Below are topics of discussion I came up with when I was asked by my friend and Realtor Sandy Frost to be on her weekly radio show. She wanted me to talk about how Financial Coaching can help people in the area of Real Estate. be sure to contact us for more information!
So how does Financial Coaching relate to Real Estate?
When a coach motivates a client to move forward and they get their “financial house” in order, they will eventually get to a point where they can purchase a home and not have that home own them. Buying a house with debt and a lot of payments is a burden that causes all kinds of stress and strain on individuals and families. One of the top causes of family problems and divorce in America is money problems and money fights. But if they are working a plan and doing it on purpose, they have a much better chance of being successful with their finances and will have a much happier life.
A financial coach can’t fix systemic issues, and will refer a couple to counseling if there are issues not related to finances that come up in conversations. But when we help them get their financial house in order and get them moving in the right direction… that will get them on a path that will help them achieve what some call the American Dream – home ownership.
Owning a home is financially more than just a payment
Here’s an interesting thought I heard not too long ago… The amount you pay for rent is the maximum you will pay… whereas the amount you pay for a mortgage is the minimum you will pay.
A lot of people say that renting is “wasting money” or “throwing money down the drain”. But that is not true at all. Renting can be a good option for someone and is a much better option than getting into a mortgage they can’t afford for a home that will take a lot of money to maintain. Renting to some can also be a long term solution because they don’t want the hassle of maintaining a home and a yard and all the things that come with it.
Am I saying I would not want someone to own a home? Absolutely not… but working a plan and moving forward slowly and intentionally instead of getting over your head in a mortgage and stuck with something because it is what your broke cousin said you needed to do is ludicrous and dangerous to your current and future financial life. The decision to purchase a home is one of the biggest single financial decisions a person or family makes in their lifetime and should not be taken lightly or rushed into. You should have no debt, a proper emergency fund, and a huge down payment before you start thinking about purchasing a home.
How do you get your clients to a place where they can begin the process of looking for and purchasing a home?
First off… looking and dreaming don’t require any money. I highly recommend that my clients find the geographic area where they want to live and look at home styles they like and for options they would like to have in a home. But delaying the purchase until they are on a firm financial footing is very important. “Children do what feels good while adults devise a plan and follow it.” Dave Ramsey
There are several steps I walk my clients through to get them to the point where they can purchase a home. Some may already have a home mortgage and we have to work the steps with that in mind. But if I can get them early enough – before they buy something, we can make great progress together toward having a very stable and healthy financial plan.
If the client is not in emergency mode and is current on their bills, the first thing we have to do is get a good handle on where they are and put a plan into place to move forward. This involves creating and FOLLOWING a written cash flow plan – or budget. Zig Ziglar says “if you aim at nothing, you will hit it every time”. With a written plan and clear goals in place you can work toward, you have a roadmap and can move forward.
I also encourage my clients to agree to not borrow money. That means getting rid of the credit cards and no longer living on margin (borrowing). If they can’t afford an item, they save up for it and buy it with cash. If my clients have non-mortgage debt, we will work out a plan to pay that off as fast as we can using the debt snowball method. That is listing debts from smallest to largest and throwing every extra penny they have at the smallest one and paying it off with intensity and intentionality.
Once they no longer have non-mortgage debt, they need to save up 3-6 months in cash and have it in a money market account ready for any emergency that may come up. This is “murphy repellant” and will keep him at bay so that anything that happens does not also cause a financial emergency. We live on the gulf coast – and every year there will be storms that hit… if you have $10,000 or more sitting in an emergency fund and you get a little damage from a storm, you just have a storm emergency and not a financial emergency.
With the emergency fund in place, we can now start the process of saving up for a down payment. If you have no payments and you don’t borrow money, this won’t take as long as you think. Now you save up 10-20% for a down payment and you go buy your new house.
Getting a healthy financial plan in place takes time… but once you have things in order and are debt free, with an emergency fund in place, you can purchase a home and not have the home own you. Most people try to get where their parents are today, but it took them 30 years to get there.
What do you recommend to your clients when it comes to a mortgage? I mean just because a lender says you can afford a payment – should you?
I would recommend using a basic rule of thumb when it comes to “how much you can afford”. You should spend no more than 25-35% of your take home pay on housing. That is PITI (Principal, Interest, Taxes, and Insurance). And yes – take home pay since that is all you have to work with.
I would also recommend no more than a 15 year mortgage with at least 10-20% down. If you can put 20% down you may be able to avoid Private Mortgage Insurance (PMI).
What do you recommend for your clients when they buy a new home? I mean they “have” to buy new furniture and paint everything and put in new floors and a new kitchen don’t they?
This is certainly “Normal”! My wife and I did not buy new furniture until we moved into our latest house two years ago. We survived on a couch and loveseat we bought from some friends for $500, a table and chairs we got from our cousins, and bedroom furniture from our childhood. My son still has a piece of furniture I had in my bedroom when I was growing up. My kids slept on beds from my wife’s father and we bought some previously loved stuff on craigslist and from yard sales. That never stopped us from having family over or just enjoying time with our friends.
Use the pay-as-you-go concept and save up and pay cash for anything you buy. Keep in mind that if you have children, they are going to destroy whatever you have – so would you rather have a dresser you paid $20 for from craigslist and painted – or one from a large furniture store where you paid $1000? They will tear both up – I am for the one we got online. And even better, from family and friends that you repurpose and spend some time DIY’ing.
I have recovered dining room chairs, stripped and painted bedroom furniture, painted a hand-me-down dresser, bought lawn furniture from a yard sale, and more – and none of that made our home less of a home.
How about real estate as an investment?
I’ve done quite a bit of research on this topic and discussed it at length with several advisors and as a part of an overall healthy financial plan, paid for real estate can be a good investment and revenue generator. But owning real estate other than your primary residence that you rent or that you have as a part of an investment portfolio should not be something that you use leverage to own. When you are debt free and have a large emergency fund (3-6 months expenses) in place and have your retirement on cruise control (investing at least 15% of your gross income) and have your children’s college savings where you want it and live in a paid for house… paid for real estate can be a good investment. But you should not buy it until you are in a place where you can afford it and can pay cash for it.
How about buying a foreclosure?
My wife and I purchased our previous home and it was a foreclosure. I think my realtor would tell you that I asked a LOT of questions and did my due diligence to understand the process as best I could. We spent a month after we completed the purchase and painted everything ourselves with family and friends helping. We stripped wallpaper, painted ceilings, and ripped out carpet. We replaced the old furnace, and bought a refrigerator from craigslist that we still have in our laundry room and use to this day. We cleaned and scrubbed… put in a lot of elbow grease and were blessed in the end to have a wonderful place to live and raise our children for several years.
Some information about our experience with buying a foreclosure and certainly some help we would provide clients if they are interested in doing this…
Determine what the difference is between the actual foreclosure amount and what you are paying if you didn’t buy the original foreclosure. I made the seller put in place a legal document that stated he was on the hook for the difference in what he paid on the courthouse steps and what we paid him for the property. I am not sure it would have held up in court, but it made me feel better. I looked around all over the place for some sort of insurance I could buy to cover the difference. For an example, say the person that purchased the house on the courthouse steps paid $100k. Then they turned it around and sold it to you for $150k… if the original owner redeems the property, what recourse do you have to get your $50k difference back? The original amount of the foreclosure is what is necessary to redeem the property – along with interest and fees and improvements (see below). I am not an expert on the subject, and the rules could have changed since we purchased ours, but just beware that the process is a little strange – and NEVER be afraid to ask questions.
Determine what needs to be updated and use the “safe, sound, secure” thought process when determining whether or not to update the property. We knew and were advised that we should not do any major updates to the house or property until after the Right of Redemption period expired. For us in Alabama, that was 12 months. So we took down wallpaper, painted, and cleaned like crazy. The house we purchased had been heavily smoked in by the previous owners so we had to paint all the ceilings and remove the carpet – it was pretty bad and we knew we would not be able to live in it otherwise. The only thing we did that might have come back to bite us was to put in new carpet. I was all ready to just live on the bare floors, but thankfully my father-in-law offered (and we accepted) to pay for new carpet. So that might have been something we could have lost the cost of had the property been redeemed by the original owners.
Understand what the Right of Redemption is and be ready to lose the house… a funny story (looking back) that happened to us occurred with two weeks left on the Right of Redemption. I have worked from home for several years, so I was sitting at my computer working and looked out the window to see a sheriff car pull up and park in the front yard. The officer got out of his car and walked up to the front door and knocked… the whole time I am praying and thinking the worst… I mean we had been there a year and it was our home. I opened the door just knowing he was there to serve us papers… turned out he was there for someone else for past due bills and it had nothing to do with the foreclosure. We made it through the year unscathed and the house was ours – with no contingencies.
How about selling a house? What would you advise your clients?
First thing I would do is tell them to find an expert realtor!
I would also talk to them about why they are wanting to sell… as a client moves forward in their financial journey, they usually change their “wants”. I’ve heard it said that “If you eat enough lobster it eventually starts tasting like soap”. So after we get them financially secure and a bit less focused on a consumer mentality, the reason for moving normally changes to something that revolves around what is best for their life and family over trying to keep up with the Jones.
A financial coach will work with clients to go over the options and see how this affects their financial plan. We can discuss options and ways to use the funds from the sale and how to move forward with another property. Ultimately it is up to the client and their realtor to locate and work through the sale/purchase, but we can coach them to keep their eyes on their “financial house” as well when they are working through the process.
How about sinking funds?
What in the world is a sinking fund? In the world of real estate, it is money that is set aside for future expenses. As for what you need to put aside, there is no exact formula, but there are things in every home that are deteriorating over time. Think about your roof, appliances, air conditioning systems, and your exterior and interior paint. As a part of a monthly budget, you should set aside money for those future expenses. You can put them in one category or save individually for each. Put that money in a savings account each month and be sure to designate it (name it) – then when the time comes, instead of borrowing the money, you can pay cash!
I like to break sinking funds into three categories;
First you need to save for fixed expenses that are due in the future. Take for example auto insurance that is due every 6 months. If your policy is $600 every 6 months, you need to be saving $100/month every month so you can pay the bill when it is due.
Second are expenses that are not known or fixed… I mean you know you will likely have the expense in the future, but you don’t know when or how much. An example of that is home or car repair. We know there will be a need for a plumber or an electrician or maybe a new battery for the car, but you can’t know exactly when that will happen. So you need to save up some amount to cover those expenses when they come up. I recommend capping the amount at some level and as a part of your monthly budget, you save some toward that category. Once the capped amount is hit, you stop funding that category until you need to use it and pay cash for whatever it is that happens and then you start to build it back up as a part of your monthly budget process.
Third are future known purchases – not just bills that are due, but things like saving up for a new couch or table and chairs – or a car. When you are ready to upgrade something you need to save up and pay for the item. There is power in negotiating with cash and not needing to finance a purchase.
Some Common Sinking Funds;
- Home Insurance, Auto Insurance, Home Taxes, Auto Tags
- Home repair/remodel, Car repair, Hills and Valleys fund, School – tuition, books, clothes
- Car fund, Home down payment, Gift Fund – Christmas, birthdays, anniversary, Vacations, Technology
If you are interested in talking about Real Estate or Financial Coaching – or just want to see how we might be able to work together, contact us and let’s get moving forward together!