Homebuying


A few months ago, we posted about the possibility of renting a property before deciding on buying in the post “Renting Before Buying – Testing the Waters.”

Renting before buying can be incredibly helpful in extreme situations: relocating to a new state, buying a much bigger home, or a much smaller one. This scenario, while not feasible for everyone, can help to save you a lot of money and headaches in the long run.

Obviously the difficult part of this is finding a place to rent that will allow you to get a feel for what you are looking to do. Finding a house that is the right size, for the right rent, with the right lease options can be very difficult. But if you are able to do so, consider this option before finding a home to blindly buy in the new situation.

This follow up post is once again inspired by Get Rich Slowly’s Holly Johnson’s own follow up post “The small house experiment, Part 2.” In Part 1, Johnson discussed renting a home for her family more than 1,000 square feet smaller than their previous home. They believed that a smaller home was the right solution for their family, but being unsure whether the logistics would work, decided to rent before buying.

In Part 2, Johnson discusses the outcome of their test. While the house works for the family, it’s not quite comfortable. But their experiment went beyond just judging the size of the house, it has helped them decide what the really necessity to them: “Storage space is something that I took for granted in our old house, and it’s apparently not something that I’m willing to give up. […] And, even though I thought I could live without an office, I’m finding it rather uncomfortable working in the corner of my tiny bedroom.”

So, now that Johnson and her family know what works and doesn’t work, they can continue to rent while they search for the right size home with the features they now know they can’t live without.

Now imagine how much different Johnson’s situation would be if they had jumped into downsizing by buying a much smaller house. They would have been stuck in a long term commitment in the form of a mortgage, which is much more difficult, time consuming, and expensive to get out from under than moving out of a rental.

We use Johnson’s situation as a real life example of renting before buying really helping a family make the right decision before settling on buying a house.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.
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Often times, renting before buying isn’t an option. You don’t always have the ability to do so. Many times you have to rely on your own best judgment, or the reviews others have given on a product.

Although people may not necessarily think of it, renting before buying a house may be an option. Not renting the house you will likely end up buying of course, but you may be able to test the waters first, especially if you are making a big change.

What do we mean by this? A big change can be a move to another city or state, extreme downsizing or scaling up, etc. Purchasing a house is a big commitment. If you are making a big change from what you’re used to, jumping right in may not be the best idea. If you buy and decide you’re unhappy with the change, it’s difficult, time-consuming, and often financially infeasible to move again.

However, you may want to look into testing the waters first. If you are moving to a new city or state that you are unfamiliar with, rent for a while, either an apartment or a house, to get to know the area. You may find there are neighborhoods you prefer, or others you decide you never would want to live in. If you buy right away, you may end up in one of those unwanted areas before you give yourself a chance to find out.

For extreme downsizing or scaling up in size, you will probably have more limited renting options. Holly Johnson over at Get Rich Slowly tells about her own experience in downsizing, and why she and her family decided to rent a house before buying in the post “The Small House Experiment – Part 1.”

Johnson discusses selling her home too quickly, and after searching for an equivalent sized home closer to her husband’s new job, they decided maybe it was time for a change. Maybe they didn’t need so much space for their family. Since they had run out of time to get out of their current home, they began renting a home more than 1,000 square feet smaller than their previous home. This “experiment” will tell them how they handle living in a smaller space and will allow them to decide if it’s what they really want to buy.

Obviously, this may not be as easy of an option as renting a temporary apartment in a new city. There may not be a rental home with the size or features available where you are looking to move. Or maybe the place you are looking to rent wants too long-term a commitment for your plan. But it may make sense to look, especially if you are having any doubts about what kind of house you are looking to buy.

Renting before buying a home isn’t necessary for everyone. And sometimes it doesn’t make financial sense or isn’t an available option. But if you find that it is something you might want to do, make sure to do your homework about your rental and not get involved in something too rigid (like signing a one year, hard to break lease when you plan on buying your home in three to four months).

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

This week, over at The Simple Dollar, Trent Hamm posted an interesting article on renting a place to live versus buying a home, “Renting Isn’t a Throwaway”. We thought it was an interesting take on the issue, and since we often hear the opinion that renting is just “throwing money away,” we thought we’d share some of Hamm’s ideas here.

It’s always been our opinion that the renting vs. buying question varies for every individual. Buying is not a financially sound decision for everyone, and the same goes for renting. Here are some of Hamm’s thoughts on why “renting isn’t a throwaway:”

  • “Insurance Rental insurance is significantly less expensive than homeowners insurance. Both provide similar protections – they make sure that in the event of catastrophe, you retain the value of your possessions – but homeowners insurance also insures the value of the home and many other things.”
  • “Property taxes Homeowners have to pay these. Renters do not.” – Depending on where you choose to buy, this can end up being a very major expense.
  • “What is the recent history of property values in the area I’m looking at? Has the area been rising in value? Holding steady? Dropping? To make home ownership worth it, your home will need to at least retain its value.” – Not all areas are conducive to buying. If you are looking to live in an area with falling housing values, buying is not likely to be a good idea.

A point that we would make that Hamm doesn’t is that if you are moving somewhere new from out of the area, you shouldn’t jump right into buying a home. Even if buying is ultimately the right decision for you, renting for a period of time to get to know the area (what neighborhoods you like, what amenities you enjoy, etc) can go a long way in helping you decide where the right place to buy is.

You should never assume that buying is the always the right decision. Take time to analyze your situation before ultimately deciding what is right for you.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

This week, David Ning had a great post over at U.S. News – Money, “Why to Pay Off Your Mortgage Before Your Retirement.” He gives some great reasons as to why entering retirement while still carrying a mortgage may not be a good idea for most. We’d like to review those reasons here.

  • “Focusing on paying off the mortgage greatly encourages us to spend less.” – If someone is paying extra money to pay off their mortgage early, that money cannot be spent on other (often unneeded) things. Since many people have trouble keeping spending under control, this can be an effective way to help cut spending while having a positive impact on their future. However, someone who has trouble controlling spending probably will not make the sacrifice of paying down the mortgage early.
  • “If you opt for the shorter fixed-rate mortgage, you’ll end up buying less home.” – If you are planning on taking on a mortgage in or nearing retirement, consider a shorter term mortgage. While a 30 year fixed-rate mortgage can be great for someone who has plenty of time to payoff that mortgage while still working, retirement is not the time to make that sort of long term commitment. And of course Ning’s point is that the shorter term mortgage will have higher payments, therefore will likely lead the retiree or near retiree to spend less on a house than a longer term mortgage might lead to.
  • “Not having a fixed expense can help you increase your retirement withdrawal rate.” – We like Ning’s reasoning here. One of the main reason entering retirement with a mortgage (or any debt) is usually a bad idea is that it can put a lot of strain on your retirement income. If you are like many other retirees, you will begin to draw down on your portfolios to cover your needed income that is not guaranteed (Social Security, pensions, annuities, etc.).

The safe withdrawal rate generally accepted in the financial world is 4.5% annually. This means that you can withdraw 4.5% of your portfolio value in one year “safely” without risk of running out of money over the long term. However, though this is a general rule of thumb, it’s not absolute. If you have a few down years in the market and your portfolio loses money, then throw 4.5% withdrawal on top of that, your chances of running out of money will greatly increase.

A great way to combat this risk is to be flexible with your withdrawal rate. Putting yourself in a position to be able to reduce or even eliminate your withdrawal rate during down years can be extremely beneficial to your portfolio over your retirement. And doing so can be very hard if you have a fixed monthly mortgage payment (that is likely one of your bigger expenses). If you are mortgage free, your withdrawal rate flexibility will be greatly increased.

  • “There’s one less thing to worry about.” and “You will sleep better at night without a mortgage.” – While Ning makes these two separate points, to us they are one in the same. Being debt free is not only a solid financial decision, but it can also be very positive in your personal and emotional life. Carrying debt, even a debt as common and acceptable as a mortgage, can be stressful, especially once you reach retirement and don’t have steady income from working any longer.

As Ning points out, paying off your mortgage early so that you can enter retirement mortgage free is not the best financial choice for everyone, nor is it always financially feasible. And while Ning concentrates mostly on paying off your mortgage early, that is not the only way to enter retirement mortgage free.

For example, someone who plans to downsize when he retires in a few years to a home that will cost $150,000, who currently has a $100,000 mortgage with a home value of $300,000 probably would not consider paying off his mortgage early. He could likely sell his current home, payoff his current mortgage, and buy his new, downsized home with cash to spare, all without spending extra dollars in the years leading up to retirement going toward early mortgage payoff. While a very simplified example, we just wanted to show that though we do believe entering retirement as close to mortgage free as possible doesn’t necessarily equate paying off your mortgage early.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

In the past, I (Dawn) have talked here about buying a fixer-upper house. A great post yesterday by Lisa Aberle over at Get Rich Slowly, brought my own (continuing) experience with a fixer-upper home to mind again.

Lisa’s post “Should You Buy A Fixer-Upper?” is about her experiences with her own home. And much of her post mirrors my own experience. Buying a fixer-upper is certainly not for everyone, and even for those who can handle it, it’s incredibly easy to get bogged down by the project, physically, mentally, and financially.

Here are some of my favorite points that Lisa makes:

  •  “I believe even a carefully selected fixer-upper is really only a bargain if you can do the labor yourself. Even though we come from a long line of blue-collar workers, we have a lot to learn. Still, we have people to ask. Between our two families, we have two HVAC technicians, a plumber, an electrician, two ex-carpenters, a concrete worker, and two RNs (just in case the renovations don’t go smoothly).”

My Comment: This is incredibly important! The more you have to hire out to get the work done, the more expensive it’s going to be. If you aren’t handy, and none of your family or friends are handy, a fixer-upper is most likely not the best deal for you.

  •  “As much as possible, you need to know everything about the house. A home appraisal and a thorough home inspection should tell you what you need to know. What’s it worth? If it’s an old house (and most fixer uppers are), how is the foundation? How old is the plumbing and wiring? Is there evidence of mold or water damage? Does it need a new roof?”

My Comment: If the house isn’t structurally sound or needs major overhaul renovations, it’s probably not worth the cost of fixing it up. Even in great neighborhoods, chances are you’ll be spending too much through the cost of buying the house and fixing its major issues to ever get your money back on it. However, if you do feel it’s worth it, make sure you work the numbers on the cost of the renovation before committing to the house.

 And Lisa’s good rules of thumb for buying a fixer-upper

  • “Rule #1: Buy a fixer-upper at a cost (way) below the rest of the houses in a good neighborhood. By following this rule, your improvements will bring your house up to (or slightly exceed) the value of the surrounding properties. You won’t recoup your costs if your renovations result in “too much house” for the neighborhood.
  •  Rule #2. Find a fixer-upper with quality construction. That first house was cheap, costing less than our combined annual income at the time. But everything about it was cheap, including the materials used in its construction. And that led to a rodent infestation, among other things. (I think our record was catching 14 mice in a 24-hour period.)

 On the other hand, our second house has “good bones.” Maybe it needs lots of work, but at least the extra work will be built on a good foundation. Ah, but “lots of work” means mostly major, expensive projects.

  •  Rule #3. Pick a fixer-upper with cosmetic upgrades instead of major, expensive projects. Well, of course! We didn’t put lots of money into our first house. Instead of fixing the foundation or updating the kitchen, we did inexpensive things like painting, pulling out old, overgrown bushes, and replacing the carpet.”

Keeping Up Appearance

Another point I would make is that if you’re the type of person who likes to keep up appearances or impress people who visit, or even just drive by, a fixer-upper may not be a good choice. Unless you plan on hiring out the work and getting everything done all at once, you will be living in a state of flux while projects get worked on, especially if you are doing the work yourself in what free time you can string together. More than three years in, and my house is nowhere near being completely “fixed-up.”

And when we have anyone new over, I always feel compelled to say “We haven’t gotten around to the bathroom yet!” since our bathroom needs to be gutted, and with everything else that needed work, it’s just sat by the wayside. It’s functional, but looks truly awful. If you can’t bear the thought of a guest seeing your house like that, I would suggest looking elsewhere.

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

This morning over at Get Rich Slowly, there was a great post about what can go wrong when you are getting a home repair done, “Our Roof Repair: A Typical Tale of Working with Contractors.” It was written by J.D. Roth, and it’s about his recent experience with working with a bad contractor while doing a home repair on his 100+ year old home.

Anyone who has owned a home for any length of time has had to deal with home repairs. Obviously, the older the home, the more likely there is for things to go wrong. Also, anyone who has any experience hiring a contractor to do repairs on your home knows that it can be a very difficult process.

Roth’s experience was this: his roof was leaking badly, so he had three contractors come out to gives bids on the repairs. One contractor had a lot of experience and seemed to know exactly what to do to solve the problem, but his bid was the highest. Another contractor had much less experience, but he seemed to know what he was talking about, and his bid was the lowest. The last contractor didn’t even do a thorough check of the problem, and his bid was somewhere in the middle.

Roth hired the contractor with the lowest bid; however, he immediately regretted it. The work was done poorly, delays kept cropping up, and all told, while the leak was fixed, it wasn’t fixed as well as it should have been.

We’re sure every homeowner reading this could share similar stories about home repairs gone wrong. There often tends to be a reason someone is the cheapest bid. Not to say that you should never hire the contractor with the cheapest bid, but make sure you do your research about them. How long has the company been around? Can you see previous customers’ testimonials? That’s not to say that the most expensive bid would have been any better. If Roth had gone with that bid, he may have ended up in the same position with less money in the bank.

And don’t underestimate how comfortable the contractor makes you feel! If you don’t feel like you can trust that person to do the job right, don’t hire them. Maybe not the best way to judge a contractor’s work, but if you’re uncomfortable with the person working for you, the experience will be that much worse!

The bottom line is, if you don’t have the knowledge and skill to make a home repair yourself, make sure you do your research. Also, the more contractors you have give you bids, the better off you’ll be. But, just like in Roth’s case, you may still end up having to deal with bad workmanship and the problems that might create for you down the road. Unfortunately, there is no real way to get around that possibility! That’s one of the pitfalls of owning a home!

Our next post will be in two weeks, as we’ll be travelling next week for a family wedding.

 

 

  • Disclaimer: The information on this blog is not meant for specific financial advice. The ideas/opinions stated are not suited for everyone, and readers should use their own judgment in applying them in their financial lives.

Because of what’s happened to the housing market, if you are looking to buy a house or will be soon, chances are you will see quite a few foreclosures on the market. While not always the case, most of these houses would be considered “fixer-uppers:” houses that need a lot of work and are usually sold “as-is.” Even if a house is not a foreclosure, it is often the case that if the house is in need of work, you could get a good deal on it.

I (Dawn) wanted to write about my own experience buying a fixer-upper house and the dos and don’ts I learned through the process.

My husband and I bought our house almost 2 years ago. While it wasn’t a foreclosure, it had been sitting empty for over a year, and it was a mess. The house had been built in the 1950s, and almost nothing had been upgraded since then. And while the structure of the house was solid (except for some ground water issues in a slightly leaky basement), it needed to be redone from top to bottom (windows, electrical, furnace, flooring, etc.). It was a very daunting task, but the house was a great deal, in a great neighborhood, and we knew it would be worth the time and the cost to fix it up.

Now that we have had the house for almost 2 years, we have made a lot of progress, but not as much as we thought. Like many first-time homebuyers and fixer-upper homebuyers, we overestimated the amount of work we could do and underestimated the cost.

Dos and Don’ts

 

  • Make sure you can live in an unfinished house – Chances are you aren’t going to be able to get everything you want done 100% completed before you move in. If you are the type of person who won’t be able to handle looking around everyday to see unfinished projects, buying a fixer-upper is not for you.
  • Make sure the neighborhood is worth it – Avoid buying a fixer-upper in a neighborhood where the money you put into fixing up the house and the amount you bought the house for is more than it’s worth. So, if you buy the house for $200,000 and put $30,000 of work into it, but the house will only worth $220,000 fixed up in the neighborhood, you may never get your money back when you look to sell. So only look for neighborhoods where fixing a house up will be worth it.
  • Make sure you can do some of the work yourself – While it’s possible to hire someone to come in to do all the work in your house, it would be very expensive. You should certainly hire people to come in a do any big job you have, but if you are handy, try to save some money by doing the smaller projects yourself.
  • Break all the work you want done into small projects – The smaller the better! If you have a list of small projects you can finish in a weekend, you will be much more likely to get them done. Even if those small projects are just part of something bigger, it can give you a sense of accomplishment. While you won’t get “paint every room” done this weekend, you might get “paint the kitchen” done.
  • Make sure you overestimate the cost of each project – Projects in the home almost always cost more than you plan. So, as with everything, we recommend saving for a project before starting it. Overestimating what you think the cost is going to be is the much safer route. It will eliminate delays because when something unexpected comes up, you will already have some money set aside. You won’t have to delay the project a few weeks (or months) while you save to finish it, and you definitely won’t have to turn to your credit card just so you can finish what you started. And if you still have money left over, apply it toward your next project.

 

These are the lessons I learned with my own experience in buying a fixer-upper. While I don’t regret buying the house, I do regret some of the things we did after, and I think it’s very easy to have buyer’s remorse while working on a fixer-upper. Hopefully my experience will help someone else who is thinking about going the same route!