HELOC

HOME EQUITY LINE OF CREDIT or HELOC

A HELOC is a line of credit secured by the equity in your home. This is different from a loan or mortgage.

What is equity? It’s the appraised value of your home that is not mortgaged. You may have put 20% down when you bought the house, and now you’re looking to tap into that equity along with the principal of the mortgage you’ve paid down. Or perhaps your home value has increased drastically, and you want to utilize the equity.

What is a line of credit? It is a revolving account of credit. This means that when you close on a HELOC, you don’t get a check cut for that amount right then. You need to “draw” on the account, as needed, which is essentially writing checks from that account to either yourself or another entity. As you make principal payments, the amount of principal becomes available again for a future draw, as long as you’re within the draw period of the line of credit.

Do you have to disclose the purpose of the HELOC? There are no parameters on what you can use the money for when you draw it from the HELOC. You may want to pay off a credit card that has a higher interest rate, do home improvements, do other construction projects, medical bills, etc. While you’d want to utilize this for larger purchases, you can draw smaller amounts as long as you draw the minimum required by your terms (e.g., no less than $100). You earn interest from day 1, so this isn’t more beneficial than a credit card that gives you a short-term “loan” for your statement period (you don’t pay interest on a credit card balance that is paid off by the due date).

TYPICAL TERMS

The application process is similar to applying for a mortgage. A bank wants to see your credit report, along with some backup documentation (e.g., tax returns, account statements). We also had to update our homeowners insurance to show the HELOC as a mortgagee.

A HELOC will typically only cover a portion of the equity in your home, depending on the bank’s terms. If your appraisal value is $400,000, and your mortgage balance is $250,000, then the equity in your home is $150,000. While there may be instances where a bank would approve a HELOC for the full amount of $150,000, most are going to approve 80% or 85% of that amount.

There are no closing costs associated with the HELOC. Typically, the bank processing the HELOC will cover the costs associated with the line of credit initiation up front. However, they will require those fees to be paid back to them if the HELOC is closed within a certain period of time (usually 36 months). For our first HELOC, when we closed it within the 36 months, we paid back a prorated amount of the fees (e.g., if the fees were $300, and we closed it after a year, we owed $200). For our current HELOC, if we close it within the 36 months, we’re required to pay back 100% of the fees they covered, not the prorated amount.

A HELOC has a variable interest rate, which may adjust monthly or quarterly based on the lender’s terms. A variable interest rate can adjust up or down. But this is something to be aware of because it’s not like a loan or mortgage that has a fixed rate made known up front. The rate, in our case, is set at the index rate with a margin. However, there’s a floor to the bank’s rate. What does this look like? The index rate is 3.50%. The margin is -1.00%. However, the bank’s floor is 3.00%. Therefore, even though 3.5-1=2.5, the minimum interest rate they’ll lend at is 3.00%. Therefore, our current rate is 3.00%.

There is a “draw period,” which means you can only take funds from the line of credit for a certain period of time (e.g., 10 years). When you do draw from the line of credit, you’re charged interest on the principal balance. During the draw period, you must make the minimum required monthly payments on the account, which is typically the monthly accumulated interest owed, but some banks may require principal payments during this period also. When the draw period is over, it enacts the principal repayment period, meaning you have a certain amount of time (e.g., 10 more years) to repay the principal balance of the HELOC. There is no charge for the HELOC existing though; it can be there and never drawn on.

OUR PROCESS

The most recent HELOC we closed on had a different process than the first. We expressed our interest, and since they already had our documentation on hand from a commercial loan, they didn’t ask for supporting documentation (e.g., account statements). However, for some strange reason, she said she couldn’t use the credit report from our commercial loan, and she had to pull our credit again. At the time we were applying for another mortgage, so the hit on our credit counted as “mortgage shopping,” so we gave up the fight and let it happen.

This company would have given us 100% of the equity available in our home. However, two weeks after initiating the HELOC process, we told them we needed a pre qualification letter for an offer we made on another personal residence. They then told us that since we’re on record as wanting to sell our home, they would only approve 80% of the equity.

The loan officer asked for two references for each of us. There was no information given on what this personal reference had to know about us. We both handed over our people, but they were never contacted, so we won’t know the purpose.

Finally, they asked for our homeowners insurance to show them as a mortgagee on our policy, which I was able to do with one quick phone call to that office.

Typically, the process will include an appraisal. This bank had a valuation system that they used. Based on this woman’s inputs into the system (which were all wrong), she said that she could approve us for $100,000 without paying for a full appraisal. We don’t need more than that, so that was sufficient to us.

We closed the HELOC a month after expressing interest. Our process may have been slower than the typical period it would take because we were fighting the credit pull for a while (not to mention the company we were working with is notoriously slow at responding to inquiries). Mr. ODA expressed our interest in pursuing the HELOC on April 12th. We were cleared to close as of May 11th, but we chose to close on that following Friday. We went to a local bank branch, and a relationship banker went through the documents with us as we signed them.

WHY THE HELOC FOR US?

My general plan was that we’d have a HELOC initiated, so that when we found a new personal residence, we could use the HELOC for the down payment of that house without having to sell our current house first. In the past, we’ve sold our home, went into temporary housing, and then moved into a new home. Granted, all our past home purchases were in a completely different locale than where we were living, but I really didn’t want to manage storage of goods or go into temporary housing with two kids and a dog again.

We initiated the conversation on the HELOC without having any intent to move yet. Not to go into too much detail on this topic, but we need to be residents of this house for two years to avoid paying capital gains. Our 2-year mark isn’t until November, so we weren’t in a rush to move before then. A home with the same floor plan around the block from us sold for $190k more than what we bought this house for less than two years ago, so we expect there to be a hefty chunk going to capital gains if we don’t meet the two year requirement.

I was keeping an eye on the market, but clearly had no plans to move. To me, a regular check on Zillow lets me know what I can get for my money. However, there are some things related to our current personal residence that are concerning, and we had decided that this wouldn’t be a long term location for us. With the market right now, I knew we’d either be paying a higher mortgage than I ever anticipated in life, or I’d be compromising on my wish list. Well, a house that met a lot of our wish list popped up in the area we liked for less than $500k, so we jumped on it. The house needs work, so even though we’ll close on it over the summer, we aren’t in a rush to move into a construction zone.

Once we close on the new house with funds from the HELOC, we’ll start accruing and paying interest on the balance. We’re not required to make principal payments until after the draw period, which is 10 years. When we eventually sell our current home, the proceeds from the sale will pay off the HELOC seamlessly through the closing process.

Laying LVP

We had a tenant abandon a property, and he left it a mess. There was some furniture and garbage left behind. I’d love to know what tenants do that destroys the walls in less than two years. I’d say the dog never went outside based on the carpet stains, but there was a giant pile of grocery bags fulled with poop outside the back door. We hired a carpet cleaner that was available the fastest, and that was a mistake. They basically just came and put lines in the carpet. I was not happy. Not only was their effort the absolute minimum of the task on hand, we had asked for it to be “rotovacced,” and it clearly wasn’t.

Recently, we received an updated assessment from the county, which included the comps they used. We bought the house for about 86k. The comps range from 110k to 130k. The comps at the high end had no carpet and upgraded fixtures. The low end had all original things. Looking to resale value, I wanted to lay Luxury Vinyl Planks (LVP) in the living area instead of replacing the carpet. Since we were nearly a month into unexpected lost revenue, the goal was just to address the main living area that would catch your eye.

WHAT IS LVP?

LVP is vinyl flooring made up of planks instead of being one sheet. It’s a floating floor, which means you don’t glue it or nail it down to the subfloor (e.g., plywood). The boards “click” together. When you get the connection right, the board lays flat on the subfloor.

Ironically, it was hitting the market around 2015/2016, and I declined it in the house we were building. I didn’t realize that it was going to be the “go to” flooring by 2020, and that it would be in our new construction house we bought then.

INSTALLATION TIPS

First, we had to remove the tack strips and staples from the subfloor after the carpet was removed. The floor needs to be mostly level. There was one spot where two pieces of plywood were not level, and it did cause issues with keeping the pieces connected.

Start in a left-most corner of the room, on the longest wall. Our living room is nearly square (13×13.5). The deciding factor on which way to lay the floor was to eliminate cuts against a schluter edge where there’s tile in the kitchen and dining room. When you enter the house, you walk up a flight of stairs, and you see the tile edge right away. Since this was our first time installing flooring, we wanted that edge to look good. The best way to do that was to not put any cut edges against it, but to lay the planks parallel to it.

Stagger the boards and create a random pattern. You don’t want to see a pattern in the flooring (e.g., don’t lay a full board, then a half board, then a full board, to start the rows). You also want to open 3-5 boxes at a time and mix up the boards. Different boxes may have different variations in the coloring, and you don’t want a splotch of a lighter shade of flooring in one section, so it’s best to mix up the boxes.

You’ll have waste. When you plug quantities into Home Depot or Lowes, they typically ask if you want to add 10% for waste. We calculated needing 9-10 boxes, and we opened 12, with 3 full boards left. There was a mishap with one of the boxes, but that probably lost us 4-5 planks, so I think we still would have opened 12 boxes.

Lay the short edge together first. The second board lays under the connection of the first board that’s already on the floor. When you connect the long edge to the board above it, just wiggle it until it lays down flat and you see no seam. Sometimes you need to use a tapping block to get it to fit together better, but when you get the right connection, it’ll literally just fall in place.

To cut a piece to fit at the end of a row, use a utility blade along a straight edge. When you go to snap the board, hold the straight edge in place. Both Mr. ODA and I tried snapping a board without the straight edge, and the board snapped in a different place.

When needing to cut the entire length fo the board, use a circular saw or table saw. It won’t be easy to score and snap because of having less leverage. To cut small areas within a board, such as floor vents, you can use a jig saw. Cutting the board with the circular saw makes a gigantic mess. Think of it like packing material that just explodes on you. However, there is a benefit that it’s not the clingy type of material, and it does sweep up easily.

At the end of each row, cut the board about a quarter inch too short. You’ll need to fit a tool into the crevice to pull it into place. I had been cutting it to fit under the baseboards, but then you can’t get the boards connected. At the end, you add shoe molding or quarter round to cover the cuts.

COST & TIME

The flooring, shoe molding, threshold to cover the carpet to floor transition, and an installation kit cost us about $700. We picked LVP because it comes with a cork type material attached to the back of each plank, and it doesn’t require underlayment.

We picked the LVP instead of getting new carpeting because of resale and because of the cost and time associated with carpet installation. At Home Depot, if you pick in stock carpet, it’s not subject to the free install. If you spend $499 otherwise, you get free installation. We would pick a carpet that is about $1/sf, so we wouldn’t get to the $499 price for free installation.

We arrived at the property at 10:30 am. We had to remove the tack strips and staples. Mr. ODA removed all the tack strips, and I started on the staples. When I got an area clean, he started laying the planks while I kept working on the staples and sweeping. At 2 pm, I will still working on staple removal, and he took a break for a work meeting. I took over laying the boards. We finished laying the floor, installing the quarter round, and caulking the seam between the baseboard and quarter round at 6:10 pm.

There was a big learning curve on how to get the boards to click together most effectively. We could have probably eliminated an hour of work where we were trying to figure things out rather than laying the floor. I also had a big speed bump trying to get the piece at the bottom of the stairs in place (a lot of cuts and having to figure out leveling the board since it couldn’t be butted up against the bottom of the step, which wasn’t level), which was probably a 25 minute delay. With that said, my back was killing me. It’s probably a project that’s better suited to be split over multiple days as a newbie, rather than powering through 8 hours of work.

I asked Mr. ODA if he would do it again (as we both complained about how much our bodies hurt), and he said yes! We just wouldn’t be in such a rush to finish one room in one day in the future, even if it was only about 200 sf.

The Mentality from an MLM

These days, you’re probably not immune to being asked to join or buy from a multi-level-marketing (MLM) business. Also known as network marketing, it a way for companies to sell their product through individuals who market product(s) to their sphere of influence. It gets a bad reputation with “pyramid scheme” and the like, but it’s legitimate and makes sense if you take the time to step back and learn about it instead of repeating the rhetoric you’ve heard from your parents.

Our experience with an MLM led to being open to buying rental properties, which eventually led to me quitting my job and being happy outside of a career. Here’s what I learned by keeping an open mind to an MLM, even though we make $0 from that business today.

This is my experience with our time in an MLM. Mr. ODA would probably have something different to say. 🙂

AMWAY

BACKGROUND

By now, you may have seen the documentary on LulaRoe. Our experience was with Amway, and it was different from how LulaRoe operates. Now, Amway is the black sheep of the MLM world if you go just based on name. They’re one of the original MLMs. But they sell good products in the health, beauty, and home cleaning genres. As a “consultant,” you’re called an “independent business owner” or IBO. I thought the best part was that there’s no inventory you need to hold. If you want to do “parties,” then you need products on hand. However, it’s much different than how LulaRoe would have hundreds of leggings on hand and makes direct sales out of their on-hand inventory. To earn money, you can recruit more business owners, or you can have customers who just order directly from the Amway website each month. You make money off of what your customers buy, as well as the income that your IBOs below you generate.

TEAM SUPPORT

There are multiple “teams” associated with Amway. It’s the education arm of the business. Our team met once a week, and you were expected to be there if you really wanted to be in-the-know and considered serious about growing. They helped you structure your business to take advantages of bonuses offered by Amway, and they taught a lot about having the right mentality. Their goal was to foster personal and business growth, provide mentoring and coaching, and provide the tools to grow your business through conferences and seminars.

This is where we got our start. I know it’s hard to believe, but we both were exposed to a lot of growth through this team. The things we learned through the meetings and books we read during these couple of years gave us the courage to make the big decisions we did, getting us to currently having 13 rental properties.

THE CASHFLOW QUADRANT

Our introduction to the business was started by being given Rich Dad, Poor Dad by Robert Kiyosaki. The book references an earlier book of his, the Cashflow Quadrant. Each quadrant has its strengths and weaknesses.
– The upper left corner of the quadrant is for those who have Employee mentality. This is someone who is trading time for money. You work an hour and earn $20. If you’re not working, you’re not earning. You’re making money in someone else’s system, and there are people over you who are making more than you (e.g., a supervisor is making more than a secretary).
– The upper right corner is for Business Owners. You own a system that works for you. You have passive income in this quadrant. You may have an employee that is generating income that you earn.
– The lower left corner is for Self-employed people. Here you’re still trading time for money, but you have control over how much you earn based on how much effort and time you put in. This is a risky area because you don’t have security and may not have an established system to rely on and project your income.
– The lower right corner is for Investing. Your money makes money for you. This can also be risky because you’re not guaranteed positive returns on your investments. If you want to make a lot of money, you need to take on more risk.

The point here, according to the team we were on, was that you want to be a business owner. You want to generate passive income so that you’re not trading time for dollars. While someone else is selling to a new customer, you’re earning a percentage of that sale while not doing anything. As you grow your Amway business, you have more and more people generating income through these sales, which you get a percentage of. The kicker is that you need to hit a certain level within your own business before you earn. We set up recurring purchases to use the products we were selling, and had customers set up with recurring orders, so that we could hit that threshold to be eligible for the passive income.

OUR MOVE FROM MLM TO REAL ESTATE

The biggest hurdle to our success was the price of the products. We aren’t someone who values a better quality to be able to justify the higher price. There are people out there that value this, but it’s not our passion. A peanut butter meal bar comes to $3.14 per bar as a customer order (as an IBO, you get the product at cost, which would be $2.82 per bar). The peanut butter granola bars we buy are $0.50 per bar. Clearly, this isn’t a marginal difference in our expenses. The products were good, but not good enough for our finances to take such a hit. I tried to focus on the beauty side of the business and held parties where I recommend products and let women try it. I had passion behind it, but I wasn’t someone who washed my face regularly and put lotion on. I could see the benefits, but I wasn’t practicing what I preached, and I lost my drive.

The next hurdle was location. Our original meeting was with our specific team within the larger team (based on your “pin level,” you had a meeting with the people who were your “downline.”). We moved down to Richmond, and our closest meeting was Fredericksburg. It wasn’t insurmountable, but it was a 40 minute drive there and back once a week. The larger team would all come together in DC every quarter for a conference. We felt like time started moving faster, and we weren’t close enough to make these our friends between conferences, and so we stopped attending the big conferences. Then we stopped attending the weekly meetings. Then we cancelled our team membership. We still maintain our Amway IBO number, since it’s just $62 per year to do that.

The thought process that we learned from their weekly teachings and reading books we probably wouldn’t have read otherwise led to our desire to generate passive income. Mr. ODA had already been interested in the concept, and then when we were talking about venturing down that path with our Realtor selling our Northern Virginia home, he really got the urge to pursue it.

When we sold our Northern Virginia home, we had about $120,000 in our bank account. About $70k of that went to the downpayment and closing costs of our new house. The remaining went to finding a rental property… or two.

REAL ESTATE, PASSIVE INCOME, AND NO JOB

Real estate is in the business quadrant, but it’s not completely passive income. Truly, the Amway business wasn’t completely passive because you still needed to have the sales (either through your purchases or customer purchases) to be eligible to earn all the passive income available to you in the business. Most months with real estate, I take the rent money, pay out our mortgages, and that’s it. Sometimes I need to make some phone calls to contractors. However, we have to do very little to maintain our business of investment properties. We can also decide that we don’t want to field the phone calls and hand off the rest our properties to a property manager for 10% of rent. If we don’t have a new property or a property to turn over, then we probably put about 100 hours per year into managing the houses.

We knew we didn’t want to be in the employee mentality for the rest of our lives. Funny, because my goal when I was in college was to work for a “big 4” accounting firm and spend 80s hour per week at work. Then I started working for the government, and my goal was to be CFO in my 30s. Then I got to the headquarters office in my late 20s and hated the environment, so I decided I wanted to be no more than a state office’s financial manager. Then we had kids, and I decided I wanted to be home with them to see all the little moments. Things sure did evolve.

I believe that the time we spent with our Amway team changed my heart. I believe that time was important for me to see a different lifestyle and a different mentality. I don’t know that I would have seen the benefits of pushing ourselves to buy more rental properties had I not seen a lifestyle of entertainment.

I started to realize it would be nice to spend time with my family while the kids were little. Who wants to wait until retirement to spend time at home, when your kids are grown and moved out of your house? Why not spend the quality time in their early years? Let’s travel more and experience more in life. Let’s have more time with the kids than the hellish hours of 5 pm to bed time.

Our cash flow each month is about $7k, just based on the rental properties. That doesn’t include expenses that come up, and every once in a while we get hit with a major system that needs replacement, but most of the charges are a couple of hundred dollars here and there. Some days, I wish I could still do what I loved to do in the transportation world, but I don’t miss the office politics and the moderately strict work schedule.

I’m happy for all the experiences that have led me to this point in life. Perhaps you can read Rich Dad, Poor Dad or Cashflow Quadrant and learn a little bit more about all the options out there. Perhaps you just didn’t know that there are opportunities out there where you’re not trading time for money, or where you’re not cushioning the pockets of an executive while you make a certain salary. Perhaps you just needed your eyes opened to the chance to make your money work for you. Or, perhaps you’ll learn that you like the stability of being an employee, and you don’t want to change. But I urge you to take a look at the options and see what works best for you, now that you’re away that there are options.

Tenant Evaluations

When looking to rent your house, you should do your due diligence. Our concerns are whether a person has a history of late payments, collections accounts, and if they have a criminal history.

We do two steps of initial screenings before asking a tenant to pay an application fee. The first two steps given them the opportunity to disclose anything that may be seen as unfavorable or not meet our rental criteria. This way, once they pay the application fee, it’s a verification step, and they’re not wasting any money for me to find out that I’m going to decline them.

Here are the details of how I go through the evaluation process, and specifically how I just did it for our new rental.

RENTING CRITERIA

First, I send everyone interested an “Interest Form.” We ask for their legal name, contact information, credit score, employment data, number of occupants, whether they smoke, if they have pets, if they’ve been evicted, and if they’ve been convicted of a felony. I also ask them to provide any other information they think I should know that may affect their ability to rent the house. I send this form to everyone who expresses interest, and it’s the first step before scheduling a showing. I request the data before scheduling a showing because I don’t want to waste my time or theirs showing the house, when they had adverse responses to our criteria. This was more important when I was scheduling individual showings, but I now conduct an “open house.” I set aside two hours to be at the house and ask they come during that time. If that doesn’t yield a tenant, then I’ll evaluate who couldn’t make it and field new requests to see it to determine if I’ll show it individually or host another open house.

We have this at the top of our Interest Form.

Properties are offered without regard to race, religion, national origin, sex, disability or familial status.

Required standards for qualifying to rent a home are:
• Each prospective applicant aged 18 or older must submit a separate application.
• We limit the number of occupants to 2 per bedroom.
• Your combined gross monthly income must be at least $4,000.
• You must be employed and/or be able to furnish acceptable proof of the required income.
• You must have a favorable credit history.
• You must have good housekeeping, payment, and maintenance references from previous Landlords.

Compensating factors can include additional requirements such as double deposit and/or a cosigner.

Our typical rental actually requires 3x the rent as the monthly income, but since our last house was more expensive, we put the requirement as a dollar amount threshold instead.

Then I would historically review those who say they’re interested and pick the one that appears to be most qualified. I’d send them a “pre-application” form to fill out. However, for our last tenant search, I asked everyone interested to fill out the “pre-application.” The tenant screening system doesn’t tell me their last landlord information or their employer, which are both necessary for making phone calls and checking their information given. The “pre-application” repeats some of the questions on the Interest Form, but the pre-application requires them to sign the form as an “affidavit” that the information is accurate.

If they tell me that they’re going to have a low credit score, it helps me to know the reasons for it up front. Additionally, by letting me know any issues up front, it saves them money. If they self-report that they have several collections accounts, then it could be cause for me to move on to a different person interested. If they don’t tell me that they have some issues in their history that may be unfavorable, and I send them the application, then they’re spending $40 per person only to potentially not get the house. I prefer to use the online tenant screening as a final verification step than an initial screening and potentially waste someone’s money.

One time I got through all these steps, had 3 different people submit an application for a house, and the report came back with an eviction. We asked why they didn’t disclose that to us originally. They told us a story about how they were asked to leave somewhere, but they didn’t know that it was reported as an eviction. We told them that they were disqualified. We went with our “runner up,” and they’ve been in the house almost 3 years without any issue or late payment.

We also had two people submit an application and then a bankruptcy was reported on the credit report (it was before the pre-application step I implemented). She said she didn’t see a place to explain a bankruptcy, so she didn’t think to mention it. For future reference, if I ask for your credit score and you have anything concerning in that credit report, it’s helpful to be upfront about it. In that case, everything else was fine and her explanation for the bankruptcy was clear and thorough. We gave them a chance, and they were amazing. She was rebuilding her life after taking on a lot of new bills after a divorce, juggling single-income life, and it was a way to consolidate the debt.

DECIDING BETWEEN TENANTS

In this last situation, I had several people express interest in the property.

I held the open house, and I asked everyone to let me know by noon the following day if they were interested in pursing an application after seeing the property. I received 6 or 7 people who were interested in the house.

I don’t look at one factor. I weigh all the information given to me in my head. In a perfect system, I may assign a weight to each data point, but that’s more effort. I’m reviewing the data and trying to see who has the best, well-rounded criteria.

The house is big (2100 sf with 4 bedrooms), and rent is higher than anything we’ve ever managed. I looked at what they are currently paying in rent. If they’re currently paying $1500 per month, then that made me more confident that they’d cover the $1750; if they are currently paying $400 per month, then I was concerned that they weren’t prepared to cover such a large expense difference. Along those lines, I also gave more credit to someone who has a stable job that they’ve been at for more than a year, versus a few people who said “I’m starting a new job at the end of April.” We have a tenant that goes through jobs every 1-3 months and is always a pain with rent, so I’m probably more scarred by job history now.

I gave more credence to those who had at least a 600 credit score, but I didn’t rule out anyone with a credit score less than that. One woman did have a lower credit score, but she had other good information, so I didn’t rule her out.

Finally, the determining factor came down to availability. My top two contenders had different desired move dates. One said early April, and another said June 1st, but May 1st may be ok. When I asked her to explain about her move date, I received a detailed story that didn’t have any conclusion on when she was available. Since this is a business, and I had a qualified group interested in the house sooner than others, they were the ones selected. If I didn’t have someone qualified for an April move in, then I would have waited for a May 1st rental instead of lowering my standards.

Luckily, I had enough interest in the property that I could select someone who was well qualified and get it rented sooner than later.

APPLICANT SCREENING

Once I’ve given someone these two opportunities to disclose unfavorable information in their credit or criminal history, and they’ve provided favorable responses that meet our criteria, I send the link for the application. The potential renter enters their data into the system, which helps keep their information secure (e.g., I don’t have their social security number) and helps eliminate any typographical errors that I may make transferring the information into the website instead of them entering the data they already know. Additionally, the tenant pays the fee (currently $40) directly to the website, which helps them understand that once the report is run and the fee is paid, it was for a service so it’s not refundable. I heard multiple stories this past week where people paid “application fees,” but were later told that they weren’t the first to respond. That’s not fair. I don’t need to know everyone’s detailed reports and cost people money if they aren’t going to get the property. So here’s how I handle the tenant screening process.

The system generates a report for me to see that includes their credit history, criminal history, eviction history, and income verification.
– The credit history shows any missed or late payments; collections accounts; bankruptcies filed with the chapter, date filed, and amount settled; and their score. I’m more concerned about late or missing payments than anything else there. The collections accounts are typically related to medical bills, but if they’re for general credit cards or an enormous car loan, I’d find it more concerning. I’ve also not ruled someone out simply because they’ve filed bankruptcy; two of our tenants actually have a bankruptcy in their report.
– The criminal history tells me if they’ve had any judgements against them. I’ve seen traffic violations, misdemeanors, and felonies. The report also tells me if they’ve been listed on any sex offender registry. If they have felonies, multiple misdemeanors, or are on a sex offender registry, it’s automatic disqualification. I’ve gone down the road of giving people chances, and it hasn’t gone well. This report isn’t fool-proof either. I know how to use the court record system where we have most of our houses, and I now look them up in all the nearby jurisdictions to be sure there’s nothing reported.
– The eviction report will tell me if they’ve been formally evicted. This doesn’t capture any times where a tenant and landlord agreed on the tenant’s departure outside of the court system. This also may miss some jurisdiction evictions. We had someone show up in a separate jurisdiction when I went looking for their information in the surrounding areas, but it didn’t show up on the report. Don’t think that this report is fool-proof.
– The income verification comes with a built-in caveat. I don’t know the details on how the report is run, but the result is something along the lines of “we believe that the self-reported income is near accurate.”

The report suggests whether to accept or decline the applicants. I suggest reviewing the data and making a decision for yourself. Some reasons why the recommendation will be to decline include: criminal history, bankruptcy, and low credit score.

We have given several people “chances” that don’t perfectly meet our criteria. Below is a screenshot where the recommendation was to decline. However, we ended up asking for more information and giving them a chance. They ended up spending a year in a rental of ours, moving out of the area, and then asking for our rental availability when they came back to town. They always paid on time, hardly asked for anything, and took great care of the house.

We have also accepted tenants that had some concerns in their report, but the system recommended we accept them. We tried to overlook the issues, but we’ve ended up regretting it. We have one tenant who has a criminal history (forgery) and we ended up having to release her roommate from the lease because of a domestic violence and restraining order issue. She’s also consistently late on making rent payments and doesn’t keep communication lines open. We plan to ask her to leave at the end of this lease term. We also had a tenant with a 480 credit score who wrote us a letter about her low credit and asked for a chance. She ended up consistently paying late (she always paid, but it was always a fight); we threatened eviction when it got to a breaking point where she was combative, but she left on her own terms. That’s a good example where she was a terrible tenant, who we gave multiple opportunities and even restructured her rent, but her eviction report won’t say anything to that effect.

DEPOSIT

Once I have an approved application, I request a deposit to hold the property and remove the listing. Typically, the lease signing doesn’t occur immediately. In those cases, I want protection of my cash flow that I’m holding the property for someone specifically. I’ve had a couple of houses that have signed a lease immediately, but typically there’s a lag between “acceptance” and the lease being signed (forming a contract).

In this last instance, the tenant was accepted on Friday, but the lease wasn’t going to be signed until the following Thursday. I requested a $400 deposit, which will be applied to their balance owed to get the keys transferred to them. I originally was going to request $500, but I realized that the week’s worth of time at the rent per diem rate came to $408. If they back out between now and Thursday, then I haven’t lost income if I had chosen someone else and not held the property until the date they wanted a lease. Ironically, they ended up paying a deposit of $500. For them to obtain the keys, they owe a security deposit ($1750), the first month’s pro rated rent (about $1300), and a pet fee of $500. Their total is $3,550, but the $500 I’ve already collected is applied to that balance. Therefore, on Thursday, they’ll owe me $3,050 for me to hand them the keys.

Usually, I require the first month of rent to be the full amount, and then the proration is applied to month 2. Since for this tenant, they already paid rent at their current address for the month of April, and the rent here is higher than our average, I went ahead and prorated the first month so they didn’t have to put so much cash out of pocket in a short period of time.

SUMMARY

You can see how I am not making black-and-white decisions. I’m not hanging my hat on one or two factors. I’m being reasonable in my decisions and understanding that there’s a person, and maybe a family, on the other end of this transaction.

Be fair. Utilize a variety of factors in making your eligibility determination. Keep your communication lines open with potential renters until you have a deposit and/or lease signed on the property.

Treat this as a business and make informed, logical decisions instead of emotional ones, but be reasonable.

Credit Card Rewards

A while back, I wrote about how, if you really wanted to put the effort in, you could be maximizing credit card rewards. If you don’t want to put the effort in that I’ll get to in a second, then you could at least have one reward-earning card that you use for all your purchases and pay off each month.

Important reminders:

We don’t use cash. Everything goes on a credit card unless it’s prohibited or there’s a service charge that outweighs our rewards.

We pay off the balance of every credit card every month. We have never paid interest on a credit card balance.

Let’s dive in.

REWARDS

Credit card companies are offering rewards for using their card for purchases. Some even give a reward for making payments on it too. The rewards can be in a point system, cash back, or incentives for specific companies (e.g., Delta, Disney). We prefer more generic reward options, but some people like to use a specific reward card. The best reward credit card for you is one that matches your spending habits.

An example of a specific reward credit card would be a a Disney card. As you earn money, it goes towards their trip to Disney. Psychologically, they feel that their expensive annual trip to Disney is “paid for.” While this may work for some people, our thought process is that if I earn $1,500, then I have the flexibility to put it towards a Disney trip or can buy something else.

The simplest way to collect rewards is to have an all-category-cash-back credit card (e.g., 1% cash back on all purchases). However, to make the most, you could be using multiple credit cards so you can earn extra rewards in different categories. Then you need to know which card to use when, and also keep track of your statement periods so that you pay it off in full each month. A category type credit card can give rewards in multiple categories (e.g., 4% on gas, 3% of restaurants, 1% on all other purchases), can rotate reward categories (e.g., first quarter is 5% on gas, second quarter is 5% on groceries), or can be geared towards one specific category all the time (e.g., 5% on gas). There are typically earning caps in these categories.

CHOOSING A REWARD CREDIT CARD

Each credit card company has a variety of cards that offer different rewards. You can decide what fits your spending pattern the best. If you don’t want to identify the categories that you spend, then the Citi Double Cash is a great “catch all” with no annual fee and no reward earning cap. You earn 1% cash back on each dollar spent, and then an additional 1% on each dollar paid towards your credit card balance. We deposit our earnings into a checking account instead of a statement credit, because we learned that we don’t earn cash back on the statement credit made.

Some credit cards have an annual fee. We typically shy away from anything that has an annual fee because we don’t like paying money to spend money, but we did have a couple of exceptions. For instance, one card had a $450 annual fee. You earn 3% points (one point is the equivalent of a penny if cashed out) on all travel and dining purchases and 1% points on everything else, but if you redeem the points earned through their travel portal, you get a 50% bonus. One of the rewards was reimbursement of $300 worth of travel costs. The card reimbursed the cost of TSA Precheck too, which as $75, and had a DoorDash credit of $30. Then the last $45 of the fee was offset by the rewards granted through point usage. But the annual fee increased to $550, and we no longer thought it was worth keeping and that the cost would be fully offset by the rewards.

We also look for a sign on bonus. If we’re going to have our credit checked, we want to capitalize on it. Sign on bonuses are typically additional cash back or points once you hit a certain spending threshold. For example, the card may say “once you spend $3,000 in the first 3 months, you’ll earn a statement credit of $300.”

In addition to a sign on bonus, we would also prefer opening a card that offers a 0% introductory rate. I’ve shared before that we most often look for a new credit card because we have a large expense coming. When faced with paying for in-vitro-fertilization out of pocket, we opened a new credit card that had 15 months worth of 0% interest. This way, when we paid the tens-of-thousands owed, we gave ourselves an interest free loan. That particular credit card was only used for that expense because the reward categories were worse than other cards we had. However, we didn’t close that card because it helps our credit by having more of credit line open.

OUR REWARD USE

Besides the Citi Double Cash, we’re partial to the Chase options out there. We use different cards for different categories, and then use the Citi for anything that doesn’t fit into a category.

Between 5 credit cards, we brought in $4,232 worth of rewards last year. That’s money in our pockets that we did nothing except spend other money to get. In the past, it’s usually about $1,500 per year that we bring in with credit card rewards. The amount in 2021 was higher due to sign-on bonuses that were earned in a previous year, and then the credit card changed their reward redemption options, allowing us to pay ourselves back for restaurant purchases. We had previously been using the rewards to purchase travel needs through their portal, but we were able to dwindle down our rewards with this reimbursement change.

What could you do with a “free” and “extra” $1,500?

If you’re smart with credit cards, they can be a powerful tool to create financial flexibilities.

Commercial Loan

We closed on a new type of loan last week. It wasn’t a completely smooth process, but it was easier than a residential loan.

WHY COMMERCIAL?

Residential loans on second+ properties were over 4.5% on their interest rates last month. The commercial loan gave us options that were lower than that. It comes with a catch though. While the loan is amortized over 25 years (there was a 20 year option too), there’s a balloon payment after 5 years. There were also 3, 7, and 10 year options. Being that this was our most expensive investment property purchase, 3 years was too much of a risk to take on that balloon payment. The interest rates for 7 and 10 years didn’t make it worth going the commercial loan route. While the interest rate is fixed (unlike in an ARM or adjustable rate mortgage), this balloon is a risk.

By going through a credit union, our costs were also minimal. Our closing costs were just over $1,000, rather than the typical $2k-3k that we’ve seen on closings that cost less than half what this house cost us.

The only other “catch,” if you want to call it that, is that there is no escrow. I already handle the taxes and insurance payments on my own for a handful of our houses, so that’s not a big deal. I also appreciate having control over my money instead of having to check in on escrow regularly and making sure all the escrow analyses are actually done correctly (because one recently wasn’t!)

PROCESS

We filled out an application, which they called the “personal financial statement” and included our detailed financial status. It had me list all our account types and balances. I assume that’s what they used to compare against our credit report, because we actually didn’t send any account statements to them (glorious!). We had to provide the last 3 years of tax returns (ugh… we haven’t done 2021 yet so we had to give 2018).

I developed a rent roll and gave that as well. It listed all real estate owned, purchase price and date, current market value, monthly rent, mortgage balance, monthly mortgage payment, and whether or not it’s occupied. I added the HOA payments on the houses where it’s applicable because that always seems to be a last minute request for documentation.

Once the application was completed and reviewed, that was it. We were asked a few follow up questions about the numbers on our forms, but we weren’t asked for anything further. Essentially, “underwriting” happened as part of the application process, versus in the middle of the application and closing dates, spanning days and maybe weeks of documentation gathering and answering of questions.

Instead of a “rate lock,” the rate given is the rate that was present at the application submission, pending any exceptions (e.g., if credit isn’t what we said it was or we have outstanding loans not disclosed). As an auditor, it was hard for me to accept that we weren’t going to be hit with a surprise somewhere along the way because we never signed anything agreeing to loan terms! 

We saw no documentation until the Monday before our Thursday closing. There was no initial disclosure, and no “rate lock.” We had no idea how much the closing costs actually were going to be. The responses to our questions were slow or nonexistent. We didn’t see our appraisal until the Friday before closing. Not knowing the process or knowing when we’d find out how much this was costing us was more than we’re used to handling emotionally.

We received the HUD settlement statement on the Monday before closing. Luckily, everything was correct. Our sellers had already moved out of the area, so we had to have the statement sent to them, signed, and sent back to the Title attorney. They did that perfectly, and we had an easy closing on Thursday. We signed all the paperwork in about 20 minutes!

FIVE YEAR LOAN

Mr. ODA ran some numbers to show me why we should go for the 5 year loan instead of the other terms.

We didn’t consider the 3 year option because we didn’t want to manage that balloon payment or refinancing so quickly.

As a reminder: the closing costs for the commercial options are the same regardless of the term, and were about $2k less than the traditional loan; all the commercial loans are amortized over 25 years, but have a balloon payment at the end of the term given; all are based on 20% down (because there was no incentive for 25% down).

The final decision to go with the 5 year loan was that we haven’t shied away from risk in the past, so take the incentives that come with the shorter term (i.e., lower monthly payment and less interest paid). Our portfolio has made drastic changes over the last 5 years. Therefore, we don’t see a reason to pay more interest, reduce less principal, and have a higher monthly payment (thereby lowering our monthly cash flow) just because a balloon of $167k is concerning.

BALLOON PAYMENT

The loan is $193,600. After 60 payments (5 years), the principal balance (with no additional payments made) will be $167,500.

Let’s face it, if we had $160k+ liquid, we wouldn’t be paying the first 5 years of interest on the account. We can make additional principal payments over the next 5 years to dwindle the balance before the balloon payment is due, and/or we can look into refinancing the balance at the end of the 5 years.

We had another private loan that had a balloon payment at 5 years. That loan was originated at about $70k and we paid it off in about 3 years. We had several issues with that lender, so we had the incentive to throw money at the loan and be rid of it, versus attempting to refinance it at the end of the 5 year term.

It’ll be interesting to see what we do on this going forward. The balloon payment would typically be an incentive to make additional principal payments. However, we have six other loans with an interest rate higher than this loan’s, and one loan with the same interest rate. We’ve been focusing on either the one with the lowest principal balance or the one with the highest interest rate. This new loan doesn’t fit either of those categories!

SUMMARY

Mr. ODA asked me if I would do this again, and I would. It was frustrating to ask someone in customer service a pointed question and not get an answer, but overall this was easy. There was minimal documentation needed, the requests didn’t drag on, and the closing costs and interest rates available were favorable. The balloon payment is something that needs to stay on your radar over the next 5 years (and mostly in that final year), but refinancing is always an option. It doesn’t mean that you have to be ready to fork over $167k on that date, but you do need to plan for closing times and ensure you keep your credit worthiness in good shape (although isn’t that always the goal?!).

Should you take the raise?

Yes.

It seems it’s time to revisit this discussion.

A raise does not mean you’re making less money because it’s “taxed more.” The tax rate is not greater than 100%, which means each individual dollar is not taxed at a rate greater than or equal to that dollar. The highest tax rate for 2022 is 37%. So even if you’re at the highest tax bracket, you’re still bringing home 0.63 cents on the dollar. So let’s revisit the United States tax system: marginal tax brackets.


MARGINAL TAX BRACKETS

Your income is taxed by the IRS according to a marginal tax bracket. This means that each dollar fits into a separate “pot” to determine how much it’s taxed. This does not mean that if you make $15,000, it’s all taxed at 12%; or if you make $95,000, it’s all taxed at 24%. This means that each dollar that fits into these “pots” is taxed at its respective rate. For ease of seeing how the math works, this post is just going to assume you’re filing single, but there are other options, which changes the bracket amounts.

Let’s say you make $80,000, and you’re considering a raise to $95,000. This is a difference of $15,000 in gross income. Only $5,925 falls into your “new” tax bracket. Your net raise (take home pay, barring any other deductions for the year) is $11,581.50, and you’re paying $3,418.50 in additional taxes.

Let’s do an example where you receive a raise, but you stay within the same tax bracket. You’re making $80,000 and offered a 5% raise, which would bring your salary to $84,000. You would make another $3,120 in net income, and you’re paying $880 in additional taxes (which is 22% of the salary increase).


Making $90k instead of $80k does not mean that your entire pay check is now taxed at that higher rate. This is the common misconception about earning more money. Each dollar is taxed within the bracket it falls into. In 2021, single filers get taxed on 10% of their income up to $10,275. That means that the first dollars they earn are taxed at 10%, but the $10,276th dollar they earn is taxed in the next bracket, or 12%. The 12% bracket goes to $41,775. Similarly, the $41,776th dollar they earn will be taxed at 22%, and so on.

Mr. ODA posted about how bonuses are calculated by your payroll processors back in 2019. I’d rather take the additional money in my pocket than worry about how it may appear to be taxed more when you see a new paycheck.

“Comps” in Appraisals

You hear this term in real estate often. “What are the comps?” “Have you run the comps?” It’s short-hand for “comparables.” These are the houses that are similar to the house in question (whether you’re trying to list a house for sale or purchase a new house) can be used to determine the value of a property. It’s touted as if it’s difficult, and I’ve seen several comments in a “moms” group that told me more people need to know about appraisals.

An appraisal is an expert’s estimate in the value of something. It can be something small like a piece of jewelry or something big like a house. During a closing process that includes financing, the bank issuing the loan is going to request an appraiser evaluate the property being purchased. The bank is using this as a mechanism to verify that the property is worth the contract amount.

A recent appraisal we had done stated the following (for context). This report is based on a physical analysis of the site and improvements, a locational analysis of the neighborhood and city, and an economic analysis of the market for properties such as the subject. The appraisal was developed and the report was prepared in accordance with the Uniform Standards of Professional Appraisal Practice.

If your real estate purchase is through a loan, the bank is going to require an appraisal. Have you ever looked at the appraisal? The lender is required to give you a copy.

Let’s dig into one of mine.

THE APPRAISAL

This particular appraisal was completed for a refinance of a loan. It was done in December 2021 and is 37 pages long, granted a lot of that is teaching documentation.

First, the appraiser identifies the property’s characteristics. Things like the address, plat number, taxes, house size and details, utility hookups, and neighborhood demographics are filled out. Here are a few snapshots with that information. All appraisal reports I’ve seen have looked like this (across multiple states).

Once the appraiser identifies the property’s details, he moves on to finding nearby homes that have sold recently. The comparable sales are of similar age, construction quality, and condition. There are formulas available to the appraiser to determine how differences between the property he’s appraising compares to the similar nearby homes. For instance, having another bedroom increases a property’s value by a certain amount, having a garage could increase the property value, having a fence affects the value, etc. Here’s a snapshot of one of the comparable sales for this appraisal. The first ‘description’ column contain the details of the house being appraised. The second ‘description’ column contains the details of the address he’s using as a comparable. Then there’s the adjustment column to identify how those differences affect the value of the home. This home being used had sold for $255,500. Each difference is calculated to account for a value of the home had it been even more similar to our house. So this house having a porch instead of a stoop is affecting the value at $3,500 (I don’t know how these values are determined, but I assume it’s all a software calculation that keeps it consistent).

This appraiser used 7 comparable sales. We’ve historically seen 3-5 houses used, but this market has created more options than usual. The appraisal was determined by removing the value of the land (since that’s calculated by the tax records regardless) and applying the average price per square foot amount to our house. The valuation came in at $230,000. We purchased the house for $117k 5 years ago, so that was a nice surprise. We were able to take out a loan for up to 60% of the appraisal’s value.

YOU CAN DO A RUDIMENTARY APPRAISAL YOURSELF

The point here is that an appraiser is using the specifications of nearby, similar real estate transactions to determine the value of the house in question. Since the concept of an appraisal is straightforward, you shouldn’t feel like you’re incapable of doing your due diligence on a purchase or determining the sale price.

It’s important to note that you’re focusing on houses that have SOLD. You’ll see houses nearby listed for sale at different prices, but that doesn’t mean that’s what the market deems a “fair market value.” You want to focus on the sold prices because that means someone was willing to pay that for that type of property, and a bank likely confirmed the value with an appraisal.

In this “moms” group I mentioned, several people told a person that she needed to hire an appraiser before listing her house. An appraiser is about $400-600. In a house sale, the buyer is responsible for the appraisal. Therefore, as the person listing the property, you’re not “ahead” in any way by paying for an appraisal up front because it wouldn’t have been your cost to bear anyway. Instead of paying someone to perform an appraisal, you look at houses nearby that sold recently.

Back in 2018, we were using sales for 6 months to a year prior to the date we were searching. The housing market hadn’t changed all that much year-to-year that you couldn’t use sales from a year ago. These days, you need to be looking at houses that have sold in the last 3 months, and maybe go back to 6 months if you don’t have any good options. If you need to use sales from a year ago these days, then assume a hefty inflation (in most areas) from the price it sold at, but it’ll at least give you a good starting point on the price.

For recent sales you dint, you’re looking for properties with the same number of bedrooms and bathrooms, approximately the same square footage, and approximately the same size yard. You’re hoping for pictures too so that you can evaluate if the condition of the property is objectively better or worse than the property you’re considering.

PERSONAL EVALUATION EXAMPLE

We’re currently on the hunt for another rental property to add to our portfolio. Things are moving fast, so we’re doing quick evaluations on the fly with best guesses of value. We have the benefit of doing several of our own real estate transactions, including plenty of searching for options outside of the ones we did purchase. Therefore, we have the knowledge to be able to eyeball the value. In the beginning, it would probably work best if you write down the details (similar to what’s found in the appraisal screenshots above) to identify the appreciable differences between your options.

We were looking at a property that was in poor condition. The listing even stated that they were offering a $3,000 flooring allowance as part of the sale, acknowledging that the condition was poor. The house is 3 bed/1 bath (colloquially referred to as ‘a 3/1,’ and was listed at 169,900. The listing photos showed a scratched up floor, but otherwise looked ok.

Not bad, right? Well, I don’t know what filter they used, but these colors are a lot more vibrant than the condition of those cabinets and appliances were in person. The photos didn’t capture the gouged walls or layers of paint that weren’t properly painted between coats. And, unlike popular HGTV shows would you have you believe, the paint color isn’t something we’re caring about. It’s a bonus if it doesn’t need a coat of paint before we rent it, but we’re generally expecting to paint a house after we buy it. The photos also don’t portray the filthy bathroom with the mismatched patchwork tiles in the shower. We stepped back and seriously considered flipping this or improving it and using it as a rental still.

I opened my Zillow app. When I’m looking for quick information, I’m focusing on price per square foot, rather than actual purchase price. This house came to $151/sqft. In the Zillow app, on the upper right corner, click ‘Filters.’ I always click ‘Reset’ before I start a new search because I never know what I last changed in the parameters. I chose the ‘Recently Sold’ toggle, left everything the same, and then at the bottom I changed ‘Sold in Last’ to ‘6 months.’ In this area, if I looked at a broader spectrum of recently sold houses, I’d have too many to look at, and the prices in 2019 would be drastically different than what’s currently happening in this market. If I still had too many results, I would have filtered down to 90 days. However, it’s January when I’m looking, so there hasn’t been too much activity in the last 3 months, and I want to capture more options that sold during the summer months.

Then I just started clicking the yellow bubbles of prices. I want to first focus on the ones closest to the house I’m looking to buy. As I get further away (or cross major roads), I’m probably looking at a different school district, or different crime levels, or different ‘feel’ of the neighborhood; be careful how far out you look.

Here are my thoughts on the first comp I found. The parentheses identify how it relates to the property I’m viewing: either it’s the same (=), my property is better (+), or my property is worse (-). It’s a 2 bed (+), 2 bath (+), with low curb appeal (+), smaller lot (+), nicer floors (-), covered deck (-), stainless appliances (-), kitchen cabinets were original and the stove’s vent hood was outdated (+), the master bathroom needs a facelift (+). This house sold in September 2021, so it’s a fairly similar market to what I’m looking in now. It sold for $117/sf. With the difference in the number of bathrooms and bedrooms, it’s hard to compare. Subjectively, the house I’m interested in is worse than this house, but it has another bedroom and a bigger lot. I decide that this comp doesn’t get me close to $151/sf for the house I’m looking at.

Comp 2 is around the block. It’s very close to the size of the house we’re evaluating (=) and is a 3/1 (=). It’s adorable, with great curb appeal, so it draws me in. Then I start noticing some things that are red flags. The roof doesn’t appear to be in bad shape, but my eyes are drawn to a water stain on the living room ceiling (+). It appears to have laminate flooring in the kitchen and carpet elsewhere, whereas the house we’re looking at has hardwood everywhere; our hardwood is beaten though, so this is hard to compare. I see that there’s old vinyl in the laundry closet that wasn’t addressed when new laminate appears to be laid, there’s some poorly laid wood flooring in just the entrance to the master bedroom, and there are several stains in the carpeted bedrooms. The backyard has power lines running through it (+); I see several issues with the vinyl siding on the house (+), but it has a covered deck (-). They had tried to sell this house from July to October, which tells me that plenty of people were drawn in, but those defects were clear (and probably more) in person. They started their listing at $166/sf and ended up selling at $146/sf. While this house looks to be in better condition than the one I’m evaluating, this tells me that I’m probably looking at the $140s/sf for the one I’m looking at.

There’s a 3rd ‘comp’ that caught my attention right behind the house I’m evaluating. Zillow claimed it was sold for $334/sf. Interesting anomaly. Our Realtor was able to pull the MLS and see it actually sold at $150k, so about $115/sf. So moving on.

I found a brick ranch around the block, so I’m excited that it’s very similar to the house I’m looking at. It’s a 3/1 (=). It sold in September 2021 for $149/sf after having first been listed at $163/sf in July. I dive into the pictures. The floor isn’t destroyed (-)! There are mismatched, yet updated, appliances in the kitchen. It’s frustrating, but they probably have a better lifespan that what’s in the house I’m looking at (-). The bathroom has been updated recently, but it’s small, and there’s no picture of the shower side of the bathroom (concern, but still better than the house I’m viewing) (-). There are minimal pictures, but at least one of every room. After comp 2 went for $146/sf, and this is better condition at $149/sf, I’m now putting the house I’m evaluating below $145/sf.

There’s a brick 3/1 next to Comp 4 that sold for $162/sf. But there are no pictures and it was for-sale-by-owner, which tells me someone probably overpaid for a higher list price because they were desperate. I’m throwing this out and not using it as a true comp.

At this point, I’m just standing there trying to evaluate whether this is worth pursuing or not. I can do detailed looks at comps later on a computer with a pad and pen. I decide that $145/sf is my highest value of this house and it’s horrible condition. However, even with that, I don’t want to go that high because of all the work that needs to be done right away on the house. The comps told me that’s the value of other homes that needed some work, but looked livable from day 1. I decided to sit on it. Well, the next day, it went under contract at a reduced price of $146/sf. I won’t know the actual price of the contract until it closes, but for now, it looks like someone bit on the $146/sf.

Now this is really important if you’re evaluating for a purchase. Do not overpay for a house. Do not feel pressured into needing it now. We’ve put in several offers on houses, but we’re not going to get into a bidding war. We also put in an offer on one house, and the seller said “raise it $5k and state the offer isn’t contingent on an appraisal, and you have a deal.” No. Requesting the appraisal clause to not be checked says we were probably overpaying even at the offer we made. So thank you to this man for letting me know that it was time to walk away.

SUMMARY

You can typically rely on your Realtor to provide you comps through the MLS. If you have questions about their valuation, ask for the details. I have an instance where I didn’t agree with my Realtor on a list price of our last personal residence. In this particular instance, I had better knowledge of the housing market where our house was than he did, because he focused on sales within the nearby city limits, and we were in the suburbs. He ran comps based on basic metrics (number of bedrooms, square footage). I had the benefit of knowing details behind some of the sales he was using or how some houses weren’t a good fit to use as a comp to the house we were selling. I was able to sway the list price to even higher than he suggested, and we were under contract that weekend.

I know how it works. I’ve taken the time to research and understand the process just enough that I can protect my finances and interests in these transactions. I’m not sharing this as an example to fight your Realtor on their suggested list price, but as a way to show you need to be an informed consumer.

Escrow Analysis Update

I posted about how one of our houses updated the escrow calculation and claimed our new mortgage payment needed to be $185 more than it had been to cover an escrow shortfall. Our escrow balance was negative, so it wasn’t a surprise that the amount was increasing, but that seemed to be a drastic increase. Most of what I said was right, but I did the increasing math incorrectly. The concept was there, but not the details.

Here’s the current escrow analysis from the mortgage company. It’s similar to what I did on my own. I knew that the new escrow amount to cover just what we owe in the year is $199.25, which is the same. I knew that there would be a shortfall in May of $256.89. This next step is where I was wrong in my calculation.

I took $256.89 and divided that specific shortfall by 12 months to come up with $16.60. Instead, I needed to take that shortfall and add it to the required balance of 2 months worth of the escrow payment. Therefore, $199.25*2+$256.89=$655.39. Take that number and divide by 12 to get the monthly payment to cover the shortfall, which comes to $54.62 (rounded).

The new payment is the new base amount plus the shortfall coverage. So our payment actually increases by a total of $96.95 because our previous escrow payment was only $156.92.

Reaching Goals

Whether you have a lofty goal of paying off a mortgage or a short term goal of not struggling to pay rent each month, it helps to establish a plan. The first step should be learning your relationship with money instead of mindless spending paycheck to paycheck. Last month, I mentioned budgeting and how it can lead to overspending instead of spending wisely. I also mentioned the envelope system and not liking it.

The envelope system is where you establish your spending categories and put cash in the envelope each month. When the money is gone from the envelope, that’s it. Don’t borrow from another envelope. If there’s money left over in an envelope, it can be added to next month’s envelope to increase your spending, or you can use that money to treat yourself to something. In few articles that I read did I see that the extra money should be put towards your goal.

THE GOAL

The first step is to write your goal down. What is it? How long do you think it will take to reach it? I’ve learned that establishing interim goals helps reach the bigger goal that may seem too lofty.

The second step is to track your expenses. Look at what you’re spending your money on. Start categorizing your spending. Can you see that you’re spending more than you thought on something other than essentials? Is hitting up the drive through several times a week costing you more per month than you realized? Have you purchased decorations for your home that aren’t on display, but you’re scraping together rent or mortgage for the beginning of each month? Are you paying up-charges and delivery fees for a meal delivery service instead of going to pick it up yourself (or cooking your own meal)?

MONEY RELATIONSHIP

I have experience living paycheck to paycheck. It’s not like we’ve always been in a position where we’re not worried about how to pay our bills. I thought if I shared two defining stories from our finances, it may trigger an idea for you.

College

I lived on campus for the first two years of college. My parents were paying my tuition, and they said that either I needed to take out a loan to pay the following year’s room and board, or I had to be a Resident Assistance to get free boarding. I didn’t want the responsibility and having to be in my dorm so much to be an RA (I never researched it; I was just 20 and knew everything.). I decided the best approach was to live off campus because I’d be able to pay my living costs monthly instead of in two large chunks at the beginning of each semester. If I broke down the monthly cost of the ‘room and board,’ it was $1533 per month (and only for 9 months of the year). I figured I could live for less than that, while paying month-to-month as I earned income, if I moved to an apartment. My rent off campus that first year was $650/month. My utilities were about $150/month in the winter. I don’t know how much I spent on food, but I know it was the bare minimum. It wasn’t that I was purposely trying to be debt-free and a hero; I just simply didn’t know how to get a loan, so that wasn’t an option to me.

I had a job at JCPenney. I was making 5.15/hour (minimum wage in 2006), and I worked outside of my school schedule as much as I could. I was able to pay my rent every month because that was my priority. I dipped into my savings from my summer jobs, but I mostly changed my lifestyle. I packed my meals with peanut butter and jelly sandwiches for when I was working. I ate pasta for dinner. I didn’t go to restaurants often. I wasn’t in a phase of life where I wanted to go to bars, so my social life was hanging at my boyfriend’s house, where he lived with 3 other guys, drinking cheap beer and watching tv. I made sacrifices in my spending so that I could pay rent every month. I didn’t want to pay a late fee every month. If I could just barely afford $650, I certainly didn’t want to owe an extra $65 because I couldn’t pay rent by the first of the month.

There is one caveat in my story that first year. Since I was making just what it took to have a roof over my head and food in my stomach, I chose to forego heat. Do you know where Albany, NY is? It’s into freezing temperatures in October. It was fine – I had sweatshirts, sweatpants, socks, slippers, blankets. I lived on the first floor of a two story home, so that helps keep the temperature reasonable into October, but I knew I couldn’t last through the days of teen temperatures without eventually turning the heat on. My parents found out that I didn’t have my heat on, and they sent me $100/month to cover that. So I did get assistance. They sent me that for 6 months to cover my utilities, and that was the last assistance I received.

My parents paid my tuition, which was $2,175 per semester in 2004. Yes, less than $5,000/year for my college education.

Buying a House

Mr. ODA and I wanted to buy a house and settle down. We had each been part of a training program at work that would end with our placement anywhere in the country, so we weren’t in a good position to purchase a house in Albany, NY. Mr. ODA got placed in Pennsylvania, while I was still employed in their NY office. It wasn’t handled well, so we started looking for other options. I accepted a job in Washington DC, and Mr. ODA went to Sterling, VA; we moved to an apartment in Fairfax, VA to live in between those two places. We chose an apartment because we didn’t know anything about Virginia and needed a place to live while we scoped it out.

This wasn’t a scenario where we couldn’t afford to live, like my college example. This was a situation where we set a goal, and to achieve that goal, we needed to spend less.

Mr. ODA was saving and preparing for a house in the $150-200k range, not the $350-500k range as a first time home buyer. So we needed a plan to come up with over $70k worth of the downpayment and closing costs.

We set a goal of spending no more than $5/day/person on food. We ate a lot of peanut butter and jelly sandwiches, pasta sides, chicken nuggets, canned vegetables, etc. That threshold meant we weren’t paying to go out to lunch at work. We were eating the bare minimum at dinner. We were eating any leftovers that were in the refrigerator. We didn’t have a desire or lifestyle where we would want to go out for a drink or buy a lot of things, so it wasn’t hard to scale back in that area. After a month or so of doing this, we decided that happiness should be part of the equation too, and we started going out to a restaurant no more than once per week.

This isn’t a magical story where we went from $10k in savings to $75k in 6 months, but we were able to increase our savings a decent amount. We each took a residential loan from our retirement accounts, and we borrowed $5,000 from Mr. ODA’s parents. We didn’t expect to find all the funds needed, but we were able to decrease the amount of money we had to borrow from our retirement accounted by changing our spending pattern.

Our rent at the apartment, including utilities, was over $1800/month. When we purchased our house, our mortgage was $1576 and our utilities averaged $150/month.

REACH THE GOAL

If you don’t know where your money is going, you don’t know how to get your money to work for you. If you don’t take the time to evaluate whether or not you’re spending wisely, then you don’t know if there’s wiggle room in your budget to put you in a position that you’ll be more comfortable. Create a relationship with money. Know where each dollar is going. Determine if you should make changes to your spending to reach the goal, or if you should find a way to create additional income.

There’s usually a way to create more room in your budget with your spending. Some examples are to eliminate alcohol purchases, reduce your restaurant spending (whether it’s not going to restaurants as often or it’s changing how you order – do you need the steak; do you need a soda, or could you get by with water and drink a soda at home), reduce your home decor type purchasing, put your heat down a degree or two.

Instead of complaining that there are bills to pay, change your mentality to take control of your money instead of it controlling you.