nesting young 4s Ranch experiences and puzzling questions

[lindismith]

we moved out here last year, put some bids in and finally woke up and realized that no matter how much sun, waves, california burritos, and sunsets we have here. It is not worth it to live here if Real Estate is that much.

What a great line! I love being a Piggington!

[ibjames]

Thanks! While I am trying to get better on the statistical portion, at least I can bring colorful commentary to the table 😉

[sdcellar]

If I wanted you to buy and I thought it would motivate you to do it now by telling you that prices will be going up on the next phase, I’d do that (well, I personally wouldn’t, but not being a salesman, I’m thankfully not put into that position).

Heck, he might even believe what he’s told you or has been told that by the developer he works for. Too bad the market doesn’t appear to be supporting price increases.

I’ve been looking for a year or so myself and I’ve heard about summer incentives that would go away (and didn’t). Heck, early on and in a brand new development, the guy told a bunch of what turned out to be non-buyers that prices would be going up every phase around $8,000 (he was just responding to a question). Turns out, they haven’t sold many to date, and they’ve continued to lower their prices (i.e. more than once). And this is actually 4S Ranch that I’m talking about.

Don’t let a builder’s end-of-year sales drive push you into buying a house you will almost certainly be able to buy for less next year.

[bubble_contagion]

So the $730,000 purchase that may be made this weekend is based on an on-line Rent-vs-Buy calculation. The crazy things young people do!

[CardiffBaseball]

To the Original Poster at least tell me you have read the 4-Closure Ranch series on one of the SoCal Bubble Blogs?

[ibjames]

link of that blog?

[ocrenter]

nestingcouple,

there are a lot of neestingcouples like yourself, some make upward of $2-300,000/year combined, most are all holding off because we know the credit bubble is bursting. don’t jump until you read these:

4Closure Ranch Part I
4Closure Ranch Part II: Don’t Catch the Falling Knife
4Closure Ranch Part III: I Think I Smell a Rat
4Closure Ranch Part IV: What’s a Motivated Seller To Do?
Update: 4Closure Ranch Rat on Auction
4Closure Ranch Part V: Flip to Flop in 5 months

[PerryChase]

ocrenter, I love your blog. I read it periodically.

[nestingcouple]

I should have described my rent-buying calculation. I downloaded a spreadsheet template from Microsoft’s website, here is the detail:

Home Rent or Buy Analysis

Initial Assumption

After-tax rate of return on investments 5.00% (CD rate)
Marginal tax rate 35.50%
Estimated annual appreciation of home 0.00%
Down payment on home $140,000 (20% downpayment)
Estimated closing costs $5,000
Estimated purchase price of home $730,000
Monthly rent $2,800

Cost of Renting
Annual rent $33,600

Renter’s annual insurance premium
Total annual cost of renting $33,600

Cost of Buying
Mortgage loan amount $590,000
Annual interest rate 5.750%
Term of mortgage (years) 30
Monthly mortgage payment $3,443
Annual mortgage payment $41,317
Property taxes 12906 (=1.75% * loan * 1.25%)
Homeowner’s insurance $2,000
Maintenance $1,200
Opportunity cost of buying $7,250
Total cost of buying $64,673
Less Adjustments:
Principal reduction in mortgage $7,392
Tax savings of interest deductions $12,043
Tax savings of property tax $4,582
Total adjustments $24,017
Annual after-tax cost of home ownership $40,656
Less:
Estimated annual appreciation in value of home $0
Net annual cost of home ownership

Rent-Buying different is $40,656 – $33,600 = $7K

As first time buyers, I may have missed something, but I looked the formula behind the calculation and they seem reasonable. I really hope someone can correct some errors so the buying won’t look so reasonable/attractive so that I can convince my wife not to buy right now.
I’m so glad and thankful to see so many insightful comments, and I’ll tell my wife to read the forum and hopefully bring reasonable doubts to her.

[no_such_reality]

As first time buyers, I may have missed something

Yep, your current rent is $2000. Not $2800. That’s $9600 a year more. Your place versus buyer = $16,600 a year and counting.

Also, any chance of moving? Cost of selling… 6% plus carpet, paint, etc. ~$42,000+ or $6000/$7000 over 7 years. Possible $25,000 a year more if you move in 7 years or less.

Also, maintenance seems light. That’s $100 a month. It might be a new place, but as a home owner, a $100 run to Home Depot seemed to be common.

Does the wife want to “decorate” … $$$

Got all the Christmas, Halloween, decorations? $$$ Not as easy not participating if all the neighbors do.

Got furniture for new space?

As nesters, is the nest currently filled with Fledglings? Is it about to be? If not, in SD I find it hard to below you can’t get and keep a pretty nice place for $2000 or less.

[ocrenter]

perrychase, you are very welcome.

nestingcouple,

your calculations are correct. I know exactly the homes you guys are looking at. we did the same calculations and it was very similar. let me put in this senario.

same time next year, these homes are $600,000. assuming all other variables are the same, you can go in zero down and pay the same monthly. in fact, with your income bracket, you want to go in zero down.

at the same time, you still have $140,000 + in the bank. you wait until the true bottom in 2009-2010 and use that $140,000, split into 2, and purchase 2 $350,000 properties at 20% down. $350,000 at that time would probably get you a detached condo ~1,500 sqft, which would get ~$2,400/month in rent each. you can probably brake even or be a bit positive depending on interst rate.

So now you have 3 properties, one the same SFR you are considering, and 2 rental properties to own long term.

[nestingcouple]

$2000 is for the current apartment, which is nice and we really have no complain. If we do not buy, then we probably won’t take the trouble to move into a rental house. Yep, I should have used $2000 instead of $2800, but to be fair with comparison, it has to been about $2800 to rent a similar new house of similar size or smaller size in 4S ranch.

but I consider other expenses mentioned by no_such_reality like decoration/furnitures necessary and “good” expenses, since they’re part of owning a house/even renting a house, and do improve life quality.

[Nancy_s soothsayer]

I just skipped over your data. I did not do detail calculation to arrive at specific numbers, but don’t forget something: The tax savings are not dollar-for-dollar federal tax credits in calculating income taxes. Basically you have to spend three dollars to get one dollar tax benefit – that’s the gist. Also, with the monthly rental payment, you get shelter. The principal paydown should be factored in(not ignored or deducted) because it still adds to money coming out of your wallet, though you are getting shelter (altghough cheaper) as equivalent benefit.

Counting all the excess fluff as all consumer expense, to simplify the whole thing, principal paydown should also be added as consumer expense, not an “investment”. Don’t ignore it because it adds to your pain.

In addition, Mello-roos is not tax deductible. But everyone does it. Since you are high-earner, you start to pray you would not get audited so that you would not get exposed.

I don’t know if I am making sense to anyone – no big deal to me coz I get it. (And today I am lazy, excuse me.)

[ocrenter]

oh, one more thing. assuming I’m wrong and the price remain the same next year, you resume your original plan. One firm thing I’m sure of, the best case senario for the home builders is if the prices stay flat. there’s almost zero chance you are going to see appreciation over the next year. so you have nothing to lose waiting for another year but plenty to gain.

[nestingcouple]

Hi ocrenter,

Your way of presenting the scenario, especially the thought of zero down, provides really new perspective to us, we were only occupied with the thought to pay as much as we could for downpayment and maybe pay off in 15 years instead of 30 years. I appreciate your insights very much, and my wife likes your idea a lot. Your ideas are really brilliant, though we are not certain if we will be able to handle such heavy activities. Is this what you’re planning to do for the years to come?

[Author]

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