What would you do?

[honobob]

It's trickier than that, unfortunately. Even at a neighborhood level just around us, some inventory is appreciating well, some is stagnant.

Do you know why that is? Is it location? Type of housing? In the Bay Area the housing that got hurt was the "lofts" that were basically a 1000sf open box. When the dotcommers retreated there was still strong demand for housing by families but this type of property did not supply that demand so prices dropped a bit until the return of the young entrepreneurs.

I've also seen this in the suburbs where new developments never lived up to their hype and quickly started to deteriorate.

Did you buy wrong or did you know going in that you would probably not see much in appreciation? I know people that want to live in a certain type of housing be damned the appreciation, think geodesic or A frame houses.

 

[brewer12345]

Brewer what were annual living expenses? The last 5 years I've averaged $19,623.

You are single (I presume) and live in a different part of the country than I, so it would be apples to oranges. If you know your budget that well, it tells you a lot more than anything my numbers would tell you. Besides, I don't track nearly that closely.

 

[Webzter]

Do you know why that is? Is it location? Type of housing?
...
Did you buy wrong or did you know going in that you would probably not see much in appreciation?

I think it's type of housing and buying wrong. We bought a 2 story townhouse that carried a mid-market (not a starter) price tag. So, the main failings in our very specific situation:

- Two story. These appeal to younger buyers

- Priced higher than starter inventory. This puts us in the range of 'just starting a family but don't want a yard' and 'two-income professionals that want a place in the suburbs'

- Builder has an active development two miles away. A builder needs to move inventory to be profitable to its shareholders. So, they'll make all sort of deals and incentives because the unrealized profits are spread across millions of shares and not realizing an extra $10k profit on one unit is better than carrying that same unit and not realizing any profit.

We were young and 'had to have a house' then. If we were half as savvy as we are now (which is still a long way from where we need to be), we would have been better informed and maybe not made the purchase... targeting a single family instead.

To contrast it, there are $400k and $600k single-story townhomes on the other side of the street that move slowly but steadily. These target empty-nester / retired types. There are $180-$220k townhomes a block away. These turn well and attract singles / first-time home buyers. Ours are $280-$300k and just managed to hit that spot in the market where there's either cheaper inventory to be had or new inventory (and who doesn't want brand-spanking-new!) just two miles away.

 

[honobob]

Thanks Webzter

Very thorough analysis. I learn alot from people who share their experience although sometimes some people think I'm nosey/abrupt/judgememtal. My best friend told me my TV counterpart is the doctor on the TV show House. I watched it with him my first time and "ouch". This guy is pretty frank talking. This was right after my friend sat in on some tenant interviews with me. My friend did say he thought it was a good thing.

MFG sure can learn alot from your post. Thanks again for sharing.

 

[Arif]

This may just be a quibble but I assume MFG is a first time home buyer. Any home buyer should realize that asking price is a ficticious number unless there is analysis to back it. I have seen people brag that they bought $50K under asking price and further research shows that the asking price was $60K over market value! Not quite the deal they thought they had.

That is why I said find a good realtor, one that can find a bargain by running comps and doing an analysis. I know several realtors in the Atlanta area and most have had to talk their owners into deep price cuts in order to move their property.
Although I'm not in Atlanta I find bargains all the time so they are out there. Some sellers have a lot of equity but are in a situation that they have to sell.

 

[dex]

Mary,
What parts of the Atl area are you looking? I live in the Smyrna area and really like it.
I owned a home in Smyrna from '99 to '05. It averaged about a 3% annual return after all costs associated with selling. Who knows what the future will bring. But I like buying rather than renting in the Atl.

 

[Webzter]

Thanks Webzter

Very thorough analysis. I learn alot from people who share their experience although sometimes some people think I'm nosey/abrupt/judgememtal.

No worries. I'm pretty willing to tell the world about my mistakes and shortcomings. If nothing else, I can be a warning sign to others

I've got an even better real estate story. I'll put that in a new thread.

 

[chinaco]

I make slightly over $100,000/yr excluding bonuses and am now interested in purchasing a home.

While beginning to explore the market, I'm noticing that my tastes gravitate to homes in the $280,000 to $400,000 range. The lower end being foreclosures.

IMHO - If you buy more than you need... you will likely regret it some day. A large house will cause many expenses in other areas. Insurance, taxes, furniture, drapes, interest on loan, etc. Not to mention that it is more to keep clean. That money could be saved and enable you to pay the house off quicker and/or save for ER.

 

[NinjaPigeon]

I'll chime in. I live about 10 or so miles from you (I live in Sandy Springs, right at the Perimeter). I make a comparable salary and homes up here, just outside the Perimeter, run about 400k for about a 2500 sq ft home. The only way to get something under 300k for me is to move further outside the city, which would suck.

My rent is 930 for a 2br. My expenses are about 23k/year (not counting taxes or savings) as a single guy. I anticipate them doubling when I get married next year, to 46k/year, before factoring in the cost of a mortgage.

I'm gonna probably go for a 250k house in Alpharetta and put down 20%, but it'll take me a few years to save that much.

I disagree with Arif about it being so easy to find your dream home for that price. Unless you are hanging out on the courtroom steps, going through REO inventories, looking at condos, or willing to live a decent ways outside the city, you won't find a home for that price that doesn't need decent amounts of work.

East Atlanta is kinda pricey ITP. I went through Candler Park and the East Lake areas recently and I definitely couldn't afford to live there.

Let me know what you find though. I'm hardly an expert in all the comps of the various neighborhoods, so I'm sure there are some gems to be had

 

[Mary_From_Georgia]

I'll chime in. I live about 10 or so miles from you (I live in Sandy Springs, right at the Perimeter). I make a comparable salary and homes up here, just outside the Perimeter, run about 400k for about a 2500 sq ft home. The only way to get something under 300k for me is to move further outside the city, which would suck.

My rent is 930 for a 2br. My expenses are about 23k/year (not counting taxes or savings) as a single guy. I anticipate them doubling when I get married next year, to 46k/year, before factoring in the cost of a mortgage.

I'm gonna probably go for a 250k house in Alpharetta and put down 20%, but it'll take me a few years to save that much.

I disagree with Arif about it being so easy to find your dream home for that price. Unless you are hanging out on the courtroom steps, going through REO inventories, looking at condos, or willing to live a decent ways outside the city, you won't find a home for that price that doesn't need decent amounts of work.

East Atlanta is kinda pricey ITP. I went through Candler Park and the East Lake areas recently and I definitely couldn't afford to live there.

Let me know what you find though. I'm hardly an expert in all the comps of the various neighborhoods, so I'm sure there are some gems to be had

I'm looking in Lithonia, Stone Mtn, and Conyers (very nice n'hoods here)

 

[kaudrey]

Brewer what were annual living expenses? The last 5 years I've averaged $19,623.

-----

If this is the case - why don't you have 20% for the downpayment? You'd have it in a year! Although you are probably not counting taxes in your expenses, I'm guessing. Just curious.

BTW - when I bought my place 7 years ago, I made about what you do and had a $240K mortgage. With property taxes and everything, I wouldn't have felt comfortable getting a mortgage above about $275K. I could have paid it, but it would have been a drain on my FIRE goals.

 

[dex]

I'm looking in Lithonia, Stone Mtn, and Conyers (very nice n'hoods here)

If your commute permits - check out the west side of Atlanta & Cobb county.
I think you might like it.

 

[lrak]

IMHO - If you buy more than you need... you will likely regret it some day. A large house will cause many expenses in other areas. Insurance, taxes, furniture, drapes, interest on loan, etc. Not to mention that it is more to keep clean. That money could be saved and enable you to pay the house off quicker and/or save for ER.

IMHO, you might be better to buy more than you need at the moment because moving is expensive. If you expect to eventually get married, have kids, have elderly parents move in, etc buy a house that will accomodate that the first time so you don't have to pay real estate comissions, legal fees, taxes, movers, etc more than once.

 

[bright eyed]

wow, these #'s blow my mind, being that i live in socal...you can get a track home in the boonies for about $400k, but everything around these parts is $600k plus...and i doubt most of my neighbors make that much more than me and my SO...

 

[Darryl]

Wait until you have the 20% AND 3 to 6 months emergency cash on hand.

With your income and current rent it won't take you long to accumulate that amount. If your not successful accumulating you would have been in a real bind if you had signed that big of a mortgage.

As brewer mentioned plenty of other costs and fees come with home ownership. Also unexpected repairs couple thousand here and a couple thousand there and before you know it your talking real money.

 

[Mary_From_Georgia]

Brewer what were annual living expenses? The last 5 years I've averaged $19,623.

-----

If this is the case - why don't you have 20% for the downpayment? You'd have it in a year! Although you are probably not counting taxes in your expenses, I'm guessing. Just curious.

BTW - when I bought my place 7 years ago, I made about what you do and had a $240K mortgage. With property taxes and everything, I wouldn't have felt comfortable getting a mortgage above about $275K. I could have paid it, but it would have been a drain on my FIRE goals.

I do have 20% - I just think that 20% will do more for me in the market than the incremental $'s I pay against a mortgage. i.e. I'd sell in 2-3 years with a minimum 5% gain---right?

 

[Meadbh]

I do have 20% - I just think that 20% will do more for me in the market than the incremental $'s I pay against a mortgage. i.e. I'd sell in 2-3 years with a minimum 5% gain---right?

Assuming 5% gain, subtract the interest rate on the mortgage and the closing and moving costs. NET gain = ?

Leverage is great if your investment goes up in value. If it goes down you lose bigtime.

2-3 years in the market is too short a time horizon. We could be in the middle of the next bear market in 2010. Think 15-20 years out....

 

[Darryl]

If you are thinking of selling in 2-3 years. It's very unlikely you will come out ahead unless your company is picking up all the realtor, banking and moving costs for you in a relocation package.

 

[honobob]

Leverage is great if your investment goes up in value. If it goes down you lose bigtime.

Can you please explain how the loss would be any different depending on your down payment? Am I missing something?

 

[cute fuzzy bunny]

Bigger down payment, more real money committed.

 

[cho oyu]

Can you please explain how the loss would be any different depending on your down payment? Am I missing something?

It's merely a comment on the risks of margin or leverage.

There is nothing quite like losing more than 100% of money that you have "invested". This isn't an impossible scenario with a 2-3 year sales window.

 

[Webzter]

I do have 20% - I just think that 20% will do more for me in the market than the incremental $'s I pay against a mortgage. i.e. I'd sell in 2-3 years with a minimum 5% gain---right?

I don't think you should ever think of your primary residence as an investment. You can get lucky and get a house that goes up a substantial amount. You could also get a house that goes down a substantial amount.

Here's one more thing to think about... you could get a duplex and rent out one side of it. Owner-occupied rentals are extremely easy to get financing for. And, after you've lived there for a short period of time (two years I think), you can move on and convert the other side of the duplex to a rental without refinancing (rentals are technically supposed to be financed with higher-interest investment rates).

Look at the numbers, consider property taxes, home repairs, general happiness (intrinsic value in getting your own house), etc. If the house is bigger than your apartment, it's probably going to cost more to heat. If it's old, you need to budget more for repairs. If it's further from your job, you're going to pay more for gas. You're going to have a homeowners policy instead of a condo rider (assuming that's what you're carrying right now with the apartment). Your car insurance may go down (safer zipcode, multi-policy discount, etc).

If your house value does go up, will you sell with a broker or real estate agent? A broker will typically charge at least 5% and a real estate agent will charge 6-8% (they need to pay the broker).

There are closing costs when you buy. This is sunk money... There's also closing costs when you sell. Again, sunk money. In my neck of the woods, closing costs are, I believe, about 1.5%.

Go in with both eyes open, that's all. Know why you're buying the house. "Because I want it" is a perfectly good reason.

 

[honobob]

It's merely a comment on the risks of margin or leverage.

There is nothing quite like losing more than 100% of money that you have "invested". This isn't an impossible scenario with a 2-3 year sales window.

My question was to Meadbh. I don't understand your response. Are you saying psychological dollars lost are different than actual cash? I'm looking at this from a mathmatical perspective. cho oyu, can you elaborate?

 

[cho oyu]

My question was to Meadbh. I don't understand your response. Are you saying psychological dollars lost are different than actual cash? I'm looking at this from a mathmatical perspective. cho oyu, can you elaborate?

Although this certainly isn't always the case, many times people use significant leverage to obtain a home because they don't have enough funds available for outright purchase or a large down-payment.

Let's assume you put 5% down on a house. Let's then assume that the value of the house decreases by 10% and you have to sell (potential scenario for 2-3 residency). You have just lost twice your initial investment. For someone who required significant leverage in the first place, this is a huge deficit to repay in order to sell the home.


Dollar loss is the same if you had put down 20% at closing, but the real-life implications can be different if other funds are not available to cover the leveraged loss.

I think this is what Meadbh was getting at - if not, I will happily stand corrected

 

[brewer12345]

I do have 20% - I just think that 20% will do more for me in the market than the incremental $'s I pay against a mortgage. i.e. I'd sell in 2-3 years with a minimum 5% gain---right?

The best and safest way to do this is to make sure you would be OK even if the house did not go up in value. It might, and if you stay there long enough it probably will, but you are really buying a place to live, not a speculative, highly leveraged investment.

The last 20% you borrow will be very expensive money, especially now that a lot of lenders have black eyes from high LTV loans. Put down the 20% and you will earn a guaranteed 9 or 10% simply by not having to pay up for the loan.