I've used my first home as endless fodder for content on this site. I've written about the 10 things to do before you buy a home, and of course the lessons I learned (and what I wished I'd done differently!)
Still, I don't think I've quite laid out the why behind my investment, the numbers of it all, and where I went horribly, horribly, horribly awry.
I've talked about it in bits and pieces, but never one long post that explained it all. So, here it goes!
My First Real Estate Investment & Where It All Began
(In my best Sophia from the Golden Girl's voice) “Picture it: Atlanta, 2013”
I'd been back in Atlanta for over a year. I was in love with someone I thought I was going to spend the rest of my life with, and that life included a home in Atlanta.
I felt the urge to buy, and after befriending Paula Pant from Afford Anything and falling in love with everything she preaches on her site, I was convinced it was a great move for me financially.(It was!)
My then-fiance and I had disagreements over what we wanted for our future family. I wanted a hip condo or town home in the heart of town. He wanted a single family home with a basement for woodworking and enough space for a growing family. A place where we could stay for a few years, which financially was a better option for the long term.
Being an HGTV addict all my life, I thought it would be fun to get a fixer upper.
Honestly, I loved the idea of creating order from the chaos of a neglected home, to get to pick my own finishes and make chic design choices. Financially, I also knew I'd get a lot more “bang for my buck” if I picked a fixer upper.
Working at a hedge fund for analysts whose job it was to research and pick “hot” stocks to grow the company's fund taught me a thing or two about how to conduct research for your own investments. This was one part of the process I did correctly: I did very thorough research when it came to selecting a neighborhood: I read news clipping on developments within “in town” Atlanta, checked property records, and became very involved in following the progress of the Atlanta Beltline project.
I narrowed it down to three neighborhoods:
- Capitol View/Capitol View Manor (where I live now)
- Adair Park
- The West End
Looking back on it, if I'd really wanted to supercharge my earnings I'd have picked a home in West End, as things are exploding over there, but I liked the home I chose better than any that were available in that neighborhood at the time.
I ended up picking the home I'm in now because it had a ton of space (3 stories, 5 bedrooms, 2 baths) a great backyard that backed onto a city of Atlanta park, and because I saw a lot of potential in the house.
It had high ceilings and lots of light and I had that “feeling” when I walked in where the hairs stood up on the back of my neck. You know the one, when you just feel like something is “right?”
Unfortunately, I fell in love with it so quickly I neglected to look at other issues, but we'll get to that in a second.
Making It Lucrative
My mortgage broker told me if I bought a foreclosure I could qualify for a downpayment assistance program through Invest Atlanta. So by buying a foreclosure in an “at risk” neighborhood that had been hit hard by the recession, Invest Atlanta gave me a “soft loan” of $15,000 for me to use for closing costs, my downpayment, or to pay down additional principal on the home.
Invest Atlanta forgives $3,000 of the loan every year I live in the home as my primary residence. This money was used for closing costs and the downpayment. $11,000 of that money went toward the downpayment/mortgage, and I famously only paid $1800 out of pocket at closing for the Invest Atlanta program and closing attorney's fees.
In this post (see: “How to Buy A Home in Your 20's“) I wrote that I bought my home for $65,000. I then had a contractor come out and bid the project and the home would need around $58,000 in renovations. As a foreclosure the home had sat vacant for almost a year and all of the copper in the home was gone. Being that it was so old, it also needed a complete re-do of the plumbing, hvac, and electrical systems to bring the home up to code.
I didn't make note of any of that and as such paid the bank's asking price for the home, when I should have negotiated a lower price. The home also had slight structural damage that (as a novice buyer) I didn't notice either, and my inspector didn't either.
I did anticipate just getting the home to a livable point would be the largest chunk of the renovation money, but that was where a lot of it went.
So the numbers for my first real estate investment are as follows:
$65,000 home price
$58,000 renovations (which I lumped into my mortgage via a cool product called a 203k renovation loan)
-$11,000 (down payment assistance)
=$112,000 mortgage (or about $915 each month after I pay mortgage payment, private mortgage insurance, and escrow fees, which are all conveniently lumped into one payment.)
$915 is only slightly more than I was paying for a one bedroom apartment is an only slightly better location, so I definitely feel good about the deal I got on the home purchase itself.
Also, because I renovated a historic property (my home was built in 1941) I qualified for additional tax incentives. One is a “freeze” on my property tax for the next ten years, meaning even if my home value and the ones around me skyrocket, I'm locked in at the price I would have paid on a $65,000 dollar home (about $800 a year== SO CHEAP!)
And then another credit I applied for and received was a state income tax rebate for three years. Between 2013 and now, I've gotten $2400 back at tax time from this rebate. Not enough to take the sting out of the $58k I unloaded into the house, but it helps.
Where My First Real Estate Investment Went Horribly Wrong
The biggest mistakes I made with my first real estate investment are easily summed up into two bullet points:
1.) Don't RENOVATE as a first time buyer. (See “How Much Does a Renovation Cost”)
2.) Vet your contractors.
It has taken me a long, long time to feel ready to write about this next part. Mostly because it was an incredibly stressful time (renovation + broken engagement = worst period of my life), but also because I'm still haunted by it. Anytime something breaks in this house I'm reminded of the terrible job my contractor did. Any time I receive a bid from my new contractor for work (that still needs to be done, apparently $58k only covered 2/3rds of the house) that is really fair and reasonable and completely below what I think the price would be, I'm reminded of how my former contractor took such blatant advantage of me and the situation. My own fault, which only compounds the anger.
The real estate agent I was working with knew I was going to need a contractor, so she recommended a guy from her church. He seemed super nice at the time and like he really went out of the way to “hold my hand” through what started out as an exciting project and time in my life.
As it turns out, he wanted to hold my wallet instead.
My ex and I started getting the sneaking suspicion he was taking money when every, single project went over budget. Or when he'd install something and say he needed additional money for an extra part of the project that “wasn't included.” Case in point: he'd quote a price to refinish the floors, not say anything, and then after they were finished say he needed extra money to reinstall the trim and molding around the floor. Typically this is included, or if it isn't a good contractor communicates up front what the charges are going to be.
Or when the kitchen cabinets came, without knobs, and he told me knobs would be extra. I instead went to Home Depot and took care of it myself.
Between the runaway renovation costs and the wedding expenses I was shelling out for, I ran through my savings, and put about $8k on my credit cards. (Which I didn't pay off until March 2015. See: “How I Paid Off $8k in 90 Days”)
Things came to a head when it came time for inspections and everything failed (which I know now is a sign of the sloppy job he did.) He kept having to re-do things, or come to the house for a scheduled inspection (which I'd have to pay him for.) Then one of our last inspections was the HVAC inspection. His workers had put the new A/C unit on the existing concrete pad. New building code stipulated that A/C couldn't be so close to the house next door, so it would have to be run around to the other side of the house.
Cost to re-run the HVAC? $3500 dollars.
Contractor said I should pay for it. I said it wasn't my job to know the new building codes and that was what I was paying him for. We were at a standstill and weeks went by where the HVAC didn't get moved and we couldn't pass inspection because we refused to talk to one another.
To add insult to injury the final renovation check from the bank came early. Whenever they came I was to sign them and hand them over to my contractor. I didn't feel comfortable handing over the final check while we still had one huge item outstanding so I sat on it. Things got ugly. He came by the house with his workers, threatened me via text. Even though I was clear with him he wouldn't get it until we resolved the HVAC issue, he wouldn't leave me alone.
How It All Worked Out
Finally my parents intervened and I spoke with their attorney. Emotionally spent and wanting to finish on the renovation which had now dragged on for four months, I borrowed the $3500 from my parents, the HVAC unit got moved, the house passed inspection, and my contractor got out of my life.
I wrote a letter to Wells Fargo about all of my grievances with both my contractor and the HUD consultant I had to pay for per my taking on a 203k renovation loan. The HUD consultant checks the contractor's work, then lets the bank know work has been done so a check for the renovation work can be cut. These checks and balances are in place to make sure people (and banks) don't get screwed over. I wasn't pleased with the HUD consultant either, but at the end of the day, I don't know how he could have prevented any of what happened.
He was overcharging me and cutting corners to make as much money as possible, and because I was a first timer I let it happen.
After my mortgage, the downpayment assistance, the $8,000 in overages I'd say I'm in the house for around $120,000 still. My home is worth $140,000 as of two years ago, so I have a nice bit of built in equity.
Aside from that, I have the loan forgiveness, the tax credits, and I've been able to take on roommates to help recoup some of the costs. With the mortgage being so low and having roommates, I was able to leave my full time job to work for myself in April 2015. So in the end, everything has worked out to my benefit. It was just a long, difficult road.
I've built back up my savings, paid back my parents and paid off all my credit card debt, but the stress of that time still lingers in my mind. I always thought I'd have two rental properties by the time I was 30, but every time I go and look at a house (and there have been a handful in the last two years) I always get really stressed out when I walk in and feel I couldn't handle the amount of work.
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I've also toyed again and again with just selling the house because it stresses me out a good bit sometimes, and I have a lot of bad memories here (runaway renovation, broken engagement, my puppy Murray died here), but as time wears on, I realize that this house is my home and not the sum of my bad experiences. I've done a lot of work on it and I should be proud.
Have you ever made a real estate investment? What did you learn?
Like this post? Get more first time home buying information in my book, The Millennial Homeowner: A Guide to Successfully Navigating Your First Home Purchase, now on Amazon. Click here to get your copy!