From hindsight, I should have seen all of the warning signs, but the pandemic housing fever got the better of me.
In the summer of 2020, I moved across the country from New York to California to begin a new life.
I had been a homeowner for the past few years and things were going pretty well. When I was 27, I bought a cute condo with a killer view of New York City and enjoyed my time there for the most part. Nothing too crazy happened in my first home purchase except one offer rejection. The fulfillment of being a homeowner, tax benefits and the fact that I made decent money selling my first home convinced me that things are going to be the same, if not better, on the other coast.
Here is what happened and what I learned.
Gambling With High Interest Hard Money Loan In A Historic Low Interest Environment
In 2020, the pandemic hit. The Fed slashed rates to historic low levels. Tens of thousands of city dwellers moved out to the suburbs and other parts of the country seeking more outdoor space, better quality of life and lower cost of living.
On TV, in targeted social media ads, in your email inbox, almost every company related to real estate was telling you “there has never been a better time to buy property.”
It was indeed a golden window of opportunity for many to finally afford a bigger house at a much lower rate. A silver lining for the pandemic, right?
I quit my 9–5 right before the pandemic in pursuit of my own business. It was a liberating decision that I still am very happy about. It hasn’t been easy, but I already made more doing my own thing than what I made in any full-time job I had in the past.
I am well aware of the fact that there will be more hurdles to jump through for entrepreneurs and self-employed individuals when it comes to securing a loan. But I didn’t know exactly how much more difficult it will be and grossly underestimated it.
I thought if I put down more, I will still be able to get a loan. After all, I have excellent credit. My self-employed friends told me they had to put in a larger down payment and got the loan. That’s not a deal-breaker — I told myself if I have a clear budget and shop with the higher down payment in mind, I should be fine.
It turns out not only does my newly self-employed status means much more down payment requirements from lenders, it actually disqualifies me from all conventional loans (bye-bye, below 3.00% interest rate) until I can prove one full year of self-employed income from bank statements.
I was about 8 months in and making consistent and much higher income than before, but from a loan underwriting perspective, that means nothing. They look for future income predictions through established financial history, which is what a person with a traditional full-time job can easily prove, even though they may get laid off any time.
In fact, when I spoke to most loan officers, they immediately lost interest in continuing the conversation upon finding out that I am not yet a year self-employed. Some of them even made the analogy to me that I am as good as an unemployed person.
The problem is, I found out about this 3 to 4 months into my house search, when I had already put in so much work every day finding a house to look at remotely. I feel that I had already invested too much of my time and energy into this to back out now.
From retrospect, that was the exact mentality that got me into the deep financial trouble later. I thought if I had already invested in something, I should see it through, even if it doesn’t feel exactly right.
I secured a hard money loan with over 10% in interest. It was an investment loan and my plan was to refinance it in January as soon as repair is done and I can legally claim it as my primary residence. In the meantime, I looked for temporary places to stay.
I Thought I Got Lucky In The Worst Bidding War
When I started to make offers, I was surprised that I was outbidded again and again.
At first, I attempted several remote offers contingent upon the sale of my condo. I got laughed out the door every time. Every seller had a ton of offers, mostly local with no such contingency. I didn’t even stand a chance.
When I finally sold my condo and moved out to California, I was excited because I thought now I have a real chance. Now that I am local, my offer will be competitive, right?
Instead, I found myself getting into a series of bidding wars locally. In fact, one house I put an offer in had 18 offers in 3 days and drove up the price to more than 100k above fair market price.
Defeat after defeat, I became almost possessed with a blind fever to win this “war”. I was living in a cockroach-infested Airbnb guesthouse and couldn’t wait to get out of there and move into my dream home.
I made a final bid to a house that only had one other competitor, which I thought was weird, because any decent house in this iron hot market would have had more.
But I saw no major issue with the house. It was in a decent size; open concept; nice school district; super convenient to all stores; clean, quiet and beautiful neighborhood. The floor and kitchen was even updated.
I thought maybe this was a rare oversight for other buyers, and I got lucky.
My offer was quickly accepted and I immediately hired an inspector.
Too Invested To Back Out, Even After Finding Out Toxic Black Mold
A series of problems came out from the inspection, which wasn’t entirely unexpected, but some problems were major.
They discovered toxic black mold in the garage that contaminated the entire HVAC system. The water heater was right next to the contaminated platform and two entire systems needed to be demolished and replaced.
Before that, professional mold remediation company needed to clean up this bio hazard zone, which is a very expensive job.
In addition, when the HVAC team came to assess, they discovered asbestos in the attic insulation, which is a highly toxic industrial material widely used in the 70s. If accidentally inhaled, the impact could be fatal.
At this point, I had already spent over $1,000 in inspection fees. I wasn’t feeling great about all these problems, but all I could think of was — I didn’t spend the last 5 months looking at houses every day, losing out on 7 offers and spending 1k in inspection to back out now.
Renovation Always Goes Above Budget, Never Below
The only silver lining from this horrible experience is that I learned a tremendous amount about houses — much more than the average homeowner who bought a house in decent shape.
Upon closing my expensive loan, I already had very few money left in my reserve.
I was betting on rental income as soon as I finished repair and renovation. I was even entertaining a few niche investment strategies that on paper would yield tremendous return.
What I had not prepared for was that repair ran 4 weeks over schedule and one problem led to another. I ended up spending $20k over budget and realized the suburban area I bought in was never going to work out as a short-term rental option — people come here to raise families, not for work or sightseeing.
As for the niche strategies, they require months of building up contacts and research to even have the hope of working out. Thanks to the expensive hard money loan I got myself into, none of these strategies will work out.
After Extensive Repairs, I Realized I Hate The House
Things start to spiral downhill rapidly when I walked into the house for the first time after repairs. I immediately realized something is off. I felt very disconnected to the house. I almost wanted to get out immediately even though it shined like a brand new house.
Our mind is not totally logical. In my head, I knew the mold and asbestos was gone as verified by the re-inspection report. But in my mind, they are still there.
On the other hand, the intense financial strain caused by the repair made me pile up on credit card debts for the first time. I knew it was time to put a stop to it before I get myself into deeper financial trouble.
I decided it is best to resell the house immediately. But of course, things won’t go so smoothly, either.
No One Wants To Buy My Newly-Renovated House
After all the extensive repair work and a beautiful virtual 3D staging, I thought at least I could add up the cost and break even by reselling it at a slightly higher price.
When my realtor listed the house on the market again, some websites even labeled it a “hot home” because it was getting a lot of views.
But showings after showings, no offer came. Not even one. It baffled me — how could a house that is now in great condition and located in a great suburban area where all the parents supposedly want to live not get any offers?
Due to the fact that I was reselling so quickly, fair market price stayed fairly stagnant and even declined because we were already over the summer high season.
Thanks To New Real Estate Business Models, I Found A Way Out
When we approached 20 showings with no offers, I panicked and started to look for alternative options.
I knew I couldn’t sell it to a traditional house flipper. They will only buy at significantly under market price and I will lose out on everything I have invested in.
I also knew the risk of becoming a landlord with no financial reserves in the middle of a pandemic. California is notorious for protecting tenants and allowing court proceedings to drag on for extended amount of time. If my tenant loses their jobs and decides to stop paying rent, I will have “squatters” who refuse to leave and who I cannot evict. Then I will be in the worst nightmare possible — not able to rent, not able to sell and no reserves for refinance.
Wait, but how do they make money?
It turns out companies like that make money by charging a higher transaction fee. They usually charge 5–7% in fees when they buy your house. They will only offer fair market price, which means they know they can resell at least for that. The fact that they buy with cash means they can afford to hold the house for a few months without worrying about paying for a loan.
Companies like Zillow, Redfin, OpenDoor are just some of the major players in the iBuyer market. Thanks to this new business model, I found a way out and finally sold the house, albeit at the cost of losing 50% of my savings.
Disaster was an understatement to my house mishaps this summer. I was financially drained and mentally exhausted to the maximum extent while trying to adjust to a new environment on my own and building my business.
The reason I wrote this lengthy article was to share some valuable takeaways I gained in this process that I hope will help anyone trying to buy a house not end up making the same mistakes as I did.
Here are what I learned:
- Learn to walk away, even if it hurts. My favorite TV show host Steve Harvey had this advice: “You said you’ve invested (X) years of your life to this man/woman, but things have not been great. Do you want (X) more years of this?” The same applies to real estate and perhaps other areas of life. My biggest mistake was not stopping after finding out extensive problems during inspection because I did not want to throw $1,000 away. Instead, I ended up throwing away much more than that. Smaller cosmetic problems and even some medium-level problems can be great bargaining chips at negotiation, but major issues such as foundation cracks, mold or extensive plumbing/electrical issues are recipes for disaster, unless you have the reserves to do a gut renovation or tear-down and rebuild.
- Learn to wait for the right market, even if it means your temporary living situation is not ideal. Buying a house immediately after moving to a new state may seem odd to most, but I rationalized it with not wanting to waste time living in a potentially not ideal rental. I also thought that I could put up with an older house in a neighborhood that has potential to grow in value in the next 5 years. But as my mother correctly pointed out (who I did not listen to at first), “If you don’t see yourself there now, how can you bet on 5 years later?” Warren Buffet said: “When others are geedy, be fearful. When others are fearful, be greedy.” Even though he was not talking about real estate specifically, his advice can also be applied here. When it is a seller’s market, hold off and let others buy.
- Really get to know your neighbors before you buy a house (whether it is a primary residence or investment property). Talk to not one, but many of them. In addition to the numerous financial mistakes I made, I also neglected to learn about the neighbors. The well-kept street and peaceful surroundings convinced me that there couldn’t be anything shady going on, except that one neighbor started to post signs accusing me of things I have never done. It was surreal to drive up to the house to check in on the repair progress when I saw big signs accusing me of dumping trash and stepping on their lawns. The more ridiculous fact is that I have actually spoken to that neighbor and made a great first introduction before. You just never know who they really are until you speak to more than a few neighbors. People always talk — and when someone has a reputation, you can decide if it’s worth risking yourself or your tenant of that harassment.
- Never gamble with a high interest loan and always spend based on reserves. It always go above budget, never below.