The Financial Advisor’s Guide to Buying a House

Cody Niedermeier: [00:00:00] Hello everyone. And welcome to BFG’s webinars series. My name is Cody Niedermeier and I’m an associate slash webinar host now, uh, as of this year, and today, we’re going to be talking about buying a house for those of you that are new to the webinars series. We’ve been doing this for all of 2021 so far.

Cody Niedermeier: And. It’s been an absolute joy. We’ve received great feedback. And we’ve been able to put a little bit more information into the world that, you know, people have been able to take and implement into their lives. So we’re going to continue doing these. And today we have Lena Nebel, who is a principal at BFG with 20 years of experience in the industry, and one of my favorite advisors in the office.

Cody Niedermeier: So welcome back, Lena.

Lena Nebel: Thanks, Cody. I’m excited to be here again.

Cody Niedermeier: Nice. So today we get to talk about a lot of people’s favorite topics. And one of the topics that a lot of people have questions on is buying a house and there’s so many different ways we could [00:01:00] go about this and we could have a webinars series for an entire year on it, and we’re going to, we’re going to try to break it down and, uh, I kind of hit all the basics.

Cody Niedermeier: And then if anybody has any questions along the way, just please type those into the comment box. And we are going to try to address those at the end. And if we don’t get to those questions, um, you’ll see a little tab at the end with a QR code. And if you’re on your phone, um, if you just respond to the email that notified you about this webinar we’ll be able to help answer any questions or set up a consultation with one of our advisors for free to, uh, you know, maybe steer you in the right direction. So without further ado, um, I believe we’re going to get started with everyone’s favorite disclosure slide that has to be on here. So there’s that.

Cody Niedermeier: And now the idea of buying a house, Lena, I want to buy a house. Where do I even begin?

Lena Nebel: Hmm. Great question. Um, I think that you, you first have to look at, is it a good idea to even buy a house? Um, so a [00:02:00] lot of people can say, you know, I want to get out of my apartment or I want to get out of my parents’ house and now I let’s buy a house.

Lena Nebel: Um, I think first thinking about, okay, is it, is it a good idea? You know, and starting with the financials of that person’s individual situation and for some people, you know, renting could be the best course of action, both short-term and long-term. And, you know, I think for purposes of this conversation and, and, um, the varying topics that we’re going to talk about, I think it’s important to, um, to mention that everything we’re talking about can relate to if this is your first house or if this is your 10th house, right.

Lena Nebel: All of the, the things to think about the concepts are going to apply in either situation.

Cody Niedermeier: Wow. All right. Well, figuring out if it’s a good idea, I feel like is always a good starting point, but, um, what do you have to say to those people that think of, you know, maybe it is their first house and they see it as that investment, um, where kind of does their ideology start in that process of being, Hey, I want to [00:03:00] get this house and possibly rent it out later, or, you know, this is my first startup.

Lena Nebel: Uh, yeah, I mean, we, we have a lot of clients who may ask the question, you know, is buying, buying a house, a good investment? Is it something that I should add into our, um, you know, to our tangible assets, into the portfolio? And I know we’re primarily talking about primary residences, personal residences for purposes of the conversation. But I think we can think about, um, a house as real estate, because that’s what it is. So the question is really is real estate a good investment. And for a lot of people, it’s not, you know, they may not have a lot of liquidity. They may be behind in their financial goals or just kind of struggling with cashflow.

Lena Nebel: Purchasing a property that could be illiquid, um, may not be the best course of action. Um, so just like stocks or bonds, real estate is a type of asset that can diversify your portfolio. And there are real estate agents who specialize in rental properties and investment properties. And so [00:04:00] meeting up with one of them to determine the cashflow of a property and to understand if that could be a good investment, I think is a fantastic idea for those individuals that can take that risk and that, that have that liquidity. Um, but if it’s your house, then I would say, no, it’s, it’s not, uh, for the most part, it’s not a good investment to look at it that way. You know, you don’t want to think about your primary residence as something that’s going to generate retirement income for you, or that you plan on selling it and using all that equity to fund education goals, because that may be the year where the real estate market takes a hit.

Lena Nebel: Right. So just like stocks and bonds, you know, real estate has risk as well. Yeah.

Cody Niedermeier: I mean, you bring up the idea of, you know, talking to a professional when you’re trying to evaluate these things based on your goal. Um, would you also say that talking to them is the best idea when determining when is the best time to actually purchase a home?

Cody Niedermeier: Because I mean, with, as you know, interest rates where they [00:05:00] are and the housing market, like a lot of people are asking is now the time to buy, or should I wait or different things like that.

Lena Nebel: Yeah, I think that, you know, even though there could be a time period that’s the best time to buy a house you may not be financially ready to buy a house.

Lena Nebel: Right. And I think if we ask all of our real estate friends is now a good time to buy a house, I would pretty certain guarantee that they’ll say a hundred percent of the time now is the best time to buy a house. Right. Um, and again, I always, I always talk about it. It comes down to that person’s individual situation.

Lena Nebel: And so when you think about just looking at the numbers and, and, you know, in the state of Maryland where we’re based, um, the average monthly rental, um, the rental market in the apartment is $2,000 a month. So if you ended up purchasing a property for, let’s just say 350,000 and you finance it for 30 years at three and a half percent, that mortgage payment is going to be around 1500 a month.

Lena Nebel: Now that gives you some wiggle room to pay for property [00:06:00] taxes, paying for insurance. Um, and then of course, utilities and other things. So if you just look at it from a dollar standpoint and if you’re renting your money could be put into something, um, Better for you financially long-term. So, you know, try not to time it from the best time of buying a house.

Lena Nebel: If this is your home, um, that’s one answer, but is now the best time to buy a house from an investment property is really going to be dependent on again what your financial goals are, how quickly you want to flip that house. Are you improving it and then selling it at a, at a greater rate? Or are you just planning on generating income from that property? So when meeting with a real estate agent, um, many real estate agents have two types of specs, you know, have different types of specialties. So you could have the one who is going to be more focused on primary residences and then one that could be investment properties. Um, you know, when I just kind of take a look back at my [00:07:00] experience in home buying, you know, my, my husband and I, our, our first house was a townhome.

Lena Nebel: We wanted to get out of the apartment. Right? We were in that situation to where we saw what we were spending in an apartment versus how that money could be applied to a house. Well in the house that we are now, which is our third home, our motivation was family related. You know, our family was growing.

Lena Nebel: We wanted more space. We were of, we were concerned about school districts. Um, we wanted that forever home. So the motivation changed for us on, you know, first house versus now. And that’s going to be the same thing for many people. So you don’t want to feel rushed that, oh my gosh, interest rates are really low.

Lena Nebel: I got to jump in on it and then you’re not ready to afford that type of house either.

Cody Niedermeier: Trying to avoid the emotional decision of, I want it. So I’m going to go get it, but you bring up also of the classic point of every answer is kind of it depends.

Lena Nebel: You know, I think that in our industry, right, there’s not one size fits all and [00:08:00] that’s what makes it exciting because people’s situations are different, you know, with a lot of our coworkers, you know, They’re renting.

Lena Nebel: They’re in process of saving to, to buy a house. Some people are building a house. Some people are going to rent for a long time. Some people are going to end up buying, you know, maybe a single family home. Whereas in my situation many years ago, it was kind of a stage, right? You went from townhome to maybe a single family to the forever.

Lena Nebel: Yeah. Now people are jumping right into that forever home because of where rates are and where evaluations are. And people’s financial situations are a lot different too, you know? Uh, which I know what we’ll talk about it, how to purchase the property and finance it, but you’re right. Cody, every situation is going to be different.

Cody Niedermeier: Yeah. It’s almost a bad word in the industry is guarantee or the idea of a blanket statement that one size fits all for everybody. Right? Now we’ve, we’ve worked our way. We decided, you know, we’re ready to move forward. We’ve identified our goals, whether it’s an investment or a [00:09:00] primary residence. And now’s the time that we are buying a house, where do we even begin?

Cody Niedermeier: So

Lena Nebel: your stress level is going to probably spike during this process. Um, you’re going to be, uh, attached to your phone with a flurry of emails that are going to be coming through. Um, so the first step quite honestly, is, you know, you’re going to be meeting with a lender. The lender is going to walk you through what you are pre-approved for.

Lena Nebel: So what you think you can afford could be dramatically different than what the lender is comfortable in having you borrow, um, especially if you were self-employed, the underwriting requirements are completely different too, from an income standpoint. Um, when I bought, uh, when we bought our first house those were during the days where, what was called no documentation loans.

Lena Nebel: So you didn’t even have to show how you were making money. You just told them that you were making money. And of course that’s what caused many issues [00:10:00] within the real estate environment. And so there’s a, it’s gotten much tighter and stricter in what you can do and everything. Um, but, um, what you’re going to be doing is you’re going to be meeting with the lender.

Lena Nebel: That’s really going to be the first step, um, as you, you know, find that home and everything to make sure that you’re looking at in the right price range. So the lender’s going to just kind of look at your income, your debt, and they’re going to calculate, what’s called a debt to income ratio. So the debt to income ratio is all of your monthly debts divided by your gross income.

Lena Nebel: And this is a way that lenders measure how risky you are. Should they be loaning you money, you know? Um, and so once they get what that number is, let’s say you qualify for $400,000. Um, that’s where you can kind of start your, your home search and everything on that standpoint. Um, but you may disagree.

Lena Nebel: With what the lender, um, thinks that you can afford. And that house, let’s say 400,000, that may not be the house that has everything [00:11:00] that you want. And so you may have to go above your price range which means you have to think about how you’re bringing more money to the table to purchase that, that higher rate.

Lena Nebel: Um, like I said, once you get pre-approved and you find that house, you then put in your offer and that’s where the real estate agent is extremely helpful through that process, because they’re going to be drawing up the contract. They’re going to be laying out the terms of your offer. And there’s a lot of details in that offer.

Lena Nebel: How you’re paying for it. Um, if there’s certain things that the seller, um, would like to have included that you don’t want to, um, the timing of settlement, you know, they may want to be able to settle right away and you may not be able to settle. Um, you may have to sell your house first before you can purchase that house.

Lena Nebel: Uh, and you may disagree on the price. So there’s a lot of negotiating back and forth and in today’s world right now, um, it really is a sellers market, right? People are putting their house on the market and they are getting a lot of contracts over list. So there [00:12:00] used to be what was called an escalation clause is built into contracts and people now they’re just saying, give me your best offer. So this is an environment where, um, sellers are, uh, being able to, to do really well during, during this time period. Again, you, the real estate agent is going to work with you and going back and forth with the seller and the seller’s representation.

Lena Nebel: And then once a contract is put in place, um, again, that’s when more fun happens, because then you get to deal with the home inspections. And this tends to be more stressful for the seller than the buyer, because they’re going through their house and they are inspecting everything about their house, right? The appliances, the roof, you know, what has been covered up by paint and carpet?

Lena Nebel: Um, what are things that the original, um, buyer, the owner never knew about. All of that stuff’s going to come up and so the inspection, they’re going to say, Hey, you need to fix all of these things. And the seller is either going to agree or not. And so again, [00:13:00] more negotiations are going to happen on what you want to have fixed or not.

Lena Nebel: Um, again, just personal example, when we purchased our townhouse, uh, the deck was horrible, not safe at all. And so instead of them just fixing it, they threw in extra money towards our closing costs to kind of offset that deck. So there’s different ways in how you can negotiate that home inspection. And again, the, the home inspection, there could be multiple inspections depending on how old the home is.

Lena Nebel: There’s different areas that they need to inspect. Um, and if there are, um, uh, let’s say a pool or other pieces of property, um, associated to that house. So if there’s, let’s say detached garages and everything. Those are going to be maybe multiple inspections that need, so, um, once that has happened, and again, you guys have all agreed to everything, then you get to set the date for closing and go through the fun process of signing over a hundred pages that nobody knows what they’re actually [00:14:00] reading.

Lena Nebel: So, um, that was one thing that we’ve seen hasn’t really changed much since COVID is you’re still signing all of those documents, right. It could be DocuSign. Um, yeah. You’re still going through a hundred pages of documents. Um, you know, we always encourage people to talk with the realtor, the title agent, the lender, to discuss all the details about it, because you need to know what you’re signing off on, especially as it relates to the terms of your loan, if you can prepay it, um, what happens if you’re late, you know, kind of all of those things.

Lena Nebel: So it is, it is important to, to go through that. From start to finish, you know, obviously one of the areas that you’re going to be focusing on the most is obviously how are you going to pay for it? Right. We kind of talked about buying the house and everything. Um, and what happens from pre-approval all the way to closing, but at some point we have to pay for it.

Cody Niedermeier: Yeah. And [00:15:00] I mean, case in point, you’re kind of leading into my next question for you was the idea of putting down 20%. It’s kind of been a rule of thumb for a long time in order to avoid something called PMI that I’m sure you’re going to explain, but, um, is, is putting down the 20% still the best idea or does it go back to our idea of it depends?

Lena Nebel: I think I can just say it depends for everything, right. That can be my blanket statement. Right. Uh, you know, putting down 20% in a perfect world would be great, right. To be able to have that amount avoid, um, PMI. And, and just so that everybody’s aware, um, PMI is private mortgage insurance, um, and this basically protects the lender in the event that you stopped paying the mortgage.

Lena Nebel: So if you don’t put 20% down, you then have this extra payment associated to your mortgage. So when the lender is calculating a debt to income ratio, they have to factor in that additional payment that you’re going to have as well. And a [00:16:00] lot of people assume that once you’ve established 20% equity in the house, PMI automatically goes away and that’s not right.

Lena Nebel: It’s up to the lender and basically there’s rules in that, uh, in your closing documents, that’s going to determine when PMI goes away. So for some people, they actually have to refinance to show that there is that 20% equity to then get out of the PMI and there could be additional costs. Um, for other lenders, they may say we don’t look at it until you’re seven years into the mortgage.

Lena Nebel: So it’s important to understand when does that PMI go away. And for some lenders that PMI could be very expensive and for others it may be manageable. So it would be okay, not putting the 20% down because the PMI payment makes sense. Um, there are also lenders who don’t require 20%, certain credit unions that will say even not for first-time home buyers, they just, you know, a special relationship that you have with that credit union.

Lena Nebel: Um, being a customer there, they have [00:17:00] rates and the rates may be a little bit higher. So you have to justify to say, okay, do I want to give up some of my liquidity to pull down that mortgage payment? And in our situation, we did not put 20% down. We actually used a lender that didn’t require it. So I didn’t have PMI.

Lena Nebel: And the reason that we wanted to keep some of our, the proceeds from the house that we sold on the sidelines was because we had projects that we wanted to do. And after we weighed the cost of getting rid of, or putting down that 20% and getting rid of our liquidity versus using that money and then improving the equity within our house, by doing different improvements, we just thought in our situation, that made the most sense.

Lena Nebel: Um, but for some people they can’t afford to put the 20% down. They need to have some of that liquidity. So. To start. Yes, it would be great to kind of plan for that 20% down. Um, but with interest rates where they are right now, money is so cheap. So [00:18:00] it may not be advisable to sink a lot of cash into the house right away.

Lena Nebel: It really comes down to what the lender is offering you. And, um, if you have to put that 20% down, uh, and it may be part of just to try to keep your mortgage payment down.

Cody Niedermeier: Yeah, and that’s doing kind of the research beforehand on what you can afford each month and building that into your ratio that you’re building.

Cody Niedermeier: But, um, if you’re trying to come up with this 20% or maybe even reach the 5% that your goal is, is there any opportunity, you know, maybe for a parent or somebody else to contribute, or if they’re willing.

Lena Nebel: Absolutely, you know, gifting from parents or grandparents or whoever it may be, uh, is extremely common.

Lena Nebel: Uh, it’s important to understand for both parties, it’s not a taxable event, but there are certain rules you have to follow. There are, uh, gifting lender, sorry, gifting letters that the lender will need to see, to make sure that it truly is a gift. If it’s [00:19:00] actually a loan, again, that’s going to be a payment. That’s going to increase that debt to income ratio as well.

Lena Nebel: That may push you out of the ballpark on what you’re trying to afford. So, um, gifting is very common and it just depends on how much they’re giving. And of course, if behind the scenes, if there’s any, um, Types of rules attached to that from, from the parents’ standpoint. But I know when my husband and I got engaged, my parents, um, basically said they can either give us money towards a wedding or give us money towards our first house purchase.

Lena Nebel: And we chose the house purchase, which made us more cost conscious in our, um, in our wedding decisions. And I’m not sure if I shared that story or not during our, uh, our last webinar about marriage and everything, but you can see how these topics kind of go hand in hand and having these financial conversations.

Lena Nebel: So gifting again, very popular. Um, there’s no issues with that. You just have to make sure that you’re following the rules as it relates to the lender, the [00:20:00] lender is going to want to see the gift letter. They’re going to want to see that the money is in the bank account. So there may be some additional questions that are needing to be answered if somebody is going to use the gifting. And lastly, um, if a parent decides to do some type of gifting for the down payment, they are not co-signers, it is a gift. So they are releasing that money. They have no rights to that equity. They have no rights to get that money back because it is not alone and they are not on the deed in any way.

Cody Niedermeier: Yeah, no, that’s, that’s a very good point that I think was, uh, actually see as a question that somebody already had before we even got to it. So thank you for addressing that. Um, I think there are a few, just two or three terms that I think are very important to know when you’re getting into the process.

Cody Niedermeier: Maybe like a little glossary of sorts, but, um, could you start off by explaining exactly what is escrow.

Lena Nebel: Sure. Sure. Um, so by definition, escrow is just a, it’s a legal agreement in which a third [00:21:00] party controls money until two other parties are involved in a transaction. And as it relates to a mortgage, um, for, for escrowing, you know, the lender deposits the escrow portion of your mortgage payment into an account, and then they pay insurance premiums and real estate taxes.

Lena Nebel: So when you’re looking at your mortgage payment, you’re going to have principal and interest, and then you may have an escrow payment and that escrow payment covers property taxes and covers, um, that your homeowners insurance, the benefit in doing that is that it allows you to budget that payment so that you don’t have to come up with thousands of dollars every six months.

Lena Nebel: And of course, depending on the county that you live in, um, it could be pretty substantial. So, uh, coming back to one of our earlier conversations on, you know, doing your research and finding out what you can qualify for. A $400,000 house in, let’s say Howard county versus a $400,000 house in Hartford [00:22:00] county is going to have a different size house.

Lena Nebel: And it’s also going to have different property taxes. So for some people, they may not be able to afford property taxes in certain counties because they’re just too expensive. Um, same thing with, uh, you know, when retiring, when, when an individual is retiring and they’re looking to go into different types of communities, You know, another app, another thing that can be escrowed, it could be the condo fee.

Lena Nebel: And so in the condo fee can be pretty expensive in some of these retirement communities and have to be factored into their, uh, their monthly payments. But, um, I’d say 99% of the time people escrow, it just makes life easier. And for some lenders they require it.

Cody Niedermeier: Yeah. And I know personally, I have the automation set up that you don’t even think about it.

Cody Niedermeier: It’s just one sum that comes out and kind of covers everything. And we’ve talked about automation, but many of times in previous webinars of, you know, don’t see it, it gets done for you and it’s a, it kind of simplifies your world. So [00:23:00] escrow is a part of that, but our next definition is just titling and the idea of titling, which actually kind of goes back to our previous webinar on getting married as well.

Lena Nebel: Yeah, absolutely. Um, titling is extremely important when two people are purchasing the property, even if they’re married. Um, and the reason I say that is because you can have a joint ownership on a property, but there’s only one type of joint ownership that is just specific to married couples, which is joint tenants by entirety. Um, so when you’re looking at all the different ways that you can own a property, uh, together, you really want to focus on that titling, um, brothers and sisters may own properties because they’re, they’re buying out their parents’ house or a parent had passed away and they’re now buying it from each other.

Lena Nebel: Um, uh, boyfriend, girlfriend partners, they can go in and purchase a property together. And, um, you know, one of the things you and I, uh, discussed during that webinar was what if two people, you know, they’re dating [00:24:00] and they decide to purchase a property together, but only one person. Is on that loan. Okay.

Lena Nebel: And that could be because of credit scores, financial strength, et cetera. The other party is participating financially, but they’re not legally entitled to that property. And they’re not liable for that property. Well, what if those two individuals break up? Right. So you want to make sure that you have some legal documentation put together if only one person is going to be on the title, but two people are going to be contributing into that, into that property. And just, um, you know, Cody in your situation, you know, you have your own property and one day when you get married and if you guys decide to keep that property, you make have her come on that property as well.

Lena Nebel: And so it is important to, to look at the titling. A lot of those things get overlooked. Just again, being biased as a, uh, as a certified financial planner, we take a deep dive into how people title any of their assets, including real estate. So we want to make sure that if something should [00:25:00] happen to that individual, it’s passing the way that it should be.

Cody Niedermeier: Yeah. And making sure it’s lined up kind of with everything else going on in their world when it comes to the estate planning side of it. Um, just everything with cost basis and all the fun stuff that as CFP professionals. Uh, our advisors and hopefully me at some point, um, we’ll be able to identify for clients and help them moving forward.

Cody Niedermeier: Uh, the last one hits kind of close to home to me. And as you know, for many reasons that I’m sure you’ll call me out and I’ll have to give an example or two, but the difference and the idea of having a home warranty. Cause I think a lot of people mix up just home insurance with their home warranty. So what exactly is a home warranty?

Lena Nebel: Yeah. Um, you’re right. You know, you and I both have had too many experiences with a home warranty and we’re seeing the, the benefits of having that in place. So I always recommend somebody get a home warranty when they purchase a new home. And when I say new home, I don’t mean brand new. [00:26:00] They just built but new for that, for that buyer.

Lena Nebel: So whether it was just built or 40 years, Get a warranty. You do not know what may happen over the next few months or over the course of the year. And typically, um, the seller usually pays the first year’s premium. That’s something you can negotiate within that contract. And then it’s up to you to continue that warranty, but something always happens, right?

Lena Nebel: It’s either electricity, you know, there’s an electrician, there’s plumbing issues, appliances. Something always happened. So, you know, we always have those stories or nightmares depending on how we look at this. Um, and so having the warranty can help to plan for unforeseen expenses. And if you decide that you don’t want that warranty, that you don’t think not much is going to happen.

Lena Nebel: Save money because you will have unplanned expenses that are going to happen. And it’s also important to understand the terms of that warranty. Um, you know, we had an issue to where our [00:27:00] refrigerator, um, it just stopped working so called the warranty. They came out, they tried to fix it. It got fixed for maybe a day or two.

Lena Nebel: And then we have the issue again, very long story short, part of the rules of the warranty. They had to come out six times. Before they would officially replace that refrigerator. That was something that we did not know because it was different with each appliance. And so they had to waste their time. We had of course waste our time, which was always between the hours of, you know, nine and three and then they didn’t show up of course until four. But that was the rules of, of the warrant. They had to make six attempts before they could officially fix it. So you want to make sure that you understand the rules of the warranty what’s covered. What’s not, um, I’m out in the country. So some of our appliances they’re not covered or they may only be covered for one year or two year, whereas other things are more normal.

Lena Nebel: So again, understanding what you’re actually purchasing. [00:28:00]

Cody Niedermeier: Yeah. I know personally, when I was going through the process of buying my home, you know, I thought I was extremely educated, but working with an agent that was educated and everything going on, he was like, oh no, no, we were going to get this warrantied.

Cody Niedermeier: And it’s going to be a part of closing for the sellers. And I trusted him. And then he went through the entire process with me. So, you know, working with the right people that really provide you with the information that you don’t think. Like this warranty. Um, I know it saved my butt a few times and, uh, a lot of headaches along the way.

Cody Niedermeier: So I think it’s extremely important.

Lena Nebel: Yeah. And you even had a home inspection that was done and you still had to use the warranty because something came up. It just, it always happens. Um, even our colleague who, you know, built a brand new house and everything, you would think that everything is going to work smoothly.

Lena Nebel: It doesn’t, there’s always something that can go wrong and everything. So. Yeah. Always want to pay attention to this thing. It’s kind of just plan for the worst and

Cody Niedermeier: yeah, you prepared for [00:29:00] that and everything else will follow through, but, uh, that actually completely leads us into, you know, we finally bought the home and you’ve already touched on it.

Cody Niedermeier: Um, and I think you just want to keep kind of reiterating it, um, the idea of unexpected expenses that you just don’t think about that have to do with the idea of, you know, maybe things going wrong in the house or the idea of, oh, I got my dream home. Well, now I got to furnish it. I need, I need a, I need a couch.

Cody Niedermeier: I need a TV. And just, there’s so many different things that go into it.

Lena Nebel: Oh sure. And you know, if you’re in a bachelor pad, I think you can do without, you know, the couch, just get the chair and the TV. And if, of course you’re in a, you know, you got the family, you’re going to need everything. Right. Um, but you know, you bought the house, you gotta move everything

Lena Nebel: so let’s factor in moving costs. Um, I used to be of the mindset. Let me get all my friends. I’ll pay them with pizza and beer and they can move all of my stuff. We’re past that point now to where we’re hiring a moving truck. So [00:30:00] let’s budget in what the costs are of, of moving. You know, some, sometimes it’s worth the money to not have the stress and the hassle of dealing.

Lena Nebel: You know, the actual moving of, of all of your furniture and, and Cody, when you get to your next house, you’re going to be moving more stuff because you’ve accumulated more stuff. Right. And then you’ll be able to fill that house. And I remember when we moved into, um, our second house, I had all this cabinet space.

Lena Nebel: I’m never going to fill this cabinet space. I mean, I filled it within months, so there’s, there’s going to be additional expenses, um, that you’re going to have and, you know, window treatments, curtains, carpeting, you know, you may want to repaint and, and do all those things. So, um, when thinking about putting money down on the house, think about what does everything that you’re going to need to purchase to make that house, you know your home, but of course there are all of the unexpected expenses that have happened. Um, you know, we’ve been in our house for six years. Last week, I had [00:31:00] two lights that just fell out of our ceiling in our kitchen for no apparent reason. Things I guess, got old and had to get the electrician out and look at, um, all the components and everything.

Lena Nebel: Those are the things that you just don’t plan for? Um, a few years ago we had a faulty toilet that actually caused major flood damage that, um, forced us to be in temporary housing for six months while our house was being rebuilt. Not something I planned for, but that’s why I had homeowners. It was a significant claim that the homeowners insurance company paid.

Lena Nebel: So when you think about expenses that you can cover those emergencies that you can cover through cashflow, and your bank reserves, think about all the things you can’t cover financially. That’s why you need to make sure that your homeowner’s coverage is covering those items, that it’s replacing the items that you had.

Lena Nebel: And I could probably have a whole webinar on that topic and that experience and what we learned from it. And how to do things differently and what [00:32:00] to keep track of. Um, but again, you, you don’t know what may happen in your house and to plan for that. So you’re always going to have unexpected costs. So you want to make sure that again, you, you come up with, um, with a number and you also look at your homeowners insurance and making sure that you’re, uh, that you’re adequately covered.

Lena Nebel: And those are just unex unexpected expenses. What about like the things that you’re expecting, right. You know, Utilities, um, you know, whether you want to get, you know, some ceiling fans or you’re going to do closet organizations. I mean, there’s so many things that you’re going to want to continue to improve on your property.

Lena Nebel: Um, you know, I, my husband and I always joke about it because every few months we, we literally walk around our house, writing down what all of our projects are, we want to do. Right. All of our wishlist items and everything. And then we just start knocking them out. Right? What’s the, what’s going to be the easiest.

Lena Nebel: What’s a priority. What’s too expensive. Um, his definition of a priority is a lot different than [00:33:00] mine. And, you know, I try to win as much as I can, but when it comes to the man cave, I, I always lose. Um, so we try to, we try to think about, you know, what do we want to have accomplished over the next year for this house?

Lena Nebel: Like I said, we’ve been in it for six years and my kids are getting older. It gets banged up more. It gets used more. Um, so you’re going to want to factor that in, um, as well and thinking about the best way to do that. And, you know, from a planning standpoint, that’s part of your conversations with your financial advisor, right?

Lena Nebel: It’s having the, Hey, I want a deck. How do I, how can I afford a deck. Though right now it’s very hard to pay for a deck, how expensive those prices are. Um, but all of those different things that you want to do, it’s, it’s best to plan for them for the major projects. Um, but there’s always going to be some little things that you’re going to want to do.

Lena Nebel: Um, some decor, some odds and ends. So factoring that, factoring that into it. Um, those are the fun expenses. The boring expenses [00:34:00] are, you know, utilities. Homeowner’s association fee, condo fee, all those things that it’s an expense and it’s, it’s part of that property and where you live, um, and should all be considered when you’re, when you’re purchasing a house.

Lena Nebel: Um, I didn’t really, uh, hit on this, but on a homeowners association. For a lot of people, they don’t want to move into a property or to a neighborhood that has a homeowners association fee, because that means there’s certain covenants that they have to abide by when living in that community. You need to understand, um, you know, can I plant this Bush?

Lena Nebel: Can I build this deck? Um, there, some communities can be extremely restricted. Um, in our last community, we got a lot of neighbors, got a notification because the homeowners association walked around the neighborhood and our grass was too long. It hadn’t been cut. Well, truth be told it hadn’t been cut in a couple of weeks because we kept having rain.

Lena Nebel: So we couldn’t cut it. So then the grass [00:35:00] grill and then the one day we didn’t, that’s when they decided to do an audit that you can get fined if you don’t follow the rules of that HOA. So for some people like. Um, it can be frustrating, but there can, but there is also a fee associated with those, with those communities that have a homeowners association, um, regarding utilities, you know what some sellers may do, they may show what the, what their past utility bills have been for the new buyer so that the buyer can factor that in

Lena Nebel: to their upcoming expenses. Um, a lot of people these past few years have been getting into, um, you know, solar lights and everything on the roof or on the side. And it’s really important to understand how those contracts work because for some companies, um, when you transfer the ownership of the solar lights over solar panels, over into the new buyer, the buyer may have to pay some fees.

Lena Nebel: There could be a transfer cost that the seller’s paying. Um, some debt still [00:36:00] associated to it that the new buyer is responsible for. So when we talk about inspections and everything, you get a separate inspection if you have solar panels, so understand everything that you were buying and all of the rules associated with it.

Lena Nebel: And that’s where, as you said, the real estate agent can be extremely knowledgeable and has that experience. In dealing with a lot, a lot of those. Um, but it’s not just the, it’s not just your mortgage payment, that’s your expense. It’s all these other things that you really have to think about when you’re purchasing a property.

Lena Nebel: Um, it’s almost like equating it to, I’m having a baby now what? Uh, it’s daycare expenses. It’s diapers. It’s camps. It’s a house is the same thing. I feel like Cody with the transition on, on the webinars we’re doing, we have weddings, we have houses. I’m thinking the marketing team is going to say, let’s now look at I’m ready to have a baby.

Lena Nebel: Now what? So we can incorporate all of those expenses. Yeah. You know, [00:37:00] shockingly similar to the same conversations,

Cody Niedermeier: shockingly similar. And I feel like we would have a lot of fun doing that one and would be making some jokes towards my way. So I’d be, I’d have to get mentally ready for that.

Lena Nebel: I, of course, I also had a lot of good stories as well, which again, could probably take up a whole day and not just an hour.

Cody Niedermeier: Oh, we got webinars coming in the future. So I’m sure that will be built in, but to put on your CFP cap a little bit, I did see that one of the questions that came in that I think is extremely relevant right now is, you know, I have this idea of I’m ready and I want to buy this house. Where should I be?

Cody Niedermeier: Where should I be saving that money? Should I have it in a money market account? Should I use possibly, you know, my IRA or my traditional IRA or my Roth IRA? Um, there’s just so many avenues that people can use to fund it, but I guess they were asking what would be the best for them.

Lena Nebel: Yeah, that’s a, that’s a great question.

Lena Nebel: Um, you know, I actually just had this conversation with a client last week, my [00:38:00] partner and I had a meeting with him. He had some excess money. We were talking about how we were going to invest this and everything. And he said, well, I’d like to buy a property next year. And so we said, okay, time out, that changes the whole plan of recommendations, because if you’re going to be purchasing a property within the next couple of years, you want that money to be safe and you want it to be liquid. You don’t want to put it into the stock market. And then all of a sudden when you need it, half of it is there. Um, you also don’t want to put it into something that’s going to cause you taxes and penalties when you take it out.

Lena Nebel: So you’re going to have less money. So while interest rates aren’t attractive and you’re not going to get any growth on it, a savings account, a money market, a short-term CD. That’s going to be your best avenue for saving for just sheltering, that, that money for, for the house. Unfortunately, there are ways you can access your retirement accounts for a house [00:39:00] purchase.

Lena Nebel: Um, I advise against that because that’s then taking away from those other goals and you would be paying taxes. Um, you may not have to pay a penalty depending on the type of account, but you would be paying taxes. You could take a loan from your 401k. Again, I would advise against that because it’s taking money out of the market for you.

Lena Nebel: It’s going to take you longer to catch up because you have to rebuild, um, those savings and everything. But, um, again, those options are all out there, but I would say rule of thumb, best practice. Keep it in a savings account, money market, short-term CD, something safe, something liquid, something that’s not going to cause taxes or penalty when you need that money for the down payment, you know, within the next one to two years.

Cody Niedermeier: No, I think that absolutely answers that question and we’ve kind of rolled through a lot and I know we definitely have some more questions. So I think we open it up and we have Sara, our marketing director, uh, who I believe is on the line, [00:40:00] who can chime in with some of those questions that she has saved throughout the presentation.

Cody Niedermeier: But I definitely wanted to make sure we had some time at the end to address these because this conversation can go a lot of different directions. So we definitely did the, the broad overview. So Sara, are you there?

Sara Lohse: I am here. I did notice you called Lena one of your favorites and I was just marketing director, but that’s okay.

Cody Niedermeier: She was waiting for that. I’m sorry. I’m sorry.

Sara Lohse: Um, we did have a question. Um, someone local actually, um, there is, uh, someone in Columbia, Maryland. They’ve submitted four offers and I’ve been outfit despite $30,000 over the asking price. Everyone right now knows this market is absolutely insane. Do you have any advice for just buyers in this crazy market?

Sara Lohse: Should they wait? Should they just keep putting offers in? What would you guys advise them to do?

Lena Nebel: Uh, great question. And, you know, uh, my, my [00:41:00] first house was also in the Columbia area. It was when real estate was going through a boom and we did the same thing. We put it in contract after contract, we had the escalation clause.

Lena Nebel: Um, we knew at that point in time that we were more than likely going to be overpaying for that property. Um, we were in a financial position though, where we were ready to purchase a house and financially we could afford to go over a little bit if we needed to. Um, so my answer to that person would be look to see what your max limit is, right. There’s going to be a point to where you can’t go more than $30,000 over. So at some point you’re going to get priced out. Um, unfortunately it’s just the way the market is right now. If now is the time where you’re ready to move and to take that step, then I would encourage you to just keep looking around.

Lena Nebel: Um, yeah. I don’t want to kind of come across where everything happens for a reason, but I can assure you [00:42:00] that the house that you eventually find will have been worth the wait. Now, the other way that you could look at it and say, well, I’m going to wait until the real estate market cools down a little bit.

Lena Nebel: Um, the risk that you have with that is that interest rates are going to go up. So what you could qualify for now, maybe a lot different than what you can qualify for down the road. So I would encourage you to continue to be patient, um, continue to look and, uh, you know, that’s something that your real estate agent and you can kind of focus on, on what makes the most sense, but this is very normal and common when we go through these types of, uh, you know, spikes.

Sara Lohse: Awesome. Thank you. Um, we do have another question that is pretty similar. You touched on it a little bit, but maybe you can go into it a little more. Assuming that rates are at or near an all time low and will likely increase, is it worth it, the purchase now, despite the plated prices and bidding wars, or wait until the market cools down.

Lena Nebel: Yeah. Again, the, the [00:43:00] risk that you have is purely interest rate risk at that point. So if interest rates are going to start to creep up, that’s going to mean that your mortgage payment gets higher, which means that your debt to income ratio changes. So what you can, what you originally qualified for, you may no longer be able to qualify for.

Lena Nebel: So what I would advise is go through the numbers to see where you’re at from a qualification standpoint, and then look to see where’s your breakeven for where interest rates have to be, to be able to hit that same price point. And that’s something that your lender or your agent, your financial advisor can all run those numbers.

Lena Nebel: Um, so that if rates jump, you know, to a 30 year mortgage at four and a half percent, all of a sudden, um, you want to be able to make sure that you can jump on that as well. Uh, as far as where you’re supposed to qualify from a house, I would say, continue to look at properties now because interest rates are low.

Lena Nebel: It’s going to keep your payment [00:44:00] low for the longterm. So the, the alternatives on waiting and getting a higher interest rate is you could say, well, I’ll just refinance down the road. That’s not a problem. We’ll just, we’ll refinance. So much can change over the next few years. Your financial world can change.

Lena Nebel: The rules of refinancing can change, which we’ve already seen happen over the past few years. We had one bank that just stopped refinances altogether. Actually a couple banks had stopped refinances altogether because they were swamped with, um, new purchases and everything else. It is risky to say, I can just refinance down the road, but is it is an option.

Lena Nebel: And so you want to make sure that the loan that you’re taking now gives you some flexibility for refinancing. If you decide I’m just going to do, what’s called an interest only loan, or I’m going to do a five-year arm, um, which means that in five years, your interest rate adjust, and you think in those five years, you’ll be able to, um, uh, refinance and get a lower interest rate.

Lena Nebel: Again, we don’t know [00:45:00] how high these interest rates are going in the next few years. So it’s a risk that you’re going to take. Um, I would say it’s worth starting to, it’s worth continuing to buy now with the lower interest rates, but know where your pressure points are, know how high you can go up when you start putting offers in.

Lena Nebel: Um, and that, again, that comes back to the pre-approval, it comes back to looking at your own financial situation. And if you plan on being there in, you know, for seven to 10 years, You’ll recoup what was overpaid that equity through improvements that you do through, you know, um, continuing your mortgage payments. You’ll recoup that equity.

Sara, do you have a couple more?.

Sara Lohse: Oh, I do. I knew this would be a popular topic that everyone had questions about. Um, someone was talking about just the types of mortgages. If you’re only able to qualify for an FHA loan, is [00:46:00] that something you should go for or wait until you qualify for a conventional, are there pros and cons to the different types and just kind of, what do you guys have to say about those types of loans.

Lena Nebel: Yeah. Um, so it’s a, it’s a very common question because there’s a ton of different loan options available and the lenders going to work with the buyer on what is suitable for them, what they qualify for because different types of loans require different down payments. It can be based upon your credit score.

Lena Nebel: The closing costs are different. The flexibility of the loan is going to be different. Um, so many, many years ago it was a 15 year or 30 year mortgage. Now there’s interest only loans. There’s jumbo loans, there’s loans with arms. There’s seven year arm, five-year arm, et cetera. There’s so many choices. Um, and so it’s important to understand what you qualify for.

Lena Nebel: For some, you may only be approved for FHA and you can’t do anything else. And so that limits your scope. For [00:47:00] others, they have to qualify for a jumbo loan. And, um, you know, one of my partners when he was building a house, um, qualified for the jumbo loan and then guess what they changed the rules on him and that bank no longer offered jumbo loans.

Lena Nebel: So you then had to kind of find another lender who was going to be able to offer that type of loan because at certain price points, you need certain types of loans. So you want to make sure that you understand the risks associated with all the varying loans out there. Um, for some individuals, the lender may customize the type of loan they’re looking at because they want to afford a certain amount of, you know, the payment needs to be at a certain level.

Lena Nebel: So they’re going to look at, um, different types of loans and that’s where an interestonly or an arm may come into, uh, may come into play. Uh, arms are very popular for short-term needs. So if it’s an investment property, they may end up utilizing just an arm versus kind of a traditional 30 year note, um, for a latter, [00:48:00] uh, individuals who are getting close to retiring, they want to get that mortgage paid off quicker.

Lena Nebel: So they may look at a shorter time period. So, um, again, kind of coming back to the good old fashioned, it depends. Um, it, it truly does. You, you want to make sure that you’re making the right decision, because at some point, if you decide to refinance, guess what, you’re going to be paying those costs. So you want to make sure if you’re paying those costs again to refinance, to get out of one loan, to get into another, um, that it’s worth that it’s worth the, uh, the cost, the expense in, in going through that.

Lena Nebel: So, um, a lot of the mortgages though, can have different types of risks, um, depending on what you’re getting. So, like I said, interest rate risk right now is huge. So if you can lock in a 30 year loan at a extremely low rate right now, That’s ideally what you want to do. Um, if you can’t afford the payment that the lender is recommending and you have some [00:49:00] flexibility with cashflow, one option that you have is you can actually buy downthe rate.

Lena Nebel: So buying down the rate is what’s called points. So you can pay points and buy down that rate, which will help you lower your mortgage payment. And for certain individuals, they can actually deduct those points off of their tax return. There’s certain rules that they’d have to qualify for, but, um, that would be an option too, if it would make sense to pay a few thousand dollars to buy down that rate.

Lena Nebel: And again, that’s where you can kind of go through the financial numbers and looking at a breakdown.

Sara Lohse: Awesome. I think we do have time for another question or two, um, someone wants to know, is there a benefit to renting over buying? Is, is there a reason someone would avoid by buying a house and just stick to renting a house or renting an apartment?

Lena Nebel: Um, you know, I look at it from a headache standpoint and also from a cashflow standpoint.

Lena Nebel: So, um, you know, I have [00:50:00] clients that have been renting for over 20 years. Because, um, and, and they’re older. Um, they’re single. Um, they don’t want to deal with, you know, landscaping or condo fees or maintenance issues and all of those, uh, other expenses that Cody and I talked about. So for them, it’s honestly, it’s a comfort decision on renting over buying.

Lena Nebel: Financially. Um, I think we can all say financially there’s benefits of buying over renting for the longterm. When you think about how much you’re going to be spending in rent over 10 years, versus if you just put it into an investment property. So, uh, I’d say that really comes down to comfort decision on what you want.

Lena Nebel: You know, my husband and I, we joke a lot about how life was so much easier when we had a one bedroom apartment. Um, versus now, um, there’s just, there’s more to take care of and I think you get to a certain point in your life where does it make sense to do that or not for younger individuals coming right [00:51:00] out of college.

Lena Nebel: They’re not in a hurry to purchase a property. They’re fine renting. Um, there’s the social aspect of it, of having different people in their apartment. They can go wherever they want and move to different cities and everything. Um, there’s content in staying at home with the parents for a few years while you’re building up your savings as well. Um, so again, there’s no financial benefit. I would say, renting over buying in the longterm. That’s really going to be a comfort decision. And, you know, just to kind of add to that a little bit, when thinking about retirees, for some people, for some retirees, they, they sell their primary house.

Lena Nebel: Um, and they don’t know where they want to go, but the market was hot. So they decided to sell it. They pocketed that cash. They may rent for a few years. Um, they may let that money grow, help it with retirement income and everything until they find where their next stage is going to be. Um, [00:52:00] so for retirees, we’re starting to see more of an influx in the rental market for those retirees, because they’ve, they’ve sold that home that they’ve been in for 20 or 30 years.

Lena Nebel: Made significant amount. They were able to reinvest some of that money to help to generate some retirement income for them. Um, and then in a few years, they’ll, they’ll figure out where they want to go and make sure that that money is set aside for a down payment.

Cody Niedermeier: Sara, I think we’ve got time for one more quick one, if you got one ready.

Sara Lohse: All right. I’m just going through the list, trying to pick the best, final question that we can get. Um, This might be something more real estate agent question, but I want to see if you guys could take a stab at it. Uh, first time home buyers, different counties usually have different incentives for first time home buyers.

Sara Lohse: Is there anything you guys can share about, um, different incentives and things that you should look for? If you’re a first time home buyer?[00:53:00]

Lena Nebel: Um, so yeah, for first time home buyers, there can be incentives both within the counties. There can be incentives with the lenders as well. Um, the issue with first time home buyers can also be, um, making sure that they have the credit and the assets to be able to purchase what they need.

Lena Nebel: Um, but if you are, um, let’s say you’re building a property. There can be a lot of incentives on building a property versus, um, uh, versus buying an existing property, regardless if you’re a first time home buyer or not. Um, so I would look at it again, I’m looking at the incentives and trying to keep the answer pretty, pretty short.

Lena Nebel: I would look at incentives that are going to maximize, um, you know, your financial situation. Right? Am I going to get a large tax break. Am I going to get a reduction in my, um, mortgage payment? And I would take reduction to mortgage payment over tax break because that mortgage payment is going to be longer term versus the tax break.

Lena Nebel: That’s going to be one and done. Um, but [00:54:00] for first-time home buyers, the challenge can be with them is making sure that they have the, you know, the credit that’s needed, um, that they have the income stability, um, and that they can make that down payment.

Cody Niedermeier: Yeah, Lena, thank you. Just answered everything that was asked of you and more so I really appreciate you coming on, but before we get your little outro, um, as everyone can see on the screen right now, we have next steps and there’s actually a barcode in the little house over. Yeah. That if you take a picture with your phone, you can set up a free consultation that, uh, that I touched on when we began with one of our advisors at BFG, and this is a completely free consultation, uh, to maybe answer some of the questions that you sent in that we weren’t able to address.

Cody Niedermeier: And if you’re viewing this webinar via your phone, uh, if you just respond with your questions or if you would like to set up a consultation, you can just respond right to that email and then we’ll reach out to you. Uh, other [00:55:00] than that, Lena, thank you so much. It was great to have you back. It was so great that we’re actually going to have you back next month.

Cody Niedermeier: Uh, August 11th and our next topic is going to be on creative strategies to pay off student loans and debt, which I think there are going to be a lot of people are interested in that topic. Um, and like I said, it’s just been a joy to have you on. So I’m going to keep bringing you back for as long as I can

Lena Nebel: Sounds good, Cody. Thanks so much. I appreciate it.

Cody Niedermeier: No problem. I hope you have a great day and thank you again for everyone listening in a, if this is on a recording, thank you for tuning in. And if you watch live, thank you. Uh, we’ll see you guys next month.

Lena Nebel: Bye bye.