Wednesday, October 3, 2012

House Update

I'm sorry for my lack of posting yesterday! When you see sporadic posting, it usually means I had a hectic weekend and I'm trying to play catch-up during the week.

On Saturday, I had a four-hour work meeting. On Sunday, I had a two-hour board meeting. I used all of my free time (Matt and I each take time to ourselves on the weekends) to prepare for the board meeting. I didn't even go into the week with a complete action plan ready to go. I hate that feeling. 

I owe you a long response to all the comments on the House Flipping post (and also a response to a long, thoughtful e-mail I received). In the meantime, I wanted to drop in to give you the update on our house: our appraisal came in $22,000 lower than we needed it to be. The appraiser looked at three "comparable" houses in East Austin. Two of them were very close to the central section of town, but they were a traditional style and on tiny lots. One of them was a modern home, but it was very far out of town, and it's in a development that's having financial problems and has to give back its remaining land to the bank. 

Our builder and relator are advocating for us. They sent an appeal to the bank/appraiser, citing the fact that renovated homes in our neighborhood are selling at a much higher cost per square foot than the comps that the appraiser looked at. Also, our builder recently got an appraisal for a home in East Austin that was $10 per square foot more expensive than our current home.

There's not much that we can take out of the construction budget without affecting the house. We could subtract the appliances, the fence, and one of the surveys (which we already paid for) and shave off $10,000. But that still leaves us with a $12,000 difference. I don't think we can afford the two downpayments plus two closing costs plus that extra chunk of change. 

So we're still in limbo. I'm not optimistic that the appraiser is going to budge. But we'll see. 

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Rachel said...

If you don't have $12K of room in your budget to build a new house, you aren't ready. This is just the first of many changes that will require cash.

This might be one of the only times I would consider borrowing from family, because you can roll it into the mortgage when construction is done and pay it back. But...

This would put your family all up in your business. And it's hard to loan money to people who are spending it on extravagances you can't afford: private school, staying at home, custom home, and so on.

Anonymous said...

It will be a close call. When we were in the process of buying a house, our realtor had a simple advice mantra for us--"Never pay more than you can afford. It's never worth it." While it was hard to ignore the homes above our price range, I am so glad we stuck to homes that were within our budget. We ended up buying in our dream neighborhood because we compromised on some of the cosmetic things we knew we could update later. Now we can put additional $$$ toward our mortgage payment each month, and it has put no limitations on sending our daughter to a great preschool or being able to pursue some leisure/travel activities several times throughout the year. My advice would be to look at the big picture. Is this plan sustainable financially? Is it something you could revisit in 5-10 years? Is there a compromise out there--say buying a preexisting home that still meets many of your desired outcomes? Okay, end of the novel. Good luck Sara!

Anonymous said...

It doesn't sound so much like the home they are planning to build is out of their budget. It's that they don't have an extra $12,000-$22,000 in cash to put towards the house off the bat. Do most people buying a house have an extra $12,000 cash to put into a down payment (without sacrificing an emergency fund/retirement savings/etc?) That's a pretty significant amount to tack on. Every budget post Sara has put up here had detailed their careful planning for their home budget, so it sounds like they are considering a great number of factors and priorities.

Sorry to hear that there's a hitch in the plans. I hope you will be able to reach a satisfactory solution!

Sara E. Cotner said...

Hi, Rachel: Please don't call staying at home with my son "an extravagance." Raising my son well is one of the most important tasks of my life. I stayed home with him for one year and then started working part-time (which I will continue to do until he's about 3). I feel like that's exactly what makes sense for our family, and it seems aligned with what my son needs.

Also, I'd like to reiterate that ALL daycares in my city are private. Henry is 19 months-old and essentially goes to daycare. Yes, it happens to be a private Montessori school which is more expensive than a regular daycare, but it's not like we're sending him to private school instead of public school. And besides, the kind of schools we send our children to all day long really matter. Again, in my book, a good school is not an "extravagance."

Third, the custom home that we are building is projected to cost at least $66 less per square foot than the first home we bought in Houston. "Custom home" does not equal extravagance.

@ Anonymous #1: I totally agree with you that the less we pay each month toward a mortgage, the more we have to put toward other important priorities. When our house is built, our mortgage payment (plus taxes and insurance) will be slightly above what we pay in rent right now. Matt and I cover all of our expenses (including our rent) on his income alone. We put my part-time income toward saving for our house. It is highly likely that we will both be working full-time in the next couple years, so I am very comfortable with the mortgage payment we are getting into. Even if we drop back down to one income (illness, lay-off, personal desire to go back to school, etc.), it's clear that we can live on one income at the current rate for housing.

The issue is that it's very difficult to amass 20% of a home's value for a downpayment. We had the same problem when we bought our first house in Houston. We had no problem affording our monthly rent (and we, too, put extra money toward our mortgage every month--until I went on maternity leave), but saving up for the 20% hurdle was difficult. In this case, we have to save even more because the construction budget includes a 5% contingency.

@ Anonymous #2: Thank you for your support!

Anonymous said...

For most people, having the choice of staying at home with a child, full or part time, and paying a premium for a certain type of daycare are financial choices that can only be made if you have attained a certain level of financial stability. I am not sure that any offense was meant in calling these choices extravagant. That being said, your posts come across to me as those of a person who is striving for the best life she can attain for herself and her family. I think you have a distinctly upper-middle class lifestyle that you are trying to attain (fancy school, fancy custom home, part-time/volunteer work combined with stay-at-home mommyhood, latest and greatest appliances, etc.). This is great, and more power to you; but as I am sure you are realizing, you need a lot more money than a one-income teacher's salary to make that happen. I think some of the comments you get are just people surprised that with your organization and budgeting skills (which are admirable) you still seem to be a little naive when it comes to topics such as flipping houses or building a custom home. I just chalk it up to your being a "dweller in possibility," which is a great thing!

Carrie said...

I wonder if some of the less positive comments are from people like I, who would be unbelievably stressed out at living so very close to the outer limits of my/their budget(s). This may sound crazy to some, but I get really stressed out if we have under $10K in our checking account. I need to know that I can write a check for a month of day care for two kids, pay whatever bills arrive as soon as they arrive, etc. As such, I am with the commenter who said that if you don't have the extra $12,000, you're not ready. Your cushion wouldn't be comfy enough for me from what it sounds. We just bought a house and subsequently wrote checks for $8000 for a new sewer pipe and $1500 of roof work. Sure, we had those items knocked off the purchase price, but they didn't get wrapped into the mortgage. We needed CASH to pay the contractors post-closing. I realize you are building, but there is NO WAY you will have ZERO unexpected problems, even with a new house.

This is my fear for you, basically: my husband is a bankruptcy attorney, and he sees SO MANY PEOPLE who have lived AT or VERY CLOSE TO their means, but who had one or two "life events" (illness, dead car, divorce, pipes bursting, etc.) that flung them into the hole out of which they just couldn't get out. Obviously it's not good to live in fear of something bad happening, but it SMART to live with the REALITY that something costly will happen at some point, and it might be a biggie. For example, my sister lost her job out of the blue two weeks ago; she has a mortgage. Scary stuff.

I don't know. I just really encourage you, and everyone, to live WELL WITHIN your means, not close to the tippy top of the range.

Sara E. Cotner said...

Hi, Carrie! I totally hear you. It is scary that we will be living at the tippy top of our range for a relatively brief period. But then the dust will settle and we will be living in the house that we want to raise our children in, on a half acre, in the neighborhood where I want to start a school, with a totally comfortable mortgage payment, and hopefully an amazing interest rate that will keep our costs down even lower for 30 years. There's at least 5% built into the construction budget for unforeseen costs. If something completely unexpected and awful happens, we can pull out of our retirement account, which would be terrible but it would be a temporary withdrawal and then we could build it back up once I'm working full-time.

We'll see how it goes. I may be back in a year with a post about how one should not live at the tippy top of their means, even for a short while.

katharina said...

I´m not sure how the system works in the USA. But the appraiser I suppose is someone working for a bank that will lend you money? Could you try comparing different banks? It might be quite a difference in how they judge a situation? Maybe another bank will make an offer that is a little bit less problematic for you to save towards?
Good luck!

BB said...

I wonder about how you grew up if you don't view things most people just can't afford as extravagances, which they are. I didn't stay home because I just couldn't afford it. And I would have loved Montessori school or a brand new home, but we couldn't afford it.

My nephew, who reminds me a great deal of you, recently asked to borrow money for a down payment. I told him this out of love: You don't need such an expensive house, if you wanted such an expensive house, your wife shouldn't have quit her job. You don't need short-term help, you need to learn to make choices about how you use your money. Those choices are always HARD, and you can't do everything that is important to you. You have to learn live within your means.

I've been through a layoff with a mortgage payment, and it sounds like you are way too close to the edge for my comfort level. You will be a car accident or a layoff or a leaky roof away from complete disaster.

Sara E. Cotner said...

Hi, BB: Since you asked, here's an explanation of how I grew up. My father didn't want to have anything to do with me (he already had another family), so my mother (a college drop-out) moved away from her family in New England to start a new life in California when she was 23. I spent my childhood alternating between living with a step-father and living with just my single mom. At the pinnacle of my mom's career, she was working at Burger King as a manager.

I started working as early as I could as a babysitter, and then I got my first formal job when I was 16. I also worked all the way through college. I attended an expensive private college (because I wanted a small, intimate learning environment with small classes and close contact with professors) with financial support from my grandparents (in addition to merit-based scholarships).

Over the years, I've internalized a strong work ethic. I believe that I can achieve things if I work hard. I also realize, however, that in the United States, work ethic is not enough. We are a society that pretends to be a meritocracy, but we really aren't. Due to racism, sexism, classism, heterosexism, ageism--etc.--different people have different forms of privilege that make it easier or harder for them to craft the kind of lives they want for themselves.

That's why I'm an educator. I believe that helping people attain an excellent education is the best way to help others achieve choice in life. I want choice in my life (the choice to stay home with my son for the first year of his life, the choice to buy a house, etc.), and I want to help other people have those choices, too.

The house Matt and I are building is not extravagant. It is not costing more than an existing house that we would buy. It's not a particularly big house, either. In fact, it's about 400 square feet smaller than the average new house in the United States.

Matt and I will be stretching ourselves very thin to buy the house, but only because it's difficult to pull together 20% of a house's value. Once we get through that hurdle, our mortgage payments (plus insurance + taxes) will be slightly more than we're paying in rent right now. And even though we both plan to work full-time throughout our children's childhoods, we will still be able to afford our mortgage if we drop down to one income for various reasons.

Matt and I do live within our means. We pay off our credit card bills in full each month. We've saved up a chunk of change for retirement.

In this space, I talk about our struggle to make our choices work for us. It's not easy, but it's worth it to me. I want to send Henry to a Montessori school, and I want to build an awesome house for him to grow up in. By living frugally and continuing to save money, I believe we can make it happen for ourselves.

Erin Curran said...

Thanks for sharing your history with us! I have no experience with buying or building a house so I really don't have an opinion on the matter. I'm just rooting for you that everything works out!

fuzzy said...


I understand what you value, and that you are working toward your values. That said, most of what you are talking about IS an extravagance for people. Staying home is a choice most women don't even get to think about....there is no room in the budget for any income to diminish. Around here, the Montessori daycare is 2-3 times the cost of a regular daycare. I know, because I wanted to help send my granddaughter.

If this is what you want, is there any chance that you can get a loan with PMI? That should let you have less than a 80/20 LTV ratio, and you could refi in 3 years for a much more favorable rate, since you would then be working full-time?

Emily said...

I was going to ask the same thing as fuzzy - in this market, surely you can get more favorable loan terms?!? You aren't first time homebuyers so FHA is probably out, but I'm not sure what kind of special incentives there are for new construction right now? I wouldn't jut accept what one bank says on this. Make sure they know you are comparing and may leave for a better loan.

Sara E. Cotner said...

Hi, Emily! The loan terms aren't unfavorable; the problem is the appraisal. We could go to a different bank and get another appraisal (especially because appraisals are so subjective), but that would cost another $600 and many, many more hours in reapplying for another loan. That's why we're trying to appeal to the bank to revise the appraisal.

fuzzy said...

Well, no. You can ask your current bank if you can increase the LTV ratio and use PMI on the current loan. It will increase your payments, yes, but can easily be refied once you finish construction and can get a better appraisal. Besides, it's easier to get a good appraisal on a refi than on a theoretical to be built home.

(Used to be in the business....)

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