Wednesday, August 27, 2014

Home Buying 101

About five years ago we purchased our first home. Here’s a little bit of what I wish I knew then BEFORE we purchased our home.

If you know you are not going to stay in a home for at least 5 years DO NOT BUY! I didn’t know this even though I did a lot of research prior to buying. We knew we had about 3 and a half years and thought that once Jared was in his last few months of residency we would just list the house and boom it would sell. WELL, we listed the house for 3 months prior to his graduation and received not one offer. Not even a low ball offer! We found renters at the 99th hour that paid for our mortgage, property taxes and homeowners insurance. That was a blessing. TODAY our home is back on the market and we are looking for renters. We have no idea if it will be sold or if we will find renters in the next 10 days. Once September 1 reaches we will be footing the bill for everything and wondering if and when we will be relieved from this burden. Research shows that it takes about 5 years for you to break even with your home…NOT make a profit, but break even! Let’s think about this for a moment, if I buy a house for $200K and sell for $200K, why do I need to wait five years just for that to happen? Well let’s look at a breakdown of the expenses we had in just our 3 years of owning a home.

  1. The first unexpected expense that we absolutely were blindsided by was lawn care! Coming from the Caribbean we had no idea that you actually had to take care of lawn! We didn’t even realize we had to water the lawn! Isn’t that what rain is for? Haha! So we had to get a lot of lawn supplies, hoses, sprinklers, lawn mower, spreader, fertilizer, lime, seed, pesticide, and the list goes on and on. Over the three years we spent somewhere in the thousands. After you get about $500 in supplies, estimate about $50 a month to treat and feed the lawn, $100/month if you pay someone to mow the lawn twice a month (we now have to do this since we are no longer there) and another $250 twice a year to aerate and seed. Since the summer heat can kill your lawn, aerating and seeding in the fall is a must! And if you live in an HOA community they will let you know AND fine you if you don’t have your lawn up to scratch. Not to mention your water bill increases if you water your lawn regularly. Add $50 AT LEAST to your water bill about 6-8 months of the year. You can easily spend $1200-$2200 a year for lawn depending on how much you do yourself! YIKES! AT the very least allocate $100/month in your budget if you are going to do your own lawn care. That should take care of quarterly supplies, seeding, watering etc. More if you pay someone. And yeah, we were the ones who said, oh we would do it ourselves, until we realized it was too much…Mowing is one thing…that’s easy…Everything else can be tedious.
  2. Speaking about HOAs…I had NO IDEA how much power an HOA could have and that crazy people…aka your neighbors…can make or break an HOA. I had the unfortunate opportunity to sit on my HOA board for one year. It was a three-year commitment and I limped my way to one year because I could not take it anymore! My major disappointment with my HOA was the draconian attitude of some of the board members. Did you know that the law allows an HOA to foreclose on your home? Meeting after meeting we had to vote whether to put a lien on someone’s house, or follow the next step and send it into foreclosure. All because they didn’t pay their HOA fee of $175 a year…Which turned into late fees, plus attorney fees, plus legal fees…Before you knew it, their $175 bill turned into $1,400! And for $1,400 they will put a lien on your home.  If you do a Google search online you will learn of a lot of horror stories of HOAs abusing their powers…but legally able to do so because the law sides with the HOA and not the homeowner! Want to plant a rose bush in your yard? Be careful! The HOA may deem it unattractive and force you to remove it. Want to expand your driveway…that’s a no-no…Because if we allow A to do that, they B, C and D will come and ask us to extend their driveway…Like really!? Ideally I would like to live in a community that does not have an HOA…But it’s a catch 22…Cause then you can end up somewhere where people cause the neighborhood to look “run-down” thus decreasing your property value. Just make sure to read the rules and regulations and be diligent about following those rules. Also note that an HOA can levy assessments to repair the pool, build a clubhouse etc. So you may start with an HOA fee of $100 a year and that can turn into $100 a month should they decided that the community should repair the clubhouse. The best you can do is to be aware and be active. You have a vote so let it count! As we speak, my HOA is putting a vote to double our HOA fees…And we don’t have a club house or anything special that other communities have…Why are they increasing our fees!? I have no idea!
  3. Loan type, we got an 80/15 loan.  Five percent down, eighty percent fixed and 15 percent interest only. WE did this to avoid mortgage insurance, which made our overall monthly payment about $150 cheaper. For our next home purchase, per the advice or white coat investor, we will put down a 20 percent down payment on a 15 year fixed loan. We would not only avoid mortgage insurance but also, but pay significantly less in interest over the term of the loan. Not to mention most 15 year loans are at least one percentage point cheaper than a 30 year loan. I would only suggest doing a 15 year loan IF you can comfortably afford the payments. That was not an option for us at the time…
  4. Speaking about payments…before you purchase a home, ensure that your first priority is your emergency fund. Many financial experts suggest your emergency fund should be at least 3-6 months of expenses. My personal goal would be 6months to 1 year! I cannot emphasize how important an emergency fund is and how it has come into play in our lives. When we moved to FL we thought my husband would start working pronto. Six weeks later we were wondering when he would actually start working! It’s a classic example that life does not always go as planned. We had visa issues then, in another scenario its our current home not being rented out…At any point you could loose your job, or have a major health emergency that can put you out of work or bankrupt you completely. I know we live by faith, but also remember that we are supposed to be wise! If you don’t have 3 months of emergency savings you are probably not ready to buy a house. Because the moment you cannot make your house payment it’s a whole can or worms…From bankruptcy, bad credit, and foreclosure.
  5. Expect the unexpected. We purchased a new construction home…The idea of buying a new home means that you should NOT have any major expenses in the first few years! NOT SO…Our AC went out after a year and a half. That was $1200-$2000 in labor expenses! Thankfully the AC was still under warranty but geeze, labor is a killer. Then after a year our garage door just stopped working. The price to fix it was the cost of the garage door! $400. Then when we left something happened to the AC again. And NOW the latest and greatest…our neighbor decided to landscape his yard in such a way that causes our yard to flood! To fix, $3,200! That’s over $4800 in less than 5 years. Under no circumstances did I expect this! Thankfully we continued to save for our home emergency fund after we purchased, but yikes it still hurts…Especially the drainage issue! Lesson to be learnt? You MUST budget for repairs. And by comparisons those expenses we incurred are far less than others have had! If you buy an older house, start saving to change the roof etc. Thinking of buying a house, save at LEAST $200/month for expenses. Also general upkeep like cleaning gutters, servicing AC/heat units yearly, termite/pest control…And don’t skimp on that either. I had a friend who didn’t have the termite people come out every year and ended up with almost $10K worth of repairs after they found out that the termites were eating away their foundations! Honestly, those types of regular “routine” expenses I had no idea about.

I think there is a pull that everyone feels at some point or another to purchase a house. Quite frankly I feel that pull right now even though I have an unsold house in NC and it’s not in our best interest at this time. I think about how old we are and how long it will take to pay off our home. I think about the rising costs of interest rates. I think about “wasting” money by renting…

But consider this…when we purchased our home at $215K, we put down $10K for our down payment. Our expenses for lawn care and repairs easily add up to about $9K. Updates to our home (painting and blinds) averaged about $2,500. Out of a $1300 payment, less than $300/month went towards the principal. Added to that it will take approximately $12K to sell our home (6% for realtor costs)! Let’s analyze:

Expenses: $34K (Lawn care, realtor, repairs, paint, blinds)
Down payment: $10K
Equity: $14K (from mortgage payments)
Tax savings: $5,500 (over a four year period)

How much would I need to sell my home to break even? Let’s take into consideration that if I rented a house I would not be responsible for any repairs, lawn care, or updates to the home such as painting etc. In order for me to break even I *think* I should get back everything I put into the home. Expenses, down payment and equity! That would be in the perfect world…But I would need to sell my home for at least $249K. If I say, okay forget the equity, how about I get back just expenses and my down payment I would need to sell for $239K…OK, how about I say just give me back my down payment! I would need to sell for $213K. And this does not even factor if I have to pay the buyer’s closing costs and other fess…and that could easily add up to $6K.

So how would it compare if I rented a house similar to mine (not a cheaper house).

Mortgage payments - $63,000
Rent - $74,400 ($1550/month)
Down payment - $10,500

Repairs/Maintenance - $34,000

TOTAL COST= $107,500

SAVINGS: home buyers credit and tax savings: $13,500

NET cost: $107,500-$13,500= $94,000

There is a $20K difference between renting and owning. If I can sell my home for $223K and not have to pay any closing costs or additional costs then I can “break-even” from the rent vs. buy perspective. Then we can say it would have been the same as renting…But in my case it actually cost us to buy our home and we had no idea that would be the case! Best case scenario we can get what its listed for now $220K.

Was it worth it?  From an emotional aspect, yes…But from a financial aspect probably not! Given the current housing market there is no telling if my property value would go up or down in the years to come. And a lot of people are now faced with their homes being under water…A position none of us want to be in! Buying a home is like investing in the stock market…Make wise decisions as best as you can but just know that the market ultimately decides and that you can never predict!

My hope is that my home-buying experience can provide you with some insight and things to consider  hat I had no idea about at the time. Please feel free to share any home buying tips you have!

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