Thursday, April 23, 2009

Can't Sell, But I Wanna Buy a 2nd Place

(sorry for the jumbled post. The copy and paste didn't work well)
Hi Frank
First, I have to tell you, your its great, after trying every free option available, and some paid for, I think this is the best for this area. Now to business. Me and my wife own (and live in) a townhouse that we bought in the worst possible moment, back in 2004,  

Frank reply> Only 2005 is worse. 

when the prices were close to > burst, it was stupid, but it seemd like a good idea at the time.

Frank reply> Kinda like now (based on yout email below)

We own more to the bank than the current value on the market.  > We both work full time. My wife works for a company and makes > XXk/year. I own my own company that I started back in 2008, > less than a year ago. I am the only employee. My total income as per the 2008 taxes is around > XXXk. We filed joined taxes for XXXk last year. This year it should be > better. My last salary for another company was XXXk/year.  
> We would like to buy a detached house in the coming months, now that the > market is down, seems like a good moment to buy, we do not want to sell the > townhouse for the same reason, and I am not even sure that we would be able > if we wanted to, we owe (~XX%) more than its worst.
> We called a loan officer that a friend recommended, she seemed really smart.
> She said that because we have no equity on the townhouse and are not selling > it, but buying a new one, and have no equity on it, we need to prove that we > can afford to pay both mortgages, which we think its still possible. But > then she said that because I have my own business, that business would have > to be in business for a year or two before I can use that income to apply > for FHA loan, and that the only option for us was a "sub prime" loan, which > does not sound too exiting.  > Is she right?? What would you recommend?  > thanks > Eric >

Frank reply> In my opinion, you are crazy. What you are proposing is SUPER risky. Ever been to Vegas? Lose $100 on the roulette table? What is the best way to win it back? DOUBLE DOWN. That is what you are trying to do. One is down, so you want to double down. What if things still go down more? You will be wiped out. Way to risky. If you sell your place and move UP and buy a bigger house, you will be ahead. Yes lose 10% or $30k on your sale, but on your purchase you also save 10%, but on a bigger home, that is $50k below. The total benefit is $20k ahead. If you can't sell, then rent. Rent your place and rent a bigger place. Even after taxes it is cheaper to rent, even in this market. And subprime. Don't even think about it. That is nuts. That extra 3% you get charged... no way. Yeah yeah , you plan to refi, but if the market goes down, you are stuck with a horrible high priced loan. I have a blog on subprime and how subprime people should never buy. But that is just my opinion. 
Sure you could make a killing with what you propose, but it is super high risk speculation.
Hope that helps.  


George said...

"Yes lose 10% or $30k on your sale, but on your purchase you also save 10%, but on a bigger home, that is $50k below. The total benefit is $20k ahead." <--- Very understandable explanation, Frank. This sounds like an elegant (i.e., not extremely sloppy) solution for a down time. Of course, it's also the conventional solution for all who seek a better place to live, in all times: sell your current place and buy a new place.

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