What would you do?

[Mary_From_Georgia]

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.

I have no other debt obligations and given that this is a buyer's market:

1) Would I be over-extending myself purchasing in this range? *I hate owing someone money, so the fact that this would be "good debt" still doesn't appease me psychologically*

2) Get the most I can afford (guidance), and wait for the housing wave to pick back up.

I live in East Atlanta, am single, and 42.

Thanks,
Mary

 

[brewer12345]

How much do you have as a downpayment and what is your total net worth? Would taking on a mortgage of this size mpact your otehr financial goals?

 

[GatorBuzz]

Good questions from Brewer. Also, how much are you paying in rent right now?

 

[Mary_From_Georgia]

How much do you have as a downpayment and what is your total net worth? Would taking on a mortgage of this size mpact your otehr financial goals?

0 - 3% for down payment (I could do up to 10% easily).

Shouldn't affect my other goals. Would still max out 401-K, etc.

My hope though, is that the return on the house would be good after 5 years. If not, I wouldn't lose sleep. In fact, I would have slept in what would have been close to a dream home---for me at least.

Mary

 

[Mary_From_Georgia]

Good questions from Brewer. Also, how much are you paying in rent right now?

$950

 

[brewer12345]

Hmmm...

Zippo down for a big honkin' mortgage and a huge ramp up in monthly obligation (mortgage plus taxes plus upkeep plus utilities plus...). And all this with a hope for a good return on the house in a declining RE market.

If you really, really want a "dream house" and you are willing to make the many sacrifices this will require, then I would save up a 10 to 20% downpayment and then start looking for a house. But be aware that you will likely be delaying any hope of retiring early for quite a few years in order to buy this house and you should not count on earning any return on the house. And I think you would be wise to keep your mortgage to $250k or less, based on your income.

 

[Mary_From_Georgia]

Hmmm...

Zippo down for a big honkin' mortgage and a huge ramp up in monthly obligation (mortgage plus taxes plus upkeep plus utilities plus...). And all this with a hope for a good return on the house in a declining RE market.

If you really, really want a "dream house" and you are willing to make the many sacrifices this will require, then I would save up a 10 to 20% downpayment and then start looking for a house. But be aware that you will likely be delaying any hope of retiring early for quite a few years in order to buy this house and you should not count on earning any return on the house. And I think you would be wise to keep your mortgage to $250k or less, based on your income.

One final note. My company will purchase your home for at least 105% of your purchase price if the market turns otherwise, so it's really a matter of how much cash flow I'd want. Is this the right way to look at it?

Thanks for the helpful responses.

Mary

 

[bow-tie]

Your comment about 'good debt' being not appealing to you psychologically needs to be explored. Owning a house can be great, but it can also be a colossal PITA, especially with a hefty mortgage payment every month. Seems to me you need to do some soul searching regarding how much house-expense you really want. I think Brewer's comment is headed in the right direction, but ultimately it's up to you.

 

[brewer12345]

One final note. My company will purchase your home for at least 105% of your purchase price if the market turns otherwise, so it's really a matter of how much cash flow I'd want. Is this the right way to look at it?

Thanks for the helpful responses.

Mary

How long is the offer to repurchase the house good for? I presume they have the right to yank or change their offer and that you could also change jobs, correct? I wouldn't feel comfy depending on such an offer to bail me out.

On the subject of cashflow, I would compile a list of the expenses that would come from owning such a home. A local homeowner could tell you more specifics, but at a minimum I would expet it to include:

- mortgage
- RE taxes
- Homeowners' insurance
- Gas/water/sewer/electric/heating/phone/cable
- HOA dues, if any
- at least 1% of the purchase price annually for upgrades, repairs and rennovations
- Some amount for periodic upgrades and remodelling
- landscaping/lawn service

No doubt there are others. Then compare this total amount to your current income and budget. Would you feel comfy with the reduced amount of free cash flow? Is this amount over what you pay in rent worth the privilege of living in a "dream home"?

If I didn't have kids I would just own a townhouse or even be a renter.

 

[Webzter]

We put 8% down on a 260k five years ago. If I had known then what I know now, I would have waited until I could at least hit 20%

Also, don't be bashful about offering really low when you're looking at houses. The worst thing you can do to yourself is to get emotionally attached.

 

[brewer12345]

Oh yeah. If you think that you will get good returns on a house.... Well, you might. But I bet all the people whose properties are listed here thought the same thing: Real Estate Disposition Corporation

 

[Gumby]

How long is the offer to repurchase the house good for? I presume they have the right to yank or change their offer and that you could also change jobs, correct? I wouldn't feel comfy depending on such an offer to bail me out.

On the subject of cashflow, I would compile a list of the expenses that would come from owning such a home. A local homeowner could tell you more specifics, but at a minimum I would expet it to include:

- mortgage
- RE taxes
- Homeowners' insurance
- Gas/water/sewer/electric/heating/phone/cable
- HOA dues, if any
- at least 1% of the purchase price annually for upgrades, repairs and rennovations
- Some amount for periodic upgrades and remodelling
- landscaping/lawn service

No doubt there are others. Then compare this total amount to your current income and budget. Would you feel comfy with the reduced amount of free cash flow? Is this amount over what you pay in rent worth the privilege of living in a "dream home"?

If I didn't have kids I would just own a townhouse or even be a renter.

Don't forget PMI if you put down less than 20%.

 

[honobob]

My hope though, is that the return on the house would be good after 5 years. If not, I wouldn't lose sleep. In fact, I would have slept in what would have been close to a dream home---for me at least.

Mary

MFG

Do you know what the average annual appreciation rate has been for the homes/area where you are looking? Has that been reasonably constant or has it been just because of the recent boom. I know when I vacationed in Alanta in the mid 70's everyone I talked to had just moved there so there must be a good history of home appreciation. A good Realtor should be able to provide this. Then question why this would increase/decrease over time.

If you are aware of all the costs of home ownership and feel comfortable that you can meet them over at least a 5 year term and determine that the increase far outweighs that extra cost over renting then I think you should purchase your dream home.

3% of $400K = $12,000. 5% increase in value per year (mine has been 9-11% in two different states) for 5 years= $110,000 increase in home value.
At your salary range I can't imagine NOT being invested in real estate for financial reasons. I do know some people are not psychologically prepared for home ownership no matter their income.

Also in looking at foreclosures you should determine if it is the result of the borrower or the house. Even if a borrower falls on hard times he should be able to sell his house unless he purchased in an undesirable area. Why would you buy there? Or it may be that the house has defects and the owner chooses to walk away. Buy smart. Question why your home will sell 5 years from now before another home in another neighborhood or another house in your area.

Good luck.

 

[brewer12345]

BTW, mary, I hope we didn't scare you off.

 

[Arif]

I don't know your tastes but with the market the way it is in Atlanta you should be able to find a dream home for much less than 280k.
The inventory of homes on the market in Atlanta is at record levels. I think Brewer recently posted a message about foreclosures in Atlanta. Also, get a good real estate agent. One that is willing to bargain hunt. Some homeowners are willing to accept offers significantly lower than the asking prices of homes in Atlanta due to so much competition.

 

[Texas Proud]

We put 8% down on a 260k five years ago. If I had known then what I know now, I would have waited until I could at least hit 20%

Also, don't be bashful about offering really low when you're looking at houses. The worst thing you can do to yourself is to get emotionally attached.

yes... this is important.... if you do not put 20% or more down you have to pay PMI... and that can be a lot... also, with less than 20% they want to have an escrow for you taxes etc... less and you can save the money and keep the interest...

BTW, I agree 105% with Brewer.. very good advice... don't overextend.. (he must have been a mortgage broker.. but then again, he has good ideas on stocks, so I also think he was a stock broker..)

 

[brewer12345]

(he must have been a mortgage broker.. but then again, he has good ideas on stocks, so I also think he was a stock broker..)

Since I consider mortgage brokers to vy for last place in the ethical sweepstakes with used car salesmen, annuity hucksters, televangelists, and former Intel middle managers, I will assume you meant taht as a compliment...

Really, it is just my experience of having been at about the same income level and carrying a $240k mortgage.

 

[FIRE'd@51]

We put 8% down on a 260k five years ago. If I had known then what I know now, I would have waited until I could at least hit 20%

I'm surprised. Over the past 5 years, most homes have appreciated enough that I would think you made a pretty good return on that 8%.

 

[honobob]

Some homeowners are willing to accept offers significantly lower than the asking prices of homes in Atlanta due to so much competition.

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.

Think about it. Why would someone sell you a home 10% below market value?

A good Realtor should provide a CMA to support any purchase offer. If they can't or won't I would not deal with that person.

"I'll wait until I have 20% down or until the market settles" Famous last words of perpetual renters. I purchased in 2003 for just over $200K and it would sell for $400K+. In 2004 I purchased $270K+ and can sell for $450K+. I had 20% down but even if I had to pay PMI for a bit the appreciation clearly outweighs the extra costs. If you're ready to buy now I would use the "buyers market" in your area to get the best house you can NOW. Why wait for a frenzy when people are throwing money at anything to get in the market?

I think generally the impact of forclosures is minimal on an otherwise healthy economy. I've never seen an impact of more that 1-2% on market values. How many people on the Atlanta foreclosure list do you think make $100,000?/max their 401K?/participate in an early retirement forum? I wouldn't give it much thought.

If you can find your dream home at market or slightly under at terms that don't overextend your resources (by your definition) then you should definitely go for it!!

 

[Webzter]

I'm surprised. Over the past 5 years, most homes have appreciated enough that I would think you made a pretty good return on that 8%.

Factor in closing costs when we bought, closing costs when we sell, realtor fees (our guy is a broker so we're being charged between $500 and 5%, depending on how the buyer comes to us), and our net walk-away profit from the house after five years is a $10k loss at the best case scenario.

If you include the material improvements (made for our benefit, not to try and capture some sort of return) and we're out another $12k.

And, we live in one of the more desirable suburbs in the metro area.

Of course, we didn't know nearly as much about real estate then (this was our first house) as we do now. (bought and sold two rental properties and made several other offers on many houses)

 

[Webzter]

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.

House value is tricky. After all, fair market value is simply the point at which a buyer and seller agree on price, assuming neither one is under duress.

Housing prices can vary by tens and tens of thousands for a variety of reasons. A hot market and emotional buyers will drive prices up. A slow market, relos, ARMs coming due, estate sales in limbo, etc can drive prices way down.

So, basically, if someone brags that they got a house that was priced at $260k for $210k, then, assuming the buyer isn't being forced to sell, that means the fair market value of that house is $210k. The person didn't 'save' $50k. A better negotiator might have been able to get the house for $200k, sure, but that doesn't necessarily mean that the buyer overpaid by $10k either.

Like I've said, I'm no longer bashful about heavily underbidding a property if the area doesn't look like it justifies the cost. I either get knocked out of the running or the seller wises up and comes back to negotiate. to that end, personally, I'd stop working with a buyer's agent / realtor that was working solely for me if they kept trying to talk up a property or talk me out of a low offer.

 

[honobob]

I'm surprised. Over the past 5 years, most homes have appreciated enough that I would think you made a pretty good return on that 8%.

I'm agreed and had to check where Webzter lived. I didn't think Minnesota missed out. It does go to show you when you compare to my results that when we talk about our real estate experiences it makes a big difference in location, location, location.

So it shouldn't be rent v buy. It should be rent MN v buy CA.

 

[Webzter]

I'm agreed and had to check where Webzter lived. I didn't think Minnesota missed out. It does go to show you when you compare to my results that when we talk about our real estate experiences it makes a big difference in location, location, location.

So it shouldn't be rent v buy. It should be rent MN v buy CA.

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

Ultimately, you should make the move to a house, townhouse, or condo because it makes sense at that time. However, go in with your head on straight and don't get emotionally attached to anything. House buying is a huge time committment and a significant financial committment. The worst thing possible would be to not do due dilligence.

FWIW, my regrets aren't about the lack of appreciation in my house... it's that we have a life plan that would be a lot easier to attain if we didn't have a house.

 

[Mary_From_Georgia]

BTW, mary, I hope we didn't scare you off.

No you didn't. You guys bring up good points. I'm meditating!

Mary

 

[Mary_From_Georgia]

Since I consider mortgage brokers to vy for last place in the ethical sweepstakes with used car salesmen, annuity hucksters, televangelists, and former Intel middle managers, I will assume you meant taht as a compliment...

Really, it is just my experience of having been at about the same income level and carrying a $240k mortgage.

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