kim and I are planning to do the following: I will make a 50% down payment from the cash I have on hand after selling our last place. She and I will then split the monthly mortgage payment 50/50. This should work for 95% of scenarios we’re exploring.
In order for us to make an offer on Greenwood, however, we had to break away from our standard plan. Our default assumptions would lead me to making a $325,000 down payment on the $649,000 list price, then my monthly budget would be $3803. But we knew that Greenwood wasn’t going to sell for $649,000. It’d sell for something more. (Probably much more.)
Ultimately, we figured we had to offer at least $100,000 over asking. Fortunately, the sellers were allowing escalation clauses, which meant we could offer $750,000+ without risking that we’d overbid anyone else by, say, $30,000.
After much internal debate (and even some external discussion with Kim), I decided I’d be willing to buy this house if I could keep my projected budget at about $3800 per month. This is close enough to my current spending that I felt okay with it. Worst case, I’d find a part-time job to cover the gap, right?
By Sunday evening, I’d come up with an offer amount: $777,7777 with a $250,000 down payment. This would give me my $3800/month budget assuming Kim was willing to pay $1200 per month toward housing (which she was). With at 50% down payment? Well, then my budget would be $900 lower each month. Still better than at the house we just sold, but less than what I want.
Why a goofy number like $777,777? For fun. I’m not joking. Real-estate transactions are deadly dull affairs. I think it’s fun to spice them up with numbers like this. (Plus, we thought it might send a positive signal to the sellers.)
When I bought my condo on the river in 2013, I deliberately offered 4.01% over asking price because it was unit #401. The selling agent later confided that the owners had noticed the number and that it played a small but important role in their decision to sell to me.
The offer we submitted on Sunday night looked like this:
- We offered a $677,000 starting price — $28,000 over asking. But our offer escalated in increments of $7,777 up to a top price of $777,777. We were offering to beat other offers by $7,777 up to our limit.
- We agreed to “no repairs”. We’d still perform an inspection, which would allow us to bow out of the deal if we found something catastrophic, but we wouldn’t ask the seller to do any repairs.
- We included a $50,000 appraisal gap waver. If our offer was accepted at $760,000 but the home appraised at $720,000, I would make up that $40,000 difference with my cash reserves.
The next 36 hours were painful for Kim. She had become emotionally invested in the house. While I was hoping we would win the bidding war — our agent himself wrote one other offer for the house! — I was surprisingly cool and collected about the whole thing.
Michael K. called on Tuesday morning. He didn’t beat around the bush. “Your offer wasn’t accepted,” he said without preamble (which I appreciated). “I’m a little surprised. You wrote a strong offer.”
Right now, we don’t know how many offers Greenwood received and we don’t know the amount of the winning bid. We won’t know that until the place closes in a few weeks. But we’re dying to know how much more we needed to offer in order to buy the place.
Ultimately, however, we have no regrets. We know that we made the highest offer we possibly could. There was nothing more that we could have done without compromising our other financial goals. We’re at peace with this outcome.
Now, though, it’s back to househunting. We’ve already lined up a couple of home tours for tomorrow afternoon. The places look promising — and one of them is much cheaper than the Greenwood place! I reamin hopeful that we’ll find a nice home in Corvallis with a walkable neighborhood, a yard for our animals, and space for Kim to do yoga and gardening.
Still, a part of me knows we’ve only been at this for two weeks. The folks who bought our house in May had been shopping for ten months. The market is crazy right now, with far more buyers than sellers.
Who knows? Maybe I’ll be writing offer recaps through the winter and into next summer. But I sure hope not!