Happy 2018! Hope everyone had a great holiday season and got to spend time with friends and family. We did all of that and more, which I will tell you about in more detail below.
2017 went by really quickly. It was my first full year of not working since graduating high school. I hit the “reset” button pretty hard, but didn’t try to pressure myself into figuring it all out within a prescribed period of time. Now I’m into my second year and I want to gain some footing — so we moved.
Being in a super-expensive area of the U.S., I felt like we couldn’t really move forward with our lives in a meaningful way, while remaining financially independent. Not only that, but our values were also changing. We were eschewing some of the prime tenets of the Bay Area (really just side effects from the high cost of living) — the desperate hustle for money, the shameless demonstration of status, and the constant ladder climbing. By staying, we would be banishing ourselves to the fringes of the Bay Area.
Our Decision-Making Process
We spent the last few months of 2017 scouting places to live. We ended up deciding between two options:
- Snowbird in Arizona and head to the Pacific NW in the summers; and
- San Diego.
Option 1 was compelling in that it offered the best of both worlds in terms of climate. While we like both places, maintaining two residences might be too annoying. We could lessen our tax burden by domiciling in Washington State where there is no state income tax. But healthcare in Arizona is not good, especially when using Obamacare. Last I checked, Maricopa County only had one participating insurer.
Option 2 was also attractive. San Diego has amazing weather, golf, and beaches. It’s pretty close to LA, where we have a lot of friends, and an hour flight to the Bay Area. But housing is a lot more expensive than Arizona and parts of the Pacific NW.
Ultimately, we chose San Diego to stay closer to friends and family.
Buy or Rent
We came down in October and looked at some rentals as well as scoped out some real estate. The rentals we picked we all kind of mediocre — either too cramped or dated. But they were much cheaper than what we would get in the Bay Area. We also met with a real estate agent who showed us some 2 bed / 2 bath units in different neighborhoods. I hadn’t looked at properties in a long time, but this time reminded me how different a place could look online in pictures versus in person. Even the ones we liked had pretty big trade-offs, from parking to neighborhood to condition.
One reason I was eager to buy was the perception that we would save money. My brain is wired to think in terms of safe withdrawal rates (to the consternation of my brother who works in finance). So I thought — how much purchasing power is equivalent to a $2,000 a month rental using a 3% withdrawal rate. If you ignore HOA fees and property taxes, $2,000 a month translates to a lump sum of $800,000. With a 1.1% property tax rate and $300 a month in HOA dues, the lump sum equivalent drops to $497,000. So we set our buying target at $400,000 and planned on paying cash — that would decrease our housing costs by quite a bit and the home might maybe even increase in value over time.
Trying to Buy Our First Place
So after that first trip, our agent offered to remotely scope out homes for us. We would send him listings to go see. Then he would record walkthroughs on his phone and post the recordings on YouTube.
After he went to a few showings, we found a 3 bed / 2 bath condo listed for $409,000 to $425,000 (agents here are lazy and will post ranges, WTF) in a safe area of San Diego. The issue with this place was the high HOA fees (~$450 a month) and a $12,000 assessment for plumbing. Other than that, the condo had golf course views and vaulted ceilings. But this being our first offer and with the high fixed costs, we were not inclined to entertain an offer within their asking range. We made an offer for $400,000, which they basically set aside. So that fell through. Turns out the winning bid was only $10k higher than ours.
A few places later, a townhouse comes on the market and they were asking $425,000. Maintenance was more reasonable at $275 a month, but there was also a $10,000 assessment to replace the roofing. Our initial offer was lowish (~$408,000), and I got annoyed when the seller countered with an invitation for us to put in a higher offer, as opposed to countering with an actual number. (This is another example of lazy agents.) Not wanting to bid against ourselves, we put in another offer with an escalation clause that said we would match any cash offer and come within a few thousand of a financed offer up to $425,000 (probably too high in hindsight). We were hoping the best they could do was come up with a $410,000 financed offer and we could get it for $407,000. Well, someone offered $429,000. But the seller still went with our offer because it was a cash offer so we were stuck at our “not to exceed” number.
Keep in mind, we haven’t actually seen the place in person yet. I get the call from our agent letting us know that our offer was accepted while I am on the golf course. In between shots, I’m arranging travel for that night for the both of us to go down to San Diego.
We get to the property the next day and our first thought is that the neighborhood looks a little worn. We do a walk through and a few things jumped out at us:
- The place needed quite a bit of work, including new floors, new paint, new fixtures, new appliances, etc.;
- The patio concrete is all cracked and uneven (our agent did tell us about this in advance);
- And most significantly, there was a large hump in the floor of the den near the patio door.
My wife is the one who noticed the uneven floors — our agent missed this in his walk-through. Upon closer inspection, the cracks in the patio concrete seemed to extend towards the den so we figured there was root intrusion from a nearby tree that was growing at an angle and was now affecting the both the patio and the slab under the floor. What’s more is that the area where the floor was bulging appeared to have been repaired fairly recently. Our agent sends the listing agent an e-mail with our concerns and the listing agent says he will have answers for us after our inspection the next day.
We have the inspection and the inspector is basically useless. He can only do a visual inspection so we get a bunch of guesses. Then the listing agent shows up and says he talked to the seller and has answers for us. He explains the floor was replaced because there was flooding, but the flooding was resolved after the HOA added gutters. The seller does not remember any bulging in the floor. We go outside only to find there are no gutters. Now the listing agent is confused because the seller’s story does not add up. The listing agent tries to assure us that the HOA will take care of the patio and the bulge in the floor if it is a foundation issue. He says they will get in touch with the HOA. We were not comforted by his attempts at assurance, especially because our inspection period was supposed to end the next day.
So we had no answers after the inspection, only more questions. To top it off, we learned the den was an addition by a prior owner and the CC&R clearly states that all repairs to additions are the responsibility of the owner and their successors (meaning us). So we pulled out. A week later, the unit went under contract again, but it was soon canceled likely for the same reason. The seller subsequently delisted the unit.
We should not have even considered buying a place prior to our move to San Diego. We kind of just got pulled in for the ride after starting the process with our agent. Part of me just wanted to rush in and skip all the intermediate steps of renting and just buy a place and then stay there forever. I got ahead of myself. But I will give myself credit for keeping a cool head during the offer phase. We never felt like we had to overpay for a property just to win.
Only on later reflection, we realized that the 2 bed / 2 bath setup might be too small for us depending on the ultimate size of our family. It would not have made sense to buy the 2 bed townhouse, only to sell it four years later for a 3 bed place.
Plus, being new to the area, it makes sense for us to rent for a while to decide which parts we like the best. We decided to rent in the UTC area, which is fairly central yet not too urban.
In the midst of our attempted home purchase and subsequent move, a lot of interesting things happened on the financial front.
First, my wife tried to leave her job, but her boss convinced her to stay on and work from home. We will continue to get full benefits and she will continue her part-time schedule. Her after-tax income offsets our expenses pretty much to the dollar.
Second, the markets have been on a tear lately. It is a little frightening how quickly the Dow seems to rack up another 1,000 points. Our net worth went up almost $150,000 in three months from when we started looking at homes until we moved to San Diego. We are up another $30,000 in the last 8 days.
Third, tax reform landed in December and I think it will have a trickle down effect on housing. While we expect to see perhaps $1,500 in lower tax bills, upper-middle class workers in California may not be as lucky. My former colleagues are all complaining about how their taxes are going way up as they no longer can take a $60,000 deduction of state and property taxes and are instead limited to $10,000. When you take the $50,000 loss in deductions and apply it to their 39.6% marginal rate, some of these folks are going to end up paying almost $20,000 more in federal income tax. Also several friends who were looking to buy bigger homes have since shelved any such plans because the property taxes won’t be deductible at all since they are already over the cap with their income taxes.
Finally, I’m keeping a close eye on the potential Broadcom / Qualcomm tie up. Qualcomm is the largest technology company in San Diego with 33,000 employees globally and 10,000 in San Diego. When we were staying at AirBnBs in San Diego, every single one was owned by a Qualcomm employee, many of them in the U.S. on H-1B visas. The Broadcom CEO has already expressed a desire to cut a third of the workforce. To ward off Broadcom, Qualcomm announced a $1 billion strategic cost reduction, which likely requires a smaller 10-15% reduction in force. Imagine if you are in San Diego on a work visa and you own an $800,000 home in 4S Ranch or Rancho Peñasquitos. What are you going to do if you get laid off? I imagine I would be running to the Bay Area or another high-tech hub to try to find a new sponsor for my visa. That house is probably going on the market, and then multiply that by a thousand. A large scale layoff at San Diego’s biggest employer of high earners is probably going to impact the housing market.
I’ll admit I’m not good at timing markets, and I’m not saying the market is necessarily going to correct on the basis of tax reform and Qualcomm restructuring. That said, I would have buyers remorse if I dove in head first and bought a place without listening to my concerns. This is especially true given the fact that we simply don’t know where we want to be or how big of a home we will need.
How Our Move Went
The move was actually quite difficult. This is the first long-distance move I’ve made in ten years. And for that prior move, my firm paid for movers. This time we were on our own and we did not have a rental lined up in advance — we wanted to take our time and find the right place for us.
On Wednesday, we loaded our things from our apartment into a 15′ U-Haul truck. (As an aside, I recently bought a really nice used sofa off Craigslist — 8-way, hand-tied springs, kiln-dried solid wood frame, down-stuffed cushions, etc. — which proved to be a total beast to move.) On Thursday, we drove the truck and our car separately for 8+ hours to San Diego and that same day, we unloaded our things into storage. We barely finished before closing time.
From Friday to Sunday, we hit the pavement and saw ten different apartments — all sourced from Craigslist. On our second day, we almost acquiesced and rented a slightly smaller apartment, but luckily someone else beat us to the punch. Finally, we went to the tenth place, which was the third place on the third day, and we both loved it. It was truly an outlier compared to the other places we saw. It has 1,100 square feet, 2 beds and 2.5 baths over two floors, good light, a nice balcony, and is located in UTC, which is a great area. The rent was only $50 more than our small, dark one bedroom apartment in the Bay Area. We applied right away and were approved the next day! I think we were the first people to look at it and the owner had just bought it in late December 2017 so we are the first tenants.
On Wednesday, a week after we arrived, we got everything out of storage and moved into our new place. This was the hardest part because we occupy the second and third floors of the building. We had to carry the Beast Sofa up a flight of stairs and then maneuver it vertically and tilt it back over a railing to fit in the doorway (with door removed). My wife was so tired she looked like she was going to throw up so it was basically all me for the last two hours. Next time, we’ll probably pay someone to move us out!
All Settled In!
We’ve been here for about a week now and are really enjoying the change in scenery. I’m going to the Farmer’s Insurance Open this week to watch Tiger and Rickie play at Torrey Pines. I have three rounds of golf this week as well — I’m a bit rusty after a 3-week layoff. We’ve been exploring our surroundings in our free time. Our new neighborhood is conveniently located to stores and the beach, including just a 15-minute walk to our local gym. We already have a prepaid membership for that gym as it belongs to the same chain we used in the Bay Area.
So it’s been a busy few months and we’re looking forward to enjoying what San Diego has to offer!