Are You Planning to Buy a Home? Read This First. It's not as simple as many entrepreneurs may think.
Opinions expressed by Entrepreneur contributors are their own.
My column has been quiet for the past two months for an interesting reason. I've been on a quest to buy a second home, in Idaho. My most important reason was to be closer to my 83-year-old mother, who was widowed when my father passed away late last year. A great plan, but I could have never imagined the adventure I'd experience.
Because it's lengthy, I'll jump to the punchline first. I succeeded, but not without a series of nightmares I will not soon forget.
For others considering this journey, I'm offering the wisdom of an expert I've recently met: Nicole Espinosa, "The Short Sale Queen." I wish I'd known her sooner. Espinosa, from Dallas, is an expert in "short sales" — situations where an owner can't afford to continue his or her mortgage and the lender accepts a reduced sum to avoid foreclosure. It helps protect the homeowner's credit and helps the lender avoid an even larger loss. The structure also helps other buyers by reducing artificially inflated prices.
From her experience, Espinosa knows what to look out for in a home purchase and an accompanying loan. With her help, I've outlined six things every entrepreneur, owner or self-employed person should know that could have stopped the majority of my woes in their tracks:
- Avoid large banks. As a realtor who specializes in entrepreneurs, Espinosa stays away from large banks. Regardless of the agent, she says, these banks don't have the flexibility or even the ability, period, to deal with exceptions. You need a lender that specializes in self-employment and can make exceptions where warranted or at least be able to bring a little extra common sense into the mix.
- The realtor is vital. He or she must be knowledgeable about what you're working with and able to route you to the deals and lenders who can make your deal work. If you are selling a home, the right realtor can also confirm that your buyer is working with a lender that can finish the deal and can do so within contractual limits for time.
- Consider a bank statement loan. There are lenders, Espinosa says, who can get a loan approved on only your bank statements. The rate is a bit higher, but it brings the ability to steer clear of nightmares like "You certainly rebounded from Covid, but these are forecasts, not historic reports. Come back in a year" or "You had a PPP loan. Forgiven or not, it makes your debt-to-income ratio too high."
- Consider the home as an investment. If the need or desire arises, could you rent it out? If you experience a downturn, can you exit it quickly? Will you have high equity and could you access it quickly?
- Strategize in advance of the buy. If you're thinking of a future purchase, find out how to structure your assets for surest success. For example, could you buy the home through your business or within an LLC and rent it back to yourself? Get input that allows you to think out of the box and get better prepared.
- If you can pay in cash, is it worth it? If the price a cash offer gets you is worth it, and you have the option to do so, perhaps the answer is "yes." Then evaluate afterward if it's advantageous to open a line of credit against the equity as emergency funds or to give you a leveraged position without the need to offer an inflated price to win the deal because you are funding your home.
And now I will share my adventure with you.
For many reasons, my decision to purchase made great sense. However, I was buying into one of the fastest-growing areas in the entire U.S. I spoke to our CPA and a rental properties expert and devised a plan to secure a home that could be compelling as a part-time rental.
Family vacations are still a giant priority, I learned from my friend Jerry Conti, who heads up LuxHomePro and LuxVacationRentals in Phoenix. The ideal home offers high-end amenities and a location where a family can enjoy parks, pools and a level of luxury while limiting their exposure to outsiders and crowds when desired.
Eureka. Renting my home for even 15% of the time would open a host of tax advantages as well as provide rental income to help offset the carrying costs.
I found a beautiful development of new properties seven minutes from my mother and the family home. I learned the builder was not a mass developer, but a retired veteran turned craftsman doing custom remodeling and real-estate flips. Extra points. My offer was accepted on January 9. I was over the moon.
Related: 2021 Home Buying Trends in the U.S.
The adventures begin
"Do you need a lender?"
The builder's wife, who also served as our agent, provided me with the card of a mortgage officer for one of the largest national banks. As an owner of multiple homes throughout my career, I'm familiar with the mortgage process and have worked with it well.
"I don't know this individual," she said, "But he gave me his contact information and said he'd be happy to help the clientele we're supporting."
I accepted the card and gave him a call. "Easy," I thought.
I'd get a 7/1 loan (seven years at the fixed rate followed by variable interest for any portion that remained by year eight). I submitted a mountain of paperwork through the online portal. Everything appeared to be great.
Weeks went by, but I wasn't worried. Neither was our builder, who signed a first and then a second extension on our agreement to purchase.
Unlike the loan we'd nearly taken for a rebuild of our Utah home the year prior, we learned late in the process that this loan, in contrast, required the down payment upfront. (The prior had required only proof of at least 20% equity at completion before finalizing the permanent loan). But nowhere in the discussion had this detail emerged. This was frustrating, but we took out a quick line of credit on our Utah home to meet the requirement, and once again, we were set.
Then the bank began pushing back on our builder, as the reviews of their work had been for projects completed before the Covid lockdown began. Without reviews from recent months, the bank refused to proceed.
Flurries of letters from subcontractors and vendors ensued. The bank relented. But during the delay, prices spiked. Material costs had gone to the moon, and contractors were suddenly rarer than gold. Even getting updated bids was now impossible for projects not already begun. Our builder couldn't offer a further extension unless we jumped to a higher price or a smaller house and a year-long build. It was untenable. I was out. But I was now holding a conditional mortgage approval.
A glimmer of hope
Our agent (the builder's wife) began to offer suggestions for alternative solutions among existing homes that were slightly smaller but still ideally located and near completion or recently built.
A smaller build would stay within the right price range, she reasoned, would be ready to occupy and would have the advantage of being constructed before the cost of materials soared. It made sense. The fewer rooms could serve additional functions. A bonus room could be a media room, a workout area and when needed, an additional bedroom. A home office could offer flexible space for additional sleeping as well.
But now an entirely different challenge emerged. Most listings in Ada County (and other booming locations) were no longer entering the market in the traditional way. They now emerge for a single open house on a weekend. Agents collect offers over a three to four day period configured as "bids" for the price above asking the buyer is willing to pay. Many are cash offers from out of state, sight unseen, with appraisal and inspection requirements waived.
Any buyer getting a loan must make a higher bid to offset the 30 days required to complete a deal (if the bank is even able to close the deal within contractual limits) or the risk of failed funding. Even worse, a bidding buyer has to verify the ability to pay for any portion of the purchase that exceeds the appraisal in cash.
The highest known bid, I was told, was for $150,000 over asking. In searches, I found 49 new homes that met the criteria I was seeking. All 49 had gone under contract within days.
"But you now have an approval from the bank in your pocket," our agent said. She was right. With the help of her ability to attend open houses and answer our questions through photos and FaceTime, we pressed on. In 30 days, I made 5 offers, all for tens of thousands above asking and our realtor drew up purchase agreements for each. All five failed.
And then … a winning contender
At this point, our conditional approval was nearly expired. But our agent presented a final idea. She'd found a home that had been a model home with nearly all of the upgrades I wanted. It had been occupied by just one owner for one year who'd been searching for horse property. Like us, the couple had attempted and failed on five offers. Finally, they'd gotten a deal, but it would require the successful sale of their current home to succeed. Our agent learned of the home prior to its listing and sent photos from its showings in the year prior. The asking price was reasonable. She suggested presenting our best offer with pre-approval in hand at the moment of opening with a time limit of 24 hours. It was brilliant.
The seller accepted. The journey was on. Our mortgage agent spoke to the seller's agent, assuring him with words that later proved to be fatal, "This deal will happen. We already approved the buyer for a larger project than this."
50 days of anguish
Because the new project was a purchase, not a build, we'd need to reapply, the banker informed us. But with our records already in the system, we were assured the new approval would be a certain slam dunk.
Then the bank went quiet. A week later, an identical home appeared and went under contract for $102,000 more than our deal. Of course, our sellers were fully aware.
Two more weeks went by. Our appraisal was late. In the market flurry, we learned, it had to be provided two ways — one, to assess the value by traditional methods and another to express the "new value" in the bidding model of sales. Finally, it was complete, and thankfully, it supported our sale. But the bank remained nonchalant about our contractual deadline.
Our seller agreed (reluctantly) to allow two additional weeks to close, which required them to board their horses and extend the lock on their loan at a cost. I offered to pay. They obtained an agreement to occupy their new property early, at a per diem rate, and extended the same offer to us. It was a wonderful favor, but a deadly risk, we later learned, with our loan still awaiting final approval and not yet scheduled to close.
Still, the mortgage agent remained nonchalant. Privately, he acknowledged the tension between central underwriters and outlying teams of mortgage agents who don't get paid unless a mortgage succeeds. He assured me, however, that all sides get highly motivated in the final week of the process, as all sides lose if funding should fail. But as the final week ticked by, approval was still pending. With the seller's stress sky-high, the bank finally provided a letter and disclosures for signature, but still labeled "conditional approval." Then the other shoe dropped. The final approval, now down to the final possible day, was denied.
The death knell
As I'd gathered final updates for the underwriting assistant, I heard a small gasp as she reviewed the credit union dashboard that confirmed our down payment funds.
"Oh, no," she said. "You've had PPP loans."
"Yes, of course," I replied. Our agency had been an ideal candidate. The grants had been a great boon during the lockdown. The two loans (we have both an S Corp and an LLC) had been documented clearly in our tax returns, had not been counted as revenue and the lender had verified forgiveness.
"Surely this isn't a problem?" I asked. I sent links of documentation from the SBA describing the way loans are forgiven, lenders are reimbursed and confirmation is received from the lending provider. All was well.
Except that it wasn't. As one of the largest banks, the lender's final process was so highly regimented, no deviation from the standard template for borrowing could fly. From the bank's standpoint, no forgiveness would be acknowledged without a printed statement from the SBA about our specific loan number, which, of course, the SBA doesn't provide.
Then the agent's final message revealed all.
"We have documented your personal revenue at $XX,XXX. With these items subtracted, it is now a negative number. You can't buy a home."
There was no opportunity for a discussion and no potential recourse. He invited me to resign my application or face the consequence of negative credit reporting on the fact I'd been turned down for the loan.
I was stunned. And I was even more stunned when I learned the revenue number he'd avoided disclosing during the six weeks of our process. It was my W2 income, which, as an entrepreneur, was barely more than a third of the sum I'd confirmed.
Now the picture was clear. In an attempt to put the loan through in the easiest way possible, the agent had accepted only W2 our income and avoided disclosing the rest, saying only that we'd need to bring 31% of the loan to the table to close.
The denouement – never say die
My story, thankfully, had a happy ending, though I would not wish the 10 days that followed on any living soul. On top of my angst at the prospect of losing our deposit and the mounting compensation to the seller, was the fact I had fully moved into the home.
In desperation, realizing we'd already gathered 31% of the purchase, I contemplated what it would take to get from 31% to 100%, eliminate the bank and finish the purchase in cash.
My mother and my brother provided loans. A dear friend provided a significant short-term loan from his own line of credit. Still, we were $183,000 short.
On the next day, which was to have been our closing, we arrived instead with two-thirds of our purchase in hand and an offer to provide the balance in 10 days by increasing the line we'd just obtained against our primary home. It was one of the most humbling moments of my life. While I held no legal obligation for the deals above mine, as worried as I was for my own deal, I'd have felt even worse if I'd caused two additional projects to fail.
Our realtor reminded me how risky this new offer would be. If I failed, I'd forfeit the entire amount now in escrow. The seller could remarket the home and probably sell within days for $100,000 more. The seller's seller could pocket their sum, subdivide their property and make as much as 5 times their original sale.
I understood the risk and was prepared, if I had to, to secure the final funds from our retirement accounts. It would have been a terrible loss and a giant hit to our taxes but would have allowed our deal to succeed.
Our last-ditch offer succeeded. An officer of the credit union that granted our HELOC loan weeks before was sympathetic, and in an all-time record, was able to double the loan. In seven days, this small organization had accomplished what one of the largest U.S. banks could not, as one entrepreneurial team supporting another.
I am grateful beyond words for that effort and for each of the individuals who helped us to weather an unbelievable storm. In that light, I am hoping this story can be of help to many additional entrepreneurs.
If you are contemplating the purchase of a home, I applaud you. Property ownership continues to be a significant investment and for many, continues to represent the American Dream. But if you are planning this step without a traditional job history, I urge you to do your homework and be savvy and aware of the market and ecosystem you're working within to ensure your success.