An intro to house-hacking

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What is house-hacking?

House-hacking is what you do when you want to buy a home, but you’re stuck in one of the following situations:

  • Priced out of the market
  • Working against a competitive seller’s market
  • High income but low in cash savings
  • Need to buy a and sell a house at the same time
  • Or, are otherwise feeling edged out of the homeownership experience.

House-hacking is a catch-all phrase for ways that your homeownership dream can finally come true.

House hacking is a combination of:

  • Using the techniques that have previously been the domain of investors and highly experienced homebuyers
  • Leveraging the massive amounts of technology available to the average consumer in 2019
  • Going into the home-buying process hyper educated, with tools and techniques that others do not have
  • Understanding the lender’s underwriting guidelines so you can structure deals to work within them
  • Looking at tough situations as opportunities to be creative and create value where others are either unwilling, or unaware that value is there to be created

While this is just a small subset of the techniques we use, our goal is always to put you in the most informed place as a buyer, so that you can make the best possible decision.

When you work with us, we’ll continually provide data, insight and strategies. Buying can be a confusing process, and our solution is data, education and a bit of persistence.

Getting priced out

When you live in a city like Seattle, with lots of high-paying jobs and scores of people who were lucky enough to buy at very opportune times and sell much higher (giving them massive down payments), you end up with a constantly progressing market.  Add in a healthy dose of all-cash buyers, and you can feel like it’s near impossible to get your own little piece of land to call home. In fact, Seattle has seen 11-12% growth in prices over the last couple of years.  That means a house going for $625k today was only around $500K just a couple of years ago. In late 2019, we are experiencing a slowing, but that doesn’t mean its not still a seller’s market.

Another way to look at this is that if your budget is 500k, every month that passes you are losing $5,000 of affordability.  While this can seem daunting, it means you need a plan, and you need to be open to more strategies. Fear not, we can help.

Strategy 1: Buy for the next five years

50 years ago, when you got a job, you could very well work that job for most of your career, retire from that company with a pension and a gold watch.  People approached houses the same way.  My grandparents owned the same house for decades, as did my parents.  But just like the average person has more than one career in 2019, the average person will own more than one house.  In fact, current trends show most people of working age are currently changing homes every 6 years or so.

When you look at buying through this lens, you can be open to homes that need work, or as investors call it homes upon which they can “force value”.  Forcing value is a very important concept in house-hacking. Ways to force value:

  • Add a bathroom.  ~10k cost, ~25k value add
  • Knock down some walls to change the feel of the home
  • Turn a basement into an AirBNB for residual income
  • Build an Accessory Dwelling Unit on the property

When you look for five year homes you open up your search geographically, price-wise and condition-wise. We love watching home renovation shows for inspiration. Homes with charm and that Instagram quality get all the attention, and the honest truth is that most buyers don’t have the imagination to see a home as what it could be. If you fancy yourself creative and willing to roll up your sleeves, this could be a very good strategy for you.

Strategy 2: Rent-to-own resources

Berkshire Hathaway agents, like us, work with a great company called HomePartners.  On qualifying homes, HomePartners will purchase a home, lease it to you, and then when the time is right, you buy the home from HomePartners. There’s obviously a lot of delayed gratification with this strategy, but it’s worthwhile to explore all possibilities.

Strategy 3: Co-buying

Co-buying, as the name implies is buying with a partner

  • One option is to look at purchasing a two or three unit building with friends or family. The FHA limit for two-family homes is $930k and $1.124M for 3 family properties in 2019. There’s always more things to deal with when you have more people involved, but look at it as an opportunity the do something really cool with some friends or family (just get it all in writing)
  • Another option is to check out Unison. This is a company that will put half of your down payment in with you, in exchange for half your equity when you sell. They also offer options to buy them out later on down the road. Obviously this is not ideal for everyone, but it’s worth checking out if you’re looking for ways to get your foot in the buying door.

Strategy 4: Pocket Deals

A “pocket deal” is a listing that’s not publicly advertised.  If you have a target neighborhood and a target price, have your Realtor or broker send out a postcard to the area, asking for sellers that might be on the fence.  Not only can you save a bundle on transaction fees, you might just circumvent the competition.

Only one of the last 7 recessions saw prices go down.  With interest rates where they are, forecasts don’t see much price easing.

Late 2019, inventory is up, prices are stable, but multiple offers are still very much a thing in the hot neighborhoods.

Getting pushed out by higher offers

There’s no amount of time that’s more nail biting, more gut-wrenching than that moment in between submitting your offer and hearing back, and few things hit the gut like hearing you were beat out.  The average home buyer in Seattle offers on 8 houses before they finally get lucky – or aggressive.  If it’s time to stop beating around the bush, here’s how to do it:

Don’t ask for the extras

Like a Home Warranty: they cost around $600 so just plan to buy one on your own. Berkshire Hathaway (our brokerage) offers all of our buyers a free Home Warranty with every purchase. Don’t ask for things such as a professional cleaning service or lawn maintenance prior to closing. That stuff is fine if there are no other offers, but you don’t want to be the diva in a multiple offer situation.

Do a pre-inspection or inspect quickly

See if you can go ahead and get penciled in on their schedule for next week so you can shorten that contingency period to 5 days instead of 10. Make the resolution period 3 days instead of 5.  Be the easy offer, and let the seller know you make decisions quickly and without delay or pettiness.

Don’t lowball the earnest money amount.

1% is supposed to be standard, but check with your agent to find out if that’s average in your area, or if it accurately conveys how serious you are. It communicates to the seller that you are seriously invested.

Add on: Offer to deliver the earnest money within one business day to the seller’s brokerage. Again, this communicates that you aren’t messing around and will meet deadlines.

Accept the little things that you can change

If you are at all handy, have your agent verbally communicate that fact to the sellers so they know you won’t be asking for GCFI outlets to be installed after the inspection report comes in. Make sure they know you understand that houses have defects and you are prepared to negotiate rationally.  We’ve seen buyers come in and ask for $150 for light switch covers.

Talk about low appraisals ahead of time

Have your agent verbally communicate that you ‘have access to funds to make up the difference in the appraisal’ if it comes in low. They don’t have to know if you are sitting on a fat savings account or if you’d be scrounging in the couch cushions for spare change. Just crack the door open.

Write a letter

Keep in mind the letter shouldn’t be about you, it should be about THEM. The work they’ve put into the house, how they just have so many memories there, how you hope to maintain it as well as they have, etc. We have a whole guide on this, and we encourage you to do this for each an every property you’re serious about

Sample deal

  • Asking price 600k, offer 600k with 25k escalation clause in 5k increments
  • 2% Interest, delivered in one day
  • Home is pre-inspected, or inspected within 3 days
  • Verbally communicate that the inspection is for major systems and safety issues only
  • Write a seller love letter

 

High Income but low cash savings

Strategy 1: Asking for closing costs

One thing that buyers often do not realize is that you can ask for a seller contribution to your closing costs.

Sample Deal: Find a house that’ s been sitting on the market for a while, where the seller may be thinking about dropping the price soon (For most sellers, this is often at the 30 or 60 day mark). Offer at the original price, but ask them to contribute 1-2% to your closing costs.

Strategy 2:  IRA distributions / 401k loans

For first-time homebuyers, you can take a 10k distribution from your Traditional IRA to cover down payment and closing costs.

You might also have options borrowing against your 401k.  Often you can take a loan worth up to 50% of your balance, and pay it back out of your paychecks through automatic withdrawal.

Trying to buy and sell at the same time

I’ve been there myself – bursting at the seams in a small house, with kids and pets running around.  Not only is it hard to get out of the house for showings, but it’s near impossible to keep the place clean.  Aside from that, your things are everywhere and we know that buyers like to see the home as a clean slate.  Toys, bottles, diaper pails, pet smells, coats in the closet, fingerprints on the windows – none of these things are helping you out.  While relatively painful in the short term, the best option is to get moved into a new home and then clean up your first home, stage it, and make it as easy as possible for people to hold private showings at any time that’s convenient for them.

Strategy 1: HELOCs

HELOCs, or home-equity lines of credit are a way to access the equity in your home for anything from home improvement to a down payment on another property.  Current HELOC’s are being offered for up to 95% loan-to-value ratio, which means if you own a home worth 500k, but owe 400k, you could borrow up to 75k to use as a down payment.  Then you use that money to buy a new property, prep your old home for sale, and then pay off the loan when you sell the first property.

Strategy 2: Look for two units

One great way to buy a second property is to find one with two units, especially if one unit is rented.  Most buyers shy away from these.  The occupied unit is hard to inspect, and you’re inheriting a tenant.  The upside is that you can count the tenant’s rent toward your income in the deal, and the loan limits for two units are higher (FHA).

Strategy 3: 6 month rental to drop your DTI

If you are close to being able to buy a second home and then sell the first, but are working on thin debt-to-income ratios, you could consider renting your primary residence.  With a signed lease and deposit, you can count that income towards your own personal income. Then, in 6 months you can sell the first home.  Not only does this buy you time, but if you play your cards right, you can buy in the winter (lowest prices) and sell the original home in the summer (highest average sales prices)

 

Conclusion

If you’ve done your homework and followed our guide on buying a house within a year, we have a whole toolbox of strategies to help you stay competitive in a hot market.

FINDING one’s dream home is easy with all the great websites around. What happens after identifying that home is where we Realtors really shine. We are number crunchers, therapists, movers, marriage counselors, interior designers, paralegals, home improvement professionals, lobbyists, accountants/bankers, chauffeurs, professional negotiators, maids, consumer protection advocates, diplomats, a great friend to our clients and protectors of their/your interests, plus SO,SO MUCH MORE all rolled into one.

We always offer a no-string attached consultation.
Contact us online or call us at (206) 458-13111.

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