Am I making a mistake?

[semtex]

Continue my house hunting story:

Last week, we lowballed a McMasion. Some numbers about this house:

Location, north Jersey, 3900SF, 1996 built. Lot 1.2 Acre. Very good shcool district. Easy commute to city. Owner bot at 2001 with 892K.
property tax: 21k.

House has been on market for about 9 months. Original asking was 1.2M, now 850k. We offered 750k. Last friday, they gave us counter offer 770k.


Question: to be or not?

Our financial number:
A couple with a three years old son.
Both work, base salary(two), 200k. Bonus 25k ~ 80k. Stable jobs.
150K cash at hand. Two cars. No debt. Good credit.

I played around the number, very streching. Especially the property tax part(although it may got adjusted for the sale price, but to be conservertive, we would like not to count this).

But on the other side, is this house undervalued? I think so. Zillow estimate is 950K. The house is in a millor dollar area. Similar house sold at middle of 2006 is around 950K.

Please comments.

 

[semtex]

Here is how I figure this:

Parts I donot like: financial streching. we are middle class, the community is high end.
Parts I like: maybe it is a good investment.

 

[runchman]

personally not a fan of stretching that much, and those property taxes are a killer.

Wife and I were in a similar income range, then wife got layed off very unexpectadly. Living below our means with a manageable mortgage, (my payment is equal to just your prop. taxes), it wasn't a stretch at all to have the wife just stay home with the kids.

Just something to think about, it is nice to have a monthy cash flow cushion that you can throttle back on savings or discretionary expenses if need be.

- John

 

[tiredofwork]

Here is how I figure this:

Parts I donot like: financial streching. we are middle class, the community is high end.
Parts I like: maybe it is a good investment.

Since you are asking on an early retirement forum, I'll make certain assumptions about your goals.

This house sounds like more house than you need. Look at the house as a place to live, not an investment. Buy a house where the property taxes, insurance, utilities, repairs and other upkeep won't be such a stretch on your budget and then you'll have more cash flow to invest in equities, bonds, commodities, and even real estate. Can't remember where I saw it recently, but there was an article that discussed the long-term economics of buying smaller houses and investing the increased cash flow one saved versus buying McMansions, paying the upkeep on it, and hoping for appreciation. The McMansion approach was the losing one.

If you're still interested in real estate, perhaps you can find some good buys on income producing properties.

 

[chinaco]

I will make an assumption. The Mcmansion is more house than you need. I will also assume that you are not considering it for a status symbol, rather you think it may be a good investment.

The only positive that I see is that you appear to be in a high tax bracket, the deduction might lower your tax braket for awhile. Essentially giving you a cheaper loan rate in the early years.

If you are sure that the house is way below market, it might make sense as an investment. But if it is an investment, I would consider what other assets you have to diversify your risk.

Here are the problems I see:

1) if one of you loses your job, has a health problem, or you wind up divorced, other events, you may be strained financially. Let's face it 15 or 30 years is a long time.
2) large houses cost more for heating/cooling and maintenance.
3) large houses require more furniture to furnish.
4) higher property taxes.
5) higher insurance costs.
6) usually a very large mortgage (unless you have a large down payment). This reduces tax dedutions.
7) more personal effort to keep clean.



And finally... there is a small problem. How come they are having trouble selling it. Is there a problem with the house? Or is the market that soft?

 

[Mwsinron]

Its not a mistake if you are happy with it. Now I would never buy one that big on that salary. I would get half the size house and sock the rest of the money away for ER.

 

[JustCurious]

That is WAY too much house for you. It is almost 4 times your gross annual salary! The answer is no, plain and simple. It doesn't matter if it is a good deal or not, you can't afford it. A house that cost $5 million may also be a good deal, but you can't afford that either.

And it's not just the mortgage, it's the property taxes, insurance, maintenance, and homeowner's dues? You will be sacrificing your future and your financial stability on the altar of having a huge house.

And so what if it is a good investment? If the value appreciates, the ONLY way to get the benefit of your "good" investment is to sell the house, take the profits, and buy a less expensive house. Now tell me honestly, after living in this Mcmansion for a few years, will you want to downsize to something smaller and less upscale? What about your wife?

 

[semtex]

I agree, the house is much more than we need.
Yes, it is nothing about status, I am a cheap guy, I know it.

Our plaN is to retire in ten years(me 45, SO little younger). The way I view it as a tax shelter.

Let's assume we will pay it off in ten years. At that time, 2017, house price back to its peak, 1.1M. Plus 700K 401k and IRA account(190k now). Total 1.8M.

FIRE!!

 

[JPatrick]

How are the guts of the house. 11 years old---you may be in line to replace heating, cooling, not to mention every appliance in the house.
Is the market at a bottom or is there more of a fall to come?? What about mortgage rates? Could very well fall if housing crisis gets worse.
Press your realtor for info about the owner--what is the desperation factor?
What else can you push for in the contract besides price. New this or that.
Did you have a home inspection? Perhaps one has been done by someone else??
Don't trust Zillow....

 

[kcowan]

OK everyone needs to follow their dreams. You must feel that this investment will turn around and start to appreciate in time for you to harvest that gain for your retirement. The last national real estate slump was a 14 year cycle: 7 years of flat or down and then resumption of growing values peaking 7 years later. This bubble was more dramatic, taking 8+ years to reach its peak. This may mean that the decline will be faster taking only 6 years, or will be prolonged taking 8+ years.

Obviously Jersey is not national so you should investigate specifics for the area you are considering. Will you be OK if the value continues to decline for the next 3-4 years? In the last slump, I bid on a house that had been listed for $699 with $300k and was outbid and out-manoevered by the listing broker who bought it for $300k. I guess it had reached bottom. When will this neighborhood bottom out?

If you are prepared to commit 30% of your combined income and can get locked-in or VTB financing at 5% or less, then you have 750-150=600 mortgage at 30k a year, plus 21k taxes, leaving you 9k for everything else: utilities, cleaning, yard work, furnishings. Might be doable. But you will definitely be joining the mortgage-poor.

What are your plans for housing in your eventual retirement in 10 years?

 

[Meadbh]

Our plaN is to retire in ten years(me 45, SO little younger).

By which time you will have paid $210,000 in property taxes, without accounting for inflation. Not to mention all the other ancillary (hidden) costs already mentioned. The house will generate a high negative cash flow, i.e. it will be a money pit. You would be eliminating the financial cushion you now have, leaving you much more open to the risk of losing the house in the event of unemployment. If you want to invest in property, then invest in property that has a positive cash flow, i.e. not your home.

My earnings are not that different from yours and my NW is considerably more. I would not be comfortable with those numbers. Buying this house could set back your retirement plans by 10 years. You may have a different risk tolerance. But if you are serious about ER, buying this house is not the way to go.

 

[kat]

I'm not sure either, and have MUCH less experience than previous posters.

I take issue with the "guts of the house" comment, but maybe it's directed at it being a relatively new house. In my 100 year old house, which has been mine for 15 years, I've had to replace one applicance. For example, the 1945 stove is still here and still going strong. And every plumber or energy guy who sees my boiler (furnace) says it's a cadillac that will outlive me. (I'm 44.)

Do what makes you comfortable. I can't understand buying more house than you need, so we're too different for me to give you advice!!

Good luck!

 

[brewer12345]

Even though I am a fellow NJ resident, the taxes alone would be enough fdor me to walk away from the deal. That and the large mortgage would be crippling, but what is worse is the inevitable consumption influences that will come from living in such a place. If you are serious about ER, I would reconsider.

Heh, if you are willing to tolerate a bit of a commute, I have a great house for you. A beautiful house on two plus acres with the property backing onto the lake (but the house is on a bluff, so no flood risk) has been for sale in my 'hood. I saw yesterday onlune that the fool "investor" who owns it has been hit with a notice of default, so you could probably get an awfully good deal. I would guess high 500s would do it, and the taxes would be half of what you have bid on. I know they put a ton of money into it, so I suspect it is in great shape.

 

[LOL!]

...
But on the other side, is this house undervalued? I think so. Zillow estimate is 950K. The house is in a millor dollar area. Similar house sold at middle of 2006 is around 950K.

Please comments.

As soon as you purchase this house for $770K all other future buyers in the neighborhood will use your house as a comp. That is, your house is in a $750K area, not a million dollar one. Zillow does not mean doodley squat. Your new neighbors won't like you as much because you took a few hundred thousand off of each of their net worths.

 

[firewhen]

I am also in New Jersey, and know that property taxes are high here, averaging over $6,000 and in North Jersey they are over $8,000. Still even if you are looking in Bergen County, $21,000 is alot. If you did FIRE in 2017, you would need to sell the house first. Even if you lived there for only 10 years, you would save over $100,000 in taxes if you found a house with half the taxes.

While the house seems to be a "deal", it has sat for 9 months, and still has not sold even with price reductions, though I have to say that I see houses built in the 50's on quarter acres half the size selling for 500k. You would not be paying much more for a much bigger and newer house.

Do keep in mind that taxes go up, often 5-6% per year, which would mean thousand dollar jumps for you. With all the talk in Trenton being just that, you could be paying 35k in taxes in 2017. You may not think that it will bother you, but believe me, every year when I open the tax bill, I just can't believe it.

If this is your dream, what you have strived for your whole life, go for it. But keep in mind that you could live quite nicely at a much lower cost elsewhere, if you find a smaller house, especially a family of 3.

 

[macdaddy]

How are the schools where you live now or where you will buy if you pass this place up? Personally, if the schools are better, I would buy the house. It does seem undervalued. Houses in that area will always remain valuable. In the meantime, your son benefits from a better education. Most people can't put more than 33% of their income toward a house because they have new cars, vacations, and expensive hobbies to pay off also. If you live below your means then you should be able to afford this. Property taxes are nuts but they will probably be nuts ANYWHERE you choose to buy around there. The alternative would be to lease a house but then you have very little stability.

 

[Sparky]

We are in CT - as of yet (but maybe soon) nowhere near NJ property taxes. DH quit his job and we planned for me to work parttime for another 10+/- years. Oops, then I got laid off.

If you google some housing bubble sites, some folks are predicting another 20-50% reduction in real estate prices.

Life comes at you fast.

 

[brewer12345]

I don't get the obsession with schools, personally. If the public schools aren't the greatest, but you aren't spending a mint on the house, you always have the option of private or parochial schools. The ~$14k less a year I spend on RE taxes than the house OP is contemplating would pay for an AWFULLY elite private school.

 

[Sparky]

And Zillow is notoriously unreliable.

 

[Sparky]

If you're commuting into the city, you can get a much better tax deal in CT.

 

[brewer12345]

If you're commuting into the city, you can get a much better tax deal in CT.

Heheh, yeah, but RE prices in most areas that are a reasonable commute make NJ look downright cheap!

 

[semtex]

Thanks all the advice.

The schools are great. Using greatshools.com, element/middle/high all with grade 9.

The main things bother me are:
1. too big house, too much waste. It means more furniture, bigger utility bills, maintainance...
2. property tax, that's something I could not pay it off.

In fact, a 2500SF colonial house with 12k tax is good enough for us. But at the same erea, this kind of configure house is around 650K to 700K. That's why I feel the McMansion is a good deal, obviously I should give the tax more weight.

 

[Meadbh]

To sum up, Semtex:
The majority opinion (apart from a few dissenters) is that the answer to your question is "yes".

 

[Brat]

It's a good deal for what it is; a big house. Were I you I look for a smaller (cheaper) house in the same school area. Then you will have enough excess cash flow to save for retirement or enrich your child's education at great summer programs.

Those property taxes are stunning, and you have sales and income tax to pay. Ouch.

 

[Sparky]

Heheh, yeah, but RE prices in most areas that are a reasonable commute make NJ look downright cheap!

Yeah? Unless you're looking in Greenwich, you can find a real nice house in a decent neighborhood in lower Fairfield County for less than $800K