HELP – Considering buying – Deal or No Deal???

[23109VC]

I have posted here before with a lot of “what if” scenarios surrounding the possibility of buying the home I am currently renting.

Well, the “what if” has turned into a “deal or no deal” situation. My landlord has called me several times – always wanting to work out a deal. I’ve always been reluctant to buy – and have repeatedly pointed out my belief that the market will degrade further – making buying a bad idea. I have always said, it would have to be for a price that will withstand future drops – and renting is cheaper.

Here is my dilemna. My lease is a few months from expiring. The landlord called and said “make me a lowball offer”. He flat out said he wants to get rid of the house.

The home is in Temecula. In a subdivision called Harveston. It is 1900 sq ft. 3 BD, 2 BA. Built by Lennar in 2005. It has all the usual “upgrades” you find in many homes up here – extensive tiling, granite, nice counters, he has done the entire backyard – very nicely. Shutters throughout. The home was never lived in, I am the first person to live in it. It is totally complete – it needs nothing. It is very nice, in a very nice location within the development. it has a nicely landscaped and very private backyard..one of the few homes in the area with no rear neighbors..backs up to a greenbelt..so there will NEVER be rear neighbors..very peaceful. Lots are small…which is a drawback.

The last “comp” which was identical to this house sold about 6 months ago or so for $430k. I believe the owner bought ofr about that much.

I told him renting was cheaper than buying, and while I very much liked the house – it was simply cheaper to keep renting than buying.
I told him unless the price was around 300-325k, it wasn’t worth buying.

He called back and offered me the property at $350k.

I am awaiting his “counter offer” via fax.

I think he would proably sell for $325…or $350k plus HE pays closing costs.

My big Million Dollar question is – am I insane for thinking of buying a 1900 sq ft. home in Temecula for #325-350…or is this actually a decent deal.

I have talked to a few realtors – just to ge an idea toward what they think the house is wroth and I have been told anywhere from $400-425 would be a “steal”. But that’s realtors.

We only pay $1400/month in rent…although I candidly think he priced it too low for the rent. Apartments rent for that much here….I honestly think the “fair market value” for rent on a home of this size/quality is probably more like $1600-1800.

I am relucant to post my actual address on a public forum like this… BUT…here are similar sized homes in the same area – comparable condition, upgrades, etc.

this house is within walking distance. mine is a ONE story…which I MUCH prefer..but this two story listing looks VErY similar inside….

http://independencerealty.idxre.com/idx/detail.cfm?cid=2445&bid=21&pid=T709516

this next one – also close by. quite a bit larger…but similar in terms of upgrades and look/feel. same builder/tract. (this home is also listed for rent at $2375/mo)

http://independencerealty.idxre.com/idx/detail.cfm?cid=2445&bid=21&pid=T685713

another one…same area. $1750/month rental. great price for size/area of home

http://independencerealty.idxre.com/idx/detail.cfm?cid=2445&bid=21&pid=T717408

here is another one. same development, same builder. a bit larger. the first few photos of this house look just like mine….the latter photos are of the common areas and lake that is int he middle of the development…my house is a 2-3 minute walk from the lake… (great location w/in the development). this one is listed at $465..and it’s actually SMALLER than mine. mine is just under 1900 sq ft. and is a one story..which I personall think is better. it feels bigger than it is being more spread out on one level vs. being a two story….

http://independencerealty.idxre.com/idx/propertymorephotos.cfm?cid=2445&pid=T681915&bid=21&pt=SFR&actv=0

one more…. similar size to mine. once again, same builder, same tract….same look. $469k

http://independencerealty.idxre.com/idx/detail.cfm?cid=2445&bid=21&pid=T710492

Bottom line is that many of the homes in this area that are very very very similar to mine are listing for $450ish…. and are virtually the same in terms of looks/size/upgrades.

the owner of my house was an employee of the builder…Lennar..so he must have got some kind of employee discount..and the flooring/landscaping/shutters/etc…were probably tossed in for free or dirt cheap… i pulled up the mortage via propety records and I believe the owner has a note for exactly $350k…but the sale price shows $440k…so I believe he either put cash down..or got a discount of some kind.

if prices keep falling, and a house like this is eventually only worth $200-250k…then paying $350k now isn’t such a great deal. if prices all….and never get much below $300-325k…than buying a house I like, not having to move, keeping mykids in the same school…liking where i live..etc…are all worth something.

the house is by no means my “deam” house. if my wife and I could have our cake and eat it too..we’d get something with an extra bedroom. we have two kids, with one more coming..it’s only a three bedroom..and we’d like to give each kid their own room..but a bunk bed is not a bad thing either….

the cost of buying at 100% financing… vs. renting at $1800/month….makes the rent/buy decision hard. the costs are very similar. I calculated that if I do a 30 yr fixed..I save *approx* $600-700/month on my taxes…and would pay about $300/month to principle. I believe…rough guess right now..that to buy at $325ish would make my total carrying costs roughly $2500-2700/month. minus the tax savings…I’m pretty close to what it costs to rent.

someone give me some suggestions. ultimately, my wife and I will make up our own minds…but I respect a lot of people on this board and value your opinions. Many of you are much smarter than I am when it comes to RE and the market.

Anyone care to chime in?

thank you in advance. buying..especially in this market is a BIG decision…and I want to make the most informed one I can. so fire away with ideas, suggestions…thanks!!

[sdrealtor]

Only you can decide what is right for you to do but here is something else to factor into your decision.

A single story home generally lives about 10% to 15% bigger than it is because there is less space lost to hallways/stairs vis a vis a 2 story house. So at the very least you should be comparing a 1900 sq ft home with a 2100 to 2200sq ft home. Also single story homes are in far more limited supply while being in relatively limited demand. Builders hate them because they take up a much bigger footprint and build them because cities force them to. Throw in rising demand from soon to be retired boomers and you have a safer bet with one over the long run.

Not that you should run out and buy because of this but it is very important information to understand and apply to your decision making process.

[Anonymous]

I was in the same situation as you several months ago. I ended up buying a 3 BR, 2.5 bath 1900 sq. ft. brand new house that looks very similar to yours (granite, stainless, hardwood floors, etc.) in a close-in SD neighborhood for $105K less than the neighbors on either side of me paid 3 months earlier for basically the same house. It was year-end and the builder was ready to unload the house and close out the development. Could I end up underwater? Sure. I may very well. But I felt like I bought at a pretty steep discount from current comps that will withstand much of the coming drop, plus I could rent out the house with minimal monthly loss. And here’s the kicker: I like the house, I need a place to live, and I want to settle down and stay in one place. Don’t be afraid to make the same decision if you think it’s right for you. By the way, that’s a nice-looking home. If you decide to buy it, enjoy it and don’t look back.

[JJsqueeze]

It sounds like you have a tough decision on your hands. If I were you I would start by establishing the true current price for the house. This will NOT be done by looking at listings. You will need to find the actual sales price. There are many ways of doing this, and I am sure that someone else has a better way, but the tool I use is quick and dirty. I look at Zillow and use their comps to the house. This will give a very long list of many properties that are not really comps. They are simply in the same city. It is pretty easy to then save the file as a text file, import it into Excel and crunch it down to a list of true comps based on square footage. It will still be incomplete because you won’t know if there is a swimming pool etc., but for a place like Temecula, square footage is probably going to get you where you need to be. Once you do this, drop the number another $5-10K to account for the fact that the selling price tends to have some sort of incentive buried in it these days. This will probably land you at about $380-$390K for that house right now. Then it is a simple task of looking at buying a house now for what will probably be 10% under market or waiting for a better deal.

The other side is the hard part and what you will decide with yor family and that is the value you place on the schools, crime rate, hassle of moving etc.

I have done this exercise with my situation and I have set the bar at 10-20% below current market value for my target neighborhoods as the point where I think the risk reward ratio is balanced and I am willing to buy.

One last comment, the 100% financing you mentioned should be a red flag that the timing may not be right. If you can afford 100% financing on this house, then you can also afford to save for a down payment and wait for what are probably better options in the future. I would say that if I were in your shoes I would be sitting tight and saving.

Good luck.

[recordsclerk]

I don’t think there is a right or wrong decision to your question. There are many positives and negatives to look at. You love the home, but it may be too small in the near future. You can always sell it to move up, but it may be hard to sell a home in Temecula in the coming years. If values go below what you owe, you won’t be able to sell it unless you come up with the difference, so you may be stuck in a home that is too small. Can you continue to live there if you’re stuck. Buying a home in this market may seem foolish to many people, but if you love this home and get a major discount, it may not be a bad choice. You may want to ask yourself, can I truly afford this home. Can you afford to make extra payments to buy down the principal and avoid being upsidedown. These homes will never go below $200K. Are you willing to take a $100K loss. On other hand these homes may only drop another 10-20% and you would be fine. You would be living in a home you love, you won’t have to move your family.

[surveyor]

dilemma…

Based on what you’ve said, I’d buy it. The rent cost/buy costs are almost equal, and you could probably even lower the cost of ownership some by accessing some of the useful tax deductions, such as the home-office tax deduction (if you have your own business).

As long as you can afford the expenses, you should be fine. If you can’t hack a 30 year amortized, go for a 10 year interest only.

As far as getting a larger home in the future, if you can’t sell it, you can rent this house out and get the tax deductions for depreciation (which would produce a small amount of cash flow), and then get the larger home (and you would even be able to justify the larger home’s home-office tax deduction).

I think you’ll be fine, but think long term in terms of your loan. As long as you can keep it up, you will be able to get ahead. Having a house isn’t guaranteed wealth, but it does allow you to access the best tax deductions.

[unbiasedobserver]

23,
I have a simple solution for you. First though, I’d say the ‘value’ of your home once you throw out fraud, loose lending, reckling borrowing, and comps based on all of these is probably about $120/sqft, or low $200s. However, it looks like you may possible be in a situation where you could actually buy the house below today’s market value and sell it for a quick profit (no I’m not a flipper, but here’s what I would do). Invite back those realtors who said it was a steal at 400-425 and several more. When one tells you it’s a steal at 425 for example, tell him you will make him the deal of a lifetime and sell it to him for 400 and ask how soon he can close. Do this several times knocking off 20-25 grand off the “steal” price. Having known several realtors, they are always looking for a truly good deal for themselves. If you get no takers above 380 (which I suspect you won’t), go find yourselve another place to rent.

[PerryChase]

Survey said America’s “faith in home values persists.”
http://www.latimes.com/business/la-fi-housing11apr11,0,5209585.story?coll=la-home-headlines

I’d wait to see cracks in that confidence. That will determine how low housing will go.

Think about it, if it’s too good to be true, it probably is. Why is the landlord wanting to sell to you if he can get $100k more by selling to someone else (ok, $50k after selling costs)? The truth is that he can’t because the Temecula market is flooded with inventory.

Landlord are not in the business of “giving away” $50k just because you’ve been a good tenant.

[Bugs]

If you’re prepared to ride out the cycle then $325k may not be a bad buy. It does represent a 27% decline off peak, and even the most bearish among us would put that at or past the halfway mark of a catastrophic return to trendline correction. You might want to bear in mind that similar homes were selling for about $150k in the mid 1990s at the bottom of the last cycle. It won’t get that low this time, but the low $200k range is not beyond the realm of possibility.

The trick is trying to figure out how long that cycle will take to play out. Is 8 years too long for you to stay in that house?

You want to keep in mind that if the R-T-T correction does follow through your position will very likely be underwater for a while. If mortgage interest rates go up during this period the trough might last for several years.

Personally, I’d hold out. There are going to be a lot of foreclosures in the Temecula area before this is all over. The only positive on your current offer is that interest rates are really low right now, and they probably won’t be as low by the time the market bottoms out.

[gn]

An identical house sold for $430k 6 months ago. Since then, prices have gone down. Currently, the most it can sell for would be ~$400k.

If you buy for $325k, you’re getting a $75k discount (at most). The effects of tightening lending stardards are just starting to kick in. I think this “$75k cushion” would last for 18 months in this downturn. By late 2008, you’ll start losing money. Will you be OK with that ?

It’s very likely that this correction will continue until 2010 (and possibly beyond).

Also, the fact that you have more than one kid tells me that you’ll like need a bigger house within 5 years.

[NateK]

IMO…Anyone doing 100% financing shouldn’t be buying a home. Don’t take this the wrong way, But you have 2 kids and pay $1400/month for rent and you have limited savings in your pocket. What makes you think that you can keep paying a mortgage comfortably at around 2700/month with a 3rd kid on the way.

I just think you should move to a comparable place and rent. Save that 700-900/month, for at least 3 years, which would give you over $30K easily plus add the extra savings that you should be putting away during the same time. And then you should have a decent downpayment. And then try and enter this market. I think you’ll be pleasantly surprised by then with a lot more options to choose from.

[PerryChase]

Like Bugs said, prices in the low to mid $200k aren’t beyond the real of possiblity. I would even go as far to say as that’s likely to happen.

Watch the market and wait until you clearly a bottom — RE prices are sticky so you’ll have plenty of time to buy. Then buy even if interest rates are relative high, compared to today. The when rates go back down again (as they invariably fluctuate), refinance at a low rate with a low loan balance.

If prices continue to drop then you could even buy that 5-bedroom house that your family needs. Sounds like you’re a family man. It’s better to buy a house and stick with it rather than buy and sell and incur all the transaction costs.

[surveyor]

caveat: completely insane suggestion….

certainly not for the conservative lifestyle – you could agree to buy it for $325k, and ask for a loan that reflects 80% of the probable appraised value of $469k (which is about $375k).

Take the cash from the closing (probably around $50k), buy a cash flowing investment property (suggestions: tennessee, missouri, nc, sc or georgia). For $50k, you can probably get a $200k four-plex that cash flows around $500/month.

So your estimated mortgage payment for the $325k is around $2100. Your $50k is generating around $500/month in cash flow. Actual mortgage cost (not even counting taxes, hello), is around $1600. This $1600 is actually lower if you compensate for the tax refund you would get (my estimate is around $3000/year if your tax rate is around 33%, which translates to 250 per month).

Your actual mortgage could be around $1350.

Did I mention that this would be risky?

It’s what I’d do though. (heck it’s what I’ve been doing, hahaha).

Of course, everyone thinks I’m crazy…

[hipmatt]

As long as you can afford the expenses, you should be fine. If you can't hack a 30 year amortized, go for a 10 year interest only.

Horrible advice!

Remember that Harveston has high HOA and really high taxes along with the really small lots.  You will have to live with this for a long time if you go ahead and buy it.  At 350k you will be paying $7000k per year in taxes and another $1500 in hoa.  Thats over $700 per month even if the house was paid off.  I just think thats high because the last home I owned the taxes were $2200 per year and $35 hoa instead of $130.  I also rent in Harveston in Chatham, I do like the houses, but I wouldn't buy here  for the reasons listed plus the yuppie factor is really high here which I honestly don't care for.

Good luck, for $325k or less, it is a RELATIVELY really good price! 

[PerryChase]

Surveyor, I’m not sure how you make the out-of-state property cash flow. With travel expenses and management fees, your profits would get eaten up very quickly. I could see if you have relatives in the low-cost states and visited there frequently.

I thought that you could get cash back of a max of 3% of the purchase price. But nothing prevents a refi and cash out later.

[Author]

Posts