Decisions, decisions

All quiet does not mean everything is calm. There was a fair bit of excitement around here the weekend of the music festival, and most of it was not the good type of excitement. I don’t want to engage in gossip or be a complainypants (nor can I promise that I won’t want to relay all the gory details at some point), so for now I’ll just note that I (once again) did not get to use my weekend music festival pass to its full capacity, there are some acquaintances that I won’t be inviting back as guests ever again, and that I was painfully reminded of how much it can suck to be a renter, all in one weekend.

For the sake of context, I’ll elaborate on the latter point just a bit. Two weekends earlier, I had noticed some issues with the drainage in the house. When the dishwasher, washing machine, and shower drained, I heard gurgling noises from the bathroom sink. Although stuff was still draining, I knew that this was Not Good. It wasn’t an emergency, however, so I waited until the regular business hours of the property management company to report it. When I contacted the maintenance department, I was told that I would be contacted after the property manager had been reached for authorization. Meanwhile, the ominous gurgling noises lessened, so I wasn’t panicking.

A series of unfortunate delays ensued which meant the drainage issues did not get addressed before Memorial Day weekend, and I found myself with house guests and a non-functioning bathroom the Sunday of Memorial Day weekend. We couldn’t use the shower, the sink, or flush the toilet, and I was forced to call the management company’s emergency line get help. I placed my first call at 11 AM that day and it took until 8:30 PM to get someone out to address the issue. In the meantime, I spent a lot of time sitting around the house and backyard waiting for notification that a plumber was on the way. By 10 PM that night I finally had a working toilet, sink, and shower, but was still quite frustrated by the experience.

If I didn’t have to go through all those layers of administration to get the drainage issue fixed, I wouldn’t have been stuck missing 95% of the music festival on Sunday and stressing over finding a place to pee. The only “benefit” of the situation: I wasn’t personally on the hook for an emergency plumbing job on Sunday of a holiday weekend.

Now that the context of “being a renter can really suck” has been elaborated, let’s look at the decision staring me in the face right now: I’ve put an offer on a house. Will this lead to an actual sale? Maybe. I’m trying to dispassionately analyze the situation, and have been talking about it with friends over the past several days.

I’ve put offers on two other houses here in Napa and lost them both. Back in Chicago, I’ve also been through the entire buy/sell cycle twice, so no part of this experience is new to me. I’ve run my numbers multiple times, received approval on a mortgage and locked a rate, opened escrow, and had a home inspection in the last 5 days. The house has two bedrooms, one bathroom, and was built in 1941. It is about 1100 sq ft and has hardwood floors, new windows, upgraded kitchen and bathroom, a single car attached garage, and a big backyard already set up for entertaining. All of the kitchen appliances (range, refrigerator, dishwasher, microwave with vent) are new and included in the price. The washer and dryer are included, but aren’t new and look a little tired.

It seems nearly perfect, but I am being cautious because of a couple of things that surfaced in the inspection.

  1. The selling agent states that the house is bolted to the foundation (meaning, it’s been “retrofitted” to mitigate damage from an earthquake.) My home inspector couldn’t verify this, mainly because of the next issue.
  2. There is knob and tube wiring in the house. The home inspector was unable to get into the crawl space under the house because there was K&T wiring located too close for his comfort. He found another way to look into the crawl space, but didn’t see evidence of the foundation being bolted, so he couldn’t confirm it had been done. He recommended that I get documentation from the homeowners about the work.

Because of that wiring, I’m going to need an inspection by a licensed electrician. I talked with my insurance company yesterday, and they’ve indicated that they will insure the house if I can get a report from the electrician that the wiring is safe. Even if the electrician thinks it is safe, I’d still need to get the electrical service replaced for my own peace of mind and to allow me to live in the house comfortably with my modern appliances. (I really want to be able to run the washing machine, make coffee, and have my computer on at the same time without losing power.) In less of a seller’s market, I should be able to use these faults as negotiating points, but I’m not sure if that will work here and now.

Putting aside those concerns, let’s exam the affordability of the house.

  • Down payment and estimated closing costs should leave me with eight months of emergency fund (EF) living expenses in the bank. Savings for things like vacation or a car replacement will be wiped out, though.
  • The monthly mortgage payment should be just under $200 more than I’m paying in rent for a smaller 2/1. That mortgage payment does not include insurance or taxes, however. (I was a bit surprised that I was even offered an option to get a mortgage that doesn’t require escrow of those expenses, but I’m happy to deal with both taxes and insurance on my own.)
  • A budget which includes line items for taxes, maintenance (at 1% of purchase price), increased insurance expenses (even pricey earthquake insurance), and increased utilities leaves me with roughly $70-$100 “extra” each month. The budget line items for “wants” (like $$ music festival tickets) is not covered, though, nor is savings for things like vacations and car replacement. This budget does include generous lines for things such as eating out and groceries where I’ve been challenged with cutting back in the past. So it is by no means “bare bones.”
  • Property taxes are a straight 1.25% of the purchase price. I have enough money in savings to pay one full year of property taxes, but it would drop my EF to just over six months of living expenses. Luckily, I won’t have to pay anything until November 1, but I’m not sure how much will be due then. (In Cook County/Chicago, tax bills were issued twice a year, too, but the first payment was higher than the second.)
  • If I have to pay out of my own pocket to upgrade the electrical system or deal with any unforeseen repairs, then I’ll be dipping into the EF even more.

There are some positive financial events on the horizon for me this year, though. Between now and the end of the year, I’ll be getting two additional paychecks (being paid bi-weekly has its perks!), so those funds can go straight into savings, home maintenance, or be used for discretionary expenses like home furnishings. In September I should see some sort of salary increase and possibly a bonus. I never count on bonuses (although I usually get something), but I’m hoping to get at least a small salary increase that would bump my take home pay by about $100 a month.

This morning I found myself pulling out my tax files for the past two years and creating a worksheet to validate my assumptions about tax implications of a house and mortgage. In 2014, I was still a homeowner and had paid property taxes and mortgage interest, which are deductible expenses. In 2015, I was a renter and had no deductions. My deductions for mortgage interest and property taxes would be quite substantial for the next few years. To me, the main value in these deductions would be to get an annual refund of cash that I can then put aside or use for property maintenance. That worked well for my much larger 1951-built house in Chicago, and I don’t see why it wouldn’t work here in California.

If I took on a housemate, I could also start using the house as a way to generate more monthly cash flow to help me tackle home maintenance/repair expenses, add to the “wants” portion of my budget, or put in savings. It’s not my ideal to have an unrelated housemate with whom I share a bathroom, but in my present state of mind I feel that it’s a compromise I could make. Around here, it’s pretty easy to rent a spare bedroom for $700 to $900 a month, even with a shared bathroom. The other benefit of having a housemate is that there is a built-in housesitter, and the potential to negotiate pet care more easily when I’m away on business trips (or personal trips, if I can scrape together vacation money again.)

Other options for generating cash flow/savings are taking on a seasonal intern in the wine industry or a traveling nurse/medical professional as housemates for only a few months a year, or looking into Airbnb. (The latter would require me to get a license from the City of Napa and would require some work on my part to turn over the room, though.)

By next Tuesday all the inspections (roof, pest, and electrical) will be completed and I’ll have to make a decision about whether I should go forward or walk away. Home ownership can be stressful, but I do miss being a homeowner. I’m grateful that I found a great place to “land” in the Bay Area, but I don’t feel like I’m thriving in my current living arrangement, just surviving.

What would you do in my place? I’m taking all the advice I can get at this point, so please do leave a comment!

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12 thoughts on “Decisions, decisions

  1. Typing on my phone so I’m going to do a list so I don’t forget anything.

    1. Wiring: pending the report, I would absolutely raise the question to see if they’ll negotiate. It may not work if they’re not feeling pressure to sell and have plenty of nibbles but it’s worth raising and hearing their response. If nothing else, their response may give you some useful insight into how they’re feeling and approaching the sale.

    2. Cash on hand: personally anything less than a year of cash makes me nervous but that’s such a personal thing and also I was unemployed for almost a year during the Recession. Things have obviously changed and your job seems to be stable enough that I’d say my foibles aren’t applicable to your situation.

    3. Property tax: ours is split in 2, evenly, and I pay it when it’s coming due (November and Febuary so it’s not THAT much reprieve between installments) instead of in one lump sum. Check the county assessor and see if they tell you how they do it, but in the end you’re going to be out that year of money after February.

    4. Not knowing what your monthly nut is, my thoughts are going to be moderately vague. Knowing you would be down to 6 months of emergency money and having the costs of an electrical system replacement (an estimate would be helpful here) plus any unexpected costs (which I always expect will appear and mentally assign an arbitrary $5000 price tag so the real cost won’t stun me) come out of the now 6-month fund again makes me nervous.

    5. But your quality of life and peace of mind and ability to live a smoothly running life are all big things. I don’t say that in a “throw caution to the wind” way, I am just acknowledging that within reason, I think this warrants a vote.

    6. Which leads me to looking at your monthly numbers. $100-200 (if and when the raise comes along) left over, not yet accounting for vacation, makes me nervous for you. I’d quite strongly felt that it’d be worth committing immediately to a rigorously screened roommate for at least a year so you can both build up your reserves and still have some wiggle room for your wants and any unplanned for expenses. I find that when you create a larger buffer either by increasing cash income or reducing spending, the painful hits come a little less frequently. Or maybe it feels less frequent. Either way.
    Airbnb feels like (and some bloggers have reported this) a lot of extra work that maybe you don’t need right now. May be worth it if you don’t mind all the cleaning and hosting type duties in exchange for having only temporary guests for a higher rate but I’m not sure the math on that necessarily works out in your favor as far as padding your cash accounts.

    7. Does Hannah dog get her own line item in the budget? With her health hiccups, I’d want to be sure you had a fairly good budget for her just in case. Checkups for random weird things like she’s been experiencing add up quickly.

    8. Finally: Knowing how you’ve felt about renting, I’d cautiously encourage you to proceed if the inspections all look good so long as you’re prepared to quickly install a roommate and they’re plentiful enough that you can pick a really good one. I’d hate for you to be dependent on the money from a roommate and be miserable living with them, just as much as I’d hate for you to go through more massive inconveniences like the one you went through with the plumbing! I know you’re good with your money and would be responsible enough to proactively cut back to bare bones if the numbers didn’t look right, otherwise I’d be firmly saying nope, please don’t do this to yourself.

    I hope that helps!

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    • That’s an impressive list considering you’re typing on your phone!

      All great points to consider, that also indicate I may not have been as clear as I thought.

      Regarding point 4, I actually have a source of back up cash in a real emergency that I can access without penalty: my variable annuity. It would certainly not be ideal, but it gives me a bit more peace of mind. Now, it’s never a great idea to raid the retirement vehicles even if there are no penalties, but I also have contributed more to it than my financial plan calls for. Last year, in fact, I added an extra 20K to it since I had so much cash on hand after selling the house. My financial plan only calls for adding 2k a year to it. So, if the bleep hit the fan, I have a bit more cushion.

      Regarding point 6, my *current* monthly budget is projected to have the extra $100-200 in it. That has nothing to do with the potential raise. I’m encouraged that in July and September this year I’ll also get three paychecks and I only need two paychecks for my budget. So those extra paychecks can be used to replenish savings and/or go straight to property taxes.

      Also, I’ll mention that I’ve done Airbnb before in my Chicago house, so I’m familiar with the duties. It can be great to meet so many nice people, but you do have to be around to clean and turn over the place. It’s not my first choice for now, although it is usually more lucrative than a housemate.

      Regarding point 7, OMG of course Hannah has her own (generous) line item. Her health expenses will always be covered. And having a big yard with trees is one of the very tempting things about this house. Hannah will have a more interesting yard to explore, and that makes her happy. 🙂

      This certainly isn’t my only option to getting out of a rental and into ownership. I could buy a condo for less money, or I could look at buying in north Napa where there I could possibly get a 3/2 for roughly the same price. But I don’t like living with wall to wall carpet and the other amenities found in those types of houses, or living further from San Francisco. I could buy in Vallejo, but it has a totally different feel to it, and I wouldn’t get any joy out of living there.

      I’m taking a chance here, for sure, but I feel like a bold move like this is necessary to get my foot in the door of Northern California real estate. If I continue to wait, I’ll continue to be outpriced.

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      • Oh gosh, in that case, I think you’re in a much better position than I was envisioning at first. In that case, I am crossing my fingers that the inspections turn out with great results and that this goes smoothly. I’d be very excited to celebrate a new home for you 🙂

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  2. Hi Linda,
    Just found your blog on I Pick Up Pennies. It sounds like you have quite a dilemma on your hands! (Of course I blog about Decision Making and saw the title and it hooked me in!) I will think about this more tonight and see if there is anything of value I can add. It’s funny but I just wrote about AirBNB today too! I need to catch up on your writing – very thorough!

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  3. You’ve been a home owner before so I feel confident that you understand the hidden costs of being a homeowner. Many home faults are fixable and it’s fine if that’s built in your budget. The more I work with home inspectors the less I like them. They often miss important stuff that takes work or experience to find and point out dumb things that are irrelevant just to have something to put in the report. My MIL is selling her 10 year old perfect house and lost a sale because the home inspector said her hurricane bolts on her ranch were rotted. (They are not after 3 different second opinions including the guy who built the house.) So I guess make sure you plan on some unplanned stuff that did not come up in the home inspection. Also, do your own walk through. Check the water pressure, make sure the appliances work, doors open and close, locks work, windows open and shut, look in the attic and basement yourself for evidence of pests. Getting an actual electrician to quote replacing knob and tube is a great idea. He will know the real state of affairs there.

    The only thing that would scare me about California is my complete and total total Ignorance about natural disasters and how that would affect my purchasing decisions. Like…if your house has previous earthquake damage, does that mean it’s in a spot that’s more prone to it (closer to a fault line etc?). I really have no idea what the answer would be.

    I enjoyed having roommates so that’s definitely something I’d pursue to lower my monthly expenses out of the stratosphere. It sounds like you are ready for a home again. Go for it.

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    • Thanks for your comment FGA! You’ve been down this path a few times, too, and I value your input.

      I think I could write a whole post about the inspection process and home inspectors, too. Let’s just say that I wasn’t super impressed with the general home inspector, but the experts that came yesterday (electrician and pest/termite specialist) were fantastic. I was able to really engage with them and am feeling better about the conditions of the property now.

      There are a few things I need to ask the sellers to address (and in this seller’s market are still totally reasonable, such as addressing the termites found in the soil under the house and adding GFCI outlets in places where they are legally required), but it’s really valuable to have their reports as my personal “punch list” of things to fix after the sale.

      Natural disasters here in CA are flood, fire, and earthquakes. I’m in a river valley, but well away from the flood plain (very, very far from the 100 year flood plain maps), and fire isn’t something that affects cities (even small ones) as much as it does houses in the fringes. (If I was buying a home on the hillside/mountain and surrounded by trees, you bet fire protection would be a HUGE worry.)

      Earthquakes are something you can only prepare for through some sensible measures: secure large items to the walls so they don’t tip and cause more hazards, and bolt/brace the house to the foundation. (Also, keep a pair of shoes near the bed so you don’t walk through debris and injure your feet trying to get out after the shaking has stopped!) This house is bolted to the foundation, although it is the original bolting, and therefore not up to today’s codes/standards. Nonetheless, there was a major earthquake here in August 2014 (a 6.0) and the house is still standing and has no structural faults. That gives me some peace of mind that it should survive the next ‘quake, too.

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  4. On the wiring and taxes: what Revanche said! In AZ we also can pay 50% of the tax bill in two payments; we copy CA in everything, so chances are good that you can arrange that in Napa.

    If you have a roommate and the person is tolerable enough to have around long-term, renting a room turns the whole house and yard into a rental property. This means everything you do to fix it up is tax-deductible. This worked well for me when Semi-Demi-Ex-Boyfriend was living with me and paying rent in the amount of half the mortgage. Check with your tax professional about that.

    IMHO, if you find a place you like and you can afford it, even if finances will be tight at first, you prob’ly ought to jump at it. When the ex- and I bought our first house, we thought we couldn’t afford it. But the thing is, mortgage payments stay about the same, but your salary increases and inflation makes this year’s bills look smaller five years on down the road.

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    • Yes, I love that having a housemate/roommate actually results in some awesome tax advantages. There are actually many good reasons to have a roommate that go beyond the financial implications. I just also like to have some personal space, too.

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  6. I would definitely find a roommate given your budget numbers. Also, re the k+t, we were able to get some money back from our state for removal as part of a barrier remediation grant (from the dept that is in charge of weatherization, can’t insulate if you have live k+t). Maybe CA has a similar program?

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    • That sounds like a great program. Unfortunately there is already insulation over the k+t in some places, which is why there is this additional scrutiny needed.

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