Buy One Get One Free! – In California, we are talking houses and not burgers. Find out how one developer is being creative to draw attention to their unsold inventory.
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This CNN video has Brian Yui analyzing the promotion. |
By Brian Yui
Currently there are many properties advertised as “short sales†on the Multiple Listing Service in the San Diego area. So, what is a short sale? Owners who can no longer afford to keep mortgage payments current due to job loss, divorce, illness or an ARM resetting used to have only two options: bankruptcy or foreclosure. However, more lenders are now agreeing to short sales in the hope of quickly recouping their losses and minimizing their costs of carrying a home without mortgage payments from the owner. In a short sale, the seller hires an agent to find a buyer for the house and sells the house for a less than the total amount due on the loan. In some cases, the lender still demands that the homeowner make some kind of payment or share the loss, but short sales may have less impact on the owner’s credit than either bankruptcy or foreclosure, which can haunt former homeowners for up to 10 years. The homeowner should be aware that there can be some adverse tax consequences by choosing the short sale route. The difference between the sales price and the loan is considered forgiveness of debt income which is taxable income to the homeowner. Having a better credit score may not be worth the potential of owing thousands of dollars in taxes to Uncle Sam.
As the lender is receiving less than the value of the home when the loan was issued, short sales do require the approval of the mortgage holder. For buyers, the bottom line is that they generally get a good deal on the property. The price is usually at or slightly below market value because the lenders are motivated to sell the property quickly to avoid foreclosure and carrying costs. Lenders tend to be more realistic about market values than homeowners who may have emotional ties to the property. Another plus for buyers!
Keep in mind that many listing agents will try to attract offers or stimulate a bidding war by listing the homes at prices far below what the lender will accept. Remember that short sales are all subject to the lender’s approval. If you’re a buyer, don’t get your hopes up when you see a home priced $50,000 or more below the last sales’ comparable for the area. If it looks too good to be true, it probably is and after you’ve taken the time to submit an offer, it will likely be rejected by the mortgage holder.
To minimize your efforts and maximize your chances of a successful purchase, have your Realtor® ask the following questions of the listing agent:
It may be helpful to give the lender a deadline with your offer to purchase. That way, if they don’t respond within the set timeframe, you’re free to pursue another property that might be more promising. And, in the rush to take advantage of a good deal, be sure that you don’t end up with a lemon. As with any other property purchase, it’s very important that you obtain a home inspection and pay for other types of inspections such as termite/pest. Don’t waive your right to obtain these inspections and make sure that your offer to purchase is contingent on approving them.
Sure, short sales make for a buyers’ market, but you may have to kiss several frogs before finding that dream home.
By Brian Yui
You can hardly pick up a newspaper or turn on the TV without hearing about the faltering real estate market. Now it’s time to turn that slowdown to your advantage. You may be eligible for a reduction in property tax, especially if you bought your home in the last couple of “boom†years of the real estate market.
The Basics
To fully understand your property taxes, it’s helpful to know the terminology:
So, how is your property tax is calculated? The amount you are billed is determined by the County Assessor in accordance with the state’s constitution. In California, Proposition 13 limits the general property tax rate to 1% of the assessed value, plus an amount for the debt service on any bonds approved by popular vote. Your tax rate will vary depending upon where the property is located and the bonds passed for that area.
California: Putting Proposition 8 to Work
Proposition 8, passed in 1979, allows a temporary reduction in property tax assessments. The proposition states that if the market value on January 1 of any current year falls below the value shown on your property tax bill, the Assessor’s Office must temporarily lower the value to reflect market conditions.
In recent years with the high rate of real estate appreciation, most assessed values in California are below market value. Let’s say you bought your home in 1990 for $300,000. The base year value would be $300,000. The bill you receive for 2007 property taxes would show the adjusted base year value (the property’s original price plus an inflation rate of 2% or less per year). Chances are that your property is worth considerably more today than adjusted base year value you are being billed, as real estate appreciation has exceeded the maximum 2% inflation rate allowed by Proposition 13.
If, on the other hand, you bought your home in the last couple of years at the top of the recent market boom, there is a good chance that the full cash value, or fair market value, of your home is less today than when you purchased the property. For example, if you bought a condo in 2005 for $520,000, in today’s market, it might bring $470,000. To ensure that you are paying the fair market value in property taxes, you should contact the Assessor’s Office for a review. Be prepared to provide comparables (recent sales’ prices for similar properties) or an up-to-date appraisal of your home to support your opinion of the property’s value.
If your review is approved, the assessed value will be lowered to reflect the decline in value of your home. Remember that this is temporary; the Assessor’s Office will review your home on an annual basis. When the market turns around and the value increases, the assessment of your property will also increase. You can find a list of County Assessors at http://www.boe.ca.gov/proptaxes/assessors.htm . Call your local office to request a Proposition 8 review form.
Other Tax Relief Options
Propositions 60, 90, and 110 provide for the transfer of a property’s base year value from an existing residence to a replacement residence, for qualified persons over the age of 55 or persons of any age who are severely and permanently disabled. The new home must of be of equal or less than the market value of the prior residence and in the same county. Here’s an example to help illustrate how these propositions work:
Jim, age 63 and his wife Ellen, age 54, plan to sell their large family home. They have lived there for many years, but with their kids away in college, they no longer need such a large house. The Proposition 13 base value of their home was $40,000 and has only grown to $68,000 by 2006. Their property tax bill is only $730 per year, though their home today is worth more than $500,000. Jim and Ellen have found a smaller townhome they would like to buy for $400,000. Under Proposition 13, this change of ownership will establish a new base year value for the townhome calculated upon the purchase price of $400,000; accordingly, their property tax bill will jump from $730 to about $4,000 per year. To avoid this increase in property tax, they can use tax relief options offered under Proposition 60: Jim and Ellen could move to the townhome and still pay $730 per year in property taxes, plus future increases not to exceed 2%. They qualify by having one of the owners, Jim, be over 55 years of age on the date the original house is sold and buying a new home of equal or lesser market value.
There are a few other requirements to qualify. See http://www.boe.ca.gov/proptaxes/faqs/reappraisal.htm for more on these tax-saving options and check with your County Assessor’s office for relief options in your area.
Tax Assistance Programs
Persons who are blind, disabled, or at least 62 years old, and meet certain minimum annual income thresholds may qualify to participate in the Franchise Tax Board's Homeowner Assistance program. This program provides cash reimbursement of a portion of the property taxes that you paid on your home.
If you don’t receive cash reimbursement, you may qualify for tax postponement. The postponed taxes are a lien on the home and become due (with interest) upon moving, the sale of the home, or death. To find out more about both programs, call the Franchise Tax Board at 1-800-852-5711, or visit www.ftb.ca.gov/individuals/hra/index.html.
Disabled veterans of military service may be eligible for up to a $154,661 property tax exemption.
For example, if your home is assessed at $400,000, the first $154,661 is deducted from the total assessment for purposes of the tax calculation. Qualifying veterans must have been disabled due to a service-related injury or disease while in the armed forces, and must be a resident of California as of January 1 of the year in which they are applying for an exemption.
Veterans with 100% disability, or partially disabled and unemployable, or their unmarried surviving spouses, are eligible for up to a $103,107 property tax exemption. Or, if total household income does not exceed $46,302, the 100% disabled veteran may qualify for up to a $154,661 property tax exemption. Call your local Veterans Administration or the Franchise Tax Board for more information.
The Pros and Cons of Foreclosures
By Brian Yui
SAN DIEGO, CA, September 12, 2006 — The slowing real estate market and higher interest rates mean one thing: foreclosures are hot. Real estate investors and novice bargain hunters are hot on the trail of homeowners who have fallen behind on their mortgage payments or homes repossessed by lenders. Nationwide, home foreclosures are up. So, how do you take advantage of this bumper crop of distressed properties?
Buying a foreclosed home is more complicated than the traditional home buying path. It can also entail considerably more risk, even for the seasoned investor. Homes in foreclosure come in several different categories: pre-foreclosures, bank-owned properties and government homes. All may offer below-market value to the smart buyer, but each should be approached with a healthy dose of caution.
Pre-Foreclosures
Pre-foreclosures belong to homeowners who have fallen behind in their loan payments. The lender has not yet seized the property but may have initiated legal action to reclaim the home. The owner may have as little as a month after receiving a Notice of Default before the home is put up for auction. To avoid the negative impact a foreclosure will have on his or her credit, the homeowner may be very motivated to sell the property.
While many cash-strapped homeowners will advertise their home in the local newspaper under “For Sale by Owner†and “Home for Rent†in a last ditch effort to avoid foreclosure, the surest way to find a pre-foreclosure is to check with the office of the county recorder or clerk, since notices of default are public records. If you find a property that way, you will have to deal with the homeowner directly. Be sure to check with your local realtor who may have access to many pre-foreclosures through the Multiple Listing Service.
While some sellers may be highly motivated and might view your interest as a saving grace, others will be less enthusiastic. They may see your efforts as predatory, so tread lightly. Remember to take all the same precautions you would with any home purchase, including a thorough home inspection. In most cases, buying a pre-foreclosure from the seller can be a good investment for you and a fair solution for the homeowner. Be sure to move quickly, as you may have very little time before the lender puts the property up for auction.
Auctions
Buying property at an auction or trustee sale is a tricky business. Frequently, the minimum bid at the auction is the appraised value of a home so bargains are rare. Buyers usually purchase the property sight unseen, and must rely upon the description of the property from tax roles. You will be buying without the benefit of an inspection that could reveal structural problems, mold or toxic materials that could cost a small fortune to repair. Financing auctioned properties is prohibited so you must pay cash, and to make matters worse, you’re not permitted to get title insurance. Remember that the home’s previous owner was unable to cover their mortgage, so there is a chance that they may also have a defaulted on their property taxes. If the property carries a tax lien, the new owner will have to pay it off. There are usually pros at these auctions, and they’re best left to the pros: With all the potential pitfalls of an auction, exercise extreme caution unless you’re a real estate mogul who can afford a mistake or two.
Auctions by municipalities are a slightly better option. These homes are sold to cover back taxes. Properties are sold “as is†meaning that you won’t have an opportunity to do an inspection and, again, you must pay cash. However, because the home is being sold to clear a lien as opposed to covering a loan, properties can often be purchased for a fraction of their appraised value.
Foreclosures
If a property fails to sell at auction, the home is “sold†to the foreclosing lender. Foreclosed properties seized by the lender are called REOs or “real estate owned.†The bank or financial institution will put the property up for sale. REOs are usually sold through real estate brokers, so check with your local agent.
Buyers considering a foreclosure should get as much information as possible. If the home has been vacant for some time, ask neighbors about the condition of the property. If there are contractors there, inquire about the work they are doing. Perform all the usual due diligence (inspections, appraisals, etc.) to ensure that you are fully informed. Some lenders will price a foreclosure at 30-50% below market to ensure a quick sale, rather than having the property on their books as a nonperforming asset, but larger banks will usually put homes up for sale at market value. Check online for comps (recent sold prices for similar properties in the same area) to be sure that the foreclosure is priced at or below market. After all, the goal in buying foreclosed properties is to get a discount.
Government Properties
Homes purchased with loans from the Federal Housing Authority (FHA), the Veterans Administration (VA), Fannie Mae or any other federal agency can be taken back by the government if the owner defaults on the loan. The VA’s foreclosure properties are often priced below market value and offer down payments as low as 2%. Check with your realtor about government foreclosures that may be available in your area.
Homes with FHA insured loans are transferred to the Department of Housing and Urban Development (HUD) upon foreclosure. They are often available for very low down payments, plus HUD will pay the broker’s commission up to 6% of the sales price. A note of caution: HUD homes are sold “as is.†This means that limited repairs may have been made but no structural or mechanical warranties are offered. However, the price of a home in need of repairs is adjusted downwards to reflect the investment the new owner must make to improve the home. For the first 45 days, HUD listings are only available for purchase by homeowners who intend to live in the property, eliminating competition from big-time real estate investors. For more about HUD properties, go to www.hud.gov.
The Bottom Line
Everyone likes a bargain and foreclosed properties can often be a great investment under the right circumstances. As with any real estate purchase, your best bet is to do as much research as possible. Always hire a qualified home inspector to evaluate the home’s condition and consult with an experience, local realtor for valuation guidelines. The experience of these pros can prove invaluable in ensuring that you’re buying a bargain, not a money pit.
Managing Your Mortgage
by Brian Yui
SAN DIEGO, CA, September 12, 2006 —Interest rates have been on the rise and for many homeowners that may spell trouble. Whether you’re having difficulty making your payments due to a rate hike or a change in your personal finances, you may fear losing the home you’ve worked so hard to attain.
Losing your job or facing unanticipated expenses can happen to anyone, and may cause you to fall behind in your loan payments. When lenders provide money in a mortgage contract, they stipulate that they have the right to foreclose on the property, repossessing your home if you are in default on your loan.
The First Step
If you have missed a payment, talk to your lender. Nobody likes to admit that they’re in financial trouble, but you’ll have to swallow your pride and work with your lender towards a solution. Don’t ignore their letters or calls. Be assured that they won’t shrug their shoulders and give up; instead, they’ll pursue legal remedies to ensure that they recover their losses. When you contact your lender:
1. Explain your situation. Be prepared to provide them with financial information, such as your monthly income and expenses.
2. Stay in your home for now. You may not qualify for assistance if you abandon your property.
3. Contact a housing or credit counseling agency. The Department of Housing and Urban Development, 800-569-4287 or www.hud.gov can help you find a reputable counselor. They frequently have information on services and programs offered by Government agencies as well as private and community organizations that could help you. Beware of credit counselors who charge high fees for their services. Use a HUD-approved agency that will offer you help for little or no charge.
Short-Term Options
The situation may look grim, but you do have some recourse. If you are behind in your payments but can guarantee a lump sum to bring your account current by a specific date, your mortgage may be eligible for Reinstatement.
If you have recently experienced a reduction in income or increase in living expenses, you may qualify for Special Forbearance. This would provide a temporary reduction in payments or a suspension of your payments for a short time.
Finally, you may be able to set up a Repayment Plan. If your account is past due, but you can now make payments, the lender might agree to let you catch up by adding a portion of the past due amount to your monthly payments until your account is current. Be honest with your lender. The surest way to lose your home is to make arrangements or a payment plan that you know you cannot keep.
Refinancing
Mortgage Modification is a written agreement between you and your lender that permanently changes the terms of your original loan to make your payments more affordable. For example, you can refinance to change an adjustable rate mortgage to a fixed rate, extend the number of years for repayment, and so on.
Predatory lenders often target people in dire financial straits. They usually offer bargain loans, promise mortgages to people with no credit or bad credit, and charge unnecessary costs like broker fees and pre-paid life insurance. Before you jump at refinancing with a lender whose offer is too good to be true, try to work with your original lender to refinance and resolve your payment predicament.
Long-Term Solutions
If catching up and making payments isn’t an option, or if you cannot or no longer want to keep your home, your lender can work with you to avoid foreclosure. Selling your home may be the best option. If you have equity in your home, selling it and downsizing is a great option. You’ll be able to cover the outstanding principal and interest due on your mortgage, and perhaps have some funds left over. If, on the other hand, you sell your house but the proceeds are less than the total amount owed on your mortgage, your lender may agree to a Short Payoff or Pre-foreclosure Sale. This means that they will write-off, or excuse, the portion of your debt that exceeds the net proceeds of the sale. Ultimately, this can be a more cost-effective option for your lender than repossessing your home and selling it themselves.
You may find a qualified buyer who wants to assume your loan. However, your original contract may specify a non-assumable mortgage. Your lender may be willing to change the terms to permit an assumption, allowing the buyer to take over your debt.
Finally, your lender may agree to a Deed-In-Lieu of Foreclosure. This will allow you to voluntarily transfer title of your home back to your lender in exchange for cancellation of your debt. Usually, you must attempt to sell the property for its fair market value for at least 3 months before a lender will consider this option.
These alternatives will have some impact on your credit rating, but will not damage it as much as a foreclosure, an important consideration if you plan to buy another home when your circumstances improve. Foreclosure is a serious legal action that indicates to potential lenders that you are a significant credit risk. Unfortunately, the record of foreclosure may be shown on your credit report for seven years, plus 180 days from the last time the account was paid as agreed. When deciding how to solve your mortgage woes, be sure to weigh the effect on your credit.
By Brian Yui
SAN DIEGO, CA, October 12, 2006—If you’re thinking of selling your home, you’re probably paying close attention to the market. Now that the real estate buying spree of recent years has slowed, more properties are sitting on the market for months instead of weeks, while their owners continue to make mortgage payments, waiting for a buyer to surface. The cooling market means that buyers can be choosy. If you’re one of those time- and cash-strapped owners, there are several ways to maximize your property’s exposure and appeal to potential buyers.
A Critical Eye
Start with a good look at your property. Put yourself in a buyer’s shoes and be critical of what you see. Do the trees need pruning? Are the window boxes full of half-dead flowers? Have your carpets seen better days? Would a coat of fresh paint turn your home from dull to sparkling? Anything that you can do to make the property look well-loved and well-kept, such as stowing garden tools and kids’ toys, boxing up clutter and knick-knacks, and sprucing up the interior and exterior to maximize space and light will serve you well.
If you have busy wallpaper in bathrooms and kitchens, consider repainting in a warm white or ivory. Replace broken tiles and ancient appliances. Remember that this isn’t a long-term investment, so you’ll want to minimize your costs while reaping the greatest cosmetic gains. Pay attention to details such as squeaky floors, leaky faucets and creaky door hinges. While these may seem like small things, potential buyers may wonder what else is “wrong†with the property. Rearrange furniture to focus attention on selling points, like fireplaces or views. Clean out your closets and pantry to make them appear larger and more appealing. Bring as much light into the home as possible by ensuring that shrubs and trees are trimmed and all light fixtures have high-wattage bulbs. Finally, nothing turns off a buyer more than nose-wrinkling odors—smoke, pet smells, dampness and so on. Clean like there’s no tomorrow and deodorize furniture and carpets.
The Price is Right
Once your home is buyer ready, you can gain a competitive advantage by pricing it ahead of the market. The first two weeks of the listing are the most critical, as this is the time when the listing gets the majority of its exposure. Pricing your home right out of the gate will get it the attention it deserves from potential buyers.
Ask your agent for a list of comparables—the recent sale prices for similar homes in your area. Set your asking price at 5%-10% below the last comparable, particularly if you’re in an area where the market is heading south. If your home is vacant, this may be hard to swallow, but remember that the longer it takes to sell your home, the more money you lose by continuing to pay your mortgage, utilities, homeowners’ dues, etc. Is it really worth carrying the home’s expenses for three or more months to gain what might amount to an extra $5,000? You won’t have to go far to find stubborn sellers from past slow markets who stuck to their high price for a year more, servicing the mortgage and watching as property values took a nose dive. Every seller wants to get the most equity out of their home, but remember that time is money.
After you’ve set an attractive price, you may be tempted to sell the home yourself to avoid paying an agent commission. Think carefully about this, as it will limit your home’s exposure to potential buyers and likely take considerably longer to sell your property. Enlisting the help of an agent will ensure that someone is working on your behalf to market the property. Agents will put your home in the Multiple Listing Service (MLS) to get as much publicity as possible and minimize your chance of potential lawsuits due to the number of legal issues that can and do arise in a home sale.
Buyer Incentives
Consider offering buyer incentives to make your home irresistible. Offer to pay the homeowners’ association fees for a year, or, cover the buyer’s closing costs, which can range from 1% to 3% of the sale price. If you’re able, you might think about seller financing: the buyer makes a large down payment, around 20%, but instead of taking out a mortgage, the buyer makes monthly payments to the seller at a rate about 1% higher than the bank rate on a 30-year fixed mortgage. To incentivize agents, you can offer the buyers’ agents an above-market commission. Typically, agents can expect 2.5%-3%. If you offer 4%, you’ll be surprised how many agents will show your home.
Finally, be willing to negotiate with potential buyers. Offer concessions, such as making minor repairs, throwing in a piece of furniture that the buyer likes, or an allowance for new flooring. In a buyer’s market with slowing sales, you’ll need to be flexible if you want to take the money and run before home prices potentially drop.
As the real estate market is slowing nationwide, rental rates are on the rise. More buyers are sitting on the sidelines, which translates into more people renting while they wait for the housing market to bottom out. Adding to the rental crunch, condo conversions have turned huge numbers of former rental apartments into condos for sale. With fewer rentals and more people competing for them, savvy landlords know they can be selective and still get top dollar.
Here are some tips to help you get the best deal:
1. There’s no such thing as too much research. Begin your search early, 45 to 60 days before you need to move.
2. Have your credit report and a rental application ready to give the prospective landlord; include landlord references, bank statements and a copy of your paycheck stub.
3. Be sure to have enough money on hand for at least the first month’s rent and a security deposit so your bank can immediately draw a cashier’s check on your account. Nothing is as persuasive as money!
4. Be prepared to make a decision quickly as the unit may not be available the next day, especially if it is a good deal.
5. Try to find rentals offered directly by the owner vs. a rental company. Owners, particularly out-of-town landlords, may not price their properties at current market rates.
6. Look in the newspaper and Internet for special deals offered by apartment communities, such as a month’s free rent or reduced rates for longer leases.
7. Contact condo conversion projects to see if they will rent you a unit on a month-to-month basis until they sell the unit.
8. Seek out investors who tried to flip their properties or have your realtor look up homes on the market that are vacant. Make the owner an offer to rent their property; they may need the cash flow until it sells.
9. Many landlords don’t advertise in the paper. Drive through neighborhoods that you want to live in to look for rental signs and be sure to visit sites such as www.craigslist.org for owner listings.
10. If you don’t need to move, stay in your current rental as many landlords do not raise rents on a timely basis.
Finding your ideal home takes some work. Do you want a single-family home or a condo? How big a home and in which neighborhood?
Let’s begin by talking about different types of homes. Single-family homes are typically detached houses on a single lot. The owner is responsible for all aspects of the property, including the interior, exterior and landscaping. A condominium, on the other hand, is a real estate project in which the individual owner holds title to a particular unit in a building. Most condos have a monthly Homeowner’s Association fee that may cover expenses such as exterior building insurance, landscaping, pool and recreation area maintenance, trash, water and a reserve for future capital improvements to the property. Town houses are legally classified as condominiums, usually share at least one common wall, but are generally situated in rows so there are no units above each other.
You’ve probably heard the old real estate adage, “Location, location, location!†The location or neighborhood you choose will have the biggest impact on the price of the property. Whether you’re aiming for an exclusive blue-chip neighborhood or a lower-priced, emerging community, be sure to evaluate the area’s shopping and business services, entertainment, park and recreational facilities, public transportation, traffic congestion, noise levels, and the general ambiance. While some of these factors, such as the quality of the school district, may not be important to you, they could significantly impact the home’s resale value.
Speaking of resale, the longer you stay in a home, the better chance you have to make money on your investment. Generally, it takes at least three to four years to recoup buying and selling costs. Depending on how long you plan to stay in your home, make sure the home has the amenities that your family requires. For example, a two-bedroom cottage may be perfect for a young couple with no children; however, before long, the couple could quickly outgrow the space.
Smart buyers know that one of the keys to finding your ideal home is to prioritize your needs and your wants. Recognizing the difference between what you want and what you can't live without makes all the difference. Make a wish list of all your "wants" including size, location and amenities. Unless you have unlimited financial resources, you'll have to compromise here and there. Chances are that the number of bedrooms you need to accommodate you and your family is more important than the built-in barbeque or stained glass windows on your wish list. Keep your priorities in mind as you view homes with your agent.
It will likely take several weeks of research and legwork, but you will find a home that’s just right for you. Deciding how much to offer the seller and under what terms will make or break the deal.
Your agent should run a comparable market analysis for you on homes that have sold in the same neighborhood within the past year. Comparing the amenities, condition and location of similar homes that have already sold and then weighing those factors alongside the current market is the first step to making a reasonable offer.
Next, decide how much you are willing to pay for the home. Part of your agent’s job is to try to negotiate a below-market sales price. If you have your heart set on a house and you are prepared to overpay to get it, let your agent know.
One key to making a successful offer is to consider the seller’s motivations. Have they already purchased another home? Is a relocation or divorce part of the equation? Perhaps the seller wants to close escrow within a certain timeframe; if so, are they willing to take less for the home if you are willing to accommodate their requests.
Your offer to buy the home will be presented in a Purchase Agreement. The seller may submit a counter offer with his demands for price and terms. You can accept the counter offer or submit another counter offer. If and when you and the seller agree, the purchase contract and the counter offers are signed by both parties and escrow, or closing, begins.
Brian Yui
CEO, HouseRebate.com
Owning a home, whether it's a "starter" or a dream home is a goal shared by millions. The good news is that today, it's easier to buy a home than ever before. Loan programs have become more readily available, terms are negotiable and numerous creative ways to circumvent a large down payment are often possible. In fact, sometimes it takes less cash to buy a home than it does to rent an apartment!
There are several home buying fundamentals you should take into consideration when evaluate whether the time is right for you to buy.
Reasons to Rent
Most of us rent prior to buying a home. Eventually, most renters want to purchase property, not only as the realization of a dream, but also as a reliable long-term investment and hedge against inflation.
Depending upon your circumstances, there are both pros and cons to renting. As a renter, you need a security deposit but not a down payment or long-term financial commitment. You also have the flexibility to change residences with few costs other than moving expenses.
In higher priced areas, renting may even be less expensive than buying. Rent does not go up proportionally with the price of the home. For example, a $100,000 home may rent for about $800 a month, but a $500,000 home will likely rent for considerably less than $4,000 a month. If you can't afford to buy in the area of your choice, renting there and purchasing a rental unit in an area you can afford will bring you all the benefits of home ownership.
When deciding whether to rent or buy, the first step is to weigh the cost of home ownership against the cost of renting. When you purchase a home, in addition to your monthly mortgage cost, you accept responsibility for the payment of many expenses, which should be incorporated into your budget estimates. These expenses include property taxes and special assessments, home/hazard insurance, utilities, maintenance (landscaping, painting, etc.), and in many communities, a Homeowner’s Association Fee or membership fee covering recreational facilities and services.
Reasons to Buy
Home ownership provides excellent tax and investment benefits. Home mortgage interest and property taxes are usually tax-deductible. Additionally, as housing prices rise, homeowners can reap the benefits of paying a fixed mortgage while rents continue to increase in the same neighborhood. When the value of your home increases to the point at which you can sell it for more than your purchase price, that difference in value is called "appreciation."
When you own your home, you are paying rent to yourself instead of a landlord. Most homeowners pay for property by obtaining a mortgage; as they pay off that mortgage, they gain an increasingly larger share in a valuable asset. The best way to look at it is like a forced savings plan. When your mortgage is paid off, you will obtain more net proceeds when you sell your home.
Another advantage of owning a home is that you are not beholden to a landlord. You aren't subject to rent increases or eviction. You're free to redecorate and remodel and to choose your own contractors without the property owner's permission. Best of all, the value of those improvements becomes yours.
A Few More Facts About Renting vs. Buying
When deciding which option is right for you, use the following calculation: If paying rent saves 35% or more versus the costs of owning (mortgage, insurance, taxes, maintenance, etc.), renting is generally a better option. As you do the math, don’t forget that the interest paid on a mortgage is tax-deductible up to one million dollars, and that you’re calculating the after-tax expenditure of purchasing a home versus the after-tax costs of renting a home.
The length of time you plan to stay in a home should also influence your decision. It's usually a bad idea to buy a house that you will own for less than four years; costs of selling and buying are high, so if the home's value does not appreciate adequately before you sell, the consequence could be a net loss. Obviously, the exception to this is if your area is experiencing rapid growth and appreciation.
Finally, if you have past credit problems that remain on your record, it may be wise to rent until the issues are resolved. Otherwise, mortgage rates might be too high and the amount you can borrow may be limited.
The Bottom Line
Most lenders prefer that homeowners have at least three months of living expenses available after closing on a loan. Keep in mind that closing costs, which generally depend upon the location of the house, type of loan and amount of down payment, will have to be paid. Sometimes a buyer can negotiate closing costs with the seller and lenders and/or finance a portion of the closing costs as part of the loan amount.
The truth is that most people can afford a house valued at roughly 2 1/2 times their gross annual salary. Individual circumstances vary and can alter this estimate in either direction. For instance, if you have more money available for a down payment, a more expensive house may be manageable because your mortgage payment will be smaller. Or, low interest rates may encourage you to buy a higher priced home while high interest rates may limit what you can afford. Generally, lenders will allow you to pay no more than 29% of your gross salary toward your mortgage while keeping monthly debt payments to about 41% or less of your gross income.
Few accomplishments in life are as enduring or enriching as the experience of owning a home. Nevertheless, carefully weigh the pros and cons of both renting and purchasing before making any decisions. Don't be discouraged; there is a home out there that fits both your needs and your budget!