Buying a house in a competitive market
Well, it’s almost here. Just a few short months ago my sweetheart and I began searching for a home to buy in the greater Los Angeles area, and by some series of hard-won miracles we are astonishingly close to closing on an adorable 1924 cottage barely within the city limits. And when I say barely, I mean I could probably skip a rock down the street and hit Inglewood. But by god, we’re doing it. And theoretically we will have the keys in two weeks.
There is such a long list of things to be done right away that if I dwell on it too much, it almost sucks the fun out of it. Ripping up the carpets is priority one for me. After, of course, the termite riddance and maybe some roofing repair. I’ve also been writing and rewriting a moving guide, as though I have the expertise to expound on such matters. One thing I do feel I have some limited expertise on at this point is buying a house in LA in a tight market without a lot of money.
When we first started looking, we asked homeowner friends what they wished they had known before starting the process. Because every transaction is different, not a whole lot of their advice was relevant, but I’ll do the same here, just because otherwise it feels like wasted knowledge. I’m no expert by any means, but here are a few of the things we’ve learned over the last few months.
Know your limits.
We knew up front that we didn’t want to pay any more for a mortgage than we were already paying in rent, and our rent was below market. That severely limited our choices of where we could afford to buy to east LA, south LA, or north; we could afford some areas of Glassell Park, Montecito Heights, etc. And though we would love to be in a walkable neighborhood, we just couldn’t afford it comfortably. So we took a bit of advice we got from friends who had been there: drive around an affordable area, and see how far you’re willing to go and still feel safe. I believe they called it The Sketch-o-meter. Find the cheapest area you’re comfy with and start your investment there.
Cast your net wide and be willing to compromise (if you’re serious).
I have a few friends that are looking to buy right now, and they say they’re being “really picky” and “taking it slowly.” That is one approach, and probably one they can afford to take. The problem with that approach is that if you really want to be able to close a deal within six months, you have to be ready to act quickly and submit offers within one day of a property becoming available. We looked at a lot of houses and made offers on any that we felt we could live in, not just on houses we were in love with. The more offers you make, the more you increase your chances of getting an offer accepted. This might only be relevant to our particular situation, because we were looking to move in together, take advantage of lower interest rates, and enter the market for the first time without a large downpayment, so it was much more about getting it done than taking our time.
Be reasonable about offers.
This might only apply to the Los Angeles housing market right now, but it’s really competitive out there. Here’s basically how it works, as far as we could tell: a property new on the market will be listed at a certain number. If the property is at all desirable and the number is below perceived market value, that number is treated as an opening bid. Within 24 hours of going on the market, that property can receive anywhere from 2-20+ offers, ranging from reasonable to completely f’ing insane. There will usually be a day and time by which you’ll submit your “highest and best” offer (meaning the most amount of money you’d be willing to pay for it), along with, possibly, a love letter to the seller about how much you love the house, plus a friendly headshot. No, I’m not kidding.
How much you offer is directly related to how much cash you have on hand and how much the house is actually worth. This might seem obvious, but it’s difficult to keep the factors in perspective when you see a house you want and you are tempted to offer your maximum budget for it. There are a lot of cash buyers out there, and the more cash you have, the more likely you are to get a bid accepted. At first, we wondered why this was. Money is money, and the seller gets the money regardless of whether it’s cash from the buyer or from the bank, right? Sort of. For example, let’s say you fall in love with a house that is offered at $359k. Your budget is $400k, and you have $20k in cash for a downpayment. Looks totally affordable and well within your budget, so you offer $394k because you think it might be the highest offer, and therefore the best. You lose to someone who bids $380k but has $40k in cash, because if the house only appraises for $360k, they have enough to cover a small downpayment plus the difference in the appraisal price (the amount the bank is willing to fund) and the buyer’s offer (what they are willing to pay). You can offer a crazy amount of money for a house, but the bank will only give you as much money as they think it’s worth. The more cash, the less hassle for everyone involved.
You might have to do some work, and not the fun kind.
If you are like us and not swimming in buckets of cash, you might ask how you ever get an offer accepted. Early on we realized that we weren’t going to be competitive in the new-on-the-market scenario unless we happened to make a personal connection with a seller that somewhat overrode their desire for a smooth and profitable transaction. So we started looking at homes that had fallen out of escrow once or twice and had been on the market for more than a few weeks. By default, there will be something wrong with these houses. They might need some foundation, plumbing, electrical, termite, or roof repair. Or, in our case, all five. But pursuing these properties offers an important advantage for the buyer, especially if there are no other offers on the table. We ended up getting our house for far less than the asking price because it needed so much work and hadn’t been destroyed by a developer looking to turn a buck. So when we renovate, say, the bathrooms, we can restore the original clawfoot tub and put in tile flooring rather than have to rip out some awful generic crap first. But this is work that’s quite far down the road – all those unfun things have to come first, and that was part of the tradeoff.
Be ready for anything.
This whole process has been incredibly stressful, I’ll admit. But it would have been a lot less stressful for me, I think, if we had been more prepared to just go with it. A lot of unexpected things will happen during escrow, and by definition you can’t prepare for them. I found it much more stressful and less useful to participate in “what if this happens” exercises, because the things that actually did happen were seemingly out of nowhere, and the things we were prepared for never happened. We were prepared to have to make a lot of repairs to qualify for FHA financing. Didn’t happen. We lined up moving supplies and gave notice at our apartments in case the closing date happened on time, and the seller suddenly requested an additional three weeks, leaving us to scramble and renegotiate. This will apply just as much during the contractors/repairs phase, but shit will go wrong. Just go with it.