Entries Tagged 'Housing' ↓

So a couple weeks ago I wrote that we entered escrow for my husband’s parents’ home.  Since then, we have locked down a 30 year fixed mortgage at 5.875% with a 0.875% origination fee last week.  Looking back, I am so glad that we locked down the rate because a new CNN article states that mortgage rates are heading towards 7% and had the biggest weekly jump in 21 years. Our loan has no prepayment penalty so in the unlikely chance that mortgage rates ever sink significantly again we can always refinance.

Additionally, we also got dozens of disclosures, inspection reports, and the appraisal report.  I think the hubby is getting tired of reading all of these forms that explain to us what we’re getting into.  I find the disclosures very helpful, though.  Even though we are buying the home from someone we trust, we still need to know all the problems and issues the property has. I actually found out a lot of things I didn’t know previously about the house.  The hubby was reading the report and found a few surprises, too, but they were mostly minor.

The appraisal report showed six comparable properties and gave an appraised value range of $514k to $550k and I thought that was a fair estimate for the current market, but the appraiser did note in the report that the market could slip down further due to the tightening of credit and the amount of foreclosures in the area.  In fact one of the comparables he used was a bank owned property and it sold for $520k.   We’re technically purchasing it for quite a bit less than the lowest end of the appraisal so we will have some cushioning for the down market.  The good thing about the appraisal is that our lender should accept that the house is worth a lot more than the loan amount we’re seeking and we will not have  to get mortgage insurance.

Next, I did a lot of research into home insurance, and learned quite a bit about building materials and various natural disaster zones.  For example, the home has a concrete tile roof, which is considered one of the most long lasting roofing materials and some insurance companies actually give a discount for that.  The bad news is that the home is in a zone with high incidences of brush fire so a couple insurance companies actually refused to quote me.   In the end I settled with a policy sold by Nationwide, which offered the best balance of coverage and price.  I got more than ten quotes and the range of prices was from $440 to $1200 for varying amounts of coverage. Interestingly enough, the most expensive policy didn’t really cover more than some of the cheaper policies so I guess  it really pays to shop around when you are purchasing any kind of insurance.

Amidst all of this stock market turmoil, I am actually glad that I have this real estate transaction to focus on right now.  We are hoping to close in less than two weeks, and so far things have been going well.  I haven’t met any unscrupulous loan or real estate agents that some people say caused the current crisis.  The loan agent I dealt with was very straightforward and explained everything.  There were also many disclosures that are required by law that tell you what you are responsible for and that the real estate market doesn’t always go up.  So after going through this process I don’t think it’s fair to blame all the real estate professionals on the ground floor for the current meltdown.  A lot of them are people like you and me making an honest living.   Home buyers are really responsible for their own actions and everyone needs to do their due diligence before making any kind of big purchase or investment.
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Lately I haven’t been blogging very much due to a variety of factors, and one big thing that is happening right now is that we are buying a house.  Yes, I know this sounds crazy considering that I have written extensively about why buying a house is more expensive than renting, but there is a good reason why we’re buying this particular house.

To make a long story short,  we are in the midst of purchasing my husband’s parents’ home  at a significant discount.  They are leaving the country to do long term missionary work in the Philippines in January 2009  and their income will no longer support the mortgage they have on the home.  So they were planning to put the house on the open market and sell it, but as you know, the current real estate market is pretty much in the pits and they are not guaranteed to sell the house by the time they leave.  So we decided that it is probably best to keep the house in the family somehow.  My husband really loves the house because he grew up in it and his parents has lovingly put in many improvements over the years.  His parents expressed that they wanted us to live in the house when they leave, but the one problem is that the house is in Southern California and our jobs are here in Northern California.

At first, we were just worried that we couldn’t afford the home, but since his parents agreed to give us a large gift of equity the mortgage will turn out to be about  15% of our gross income and that is pretty affordable. The price we are getting is basically 30% off market value so it is a fairly good deal.  We also found that California has a law called Proposition 58 which allows the present tax value to pass from parent to child so the property taxes will not be reassessed to the current value.  So after crunching the numbers several times, we found that by renting the home out for the current market value for similar homes we are able to pretty much break even.  We plan to keep the house long term as a hedge against inflation, and if his parents decide to return to the United States they could move back to the house they are familiar with and rent it from us.  The house is located in a very good upper middle class neighborhood with median household income of $103,000 per year and elementary school API scores of above 900 so we are pretty confident that we can get some willing renters.

We just entered escrow right now and plan to close by the end of October.  It is sort of sad that we can’t live in the house because we both like it very much, and it is really weird to be a landlord and renter at the same time, but it will definitely be interesting.  For now we are going to rent the home to my husband’s parents, but at the same time we will need to find a renter for the future.  I am learning quite a bit through this experience, and I will certainly write about it later.

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Next month our lease on our apartment will be renewed. I’m pretty sure it won’t go up all that much since we are pretty good tenants. None of the neighbors have complained about us, either. Just out of my interest to know whether or not our rent is fair, I found some rental data for San Mateo County for the past seven years. I was sort of surprised by what I found.

As I have stated previously, we pay $1700 for a two bedroom two bathroom condo. The rent includes water, garbage, and cable TV. According the the historic data from San Mateo County, our rent is actually cheaper than the average rent for a two bedroom apartment in 2000! Here is a summary of the rent trends on a 2 bedroom 1 bathroom apartment as recorded by the county and a timeline of recent history:

12/2000 – $1902 – The year of the dotcom boom and craziness. I was in highschool.
12/2001 – $1764 – The dotcom bubble popped and 9/11 happened in this year.
12/2002 – $1597 – Recession
12/2003 – $1478 – War broke out
12/2004 – $1421 – Valley beginning to recover, the hubby moves to San Mateo
12/2005 – $1449 – I moved to San Mateo
12/2006 – $1621 – Tech sector in full recovery, new startups and lotsa hiring
12/2007 – $1785 – We got married, moved to our present condo.
3/2008 – $1812 – Latest data available, rent prices trending up as more people are renting due to the ridiculous purchase prices. Jobs are still abundant.

So after looking at this data, I feel that our rent is pretty fair. Actually, I used a CPI calculator and found that $1902 in 2000 is actually worth $2381 today. So we are really getting a bargain and rent prices don’t always follow inflation. It is a bit alarming how much the rent jumped from 2005 to 2007, but I think as more foreclosures and cheap homes come onto the market the rental market can’t rise all that much. From what I have seen, there are actually quite a lot of 2 bedroom listings on Craigslist for under $1700 a month.

So if you are facing a rent increase, I encourage you to look up the fair market rent in your locale and see if it’s fair. If it’s too expensive then don’t be afraid to negotiate because even a month’s vacancy is very costly to a landlord and could wipe out all the gains he/she gets from raising your rent. Additionally, look for a cheaper alternative early if you know you can’t afford the increase. Oftentimes, there are individual homeowners who have held a home for many years and do not want to sell. In those cases you can get a very good deal as a renter.

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Lately my mom has been telling me that several friends of hers are snapping up real estate in the East Bay because prices have fallen anywhere from 20% to 70%. She argues that if I ever see a property that has a mortgage lower than my rent I should just buy it. Well, San Mateo County hasn’t really fallen to the extent that any mortgage is cheaper than a comparable rent yet. The average price per square foot in my zipcode is currently $571. We live in a place that’s about 1040 square foot and pay $1700 a month. So the purchase price for a comparable property would be $592.8k and it still doesn’t make sense to buy since I am 99% positive prices are still going down right now. Financially, it’s more beneficial to us to invest all the money we are saving rather than being tied to a $3000+ mortgage.

Financial considerations aside, I don’t think we’re very enthusiastic to be homeowners because of the maintenance it would involve. I read a pretty funny article on Salon.com recently about a long time renter that turned into a homeowner. His conclusion was, “What the hell was I thinking?” He didn’t have the money to fix all the problems his home had and he didn’t have the skills to do it himself. While I am a renter I could just ask my landlord to repair the leaky pipes or replace the broken stove. Sure, I am paying rent, but I consider it to be outsourcing home maintenance to my landlord. The simple fact that renting is actually cheaper than the mortgage and property taxes makes the arrangement a sweeter deal for me.

Another ridiculous argument people have thrown in my face as why owning is better is that, “it’s better for the children.” I have no idea why this is remotely true. As long as children have a safe and loving place to call home, it doesn’t matter if their parents rent or own. I would actually argue that a home ripped apart by the financial stress of an unaffordable mortgage is a much worse place for a child to grow up than a family that happily rents without financial trouble. So before anyone tells me that I have to raise my kids in a place I own ever again, consider that I can rent in an excellent school district for less than 13% of our salary. On the flipside to own the same property in those school districts we would have to carry double or triple that cost. The money we save by renting could be used for tutors or a college fund for our kids. Renting gives us flexibility to live wherever we want, and that freedom is extremely valuable.

The hubby and I are pretty sure we won’t stay in our present condo forever, but I don’t know if homeownership is ever going to be right for us. I think I will only considering owning when it is cheaper than renting and we decide to stay in one area for more than ten years. If that never happens, then we just might rent forever. For me, I feel much more secure in managing a gigantic portfolio rather than a gigantic house. Currently my portfolio already generates enough income to cover approximately half of my rent, and to tie a lot of these perfectly sound liquid investments up in a house seems rather stupid at this point.

Anyway, here ends yet another one of my rants against the overrated ideal of homeownership. I think what frustrates me and several other of my friends is that our Asian parents are unhealthily obsessed with real estate and our parents want us to become indentured servants to the banks as soon as possible. I probably have enough material for that to fill up another ten blog posts, but I shall stop here. Finally I shall say that homeownership is not proof of adulthood or financial security. The ability to logically analyze your means and make responsible choices is better than succumbing to the pressures of society and doing something you regret later.

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In part one I talked about dealing prejudice, and I got some pretty interesting comments. I encourage you guys to check it out. In this part I want to talk about the reasons why in some instances you shouldn’t try so hard to fit in. Granted, everyone wants to be “normal”, and I expressed that feeling in a previous post about sending children to school early. However, being “normal” is not always wise, and you shouldn’t follow along for the sake of being part of the majority.

It all started when I was a kid. I was never into fashion and I was fine with wearing things I picked out at church sales for 25 cents. Heck, I still have one of those shirts and I wear it sometimes. I have been teased about my clothing in elementary school, but it didn’t matter to me. I knew that having brand name clothes and shoes wouldn’t really affect my schoolwork and I had good friends anyway.  Additionally, my parents really didn’t have money to buy me new clothes so there was no reason for me to unnecessarily add to their expenses.

Now that I am an adult, I think I still tend to shy away from what is considered popular. For example, I still don’t have an iPod, and I don’t intend to ever get one. I could afford a very nice car, but I have no need for it. Considering how many of my coworkers have extremely luxury cars I would say that I am in the minority. I’m not in a car contest with them, so I don’t feel the need to join in and fit in. I have to confess that as a teenager I wanted a Porsche, but now I understand that fancy cars are not necessarily a mark of success because most of them are financed by debt.

Another way that I am a minority right now is that I am a renter. I have written quite a few articles on why I am not buying a house now, and I truly believe that in San Mateo County I am building more wealth by renting rather than buying. Even though I will buy a house some day, I think it is good to have a different mindset right now.   I know many people jumped in to real estate because everyone was doing it in the past couple years.  Now many of the same people are regretting their decisions.  So in the particular case of real estate, I am glad that my husband and I did not decide to buy anything when we got married even though our parents wanted us to.

Finally, what is scary to me is that in America debt is considered normal. Dave Ramsey actually has a funny sticker that says, “Debt is normal, be weird!”. So when it comes to things such as debt and fashion, I don’t mind being in the minority. In fact, I think many people would be much more successful than they already are if they stopped trying to fit in and do their own thing.  I know that peer pressure is a powerful force, but we have to be level headed and see if “normal” is really the best thing for our goals.

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