I Spent All My Money and Bought A House I Hate. Here is What I Learned.
By: Stella Guan
Tags: Selling A Home, Real Estate Investments, Real Estate, Buying A Home, Personal Finance

Gambling With High Interest Hard Money Loan In A Historic Low Interest Environment

In 2020, the pandemic hit. The Fed slashed rates to historic low levels. Tens of thousands of city dwellers moved out to the suburbs and other parts of the country seeking more outdoor space, better quality of life and lower cost of living.

On TV, in targeted social media ads, in your email inbox, almost every company related to real estate was telling you “there has never been a better time to buy property.”

It was indeed a golden window of opportunity for many to finally afford a bigger house at a much lower rate. A silver lining for the pandemic, right?

Except that it comes with a caveat for some people such as myself, who is newly self-employed.

I quit my 9–5 right before the pandemic in pursuit of my own business. It was a liberating decision that I still am very happy about. It hasn’t been easy, but I already made more doing my own thing than what I made in any full-time job I had in the past.

I am well aware of the fact that there will be more hurdles to jump through for entrepreneurs and self-employed individuals when it comes to securing a loan. But I didn’t know exactly how much more difficult it will be and grossly underestimated it.

I thought if I put down more, I will still be able to get a loan. After all, I have excellent credit. My self-employed friends told me they had to put in a larger down payment and got the loan. That’s not a deal-breaker — I told myself if I have a clear budget and shop with the higher down payment in mind, I should be fine.

S ee, things are not quite as simple as I thought.

It turns out not only does my newly self-employed status means much more down payment requirements from lenders, it actually disqualifies me from all conventional loans (bye-bye, below 3.00% interest rate) until I can prove one full year of self-employed income from bank statements.

I was about 8 months in and making consistent and much higher income than before, but from a loan underwriting perspective, that means nothing. They look for future income predictions through established financial history, which is what a person with a traditional full-time job can easily prove, even though they may get laid off any time.

In fact, when I spoke to most loan officers, they immediately lost interest in continuing the conversation upon finding out that I am not yet a year self-employed. Some of them even made the analogy to me that I am as good as an unemployed person.

The problem is, I found out about this 3 to 4 months into my house search, when I had already put in so much work every day finding a house to look at remotely. I feel that I had already invested too much of my time and energy into this to back out now.

I made the mistake of not asking about my loan qualifications earlier, way earlier.

From retrospect, that was the exact mentality that got me into the deep financial trouble later. I thought if I had already invested in something, I should see it through, even if it doesn’t feel exactly right.

Instead of realizing that it may be best to hold off until I can qualify for a conventional loan, which is next year, I made a dangerous bet.

I secured a hard money loan with over 10% in interest. It was an investment loan and my plan was to refinance it in January as soon as repair is done and I can legally claim it as my primary residence. In the meantime, I looked for temporary places to stay.

I Thought I Got Lucky In The Worst Bidding War

When I started to make offers, I was surprised that I was outbidded again and again.

At first, I attempted several remote offers contingent upon the sale of my condo. I got laughed out the door every time. Every seller had a ton of offers, mostly local with no such contingency. I didn’t even stand a chance.

When I finally sold my condo and moved out to California, I was excited because I thought now I have a real chance. Now that I am local, my offer will be competitive, right?

Instead, I found myself getting into a series of bidding wars locally. In fact, one house I put an offer in had 18 offers in 3 days and drove up the price to more than 100k above fair market price.

Defeat after defeat, I became almost possessed with a blind fever to win this “war”. I was living in a cockroach-infested Airbnb guesthouse and couldn’t wait to get out of there and move into my dream home.

My “can-do” attitude and determination kicked in — usually for the better, but this time, absolutely for the worse.

I made a final bid to a house that only had one other competitor, which I thought was weird, because any decent house in this iron hot market would have had more.

But I saw no major issue with the house. It was in a decent size; open concept; nice school district; super convenient to all stores; clean, quiet and beautiful neighborhood. The floor and kitchen was even updated.

I thought maybe this was a rare oversight for other buyers, and I got lucky.

My offer was quickly accepted and I immediately hired an inspector.

Too Invested To Back Out, Even After Finding Out Toxic Black Mold

A series of problems came out from the inspection, which wasn’t entirely unexpected, but some problems were major.

They discovered toxic black mold in the garage that contaminated the entire HVAC system. The water heater was right next to the contaminated platform and two entire systems needed to be demolished and replaced.

Before that, professional mold remediation company needed to clean up this bio hazard zone, which is a very expensive job.

In addition, when the HVAC team came to assess, they discovered asbestos in the attic insulation, which is a highly toxic industrial material widely used in the 70s. If accidentally inhaled, the impact could be fatal.

At this point, I had already spent over $1,000 in inspection fees. I wasn’t feeling great about all these problems, but all I could think of was — I didn’t spend the last 5 months looking at houses every day, losing out on 7 offers and spending 1k in inspection to back out now.

I thought I had too much at stake. Backing out sounds like a failure.

Renovation Always Goes Above Budget, Never Below

The only silver lining from this horrible experience is that I learned a tremendous amount about houses — much more than the average homeowner who bought a house in decent shape.

Upon closing my expensive loan, I already had very few money left in my reserve.

I budgeted 75% of that reserve for all of the repairs and of course, ended up using 100% of it.

I was betting on rental income as soon as I finished repair and renovation. I was even entertaining a few niche investment strategies that on paper would yield tremendous return.

What I had not prepared for was that repair ran 4 weeks over schedule and one problem led to another. I ended up spending $20k over budget and realized the suburban area I bought in was never going to work out as a short-term rental option — people come here to raise families, not for work or sightseeing.

As for the niche strategies, they require months of building up contacts and research to even have the hope of working out. Thanks to the expensive hard money loan I got myself into, none of these strategies will work out.

After Extensive Repairs, I Realized I Hate The House

Things start to spiral downhill rapidly when I walked into the house for the first time after repairs. I immediately realized something is off. I felt very disconnected to the house. I almost wanted to get out immediately even though it shined like a brand new house.

I realized the psychological effect of knowing about the extensive problems of a house — even though they have been fixed, they still bother me.

Our mind is not totally logical. In my head, I knew the mold and asbestos was gone as verified by the re-inspection report. But in my mind, they are still there.

On the other hand, the intense financial strain caused by the repair made me pile up on credit card debts for the first time. I knew it was time to put a stop to it before I get myself into deeper financial trouble.

I decided it is best to resell the house immediately. But of course, things won’t go so smoothly, either.

No One Wants To Buy My Newly-Renovated House

After all the extensive repair work and a beautiful virtual 3D staging, I thought at least I could add up the cost and break even by reselling it at a slightly higher price.

When my realtor listed the house on the market again, some websites even labeled it a “hot home” because it was getting a lot of views.

But showings after showings, no offer came. Not even one. It baffled me — how could a house that is now in great condition and located in a great suburban area where all the parents supposedly want to live not get any offers?

It turns out that neighborhood comparable home prices can really affect how much you can sell your home for.

Due to the fact that I was reselling so quickly, fair market price stayed fairly stagnant and even declined because we were already over the summer high season.

Thanks To New Real Estate Business Models, I Found A Way Out

When we approached 20 showings with no offers, I panicked and started to look for alternative options.

I knew I couldn’t sell it to a traditional house flipper. They will only buy at significantly under market price and I will lose out on everything I have invested in.

I also knew the risk of becoming a landlord with no financial reserves in the middle of a pandemic. California is notorious for protecting tenants and allowing court proceedings to drag on for extended amount of time. If my tenant loses their jobs and decides to stop paying rent, I will have “squatters” who refuse to leave and who I cannot evict. Then I will be in the worst nightmare possible — not able to rent, not able to sell and no reserves for refinance.

Then I found a third option — selling to iBuyers, which are companies that pay fair market price for homes in cash.

Wait, but how do they make money?

It turns out companies like that make money by charging a higher transaction fee. They usually charge 5–7% in fees when they buy your house. They will only offer fair market price, which means they know they can resell at least for that. The fact that they buy with cash means they can afford to hold the house for a few months without worrying about paying for a loan.

Companies like Zillow, Redfin, OpenDoor are just some of the major players in the iBuyer market. Thanks to this new business model, I found a way out and finally sold the house, albeit at the cost of losing 50% of my savings.

Key Takeaways

Disaster was an understatement to my house mishaps this summer. I was financially drained and mentally exhausted to the maximum extent while trying to adjust to a new environment on my own and building my business.

The reason I wrote this lengthy article was to share some valuable takeaways I gained in this process that I hope will help anyone trying to buy a house not end up making the same mistakes as I did.

Here are what I learned: