Stories

House #1: Off market purchase

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Our first investment purchase was a townhome in central Kentucky (while living in Virginia) in February 2016.

At this point, we had purchased and sold our first primary residence, and had purchased a new construction home. Our first home sold for $62,500 more than what we purchased it for and we walked away from the sale with over $130,000. Our new home needed about $70k for closing, leaving $60k that we wanted to use for investment properties.

PURCHASING FROM FAMILY

Mr. ODA’s brother-in-law had purchased a foreclosed townhome while he was in college and rented a room out to his friend – excellent forethought and financial decision making there! When him and his wife got married, they were ready to look into a home with more space and less stairs, so we offered to purchase the house. About 2.5 years after he had purchased it, we set him up to make $16,500.

Their Realtor suggested listing at $90-95k. The comparable sales in the area were suggesting 95-100k, but the townhouse in question had a lower PVA than the others recently sold. There was another townhome in the community listed for sale at $100k, but it had been on the market for 4 months at that time, meaning the market wasn’t interested in it at that price. Additionally, this deal was being done off market, which automatically yields a higher net for the seller because there were no Realtor commissions and minimizes the risk of a listing. They didn’t need to get it ‘show ready’ or have to leave the house for an indefinite number of showings. We removed the uncertainty of how long the house would be listed and therefore how many mortgage payments they’d still be paying before it sold. We also eliminated the possibility of an appraisal and home inspection negotiation during the contract period. For all those reasons, we offered $85,000. We settled on $87,000 with $2,000 in seller-paid-closing-costs. A family member, who’s a lawyer, sent us a template for a contract, so we used that as a starting point, and I wrote up our own contract.

We first looked into a loan assumption. We started with several questions regarding how he was paying PMI (whether we’d have to assume the PMI, whether the PMI would be recalculated for the new appraised value based on our purchase, and whether there would be a penalty if we paid down the balance faster to eliminate the PMI), how the loan balance would transfer cleanly, and whether they needed to cash out escrow. After asking all these types of questions, we learned that PNC wouldn’t allow a loan assumption of an FHA loan since our intent was to use it as an investment property.

We did not do our own home inspection. We figured the HOA would cover the exterior, and we reviewed the home inspection he had completed two years prior. There had been a few upgrades since the initial home inspection, and there wasn’t anything that needed our immediate attention. We bought a new washer and dryer since the unit didn’t have any, and I painted most of it before it was listed for rent.

THE LOAN PROCESSING

Both sides of the transaction were able to sign the purchase contract electronically. We went through the whole loan processing without having to visit Kentucky. The attorney shipped the loan documents to us, we invited a notary over to watch us sign the papers, and then we FedEx’d the papers back to the loan officer for the sellers to sign.

While the closing itself went smoothly, we had several issues with our loan provider.

Our loan was a portfolio loan, which means that it’s a loan on the primary market and not backed by Fannie/Freddie. The interest rate was 4.5%; it was amortized over 30 years, but it had a balloon payment after 10 years. We paid careful attention to this loan (e.g., made many, frequent principal payments) because that meant we’d owe over $59k in 10 years.

It was amortized by 365/360 Rule (i.e., by the day) rather than the way it works in a traditional mortgage (annual rate divided by 12). In a traditional mortgage, the principal and interest difference is based on an annual APR, which creates a consistent amortization that gradually reduces the amount of interest in each month’s payment compared to the principal that will be paid. In the 365/360 Rule, each month’s principal and interest applied to the loan is different because it’s based on the number of days in the individual month. For example, in March, we paid February’s 28 days of interest, and in April, we paid March’s 31 days of interest; therefore, more of our March payment was applied to principal.

Here’s a snapshot of the amortization schedule, reflecting the changes of interest and principal by month.

The bank’s system was antiquated in that we could not make online payments unless we had a bank account with their bank. Being that this bank was in Kentucky while we lived in Virginia, we weren’t interested in opening a bank account and funding it just to pay this loan. This meant that all of our payments had to be sent by check to their location for keyed entry. The people responsible for entering these payments were not aware of the principal-only concept, and we spent almost the entire first year of the loan having to call every single time we sent a principal payment to have them reverse it, apply it as principal-only, and credit us the days worth of interest it cost us. After several months of this occurring and the response being that the teller doesn’t know how to enter it (then teach them…), we filed a complaint with the Better Business Bureau. We received all the interest owed to us as a result and all future payments were applied correctly.

Due to the poor relationship with the bank and the impending balloon payment, we paid off the loan faster than the 10 years. The loan was issued February 2016, and we made our final payment in April 2020.

PROPERTY MANAGEMENT

We hired a property manager since we were not local and didn’t want to manage showings or maintenance issues in an unknown market. The property management fee is 10% of the monthly income. We actually had several issues with the first property management company, but ‘managing the property manager’ is another post. We released ourselves from that first contract and negotiated with another company, who has been managing the property for the last 4 years.

We have also had to manage the HOA company to address water leaks that stemmed from the brick facade. Both times, the issue presented was eventually resolved, but never in a timely manner. Unfortunately, we are responsible for interior fixes (e.g., drywall) caused by the exterior cracks, which are covered by the HOA since it’s a townhome.

One final interesting story about this house. In November 2016, just a few months after we purchased the house, an intoxicated driver crossed the center line, hopped the curb, drove through the fence, and drove into the back of our townhome, destroying our HVAC unit and taking out a post of the 2nd story deck. It was a Sunday morning. We didn’t pay anything for this incident. The HVAC and a broken light were covered by the insurance company; the deck was repaired by the HOA’s management company. It was an incredible incident.

The townhouse hasn’t been easy to rent. We actually looked into selling it, but our property manager, who is also a Realtor, thought we could only list it at $90,000, which was not something we were interested in, having purchased it at $85k. Once the place is rented, we don’t have issues with maintenance, rent payment, or tenant-related issues. It just takes a month or two of vacancy before we find a qualified applicant. We have offered incentives for leases longer than 12 months to help eliminate our turnover rate and number of days vacant.

PMI – Private Mortgage Insurance

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Don’t pay it. Get creative for your down payment. Here’s a brief on how PMI works and how we avoided paying it.

What is PMI?

A lender typically requires PMI when the loan is greater than 80% of the loan-to-value (LTV) ratio because it’s higher risk for them. If a buyer has less of their own money as equity in the property, the bank views this as a higher probability the homeowner will default on their loan. With that, the PMI is required until the borrower reaches at least 80% for the LTV ratio and the loan is in good standing for at least 5 years. This typically means that a borrower needs 20% of the purchase price as a down payment. There are a few exceptions, but overall, if you don’t have a 20% down payment, you’ll be paying PMI.

PMI can be up to 2% of the loan balance. The lender uses your credit score/history, the down payment amount, and the loan term to evaluate your risk and set the PMI rate.

While there are requirements that the PMI must be removed when your loan hits 78% and 5 years in good standing, you can request the removal of PMI earlier if your house value has risen (e.g., market fluctuation, improvements you made). If you request the removal of PMI, you may be required to pay for the new appraisal, which is an added cost. You should weigh the cost of the appraisal against the remaining payments. In a broad example, if the appraisal costs $450, and your monthly PMI is $120, then as long as you have more than 3 months left before hitting the 78% LTV ratio, it’s worth paying the appraisal fee to have PMI removed. There is also a risk that the appraisal doesn’t come back with a high enough house value, so you should be confident in your home’s value before requesting said action.

How did we avoid paying PMI?

While we were more than qualified to purchase a home in the D.C. suburbs based on our debt-to-income ratio, we restricted ourselves to what we could afford as the down payment.

A bank qualifies you based on your debt-to-income ratio. If you have low recurring monthly bills, then you’re qualified for a larger loan. At the time, our only recurring monthly payment was on my vehicle, at about $350/month. The bank pre-qualified us for about $700,000. Sure, we could “afford” a monthly payment on a $700,000 mortgage, but then we couldn’t eat, sit on furniture, or do anything else. 😉 We’d also be paying PMI because we didn’t have 20%, or $140,000, to put down.

Also due to our low debt-to-income ratio, we couldn’t qualify for any programs that would allow anything less than a 20% down payment for a mortgage. We set our purchase limit at $350,000, which meant we would need $70,000 for the down payment, plus closing costs. Due to the limited inventory at that price in the DC suburbs and the knowledge that we were pre-qualified for double what we were searching for, our Realtor kept pushing us to raise our purchase price. However, we advocated for ourselves and kept our focus on what we could afford as our down payment so we wouldn’t pay PMI. After months of searching and seeing places that were literally missing floors and walls, we increased our search to $400,000, hoping that if we found something in the 350k-400k range, we could negotiate it to 350k.

Our move to the D.C. area was not in our original plans. Mr. ODA had been saving through high school and college, expecting to buy a house in a lower cost of living locality. When we moved to D.C., we knew that we would need to change our expectations and day-to-day actions. We rented an apartment in Fairfax, but we didn’t want to be putting over $1600 per month towards rent for long, and we’d prefer to be paying towards a mortgage and building equity in a home. Positives to owning a home: mortgage tax deduction, appreciation, and the equity building that you get back when you sell the home.

While we rented, we were conscious of our spending. We aimed to spend less than $10 per day on food between the two of us, and we limited how much we ate out. We did activities with Groupons or restaurant.com coupons.

We moved to DC in December, and over the summer, we put an offer on a flipped foreclosure. The listing was $384,900; our offer was $380,000 with $2,000 in closing costs. It was denied by the bank, as we were told we were the 2nd best offer of 3. The next day, we got a call that the bank countered our offer. Apparently, the first offer attempted to negotiate their offer further, and the bank moved on to us. They countered $380,000 with no closing costs; we accepted. We now had to scrounge up about $80k for closing. 

We looked into a Thrift Savings Plan (Federal government’s 401k) loan. Many warned us against the idea, but our research showed it wasn’t as much of a concern as others let on. The details of this loan option are on another blog post. We decided to each take a residential loan from our accounts. I took a $15,000 loan and Mr. ODA took a $25,000 loan. We also borrowed $5,000 from Mr. ODA’s parents and paid it back within a couple of months. We avoided PMI.

An argument heard about not owning a home is that it costs a lot to maintain a home. While owning the home for 3.5 years, we gutted the main floor bathroom ($4,000), replaced the AC ($3,600), replaced the hot water heater ($1,100), resolved termite issues with treatment and wall replacements ($2,000), laid carpet in the basement living area, improved the yard through grass maintenance and purchased a shed, and painted a few rooms. We sold the home for over $60,000 more than we purchased it for (tax free since it was our primary residence the whole time), far more than the minimal expenses we put into it.

Key takeaways from our experience:

  • The efforts we put in to avoid paying PMI meant we had another $100-200 in our pockets per month. Instead of padding the bank’s ‘pockets,’ we paid ourselves back with interest into our retirement account.
  • We lived below our means, saved, and kept focus on the big picture.
  • We pushed ourselves to our financial limits to begin building equity in a home, rather than paying rent to a landlord (or in our case, an apartment company). The efforts put in that year have paid off time and time again, starting with selling the home 3.5 years later for a profit that led to some of our first rental purchases.

House #8

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I shared that I would tell the stories of our home purchases. Instead of starting with #1, I decided to start with the most interesting. This property was being sold by a licensed Realtor, so we had a false sense of security. It ended up being the sketchiest (technical term) deal we’ve done. This is in Virginia.

We started with a home inspection, which revealed several issues. We requested the HVAC condensate line be cleared and the water in the backup pan removed. We also agreed to have our attorney withhold $1,300 at closing, to be paid to a contractor of our choice after closing, to repair other items found during the inspection. I can’t remember why we were handling the home inspection items, but that should have been the first red flag.

Our closing was scheduled for 8/18.

We were told that the HVAC repairs agreed upon were completed. We went to check on the progress of cleaning out the house and the HVAC repairs on August 10th. The HVAC’s backup pan still had water in it, and the house was filthy (after being told it was ‘vacant’ and ‘cleaned’). Plus, the electric was turned off. We had our Realtor reach out to the seller to cover our bases. Here’s his email:

While waiting for a response on this email, we checked with our closing attorney to ensure everything else was ready for closing; it wasn’t. We fully expected a “we’re clear” response, but instead we were told they were having trouble clearing the title. We weren’t given the specifics, but that’s not what you want to hear a week before closing. It ended up being cleared, but that was one more thing to worry about!

As typical, we had to do a final walk-through of the house to ensure it’s in the same condition (or better) as it was when we went under contract. Knowing how poorly the seller communicated over the previous month, we wanted to see the house the day before closing, rather than right before we head to the closing table. The electric was still not turned on, and it wasn’t cleaned. Our Realtor contacted the seller again. We were assured it would be addressed, and the electric would be on. We made plans to walk through the house in the morning.

Our Realtor was unavailable that morning, since this wasn’t supposed to be part of the schedule, so he sent a team-member to let us in. As luck would have it, she dropped the lockbox key below the front porch, so we couldn’t get in. We called our attorney and postponed the closing to later in the day. The Realtor was able to obtain a copy of the key to let us in, where we learned the electric was still off.

I contacted the electric company. I explained that I was the buyer, and the seller kept saying the electric would get turned on, but here we are at the 11th hour with nothing. The woman on the other end couldn’t tell me what she was seeing since it wasn’t my account, but she carefully played with words to let me know: sorry, hunny, but there’s no way this electric is getting turned on while under this person’s name because there is a high outstanding balance. She assured me that if I put it in my name, there wouldn’t be any issues. However, I wasn’t about to pay fees and put it in my name before the house was legally mine.

This is where we learned that a good attorney is worth his weight in gold. We never really understood the role of a closing attorney, since all our closings had gone smoothly (I mean, we could sign all the closing documents in about 20 minutes at this point). Since the electric wasn’t on, and we couldn’t verify the condition of the home, as required by the contract, our attorney withheld $5,000 of the settlement proceeds. The seller’s attorney was NOT happy, but it was entertaining to watch from our standpoint. 

We had been provided a ‘receipt,’ dated 8/17 (the day before closing), that indicated an HVAC repair man had been out to do the work required. We are pretty sure that this was falsified. There was no electricity in the house that day, and there was still water in the pan on 8/18. Here’s the email I sent to our attorney releasing the $5,000 withheld, less the cost of my HVAC technician performing the repairs.

It cost me $125 for the HVAC technician’s trip. Our attorney told the seller’s attorney that he would release the $5000 less the $125. The seller’s attorney said he didn’t have any authority to allow that; so our attorney said he didn’t have any authority to release the $5000. Well, the seller’s attorney decided $4875 was better than nothing, and I got my $125 back.

All in all, everything fell into place, but there were many days and hours that felt like we were about to fall into a pit.

We purchased the house for $89,000, plus the $1,300 for contractor repairs, and the seller paid $2,000 of our closing costs (this minimizes the amount we have to bring to closing and allows us to leverage every last dollar we can for maximum efficiency). Our first lease was for $995/month, exceeding the 1% Rule. We closing in mid-August, and the first lease didn’t execute until October 1, which was one of our longer vacancies. That tenant renewed her lease once. Currently, the rent is $1,025/month. We sought $1,050 for a 12 month lease, and the prospective tenant negotiated an 18-month lease at $1,025. We accepted this because it was rented in October, and an 18-month lease brought as back to spring-time turnover. Even though taxes have risen since the purchase, we still maintain the substantial cash-on-cash return that is provided for in trying to obtain the 1% rule on investment real estate purchases.

After closing, I painted nearly the entire house (including the trim) over the course of a week; the house looked significantly better with just a fresh coat of paint. We also had to do a more thorough cleaning job than we’ve typically had to do on houses we purchase, including caulking the tub and cleaning the carpet.

We replaced the dishwasher with the first tenant, and then replaced the refrigerator after the second tenant kept complaining about the seal not working well. Most costly, the house has had several roof and siding issues. The kitchen was an addition with a flat roof, which typically causes problems. We replaced the gutters, fixed the flashing, repaired some siding, and then eventually replaced that part of the roof altogether. We also had to replace a cracked window, which was surprisingly under warranty. It took a lot of work to find the window manufacturer and a local distributor, but it surprisingly all worked out because it was a stress fracture and covered under a lifetime warranty.

Mrs. ODA Taking Over

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Back in 2018, my husband started this blog and introduced himself. I had a different upbringing than him, and he asked me to introduce myself back then, but I didn’t make the time for it (something about being a first-time mom and going back to work 🙂 ). Now I’m ready to take over the majority of this task, but first wanted to share more about me. You can see whether it’s my post or his by the author listed by the post title.

I’ll come right out with it: I didn’t grow up with an allowance. I don’t have a pretty, neat story like he does. I mostly learned about the value of money through hardships in college, and then I let Rob lead my finances before we even started dating. That’s the quick version; now the long.

I had a check register, and my mom taught me how to balance a checkbook. I found the process fascinating and kept up with it, but it was always in terms of play, not actual budgeting of my money. Quick sidetrack: I remember having a sleepover at a friend’s house with 3 or 4 other girls. I was so excited about my new checkbook and how to manage the register, but we went overboard and I regretted how many checks we used in my checkbook. I hid at the top of the stairs to the basement, sulking in my decision and making it awkward for everyone. Things you wish you didn’t remember, but they always seem to surface and renew that 12-year-old’s embarrassment. 

I had chores, but they were expected to be accomplished without payment. Before you feel bad for me, it wasn’t what it seems. My parents were GOOD to us. If I went to the movies with my friend, my dad handed me cash. I used to hang out at the mall regularly. I rarely bought anything other than McDonald’s and candy, but I can honestly say that I don’t know how I made the money to even buy those things (I’m assuming it was related to birthday cards). 

I didn’t have a job until after high school. I really don’t know why; it wasn’t discussed and my friends didn’t work, so it wasn’t a thing I thought about. The first I remember it being discussed was right before graduation. I walked through my town’s main street and asked each business if they were hiring. That’s how I ended up working in a bagel shop every morning at 5:30 am. I was paid ‘under the table’ and continued to not understand the value of money and how taxes affect my pay. 

During the summer after my freshman year of college, my dad told me that I needed to have a job before I could have a car. I was already back at the bagel store in the early mornings, but it wasn’t ‘full-time.’ I applied to several places, but not many places got back to me. I eventually got a second job working at a catering hall in my town, which took up my Friday nights, Saturday days and nights, and Sunday afternoons. For some reason that I can’t remember, this wasn’t enough to meet “full time job” level of income or hours worked because I then started working at K-mart as a cashier. I worked 3 jobs that summer. At the end of the summer, my dad let me bring his car to school (3.5 hours away). I was disappointed that I thought I’d be getting a new(er) car (disclosure: I expected to pay for it, but I thought the goal here was to prove I could make enough money to support the payment of it, and he’d help me get the car).

I was driving home for winter break, and the car just stopped accelerating up a hill on the interstate. Turns out, second gear on the transmission was shot. My dad said I could pay to replace the transmission and the car would be mine. I didn’t like the idea of having an unreliable car 3.5 hours from my family and was still salty about all the hours of work I had put in over the summer. I decided I wanted a leased vehicle because it didn’t require a down payment (amazing logic…), and I ended up with a Honda Civic for about $350 per month. At the time, I was working at JCPenney for about $5.85 per hour while attending school. 

During the school year, my parents told me that they wouldn’t pay for me to live on campus in my junior year. They said either I needed to take a loan out or become a Resident Advisor (RA). Being an RA seemed to interfere with my social life, so I decided to move off campus because then I could pay month-to-month with the money I earned instead of needing a loan to pay a semester’s worth of housing up front. However, it wasn’t easy. All my friends were still living on campus, and I didn’t want a random roommate. I lived on the first floor of a house where my landlord lived upstairs. I couldn’t afford it, but I was determined to make it work, meaning I didn’t turn the heat on. I had blankets though … in Albany, NY. My mom didn’t appreciate finding out that I hadn’t turned the heat on by Halloween, and she started sending me some money. She sent me $100 for 6 months in a row, and that covered my utility bills through the winter. 

When I started working, my parents taught me to contribute to my TSP (401k). I put the amount required for full match (5%) because if I didn’t, that would be like throwing away free money. Then they taught me that each time I got a raise, increase my TSP contribution with that difference since I was already living comfortably without it. I followed all of that advice and continue to share that insight with others.

Enter Mr. ODA. He showed up at my office nearly 2 years after I started working there. One night, before we were dating, he asked me my social security number. Odd! He told me I needed to build credit and was signing me up for a credit card that I was to pay off monthly. Multiple people had told me that I should always carry a balance on a credit card to “build credit,” and he was quick to right that wrong. Shortly after we started dating, he had me max out my TSP contributions and start a Roth IRA, and the rest is history. He’s lucky I’m such a quick learner. 🙂

New Year

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In honor of my last post being two years ago, we’re starting this back up! Here’s a summary of what’s been happening, and I’ll delve deeper into specific topics with future posts.

In January 2019, Mrs. ODS was back at work part time after having our first child, burning through sick leave, getting ready to quit her job. In February 2019, the Federal government was shut down for several weeks, and I found other tasks to occupy my time, including being the full-time caregiver to our son. I took a temporary assignment over the summer of 2019, moving my family to Lexington, KY for 3 months. My wife was pregnant with baby #2, which wasn’t easy. On January 2, 2020, she was admitted to the hospital for pre-term labor at 26 weeks. Luckily, they were able to stop contractions and send her home for bedrest for the next 10 weeks. A week after the country shut down, baby girl was born full term and healthy. Living through a pandemic and limiting our social circle while at home with a newborn and toddler (19 months apart) made us realize how we wanted to be closer to family. On a whim, we agreed to move to KY. Everything played out a lot faster than we expected, and we sold our VA house in September 2020, moved into our new home in KY in November 2020, unpacked, celebrated the holidays, and here we are. We both feel better suited to continue to build these efforts started so long ago.

Here are the goals: teaching posts, story (background) posts, and monthly financial updates. Each post will be categorized into one of these for ease of future searches. We’ve made a lot of financial decisions over the past two years and have a lot to share!

Allowances and that Green Ledger Paper

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I grew up in a middle class household; my dad set us up with a system to understand the value of a dollar at a young age.

Our allowance each week was a dollar. (Hey, that’s the name of this blog)

We had our typical household chores, and expectations were set early on that straight A’s were the expectation in school. Since we weren’t rewarded for specific actions, like getting good grades, allowance was how we got our money.

It came with a catch.

Each dollar had to be split into 4 categories. Each of these categories had to be logged in an accounting ledger book that my dad provided, to keep a running total of the balance. Categories were:

  • Savings
  • Tithing (Church)
  • Christmas gift savings
  • And the leftover: free spending

dad-acct.jpg

(Dad setting the template for how to track)

As you might imagine, these categories didn’t grow quickly – 35 cents in spending per week doesn’t buy you much! So it made us learn what was valuable and “worth it” when it came to spending our money.

Who knew that as an 8 year old, I was learning what it meant to be frugal, assign value to any purchase I made, and establish the difference between needs and wants.

As much as we complained about this forced treatment of money at the time, laughed about it when we went on to get our own high school jobs, and look back at it as a family now that we’re adults, this household policy was the single most important thing that shaped my philosophy on finances in my life.

I was just talking about it with my brother: “ah, memories of learning how to split a nickel!”

me-acct.jpg

(Me trying my hand at tracking; with some mistakes and fascinating hand writing!)

This was reinforced in the way my parents handled their own finances – a high savings rate, smart spending, and strategizing for their whole family’s future.