You may have noticed that it has been a little over two months since my last newsletter. Apart from simple procrastination I was also going through the process of selling my vacation home. With that sale a few things happened. First, I had to face some hard financial facts that I knew were coming but I hoped that maybe just maybe they wouldn’t apply to me…after all, I am a financial expert right? Guess what, these lessons apply to EVERYONE and crossing my fingers and closing my eyes real tight wasn’t going to change the outcome. I was going to have to face each reality head on and make peace with it one step at a time.
The second issue was not financial, it was emotional. You may be thinking I’m about to say I was sad to say goodbye to my beloved vacation home but the truth is I was nostalgic for all of 15 minutes. The house, which was used mainly as a vacation rental over the past years, had become a time and energy suck along with being an overall giant pain in the a**! The emotional issue that came along with the sale was a sense of failure. Here I am teaching people about personal finance and I had to admit to family, friends and clients when they asked me how much I had made off the deal that I had actually lost money. What?!? But Ari, not only are you a personal finance coach but you also have a real estate brokers’ license!!! Yes, it’s the truth, despite all my financial knowledge and despite my real estate broker’s license there were some lessons I couldn’t have learned anywhere else. The good thing about the school of hard knocks it that it makes sure you really get hands on lessons. And since I like to practice what I preach, I am going to use this experience to fail forward. Instead of hiding behind a fake smile, I am going to share my story with you and apply this loss as a real life example to reiterate why I coach you to do things certain ways. Sometimes the most memorable lessons come in the form of a personalized story from someone close to you about what NOT to do.
If you have been day dreaming about buying a house, thinking about selling your house or are ridiculously annoyed that you continue to pay so much in rent, then this is the article for you. Granted some of the more technical financial lessons I learned firsthand only apply to second homes/homes used as rentals but the overall sentiment is the same.
LESSON 1: BUYING A HOME IS EXPENSIVE
Those of you who own a home are emphatically shaking your head in agreement right now, aren’t you? When I bought my first house my step-dad said “Welcome to the home moaners club!” At the time I laughed. Now I realize, nope, not a joke. :(
For those of you considering buying a home here is a little snapshot: Let’s assume you currently rent a 2 bedroom apartment in Los Angeles and you are going to buy a house/condo where the 30 year fixed (meaning the interest rate never changes) mortgage payment is the same as your rent.
MONTHLY ROOF OVER MY HEAD EXPENSES
If you have been day dreaming about buying a house, thinking about selling your house or are ridiculously annoyed that you continue to pay so much in rent, then this is the article for you. Granted some of the more technical financial lessons I learned firsthand only apply to second homes/homes used as rentals but the overall sentiment is the same.
LESSON 1: BUYING A HOME IS EXPENSIVE
Those of you who own a home are emphatically shaking your head in agreement right now, aren’t you? When I bought my first house my step-dad said “Welcome to the home moaners club!” At the time I laughed. Now I realize, nope, not a joke. :(
For those of you considering buying a home here is a little snapshot: Let’s assume you currently rent a 2 bedroom apartment in Los Angeles and you are going to buy a house/condo where the 30 year fixed (meaning the interest rate never changes) mortgage payment is the same as your rent.
MONTHLY ROOF OVER MY HEAD EXPENSES
| RENTING Rent: $2400 Utilities (Gas/Electric): $100 Renters Insurance: $20 GRAND TOTAL: $2520 | OWNING Mortgage: $2387.08 Utilities (Gas/Electric/WATER): $250 Homeowners Insurance: $200 Property Taxes: $781.25 $3618.33 Ouch!! |
Now you are probably thinking well, duh, I will just buy a cheaper house to get all the expenses to be the same as my current rent, utilities and insurance. Unfortunately, the purchase price I used for this example is very close to the average home price in Los Angeles at $625,000, and also assuming you are putting 20% or $125,000 down, and you have amazing credit and qualify for a 30 year fixed rate of 4% on the $500,000 you intend to finance. In order to keep the cost of owning the same as renting you would have to be super lucky to find a place to buy for around $450k and be ready to put 20% or $90k down. If you can’t put the 20% down you will have to face the ugly monster called PMI or Private Mortgage Insurance. Basically your mortgage company takes out an insurance policy (which you pay for) just in case you can’t afford to pay the loan…and it is VERY EXPENSIVE. Usually about ½% of your mortgage amount. For a mortgage of $500k you will add about $250 per month to your expenses just for PMI. I can think of a heck of a lot I’d rather do with that money than pay for an insurance policy.
LESSON 2: OWNING A HOME IS A PAIN IN THE A** (literally) AND EXPENSIVE
Right after I bought the house I currently live in I came home one evening, walked through the front door after a long day at work, I took one step forward and felt my feet slip out from under me. As I lay there for a second staring at the ceiling trying to figure out what had just happened I noticed a lovely bubble in the ceiling with a single drip or water coming from the center. I had slipped on a puddle INSIDE my house and had landed flat on my butt!!!! As a renter I would have called the landlord. As the homeowner I had to go outside into the rain, find a tarp, pull out the ladder, call a friend to tell them I was getting up on the roof and if they didn’t hear from me in an hour to call 911, and then cover the roof for the time being. I wish this story ended there but sadly no, it ended a few thousand dollars later with a brand new roof.
As a homeowner stuff like this happens almost every year. In 2013, it was plumbing issues for approximately $5,000.00, in 2014 it was a new main sewer line for $7,000.00, and just this year a new water heater for $1500.00. Each of these moments was painful and I wished every single time I could have just call my landlord and gone to see a movie while they took care of it.
LESSON 3: SELLING A HOME IS EXPENSIVE
This is where my hard lessons came from. Let’s say you purchased your home using my example above (REMINDER: $625k purchase price, $125K down, 30 year mortgage at 4%) lived in your house for a few years (let’s say 2 because you need to have lived in your house for at least 2 out of the last 5 years you own it in order to qualify for a tax advantage) and then decide to sell.
Super exciting! Your Realtor tells you the market has improved and you can now list your house for $673K. (NOTE: How did I get this number? In 2015 the average increase in property prices in LA was 5.3% and next year is projected to be 2.2%- don’t worry, I did the math for you.) What you are probably thinking is “Awesome!! I’m going to get my original $125k down payment back plus the $48K in appreciation that has happened over the past few years. That would be nice, but that’s not gonna happen quite like that.
I’m going to use data from my own sale to help put this all in perspective. Let’s assume you get an offer for 98% of the asking price (which I did) that means the buyer in this scenario is offering you $659,540.00. Woohoo! That’s still an additional $34k in your pocket right? Nope.
Sellers pay the fees associated with selling the property, which includes the industry standard brokers fees of 6% (3% to sellers agent and 3% to buyers agent- negotiable but don’t expect much wiggle room) and all the other sellers’ fees (escrow, title insurance, reports etc. etc.) which total about 1.5% of the sale price. So what does this mean? It means $49,465.50 in deductions or in other words, you very well may have a LOSS!
Here’s an easier way to look at this:
Sales price: $659,540 (here’s to hoping they don’t request repairs or credits towards closing costs)
Real Estate Agent’s Commission: -$39,572.40
Sellers’ Fees: -$9893.10
_________________________________________________________________
Proceeds: $610,074.50
That would be a great number if we didn’t have to pay off our loan. The good news is that we have paid the loan down some or we'd be in the hole by $15,000 (proceeds $610,074.50 less loan of $500,000 = $110,074.50, but you put $125k down...eek) but remember you pay mostly interest at the beginning of the loan so you haven’t made a big dent even with your monthly payments over the past two years.
Loan Payoff: -$482,030.85
________________________________________________________________________
Final proceeds: $128,043.65
In two years you made $3043.65 on your purchase (remember you had to put $125,000 down to avoid PMI) and this is assuming that property values went up, that your selling costs are average, and that you didn't plunk down thousands in repairs since you bought the place.
This is exactly what happened to me but in addition to these selling fees I had some repair expenses before the deal would close and since it was a second home I had some other taxes that I had to pay so at the end of the day I lost some money. Then I started beating myself up even more! (We all need to stop doing this...it doesn't change the outcome of the situation!) Had I just invested my down payment I would have made money and saved myself the hassle all these years! Let’s assume instead of putting $125,000 down you had not bought a house and instead invested it and got a very conservative 6% return. You would have $140,900.00 in the bank. In economic terms we call that an opportunity cost. The opportunity of owning this home cost you an additional $15,400 in potential earnings. Makes that $3043.65 gain not seem so good huh? Especially after you pay the movers :(
Now that you are probably convinced you never want to own a home, here is the final lesson.
LESSON 4: OWNING A HOME IS AMAZING
If I could choose whether or not to do it all over again, would I? You bet you’re a** I would. Yes, I took a loss but I had a home in the mountains that I enjoyed and made memories in for 7 years!
There is nothing that tops the sense of security knowing that no one (assuming you pay your mortgage) can kick you out of your home, and there is nothing as exhilarating as deciding to remodel a room so it is just the way YOU want it and taking that first sledgehammer swing.
The first key (pun intended) to owning a home successfully is knowing the REAL cost (all that junk I just explained in lessons 1-3) as opposed to the idealistic perception we tend to have, like a house that never has any problems! Secondly, you should only buy if you know this is a place you will be staying in for a long time. Long enough for the property values to increase substantially. And lastly the most important thing both emotionally and financially is to be prepared, be ready with your down payment when you buy, be ready for the costs when you sell and be ready for the expensive stuff that life throws at you in between!
Need help figuring out how to save a down payment for a home or how much you can really afford (not what the mortgage bankers tell you)? Make an appointment today and I will help you sort it all out.
LESSON 2: OWNING A HOME IS A PAIN IN THE A** (literally) AND EXPENSIVE
Right after I bought the house I currently live in I came home one evening, walked through the front door after a long day at work, I took one step forward and felt my feet slip out from under me. As I lay there for a second staring at the ceiling trying to figure out what had just happened I noticed a lovely bubble in the ceiling with a single drip or water coming from the center. I had slipped on a puddle INSIDE my house and had landed flat on my butt!!!! As a renter I would have called the landlord. As the homeowner I had to go outside into the rain, find a tarp, pull out the ladder, call a friend to tell them I was getting up on the roof and if they didn’t hear from me in an hour to call 911, and then cover the roof for the time being. I wish this story ended there but sadly no, it ended a few thousand dollars later with a brand new roof.
As a homeowner stuff like this happens almost every year. In 2013, it was plumbing issues for approximately $5,000.00, in 2014 it was a new main sewer line for $7,000.00, and just this year a new water heater for $1500.00. Each of these moments was painful and I wished every single time I could have just call my landlord and gone to see a movie while they took care of it.
LESSON 3: SELLING A HOME IS EXPENSIVE
This is where my hard lessons came from. Let’s say you purchased your home using my example above (REMINDER: $625k purchase price, $125K down, 30 year mortgage at 4%) lived in your house for a few years (let’s say 2 because you need to have lived in your house for at least 2 out of the last 5 years you own it in order to qualify for a tax advantage) and then decide to sell.
Super exciting! Your Realtor tells you the market has improved and you can now list your house for $673K. (NOTE: How did I get this number? In 2015 the average increase in property prices in LA was 5.3% and next year is projected to be 2.2%- don’t worry, I did the math for you.) What you are probably thinking is “Awesome!! I’m going to get my original $125k down payment back plus the $48K in appreciation that has happened over the past few years. That would be nice, but that’s not gonna happen quite like that.
I’m going to use data from my own sale to help put this all in perspective. Let’s assume you get an offer for 98% of the asking price (which I did) that means the buyer in this scenario is offering you $659,540.00. Woohoo! That’s still an additional $34k in your pocket right? Nope.
Sellers pay the fees associated with selling the property, which includes the industry standard brokers fees of 6% (3% to sellers agent and 3% to buyers agent- negotiable but don’t expect much wiggle room) and all the other sellers’ fees (escrow, title insurance, reports etc. etc.) which total about 1.5% of the sale price. So what does this mean? It means $49,465.50 in deductions or in other words, you very well may have a LOSS!
Here’s an easier way to look at this:
Sales price: $659,540 (here’s to hoping they don’t request repairs or credits towards closing costs)
Real Estate Agent’s Commission: -$39,572.40
Sellers’ Fees: -$9893.10
_________________________________________________________________
Proceeds: $610,074.50
That would be a great number if we didn’t have to pay off our loan. The good news is that we have paid the loan down some or we'd be in the hole by $15,000 (proceeds $610,074.50 less loan of $500,000 = $110,074.50, but you put $125k down...eek) but remember you pay mostly interest at the beginning of the loan so you haven’t made a big dent even with your monthly payments over the past two years.
Loan Payoff: -$482,030.85
________________________________________________________________________
Final proceeds: $128,043.65
In two years you made $3043.65 on your purchase (remember you had to put $125,000 down to avoid PMI) and this is assuming that property values went up, that your selling costs are average, and that you didn't plunk down thousands in repairs since you bought the place.
This is exactly what happened to me but in addition to these selling fees I had some repair expenses before the deal would close and since it was a second home I had some other taxes that I had to pay so at the end of the day I lost some money. Then I started beating myself up even more! (We all need to stop doing this...it doesn't change the outcome of the situation!) Had I just invested my down payment I would have made money and saved myself the hassle all these years! Let’s assume instead of putting $125,000 down you had not bought a house and instead invested it and got a very conservative 6% return. You would have $140,900.00 in the bank. In economic terms we call that an opportunity cost. The opportunity of owning this home cost you an additional $15,400 in potential earnings. Makes that $3043.65 gain not seem so good huh? Especially after you pay the movers :(
Now that you are probably convinced you never want to own a home, here is the final lesson.
LESSON 4: OWNING A HOME IS AMAZING
If I could choose whether or not to do it all over again, would I? You bet you’re a** I would. Yes, I took a loss but I had a home in the mountains that I enjoyed and made memories in for 7 years!
There is nothing that tops the sense of security knowing that no one (assuming you pay your mortgage) can kick you out of your home, and there is nothing as exhilarating as deciding to remodel a room so it is just the way YOU want it and taking that first sledgehammer swing.
The first key (pun intended) to owning a home successfully is knowing the REAL cost (all that junk I just explained in lessons 1-3) as opposed to the idealistic perception we tend to have, like a house that never has any problems! Secondly, you should only buy if you know this is a place you will be staying in for a long time. Long enough for the property values to increase substantially. And lastly the most important thing both emotionally and financially is to be prepared, be ready with your down payment when you buy, be ready for the costs when you sell and be ready for the expensive stuff that life throws at you in between!
Need help figuring out how to save a down payment for a home or how much you can really afford (not what the mortgage bankers tell you)? Make an appointment today and I will help you sort it all out.