Why buy a house when you can rent?

Now that the market is becoming balanced, I am seeing a lot of articles predicting doom and gloom for real estate.  I get it, nobody wants to read an article that says “The real estate market is about to become boring because it will neither be a seller’s market nor a buyer’s market”.  They’ve got to go to an extreme to get and keep your attention.  I am seeing lots of articles telling people that their home is not an investment.  I’ve even seen some articles suggesting people continue to rent and get into the stock market instead of buying a home.

Which might be good advice if you were going to live in your car, or with your parents the rest of your life.  Sure, you might come out ahead over the long haul, but the reality is you will have to pay to live somewhere, may as well pay to live in your own house.

Why did I want to buy my first house as soon as I could save the down payment?

I used to mow lawns for a lot of elderly people.  I would always enjoy them telling me what they paid for their houses 30-40 years ago and what their mortgage payment was.  I had one little old lady who told me her mortgage was $163 a month and some months it was hard to pay it.

When it was new, her house might have rented for about the same amount.  Do you think rent prices have gone up since the mid 1960s?  Meanwhile, that little old lady paid $163 a month until the house was paid off. (Okay, I am sure her property taxes and insurance went up, but not by that much.)  And when she made her last $163 payment, do you know what she did the next month?  Nothing.  There were no more payments to make (Okay again, she would still have taxes and insurance to pay but both of those expenses would be FAR less than what the house would rent for at that time.)

Let’s take a look at what happens when this little old lady moves out of her house.  She pays a real estate commission and gets to keep the rest because there is no mortgage.

What if she had rented a house that whole time and moved?  She would have paid off the house for the landlord and had nothing to show for it.

I think owning your home is the best decision you can make.

The worst house to buy

Want to know the house to stay away from?

It’s the one that has had the same owner for many decades and has never had anything major done to it the entire time.

How do I know this?  I own two of them.

I sometimes stumble across a deal that I can fix up and rent out.  The ones that I have spent the most on are the ones that fit this profile.

Most of the time, there isn’t much you can save.  I usually end up replacing windows, the roof, the furnace, air conditioner, water heater and all the appliances.  Often the kitchen and bathrooms are worn out enough that I end up having to start all over, even though I prefer to keep as much of the original character as I can.

A lot of these houses were built in the 50s and 60s.  Houses from that era are arguably the best built houses ever……I can tell by how hard it is to do any demo work.  Most have bathrooms with lots of ceramic tile.  The kind that goes half way up all the walls.  Only once have I ever been able to keep the tile.  Most of the time there is a really bad section and it can’t be saved, or the vanity needs replaced, but the tile is all around it.  To replace the vanity you end up having to take off the tile and it forces a pretty big renovation.

It’s all worked out pretty well for me, but I was just thinking about how these type of houses are the ones that I am always over budget because they are like that “If you give a mouse a cookie” book where you do one thing that leads to another action, then something else, and so on.

These type of houses appear to be a real bargain to most buyers.  They are usually in pretty cool older areas with big trees.  They have character.  If they are decorated right, they look nice too.  It is only when you do a home inspection that you realize that while nothing is catastrophically wrong with the house, almost EVERYTHING needs some attention, and that attention costs a lot of money.

Which seller did better?

Two houses on the same street.  One is smaller and has been renovated.  The other is bigger and has had a few minor updates.

The smaller renovated one sells for more money that the larger one with mild updates is worth.

Which owner would you want to be?

You are probably thinking that the renovated house that sold for more would be the owner who comes out better than the other, but you’d be wrong.

That’s because the cost of a remodeled kitchen with a tiled backsplash and stainless appliances, remodeled bathrooms and new flooring greatly exceed the difference in values.

Back when the market was slow, it could have been harder to sell a house that hadn’t seen any big ticket updates like a new kitchen and/or baths.  That’s cause there were more houses for sale than there were buyers.  The problem is the opposite today.  There are more buyers than houses for sale, especially in the sub $200k range.

Sure, everybody loves a renovated house with all the trendy finishes.  Buyers will pay top dollar for that look, but for the person who wrote the check for the work, it is a little bit of a bummer because most of the time a seller is lucky to get half back in the increased value.  Great for the buyer.  Bad for the seller.

I had to tell a seller not too long ago that her house was worth about the same as she paid for it nearly 10 years ago.  On paper, you’d think that wasn’t possible.  She hasn’t done anything to the house other than enjoy living there.  Everything is nearly 10 years older now.  Sure, her house could potentially be worth another $15k, but she would have to spend over $20k to add that value.  She is actually coming out ahead by selling for about the same as she paid for verses getting a high sale price that lost money to achieve.

They don’t tell you all this stuff on HGTV.

The best bang for your buck on updates are paint, flooring and lighting.

What does this do to my property value?

I get asked that question a lot.

Believe it or not, most of the things we worry about don’t really have all that much effect on the value of a house….so no need to rush out of the neighborhood when there is a big change coming.

A friend of mine was upset because the city made part of his huge backyard into a retention basin to solve flooding issues.  He was worried that it would make his house worth less.

I told him that his backyard is so big, losing this space didn’t have any impact on how he or future buyers would use it.  There was still plenty of room for a pool, swing set, firepit or any outdoor thing people want in their backyard.  I told him that about the only person who might not buy his house now would be somebody who wanted to build a huge garage in that space.

I think part of what is hard for owners to realize is that the person buying your house when you sell won’t have the “Before” picture in their head of how it used to be.  Only the current owner will know what the good old days were like.

I had a friend say that Ball Homes building on the opposite side of the fairway from Greenbrier would hurt the property values.  I told her that while the view of a wooded hillside was preferable to seeing a new neighborhood, it was still nice to have a beautiful fairway to separate them, so it would not have any impact on value.  Only the current owners who remember the wooded hillside will ever know the difference.  The next buyers will say “Wow, look how pretty the golf course is” and how nice it is to have so much space behind your house in Lexington.

Then there are threats of new development.  Andover Hills and Andover Forest residents are afraid that if the foreclosed golf course fell into the hands of developers that their property values would plummet.  The residents of Squire Oak are concerned what several houses, townhouses and 3 story apartment buildings on the property along Armstrong Mill owned by Overbrook Farms would do to them.

There is no need to consider selling if you live in those neighborhoods.  Sure, it would be nicer to have less traffic, fewer homes, not lose the green space if you are lucky enough to back up to it…..but it will not have much impact, if any,  on property values.  Plus, Lexington is only going to become more dense.  We should all get used to it.  I often see houses with terrible lots sell for practically the same amount as houses with average lots.  There are several houses that back to New Circle Road, the interstate, a shopping center, a light industrial area.  They usually sell for within 1-2% of what the houses with average lots do.

This might be the time to discuss the difference between property values and desirability.  A house that used to back to a farm and now backs to a 3 story apartment complex had a prime lot and now has a below average lot.  The value might not change much at all, especially in a sellers market.  What it does do is make the house less desirable.  That just means it might take more showings before catching a buyer in a slower market.  Corner lots or houses on the main drag through their neighborhood experience this already but nobody notices.

Want to know something funny?  YOU have the most control over your own property value.  A clean, updated house that is move in ready will always sell for top dollar regardless of the market and what is around it.

The first house you buy is the most important one ever

First time buyers.  I’ve been working with a few of them lately.

Most first time buyers are thinking about finding a place they like.

I like to show them that their first house is so much more than that.

Every house you are ever going to own is impacted by that first one.

It is really the most important house you are ever going to purchase.

Why?

Because eventually you will sell that first house.  How well of an investment it turned out to be will impact how much money you have to put down on your next house.  It just keeps going until you are middle aged and in your forever home.  You know, the one you sell to help fund your retirement when you downsize to a cheaper home.

My dad called this compounding.  He was mainly referring to interest when he was teaching me this stuff in middle school, but it applies to real estate too.

It really reminds me more of bowling though.  To get a strike, you don’t knock down every pin with the ball.  You just hit one of them right and the pins begin to knock down the remaining pins.