Buying a Vacation Home: Our Step-by-Step Process

Those of you who subscribe to my weekly newsletter have been hearing all about my desire to reinvest the money from our cash-out refinance into buying a vacation home. Interest rates are so good right now, and I live in Austin, which is a strong real estate market. Our personal financial goals include big ticket items like sending our boys to college debt-free, saving enough for a modest retirement, and enjoying our lives between now and then (with things like frequent vacations). And although I personally plan to work well beyond 60 or 65 if I am able to, Henry is just eight short years away from college.

Matt and I got the idea that we wanted to buy a vacation property within 45 minutes of Austin using the money from our cash-out refinance. Our vision is to bring friends with us on weekends whenever we can. Then, we will rent it out on AirBnB and VRBO when we aren’t using it. In case you are interested, here’s the step-by-step process we went through:

Step One: Clear Vision

The first step was to get crystal clear about what we were looking for. Here was our list:

1. At least a 3-bedroom, 2-bathroom house. The vision is to put king-sized beds in two of the bedrooms and two sets of bunk beds in the 3rd bedroom. That way, we could bring family friends with us, and all 8 of us would have a comfortable sleeping spot.
2. Within one hour of Austin. We want to be able to get there quickly and easily on a Friday night.
3. Lifts our souls—Matt and I are really picky about our physical environment!
4. Surrounded by nature (see above)
5. Fun stuff to do nearby: walking trails, tennis, water/beach, etc.
6. Covered patio
7. Garage
8. Area for a big dining room table
9. Room for a big sectional couch
10. Access to city utilities

Step Two: Identify Locations

I then drew a 45-minute radius around Austin. It led me to towns I had never visited. We started driving to towns on the weekends to see if we liked them. A small lake town 45 minutes outside of Austin really rose to the top of our list.

Step Three: Figure Out What You Can Afford

This step is huge. There are so many factors that go into this question!

• How much of a down payment can we afford? (10% down is required for a second home)
• Let’s not forget about the inevitable closing costs!
• How much can we afford for principal and interest each month?
• And don’t forget PMI since you have to pay it any time you aren’t putting 20% down!
• And then there are all the regular expenses like home insurance, utilities, internet, supplies, etc.
• Finally, how much do we think we can rent it for when we aren’t using it? And how many nights do we think we will actually be able to rent it for?

My friend Noah helped me put together a spreadsheet to input all the different variables. Working through this process helped me feel very confident in what the “ceiling” was for this property, given our budget.

Step Four: Start Working with an Agent

This part was sort of confusing. The small lake town we were targeting was a really specialized market. We started working with an agent in the area, but it turned out she didn’t really know the area well. So we got a recommendation from her for someone who actually lives in the area. That realtor was much better about giving us advice and steering us in the right direction.

However, we also wanted an agent to help us with all of the other areas we were considering. While you can totally set up searches in Zillow and get them delivered to your inbox daily (or immediately) on your own, when you work with an agent, they can set up MLS emails, which are apparently more accurate than Zillow’s.

We didn’t want to work with a million different agents in all the different small little towns, so we opted to work with the same agent who helped us build our original house in Austin. She has a very entrepreneurial, “can-do” spirit, and she has direct experience with purchasing real estate in rural areas outside of Austin.

Step Five: Get Prequalified for a Loan

When I’m looking for a loan, I always put my info into Bankrate.com and LendingTree.com and then ask folks to reach out to me. I also talk to local mortgage brokers that I’ve build a relationship with over the years.

Note: there’s a difference between a pre-qualification letter and a verified letter. The latter requires sharing a lot more information, and it looks a lot more legitimate when you are making an offer.

Step Five helps with Step Three, as well.

Step Five: Start Making Offers

Oh, my. This part is NO FUN AT ALL in a hot real estate market! In the small lake town that we were looking, we were offering $65,000 over asking price. That amount was still in our budget. However, we were not even getting close to getting the houses we wanted. We were routinely getting beat out by all cash offers. (I’m not exactly sure how people have all cash offers for homes? Are they selling their homes in California and moving to small Texas lake towns? Are they investors from big corporations? Who are these people?!?)

Step Six: Don’t Give Up

This is the hardest part! It’s demoralizing (not to mention a waste of time) to make offer after offer and get rejected each time.

After a couple of rejections, we decided to shift our focus on a different small town in a different direction. We went out there with our real estate one Saturday to look at two houses.

The first house required lots of off-road driving to access it, and our 2009 Honda Fit didn’t handle it too well. It also had super-tiny bedrooms, so the bunk bed room wouldn’t have worked. Being able to spend time with friends was one of the most important features for us, so that was a deal-breaker.

The second house was interesting. Matt fell in love with it in an instant, and I was like, “Why?” It doesn’t check many of our boxes! The house itself doesn’t lift our soul (it’s currently very dingy and requires a lot of renovation), the prospects for short-term rentals are okay (but not great), the house doesn’t have a garage, there isn’t room for a big dining room table, and it has a septic tank.

In the end, I got on Team Lake House in the Forest. It’s on 0.87 acres of land in a pine forest. A pine forest may not sound like such a big deal for those of you from the northeast, the Pacific Northwest, Norway, etc. But Texas does not do a lot a big trees! It’s short shrubs for miles! So this little community is like a slice of heaven to us.

And it’s just a one mile walk to a lake with beach access, a miniature golf course, a playground with tetherball, and at least four miles of trails through the forest. I immediately got visions of waking up at the house with friends and asking someone to go on a walk with me around the lake.

I also started playing around with renovation ideas and could start to see the pathway to a cute house. The tipping point was when I realized that the kids’ room was large enough for two sets of bunk beds, a couch, a TV, a Nintendo console, and a foosball table. I imagine they are going to want to spend all their time in the backyard, at the lake, or in their room—giving the adults a lot of time to relax and connect.

Step Seven: Make Your Best Offer

Now this section is going to be a little controversial because I actually know very little about investing in real estate. This is only the fourth house I have bought, and I have never tried to buy a house in such a hot market.

But here’s my approach in a really hot market with lots of all-cash offers: When making an offer on a house, ask yourself, “What is the biggest and best offer I can put on the table that will 1) keep us in budget (this is VERY important; I am not a fan of being “house poor.”) and 2) will make us have no regrets if we lose the house (since we will know we did our best).

This second town was much more affordable than the first town we were looking in. So we decided to go WAY OVER asking price. Our strategy was to try and beat out all the cash offers.

The Downside of Going Over Asking Price

Here’s the worst part of trying to buy real estate in a hot market: the actual sales prices do not align with the appraisal amounts. What this means is that if a house is for sale for $100,000, you go big by offering $150,000, and then the house appraises for $120,000 when you are getting a loan, then you have to bring 10% down PLUS $30,000 to cover the difference between the sales price and the appraisal amount. Does that make sense?

So I had to factor all of this into Step Three. What we could afford was so hard to figure out in this scenario. I basically figured it out by going through the Worst Case Scenario Process. I ran a bunch of scenarios like: What if we offer $XXX,XXX and it only appraises for $XXX,XXX?

It looks like in our worst case scenario we will still have a little money left over for renovations. However, we would not have enough everything we want to change. And if it appraises for even less than the worst case scenario, then we will just move into it without any renovations.

Matt and I decided that we were okay with sinking all of the cash from our cash-out refinance into this property. We have to pay for the downpayment, whatever the discrepancy is between the appraisal and the sales price, renovations, and all new furnishings.

Once we decided we were okay with sinking all of our cash into this property, we were then able to make our Biggest and Best Offer. If we hadn’t have gotten the house, we would’ve been okay because it was the most we could offer.

But we did get the house!

And now we are in the whirlwind process of finalizing the loan, going through all the inspections, negotiating with the seller about repairs, etc. Our goal is to close by the end of April.

I’ll keep you updated along the way!

Definitely let me know if you have questions about any of this.