By Dr. Charles Patterson, WCI ColumnistCall it an attempt at transparency or an airing of stupidity, but I lost money on a house. When pursuing a three-year fellowship in a high-cost-of-living area, I opted to spurn wisdom and gambled on the local housing market. What’s worse: I did it while preaching to others the gospel of patience and prudence, of diligent savings and careful foresight. They say that the house always wins, but in this case, the house lost, and as a result, I lost harder.
In the following paragraphs, I will detail—to my shame and your judgment—how and why. This is a story of financial recklessness masquerading as the American Dream. It's a cautionary tale for trainees and transient employees, a lonely foghorn to countering the siren call of home ownership. As the “ghost of homeowners past,” allow me to regale you with the folly of a great financial blunder.
Why We Bought
It was the early 2020s. The housing market was up, and COVID numbers were coming down. My family and I had been reassigned to train in a subspecialty. We had been inordinately successful in selling our previous home, having, through no fault of my own, seen it double in value over the course of a few years. This had been our first house, which we had undertaken with every intention of staying for the long haul. It was ours, and frankly, we really enjoyed home ownership.
When the time came to relocate, the thought of renting was about as palatable as a soap-flavored lollipop. While I knew that we would again be relocated after three years of training, my mindset was more of one who fancied himself a real estate savant, rather than the Mr. Magoo that more closely paralleled reality. I convinced myself that I knew the local area, and I felt comfortable with the risk. This arrangement, I thought, would be best for my family.
Just to be safe, I consulted myself and answered the same questions I posed to other physician and military homebuyers assessing their prospects:
- Can I be told to move in the next five years? Well, yes . . .
- What is the plan for the home, should I be ordered to move in 2-3 years? Simple, I will either sell at a profit or rent locally.
- What is the ops tempo (deployment/TDY pacing) at my unit? Nearly zero, I am in training.
- How will my family's needs grow or change in the next five years? We are pregnant! We need space of our own!
- How well do I know and enjoy the local community? I love it, and I would be happy to be stuck with a house there.
- Will I be in a training environment? Yes, but that shouldn’t be a big deal because I should have plenty of free time . . .
- How much more will I be leveraged by virtue of this mortgage? Oh, not that much . . .
- How would unforeseen costs affect my savings goals? I mean, well, we do have an emergency fund.
- How would a significant loss set me back on my journey to financial independence? Perhaps a month or two?
- How much am I willing to lose on this endeavor? I can’t lose.
- Can I afford to become a long-distance landlord? Oh, heck yeah, brother! Owning rentals is the key to financial independence.
In retrospect, the questions were spot on. But I was house-delusional: filled with hubris at my recent success, fearful of losing my autonomy to a landlord, and eager to provide a house of our own to my beautiful (and deserving) wife and darling children during what I knew would be the three most trying years of our marriage. So, I lied to myself. I answered the questions as above, when by rights they should have been answered as follows:
- Can I be told to move in the next five years? Yes, it’s guaranteed.
- What is the plan for the home, should I be ordered to move in 2-3 years? We will need to sell. We would have a lot of equity tied up in it that we will need to access going forward. Plus, I can’t reasonably be a long-distance landlord at this stage of my life.
- What is the ops tempo (deployment/TDY pacing) at my unit? Nearly zero, I am in training.
- How will my family's needs grow or change in the next five years? We are pregnant! But we know this already. Flexibility and prudent savings should be prioritized.
- How well do I know and enjoy the local community? I love it, but know that I am transient here.
- Will I be in a training environment? Yes, and a time-consuming one at that. I have next to no free time. I am either at work or with my family. No hobbies, no dilly-dally.
- How much more will I be leveraged by virtue of this mortgage? To the teeth. This is an extremely high-cost-of-living area, and it's almost certain that we will lose the same housing benefit at our next duty location.
- How would unforeseen costs affect my savings goals? A significant portion of our net worth would be tied up in this home. Losing it would make life marginally more difficult in the next two decades.
- How would a significant loss set me back on my journey to financial independence? It could affect the standard of living should we keep our retirement date the same.
- How much am I willing to lose on this endeavor? Gosh, I really don’t want to lose anything . . .
- Can I afford to become a long-distance landlord? Absolutely not. I am not the stuff of which good landlords are made.
And so, with self-applied blinders, I ventured forthwith to secure a house for us to call home . . . At the peak of the market . . . In a neighborhood where homes were selling for $200,000 above asking . . . And, at the time, with interest rates rising . . .
More information here:
Does It Make Sense for Doctors to Rent Forever?
Is Renting Better Than Buying? Why We’re Financially Independent and Renting
Buy High, Sell When You Must
Fortuitously, of the houses we looked at, nearly all had six or more better offers. Even if we could “afford” the houses of interest at their listing price, the bidding wars quickly outpaced us. After weeks of searching and coming up empty, we grasped at straws. The rental market was saturated and overpriced. Being a larger city with my work in its center, living well outside of it was untenable. In true Patterson form, we finally settled on the runt of the litter. It was a downtrodden place, an insult to all of the fixer-uppers of the world. It was the only structure with more than two walls in a 50-mile radius that had been on the market for more than five days (it had, in fact, been on for 60). Unperturbed by these facts, we dove headlong into our new mortgage.
Why was it available? Perhaps it was overpriced. Perhaps the sellers (a now-defunct corporate conglomerate) didn’t care about selling it correctly. Perhaps it was because it may or may not have been used as a “residential dispensary” in decades past. Certainly, none of the buyers in the neighborhood had interest in it as it represented whatever the opposite of turnkey is. However poorly presented it was at that time, its potential was undeniable. The lot was large, private, and in a fantastic location. The school district was strong for the region, and while everything about the home needed some TLC, inspections would certify that no major repairs were needed.
It was available. I am an idiot. It was a match made in heaven.
As it happened, the house worked well for us. The neighborhood was truly great. The location was simply the best. Most of the issues with the home on presentation were cosmetic and easily rectifiable. But some were not: the deck (a two-story structure) was later found to be rotting and needed to be replaced. The kitchen, while workable, was tired and needed some updating. But from a functional perspective, aside from the typical upkeep that comes with home ownership, it generally worked out well.
Until, that is, it came time to sell.
The Impact
To recap, we bought at the top of the market as interest rates were climbing. It occurred to me in those days that this did not bode well for selling in a mere three years. But it was hard to ignore the “value proposition” of buying the least desirable, most cost-efficient home and shining it into a winner. That we did.
I lost a lot of sleep in the year prior to listing. Where would the local housing market be? What were interest rates going to be? Where would the Fed funds rate find itself, or the 10-year note? What if another ice storm came through and caused another $10,000 worth of damage? It's hard to quantify the cost of such stress, but it's not zero.
This is the point in the story where the scope of the mistake is admitted, and I think it's best to first articulate a counterfactual reality: the cost of housing for a three-year period had we rented. For a similar house in a similar neighborhood, we would be looking at a rent of at least $3,800 per month if we could even find one. Over a three-year period, we would have spent nearly $140,000, plus the cost of utilities, insurance, and incidentals, which fall to the renter.
Much of this is back-of-the-napkin math, but we can’t be fully honest with ourselves without addressing opportunity cost. You see, if we had taken the proceeds from our previous home and put them into the market (which returned -18%, +26%, and +24% over those three years), we would have grown our position significantly—something like +28% from the starting point. In reality, we would have probably just put those funds in something conservative like money market funds or CDs (which returned 1.5%-5% over the same period) to preserve capital. While not doing much to keep up with inflation, we would not have lost much, either.
Instead, we used the proceeds of the previous sale to “purchase” the new home. Without them, these buying shenanigans would not have been possible. While we were fortunate to hold a meaningful equity stake, the taxes, insurance, and interest were burdensome. The house ended up selling for a mere 2% more than the purchase price—which, at face value, seems reasonable, given a shift in market conditions that saw homes selling for 7%-10% of asking and up to 20% below their appraised value several years earlier.
The true and meaningful loss happened in large cuts and slow bleeds. Decks and kitchens are expensive. Real estate transactions are even more so (to the order of about 10% of the purchase price). Between these, the cost of upkeep, the smaller projects, and the recovery from an aforementioned natural disaster, we burned an additional 10% of the purchase price to get in and out of the house.
All in, we spent 12% more than we would have had we rented. When I factor in the potential growth of the funds used as a down payment, this number increases significantly. How much is it in dollars? It's a lot. For us, it's real money. Real money that we don’t get to use for our next (and hopefully, last) home. Real money that could have been put in savings or toward college education or recreation.
More information here:
How to Buy a House the Right Way
10 Reasons Why Residents Shouldn’t Buy a House
Lessons Learned
While this could have been worse, there are lessons learned worth highlighting. In the first place, even if you are financially ready, don’t buy a home until you are ready to stay in it. This means ensuring stability with family, community, and especially career trajectories. Secondly, commit to being honest. There were many points in this journey where I lied to myself, but one of the most egregious was in contingency planning. I’ve long entertained the idea of owning rental property, to the point that if I couldn’t sell a home, I would “simply” rent it out. Truth be told, I don’t want to be a landlord. Some folks are well dispositioned for that work, but I am not one of them.
Next, I didn’t fully appreciate how magnificently this could fail. While this wasn’t a catastrophic housing downturn, I had no way of knowing that it wouldn’t turn into one. Had I purchased in 2006 and sold in 2009, the scale of the loss would have devastated our net worth and ultimately had a tremendous impact on our financial outlook in the ensuing decade. That’s not healthy for someone who is generally risk-averse. While there are many other lessons learned worth sharing, it was prescient that we bought what we did. Had we purchased a desirable home in the same neighborhood, we would have seen a decline in value of about 15% over our ownership period.
Buying high and selling low is not a winning strategy. In this case, having little to no control over the sales timeline forfeited an important safety net.
It bears repeating: homes are consumption items that can have an outsized impact on your long-term financial health. While billed as investments (and indeed, constitute a major pillar of savings for most Americans), speculating on them is not for amateurs (read: this author). As with equities, understanding the investment, knowing the fees, basis, value, risk tolerance, and timeline are critical to success. The allure of ownership and the deeply ingrained social construct of the “American Dream” are pied-pipers that can impede the journey to financial independence.
So, be wary, fellow readers, trainees, and young professionals. Take heed of my weakness, so that you might be stronger and wiser in your housing choices!
Did you ever make a mistake in buying a doctor house when you really couldn't have afforded it? What happened? What lessons have you learned from homebuying mishaps?
Enjoyed the post!
We, as humans, have such a wonderful ability to believe things that “just ain’t so.” We all must watch out for lies from the “trusted souce” berween our ears.
Even ignoring the financial aspect, there’s a huge convenience factor to renting as a trainee. Being able to just take your stuff and leave on short notice has great value.
Great post, we bought a condo in Chicago while we are in training, that my wife and I essentially lived in for 6 years, tried to sell in the seventh year, could not sell it because the market was terrible and the HOA was high, rented for another 2 years with great reservation but the rental market was hot, and finally sold it for approximately 25% less money than we paid for. I even wrote a WCI article on it a couple years ago. We enjoyed living in the condo, and all in, relative to a comparable rental, we lost about $17,000 over the course of that 8 to 9 years, taking into account to that rental income, and the tax deduction that I received from the loss sale since it was a rental by that point, which was helpful. Regardless, definitely agree with your article, in that it is probably good to stay financially mobile in residency, and honestly not a bad idea to continue doing that even as an attending. I will say for us, the saving grace was that we were making significant money as attendings by the time we had to sell the apartment, so it was relatively low stakes at that point, and we could easily afford our forever home even while carrying the financial baggage of the condo. But, had we needed the equity proceeds to purchase our next home from the condo, it would have been a complete disaster, because nearly all that was lost in the sale. Agree in that homes are consumption items, but I will say on the flip side, if you are living in your forever home, no amount of money you spend renovating that, regardless of building equity or not, is a bad idea as long as you can afford it, because you are enjoying it daily. I will say, of all the consumption items in my life, my home brings me the most satisfaction. The lesson I learned from my personal experience is that I will never buy a second home, and if I like a destination enough, I will just stay in a premium hotel, spend whatever that costs, and come home. No overhead, out of sight, out of mind.
Here’s the link to Dr. AP’s post. https://www.whitecoatinvestor.com/owning-condo-with-expensive-hoa/
Loved this line: “It was available. I am an idiot. It was a match made in heaven.”
TBH, I think you’re exaggerating the setback. You spent 12% more than if you rented, which you estimate was $3800/month for a 3 bedroom. So what, an extra $400/month for three years? Like $15K. Dude, you skated through.
Also, my VHCOL benchmark is showing, but $3800 for a 3 bedroom in a “very large city” seems…affordable. For a doctor salary in a sub specialty, possibly even a rounding error.
You got really lucky that this wasn’t a lot worse. You could’ve lost hundreds of thousands of dollars.
Buying a home is great when you’re going to stay for the long-term. Otherwise you’re just gambling.
We’ve made out great with home ownership, but I’m old. We lived in one house that we put down $125,000 and we came out with over $1 million in cash 20 years later after paying down the mortgage. The house we’ve now lived in for thirteen years has increased in value from $1,300,000 to $3,000,000. Long-term home ownership tends to work out well. Short term, roll the dice.
We had nearly the same story – in the late 1980’s and early 1990’s. Scarred me for life… no, of course not. Back in those days, it seems like you could buy a house with nothing and that’s what we did. 3 years later, we needed 10k at the closing to settle the mortgage, but I had my advanced training, we had a baby daughter, big pet dog, many life-long friends and a lot of memories. I am not certain that a goal during my training was to save any money.