So you’ve been paying rent because the housing market has scared you, but a realtor has just thrown temptation in your way. A property similar to the one you’ve been renting has come on the market, and the payment is a couple of hundred less than your rent. Now it’s a no-brainer. Now is the time to buy- right? Before you sign on the dotted line, you’d better sit down and look at a few realities: [Thanks L!]
When Bill Douglass and his wife bought their first home, he budgeted for $250 a month for maintenance costs.
He soon found out that it was $300 a month — just to maintain the lawn.
“I have to admit, I was rather naïve about the costs involved in being a homeowner,” he said.
Two months after they moved in, a FedEx truck accidentally backed into the house, damaging the gutter. That was $900. Then they had a baby girl! It cost an estimated $10,000 for the first year of a baby’s life, according to this baby calculator. Then, the air conditioner went on the fritz. That was $8,000 to replace it. They soon discovered that their neighborhood is prone to power outages, so they needed to consider dropping $10,000 for a backup generator.
“Most people are unprepared for the big repairs — and even the small repairs,” said Guy Cecala, publisher of Inside Mortgage Finance magazine. “When the toilet starts flooding, you can’t call someone like you did when you were renting. You’ve got to fix it yourself.”
Diana Olick goes on to list “20 hidden costs of homeownership”, and it would be a good list to consider before making any commitments. I would add a couple that Olick missed.
1. ROI on your downpayment- In a declining market, what are you earning on your downpayment? The answer- less than nothing. You’d be better off putting your money in a savings account in the bank. For those who say, “Yes, but it will be off in the long term”, I would like to point out that if you can save money by renting, you’re better off financially saving the difference until the market starts to turn around.
2. The potential risk if you need to sell- Suppose you decide that you are in it for the long-term, so you don’t care if you lose money in the short-term. Then you have a job transfer, or heaven forbid, you lose your job. Now you could be selling at a loss. In a recourse state, you could be on the hook for the loss. If you have a large downpayment, you could be kissing a lot of that goodbye. If you have a spouse staying behind to sell a property, you could be looking at a long separation. If you end up walking away, you could end up with a big ding on your credit.
I’d rather own a house than rent, myself. I love to redecorate and remodel and redo the landscape. I’ve been a renter for the past five years though because I’ve got to consider things like braces and college for the kids and with luck, a comfortable retirement for me and my husband. If you can make the numbers work while owning a home- good for you. Just make sure you can make the numbers work before you “get off the fence”.
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Too bad the Douglass and thier Realtor neglected to obtain the following:
A solid Home Warranty. Would have cost $400 and completely replaced the HVAC unit had it failed in the first 365 days. The seller usually pays for this.
Homeowner’s insurance. They would retain an attorney for the the Douglass’s and seek damages from FED EX. Their driver could have accidentally killed a child. Gutters are hard to hit.
The $10,000 recurring annual expense of a child can be prevented in a variety of ways.
Life comes down to two options: Pay Interest (or someone else’s interest in the case of rent) or Collect Interest. The quicker you reach the collect stage the more set in life you are.
Seriously???
I respect serious commentary – and this can’t be serious.
Every example cited is hogwash!
$300 a month for lawn care? Do you really believe renters get that kind of service, or have lawns worthy of that much expense?
$900 because a Fedex truck backed into the house? Like Fedex isn’t responsible for that?
$8000 for an air conditioner? Do you really think that landlords buy top-shelf variable-speed high efficiency units for income properties? They don’t – renters get the cheap stuff.
$10k for a generator? You think your equivalent rental will have one? They don’t around here!
Interest on your downpayment? What are you getting now, 0.25% on safe investments?
How about a real world example of the other side?
I sold an old pickup to a gentleman on Craigslist this week. He lost his job last year, and his truck got repossessed. He’s found another job, and he’s doing fine, other than the credit ding. He’s paying $1050 a month in rent, and the house next door to his just sold for $79k. Buying that house would cost $600 a month, soaking wet – That’s $450 a month, for someone who doesn’t have much “extra” cash laying around.
Came here to say this. This example homeowner is an idiot and gets what he deserves.
Zork-
I have to agree that there are deals where owning beats renting. One example is the investor that can rent out his home on a cash positive basis. I was reading a post somewhere by a landlord that said that even with declining home values, his renters were going to have the property paid off in a few years, so he didn’t care about the depreciation.
My point remains that it’s important to do your homework. I know some folks who’ve said they expect their property to depreciate, but they can afford it and the deal was worth it to them. I can understand and support that- just as long as they are making an informed choice. Given how many foreclosures are out there that represent a hit to taxpayers, I’d really like to see more people do their research before closing.
Zork-
And have to admit that I thought $300 for lawn care was a poor example of a homeowner expense. I doubt that vast majority of homeowners pay a landscaper to take care of the yard. Additionally, for those of us that rent a single family home, we are responsible for the yard, so there’s no savings here. It sounds like this guy might have been better off with a townhouse or condo if he didn’t have the time and money to pay someone to do the yard.
I am a review appraiser, looking at appraisals all over the United States. I have seen perhaps 6 backup generators in 10′s of thousands of appraisals I have looked at. $300 per month for a lawn? What is this, a 10 million dollar house?
I purchased and paid off a home that is one step above a “starter home.” Made extra payments. Today, no monthly payments, no debt. We have friends with larger more expensive homes and mortages. I sleep better.
I agree with other posters, the numbers don’t add up for this guy.
What’s more interesting, though, is this a “it’s better to rent” article from a mainstream media outlet. For those that have seen this graph, then sentiment towards housing must be reaching the bottom. Progress!
It is quite an imperative reminder, but sometimes when we think we’re being a given a great deal, all rational thoughts fly out the window. Which is why it is necessary to have someone who’d curb our buying desires. Perhaps assign your partner to temper it with facts and research, if and when you have a huge urge to spend on something.
As a Realtor and real estate broker who specializes in short sales, I am sick and tired of the typical rent versus buying discussion which tends to focus on the monthly savings and the ability to decorate a home and “make it yours”. I am glad this post addressed far more serious issues.
First, I would like to applaud Ken who stated “I purchased and paid off a home that is one step above a “starter home.” Made extra payments. Today, no monthly payments, no debt. We have friends with larger more expensive homes and mortages. I sleep better.” Ken’s experience is exactly the reason that home ownership really was a good “investment”. Home price appreciation (or inflation depending on your view) was a nice bonus, but the real investment aspect of buying a home was that eventually you would not have monthly payments (except for real estate taxes, insurance and association fees, if applicable) and, therefore, you would be much better off than your contemporaries who rented all those years. This requires long-term ownership of the same home since home selling and moving costs eat up most equity gains in most market environments. The problem is that most home buyers move every 5-10 years so they never actually get the full benefit of long term ownership, and, therefore, have perpetual mortgage payments. As a result, most home buyers will not share Ken’s beneficial experience with home ownership.
Renting and buying a home are completely different. Renters may pay more per month, but have the ultimate in flexibility since they are either tied to a property on month-to-month basis, or at worst a 12 months basis. Even then the lease can usually be broken by the renter agreeing to move out within a certain time, cooperating with the landlord regarding their efforts to re-lease the property and forfeiting some or all of their security deposit. In other words, the consequences for a renter who needs to break a lease are minimal. Compare that reduced flexibility to that of a “homeowner” (I use “” since very few home buyers actually own their home regardless of what they think – in reality they just rent the home from the bank instead of from a landlord) where the “homeowner” is needs to sell their home, and, unless the market has increased by at least 10%, that “homeowner” will end up digging into their pocket to pay the shortage, loses part or all of their down payment, or sells via a short sale (and still possibly has to contribute something) and incurs damage to their credit that will last for 2-3 years. Therefore, the decision process of renting versus buying must include the person’s residence time-frame (if they will probably move in 2-3 years than except for bubble type markets buying a home almost never makes sense) and their view of the housing market. Since most people buy a home thinking they will be there for more than 5 years, it really is the unexpected life events that put them into financial distress (i.e. having a baby and needing a bigger home, a disability requiring a different floor plan, change in marital status, job transfer, job loss, illness, income curtailment, etc.). Since most people can can expect one or more of these types of events to occur in any given 10 year period of their life, they absolutely should factor this into their rent versus buy decision. Unfortunately, most do not, at least until it has happened to them at least once. Given that the home ownership time frame is not really definite, the rent versus buy decision then really comes down to the person’s view on the market. Right now, it is clear to me that home prices are headed for a second decline (the infamous “double dip”). See my blog posts, US Housing Market Facing Doom and Home Prices Decline Again, for my view on home prices. Given this view, it would make little to no sense to buy a home unless that home purchase was substantially below market, or you were able to buy on an “all cash” basis thus not having any monthly payment so the non-monthly payment savings would exceed any home value decline. Since most buyers are not in this position with nearly 30% using FHA loans and another significant percentage buying with other low down payment loan, it is clear that many home buyers are almost betting exclusively on another run up in home prices (whether they know this consciously or not). As a result of this bet and my view on the housing market, I believe that there will be a lot of short sales and foreclosures over the next several years, and many of these financially distressed home owners will be the same ones who thought buying made more financial sense than renting (that is until they need to sell their home).
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