Home buyin' question

In My Humble Opinion
1

While I’m not really financially ready to purchase a home I might spend decades in, I’ve gotta get out of this apartment. So, I cranked up a realtor this weekend.

I’ve never purchased a home before, so I’m on the front end of that learning curve people go through when approaching such. Fortunately the realtor’s a long time friend.

Although I really don’t want to share walls anymore, to stay in the part of town where I currently live I’m either going to have to go for a townhome or a fixer-upper (for which I have no desire). Moving just a little west, north or south just seems to get pricier.

The plan that’s forming, which I’ve discussed with the realtor, is to buy a townhome that I can afford now, and in two to three years start looking for a free standing house in this or adjacent areas. I plan on making an ~$80K down payment on something that will likely fall in the $180K-250K price range. Knowing that I’ll be leaving before too long, I may well aim for the south side of that range.

So I can see plenty of upside. First and foremost would be living in a modern place, and not renting anymore. My current place, while it has a charm borne of unique architecture, is antiquated and ready to fall down. And, if the place I purchase is in fairly good shape and I know I’ll be gone in a bit, I probably won’t get sucked into major repairs or renovations.

Finally, the question: is it worth it to buy a place I know I’ll be looking at selling in about two+ years? The Houston housing market has only gone into free fall once that I know of (mid 1980s) and seems pretty healthy right now. An alternative I’ve also considered would be to lease one of the new high rise apartments in the area for a couple of years, or perhaps just lease a more modern apartment.

I’m in unfamiliar territory with this, but I guess a way to rephrase the question in terms with which I’m more familiar would be: does the benefit of building whatever equity one might (as opposed to paying rent) during a stay of short duration adequately counterbalance the startup costs?

2

From everything I’ve read - Yes

3

It is a hot market now, but that doesn’t mean the bubble could burst in six months, a year, two years or maybe not for 10 years.

Here in Las Vegas, when I bought my house five years ago, our realtor told me not to expect the value of the home to rise more than 5 perent in the next five years. Ha! The value has more than doubled since then, but who could have predicted that?!

That said, I really doubt that prices are going to jump that high again in the foreseeable future. Prices are already ridiculously high, and at some point there are not going to be enough millionaires left to buy shanties in “iffy” neighborhoods.

If I were you, I would bite the bullet and save that money and bet that home prices are going to go down a tad, if not stay the same. Especially if interest rates climb. So far so good, but it will only take one giant leap to turn this all into a buyer’s market. Greenspan is retiring next year, and who knows what the next guy is going to do. If interest rates ever go back into double digits, the housing market will go flat fast.

Buying a condo now that you know you will want to sell in two years doesn’t seem a wise idea…but that is really just my humble opinion and not based on any inside information. Don’t come gunning for me when that condo goes for tripple what you would have paid for it…but I sincerely doubt that will be the case.

If I were you, I would contact three or four realtors who have been in the business in your area for a long time and get their predictions. They probablly have a better read on the market.

4

Ringo,
If I were you I’d just look for that “free standing” house now instead of in two years. I don’t see why you’re bothering with the townhouse if you’re going to leave in two years. You will have paid off none of the principal on your loan to speak of in two years, and whatever equity you’ve picked up due to any rise in real estate prices will be more than offset by the same rise in the price of a free standing house during the same period. And you will have to find financing in two years again!? More points to pay, brokerage and other closing costs from selling the townhouse, more moving costs. Why bother with a “transition” townhouse?

5

You’re probably going to lose about $10k on the closing costs, fees, inspections, etc. As far as the principle of the loan is concerned, you aren’t going to be building up any equity worth speaking of in that short of a time, so basically the cost of the interest on the mortgage and the cost of paying for utilities, etc. yourself are going to be just a straight loss, as would rent for the same period of time. Based on the amount of money you are putting down, the cost of buying (interest on the loan, plus utilities and things you would normally get for free when renting) is probably going to be pretty close to the same as the cost of renting for the same period of time. Since the cost of renting is pretty much equal to the cost of buying, you just need to make up the $10k you’ll lose in closing costs and fees to be profitable.

If you stay for 2 years, then if the value of the home goes up $10k in 2 years (about 2.5% per year) you’ll break even. If you stay for 3 years instead of 2, the value of the home only needs to go up $10k in 3 years (about 1.7%) for you to break even. If you stay any longer than 3 years and you are going to start building up some equity and then this becomes a no brainer, but you don’t plan on staying that long.

6

Here’s a calculator to help you decide which is best for you.

7

I am not by any stretch a financial guru. However, if you have $80,000 available to make a down payment on a house, don’t do that. It doesn’t make any sense to sink a ton of money into a place you’re not going to stay for a long time. Plus, if the housing market does go down, you probably won’t be able to recoup all of that investment.

If you know for a fact you’ll be moving in a couple of years, many mortgage advisors will tell you to get an adjustable mortgage. Those usually have lower rates than fixed-rate mortgages, and while it’s possible the rate will rise while you’re living in the townhome/house, it won’t rise enough to cause you to lose money vs. a fixed-rate mortgage.

I dunno. If you’re certain you’ll be moving again within two to three years, I’d probably recommend getting a good apartment and minimizing your cash outlay.

8

I concur.

9

Let’s crunch the numbers.

Assume you buy a $250k house and pay around $8k in closing costs and take out a $170k 30-year fixed mortgage at 5.5% (just to make it simple), and that when you sell you’ll be paying a %6 comission to real estate agents. The first column is “years since taking out the mortgage,” the second column is how much interest you’ll have paid, the third how much principal (the actual balance that you owe on the loan) you’ll have paid, the fourth equity (not counting appreciation) principal payments, and the fifth “how much the house’s value would have to increase to break even on $8k in closing costs and a 6% comission on sale”. Whew. Here’s the table:


          
Year	Interest	Principal	Equity	        Apr. Req.
1	-$9,350.00	-$2,346.92	$82,346.92	6.75%
2	-$9,220.92	-$2,476.00	$84,822.91	5.69%
3	-$9,084.74	-$2,612.18	$87,435.09	4.58%
4	-$8,941.07	-$2,755.85	$90,190.94	3.41%
5	-$8,789.50	-$2,907.42	$93,098.35	2.17%
6	-$8,629.59	-$3,067.33	$96,165.68	0.87%
7	-$8,460.89	-$3,236.03	$99,401.71	-0.51%
8	-$8,282.91	-$3,414.01	$102,815.72	-1.96%

So would the value of the home you buy increase by at least 4.58% over the next three years?

IANAA, IANAREA, etc. Make your own spreadsheet if you don’t trust mine, which you shouldn’t.

10

You are calculating turning a profit on the house in 3 years. What you aren’t considering is that the other option is to rent for the same amount of time. The OP doesn’t need to turn a profit for this to be a better option. What the OP needs is to have less of a loss buying the house than how much money would be lost in paying rent over the same amount of time.

Assuming a rent of $800 per month, the OP would spend $28,000 in 3 years. The OP doesn’t need to turn a profit. The OP needs to lose less than $28,000 on the house deal for it to be a better option. If the house didn’t appreciate at all, then they would have a loss of 4.58% (using your number). 4.58% of $250,000 is $11,450. In other words, it would cost them more than twice as much to rent over the same time as they would lose in buying the house.

Your spreadsheet also doesn’t take into consideration taxes, homeowners insurance, and other costs that go along with owning a home. The cost of renting also often includes costs like heat, water, trash pickup, and electricity, so you’d have to factor these in as well to get an accurate comparison. I’d be curious to have all of this factored into your spreadsheet.

An interest only mortgage might also be worth investigating, since the OP knows they will be moving within 2 or 3 years. Interest only loans are a really bad idea for the long term, but in a quick turnaround like this I believe they can work to your advantage.

11

Wow! Thanks for the input!

I was wondering about the viability of a relatively short term stay, and y’alls’ responses have addressed that concern. The last two posts, by Metacom and engineer_comp_geek give some fat to chew on, but I appreciate the rest as well.

If I understand an interest only loan, you’re betting on the come; i.e., you’re betting that the property will appreciate enough that you can pay off the principal and recoup costs upon sale within a few years.

12

No…

I was calculating how much the house would need to appreciate to recover the cost of closing costs on purchase and comission on sale. I didn’t include the cost of interest paid on the mortgage at all, nor did I include (as you pointed out) property tax (which is very high in Texas because there’s no state income tax).

The last two are hard to incorporate in a spreadsheet without knowing more about the OP then he’d want to publicly disclose, because they’re both tax deductions and that would need to be taken into account.

:confused: I don’t think that’s correct, but I could be calculating something incorrectly…

Assuming a rent of $800 per month, the OP would spend $28,000 on rent over 3 years.

In that same time period in the house, he’d spend $27,655.66 on interest payments, $8,000 on closing costs, and (if the house didn’t appreciate at all), $15,000 on the realtors’ comissions when he sold, and assuming a 2% per year property tax (typical for Texas) about $15,000 in property taxes. Now, assuming most of his income is in the %25 bracket, and he’d save $10,663.91 if he itemized and deducted interest payments and property tax (we’ll assume he can find enough other deductions to make up for the standard deduction; otherwise he’d save even less on taxes over renting).

Total costs to buy for the three years (interest payments, property tax, closing costs, agent’s comissions less federal income tax savings) would be $54,991.75 for the three years. It would cost almost twice as much to buy then to rent for the three years; the difference between the two being $26,991.75.

In order to make up for the difference (and ignoring that the agent’s comission would be more then $15,000 if the house appreciated), the house would have to appreciate about 10% in a three year period.

Probably not going to happen.

Oh, and keep in mind the rental calculations assume no rent increase…

13

The only practical home-buying advice I can offer is that you almost always stay at a place longer than you’d expect. So buying a house that’s “good enough” to stay for a couple of years may not be a great idea if you end up staying there for five or ten years.

14

We were going to build, decorate it and move out into another house that we would build, decorate, move…etc.
Except we’ve been here 12 years…and haven’t really motivated past the build and primer phase.
We love it .
One thing, not related to money, is where ever you think of buying, go out and actively meet the neighbors. To get a feel for them and the area and the former owner and their upkeep of the property. They are a huge part of your life and if you get a ‘this guy is a bung-hole’ feeling, chances are, he is and it will suck until you or he moves on.

Just my two bits.

I love my neighbors. I have keys to all their houses and we are the local rent-all.

15

Metacom is right. If you’re going to stay for less than 5-7 years, it’s better to rent than to buy in most areas. In some cases, far better. There was an article (have to get a day pass to see it) in the Economist a couple of months ago which found that one comes out way ahead by renting instead of buying. This is in large part due to the fact that rents have only gone up modestly in recent years while home prices have exploded. So even if house prices don’t go flat or decrease in the next few years (which I think they almost certainly will), the costs of home ownership are higher in the short term than rent.

This is especially true if you factor in the expected return if you were to invest the difference between a mortgage payment and rent. An index fund will almost certainly give you a better return on your money than real estate in the near future.