When you bought your current home, you may have heard the phrase, “you make your money when you buy”. We say this pretty often in our office, because – let’s be real – we want our clients to make lots of money with us! Not only is a mortgage payment like putting money into an appreciating piggy bank (the piggy bank being home equity), but the house can also help you build wealth AFTER you’re no longer living in it, so long as you look ahead when you buy. Let’s take a look at buying vs renting, buying with the long term goal in mind, & best practices for buying when you’re out-of-state.
How do you even know whether you want to buy at the next duty station? I look at a few key factors:
1. How long do you expect to be stationed there?
2. Do you believe housing prices will be worth more when you PCS again? And,
3. Will you be able to cash flow the house as a rental when you PCS?
If you will only be at the next place for 1 or 2 years, you may want to consider renting unless you can find a great deal or will be able to get good cash flow on the property as a rental after you leave. This is because the costs of selling a home will typically be more than 1 or 2 years worth of appreciation. I find that the break-even point on the costs of selling a home is typically between 12 and 24 months of ownership.
To answer the other 2 questions, it will be important to speak with some good agents to get their opinion on market rents and expected appreciation trends. Let’s say you’re moving to Ft. Stewart and want to buy a house in the mid $200k point in Richmond Hill, GA. Typically, those homes will rent around $1600-1800/mo, and a $250k mortgage should cost around $1100/mo. Factor in $160/mo for property management, $100/mo for maintenance, $50/mo for vacancy reserve, and you’ll be looking at $190-370/mo of cash flow straight to your pocket, plus the profit you’ll capture as equity in the home by paying down the mortgage and normal market appreciation. That’s a pretty decent deal, and I expect Richmond Hill to continue to be a strong market over the next few years, so I would recommend buying a house like that. If you were looking at losing money every month instead, then it might actually make sense to rent, though you are taking on the risk that your rent will go up while you’re living there, especially if you plan to be at that duty station for three years or more. Unlike housing prices, rents are very sticky and typically do not go down; even during the 2008-09 recession, rents held steady while housing prices fell 40% or more.
Who are the key players to have on your team?
The biggest factor in making sure you’re buying a good deal remotely is working with a trustworthy real estate agent, period. This is someone who will put your best interests first and offer candid advice even if it costs them a commission. As discussed in earlier blogs of this series, the best way to find someone trustworthy is to get a recommendation from friends or another trusted agent who may have relationships with someone in that area, and then doing your own due diligence on that person by researching them, getting information on their background, and checking out their recent transactions on Zillow to make sure that they actually have some experience.
The next piece of the remote-buying puzzle is working with a reputable home inspector. Your agent should have two or three good ones on speed dial, and if your agent is trustworthy, the inspectors they work with will be trustworthy as well. When I’m making offers for out-of-state buyers, I always engage my inspectors before going under contract to see when their earliest available inspection time is. Then, I can make the due diligence (or inspection period) length in the contract just long enough to give us a day or two after the inspection. It’s important to do this right now because sellers love contracts with a short due diligence period. Why? During due diligence, a buyer can back out of the contract with no penalty. After due diligence, they cannot. If you can offer a seller a 4- or 5-day due diligence, you may be able to beat higher offers that are asking for longer periods of due diligence.
I believe in trust, but verify. Look up online reviews of your agent and home inspector. It’s not uncommon for a trustworthy professional to have one or two bad reviews from disgruntled customers, but if you see a lot, then maybe you shouldn’t place your trust in that person or company. I also like to look around Zillow to double check the rental estimates a person is giving me. If you see numbers that don’t line up, ask them about it. “You said I’d be able to rent this place for $1600/mo, but everything I’m seeing on Zillow is listed at $1300/mo – what’s up?” Maybe they have some knowledge that isn’t accessible on Zillow that they can share, or maybe they’re fudging numbers on you. You’ll have to be the judge of that.
Don’t forget to check on property taxes and insurance rates as well. Your agent should be able to estimate these for you, and you can verify by going to a county or city’s tax assessor website and speaking with your own insurance agent about a property you are interested in.
I’ve got my team. Now what?
1. Get acquainted with the area
If you can, it’s really great to fly out to your new duty station for a long weekend so you can tour neighborhoods, even if it’s a few months before you’ll be moving. Google street view is a great tool to scope out a neighborhood from afar, but that only goes so far, and there’s nothing quite like getting on the ground and spending a day or two driving around. I absolutely recommend at the very least taking a google street view tour of a neighborhood that you want to make an offer on, and check to make sure that the imagery is relatively current (street view will tell you what month and year the imagery was captured). Also, take a look at the overhead map – how close are you to interstates, railroads, or airports? Is there a left turn onto a busy road at the end of a development you like that doesn’t have a stop light? Things like that can be aggravating.
Checking out drive times to work is also important. You can do this by going to google maps and setting your arrival time to a certain time, like 6:30 AM at your new unit or 6:00 PM at a potential house. Your agent should also be able to provide insight here.
2. Get to know potential common pitfalls
Other important investment considerations relate to the home itself. Homes built after 1985 or so are typically going to be built well and up to current building standards but there are still things to watch out for, like polybutylene (PB) plumbing that was common in the mid to late 80s. I own a home with PB plumbing that hasn’t been an issue, but some folks have experienced issues with it and it is no longer used. HVAC systems and water heaters are typically expected to last 10-15 years, and roofs 25-40 years depending on type of shingle used. If you have an old roof, old HVAC, and old water heater, you might expect to spend $15k in a relatively short period of time replacing all of those items. Maybe the deal is good enough to justify those expenses, maybe not.
3. Get to know the homes
Video tours are a great way to get a better look at a home. When doing video tours for my remote clients I do a few things to make the video as useful as possible:
– Put my phone into a stabilizing gyro to keep it level and steady at all times
– Use a wide angle lens on my phone as I’ve found it to be better for giving a client the real feel of the home’s layout
– Keep videos 60-90 seconds long so they send easily in iMessage or WhatsApp
– Use a 60 FPS rate as I’ve found that reduces the choppiness of the image when I pan from room to room
* I do NOT like using facetime for virtual showings as the video quality often sucks and the buyer can’t look at the video again to get another look. I just try to be careful to narrate the answer to every question they might think of (ie: “These are stone countertops, this sink has good flow, this AC appears to be somewhat old, there is some minor scuffing on the floors, etc.”)
Another decent idea is to secure short term rental accommodations so you can house hunt in person. This might be a great option if you’re a single soldier and can rent a spare bedroom from a friend for a couple months, but isn’t a workable solution for everyone for obvious reasons. You might even be able to find month-to-month furnished rentals on AirBNB or Furnished Finder.
4. Lock down your house
Of course, once you find a good investment candidate, you’ll actually need to win the contract on it. This is not easy to do at the moment and some markets are tougher than others, but there are always levers that we can pull to make our offers stand out in a competitive situation.
What levers to pull depend on many factors including the buyer’s ability to pull them (if you don’t have much cash on hand, we can’t exactly guarantee to cover an appraisal shortfall for example), and the seller’s needs (if we can find out from the seller’s agent that they need a 30 day rent-back after closing then we might want to pull that lever). Here are a couple common tools that I’ve advised various clients to use:
- Price price price! Price is often the number one consideration to a seller. Sometimes winning a bidding war comes down to just that.
- Not asking for any seller paid closing costs. Most winning contracts in my market are not asking for seller paid closing costs. We can always negotiate for them after the inspection, but I typically advise folks not to ask for them up front.
- Escalation clauses. I personally do not love escalation clauses as a seller, but they can be effective. You should at least offer to pay $1000 more than the next highest offer when you choose this option.
- Appraisal gaps. You can say “I will pay $200k, and if it appraises low, I will cover the difference up to $10k.” You’ll also want to provide proof of funds showing that you actually have the $10k that you might end up needing to do this.
- Large earnest money deposits. Earnest money is money that you put on deposit while you are under contract. This money goes towards your closing costs or down payment at closing, or is refunded to you if you don’t need to use all of it to close. If you terminate the contract during your due diligence period, you get it back. If you terminate after, you don’t under most circumstances. This money is basically insurance to the seller. It’s typically expected to put up 1% of the purchase price as the deposit. Putting more indicates your financial strength and desire to close.
- Short (or no) due diligence periods. Never ask for more than 10 days in this market. If you’re buying a newer house, it might be worth rolling the dice to ask for none – a good agent can give a solid once-over of a house to check for the biggest potential issues.
- Option money (non-refundable earnest money). Option money is saying “I want a due diligence period where I can get my earnest money back, but I will make a portion of that earnest money non-refundable for any reason”. Typically, this will be $250-500. This again just demonstrates that you’re serious about the deal and don’t intend to jerk the seller around during due diligence.
- And more. We elaborate on all these tools and offer a few more in our Ways to Win in Multiple Offer Situations blog.
As a remote buyer in this day and age, you have plenty of resources to help you succeed not just in finding any home, but a home that will continue to make you good money. Use these resources! Talk to agents, get recommendations, research agents & home inspectors online, research neighborhoods using maps, & figure out what you can offer to win a great house in a competitive market. A great real estate agent will propel you in every one of these facets. Always know my team and I are happy to talk and help you out any way we can. Get the conversation started online at www.trophypointrealty.com/contact. We’re looking forward to seeing you and fellow military build wealth through real estate!
Written by: Pat Wilver