Monday, March 12, 2007

Rent Vs Buy in Arlington, Email: Help! Need straight answers fast PLEASE

Hi Frank,

I stumbled onto your site and am so glad, especially about helping people decide whether or not to buy. I'm getting so many mixed messages and, based on your site, I think I can count on you to give me some straight, honest answers. I am new to the area and don't really have anyone to help me make such a big decision.

My plan was to buy a house this year, but I wasn't planning on having to move twice (I just moved here from CA last year) - which is a strong possibility as my landlord decided to put the house I'm renting up for sale on 5/7. So, I'll have to move in around 90 days (depending on how fast it sells). To make things worse, I'm in between jobs, so it'll be a few months before I can even put an offer on a house.

My main questions are:
1. I think I can afford a townhouse for $350K-400K and am looking in the VA area within 10-15 miles to DC (the closer the better). My goal is to sell the place in 2-3 years so I can get a single family home (maybe out of state). What do you think is a reasonable range for the expected return in 2-3 years? I've heard anywhere from 5% to over 10% and don't know what to believe.

2. How do I figure out if I'm better off renting - in other words, what is the max I should spend on rent before it makes more sense to buy?

3. Since my goal is to move within 2-3 years, does it make sense for me to put a lower percentage down (like 5-7%)? It seems like that I should put down a lower percentage, but am I missing something?

4. Is there anything you can think of to persuade my landlord to wait another year? I told him everything I read says it makes sense to wait at least till 2008 if he can hold on (which he can, but he had to move to NY so isn't sure he wants the long distance "hassle"). He's only had the house since 6/05. It's in south Arlington (Columbia Forest) and I'm sure he'll put in on the market for over $500K. It's an older house (originally built for military families; has add-ons, needs work).

Thanks so much for any help you can give me,

Rxxxx

REPLY FROM FRANK (2 hours later)
Hello Rxxx

Ignore all those Realtors telling you what to do, most are probably trying to put money in their pockets. I'm glad you came to me for straight advice. Thanks for reading my Don't Buy, Ask Why blog.

1) I would not recommend buying a house with only a 2 year hold time, unless you are
  • Getting a REALLY good price 10%+ below market
  • Have a high enough risk tolerance.
  • Own a crystal ball that says homes will increase 10% each year.
Why? Because the marketing reselling fees from those damn Realtors are too high! Closing fees on the purchase AND commissions when you sell will eat up 7-8%.

Here is where people say : "Oh, I don't worry about that, I'll just sell it myself without commission", to which I say "Just trust me on this, from somebody not telling you to buy, if you sell it for sale by owner, FSBO, you will probably net less in my opinion, long story, maybe another full blog.)

As for the expected return, who knows (read my blog on Realtors vs Stock pickers). The only thing that makes people rich in real estate is TIME. You are removing that crucial aspect, therefore you are gambling. Renting is NOT a waste of money (for everyone), read my don't buy blog and watch that video again (kinda cheesy video, sorry)

As for the 5% to 10% that people tell you, um, yes that is what it was historically. But just like stocks it should have the disclaimer "Past performance is not indicative of future results." Who knows what it wil really do. People love to say "but it can't go lower," to which I reply "it can ALWAYS go lower." If YOU are certain that it will go up 5% to 10% each year, then BUY! You would be guaranteed a profit.

Instead I tell people you need to run the numbers with my 1/3rd System
  • 1/3rd chance of it going DOWN 5%
  • 1/3RD chance of it staying flat (and still paying fees!!)
  • 1/3rd chance of it going up
And ask yourself if you would be ok in all 3 of those scenarios (if you say "I'll just rent and wait it out," read the Upside down blog)

2) See above. Also think this way, you aren't going to want to downgrade from where you live now. So if you want the same size and location, it will cost you about 10-20% MORE to buy, and yes, even after the tax relief. So you are 100% gambling on future gains exceeding the 7-8% in fees. One might say you "might" be ok, but is "might" good enough?

3) Putting more or less down doesn't really matter in this case. If you put more down, yes your monthly is lower, but then you aren't comparing apples to apples. You should run the numbers as IF you were doing 100% financing (since if you put 5% down, you have to ask what your money would have been doing otherwise, that is called "opportunity costs"). Another way to put it, if you buy a $400k place and it goes up or down $40k, you will make or lose $40k regardless of putting $40k, $80k or $20k down.

4) Want your landlord to keep it? Tell your him you won't call him for any repair under $200 and you will do direct deposit into his account. The easier you make it for him, the less likely he will sell. As for waiting for 2008 for a better market, I don't know about that, you can read 10 things that say yes and 10 that say no.

HOW ABOUT THIS? Buy your Landlord's house. Do you like his house? Don't think you can afford it? Maybe you can do a Lease / Rent to Own option. Long story on how that works, but it shields you from the downside. If the market goes down, just opt NOT to buy it and only lose a few grand.

Hope that helps.

Again, Renting is NOT the devil that everyone makes it out to be.

Written by, Frank Borges LL0SA- Virginia Broker/ Owner FranklyRealty.com

Blog.FranklyRealty.com Featured in BusinessWeek, CNBC, WSJ etc.

Keywords: Arlington Virginia homes Metro Clarendon Ballston Courthouse

4 comments:

Rxxxx- Arlington Va buyer said...

Wow - thanks so much for the quick response.

Just from glancing through this, I know I have a few follow up questions/comments (e.g. my 2 year time limit was self-imposed, so what would be the minimum recommended time). I need to get some things cleared up by an impartial person who knows the real estate market here. My head is spinning and I have to make some major decisions soon. Frankly, the 2 major reasons why I am considering buying is:
1) if it's better financially &

2) so I'm not at the mercy of a landlord when he decides to sell, etc.

Thanks again and I would REALLY appreciate any time you can spare!

Cheers,
Rxxx

FRANK LL0SA Broker said...

Hey Rxxx,
I can't tell you what to do. But I can say that I would NOT buy a house just because the landlord is selling.

As for the more crucial question "if it's better financially," I can't tell you that and don't you dare ask any Realtor that, what are you doing? You are asking somebody "Dear Realtor, I know you will make $12k if your answer is yes, do you think I should buy given XYZ"

It really scares me that you are asking Realtors this question. I'm just glad you hit this page.

You have to run the numbers but with a 2 year horizon it is VERY risky. GO RENT and save the money (renting, even after taxes tends to be less) to buy your bigger house in 2 years. Call me then.

Frank

Anonymous said...

Enjoy your blog immensely as well as the new sub-blogs. You raise a lot of interesting points both here and in your "don't buy" post. One thing that I think you are overlooking or at least undervaluing is the building block advantage of buying. The theory is that if you own already, you will have a greater chance of qualifying for a larger loan by already proving you are credit worthy. Depending on individual factors, Rxxx may have difficulty buying the ideal house down the road if s/he has not owned before. I am not saying this is THE reason to buy or that this trumps any negatives, but since you are comparing all the pros and cons, this should not be overlooked. Of course qualifying for a loan and actually being able to afford to take the loan are not always the same thing. But for people with careers of nearly certain increased earning potential (eg, young doctors, lawyers) buying something sooner rather than later could be a distinct advantage to acquiring that dream house. Thanks and keep fighting the good fight.

Jeffrey Austin White said...

I have simplified this decision making process into three simple questions and have developed my own theory on renting vs buying. I am interested in your opinion. If you have time please checkout 555 theory. I would warn against trying to flip a property so quickly!