Buying or selling a home is among the most important decisions in your life.
Homebuying can be an intimidating experience.
That is especially true in today’s market where the opportunity to buy a home is clouded with a large inventory, fluctuating mortgage rates and terms, more complex situations involving short sales and foreclosure properties. In short, it is more technical than it used to be. It is best to organize your thoughts and to do some good old fashioned “number crunching”.
Ask yourself, and your buying partner(s) about the following:
Is Buying Better than Renting
The traditional question and answer is “Will you live in your next home for at least 3 years?” If the answer is “Yes,” you should probably purchase, rather than continue renting.” The problem is that property values are no longer on a steady, predictable incline. Also, in our area many folks are associated with military or with short term employment/contract situations which can call for a relocation with very short notice. If you haven’t thought this through ahead of time you can end up in a bind.
Expect to find that you will be paying out money on a monthly basis in either a purchase or a rental situation. Your objective is to choose the option that matches your needs for a place to stay and your overall budget. Establish and compare these two scenarios:
Buying a Home: The majority of your costs will be associated with the “front end purchase” and the “back end sale” of your home. Do the math on these and don’t hesitate to ask a realtor to assist you in forecasting the costs. The lender is also helpful with a “good faith estimate”. If you plan to stay only 2 years it will be unlikely that you can re-coupe the expenses of exchanging the property into your name and then into someone else’s name.
With a purchase you will have taxes, insurance, utilities and possible HOA dues. Don’t forget to estimate ongoing maintenance fees. There are tax advantages on the interest you pay, and there can be a build-up of equity, although that is no longer an easy expectation. In this case picture the property after three years of your DIY projects and improvements. Often called “sweat equity”, there are many projects that a homeowner can undertake that actually improve the marketability, and sometimes the sales price of their home. A good example is tile flooring in place of vinyl. There are others that can be very expensive and offer little or no return on your investment. A good example is a swimming pool.
Renting a Home: Do some research on rental property and, again “do the math”. Calculate a zero return on that check you will be sending to the landlord each month.
With a rental you will have a deposit and contents insurance. You will have an “as is” situation. Let me explain that. Just before moving into a rental, you will do a “walk through” of the property. Picture the property after 3 years with little or no upkeep, a hassle if there are any repairs during the rental term, and limitations on your freedom of use. Landlords don’t look for ways to spend money during the rental term. They usually have a crew go in and paint and repair “in between” tenants.
The longer you can live in the home the better. Take a look at the difference between a purchase of a $172,000 home and paying rent of $1,100 on a similar property, all over the period of six years. The purchase would give you nearly $33,000 in savings. That’s about $5,500 a year in “YOUR POCKET”!
| Buying: $172,000 |
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Renting: $1,100 |
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Year 6 |
6 yr Total |
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Year 6 |
6 yr Total |
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Expenses |
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Expenses |
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| Purchase Costs |
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Initial Renting Costs |
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| Down Payment (@10% |
|
-17,200.00 |
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Rent Deposit |
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-1,100.00 |
| Closing Costs |
|
-3,440.00 |
|
Broker’s Fee |
|
0.00 |
| Yearly Costs |
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Yearly Costs |
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| Mortgage Payment (772mo) |
-9,264.00 |
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Rent |
-15,302.00 |
-85,383.00 |
| Principal |
-3,931.20 |
-21,652.22 |
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Renter’s Insurance |
-202.00 |
-1,127.00 |
| Interest* |
-5,337.10 |
-33,957.48 |
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| Association Fees |
0.00 |
0.00 |
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| Property Taxes |
-2,092.00 |
-11,952.00 |
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| Utilities |
-1,325.00 |
-7,570.00 |
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| Rennovations |
-968.00 |
-5,533.00 |
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| Maintenance |
-968.00 |
-5,533.00 |
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| Homeowner’s Ins |
-891.00 |
-5,091.00 |
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| Selling Costs |
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-12,900.00 |
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Leaving your Rental |
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| Closing Costs |
|
-400.00 |
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Return of rent deposit |
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-1,100.00 |
| Remaining Principal |
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-150,347.78 |
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| Tax (if any) on Profit |
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0.00 |
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| Proceeds from sale |
|
197,800.00 |
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| Year 6 Totals |
(15,512.30) |
(56,124.26) |
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(15,504.00) |
(88,710.00) |
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| NET DIFFERENCE: |
(32,585.74) |
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Note that the annual cost between buying and renting (@15,500) are almost the same. But after six years the main difference is the improved value of the home.
Consult A Realtor: Many first time home buyers avoid contacting a Realtor because they dislike high pressure sales. However, Realtors have an advantage over traditional salespeople because they have access to the Multiple Listing Service, which is a database that lists roughly 99% of the homes for sale in a given market. This means that your Realtor doesn’t have to sell – he/she merely presents your options. The most important qualities to look for in your Realtor are his/her knowledge of your specific market and their willingness to understand your needs. Interview a few agents and choose one that will help guide you through the process. You’ll find the help & insight will be invaluable – and you’ll be glad you contacted your Realtor sooner, rather than later.
If you would like a template so you can do the math for your specific situation, give us a call and we will send it to you.
