How I Bought a Home in a High Cost of Living Area Without Being Rich

Buying a Home in an Expensive Area

I bought a single family house in California in 2014. In hindsight, going through each of the steps that led up to the actual move-in day taught me something different about personal finance, achieving goals, and the art of sales. This is the story of how my wife and I bought our house, and a framework for how you can too.

It’s difficult to overstate how complicated the house buying process is. Market dynamics, local regulations, and a surprising number of people—who have different motivations—conspire to make successfully completing a home purchase a significant challenge. The three sections below focus on the biggest specific challenges we faced, rather than the full process from start to finish.

A note on the context of this story: California has one of the highest cost of living levels in the country, and the San Francisco Bay Area specifically is now infamous for it’s high housing costs. If your area has a more favorable balance of housing demand and supply, you’re likely to have a better buying experience.

The Down Payment

Saving up for the down payment in a high cost of living area is the first major challenge prospective buyers face. It almost stopped us in our tracks. During the first conversation with a mortgage specialist at a giant bank whose name sounds like, “bell cargo,” we saw numbers for a potential down payment that were significantly larger than what we expected to pay, or that we had.

The challenge is that while the Department of Housing and Urban Development’s Federal Housing Administration offers loans that only require a 3.5% down payment (an approachable $25,800 for an average cost single family home in Alameda county where we were looking), it’s unlikely that an offer written with an FHA loan would be chosen by the seller.

So, we decided to do two things:

  1. Not apply for a loan at the maximum we’d be approved for.
  2. Focus on saving for a 10% down payment.

For us, this meant that $50,000 was our magic number. If we could save up that amount, we’d be able to make a solid offer on a $500,000 house, with a manageable mortgage if we were successful.

Of course, $50K is still a lot of money. It would take about 8 years of saving $500 a month to get there.

This is the first place in this story were something like serendipity, provenance, or just plain luck makes an entrance.

My wife and I had 80% of our down payment ready, through a combination of profits we made by selling her small apartment in the outskirts of Stockholm before we moved to California, and the company she works for recently going through an IPO. These were the extra pieces we needed to reach our goal.

How you reach your goal will likely be different. Many people get help from parents or extended family. If that’s not an option for you, consider some possibilities for additional income. You can use temptation bundling to turn your motivation for that first house into revenue streams from Lyft, eBay, and UpWork among many others.

For example, the average AirBnB host makes $7,530 annually. Think about how small chunks of time or work could really accelerate saving for your down payment.

The takeaway: find out what you’re magic number is, and map out how you’ll get there.

The House Itself

Finding a house that you really want to buy is inherently subjective. Adding the emotional criteria into the long list of financial and logistical criteria, means that it’s practically impossible to create a repeatable framework for deciding on, “the one.”

I loved the house we were renting in Oakland. It had a unique layout, mix of historic features with contemporary updates, and a great little backyard. Initially I wanted to make an offer to the landlord to buy the place from under him (and over us). It wasn’t to be however, since house prices in Oakland were going up by 76% a year at the time, putting the estimated value of our rental house about 30% higher than our target price.

Caption: This Credit Karma TV commercial was shot in the author’s formerly rented home in Oakland in 2014.

This is the second place in this story were serendipity (or provenance, or just plain luck) enters.

15 miles south of Oakland, in Hayward, CA, the average house price is 13% lower than in Oakland proper. Oh, by the way, those 15 miles also had the potential to shorten my wife’s daily commute, by an estimated 200 hours a year—equal to 5 weeks of vacation time!

The takeaway: by focusing on neighborhoods that “work” for your life as a first criteria, and then finding a house you “love” that’s there, you can avoid the heartache of falling in love with houses that you really can’t—or shouldn’t—have.

Doing the Deal

The third major challenge home buyers face is the offer stage. Thanks to the competitive market in the Bay Area, many houses that are listed for sale receive multiple offers. This is the one that can really break your heart—you write and offer, cross you fingers, and the seller takes another offer that’s $20,000 higher.

This is the third (and final) place in this story where just plain luck caused us to meet our truly amazing realtor.

Since there was such a strong seller’s’ advantage when we were house shopping, she suggested doing two things to help us win an offer:

  1. Include a cover letter, with a photo of our little family, that says who we are and how much we want the house.
  2. Set the our offer to be, “straightforward with strong terms,” to show that we’ll move to closing faster than any of the other buyers, and sending our full down payment to the escrow company as earnest money.

These two tactics are what caused our offer to win! We got the house we really loved, even though OUR OFFER WAS NOT THE HIGHEST.

The takeaway: Don’t get a good realtor. Get a great one. A great one will help you get your perfect (or perfect for now) house, by working with you to identify what levers you can use to win.

Final Thoughts

If you have a million dollars in your checking account, then shopping for a house might be fun, since you can really focus on wants, and nice to have features. However, statistically you’re likely to have a lot less than that, and if you’re in a competitive, high cost area, then shopping for houses can seem like a Sisyphean project.

As for us, we’ve now lived in a quirky two-bedroom house in Hayward, CA since the summer of 2014.

I sincerely hope that you are able to find some insight from my experience that will help you get into a house you love.
The keys to success are: don’t get intimidated, be practical, get great help—and luck will find you.

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