How To Buy a House in 2023

Hi folks,

Sorry about the long hiatus. I’ve been busy learning about and buying real estate. This is going to be a multi-part series where I will be going over my strategy in doing the following:

1. Walking you through the home purchasing process

2. Evaluating the rent vs. buy decision

3. Showing you my step-by-step House Hacking Guide

Let’s get started with the home purchasing process.

One thing I will caution you on before getting into the details of this guide is that there are certain things that people think are non-negotiables. However, these can easily be fixed, and there are negotiables that are actually non-negotiables that home buyers often gloss over.

Non-negotiables:

1. Location, location, location! You can’t (easily) uproot a house. Make sure you are okay with the neighborhood, and school system (if you plan on having kids).

2. Homeowners Association: These can be a nightmare, and the worst part of HOAs is you PAY to be a part of these. Make sure you understand the CC&Rs before you buy the house. Spending 6 hours reading through a boring 90 page document of rules might be painful, but it’s a lot less painful than spending half a million dollars and having to adhere to some ridiculous restrictions and nosy neighbors.

3. Age of house: Lead paint was outlawed in 1978, and lead plumbing was outlawed in 1986. Most popcorn ceilings in houses built before the 1980s have asbestos. Not-so-fun fact: my college apartments had an asbestos ceiling. Depending on what part of the country you’re in, you might also want to get the basements tested for radon. Behind smoking, radon is actually the second leading cause of lung cancer. I’d aim for a house no older than 1990-ish.

These are my personal non-negotiables. I’d like my residence to be lead and cancer-causing substance free (of course, it’s impossible to achieve this standard, but it doesn’t hurt to aim for it).

Negotiables:

1. Condition of house: Renovation is a lot cheaper than buying the perfect home, and often it’s better because you can pick what you want. I had extensive renovations on my home, and I’m really pleased with how it turned out. Things that were changed: bathrooms, floors, kitchen, paint (internally and externally). Don’t fall in love with the gorgeous kitchen or outdoor area - you are often paying a hefty premium. It’s easier to do it yourself. By this, I mean spending 10 minutes on the phone and paying someone else to do it, and in the process, saving yourself thousands or tens of thousands of dollars.

2. How nice the kitchen is: see above

3. Number of bedrooms (potentially): In some cases, if you absolutely need a particular number of bedrooms, you might be able to repurpose an open area, a den, and a formal dining area into another room with the help of a renovation company.

Let's dive right into our guide 😀

Pre-Work: The home buying war is not won when you go under contract (sign an offer to buy the house). As with any large purchase (cars, houses), the war is always won in the preparation phase. You will want to spend the bulk of your time in this phase (pre-work phase) so that you don’t get taken for a ride when it comes to the two most important factors of the home buying process: the sales price & the interest rate (financing).

1. Scanning Houses: I would first passively scan popular websites like redfin.com, zillow.com, and realtor.com to identify properties that fit the bill of what you’re looking for. You can even use their filters to help narrow down your search – like a 3 bedroom/2 bathroom house. The reason we are passively scanning properties is to get an idea of price. Let’s say the kind of house you are looking for is about $400,000. This is salient information that we’ll be using in the next step.

2. Pre-Approval: Before we find our ideal home, we are going to get pre-approved from a lender. This means that a lender, like a bank, is deciding if they want to lend you money to buy a house. Based on your income, debt, credit score, and other factors, they are going to decide to give you a loan up to a certain dollar amount. There are important figures to keep in mind: interest rates, lender fees, and approval amount. The interest rate is the interest that you will be paying on the loan. The lender fees are costs that the lender incurs to write you the loan. The approval amount is the amount that you are approved to. For example, your lender might say, $0 in lender fees, 6.15% interest on a 30-year conventional loan, and approved up to $600,000. Some lenders have absolutely garbage interest rates, and others are more reasonable. When it comes to financing, some lenders may be offering Doctor Loans. These doctor loans are nice in that they often have a low or zero downpayment. Also, many don’t require you to pay private mortgage insurance (PMI). However, I decided not to pursue these because the interest rates were so absurdly high. Sure, you don’t need a hefty down payment or need to pay PMI, but the cost of the greater interest outweighs any money you are saving. For the sake of comparison, you can take their loan estimate and take a conventional lender’s loan estimate and compare the two. Unfortunately, there are entire segments of the financial services industry that are built on taking advantage of the health professions. 🙁 Do NOT go with the first lender you come across. I would shop around; I got quotes from about 10 lenders during the process. Do this as soon as you go under contract! The worst rates I saw were from Bank of America and Chase. I used nerdwallet.com to find a lender with a more reasonable rate. The lender that I went with was 1.625% lower than the big banks (Chase, Bank of America, Wells Fargo). BNC Bank, NBKC Bank, and Farmers Bank of Kansas City had decent rates. I would do all of this in the same week, so there’s only one hit to your credit report. If you get rates over a month and a half you may have multiple hits to your credit score. As a rule of thumb, as long as you do it during the same 30 day period, you won’t have much to worry about. Some lenders I spoke to said this is a different kind of credit pull and the time frame doesn't even matter; according to some lenders, the 30 day window is a myth. Personally, I would get approved for more money than you anticipate to spend. For example, if you are looking for a $400,000 house, get approved for $500,000. It’s always easier to go down than it is to go up (but going up is also not that hard provided you make enough money).

   1. You can always switch lenders later, but you will want to ensure that they will be able to hit your contingency dates on your contract (inspection contingency, appraisal contingency, financing contingency, etc). We’ll go into what these terms mean in more detail below.

   2. Generally, I wouldn’t recommend switching lenders after you have ordered an appraisal since this is something you pay for out-of-pocket (unless you are saving much more than the appraisal). Appraisals cost about $500 today but may vary depending on your particular market.

   3. Since you are going to be shopping around, most lenders will require the same documents – make sure to save them to your computer, so you can quickly upload them. This will include things like:

      1. W2s for the last 2 years

      2. Tax Returns (IRS Form 1040)

      3. Last 3 months of paystubs

      4. Bank Statements

      5. Brokerage Statements

3. Finding Realtors: You’ll want to find a realtor that has your best interests at heart. Now if you’re a fairly agreeable person that doesn’t like to step on toes, you’ll want to be extra wary. Some realtors will try to strong-arm you; you’ll want to terminate a relationship with them quickly. This is potentially the largest purchase you have ever made, you’ll want someone that is concerned about your needs and not someone just trying to make a quick buck. You can use google.com, biggerpockets.com, or ask your friends who they used.

4. Identifying a property: With your realtor at your side, you’ll want to communicate what you are looking for in a house. You may not find exactly what you are looking for from the get-go. Even if it’s not the perfect house, you can always do renovations (floors, paint, etc.) later.

5. Property Visit: Hooray! Your realtor or you have found a property that fits your wants and needs. Now, you’ll visit the property and ensure it actually looks like the pictures posted online. Some real estate photographers use a wide-angle lens and other camera tricks to make the property look much better than it is. You don’t want to be house-fished too many times on your search. Unfortunately, house-fishing is rather inevitable. In any case, this pales in comparison to the camera tricks and TikTok filters used by your average Tinder/Hinge user, so I wouldn’t be too paranoid about this.

Purchasing & Closing

1. Making an Offer: Before you make an offer, you can come up with your own comparables (comps) by looking at similar listings that recently sold to get an idea of what the property value is. Let’s say you recently saw a house with the same number of bedrooms and bathrooms and a similar square footage sell for $390,000 and the house you are looking at is $400,000, you might want to make an offer at $385,000. This is similar to what the lender’s appraiser will do before issuing you a loan. Your realtor may also have a lot of contingencies on the offer to protect you including a property inspection contingency, appraisal contingency, and financing contingency. A contingency is a condition that a property must meet for the transaction to continue. These are good things – they protect you, the buyer. For example, the inspection contingency lets you back out of the deal if there are issues with the house during the property inspection. The appraisal contingency lets you back out if the house doesn’t appraise. For example, you agree to $470,000, but the appraiser says the house is only worth $350,000. Your lender may not issue you the loan (or for the same amount) because the house didn’t appraise. The financing contingency lets you back out if your lender doesn’t issue you a loan. Please note each of these contingencies may have contingency dates that you will need to hit. After the contingency date passes, you can’t back out of the deal due to that contingency.

2. Going Under Contract: Once you have made an offer or potentially accepted a counteroffer, you are now “under contract” and “due diligence” kicks-off. Before I describe due diligence, there is something important you should know. CONTACT ALL POTENTIAL LENDERS as soon as you go under contract to find and secure a mortgage rate that is best for you. Do not delay this step...Alright, back to due diligence. Due diligence is a period of time (usually about a week or two) where you can generally back out of the deal for any reason without incurring any kind of penalty. Shortly after you and the seller have come to an agreement, you will need to pay an earnest money deposit (EMD) to the Title Company that holds this money in an Escrow Account. This is usually a few thousand dollars – let’s say $5,000. This tells the seller that you are serious about this deal. More importantly, if you fail to hold up your end of the bargain, you may lose your EMD! The due diligence period allows you to back out of the deal without losing your EMD. Let’s say you decided that the house was too big to fit your needs or the property inspector finds out there is an expensive issue with the foundation. You can safely exit the contract and get your EMD back.

3. Order an Inspection: The first step once the seller has accepted an offer or after you have accepted a counter-offer is to order a property inspection. A property inspector will evaluate the house to look for any things that could be an issue. They will provide you with an inspection report that tells you if anything is wrong with the house. A house generally has minor issues, but your inspection may reveal that there are expensive repairs that will need to be done. If so, you can back out of the deal.

4. Purchase Homeowners Insurance: Again, just like the lenders, shop around for homeowners insurance. I found that rates differ significantly depending on the insurer. If you have a car and renter’s insurance policy with a singular insurer, sometimes you can get a fairly decent multi-policy discount with the same insurer. You have some time to shop around to find an insurer after going under contract, but this is something that your lender will need to issue you a loan estimate.

5. Finalize Your Loan: The clock starts here in securing your loan terms. If you haven't shopped around for loans, now is the time to make it your part-time job in calling and negotiating with lenders to get the absolute best terms possible. This is where champions are made. This is Spartaaaaaaa! Tangents aside - this is not nearly as dramatic or as engaging as watching King Leonidas wage war on Xerxes. Yes, this will take a lot of time. Yes, this will be boring. Yes, this will require you to be organized and keep track of documents. However, if you play your cards right, you'll secure financing that will save you thousands to tens of thousands of dollars, and maybe even hundreds of thousands of dollars of interest depending on the cost of your home and/or initial rates quoted by your big bank lenders.

6. Order an Appraisal: Your lender will require an appraisal of the property. A lender requires an appraisal to determine the value of the property being used as collateral for a loan. This is an important step in the loan process because the lender wants to ensure that the property is worth at least as much as the amount of money being loaned. The appraisal helps the lender assess the risk involved in lending money against the property and protects the lender from a potential loss if the borrower defaults on the loan. If your property doesn’t appraise, you can back out of the deal as long as it happens before your appraisal contingency date.

7. Review Resale Package: The resale package contains the Declaration of Covenants, Conditions, and Restrictions, which is also known as the CC&Rs. The CC&Rs contain the rules and regulations of the Homeowner’s Association (HOA) that you must follow. You will also get several other documents as a part of the resale package including HOA minutes, HOA bylaws, fees, etc. You will want to read this in detail. In Nevada, you have 5 days to back out of the deal if you don’t agree with the HOA rules. If you back out, you can still get your EMD back, but you will probably have paid for the property inspection and appraisal, which are both out-of-pocket expenses that you will lose.

8. Closing the Deal: In the days before the deal is closed, you’ll be required to pay the down payment to the title company and any other closing costs that are associated with the purchase of the house. This includes several things that can be found on your closing disclosures from your lender on the loan estimate. This includes line items like homeowners insurance, property taxes, HOA fees, and home warranties. You’ll also want to contact the utility companies in your local area to ensure that the utilities will be on once you are ready to move in. This includes the power, water, trash, sewer, internet, and gas companies.

9. Signing Day: On this day, you’ll sign your closing documents with your lender and then you’ll get your documents notarized with the title company. I ended up doing this task a day before the close of escrow.

10. Close of Escrow: This is the closing date of the deal where the ownership will transfer to you after the recording. When the property is recorded under your name, you’ll have legal ownership of the property and you now have a new house. Congratulations!

11. Final Closing Disclosure: After you have closed, you may get another closing disclosure, which shores up any remaining dollars that have not been accounted for. You may get back a few hundred dollars after everything is said and done.

Congratulations! Welcome to the wonderful world of homeownership.

Glossary of Terms

Appraisal: This is an assessment of the fair market value of the property you want a loan on. Let’s say you agree to $500,000 for the house. The bank wants to make sure you aren’t overpaying on the house because they don’t want to be overpaying on the house. If your house doesn’t appraise, meaning that the value of the home is less than what you are paying for it (for example, if you agree to a sales price of $500,000 with the seller, but it’s only worth $300,000), you may not be able to get a loan for the full amount you applied for. Also if your house doesn’t appraise, it might be because the seller is delusional, you are being taken advantage of, etc.

CC&Rs: CC&Rs stands for Covenants, Conditions, and Restrictions. It refers to a set of rules and regulations that govern the use, appearance, and maintenance of a property within a specific community, such as a homeowners association (HOA). CC&Rs are designed to ensure consistency, maintain property values, and promote a certain quality of life within the community. They often include guidelines regarding architectural standards, landscaping, noise levels, pet policies, and more.

Close of Escrow: The close of escrow refers to the final stage of a real estate transaction when all the necessary legal and financial documents have been completed, funds have been transferred, and the property ownership is officially transferred from the seller to the buyer. It usually takes place at a designated escrow or title company, and the closing date is specified in the purchase agreement.

Comparable: A comparable, also known as a "comp," refers to a similar property that is used as a reference point for determining the value of a property. When appraising a property or establishing a listing price, real estate professionals look for recently sold properties that are similar in size, location, condition, and other relevant characteristics to the subject property. These comparable properties provide valuable insight into the current market value and help determine an appropriate price for the property in question.

Contingency: A contingency in a real estate context refers to a condition or requirement that must be fulfilled for a contract to remain valid. It typically allows the buyer or seller to back out of the contract without penalty if certain specified conditions are not met. Common contingencies include home inspections, financing contingencies, and appraisal contingencies.

Earnest Money Deposit: A dollar amount that you will need to deposit as part of going under contract. This tells the seller that you are serious about the deal.

Escrow Account: An escrow account refers to a financial account where funds or assets are held by a neutral third party, typically in a real estate transaction. The funds in the account are held until certain conditions are met or obligations are fulfilled by the parties involved. It serves as a safeguard to ensure that all parties are protected and that the transaction proceeds smoothly.

HOA: HOA stands for Homeowners Association. It is an organization typically created by a real estate developer to manage and govern a community or neighborhood. Homeowners who purchase property within the community automatically become members of the HOA and are required to pay dues or fees. The HOA is responsible for maintaining common areas, enforcing community rules (CC&Rs), and managing shared amenities or services.

Inspection: An inspection is a thorough examination or evaluation of a property to assess its condition, identify any potential issues or defects, and determine its overall quality. It is usually conducted by a professional inspector hired by the buyer during the due diligence period. The inspection report provides valuable information to the buyer and may influence the negotiation or further steps in the real estate transaction.

Loan Estimate: This is a 2-3 page document from your lender that goes over all of the financial details of your loan including the amount being loaned, your interest rate, monthly principal and interest, closing costs, recordkeeping fees, insurance, property taxes, and origination fees. This is your source of truth with regards to the cost of buying a home.

Pre-Approval: Pre-approval refers to the process by which a lender evaluates a borrower's financial information and creditworthiness to determine the maximum loan amount they are eligible to borrow. It involves a detailed assessment of the borrower's income, assets, credit history, and other relevant factors. Pre-approval provides buyers with a clear understanding of their budget and strengthens their position when making an offer on a property.

Private Mortgage Insurance: Private Mortgage Insurance (PMI) is a type of insurance that protects lenders against the risk of default by borrowers who have a low down payment on their mortgage. PMI is typically required when the borrower's down payment is less than 20% of the home's purchase price. It provides the lender with a degree of protection and allows borrowers to secure a mortgage with a smaller down payment.

Resale Package: A resale package is a collection of documents provided by the seller or the homeowners association (HOA) to a potential buyer when purchasing a property within a community or development. The package typically includes important information about the property, such as the governing documents (CC&Rs), financial statements, meeting minutes, association bylaws, and any other relevant information that may impact the buyer's decision or the terms of the purchase.

Title Company: A title company is a business entity that specializes in conducting title searches and providing title insurance for real estate transactions. Its primary role is to ensure that the title to a property is clear and marketable, meaning there are no outstanding claims, liens, or encumbrances that could jeopardize the buyer's ownership rights. During the closing process, the title company plays a crucial role in facilitating the transfer of ownership. It collects and disburses funds, prepares the necessary legal documents, and ensures that all requirements are met before the transaction is finalized.

Under Contract: When a property is under contract, it means that the buyer and seller have reached a mutual agreement and have executed a legally binding contract for the purchase or sale of the property. Both parties are now obligated to fulfill the terms and conditions outlined in the contract, including contingencies, timelines, and other agreed-upon provisions.

While buying a home is potentially one of the largest purchases you'll make, it's important to have a strong foundation in personal finance education. How can you get all of the battle-tested, tried and true knowledge as quickly as possible? I wrote a book explaining exactly this; it's short; it's cheap, and it's written in plain English. You can find it here: https://amzn.to/32PLB3x. You may also want to consider subscribing to this blog by entering your email on the homepage next to the “Never Miss a Post” section and following the podcast “Nondelusional Investing” wherever you get your podcasts.

Is there anything you found useful or that I missed above? If so, please leave a comment in the comment box below.

See you on the next one!

Go To Next Post

Go To Previous Post

Go To First Post

Disclaimer: The article above is an opinion and is for informational/educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The author has taken care in writing this post but makes no expressed or implied warranty of any kind and assumes no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of this information.