Buying A First House, How My Sister Became A Homeowner

Last month I wrote about how my brother in law just bought his first house at age 25 for $45,000 in South Bend, IN.  My sister is 34 and on the opposite end of the housing spectrum.  She lives in San Jose, CA, the tech capital of the world.  Both my sister and her husband have great jobs (even by silicon valley standards) and are responsible with money. Why then would buying a house be a difficult proposition?  Well the median house sells for just shy of $1 million, over 5 times the median U.S. price, and 10 times what a modest house costs in the area my sister and I grew up in.

The Housing Shortage In Silicon Valley:

The median rent for a 1 bedroom apartment in San Jose is $2,455. To say that there is a housing shortage is a gross understatement.  Because of the density of so many large employers, there is of course a large demand for housing.  The state Department of Housing and Community Development states that California needed to build 180,000 units each year for the past decade, but only built 80,000 per year, putting them over 1 million homes under demand.  The local municipalities don’t make things better with arbitrary zoning regulations.   This woman wants to build 8 – 16 units on her vacant lot, but since it is zoned “commercial”  the city isn’t allowing it.  Currently there are over 130 bills in the state legislature to address this housing situation.

Can you imagine being a Realtor out there?  I’m sure its wicked competitive to get listings, but once you get the listing the money just pours in.  List it on the MLS, have an open house, then sell for $100K over list price, and collect your check for $90,000.

History Of Our Family’s Home Ownership:

trailer parkMy parents attended Ohio State University and when my dad graduated he accepted a job with Whirlpool Corp, which is based in Benton Harbor, MI.  When they moved up here they bought their first home, which was a trailer in a large trailer park in the wealthiest school district in the area.  My parents paid around $15,000 for this home, which is about 1% of the purchase price of my sister’s first home.  Although our parents income was probably on the high end for the trailer park, it was certainly on the low end for the area, add in that they were responsible with money, and we didn’t have super nice clothes or backpacks, or a yard full of ridiculous toys.

Old House5 years later we moved from there into a house about 15 miles north in a rural area outside of Coloma, MI.  This place was about the same distance from my dad’s work, but was a much better environment. The school district wasn’t filled with “rich kids”, and we had a big yard and an actual house in a quiet neighborhood on a dirt road.    It was a roughly $60,000 house on 3/4 of an acres and our neighbors were typically only present in the summer.  The area we lived in was a popular summer retreat for Chicago city dwellers to own homes “out in the country.” We were only a couple miles from a Lake Michigan public access, which my sister and I would ride our bikes to.  The area felt like it was 30 years in the past, which certainly wasn’t a bad thing.

House 26 years later our parents upgraded again to a house closer to town in a subdivision.  It was a much larger house and was a quad level design.  They paid around $130,000 for it.  This was around 98-99 during the tech stock boom.   We were in a firmly middle class house and my sister was only a couple years out from graduating high school.

When my sister moved out and went to college she started moving at a rapid pace.  I think she moved 9 times in 4 years.  Once she graduated she moved between different cities for work, arriving in the silicon valley area about 5 years ago.  During this time she has rented a very modest house that still costs about what my entire monthly budget is. Needless to say it doesn’t take too long to want to buy a house in that situation.  The two major problems being that her future residency wasn’t known as she had moved several times for work already, and of course saving up a down payment on a $1 million plus house is insanely difficult.

I think the number of people who grow up in a trailer park and then buy a $1.5 million home is fairly small to say the least.

 

The House:

San Jose House 1The house is a 5 bedroom 3 bath 2,500 square foot home on an 8,000 sq. ft. lot.  The house sits at the end of a cul-de-sac in a nice looking neighborhood.  The house has 2 master suites, a beautiful open floor plan in the living areas and a giant backyard.  The house has an attached 2 car garage and a fully private fenced in backyard. Even though the houses are closer together than my liking,  all the houses in the area have a decent amount of privacy between the fences and shrubbery.

 

They paid $1,477,000 Million for the house.  With a 20% down payment of $295,400 this leaves a mortgage of $1,181,600. On a 30 year mortgage at 4% interest the monthly payment will be $5,641. Since they are in the 33% federal tax bracket and a 9.5% state of California tax bracket, they will save 42.5% on $1 million of mortgage debt, which amounts to $17,000 per year, bringing their monthly payment down to $4,225.  Adding in their $22,125 per year property taxes and adjusting for their tax deduction of 42.5%, total property taxes will be a net of $12,721, bringing their total house payment to $5,285.

Advantages:

1. Opportunity For A Room Mate:

Since this is a 5 bedroom house and they have a child, I can’t see them needing more than 2 of the bedrooms for sleeping, and perhaps one as an office.  That leaves 2 additional rooms that could be rented out.  There are several listings in their area for room rentals in the $1,300 to $1,500 per month range.   Choosing 1 room mate carefully could be a huge help, dropping their house payment down to $3,785 per month.  Cutting a third of your house payment is a pretty big deal.  Since there are 2 master suites in the house, they could probably command a decent premium for a master suite rental.  I’ve seen some master suites in the area listed as high as $2,000 per month.  $2,000 per month from 1 person would cut their house payment down to $3,285.

Although they could rent out two rooms and drop their payment down to around $1,150, I think having two room mates would be too much chaos. The second room mate doesn’t reduce the house payment enough to justify the extra strain of having another person in the house.  I’ve had roommates in the past and most of the time the extra headache generally wasn’t worth the rent money that trickled in.  Of course there is a big difference between $200 per month and $2,000 per month.  You also get a much different tenant on a $2,000 rental than on a $200 rental. Most tenants in the area will spend the majority of their time at work.

AirBnB: As an alternative to a full time renter, my sister could rent out the master suite on Airbnb. Similar setups in the area rent for around $100 a night on AirBnb.  This could allow for a lot more flexibility in renting out a room and would decrease the risk of headaches from an everyday long term tenant.

 

2. Location, Location, Location:

When buying a first house it is paramount to consider where exactly you want to be at.  Although this greatly reduces your options it is the most important factor in a home purchase because location determines future appreciation and travel times to all the places you need to go in your daily life.

Proximity to employers: Less than a 40 minute drive to most silicon valley employers during rush hour, with some large employers under 20 minutes away. Also, Google recently announced it will be building a new 6 million square foot campus less than 5 miles from her new house,  a campus that will bring 20,000 new jobs to the area.  This will certainly add to the demand in the area and bring up property values even further.

Proximity to school: My sister has a daughter who is soon to be 4.  Her house is in walking distance to the school her daughter will be attending.

Proximity to other things: 2 minutes to Dominos pizza, 3 minutes to the library, and 4 minutes to a swim school.

3. Large Yard:  

Every square foot of yard makes a difference out there. Your average lot is about 50 – 60 feet wide by 100 feet deep; roughly 5,500 square feet.  This lot is on the end of a cul-de-sac and has just over 8,000 square feet, roughly 37% larger.  This may not seem like much, but it makes a world of difference.

4.  Future Appreciation:

This same house sold for $1,000,000 less than a year ago.  Currently large employers in the San Jose market are aggressively expanding, showing that for many years to come there will be substantial demand for housing.  There currently are no large solutions being implemented to increase housing inventory in the area.  I would not be surprised if the value of their home doubles in under 10 years. On that note too, can you imagine being a house flipper out there?  Having a gross sale price of over $400,000 increase on a flip is insane.  Most anywhere else you would have to flip 10 properties to have that much change.

 

What My Sister Did To Buy A First House:

Save Up A Down Payment:  

Saving up a down payment has to be the most difficult part of buying a first house. When Mrs. C. and I bought our $145,000 home we had to come out of pocket $30,000 at the closing table.  My god that hurt, letting that much cash go.  At the time that was like half of our net worth and 90%+ of our cash.  Now add a zero to that. It took them a really long time to save up for a down payment and it has to be a really nerve racking feeling letting go of that much money at once.

Keep An Eye On The Market And Move Fast:

My sister has put in bids on multiple houses.  There was one house that was in a perfect location for her that ended up selling for $200,000 above list price, and the buyer allowed the seller to live in the house for an extra 2 years for their kid to graduate from high school without having to move.  Amazing.   Houses get listed and have immediate bidding wars.  If a house is on the market for 2 weeks, something is super wrong with it.  My sister and her husband both work full time jobs that come with a lot of extra hours.  When working 60 – 70 hours or more per week it’s really difficult to keep your eye on the market, attend open houses and put in a bid in time.

Offer More Than Asking Price:

The house was listed at almost $100K less than what they paid for the house. In order to get a house in this area you have to be willing to put in bids above the asking price.  This is scary because you have no idea what other people are going to offer on the house, you just know that there will be multiple bidders.  On this house in particular there were 5 sets of bidders!

Bottom Line:

My sister and her husband just purchased an amazing home that suites their needs perfectly.  Most likely it will appreciate considerably in value and if and when they decide to leave the area it will give them a giant chunk of cash, and quickly.  When our parents moved up in house once it took over a year for them to sell their previous home,  which put a huge drain on their finances.  There’s no way my sister and her husband would have to deal with that situation.  When they want to sell, they will be able to close within 30 days of listing the darn thing!

When talking to her about her new home purchase, she mentioned that she felt both proud and guilty at the same time from buying a house that costs so much.  It has taken many many years of focus, planning, and saving to be able to get to where they are right now and it’s a major achievement, but at the same time, we came from an area where a $1.5 million home would be a mansion with several acres and beautiful sunsets every night over Lake Michigan.  We didn’t grow up in a world where “normal” people lived in a million dollar home.   Here’s what a $1 million home looks like in our area.

1 Million home SW MI

Okay, it’s listed for $1.1 Million, but still, that’s 4,500 square feet and a big yard leading to over 100′ of frontage on Lake Michigan

She also bought a higher end home for the area, which I think makes sense. The house was a recent flip with virtually everything in the house being redone.  Her and her husband don’t have a lot of time for home repairs, and if you have to spend over a million to get a house at all, spending a few hundred thousand more to get a nice house that you will be comfortable in for many years to come makes sense.  A quote from one of her friends was “You spend all this money on your house and then it is empty all day”.

What are your thoughts on feelings of guilt when making a big purchase such as this? Any thoughts about how expensive real estate is in Silicon Valley?   

John C. started Action Economics in 2013 as a way to gain more knowledge on personal financial planning and to share that knowledge with others. Action Economics focuses on paying off the house, reducing taxes, and building wealth. Check out the Action Economics archives section for all past posts.

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