S2E33 – Don’t Make These MISTAKES When Buying A House in 2023

Do NOT Buy a House In 2023 without understanding the mistakes we have made when buying and selling real estate. What do you have to consider when buying a home in this housing market? In this episode, we discuss the mistakes that we have made as both home buyers and home sellers to help you become The Educated HomeBuyer.

✅ – Want to get connected with us or to a local expert in your market, please reach out at http://www.theeducatedhomebuyer.com/expert

Connect with me 👇 Jeb Smith (huntington beach Realtor/orange county real estate) DRE 01407449 Coldwell Banker Realty ➡I N S T A G R A M ➳ https://www.instagram.com/jebsmith ➡Y O U T U B E ➳https://www.youtube.com/c/JebSmith

Connect with me 👇 Josh Lewis (Huntington Beach Certified Mortgage Expert) DRE 01209148 Buywise Mortgage M:714-916-5727 E: josh@buywisemortgage.com ➡I N S T A G R A M ➳ https://www.instagram.com/borrowsmartjosh ➡Y O U T U B E ➳https://www.youtube.com/c/buywiseborrowsmart

📩 – info@theeducatedhomebuyer.com

For Show Notes, See Below 👇

[00:00:00] Jeb Smith, Huntington Beach Realtor: Today we’re gonna go a little bit different direction, if you will, and talk about mistakes. Mistakes that Josh and I have made when buying and selling property, as well as some mistakes that we’re seeing out there in the market at the moment with both buyers and sellers. There’s this belief that Josh and I don’t understand what people out there are going through or what they’ve been through in the past. 

And that because we’re out here educating both buyers and sellers, that we’ve got it all figured out and there’s never been any mistakes. And so we both thought it was important to maybe talk about those mistakes and, bring back some stories, if you will, some reminders, ’cause it might help some of those out there that are in the market struggling with the same things. And help understand that we’ve both been, where you have been and there are still options out there to become a homeowner. 

Josh, when I say mistakes, what comes to mind? 

[00:01:08] Josh Lewis, Certified Mortgage Consultant: Everything. Errors of omission and then errors of comission. What are the things that you didn’t do that you could have, should have, would’ve done? What are the things that you did do that were dumb, suboptimal not likely to work out well for you?

 I will say, Most everyone in my family, I come from a family middle class, very middle class, no one really wealthy, no one made tons of money. And they’ve all enjoyed very comfortable retirements, largely due to real estate investments. And we talk here about real estate being a get rich slow scheme.

It very much so was. We’re not talking about, they were buying and selling houses, investing in stuff, rotating up into new properties. It was largely buying, paying the mortgage down, not taking cash out, and arriving at retirement with one or two properties with very low mortgages and a lot of value in them.

Relating that back we’re gonna go through things that you’ve done. Things that I’ve done, we’ve been on very different paths, although Jeb viewers at home are gonna say, these guys look like they’re the exact same age. I am a little bit older and wiser than you. So I have about five more years of experience, of mistakes, both good and bad on you.

And we’ll go through that. And even you talk about people today saying you don’t understand because Jeb, you got into the market 22, 23 years ago, Josh, 27, 28 years ago. 

[00:02:26] Jeb Smith, Huntington Beach Realtor: Not quite that many, but yes… 

[00:02:26] Josh Lewis, Certified Mortgage Consultant: That’s true. But there’s always headwinds, there’s always problems. I will relate it back to this Jeb. One of those people who did very well in real estate in my life is my aunt. She’s retired, owns her home free and clear. Sold a free and clear home. That was their second home in Havasu made a ton of money off of that. But when we bought our current home in 2003, she told me, she says, you are insane.

I paid $580,000 for my house in 2003. She goes, that’s crazy. House will never be worth that. You’re gonna lose your ass and you should never do that. And [00:03:00] that is the view of someone who bought her first home, very similar to mine, but she bought it in 1972 for I believe $36,000. So when you hear $580,000 it’s crazy.

So don’t feel like we’re looking and saying, Hey, go buy an $850,000 starter home and that’s, Normal or rational or easy. It wasn’t easy buying that house for $580,000 in 2003 either. So everything has to be in its proper context and realize that it’s really easy for us to look back and say, it was easy for my aunt in 1972 as a grocery store checker and her husband who drove a gasoline truck for a Union 76, that they were able to buy that house ’cause it was only. $36,000. 

Yeah, but once we got to the eighties, interest rates had shot up. Home values had gone up in the expensive parts of the country. It has never been easy for anyone. So it’s not easy today. Wasn’t easy 20 years ago, it wasn’t easy 40 years ago. It may be more difficult today than it has been.

It doesn’t mean that you just punt on the decision and say, I’m not getting into real estate ’cause it’s too difficult. Because the end result of what it does for your finances by fixing your housing cost, accumulating equity, getting leverage on your side is worth figuring out how to make it happen. So we’re gonna reverse engineer that today by talking about the dumb things that Josh and Jeb have done.

[00:04:24] Jeb Smith, Huntington Beach Realtor: We’re definitely gonna do that. And I’ll start because I think I probably have the biggest and dumbest of them all. And that was buying a house at the peak in 2006, new construction. For those of you who don’t know and many don’t, I was actually married prior to being married to my wife now for a very short period of time.

That relationship, we were both in the mortgage business. She was a wholesale account executive, made a lot more money than I made. Big numbers and that was a time when money was very easily made because of loan programs and housing and all of these different things.

And so we had bought and sold a couple of homes. 

[00:04:56] Josh Lewis, Certified Mortgage Consultant: Jeb. Jeb, one thing on that. Not only easily made, easily borrowed. 

[00:04:59] Jeb Smith, Huntington Beach Realtor: Oh yeah. 

[00:05:00] Josh Lewis, Certified Mortgage Consultant: So especially for a high income earner, you could have bought any property you wanted at that time. 

[00:05:04] Jeb Smith, Huntington Beach Realtor: Yep. 

[00:05:05] Josh Lewis, Certified Mortgage Consultant: Realistically, with you and Toni’s income could have bought any property anywhere in the US with the income you were making and how easy it was.

[00:05:11] Jeb Smith, Huntington Beach Realtor: And we did on several occasions, and we made some money on different properties, and we’ll talk about one of the others here in a moment. But, we bought a property, new construction, downtown Huntington Beach, 1.6 million. Put 10% down, so $160,000 down finance the rest. And little did we know we were buying at the peak in the market.

Now what I will say is that the decision to buy that house was more on her than it was on me largely because she was making the income. She basically had way more savings than I had at that time, and the decision was largely on her. That’s where she wanted to be. I just went along with it, honestly, not really asking a lot of questions.

I was young, 24 at the time, and that ended up being a mistake on several different levels. But the largest one really not thinking it through. But, [00:06:00] buying that property. Putting 10% down. We ended up selling that property for I think just over a million bucks, maybe $1,100,000.

Was it a million? I can’t remember if it was $1,100,000 or $1,160,000. Either way, it was about a 30 plus percent loss on that property. And it ended up being a short sale on that deal. Obviously property went bye-bye. And that was the time. Her and I were actually no longer together either.

So everything went bye at once. And fortunately, property was in her name. I was on title. It didn’t affect my credit on that particular property. Now what could have been avoided or done differently so that those mistakes weren’t made? Honestly a number of things. But the biggest one was she went, I went from making a lot of money.

And I say a lot, I’m not gonna boast or brag or whatever on the numbers, but essentially, large six figure incomes and they went down to essentially nothing during that period of time because of the changes in housing and what have you. And we made the choice, right or wrong to walk away from the property and do what we did even with money in the bank.

Now people will look at that and go Jeb you basically used the system, you had money. Whatever, it was what it was. But we chose to keep money in the bank and let credit go. In this case, the credit didn’t affect me, so it was less of a decision on my side. But decided to keep money versus continuing to pay for something that we didn’t think was going to come back within a reasonable amount of time, and our relationship was essentially done.

So better part of, five or so years later, things were different. And we’ll talk about that. But Josh, that was a huge mistake. We both knew that the market was changing. Conversations were being had. I was having it with clients at the time. I just didn’t think we thought it was going to happen as fast as it did and affect both of us as quickly as it did. 

[00:08:01] Josh Lewis, Certified Mortgage Consultant: I wrote a report with Doug Fabian, financial advisor with a mutual fund newsletter, that I was his mortgage expert at the time. We wrote like a 30 page report giving you every reason why we thought home prices were gonna drop at that point in time. And it’s almost cute in retrospect. We say, Hey, We think home values are gonna drop 20%. And in retrospect, 20% would’ve been awesome. 

[00:08:19] Jeb Smith, Huntington Beach Realtor: Yeah. 

[00:08:19] Josh Lewis, Certified Mortgage Consultant: If you had that house at 1.6 and it only dropped 20%, you guys may absent the divorce, have made a different decision because it was a bitchin’ house. You may have tried to fight and save it.

And you said something there that’s important. I think everyone should note It was a decision and it was a decision within your rights and for anyone else at that time. When it works out, a lender makes a lot of money on the interest over the life of the loan.

When it doesn’t work out, they made the loan based off of the collateral. You are not signing your life away. You’re not saying that you can’t walk away from it. You’re not saying that you will sell every other asset to make this loan good. Many people choose that route, and that’s what feels right for them.

But a secured [00:09:00] loan is exactly that. I am pledging this house to borrow this money and to make those payments. When it doesn’t work out, the lender gets the house. That’s the way it works. They don’t get anything else in that situation, including other assets that you may have. So when I look back at that situation, As long as you go in eyes wide open and knowing where you are at in the cycle in the market, we had a lot of bad loans out there.

We had a lot of people with limited equity who had bought late in the cycle, and those bad loans were what was leading us to believe the 20% downturn was coming. So when you compare and contrast that to now, the similarity in the market is that prices are elevated. Prices are at a near term high. If you look on real terms, I believe we’re still a little bit below that level in terms of real values once you account for inflation.

But as a buyer in today’s market, the lesson that you take from that is there’s definitely a yellow flag out there. You shouldn’t, if you’re not certain in your relationship, you’re not certain in your income, you’re putting a minimum down and you haven’t been making money very long. Definitely is a market to be cautious, whereas in that situation, you guys wanted what you wanted and bought a bitchin’ house and again, hindsight being 2020, you say it was the wrong decision, but it may not have been the wrong decision on the way in.

[00:10:20] Jeb Smith, Huntington Beach Realtor: Like a lot of people at that time, cars were what was important in life. Houses were what was important, and none of those things matter at all. Watches, all of the things that mean absolutely nothing, provide zero real value in your life were things that were important to me at that time. 

My values have changed. A lot has changed since then. But I think that’s where the podcast really stems from Josh, is it’s the idea of educating home buyers that, Hey, listen. For one, you can make mistakes and still use housing and buy housing and still get to where you want to get for one.

But also using the podcast as a platform to teach people about some of the things that I was aware of but really not even paying attention to myself in detail and educating myself on these things. And I think that’s important. People wonder why do you do this? That’s part of the reason. I’ve been there. I’ve been in your shoes, I’ve been in those positions, and I think it’s important to look back at that and try to teach from it. And so here we are. 

[00:11:22] Josh Lewis, Certified Mortgage Consultant: One of the things, Jeb, that I think that they’re gonna see here is we talk about errors of omission, errors of commission. In real terms, you are more, I’m aggressive, but you’re more aggressive and bolder than I am.

So the things that you’re talking about are almost. You took action, you made actions and the actions didn’t work out well. Josh deliberated, when we get to that section deliberated and thought a little too much and didn’t do things that would’ve made a big difference. So there’ll be two, two sides to it.

But with that, do you wanna transition to the properties that you sold during the downturn? 

[00:11:53] Jeb Smith, Huntington Beach Realtor: Yeah. Yeah. So at the same time happened to own two rental properties outta state. Had an investor that I was working with here in California, owned a [00:12:00] bunch of property. 70 plus properties, I believe at the time.

And he was buying in markets that he thought were going to appreciate over time. And let’s be honest, the guy was spot on in everything he did. He did his homework. He was looking for growth in population, growth in jobs, healthcare, just infrastructure things that were going to bring people to a city.

And at the time he had properties in Surprise, Arizona, Las Vegas. The markets that were booming at the time, and these are the markets that got hit quite a bit. St. George, Utah was another. And then he was buying property in Boise and Lexington, Kentucky, and some places in Florida. And so he basically, he would go in, he would create these cohorts of groups, find new construction builders, basically work a deal with them and say, Hey, listen, I’ve got 15 investors, 20 investors are gonna come in, we’re all gonna buy a property, two properties, whatever.

And then he would find the property manager and basically set it all up. It was a good deal for him. One, because he got something out of it. Less fees, different things. And for investors that were smart enough to keep their properties, they did well in these markets and I will say that I wish I still own them. But because of everything that was happening with Property one that we talked about a moment ago life changes in divorce and income and all of these other things.

I owned a property, one in Boise and won in Lexington. Bought the one in Boise for $189k back in November of 2005. Ended up selling that property. As a short sale for 140,000. Now, what’s important to note here? Never missed any payments on these properties. Never let my credit get ruined. I just continued to pay the mortgage.

In fact both the properties cashflowed, which was crazy, right? And I still decided to sell them for less money at the time because I had unknowns. I was going through a divorce. Business was changing. I was transitioning into real estate full-time at that time, just making less money and quite frankly, just scared about the market.

I let emotions dictate decisions and I always say that people buy emotionally just justify logically. In this case I was doing, similar things, right? I was selling emotionally and then using that logic to justify it, but ended up selling it for 140,000. Today again, hindsight’s 2020.

Today that property on Zillow of all places is worth like 435,000. So would’ve been a nice nice property to have. Rents would’ve gone up. It would’ve appreciated, it would’ve done a lot of things. Similar story in Lexington. Purchased for $173k in April of ’06. Sold it for $142,235. The estimate, today’s $347,000.

So had I just continued to do my plan, let the tenant pay the mortgage and whatever. Maybe there wasn’t a lot of cashflow there, but just continue to pay the mortgage. I would’ve had equity, I would’ve paid down the principle. I would’ve had write-offs. I would’ve done a number of different things by just letting real estate do what it does best, and that’s appreciate over time.

Josh that’s [00:15:00] the bulk of my mistakes there. 

[00:15:02] Josh Lewis, Certified Mortgage Consultant: Yeah. The interesting part to that, to me is the decision that when it was cash flowing, it wasn’t bleeding you dry. It was an easy decision. A lot of people overpaid for properties later in the cycle that didn’t cash flow.

You didn’t really have a choice. It’s Hey, the best and easiest way outta here is to do a short sale. Dings my credit a little bit, but it gets it off there, satisfies the debt and can move on. So with that big picture, just know what the purpose is of property if you’re buying it as an investment.

We do have a lot of investors in the market wanting to get in the market, and I’ll say Mike Cantu a guy out in the Riverside area owns hundreds maybe not hundreds, but high single, high double digits, 70, 80, 90 houses. He says, every house that he buys has a purpose. It’s going to do this, it’s gonna pay for my retirement, it’s gonna pay for my kids’ college. It’s gonna cashflow and it’s gonna pay for my car payment. 

So know what the purpose is of a property, and if it’s meeting that objective, try to not be emotional about it. Remembering Jeb, there’s a limit to the lessons that can be learned from your situation because that was the perfect storm. It was the mother of all real estate crashes. 

As much as people would like to believe, we’re going to see that again. We will never, ever see anything like that again? We can have a downturn. You can lose 10, you could possibly lose 20%. You lost 35% on a trophy home near the beach. Inland areas lost 50, 60% of their value. Other parts of the country lost 50, 60% of their value. 

We’re never going to see that again, even in a potential bad downturn. But it’s important to just think through everything on the way in. So we talk about difference of errors of commission versus errors of omission. When I look at this, I had a plan when I first got into the business.

I graduated in 95, started doing loans at the end of 1995. So it’s funny to me that people buying homes and making the biggest investment of their life and the biggest debt would look at a 22 year old who graduated from college six months ago and didn’t own anything but a car and would take advice on what to do, but they did.

So thankfully, over 27 years we’ve learned a thing or two. But I had a realtor who was helping a couple of different investors buy distressed four unit buildings in two pretty high priced areas in Orange County. Here in Huntington Beach and over in West Side Costa Mesa. So both those areas have pockets that are lower end areas, and at that time, they were picking up fourplexes for under $300,000.

Now these were distressed, they needed work. But I’m sitting here saying, I live at home with my dad. I live rent free. I can buy this as an owner occupant. I can get ’em dialed in, can live there for a period of time, convert it to a rental, and it will be the easiest way to ever acquire units at good terms, and in the big perspective, it would’ve absolutely worked out perfectly.

Those properties, again, we could get ’em for a little less than $300k. At that time, a full renovation on a 3000 square [00:18:00] foot floor plan, it’s actually closer to 4,000. about a 4,000 square foot fourplex. You could do a full renovation on them, rental grade for about $65,000. You’re into ’em for $365k.

You have a loan of about $350k. Now, rents weren’t great at that time. It would’ve brought in about $3,000 of rent. With 8% mortgages, it would’ve been a $3,000 payment. But again, I’m living at home. This thing breaks even. Now, I have an investment that’s giving me some tax shelter, is building up equity, and as we all know now in hindsight, You would’ve ridden the interest rates down.

Those properties today, I haven’t even looked at West Side Costa Mesa, but approaching $2 million, well over 1.5, 1 6, 1 7. 

[00:18:41] Jeb Smith, Huntington Beach Realtor: Oh, more than that. 

[00:18:41] Josh Lewis, Certified Mortgage Consultant: If I’m into ’em for probably more than that I try not to think about it. Jeb, I downplay it in my head. It’s not as, it’s not as bad as what you thought. So if we had just got one of those, and the funny thing is both of the investors that were buying it that time got super aggressive.

They bought tons of them and then also went through divorces and lost most of them ’cause they were just pulling cash out as the market changed, these things were cash flowing. They did the right thing, acquired each of ’em had 5, 6, 7 of these buildings, and that’s life changing. If they had just done the right thing, just got ’em rehabbed, got ’em rented, ridden the market up, they would be sitting here with millions of dollars of equity and tens of thousands of dollars a month.

The rent on those now, $3,000 in 1997 total, more or less was the rents. Today you’re talking $2,500 for the two bedrooms. Even say on the low end, $2200, so 4,200, probably $3000 for the bigger and a little one, like $9,000 a month rent. So it would’ve been a life-changing investment. Now, don’t feel bad for me.

The reason why we didn’t do it is we had an opportunity, that same realtor had a seller with a condo here in Huntington Beach and they wanted to sell it and it was a great opportunity and it was a couple blocks over from where Jeb’s house was that he lost and it was a bitchin’ area and we got it and it was a cool house and it was a great deal and we made a lot of money on that.

But in hindsight, the trophy property and getting that pretty thing that my soon to be wife and I liked, kept us from getting a thing that was a much bigger and better investment. And when I look back at that, Jeb, what is the lesson? It’s on that first property it’s not about what’s gonna be the coolest or the prettiest or the most enjoyable, it’s what’s going to set me up best for the long haul.

That could be having the lowest payment so that you can save more money. It could be possibly appreciating more over the long haul. It could be what would set up as a rental when you move on to your next property. But what other lessons do you think that a listener could glean from my experience there, Jeb.

[00:20:38] Jeb Smith, Huntington Beach Realtor: I think you you nailed it there. It made me think of yesterday I was driving to my car, driving to see a client in Long Beach, and I popped on Instagram stories and did a quick story about, answering the question, who is buying in this market? That’s the question that a lot of people are asking, who is buying in this market with, prices, quote unquote inflated in rates at near term highs or what have you.[00:21:00] 

And it was a really good example because I was going over to a client’s property that I helped him buy in 2015, 2016. Somewhere in that ballpark. Small two bedroom, two bath. At the time, him and his now wife were just dating. No kids, no pets, nothing. And now he has essentially outgrown that property.

Has a daughter who’s now three, has a large lab lives on a second story of a condo building downtown Long Beach, and the property just no longer works for their life. Now what’s nice is when they originally bought it, mom had to co-sign with them because of income. Didn’t help ’em pay the mortgage, just co-sign to allow the financing to actually take place.

Now they’re in a position where they have equity in that property. They have enough to put 20% plus down on the property that they’re buying because they took that initial step, bought the first property that wasn’t perfect. But it matched where they were at that time in their life. They’re now looking at a single family home.

A higher price. Mom no longer has to be on the loan to qualify because now their incomes, they have better paying jobs and just in a better position in life in order to take advantage of what they wanna buy. And they’re buying at a time where rates are high, chances are rates are gonna come back down and give ’em an opportunity to lower that payment even further.

So you know that. It’s using that property as a stepping stone. Now for some people that might be their only property and that’s okay. But what I see people doing, and we’re gonna talk about this, is getting caught up on having to find the perfect property with everything that is dialed in to start with because they’re watching Joanna Gaines because they’re watching, different people.

Jasmine, on, on HGTV, do all of these properties. And that’s what we want. We all want that. But the reality is a lot of us aren’t able to get that. And so instead of just saying the hell with it, if I can’t get that, I’m gonna get nothing. You see how that works out over time. And so I think it’s a really good example of taking the step when it’s the right time in your life, as long as you’re comfortable with it, as long as you’re comfortable with the payments and you’re comfortable being in that position. So that’s what I got from them. 

[00:23:01] Josh Lewis, Certified Mortgage Consultant: And moving on from that, I would say my biggest mistake is not buying and holding more of the properties that we acquired through that flip period.

So those of you that are longtime listeners know two things that from 2008 to 2012, 13 primarily existed off of buying and selling homes for a profit. We were still doing loans, but we’re talking, 20% of the loans that we were doing prior to the downturn. So the only way to pay the bills and make ends meet was do other stuff.

And that was the opportunity in the market at that time. And if you’ve listened for a long time, you’ve also heard me say that I would scream to anyone from 2009, 2010 on that if you are renting and you are in a position in your life that it makes sense for you to own. This is insanity. So we primarily Bought in the Anaheim area, so Central Orange County, strong, first time buyer area, and we were picking up homes when we started at $220k to $260k. 

And again, a $50-60,000 renovation at that time would be a full renovation. Roof, windows, [00:24:00] bathrooms, kitchens, flooring, doors, molding, everything that you touched in a house was brand new. So for $300-325,000, you had a brand new home. And at that time the rents were $2200-2400 for those houses, and a mortgage on them would’ve been $21-2200

So we did close to 40 properties. I look back, Jeb the ones that you and I always get a chuckle out of, even late in the cycle in 2015, you had a seller that bought a unique property that had two single families attached to it. 

[00:24:32] Jeb Smith, Huntington Beach Realtor: Mm-hmm. 

[00:24:32] Josh Lewis, Certified Mortgage Consultant: And they didn’t want them, so we bought ’em for a hair under 400,000. They were in decent shape, did a minor renovation on each one of about $35,000, and we sold ’em for just over $500,000. So it was a nice profit, rang the cash register in the short run. But in looking at those, at that time, I’m just sitting there going, I don’t see a world where these get to more than say, $600,000. Cash flow is basically break even unless we put money into them. And I would rather have the cash right now. 

[00:25:03] Jeb Smith, Huntington Beach Realtor: Big yards too. Could have done an ADU, big yards or these reviving all sorts of things. 

[00:25:06] Josh Lewis, Certified Mortgage Consultant: Yeah, all sorts of things. And we look back now, Jeb, and those are closing in on 800,000. Despite all of the drawbacks, the negatives that I saw. So those are just two of the best examples. Now, I’m not gonna beat myself up too bad. I own two properties that we bought through that timeline that are worth. One is about two and a half times what we paid for it, and the other one is about three times what we paid for it.

Both of those had fairly extensive renovations. But we did good when we should have crushed it. Looking around it, my brain telling potential homeowners, home buyers, you should be doing this. I should have found a way to do more of it. I look back and I say, Jeb, my big lesson is I limited myself to the cash that I and my partner had available to us.

So we pooled our money and we would use hard money loans and what our assets plus those hard money loans. That’s how many we could do. If I had the to do over again starting in 2009, I would go out to anyone who had $5 in the bank and try and raise a couple million dollars and be doing 5, 6, 7 of them at a time and keeping as many of them as possible because the one thing, the thought that always occurred to me at that time people ask, who’s buying in this market? What if owners sell their properties? What if the hedge funds sell? One of the things that occurred to me at that time are a lot of seniors say, so say you’re 70 years old and you retired in 2009.

You have your money in the bank and you’re getting less than 1% return on that money. If you put $300,000 into one of these houses and you have the cash flow off that, again, $2,000 a month, $24,000 a year off of your $300,000 versus less than $3,000, plus, you were gonna get the appreciation over time and you would have some tax benefits.

So all of the things went through my head of why this was the right thing to do, but just didn’t step out and acquire more of them either because of the risk of taking cash flow out of circulation or not [00:27:00] truly being committed to the process? 

[00:27:02] Jeb Smith, Huntington Beach Realtor: Good lessons nonetheless. Right? Again, like you said, two sides of it, right? One of us has a tendency to shoot first and ask questions later. The other one has a tendency to think, overthink in some cases, and not take the actual action. So there’s not a right or wrong plan. I’ve benefited in many ways by having my method, but I also have regrets in some of the stuff that I’ve done too quickly without thinking it through as well.

Another that comes to the example before we talk about what’s happening to buyers in the market right now. We always tell you never sacrifice on an area, right? And sometimes you have to just because of affordability and some other things. In this instance, we didn’t have to because of affordability.

This is back in the day as well prior marriage and ended up buying in South County. And, just for, I don’t know why, quite frankly just seemed like, I guess the right decision at that time, for whatever reason. Ended up being in like a family community when I was younger, she was younger, we weren’t in that family environment mentally and just didn’t enjoy being there. 

And so we weren’t really a big fan of the location, but what we tried to do was make ourselves fan of the location by doing things like a swimming pool and doing different things to the house to make it what we wanted when in all reality the real answer was to not be there to start with. And so what we ended up doing was putting a pool into a house and doing all these upgrades, and then ended up selling the house almost immediately once it was completed. Fortunately, we didn’t lose money because the market was still doing well at that time.

But I think having a plan, thinking it through. The things that we talk about all the time are important in whether you’re buying a house, doing something else is creating a plan first and then following that plan or sticking to that plan? Like I mentioned, I’m the kind of person, there is no plan.

Just whatever happens is the plan. It can work out, but having a plan typically works out better. So that said, Josh, I think transitioning into what we’re seeing buyers, sellers at the moment do that we feel are mistakes. Maybe not mistakes in everybody’s eyes, but where they could be putting themselves in that position to overthink things or not take action because of media headlines, that sort of thing.

[00:29:12] Josh Lewis, Certified Mortgage Consultant: You have on here one of those things is sacrificing on important things just to buy a house. We do regularly talk about, here on the show the importance of buying a home for building your financial foundation. The most important thing you can do, the most important things you can do for happiness and a solid financial foundation is find a partner to get into a relationship with.

Get a solid career, buy a home, and invest in a 401k, like those four things, if you just did that. So you have dual incomes. A partner you like. You buy a home, you live there for an extended period of time, and you put 10% of your income in a 401k, you’re going to arrive 25, 35 years down the line. You’re gonna look around and go, Hey, this is pretty good. 

But I have a potential client, and we’re going through it and I’m looking at you like why are you saying [00:30:00] such a low number? I’m seeing that. We can qualify you for this. You’re telling me you can afford this.

And we start talking. And what he said is we have two children and it’s important to me. They go to a certain school and that’s $1,200 a month for each, so $2,400 a month. And that was important to them. And he had some very good and very valid reasons. We have to adjust our thinking, not from what can you qualify for, to what should you buy so that you can do both of these things.

And childcare, schooling, those things are not the only thing, but it is important to remember that it relates back to, we talk all the time. People will ask me Josh, how much can I afford? Got no idea how much you can afford. I know what I can qualify you for. To make sure you are thinking through what is important in life, what are the things that you want to do, and make sure that home ownership doesn’t prevent you from being able to do those things again.

We’ll go back and I will say owning a home is incredibly important. We did an episode a couple months ago. If you’re not going to buy, what do you need to do? And you need to massively ramp up your other savings if you are not going to become a homeowner. But that doesn’t mean become a homeowner at all costs, and that sacrificing anything and everything else that you wanna do is worth it just to own a home.

[00:31:19] Jeb Smith, Huntington Beach Realtor: No I agree. And one of the other things that we mentioned earlier is the need to find the perfect home right now. I do believe that you shouldn’t sacrifice on things like bedrooms and school district and certain things that are important to you or. Buying something just to buy it without thinking where you’re going to be in a couple of years.

And what I mean by that is oftentimes I’ll have a client looking at, say, a three bedroom house, three bedroom’s important because hey, we want a guest room for when family comes in and we’re planning on having a child or whatever. So we want that third bedroom. And then what happens is, Inventory’s low, market’s crazy, Things are selling quickly, and they go maybe I’ll just consider a two bedroom house.

And let’s back up. Let’s talk about why that’s not a good idea. One, less desirable for the most part. Don’t appreciate as much as say a three bedroom would. Harder to sell just different things that you need to think through. Now, for some people it’s still the right decision, and that’s okay, but as long as we’re talking about ’em and thinking about ’em and not making an irrational decision just to do something because the other’s harder or more difficult.

That’s okay. But. Have we thought it through? Yes we have. Okay, we’re ready to move forward. Same thing goes when people are considering like a studio. Nothing wrong with a studio condo, but harder to sell. Less people interested in ’em. The same things I talked about a minute ago. 

And what happens is those are the properties sitting on the market because there’s less people interested in ’em. So the two bedroom that you really want, or the one bedroom that you really want, Yeah, those are moving quickly because there’s more people interested in them. Why isn’t one selling? So don’t sacrifice on those things just to get into the market.

And [00:33:00] I think, we’ve seen FOMO over the last couple of years. We’ve seen, people sacrifice and do crazy things, waive contingencies. And in some cases that’s okay. It’s okay to waive some contingencies. Waiving all contingencies, never seeing the property in person and doing these things.

Those are things that could end up biting you later on because again the action is happening too quickly in many cases. And Josh, another thing I wrote down here is basically letting others dictate your decision on buying a house.

And what I mean by that is, it’s the right time in your life. You’re married, you’re getting married, you’re planning on having kids, but yet you’re giving way too much credence and, paying too way too much attention to what YouTubers are saying about the market. What, CN N or MSNBC just put on their headline and, or Forbes, for example, and, yeah, it’s bad, it’s whatever. I’m not gonna do it because of this. I’m gonna wait for better times. 

That’s okay if you wait for better times, but just understand why you’re waiting and don’t get caught up in Everything that’s going on around you because it’s click bait if you will. 

[00:34:10] Josh Lewis, Certified Mortgage Consultant: And I think your plan is if you say, Hey, today is not the right time for me, here’s my plan. The majority of Americans want to be homeowners. They may not want to do it today. They may not make the decision to become a homeowner today, but they still want to be homeowners. So if your decision is today is not the right time for me, I think it’s important to define the criteria of when the right time would be.

You had talked about fear of missing out. I think we have a lot of people today that have a fear of getting in. A lot of our prime home buyers, 32, 33, 34, 35 years old, they were teenagers when many of their parents were losing homes, doing short sales, going through much of the distress that you talked about.

So that’s their point of reference, that’s their memory. So they want to avoid that at all costs. So we have no lack of websites, headlines, YouTube videos, talking about for the, literally the last five to seven years about the housing market is going to crash and there are incredibly obvious dissimilarities between that market and this market.

Does it mean that home values can’t come down? No. It doesn’t mean they can’t come down. It means there’s absolutely nothing even resembling the recipe for what people are fearing is happening. And I’ll go back, one of the stories that we tell here on the show, Jeb, is my wife’s friend’s parents, they literally bought at the absolute peak at the market, and here they are, 17 years later sitting on a million dollars of equity with an incredibly low mortgage payment heading into retirement with the opportunity to sell that property, put some money in the bank, and go to Tennessee where they want to go and buy a home cash. 

That was the worst perfect storm, terrible crash ever buying close to the absolute peak of the market and just riding it out and going through it. So that’s your worst case scenario. If you have a [00:36:00] long-term time horizon, you make sure you’re buying something you can afford in an area you want to be, and you’re willing to ride it out. But that being said, that is incredibly unlikely to happen. We’ve talked about here we’re more likely to see mean reversion through a sideways trending market for the foreseeable future.

Just saw a headline two days ago. Robert Shiller, the creator of the Case Shiller home Price Index, one of the big people screaming from the mountaintops in 2005, 2006. This is a bubble. This is going to end poorly. Basically said the same thing. He says, I see this market trending sideways for the next several years until we get to better fundamentals in terms of more income and lower interest rates. 

Just a long way of saying there’s no similarity between then and now. You have to know where you’re at, what you want, all of the decisions that Jeb had talked about, your timeframe, your situation with your relationship, and when those things work out, do not let the noise keep you from entering into the market at a time that should be appropriate for you and your family. 

[00:37:02] Jeb Smith, Huntington Beach Realtor: Yeah. And along the same lines, so many people are worried about the price of their home, right? They follow it every day. They look at it like it’s a stock, like they have to sell it or in fact, some people don’t even sell the stock they just look at the price every day. 

You should not be looking at your home value every day. Your home value, the price of what your home can sell means zero, absolutely nothing unless you need to sell your home. So if you buy the home, hypothetically 500,000, and it drops to $400k, for example, 20% drop means nothing.

All you do is continue to make your mortgage payment, live your life, do whatever you were doing prior to it, and at some point you know it’s going to come back up in value. Now, I’m not saying that’s going to happen, but I’m just saying stop worrying about the price. Worry about where you are in your life, the affordability.

Can you do it? Having savings, having a longer term time horizon, and you’ll be good. Josh, last thing. What about the idea of people thinking, Hey, it’s less expensive to rent in my market than it is to own. Is that a valid reason for somebody to take a step back and consider one over the other? 

[00:38:09] Josh Lewis, Certified Mortgage Consultant: It’s a reason to pause and think it through.

Go back when I’m saying in 2010, I’m screaming from the mountaintops everyone that wants to buy a house should buy a house. It’s because even in expensive, Southern California, you could own with a minimum down for less than it cost to rent in most areas. Now we see the flip side of that. If you want to own a home, it’s going to cost you more than rent.

And people look and they say, Why would I do this? I’m super happy where I’m at, and I don’t want to pay a thousand dollars more, $1,500 more. It’s a shortsighted view if home ownership is right for you over the long haul because those dynamics are unlikely to reverse even if home values stagnate for 3, 5, 7 years.

Rents are unlikely to stagnate. So the example that I have, a friend of yours referred a friend of theirs [00:39:00] and we went through the numbers. They’re up in Redondo, young couple. They make good money, $130,000 each. So about $260,000 household income, they have 5% down. They wanna buy an $850,000 place.

That payment with the HOA dues is gonna be about $6,800. And they were a little bit shocked when they heard that. So I said, okay, what does it cost you incurrent rent or rent for similar things you would like to buy? 5,000 minimum. Realistically something nice, 5,500 to 6,000, but 5,000. Okay, so call it 5,000.

That’s a $1,700 savings. If we have 3% rent appreciation in less than 10 years, the rent will be more than the mortgage. If rates drop from 6.75 to 5.25, so not back to four or three, but somewhere in the low fives, that payment drops to $6,000 a month. Over 10 years, if you have a 3% appreciation, that $850,000 house goes to almost $1.2M, and you pay the mortgage down to $690,000.

So you’re sitting on $460,000 of equity in 10 years, and your house payment is less than what the rents are. If you don’t get a chance to refinance, it’s a couple dollars less. If you get a chance to refinance to the low fives, it’s seven or $800 less. And again, when I say kids, these guys are 31, 32 years old, so 10 years forward, they’re gonna be 40 hitting their prime earning years.

If they’re making $130k now, they’re probably gonna be making $170k – $180k a piece. So people don’t take into account how life changes over time, so something that is a stretch, something that is a little uncomfortable right now. If you can afford it and you can qualify without sacrificing the things that we talked about early, it is worth paying more to own a home than it is to rent.

No one wants to. In a perfect world, we wouldn’t do that, but that’s the world that we’re in. And in less than 10 years, in the most likely case scenario, you’re going to end up in a better position as an owner than as a renter. We have a lot of people, Jeb, we have a couple clients that literally, I think you referred ’em to me in 2014 was when I first talked to them.

We are in 2023. I believe I’ve talked to them every two to three years since then. And they look at it and they talk themselves out of it, and they look at it and they talk themselves out of it. 

[00:41:19] Jeb Smith, Huntington Beach Realtor: I’m curious, I gotta find out who is this? 

But yeah, good stuff. So hopefully, our mistakes helped you understand you know that it’s still worth it, right?

We’ve both made mistakes, but yet we’ve both are now in a position where homeownership makes up a large percentage of our financial net worth and will put us in a better position long term. With that said I guess the easiest and best advice, Josh, is our slogan here at the channel, which is buy right, borrow smart, build wealth.

Doesn’t happen immediately, takes time, but those three things right there will set you up for success.[00:42:00] Until next time, Adios.

[00:42:02] Josh Lewis, Certified Mortgage Consultant: Amigos!

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