I recently received an email from a reader asking for tips on how to buy a house in an expensive area like DC.
It was my first time receiving a direct message from one of you. I was so excited I told Mr. FAF right away and read him the nice email.
(If you’re reading this post, I want to thank you for taking the time to write to me. You made my day that day.)
As I was typing a response, I figured that I could write a more detailed post that can be useful to many other people as well.
While I’d love to have a post titled “How to buy a house in an expensive city,” I realized I have only bought one house in DC and can’t generalize my experience to other expensive places in the US.
Housing prices vary widely across cities and states in America. In 2017, the median home value is $559,200 in DC, $1,167,200 in California, and $650,000 in New York City, according to Zillow. Those prices far exceed the median home value across America of $196,500.
Yet, Mr. FAF and I bought a house in one of those high-cost cities: Washington DC. How did we do that?
I have written about the housing market in the DC metro area and our lessons learned from the first realtor. In this post, I will go into more detail about the steps that we took to buy a house well under the median value home of $559,200 in DC.
1. Prepare the down payment
When we decided to buy a house, Mr. FAF was (and still is) a poor graduate student with a small stipend enough to support only himself. I had just started a new job after graduating from grad school.
I wasn’t ready to buy a house yet. But Mr. FAF’s parents were more than ready and eager to help. My in-laws are not wealthy, but they have been saving all their lives partly for this purchase. They consider it one of their their main responsibilities to help us buy our first home.
Having parents to help out with a house purchase, especially if you’re a man, may not be the norm in America. But in China and Vietnam, if a couple has a son, they know that they’re expected to provide their son with a house for him to get married.
If the parents can’t afford to buy a house for their son or don’t own a home to leave it to him after they pass, he is considered to be less marriage-material by many women and the women’ parents. It might seem sad and absurd, I know, but that’s how society works in those countries.
Our down payment: My in-laws helped us with the down payment. You might think we’re lucky, and that there’s nothing else worth reading beyond this point. But I assure you that there is.
I took out a huge mortgage under my name. Mr. FAF was in school and wasn’t qualified for a loan. It is Mr. FAF and I, not our parents, who are responsible for paying that mortgage off.
If you don’t have parents to help out financially, you have two main options:
(1) Try to save for the 20% down payment aggressively for a couple of years to avoid private mortgage insurance (PMI)
(2) Put down less than 20% for house and pay the PMI until the principal paid on the house exceeds 20%.
2. Find a real estate agent
When Mr. FAF and I got more serious about buying a house, we decided to work with a realtor who could guide us through the process.
We didn’t want to tell our friends just yet since we felt a bit embarrassed about relying on our parents to buy a house. Also, we didn’t want our friends to think that we had rich parents and had pretended to be poor and frugal all this time.
I filled out a form on Dave Ramsey’s Endorsed Local Providers network and got an immediate response from an agent in the area.
Although the realtor was nice, we later realized that she wasn’t the right fit for us. She referred us to her colleague, who was licensed in the area we later wanted to move to. Our second realtor turned out to be outstanding. Let’s call her “Sara.”
Sara set up an email system where new postings of houses that met our criteria were automatically sent to us. Whenever we went to see a new house, Sara would walk around with us, examining every nook and cranny to give us a quick analysis of the pros and cons of the house.
She had been at various house inspections and could tell us on the spot what major problems a house seemed to have. She had also done renovations on her own houses and could even give us an estimate of how much it’d cost to fix something.
She also gave us references for the great contractors she had worked with. After we bought the house, Sara continued to answer our questions and address our concerns in a timely manner.
Sara has set a high standard for a realtor we want to work with in the future.
Our real estate agent: A referral from a realtor we found on Dave Ramsey’s Endorsed Local Providers network. In hindsight, we should have asked our friends for advice since they later told us about their wonderful realtors, who we could have worked with.
3. Find a mortgage lender
I read everywhere that we should shop for a mortgage lender with a low interest rate, no hidden fees, and no gimmicks. Being presented with a variety of options, we decided to ask Sara, our realtor, for recommendations.
After we got a quote from the mortgage firm and confirmed that there were no hidden fees, I went online to look at the mortgage rates at different banks and got a couple of quotes, all of which were almost the same or higher than the one from Sara’s referred lender.
I contacted the mortgage rep who explained to me that the mortgage rates fluctuated on each business day as they were determined by the movements in the US Bond Market (as mortgages are essentially fixed rate bonds).
The rate they gave me was for that particular day. The actual interest rate that we would get for our loan would be determined the day we negotiated an agreement with the seller (aka a “ratified contract”).
The firm rep said that many lenders can quote a very “low ball” rate to get us to think that they are so much lower than all the other lenders in the market.
When you do get the ratified contract, however, they decide to tell you the real rate and blame it on the sudden increased rates on the market. It’s a “bait and switch” tactic commonly used by many dishonest lenders.
I asked for evidence, and they directed us to the Freddie Mac website. At this point, Mr. FAF and I were convinced and decided to work with the firm.
Our mortgage lender: A mortgage firm referred to us by our realtor. We asked about the basis (evidence) of their quote and also researched other lenders.
4. Finding our home
Since our first realtor wasn’t so active in sending us postings, Mr. FAF and I set out to search our dream home by ourselves. Knowing that downtown DC is expensive, we looked at surrounding neighborhoods in Maryland and Virginia where we could get more bang for our buck.
We used four websites primarily:
Pros: The website looks modern and is user-friendly with great pictures and a nice layout.
Cons: The status of a house (i.e. a house under contract, sales completed) is not as updated as on Redfin. This can be a major drawback when you’re interested in a house but not sure if it’s under contract to put in an offer. Also, Zillow rarely has information about the HOA fee for condos and townhouses.
Pros: Redfin has updated info about the status of a house.
Cons: I don’t really like the photos and the layout on Redfin. It doesn’t look as modern and clean as Zillow.
Pros: This site presents points of interest (i.e. restaurants, public transit, grocery stores) within two miles of the property.
Cons: The font is hard too read, and the layout seems confusing.
Pros: Mr. FAF and I wanted to buy a house near a Metro station. While Mr. FAF was excellent at navigating houses on the map, I had a hard time using Redfin and Zillow to find a house near the Metro. Live Near Metro lists houses for sale and for rent within one mile of each train station in DC.
Cons: Though convenient, this site does not list all the houses on sale within the 1 mile distance from the Metro. At one point, we saw our house available on the website, but it was later removed although no one had put in an offer yet. It also doesn’t offer as much detail as Zillow and Redfin.
5. Put in an offer
The very first house we fell in love with was a 3bd/2bth townhouse within a 10 minute walk from the Metro, had a finished basement with a half bath, and was lower than $400,000. We went to check the house at 8 PM since I had to work that day.
We had already liked it just from looking at the pictures on Zillow. Our realtor called the buyer’s agent and told us someone had already put in an offer at the full price. If we didn’t want to top that by 10 AM the next day, then we didn’t need to write an offer. Mr. FAF and I went back and forth for two hours.
It seemed like the perfect house for us. However, we felt like it might have been just a tactic by the seller’s agent to make us pay a higher price. Not willing to be tricked, we decided to wait until the next day.
The house went under contract that morning. When we got the news, I was heart-broken. I felt like I just had a breakup. It took me weeks to get over that first rejection. I just loved the house so much.
Our second dream house showed up about 2 months later. Mr. FAF and I loved the house and put in an offer for it. This time, we decided to be aggressive.
After consulting with our realtor, we put in a reasonable offer and were willing to go way above that. We had another competing offer on the table. The seller counter-offered with a price we were comfortable with.
I don’t know if it’s because the seller came back so fast, we felt like we could have gotten more out of the deal. We negotiated $1,000 less than the counteroffer here and there.
We never heard from the seller’s agent until much later when we were told the seller had accepted the other offer. We were devastated.
While waiting for the seller to respond to our counteroffer, we had mentally moved into the house, picturing what we would be doing at our new home.
I was heart-broken once again. I literally broke down into years and sobbed for half an hour. I felt like someone had broken up with me again, and I had to find out about it through someone else.
When we found the 3rd house we wanted to purchase, we learned from our past mistakes and acted fast. We thought about the big picture and didn’t bargain for $1,000 here and there before our contract was ratified.
We asked for $10,000 below the asking price and half of the closing cost. The seller said yes to half of the closing cost but only would accept only $5,000 below the asking price. We accepted and signed the contract.
After the inspection, our realtor took a contractor to the house to assess the major repairs the house needed, which came down to $9,000. We asked for a $4,500 subsidy from the seller.
Our realtor suggested only $2,000, but I wanted to be aggressive with the negotiation since it was the last day of the inspection period. In other words, if the seller rejected our $4,500, the ratified contract would be nullified.
It was a risk for us as well. But since our offer was the first after the house had been sitting on the market for two months, we figured the seller wouldn’t want to wait for a couple more months just to avoid getting $4,500 less.
We bought our house in the winter, so the competition wasn’t stiff. The housing market is usually fiercely competitive in the spring and summer when family moves before school starts.
Our strategy worked. We closed on the house a month after.
Our offer: We learned not to negotiate too aggressively before the contract was ratified. There’s room to negotiate down the road, especially after the inspection and appraisal.
The first day we moved into our new house, we still thought it wasn’t real. The whole experience took half a year.
It was an emotional roller-coaster for me, seeing our dream houses “snatched” by someone we hadn’t even met and finally being able to own our first home.
If we ever move to another expensive city, I’ll learn from our first purchase. Not everything will be the same, but at least now we know what it takes to buy a home.
We will still need a realtor to guide us through the process and will listen to their advice. But at the end of the day, we will need to decide what’s the right choice for us, accept the result of whatever decision we make, learn from it, and move on.
What about you? Did you go through a roller-coaster of emotions with your first home purchase?