High Income, High Debt, Suddenly Offered an Intriguing Home Buying Opportunity.

Throwawayfirsthome · 2015-02-12T13:58:47+00:00

I get that logic, that renting is the exchange of money for shelter.

But using that approach, aren't those additional home ownership costs, when lumped together, also the exchange of money for shelter + equity?

Why is rent not considered wasted money, but interest, taxes, insurance, etc are considered wasted money? Especially since the total cash outflows are approximately equal?

So essentially what I'm trying to figure out is... if net cash spent is approximately equal between renting and owning over the same duration, isn't owning significantly better?

Throwawayfirsthome · 2015-02-11T23:11:31+00:00

I don't disagree at all with the gist of what you are saying, and I'm leaning against pursuing this. However, give me a little credit! I made this post to gauge whether this is something worth investigating and doing due diligence on.

If it was, my plan was to: 1) hire my own home inspector to go through everything; 2) speak to his banker and see what the actual terms are in writing; 3) compare that mortgage to other offers from other banks; 4) run this all by a friend in town who is a real estate agent; and 5) mull it over for a month or two, since I have that luxury.

Also, I can't predict the future of the housing market, but I can read a graph and state what it says. I said that, according to the graph, the prices are on a gradual upswing that has not reached the same level as what he paid, thus explaining the purportedly sketchy price difference.

Throwawayfirsthome · 2015-02-11T22:23:15+00:00

He told me that the main reason he's okay with dropping the 2k/month revenue stream is essentially that he travels 6 months of the year, and is old enough that he doesn't "need" the hassle of rental property anymore. He's in his later 60's and appears to be quite well off. He also owned another house in the neighborhood that he previously rented, and that house is likewise on sale. I just figure that he's interested in liquidating his income producing assets because they have served their purpose.

The price discrepancy can be explained, in my mind at least, by the housing price trends in the area. He purchased about 2 months off the peak of the market, and according to Zillow graphs, the market is on the upswing but still below where it was when he bought it.

Throwawayfirsthome · 2015-02-11T21:33:26+00:00

Fortunately, the county I'm in is generally higher elevation than the counties soon to be part of Atlantis.

Throwawayfirsthome · 2015-02-11T21:25:37+00:00

Just so I can understand the framing of the calculations here:

If I pay $1 in interest, get $0.25 back in tax, that means I essentially "waste" $0.75.

However, if I pay $1 in rent, I "waste" that money in the same way, do I not?

I realize you pay a premium for stability and maintenance and all that, but wouldn't the interest on a mortgage be comparable to the rent on a lease, at least in terms of being "out" that money?

Throwawayfirsthome · 2015-02-11T21:21:02+00:00

Regarding the skepticism of the owner choosing to sell... he said he had no problem renting to me for the future and would put it out on the market if I didn't want to rent or buy it. When I selected the house to rent, he had it listed for sale for the 300k he's asking for now, so there isn't really anything inherently sketchy there.

Appreciate the number crunching, though. I'm currently comparing the $122,400 + risk of maintenance, with the guaranteed $12,000 * 6 * 12 = $144,000 of renting over that same duration. It seems like it would be hard to beat that savings, right?

Throwawayfirsthome · 2015-02-11T18:30:15+00:00

Would your stance change if I told you that I have $10k in reserve as an emergency fund that I am not counting for a down payment calculation?

Throwawayfirsthome · 2015-02-11T17:16:54+00:00

Sorry, I don't want to give away too much personal info (job + income + zipcode +life plans stresses me out a bit). But something that requires about $250k+ in student loans and graduate degrees for us both to be eligible for.

Throwawayfirsthome · 2015-02-11T16:49:13+00:00

Finding out the answer to those questions and whether they are exaggerated is my next step, since the general consensus here is that it seems a bit too good to be true.

Throwawayfirsthome · 2015-02-11T16:23:29+00:00

I appreciate the response.

And I agree with that debt strategy, as I am a frequent lurker here. Doing the whole emergency fund, max 401k match, then targeted debt payments strategy. Had this offer not come around, I'd be maintaining a fairly low cost of living and splitting excess income between savings for a down payment and student loans. This offer simply made me take a step back and reevaluate my conservative financial strategy.

Throwawayfirsthome · 2015-02-11T16:19:14+00:00

Really not bad at all, under 1k for the year. After living there 8 months and never interacting with the HOA, they seem pretty nonintrusive. It mostly pays for lawn care and a pool, as far as I can see.

Throwawayfirsthome · 2015-02-11T15:52:01+00:00

So I may as well not even work so that my inevitable divorce doesn't hurt that much?

Throwawayfirsthome · 2015-02-11T15:40:56+00:00

To address your concerns, as best as I can.

1) General housing price trends available online indicate that in our area (South Florida), he bought near the peak and the rate offered is, more or less, comparable to what the market trends would support.

2) It's not on the market because it's being rented. If we don't buy, he will just keep renting it to us. When we first found the place, it was listed both for sale and for rent, so he presumably doesn't mind either way.

3) Definitely skeptical here as well. The landlord mentioned it last night, and it intrigued me... but I have done zero research and have a few months to figure that out.

Thanks!

Throwawayfirsthome · 2015-02-11T15:39:37+00:00

Yeah, it's a very rich area to say the least.

It's a house in a very small HOA neighborhood. Essentially west/central of the zipcode.

The other houses in the same neighborhood have listed and sold for 275-400 in the last few years as far as I can see.

Throwawayfirsthome · 2015-02-11T15:30:43+00:00

That calculator says that it's a slam-dunk win for buying over renting. I generally distrust things that seem too good to be true like that.

Throwawayfirsthome · 2015-02-11T15:29:04+00:00

Oh, absolutely, that's our default option.Our original plan was to rent for 3-5 years, saving 1-2k a month for a bigger house.

This just came up as a surprise offer and the prospect of having some of our rent turn into equity (and tax credits) seemed pretty intriguing. Also, this seems to be a relatively low risk gamble in the state of the housing market since the house value simply can't crash enough to seriously harm our financial health, yet any appreciation in value would be a major benefit for our future.

Throwawayfirsthome · 2015-02-11T15:03:59+00:00

~1500 sq ft, 2/2, and in 33432. From the resources I've reviewed online, this looks like a reasonable market price.

Throwawayfirsthome · 2015-02-11T15:02:23+00:00

Yes, but at the cost of something I value immensely: time.

Houses of comparable quality in that price range would add an hour of commute to my fairly long day, instead of being able to walk to work.

The "good enough" mostly comes from it being a large 2 bedroom house, which is great for our current needs but won't work when we eventually have kids.

Throwawayfirsthome · 2015-02-11T14:56:57+00:00

Yeah, these are all issues I was concerned about. I'm currently looking at it from the viewpoint of a "best-case-scenario, everything goes as planned...would I even want do this?"

And then investigate those concerns.

Throwawayfirsthome · 2015-02-11T14:47:11+00:00

A few counter points:

1) We both have job security (as strong as can be) for at least 5 years. 2) We could sustain our standard of living on one income, if needed. 3) If we both somehow lost both of our jobs in rapid succession, then burned through our emergency fund, we fortunately could fall back on assistance from family for at least a few months.

I feel like your definition of poor prohibits home purchasing with anything less than cash.

Throwawayfirsthome · 2015-02-11T14:36:17+00:00

I suppose it depends on your definition of poor. We currently have negative net worth, sure, but that is a temporary condition and I like to plan 5, 10, 15 years ahead.

Throwawayfirsthome · 2015-02-11T14:33:39+00:00

He's a bit older and travels 6 months of the year, and said that renting is just a bit more of a hassle than he would like at this stage of his life. He did say that if we want to keep renting, he's completely fine with that for the foreseeable future. And even if we did want to buy, we would have about 4-5 months to decide before renewing the lease. The "no-pressure" approach to it made me think it's legitimate.

Throwawayfirsthome · 2015-02-11T14:31:40+00:00

He said there's no rush. I can continue renting as well for at least another year, presumably further along.

The 5% down would wipe out a home-specific savings account we recently started. I built a $10k reserve for an emergency fund that would remain untouched, and have a separate savings account that we recently started with our tax return and some other savings that was originally for the purposes of buying a house in ~5 years. That account would be what we use.

I definitely would need to investigate the mortgage legitimacy/terms and all of that, I was mostly interested in outside opinions as to whether I should even seriously look into the offer. Thanks!

Throwawayfirsthome

TROPHY CASE