Stop Milking Me! - Cow’s Journey To Financial Freedom

If you missed yesterday’s Tip 1 – Give Seller higher price, please click here.

Tip 2: Finding Growth

Just like the previous “saving money vs making money” discussion, I think Jonathan from MyMoneyBlog hit the bulls-eye: “Why not doing both?? “

Same principle applies to the real estate purchase : while cutting down the cost, why not finding a house that has potential to grow? I am not talking about sitting on the property waiting for the market to appreciate (although that’d be nice). There are ways to significantly boost your home value without major renovations.

1. Look for a room to add:
   The home I am negotiating now has only 2 bedrooms. Although it does have another den/sitting room on the main level, it doesn’t have a door so it is not qualified as a 3 bedroom house. There is actually a clause on the MLS remark for this house: 3rd bedroom to be confirmed. To qualify as a bedroom, I think there must be a closet, a window and door(s). I don’t think adding a door can be that difficult and all the sudden, I have a legitimate 3 bedroom home.
2. Try to add some more finished sqft.
   For an area that has lots of small older homes, every square footage counts. If you look at MLS provided by the realtor, there is a sqft number and a finished sqft number (usually including finished basement). If your neighborhood is sqft hungry like mine, the finished sqft number also matters a lot. So finding a home that has full basement with the potential to be finished can add a lot of value. Adding a sunroom may not be a bad idea either so look for a yard that is suitable for that type of home improvement. Not only you can add sqft to your home, a nicely finished basement and a bright relaxing sunroom also add lifestyle, uniqueness and excitement to the house. This kind of lifestyle “add-on” is usually the key factor to have the buyers to “Fall In Love” with the house.
3. Try to look beyond the cheesy décor and disgusting wall paint.
   A lot of home owners don’t stage their homes before selling so their own lifestyles and tastes turn away a lot of buyers. The home I am negotiating right now is painted in dark grey with horrible dark grey carpet. The bathroom got some very unpleasant black and white tile. With the owner’s ancient furniture and stone-age décor, the house seems quite depressing and we figured that was probably why it has been sitting on the market for so long. But, it is a very solid home comparing with majority of the homes we saw. It is very well maintained, and has a very nice floor plan. I can picture how charming this home will be after I give it a face lift and change its color and style. So, yes, definitely try to look beyond the wall color and the furniture and focus on the house itself. You can find diamond in the rough that other people can’t really see.

So I think the house I am buying has a lot of potential to be priced in a much higher category once I add a room and possibility some sqft, and insert some energy into it by adding lifestyle to the house. According to my market analysis, a 3 bed 2 baths with 1700 sqft can be sold for $425K - $500K depending on the condition. So, yes, I definitely think this home has some potential to grow. And such growth is able to help me to offset the market downturn if that happens.

I think I am buying a house at the worst time right now. Mortgage rate climbed 6 consecutive weeks and hit the highest level since June 2004. After a 5 year red hot housing booming fueled by the low mortgage rates, the market finally started to cool down. However, the sellers don’t realize that and still listed their homes at the “red-hot” prices. It will take a while for the market to adjust to the “cooling down” price. But for now, it only means tough negotiation since the sellers are still stubbornly believe that their homes will go up 10% a year.

So how am I going to protect my hard earned money from this uncertain market? Here are three tricks I am trying right now and hopefully I can ride through the downturn of the housing market.

Tip 1: Give Seller A Higher Home Price
You might flip: What are you talking about?! Seriously, if you are buying a fairly expensive home, this strategy might make sense.

Here is how it works: instead of bargaining your ass off on the house price, ask for the seller to pay for the closing cost.

I am currently negotiating a deal with the seller. So let’s use my potential home as an example as how much I can save by asking for the closing cost vs. bargaining down the home price.

The numbers:
Home Price: $365,000
Total loan amount (5% downpay): $346,750
Average interest rate: 6.25%

Let’s say that I am trying to cut down the home price by $5000, an average 6.25% mortgage rate translates to
$29 a month savings
$348 total payment savings a year.
$1724 savings on interest over 5 years
$3034 savings on interest over 10 years.
Plus $250 (5% of $5000) down payment saving.

Let’s say instead of slashing $5000 off the entire home price, ask seller to pay for the closing cost not exceeding $5000, which is the same thing for the seller. I can then use that money to buy a much cheaper loan. The following clip shows the differences between high fee loans with low interest rate vs. low fee loans with higher interest (from www.interest.com).

Let’s say I take the 5.75% loan with $6090 fee, I am looking at:

1. $111 savings per month
2. $1338 savings per year
3. $10.415 savings on interest over 5 years
4. $18958 savings on interest over 10 years.

Although I do realize that this method works great if you are borrowing a large sum of money. I guess for a $150K home, it’d be nice to cut down $5000 on the home price then saving it on a loan application.

I will talk about the other two tips in the next couple of days.

Spring is here and it seems that everybody is on the market selling and buying homes these days. Since my schedule unfortunately syncs up with the real estate season (I need to move out of my current apartment in Sept), I have to join the crowd and start looking now.

Location
Like I wrote earlier, I am a strong believer in location. My criteria are actually very simple but rigid:

1. A well known and popular neighborhood that most people would like to live in.
   When I bought my last Chicago area home, I purposely chose Naperville, the town which was rated as number 1 in the nation to raise a family because of its kids friendly environment and extraordinary school system. I sure made money when I sold it. So, this time, there is no exception either. It must be an ideal place that is desirable by a lot of people. The winner? Washington Park, Denver. It is minutes away to Downtown and Cherry Creek shopping; it has a history and this fantastic recreation heaven shown in the above picture. Best of all, you can actually take an easy walk to the park, mom-pop coffee shop or the nearby Gaylord stripe to party till 2am. And school system is fantastic! You can’t go wrong with this place.
2. Location in the neighborhood.
   Even within a neighborhood, there are differences in terms of location. I am staying away from the busy streets or crowded lots. I looked at one of the homes last week. From the backyard, I can see everybody’s back windows and what they were doing. I turned around and ran. I am looking for a cute home situated on one of those quieter streets, not too far from the park, has a private yard and have at least a few feet room from the neighboring houses.
3. School System matters.
   Although most of the residents in this neighborhoods don’t have school children, I am a strong believer that no matter what, the schools in the area can’t suck too bad. There is another neighborhood on my screening list called Highlands. It is a trendy and a fast growing community, but the schools are beyond terrible. I checked the scores on greatschool.net and only a quarter of the 5th graders can read and do math. Unless there are strong evidences to convince me the place has great growth potential, I may not feel comfortable to buy in an area where majority of the kids can’t receive proper education.

Potential to Flip
Given the special circumstances of the communities I am looking at, I may not want a home that needs major repair since most of the homes are built before 1920’s. I read enough books about “knocking down the wall to make the open space” type of theory. I suspect knocking down a wall in a 1980’s home might be fine, but knocking down a wall in a home built in 1895 may sink the entire house. So I am looking for a home that has larger rooms and space and need the following updates:

• upgraded kitchen
• upgraded baths
• need new paint
• Full basement with the potential to finish up
• Need new floor
• An extended sunroom may be added
• Landscape needs to be updated

Since I am a newbie, I don’t want to touch the guts of the home. And for now, I will stay away from my “knocking down the wall” theory until I talk to the professionals.

10 homes were looked at last week. One was perfect but was gone even before we had a chance to make an offer. There are 11 to go this week. We’ll see if there is any sweet deal… Stay tuned…

OK, I know I haven’t started my “Flipping Project” yet. But here is a great tip I saw that I don’t want to forget:

You want to write down your very first impression about the house you see and focus on the bad stuff, because these items WILL be on your “Home Improvement” list. If you are annoyed by some features of the home, say a cracked drive way, or the disgusting landscape, your potential buyers would not appreciate these features either.

Then, write down the good stuff about the house. Although you don’t have to worry about these good stuff this time. It might be something you want to add to your next flipping project.

In time, you will have a comprehensive “First Impressive” list that documents all the appealing little features with those not so appealing ones that you want to work on.

After all, buying a home is an emotional process for most of the buyers. They want to “feel” the home is right for them and the first impression and guts instinct play a major part in their decisions. The statistic reports show that the buyers usually decided whether they like the homes or not in the first few minutes. So capture these little things that matter a lot in the first few minutes.