We Up and Bought a House

Cayenne doing her favorite thing: chilling in the yard.

It happened: we bought a new home. And we freaking love it already. Through nights of packing boxes, selling things on eBay and craigslist, and bringing carloads of donations to Goodwill, we've managed to get all our worldly possessions from one house to another thanks to some good friends, a couple pizzas, and a lot of hoppy beer. I'm writing this post from the back porch with my dog and a beverage, and it's downright idyllic. 

But from a frugality standpoint, this house might not be completely ideal. We spent around $343k for the house, a full $13,000 over what we'd initially set as our maximum budget. And there's a pool: complete with a vacuum and skimmer that run at night, and chemicals that need to be purchased every so often. I think emotions may have gotten the better of us on this one, but we want what we want. On the plus side, the house is exactly what we were looking for: a white kitchen that's already done, with those little scoop handles on the pull-out drawers. Bathrooms that match the kitchen, and a big back yard with a covered patio and a grassy area for the dogs. Basically, it's done. We don't have to paint a wall or turn a screw.

Since this is supposedly a personal finance blog, let's run through some numbers, and a big decision we have to make with our old house.

New Home Purchase:

• $343,000 purchase price
• $69,000 down payment
• roughly $5,000 in transaction costs, initial insurance & escrow, etc.
• Approximately $175,000 in additional mortgage debt (compared to the old house) at 4.2% that is mostly (but not totally) offset by the additional investment dollars outlined below.

Old Home Sales Scenarios:

• Scenario 1: Traditional sale via a realtor, estimated $230k-$250k sales price, netting between $213.5k - $232.5k after paying 5% realtor fees and investing $5k in repairs/landscaping for a retail sale. After paying off the $98,000 mortgage, we'd have between $115,500 - $134,500 to invest. Our plan is to invest approximately 25% of that in a lump sum, and to dollar cost average the other 75%, monthly, over two years.
• Scenario 2: Sell to an investor for $225k (which is the current offer). This would also be the net, as they pay all closing costs, cut out the realtor fees, and require no repairs. After paying off the $98,000 mortgage, we'd have $127,000 to invest. 
• Scenario 3: Partner with our old neighbors, an architect and an interior designer, to flip the house. Their design is to add 600 square feet with a bedroom and expand the common living space, gutting the kitchen and baths: more or less a total remodel. We each would invest $50,000 into the renovation, split the mortgage, insurance, and utilities for the 6-9 month timeline (approximately $400/month per couple, so $2,400 - $3,600 total), aim to sell for $415,000, paying $17,000 to a realtor, and then splitting the profits. Agreeing to an initial "sales" price of $230,000 (i.e. - the baseline from where our profit is calculated), adding in the $100,000 in renovation costs and the $4,800 - $7,200 in holding costs, each couple would hypothetically net between $30,400 and $31,600 in profit. After paying off the $98,000 mortgage, we'd have between $162,400 - $163,600 to invest. But the sales price could range between $390k and $425k, changing those figures quite a bit.

My heart says to go for scenario three, but it's clearly fraught with the most risk, the most effort, and the most stress over the rest of the year. I'm tempted by the ROI on our $50,000 investment. But I'm even more attracted by the opportunity to build something great out of our first house, and improve the neighborhood. Even though we would not be expected to help in any way with the construction, we'd learn a lot of new skills just by volunteering and watching the renovation. And it has all the allures of a big challenge: something that you're not quite sure you can do, but you just might pull it off, and there's that feeling in your stomach that says, "You can. You should."

But that's just looking at the upside. There's plenty of bad outcomes, too: the renovation goes over budget and over timeline, the sales price is lower than we expected, and no one makes any real money off the deal despite working on it for the better part of a year. The sales price at which we'd actually lose money seems to be anything less than $355k. So long as we sold at that price, we'd get our $50,000 renovation budget back as well as the holding costs, pay the realtors, and we'd be back down to the original $230,000 we agreed upon, only suffering opportunity costs, a lot of headaches, and maybe a friendship if we're unlucky.

Which brings us to scenario two: the easy money from an investor. While it's not a home run, it does get us a quick sale with the property as-is and a pretty crazy return, considering we bought the house for $132,000 back in 2010. My head is telling me this is the smart choice: just take the bird in the hand and be happy with the returns we got. And we could use a little simplicity around now, as we're also trying to sell one of our investment properties (a story for another day) and to start a family this summer. Maybe the stress of a flip is the last damn thing we need.

Scenario one, while definitely the most traditional and straightforward approach, is the least attractive to me. But they do say never to sell your home to an investor, so I suppose I should give the retail sale more consideration.

Well, I've rambled on long enough. As we tend to do, we'd like to ask our smart readers to help us see the forest for the trees, and let us know which scenario you think is the best for our situation. (I keep having trouble with polls in Blogger, so please just leave your choice in the comments below.)

For now, it's time to walk around barefoot in the yard, sip a beer, throw the ball around with Cayenne, forget about all this house selling nonsense for a while, and just enjoy our home. Thanks for reading.