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Year in Review: Part II

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I have gone through all our expenses in 2021 and categorized them, which was very time consuming. I swore I’d do better this year, but it’s March, and I haven’t done anything.

In the past year, we hit a net worth of $3 million. That’s really exciting, but we have more goals. It’s important to note that the net worth is through our investment properties, retirement accounts, and other investment accounts, so it’s not liquid funds. The values on our properties have drastically increased, many of which we’ve recently refinanced and have an appraisal on file showing just how much equity we’ve gained on these. Except for the cash that we have in our savings account right now, as we prepare to purchase another property at the end of the month, we don’t typically carry a cash balance. Our philosophy is that, if there’s an emergency, there are very few things that can’t be put on a credit card, and we can liquidate investment funds within 24 hours. We don’t subscribe to “3 months worth of expenses in savings” type actions. We’ve had plenty of large expenses hit us with rental properties, fertility treatments, and other random health needs, but it hasn’t ever been something to drown us financially. So while it’s exciting to see that new net worth, it doesn’t change our spending philosophy.

DIVIDENDS, INTEREST, & REWARDS

Mr. ODA used to have our dividends get reinvested automatically, but now they are transferred into our checking account. That was over $6,500 that came in, mostly at the end of the year, but there was ~$30 per quarter deposited also. In a different time, interest earnings on accounts used to be something to be excited about. Our checking and savings account combined brought in $6.51 for the year.

Mr. ODA is set up with GetUpside. When I went to their site to get a better description, I learned that you can earn cash back through gas, grocery, and restaurant purchases; I thought it was just gas. It’s an app that allows you to earn cash back through your normal purchasing. However, it also gives you an incentive for referring people, and so when that person buys gas, you get some cash back. By checking the app for a participating gas station (and only using it if the incentive offered is a better price than surrounding gas stations), Mr. ODA deposited $32.45 for the year.

Between 5 credit cards, we brought in $4,232 worth of rewards. These are simply earned by either spending or paying the credit card, no further action. We preach and preach to have credit cards with rewards. Everything we purchase goes onto a credit card; at the end of every cycle, we pay that credit card off. We’ve developed a mindset for spending that means we’re not afraid of what we put on the credit card and whether we’ll be able to pay it off in full at the end of the month, because we’re not spending frivolously. I will caveat that this amount of rewards was possible 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.

INVESTMENTS

Every month, we each put $500 into our investment accounts as an automatic contribution to max out our Roth IRA contributions. Additionally, each kid gets $50 deposited into their investment accounts each month. We also received the child tax credit each month, so with that, we put $125 into each kids’ account. The thought process was that we received $600 for them, and so after investing in their accounts, we were left with $350 to go towards “raising” them, which was the intent of the money being sent out in advance.

EXPENSES

My categories were super broad. For instance, if we traveled, I included all the expenses (e.g., lodging, flight, activities, parking, dog-sitting) as “entertainment.” But “entertainment” also included watching horse racing, baseball game, zoo, babysitting, etc. “Home” includes any furniture purchased, decorations, cabinet knobs, pictures/frames, etc. Even with the broad categories, I still had too many.

There are 3 categories that we have more control over, so I took a closer look at them: groceries, gas, restaurants. These are the ones that we can control our actions to change if we wanted/needed.

GROCERIES

A shortfall on my tracking is that I don’t know if Walmart purchases were necessarily for groceries or for something else. I removed a $300 purchase from my list because we wouldn’t have spent that much in one transaction in groceries, but I can’t figure out what we did spend it on because it was too long ago.

I investigated the spike in June, and I didn’t come up with anything jarring. There’s a transaction for $165 on a day with another transaction, so that may not have been food. August had several trips to Kroger. Trips to Kroger mean that we’re buying in bulk, so things purchased there are typically several of a particular deal they’re running that week versus an actual grocery shopping trip. There are 19 grocery transactions in August, which is higher than usual. August also included an emergency “find this kid some medicine while we’re on the road” that cost us $8 worth of medicine.

Lesson learned: We can do better meal planning and making fewer trips to the grocery store. We can be more deliberate about what we’re purchasing instead of stocking the pantry without a plan. We have a Sam’s Club membership and sometimes we tag along to Costco to scope out deals, so those lead to more bulk purchases, which will fall by the wayside in 2022. The Kroger deals will continue to be on Mr. ODA’s radar though.

GAS

Interesting that January through April are so much lower because we didn’t necessarily stay home. We drove about an hour away for a trip in January and a trip about 90 minutes away in March, went from our house to Lexington (about a half hour) every weekend, and went to the zoo (about an hour or so away). I guess we stayed home during the week more, which kept our gas costs low. April was when we gave up on a lake house and decided to be deliberate about going on trips, so I expected to see an uptick in gas costs at that time. I described that whole thought process and what we did in this post. Some of the uptick in certain months can also be contributed to us trying to maximize gas prices (e.g., we fill up if we’re going to be near Costco, even if we don’t necessarily need the gas at that time). In October and half of November, I was working in Lexington on the weekends, so that was 3 days a week that I was driving 25 minutes each way. Then in December, we drove from KY to Long Island, which is a whole lot of gas.

Lesson learned: We like to be active, so I don’t foresee a change in our gas-purchasing patterns in this year. As I type this, gas prices are soaring all over the country. Since we like to travel, our trips are usually within driving distance versus flying with two kids, so spending the money in gas is cheaper than 3-4 plane tickets.

RESTAURANTS

This is a funky one to track. While we’re traveling, we’re clearly eating at restaurants more often. That’s seen in the higher spending that happened over the spring and summer months. I don’t remember spending all of February in the house, but our credit card purchases seem to say that’s what we did – no gas and no restaurants. In March, we splurged on a birthday dinner ($77!), which is unusual for us. From April through August, we were traveling (and therefore eating fast food and at sit-down restaurants), Mr. ODA had work trips (so he’s going out to eat with coworkers for multiple nights), and there seems to be one or two transactions each month where we paid for a group dinner that was reciprocated (and not captured). Under the restaurants category is also when we went for drinks somewhere. We went to a winery and had a couple of drinks with friends, and that could probably be considered “entertainment” versus eating outside the home.

HOUSE WORK

We put a lot of money into our house this year, which is surprising since it’s new construction. We finished our basement, which was about $15k instead of the $75k-100k that other people have been quoted for the job. We bought a patio set, a grill, and an entryway table. Mr. ODA built a “shed” under our deck (we can’t have free-standing sheds per the HOA, so we enclosed under the deck .. not “free standing” 🙂 ). Most of our furniture moved with us from the last house without an issue, but there were a few purchases needed. Between our initial move in purchases (a kitchen table and chairs), purchases in 2021, and a few purchases that have already happened in 2022, we should be done with big house purchases.

INCOME

I quit my job in 2019. I manage our 12 rental properties as my “job” now, but I also am open to part time jobs as something to do. In April 2021, I was asked if I could help fill a position at the race track during their Spring meet. It wasn’t a job that I wanted to go back and do in future meets. I mentioned that I’d work the Fall meet if I could do something like pour beer, and Mr. ODA’s dad (who works there) made it happen. I also worked some of the days of their horse sales. I worked 22 days for the year and contributed $5k to our family’s spending for the year.

LOOKING AHEAD

I’ll try to track our expenses in real time this year, so that I can categorize them more accurately. Watching expenses month-to-month means you can also make adjustments if you see you’ve spent more than usual in one category.

Finishing our basement meant that we moved furniture around. A sections that was in our dining room moved to the basement, freeing up the dining room to actually be a dining room; I purchased a table and chairs. The “playroom” toys were moved down to the basement, and that room became the guest room. It’s nice that the guests can have their own space on the first floor and not share a bathroom with the kids. That freed up the previous guest room to be an actual office, so I purchased a desk (our old desk was in poor shape and it didn’t move to KY with us). Other than that, I don’t see any major expenses on our own house for this year.

We expect to travel a lot again this year. We already have six trips planned. They’re all driving trips, so that’ll increase our gas category. I have one trip expected to fly to my sister’s baby shower, but that hasn’t been scheduled yet. We’ll also have day trips that we’ll do around our house, which is usually an hour to an hour and a half worth of driving.

While we don’t “budget” or believe in the “envelope system,” we do watch our spending on a regular basis. We check our accounts every few days to ensure there are no surprises as well (i.e., don’t wait for your statement to come and find out there have been false charges). Keep paying attention to what’s being spent and where your money is going so that you can make informed financial decisions.

“Comps” in Appraisals

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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.