*If there’s one money topic I don’t have firsthand experience in, it’s real estate. As a New Yorker, buying an apartment is not for me. So I asked my friend to write about her experience buying a home in Los Angeles, another pricey market. I’m all about thinking creatively to get what you want, and this is definitely an example of how going off the beaten path can sometimes yield the sweetest rewards. Enjoy! -Luxe*
As millennials who lost our first jobs in the recession, my husband and I were wary of homeownership. Our low rent in Los Angeles ($1100!) kept us in our outdated one-bedroom for years. The 1970s cabinets and gross carpet didn’t bother us since we saved on rent.
But then we had a baby.
School districts, convenience and safety became our top priority. Proximity to bars and restaurants? Less important these days.
We didn’t know what we were getting into, but we wanted to avoid rising rents in our area. So we started the househunt.
I told Luxe that going through this homebuying process took a few years off my life. There were times where I tore my hair out.
But by changing a few strategies in our search, we were able to buy a two-bedroom condo in a pricey area of LA.
Here’s how we went from renters who never painted the walls before move-in day to homeowners managing a gut renovation on our starter home.
Avoiding the Bidding War
The hardest part in a seller’s market is winning the bidding war. Multiple bids drive up the price, and then you’ll lose out to a higher offer or all-cash offer. In our area, it’s common for a seller to receive 20 bids, and for homes to sell way over asking price.
But what if you could avoid the competition?
All told, we toured about 14 condos and 5 houses all over LA. We were losing out on move-in ready condos and small fixer upper houses.
Our agent then told us one crucial thing: the only thing you can’t change is the location. Everything else about the property can be changed.
We started looking for listings that had been sitting on the market for awhile, that were priced too high for their market value. Also key: look for listings with bad photos and poor marketing.
We stopped going to open houses that had a steady stream of looky-loos. We searched for properties that were sitting more than 90 days (you can filter for this on Redfin).
The two-bedroom condo we ended up buying? Total dump. Holes in the walls, black stuff under the sinks, busted up floors, etc.
But the location was in one of the best school districts in LA.
Plenty of people toured it, and got scared off by the extent of work it needed. It was a real-estate owned property (REO), meaning the bank foreclosed on the owners, who didn’t maintain the unit.
Our agent found out the bank rejected previous lowball offers from investors looking to flip the condo. But timing is everything and the bank was now desperate.
They accepted our lowball offer after two counters. Two-bedroom condos in our town typically go for $400,000-$475,000 if it’s move-in ready, with accepted offers much higher than the asking price. We were able to get our condo under $400k, at 20 percent below asking.
Buying a Fixer: Estimating the Reno Costs
Not going to lie: buying a fixer, especially a REO, is super scary. The frugal part of me loved getting a good deal, but I’m used to scoring deals on handbags and plane tickets, not property.
After inspection, our agent lined up a few contractors to get us estimates on renovations before our contingency expired–if it was over budget, we could still back out.
Reno would cost $15,000-$30,000 depending on what we wanted to do. We decided to leave the bathrooms alone for now, bringing it closer to $20,000. Including reno, we paid less than market value for our condo.
Buying a fixer upper isn’t for everyone, though. Though there are home renovation loans, they only apply to houses, not condos. We’re also on a month-to-month lease at our current rental, so we had some flexibility.
If you don’t have cash saved up for renovations, or you have a set date you need to leave your home, you don’t want to take on a major fixer.
Note: Always get multiple estimates! Early on, I went with the first flooring guy I met. He bailed as soon as I asked for his license number, but thankfully, I hadn’t given him cash yet. There are honest contractors in the business, but they’ll be happy to answer all questions, and will ask to be paid in installments (typically a deposit upon booking and balance upon completion).
Stay Away From Flipped Properties
Earlier this year, a small house needing work came onto market, where it was snatched up by investors. Five months later, it was relisted at $150,000 higher. Newly painted, it now featured gray laminate floors, white kitchen cabinets with mosaic backsplash, and stainless steel appliances.
Investors need to make a profit, so it’s unlikely that they made $150,000 worth of renovations on the home. Also, they cut corners and typically use the cheapest labor and materials. Our agent said flipped properties are easy to spot, since they have whatever is trendy and look dated within a year.
My neighbor joked that this flipped house came with a $150,000 stove.
We estimate that we saved anywhere from $20,000-$50,000 by not buying a flipped property. Renovations are a pain, but I’m happy to coordinate several weeks of work to get a $20,000 discount.
On top of that, all the renovations are exactly how WE want it. Paying less and getting exactly what we want? I’ll take that over paying more for shoddy work and cheap design.
Getting Through Escrow on a Bank-Owned Property
Buying a bank-owned property can save you money because 1) there’s usually less competition and 2) it usually costs less than market value.
But there are some caveats. We didn’t receive any seller’s disclosures as the foreclosed owners were long gone. We know the place is in bad shape, but how bad? That’s a mystery we tried to solve via inspections. When we closed escrow, we weren’t handed keys in a moment of celebration–we were told to call a locksmith and replace the locks.
Unlike a standard sale, the bank is less than motivated to get through escrow. Your home purchase could be stalled by Linda, the bank employee in another state, who just wants to beat the traffic home, so she’ll get to your escrow doc tomorrow. Our close of escrow was delayed three days because the bank misplaced some documents.
Basically, if you don’t have savings left over and need to be out of your home by a certain time, this may not be the best route for you.
Paying for Renovations with Credit Cards
No, I’m not suggesting you rack up a huge credit card debt.
But I didn’t want to drain our emergency fund. So I applied for the Chase Freedom Unlimited card and Citi Simplicity card the day after we closed escrow. Both have a long 0% APR intro period, and I plan to pay off balances in full before the interest rates go up.
This way, I can continue to auto-save and keep our savings intact (well, post-down payment savings) in case of emergencies that require cash.
Not all renovations (like labor) can be put on a card. But we paid for our flooring, paint, appliances, etc. on the 0% APR credit cards.
Note to travel hackers and credit card churners: Do NOT open any cards until you close escrow. It could ding your credit, which could mean a higher interest rate on your mortgage.
Taking Advantages of Sales
If you’re buying near a holiday, purchase materials/appliances during the holiday sale. You can schedule delivery up to 90 days after purchase at Home Depot.
We saved 50% this way on our washer/dryer, and also got a $125 rebate from the gas company for buying an Energy Star certified machine.
Chase shopping portals gave 2x points on Home Depot, so I purchased most of our materials online for in-store pickup. We’re within budget of our monthly payments so we won’t be “house poor” but it’ll be nice to pay for flights with points/miles.
Ikea also had a sale where gift cards were 20% off, so we bought $2,000 worth of gift cards since we knew we’d have major purchases there.
People Will Have Annoying Opinions About Your Home Purchase
The day after we closed escrow on the condo, I went to meet the neighbors. A little old lady introduced herself and then bluntly asked, “How much did you pay?”
Um. I fudged my response, but told her it was below typical condo prices in the area.
She scoffed and walked away, “I paid $85,000 back in the eighties.”
I’ve since seen this new neighbor a few more times, and she’s actually nice (though still blunt). This type of comment is common, though. Folks love to tell you how the only time to buy was 1) decades ago or 2) in the recession.
Well, decades ago I was still a baby. And I was just getting to know my husband in Brooklyn during the recession, so he may have bailed if I started our second date with, “We just met, but let’s buy a house in a suburb of LA!”
The Seven-Year Real Estate Cycle: Is It a Good Time To Buy?
The other typical response is “You’re buying at the height of the market, aren’t you worried the market will crash?” This one bothers me sometimes, since it’s legit.
Our agent did warn us that real estate cycles roughly every seven years, like a roller coaster. Counting from the last recession in 2010-2012, we’re due for an “adjustment” in housing prices. Random folks told us to wait for prices to drop and “buy low.”
“Buying high” and selling in a downturn, or selling within a couple of years can result in a financial loss. For us, I figure the market will downturn. Prices seem too high to keep going up.
This is where personal situations and finances will dictate your choices. We were staring at a higher rent and a need for more space NOW–we couldn’t wait who knows how many years for the market to downturn.
We prioritized location and school district over move-in ready condition for this reason. So if the market downturns when we’re ready to trade up? We can stay put until prices increase, while our kid attends the local Blue Ribbon school.
But that’s us. Other folks will choose a flip in a gentrifying neighborhood, or a nice home with a long commute. Everyone has different priorities and deal breakers.
Starting the Homebuying Process: Know Yourself
If you’re thinking of buying, figure out why you want to buy. Are you ready to hunker down in a location for several years? It’s kind of like marriage–you shouldn’t do it just because it seems like the next step in your life.
I think people get caught up in a real estate frenzy, or they forget why they wanted to purchase a home in the first place. They end up higher than their budget, or they buy in a location they don’t like.
No one can tell you if homebuying is right for you, but there are definite perks. Historically, home prices trend upwards in the long run. Mortgage interest can be deducted from taxes. Unless you foreclose, no one can kick you out. If you want to move elsewhere without selling, you could always rent it out.
If you’re interested, talk to a reputable lender and find a good buyer’s agent. Like us, you may find an overlooked diamond in the rough to make your own.
What do you think–would you consider foreclosures or bank-owned properties to get a deal? How did you save money buying your home?