I made my first offer recently. With pretty conservative (0% appreciation over 30 years, 1% inflation) calculations it is net neutral to positive over our rental situation the last few years. There is a pretty good chance of getting it net to us.. zero down. So the basic calculations were that we don't have to put a lot into the place, we like the area and if everything goes to heck the bank has a nice shiny well kept house to market.
I won't provide too many more details, as many know I am extremely private. But I thought it'd be a good topic for discussion.
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With those underlying assumptions, we must be talking good ol' fashioned cash on cash return. Rent needs to fully cover interest, maintenance, vacancy, insurance and leave some for you. To get there, you likely need (near)zero interest, long amortization, and confidence in tenant performance.
my $.02,
jimi
Wasnt expecting you to cave yet. I am waiting until the HAMP crap is over to see what happens. I am sure there will be another program of sorts but BofA has been ramping up their foreclosure dept hiring and training recently.
Tough to buy into such a supply constrained market right now. Must have been quite an argument going on inside of your head ;) Hope everything works out in a way that is positive for you financially and emotionally.
Anon,
This will be Owner Occupied and so the comparison is to me renting vs owning.
Mike,
I didn't expect to cave either. But zero down and the math working out from neutral to net positive made it macht nichts. We keep our nest egg intact and we can have some measure of protection against the increasing desperate measures taken to "rescue" homeowners. And if I'm completely wrong the bank gets it back and we would be no worse off then renting (by the time they foreclose the money saved not paying would pay for any tax liability if that law isn't extended).
I'm surprisingly ambivalent towards the deal. I thought I'd be more nervous either way. But it isn't a home run and isn't a mistake as far as the numbers I have run. I'd say it is small ball, I am on first base but the question is did I get there by hitting a single or getting nailed by a fastball. One is definitely more desireable than the other.
It isn't a done deal and I think there will be much better times to buy. This was a unique situation that matched our situation very well and so we wrote it up.
Note I didn't say I think we'd be "building equity" with our payments. With my assumptions we'd be paying down debt and it is a long time before we are "building equity".
Assuming that you get the place, I figure your personal interest in closely tracking the housing market will diminish, at least a bit. are you going to continue updating ED?
I am very, very selfish :)
Can you elaborate more on how you securing zero down financing? Is it a special case in which you net zero down using FHA?
I have been getting more serious as well, but the primary area in which I am focusing is very small and the inventory appears to be much more constrained there than the areas I am willing to settle for.
I have been juggling the idea of going FHA with less down as not to deplete the nest egg, but my lender does not require PMI with 10% down.
ED:
It's quite surprising and actually alarming that after all this time, you're resorting to the same approach as many others did (who pretty much screwed up the housing market) that if the shit hits the fan, you're going to walk because you have nothing invested into it?
Actually I'm really disappointed. Correct me if I'm wrong.
Also, what's the hurry?
Mike,
I fully expect to keep the blog going but some of the stuff I do costs money and I will reduce some of those things but not all after I buy a home.
Longhorn,
I cant elaborate more but I chose my words carefully in describing the financing. There are some things about my situation that are somewhat unique but I've never verbalized on the blog for various reasons. You might be able to figure out what I mean but I won't go into much more detail because of privacy (perhaps if I close I'll spill the beans).
Noz,
Absolutely fair point and I'm surprised I haven't received more outrage. First, it is not my plan to ditch the house. If "TSHTF" in a major way either personally or generally I am keeping the option open. I am a guy who likes stability a lot, there is no rush.. the deal could fall through and I would be ambivalent about it. But the unique circumstances of the particular house and the numbers made the decision neutral to net positive.
The "net to me" zero down reduces the exposure of some of my nest egg to the vagaries of the market. Not writing the big check of a down payment, fixing my costs lower than they are now, and not having to concern myself with the insanity of buyers, sellers and government is all very appealing to me.
IMO this is the best way to buy now.
We are probably going to live in a world with PERMANENTLY HIGH foreclosure rates for a long, long time.
Look at the typical buyer with a 3.5% down FHA loan. When a normal life event happens and they cant/wont continue making payments (lose job,get divorced,death in fam, etc) they won't have equity to sell so its foreclosure/short sale time. It takes 7% equity just to cover the realtor commissions+closing costs!
This is the new normal. Anyone buying from 2004 until ???? won't have much if any equity for a looong time and under water mortgage is the main predictor of foreclosures.
They key is to buy a place that needs little or no work with as small a down payment as possible. Any money you spend do so on furniture and things you can strip out of the home, not room additions or flooring.
I don't like this situation but this is the only pragmatic way to deal with it IMO. During the bubble one lesson we learned is to NOT put a large down payment into the property then spend 200k remodeling. Those people got wiped out.
Good luck ED and thanks for the blog.
HelloKitty, my lesson from the past few years is that having a hefty down payment is the prudent way to buy a house. If you have a 20% down payment, then the market can fall up to 20% and you will still have positive equity in your property. This means that if you need or want to sell your house you can do so. Yes, you will lose that down payment money, but you won't have to be foreclosed on or have to write a check to your lender (money that you surely don't have) to sell your home.
I think that in the long run, the real estate market will be healthier if lenders require higher down payments. This will push the purchase price of homes down and make them more affordable.
Ritchie I understand your perspective but losing a 20% down payment is not how I define prudent.
CA is a non recourse state unless you refi or get a HELOC. That is a potentially very valuable situation. People who put zero down are now walking away from a 40% loss on thier house scott free and 'buying the same house across the street' for half the price. Its happening now every day - the people who poured money into thier home are unfortunately stuck or simply wiped out if they have to sell.
Its not that easy to save up $150k or whatever. Putting zero down and making higher mortgage payments is 'insurance' on that money, in my mind its worth it. You think you will stay there forever when you buy.... but life is not 100% under our control.
Has your offer been accepted?
I guess if the banks are going to continue letting people purchase homes without any skin in the game, I guess we should let them.
But if I buy a house and it loses 20% of its value, I am the one that should take the hit for that. Either in loss of equity/downpayment or by having to write a check to cover the difference at sale. I took the risk - I lost.
It's amazing and appalling that people are able to walk away from such a large debt with only a hit to their credit. I'm not sure if any of these walkers are being hit with tax bills for their forgiven debts, but they can be.
Richie,
I definitely agree, hefty down payments and skin in the game should be he norm rather than the exception. But that won't be happening in my lifetime.
I think going in now with large downs is crazy. If you are going to play going in with low down is a optimal response to a sub-optimal situation.
Anon 2,
Not yet, I give it a 1 in 10 chance, I'm asking for a lot and people don't generally like the low down borrowers since they have the highest risk of not closing due to loan issues.
"Luckily" I don't have much cash to make a large down if/when I ever buy a house! hehe
I want my payment to be low so a large downpayment for me would be worthwhile.
Housing is illiquid, if you need that money you might not be able to get at it.
So a large down payment is gaining you the debt service cost minus the tax break. But it is losing the opportunity cost (for example your down payment could be in a bond making 5%) minus the tax cost. There is liquidity issue and also a depreciation issue.
You definitely want to fix your costs as low as possible.. but you have to factor the total costs into the equation. A large down may fix your monthly costs low but if you amortize the down plus the opportunity cost across the lifetime of the loan you will see if you are saving or not. Total cost is the key.
There are so many ways to consider the total costs of long term investments, when you factor in interest rates, tax savings, future value of money, inflation, etc.
A $350,000 house at 6.5% interest and 30-year loan will have a total cost (sum of 360 payments) of almost $800,000. That same mortgage with a $70,000 downpayment will have a total cost (down + 360 pmts) of a little more than $700,000.
So, the $70k down payment will save you about $90k in interest costs in nominal dollars.
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