JF2385: Becoming A First-Time Homebuyer With Scott Trench and Mindy Jensen #SkillsetSunday

Scott is a CEO of BiggerPockets, and Mindy is the Community Manager. Together they wrote a book for first-time homebuyers, helping them avoid rookie mistakes. 

They focus on primary resident homeowners who have a lifetime worth of earnings and savings to work with. They teach people how to spend their money without severely impeding their ability to make other investments.

Scott and Mindy  Real Estate Background:

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“You’re spending hundreds of thousands of dollars in most markets. You should know what you’re doing” – Mindy Jensen.

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to The Best Real Estate Investing Advice Ever Show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast we only talk about the best advice ever, we don’t get into any of that fluffy stuff. We’ve got a special segment, we’re going to be talking to all the Best Ever listeners who are looking to be first-time homebuyers. Well, we have a perfect book that is coming out, written by Scott Trench and Mindy Jensen, called (surprise, surprise) “The first-time homebuyer”, that is just for you. It is the complete playbook for avoiding rookie mistakes. With us today to talk about the lessons that they wrote about in the book so that we can get some value from this conversation, and then ultimately go check out the book, is Mindy and Scott. So first off, how are you two doing?

Scott Trench: Doing great. Thanks so much for having us, Joe.

Mindy Jensen: I’m doing fabulously, Joe. Thank you for having me on the show today.

Joe Fairless: Oh, well. It’s our pleasure to have you both on the show. So most of the listeners know all about BiggerPockets. Mindy and Scott are from BiggerPockets. Scott is the CEO of BiggerPockets and Mindy is the community manager for BiggerPockets. Scott, also, from an experience standpoint, has six years of real estate experience. He has a portfolio that consists of three multifamily projects. He’s also done some syndications. Mindy has done nine live-inflips, has two rental properties, she’s done a mobile home park and a few syndications. She’s been investing for 20 plus years. They’re both based in Denver, Colorado, where BiggerPockets is headquartered. So with that being said, let’s dive right into the book. First-time homebuyers and how to avoid rookie mistakes… It’s been a little while since I was a first-time homebuyer. So first off, are you all talking about first-time homebuyers as a primary residence or as an investment property?

Scott Trench: First-time as a primary residence. If you go back and remember when you’re buying that first property, typically, the position that you’re in is you have a lifetime to you of accumulated cash or liquidity, and you’re about to make the biggest financial purchase of your life. So what the first consideration, at the strategic level for someone in that position, is if I use up all of my cash on this first home purchase and assume a higher level of monthly mortgage payment than what I was paying previously, that’s going to significantly impact my ability to make additional downstream investments, like those in real estate or those other types of things. I’m just jumping right in from the strategy perspective with that, and kind of going back to that first step… It’s a little harder to get started, depending on what decision you make in that process.

Mindy Jensen: However, if you have never bought a home before, and you’re in a high cost of living area, and it doesn’t make sense for you to purchase a primary residence and then purchase an investment property, the concept of buying an investment property – it’s the same steps as buying a primary residence. You still need a real estate agent, you still need to look at properties, you still need to make an intelligent offer based on numbers, not emotions… So the book is helpful for anybody who is going to buy a property. I’m a real estate agent, I come in contact with a lot of people who’ve never done this before… The whole reason I became an agent is that I have had my fair share and everybody else’s fair share of bad agents. It’s so easy to find a bad agent; it doesn’t really share the process of what it is to buy a house from start to finish. So that was the impetus behind the book, is just this is a big purchase. You’re spending hundreds of thousands of dollars in most markets to buy a property; you should know what you’re doing.

Joe Fairless: Your scenario, Mindy, that you described was me whenever I was getting started. I was living in New York City, and I did not have the money to buy anything in New York City, or in Jersey, Connecticut, or anywhere else in the Northeast that was close to New York City…. So I ended up buying my first house as an investment property in Duncanville, Texas, south of Dallas a little bit, because it was an investment property while living in New York. Now I’m thinking about the process of the single-family house purchase investment property – it is pretty similar to the purchase of a primary residence.

One thought I have is, should the first sentence in your book be “Why are you considering a single-family? You should be considering a duplex or triplex.” Because that truly is the best investment. So do you mention that at all? Or do you talk to your audience at all about that?

Scott Trench: I wrote a book called Set for Life, and in that book, I make no bones about it, that the way to dramatically accelerate your financial position using a home purchase is going to be with a house hack or live-in flip. The first-time homebuyer book here acknowledges that for some people, they’re just not going to make that decision. I think the first sentence of our book is it all starts with a simple concept – you want your dog to have a yard, and it goes from there. This is that audience that we’re speaking to. The idea here is that for a reader who is not going to do a house hack – we talked about those concepts, we talked about the house hack concept, we talked about the live-in flip concept and how that can add value, and how that is such an advantageous move… But this is really about the first home purchase that is a primary residence, and walking through “Housing is an expense, it is not an investment.” The more house you buy, the more you’re paying for housing. That’s true whether you’re spending more on rent or more on your primary residence. Buying can be cheaper than renting, and that’s a strategic decision that we can make, and we walk through that in the first part of the book. But it’s about the strategy at first of home buying and understanding that at its core, a house is a liability, an expense… And there are multiple ways to do it and there are ways that cost more and less. Then we walk through  those trade-offs there.

Mindy owns her home. I’ve owned homes in the past, but I rent currently, and we acknowledge that. I just wrote a book called First-Time Home Buyer and I have chosen to rent currently, because who am I not to take my own advice and say “I don’t plan to live in this location for longer than a couple of years. House hacking did not make particular sense in this specific instance so I’m renting with it.”

So the first part of the book is about the strategic concept of the house as a liability and here are ways to offset that cost. Exit options, and thinking about ways to, if I move out, can I keep the place as a rental? That gives me another exit option that a lot of first-time homebuyers aren’t thinking through. You don’t have to go into your first home purchase with the intent to be a landlord, but if you leave that option open, you give yourself a lot more flexibility downstream, if there are ways to add value, those types of things.

The second part of the book is about getting a good deal and the specifics behind that. The third part of the book is about the nuts and bolts of the transaction process, how to deal with that, inspect, that scary inspector report, what’s important, what’s not, and all that.

So the idea here is that the strategy is the piece that we see a lot of people making mistakes with, where they buy way too much house way too early in life, and cost themselves hundreds of thousands of dollars or millions maybe in opportunity cost by locking themselves into that mortgage and depleting their cash position.

The second part is the idea of “Hey, we’re going to save you tens of thousands of dollars by showing you here’s how to identify a good deal and narrow in on that, rather than buying and making an emotional decision at the last minute when your lease is about to expire on a property with a couple of turds in it.”

Then the third part of the book is saying “Hey, we’ll save you a few thousand, maybe a few tens of thousands on not getting scared off by that inspector report there.”

Joe Fairless: What’s too much house? How do you define that in the strategy stage?

Scott Trench: I think it varies by income level. The cheapest way to live is to sell all your possessions and buy a tent and live under a bridge. But most people don’t want to do that. So what is too much house? I think it’s when it begins to become a meaningful part of your income. If you’re qualified for $400,000… Let’s say I make 80 grand a year, I have accumulated 40,000 in lifetime savings and my lender just approved me for 400 grand. Too much home is putting down $40,000 and taking out a $400,000 mortgage. That’s too much. Somewhere below that is a better option. The farther you can go below that while still finding a place that you will enjoy living in, that’s the sweet spot. So where’s that art? I don’t know. But it’s not immediately jumping to the top end of what you can possibly qualify for.

Mindy Jensen: So many people do that. They’re like, “Oh, I can get a $400,000 loan. Let’s look at $400,000 houses.” They don’t look at it by monthly payment. They don’t look at it by what do I need down the road. I have two children, I want a house that has at least three bedrooms. I don’t need a seven-bedroom house. I don’t want a seven-bedroom house; you’ve got to clean all of that seven-bedroom house. I want at least two toilets, because A, that’s easier to sell and I always have my mind on resale value… Because I’ve never lived in a house for more than six years in my entire life, and a lot of those were a lot less. So I’m always thinking about how am I going to be able to sell this. I don’t buy weird houses, I don’t buy small houses, I don’t buy really big houses, I just buy the middle of the road, because that’s going to be the easiest to sell.

Scott Trench: Yeah, and I’ll just chime in there… Mindy made a great point there – she’s only lived in a house for six years. Many, many people do not live in their house, even though they go into it with the thought–

Joe Fairless: It’s like five years, right? That’s the average, something like that.

Scott Trench: We saw five to seven, something like that. I put a little fancy little Excel model for this together… I believe that the cutoff point between whether it’s better to buy or rent is between five and seven years. If you’re going to live in a place for less than three years, you should be renting most likely, all else equal, with the home buying decision. Or buying a house that would make sense as a rental. But you’ve got to keep the property for a long time to get out of that transaction cost cycle that’s really going to lead you dry in terms of wealth if you transact too frequently. So that, I think, is a key consideration that people aren’t thinking through, coupled with buying at the extent of the range.

I know Mindy has one point, but one more thing real quick… If you are buying a house – what we just talked about previously, how much is too much house… And you’re going in that spectrum of “Here’s the minimum I could tolerate, and here’s the maximum of my price range”, you can go farther along towards that higher price point range in that first purchase if you’re darn sure you’re going to be living in that place for a very, very long time. If you feel like you’re the kind of person who’s probably going to be moving in five to seven years, that’s where the stakes become much, much higher for buying more and more within your means on that first-time home purchase.

Mindy Jensen: Okay, so Scott just said these people are buying — if you’re not planning on staying there five to seven years you should be renting. I will say that most of the time, but I absolutely don’t plan on staying there for five or seven years. I’m there for two years, because I live-in flip. But I am not buying really nice properties at market price. I am buying dumps at bottom of the barrel prices, because I’m going in there, I’m making them beautiful and then I’m going to sell them. I am making… How do I say this without sounding so snotty? I’m making hundreds of thousands of dollars on my sale, even though I’ve only been there for two years or three years, because I bought such an ugly house that nobody else wanted; it’s habitable, and that’s about all you can say about it.

Scott Trench: It’s exit strategies. Most people when they buy their first home have only one exit strategy, which is I’m going to live there forever, which does not turn right for people. So Mindy and I have bought out houses and lived in them for much shorter time periods, because our exit strategy was completely different. My exit strategy when I bought my first duplex was to move in, fix it up, rent it out, move out, and keep it as a rental. That’s an exit strategy. I’m planning on keeping the property for a long time. Mindy’s exit strategy is to move in, fix it up, flip it, and she has optimized every part of that process. She is an agent, so she’s able to transact on the buy and sell side and collect those commissions. She knows how to rehab the properties. She lives in them during that, and then when she sells it, she doesn’t have to pay a capital gain because of certain specific tax rules for that. But again, we mentioned these exit strategies, and you as an investor listening to this, should be thinking about those exit strategies with your primary residence.

But again, for the purpose of our book, why we mentioned those – we’re trying to open people’s eyes more generally to the fact that other exit strategies besides living there for the rest of your life exist in the first place. One of those should be living in there for a long time, another should be selling it for a gain at some point, and you can accelerate that through improving the property like Mindy, or flipping it, or holding it as a rental should be a third option. The closer you can get to having all three of those exit options, the more freedom, flexibility, and wealth that you’ll build over time.

Joe Fairless: I love the awareness that you’re bringing to the exit strategies. On a personal story, my family was considering purchasing a house for another family member of ours. I’m being a little cryptic because I don’t want to give away who the family members are, for their own purposes… But we were going to purchase a property for one family of ours a house… And while considering this process, another family member was asking, “Well, what about if the person who you’re buying the house for decides they don’t want it? Can we just have it as a rental?” The answer that I gave was a hard “No way”, because in this case, would have been in an area of Michigan that is not the hottest market, and I certainly wouldn’t want to have a property management company manage the only single-family house that I own in that area as a rental…And just having that conversation is necessary before figuring out “Okay, does this actually make sense to purchase?”

So I can tell you personally, with you two describing the thought process, that you really have to have when thinking about purchasing homes, that was helpful for me to have that conversation with family. Okay, well that option or strategy is off the table; we’re not having it as a rental. So now it’s just “Are we going to be okay with losing money if we buy it and the market goes down, or really– that’s it, because we’re not going to be living in it.” Are there any other strategies that I was missing on that?

Scott Trench: They all boil down to those three fundamentals of living in the property forever, sell it for a gain, or rent it out. But there are so many permutations of those strategies. You can improve the property and sell it after you move, long-term; you can improve it and that will jack up rents and enable you to keep it as a rental. You can consider short-term rentals, you can consider additions or major rehabs, or you can consider basic work that you’re going to do yourself. There’s a whole spectrum across each one of those exit options that you can consider. We go through, I think, giving a high-level overview of those types of things.

But yeah, you’re right. If you’re not analyzing your property at the outset, you’re doing the buy and pray house purchase method, which is what most people seem to do… That’s what we want to save people from, because we think that if you’re able to think through those exit options, even if your reality is that you don’t have those exit options available to you today, at the time of purchase, the closer you can get to that, your mortgage is going to be two grand and your rent is 1,700. You know you’re bleeding 300 a month and then some, because of the vacancy and the repairs, maintenance, and those types of things. But at least you know going in what that exit option is going to cost you, and if you can get to the place that’s 2000 in rent and 2000 in the mortgage, you’re bleeding less after those other expenses.

So I think it’s just important to conduct that analysis and then make a conscious choice. So our book might be for you, the investor that’s listening to this, but it might be even more powerful for your spouse to read and understand where you’re coming from on those types of things.

Joe Fairless: As we wrap up, I do want to ask about your second section in the book with a couple of specific examples. In your second section, you said getting a good deal… And clearly, Mindy, your example of buying an ugly property, fixing it up, and making money every step of the way – that’s a great way to get a good deal. What are some other examples of how to get a good deal?

Mindy Jensen: Well, Scott has a really great method of thinking about what’s on the market and what is selling. I’m going to let him talk about that. But to get a good deal right now in this market, it’s insane. I don’t know what market you’re currently in Joe, but I’m in the Colorado, the Denver Front Range market, and everything is going under contract instantly with no contingencies, all cash; three days it’s on the market and it’s under contract. So right now getting a good deal is looking at properties that have been sitting there for a while. There’s something wrong if it’s been sitting there, so what’s wrong with the property? I’ve been watching a property in the hottest market of my town sitting there since August. I don’t think it’s overpriced. I haven’t been inside, maybe it smells horrible, but it looks really nice from the pictures… So I don’t understand why it hasn’t sold yet. That’s the kind of thing that I would be looking at as a first-time homebuyer, is something that’s got long days on market. In my market, 20 days is long days on market.

Unattractive houses, who cares what the carpet looks like? You can get that replaced in a day. You can install flooring on your own, that’s such an easy win. We do most of the work ourselves, and flooring is such an easy installation… Except for [unintelligible [00:19:42].17] that out because you’ve got to stretch it and whatever. But paint — I’ve got a client right now, she sent me a house that’s got fluorescent green paint on every wall and the ceiling. I can pay somebody to paint a house pretty inexpensively and now this house is desirable. There are some people who don’t want to do any work at all. That doesn’t make them bad people, that makes them not your competition. The more competition you can knock out, the better chances you have of finding a deal.

Off-market really is going to be a great way to get a good deal in COVID. I’m not putting my house on the market because I don’t want everybody and their mom traipsing through with their COVID breath, breathing all over my house, especially if I’m living there. But if I got a letter in the mail that says, “Hey, I want to buy your house. I’m not looking to steal it, I’m looking to pay fair market value. If you’re thinking of selling or if you know somebody who is, here’s how you can contact me.” You might get people who call you that yell at you, but you might get people who say “Hey, I was thinking about selling my house, do you want to come see it?” And any advantage you can get right now is going to help you out, because right now the markets crazy.

Scott Trench: I agree with everything Mindy said, and I acknowledge that many first-time homebuyers are buying properties from the MLS. When you look at the MLS, let’s say I have 10 identical two-bed, two-bath properties, that are 1,800 square feet, 1950s built, in Denver, Colorado, within a mile and a half of each other, all selling around the $400,000 price point. Let’s say I bucket them off – one sells at 375, 380, 385, 390, 395, so on up to 425. The ones that are below 400,000 are going to sell immediately or off-market, because as soon as I hit the market, there’s going to be an intense war to get them and people are going to buy them. The same property priced at 425 is going to sit there on the market for a long time. So when I as the homebuyer go and look at the market, I’m only looking at the bad deals most of the time, the ones that are sitting there, or the ones that have just come on the market recently. I get very disappointed and overwhelmed because, “Oh, there are no properties for sale at my price point.” It’s because I’m looking inherently in a seller’s market, at the bad deals that have been sitting for a while, for the most part.

What I need to do is I need to go back, cool, calm, and collected, figure out what I want. I want a two-bedroom, two-bath, 1,800 square foot property, in this neighborhood in Denver, Colorado, at this price point, this is the kind of price point that they come at, and just write it down in like a two or three-paragraph summary. Look at all the properties that have been sold that meet those criteria and determine what a good property looks like. Then go fishing, not hunting. You just sit there and say, “Great, 10 properties have sold that I would have bought that would have been made sense for me in the last 180 days.” That means one property is going to hit the market every 18 days, every two and a half weeks.

What most first-time homebuyers do is they don’t do this approach. They begin thinking about home prices, they tell their agent what they’re doing, they get overwhelmed by the bad deals that are on the market, and then when a moderately bad deal that is better than the bad deals in the market comes online, they think they’re getting a good deal and go after it. They’re forcing that timeline upon themselves because their lease expires at the end of June and they’ve got to buy and move in before their lease expires.

No, no, no. You figure out what a good deal is, you go fishing and set up a search, you know that you’re only going to get one shot every two and a half weeks, and you might have to take six or seven shots before you actually land your property. You call your landlord and you pay the extra rent if you’re renting to make sure that you can go month to month, so that you can make a cool, calm, and collected decision on a passive deal search, or an active one if you’re interested in that… But on a passive MLS search, and you reacting instantaneously when the deal comes on the market; you’re making a decision ahead of time, but you’re reacting in real-time to something you’ve already predetermined is a property you’re going to offer on. That is how you get a much better deal or at least acknowledge what a good deal is. You can of course apply that to the properties that have the green paint, or that are an off-market listing or whatever there… But I think that that’s a fundamental, strategic choice that most first-time homebuyers don’t make. They make the choice instead to “My lease is expiring, so I have 90 days to conduct a search.” And at the end of that search pressure is going to mount and I’m going to be forcing myself into an emotional decision at the last second with a buy and pray approach.

Joe Fairless: Which is probably why people move so frequently, because they’re forcing themselves unnecessarily into a property that doesn’t quite fit what they were initially looking for.

Scott Trench: I guess there’s no reason to read the book now.

Joe Fairless: It wasn’t my complete intention, but I did want to make sure we got a lot of value during this interview, and  we definitely did that… But I know there’s a lot of other good stuff in the book, obviously. Well, we’ve got to wrap this up… Mindy and Scott, thank you for being on the show. How can the Best Ever listeners go buy the book?

Mindy Jensen: They can find it at biggerpockets.com/homebuyerbook. It is on sale starting March 8th in the BiggerPockets bookstore.

Joe Fairless: Awesome. I will include that link in the show notes. Thank you you two for sharing your insights and the strategy for how to think about the first home purchase, some parallels with the strategy from an investor mindset, some tactical ways for getting a good deal, and also the way to think about it that Scott just went through… We didn’t touch on the nuts and bolts of the transaction process, so there is a lot of other information in this book that you’ve got to check out. Thanks for being on the show. I  hope you two have a Best Ever day and we’ll talk to you again soon.

Scott Trench: Thanks so much, Joe.

Mindy Jensen: Thank you, Joe.

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