What to do if you are forced to buy a house?

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stillConfused_IHB

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Even though RE prices are going down, the correction is happening very slow and looks like it may take a few more years before prices will stabilize. This has created a big problem for me as I can not convince my wife to wait much longer before buying our home. She has a valid point though as this is our third year renting since we have moved here....





Basically I have rest of the year to decide on what to do and I was wondering if you guys can help me avoid any potential mistake.





Currently, I am considering following....





(1) Buy the most expensive home we can afford now and just live there for many years OR


(2) Wait for the summer season to be over and then start low balling available vacant homes (in the order we like them most to least) OR


(3) Buy the smallest SFR that fits our needs now and in a few years buy the dream (or nightmare?) home. At that time, use this home as a rental property or sell it for a small loss, but hopefully the saving on the dream home will be substantial. OR


(4) Around December, purchase a new home from builder for hopefully bargain price (at least at that time). OR


(5) Continue to save by renting and eventually buying a home where we can live for many years (obviously, we are losing patience on this option day by day)





Facts about us:


- currently renting in an apartment for $2300/mo (lease break fee is only $1800)


- both of us have good FICO scores


- liquid assets more than $200K


- monthly household income more than $20K





I will appreciate any feedback you guys can provide me...
 
<p>I am almost in the same exact boat as you and my profile is very similar to yours except my wife and I have no kids. For me, Dec. 2008 is the drop dead date. </p>

<p>One thing that you can do is rent your deam house. Most people think that renting is throwing away money that can otherwise go to the house but as we have seen on this thread, most houses are renting for half of what it would cost to own them.</p>

<p>The only downside to renting is trusting the financial strength of the owner. That is, we saw beautiful quail hill properties that we could rent for $4000 a month which were bought in the last 2 years and it was obvious that the owners were losing money on the property. My fear is that we move in and 6 months later, the owner defaults and we have to find a new place. </p>
 
Let’s see, you guys are spending not much more than 10% of gross income on housing? I would say that is pretty efficient, and I don’t see why you would have to change that. So the obvious answer would be option 5, but I know that is not entirely up to you. I was at a point a few months ago when my wife went through the same thing with her patience, so our compromise was to wait through the summer, when I think the market will tell a lot about the next couple of years. She came to her senses, thankfully, so we have a longer horizon now, but in your situation I would choose option 2 and assess the market at that point.
 
<p>stillConfused,</p>

<p>rkp makes a very good point -- get out of the apartment and rent a house if you are feeling cramped. There should be some excellent rental deals hitting the market soon (all those folks that haven't been able to sell may start renting out their "investment" to slow the bleeding).</p>

<p>rkp said "My fear is that we move in and 6 months later, the owner defaults and we have to find a new place."</p>

<p>Your lease takes priority -- you won't be kicked out. The new owner (bank, whoever) must honor the lease. Of course, don't count on being able to renew the lease. If you want some continuity for you kids, your best bet is to sign a lease for a longer term: 2, maybe even 3 years (hopefully with a reasonable lease break fee in the event you want to buy sooner than you planned).</p>
 
rkp/skeptic





Thanks for the feedback...





Actually when we moved here from Austin, TX, we had rented a townhome and were thinking about staying there until we purchase our home. Exactly year later, our landlord did not renew our lease as he wanted to sell it and asked us if we were interested in buying it. We declined, but the house sold for full price $660K in a week or two (probably worth 10% less now)...





At that time, we decided to rent an apartment to avoid similar situation again. I don't think the same idea of renting a bigger place would fly again with my wife. It will be easier to extend our renting for few more months than asking her to move.
 
<strong>gepetoh</strong>





I am sure you know that these incomes only look good to begin with, but our take home pays are very small and we can not save much after considering following....





12% in rent (after tax)


10% in ESPP


6-7% social security/medicare???


35% federal/state taxes


7-8% charity


30K/year in 401K


1000/month in after school care for kids


500/mo in fast food


200/mo at restaurants


300/mo gas


600/mo groceries


auto insurance


life insurance


health insurance


medical expenses


vacations


occasional big ticket items


cable/internet/cellphones/other utilities





and list goes on an on and on....





So my point is that we are also looking for ways to save a little more money for our kids' education. As it is we are not saving much and if we buy a house we will build some equity that can be used later for urgent needs.





I don't know how people drive all these expensive cars here in Irvine. I have seen more expensive cars here in my apartment complexes than our upscale residential neighborhood in TX.
 
<p>stillConfused - in all fairness, you are electing to participate in your company's stock participation plan and 401k so you can't really count them as expenses. You could always choose to invest that money for your children's education. However, I agree with your point that even with big incomes, their isn't a lot of room. It seems like the more I make, the more expenses we have!</p>

<p>Also, you don't have to rent big places from private owners. IAC has quite a few communities with townhomes that are around 1500 sq ft. </p>

<p>skeptic - "Your lease takes priority -- you won't be kicked out. The new owner (bank, whoever) must honor the lease." Are you sure about that? I thought if the place foreclosed, I was SOL. Even if you are right, we don't want to be in a position where the new owners won't renew the lease. </p>

<p> </p>
 
<p>rkp,</p>

<p>Yep, I'm sure. Property Law 101. Of course, almost everything is negotiable -- so you need to read your lease closely to make sure it doesn't make your leasehold interest somehow subordinate. In most cases, the lease is an encumbrance on the property that survives all transfers in ownership of the house.</p>

<p>Any lawyers out there care to comment?</p>
 
<p>stillConfused: <em>"As it is we are not saving much and if we buy a house we will build some equity that can be used later for urgent needs."</em></p>

<p>This type of thinking was somewhat acceptable in a rising housing market. In today's market, it is most certainly flawed logic, and until we reach somewhat of a bottom in the market, you are *sure* to lose equity, that you purport to use later for urgent needs. If you haven't yet seen the numbers from last week on <a href="http://www.ocregister.com/ocregister/money/housing/article_1672826.php">OCRegister</a>, the decline is affecting every single ZIP code in Irvine, and it has only just begun.</p>

<p>Ideally, you should be building a strong cash cushion for "urgent needs" via savings in CDs, and tax-free muni funds for example. Our <a href="http://www.irvinehousingblog.com/2007/04/08/southern-californias-cultural-pathology/">cultural pathology</a> is such that people are afraid of seeing too much cash in their accounts and want to either spend it or "invest it". Read the linked post on Southern California's Cultural Pathology by IrvineRenter if you haven't already, it helps shed some light on why people in Irvine drive expensive cars.</p>

<p>Also, for your own financial benefit, balancing your individual needs short term and longer term, including foreseen and unforeseen cash outflows, you should take everything into account carefully before jumping headlong into "homeownership". In planning for homeownership, are you taking into account all the cash outflows you will need to make towards:</p>



Property taxes and Mello Roos assessments- builds no equity, is a huge portion of your monthly expense these days

Homeowners Insurance - builds no equity

Increased utility bills (no shared resources like when renting - such as water or hot water etc.) - also builds no equity

>

<p>In talking to your spouse on these matters, whatever be the sense of urgency borne out of her innate nesting instinct (you can't fight it, but you can still try reasoning ), it may help for you to put it all down on an Excel spreadsheet with realistic numbers and see what the financial impact will be. Good luck...</p>
 
<strong>cruicialtaunt</strong>





I agree with you that we should not look at home equity as any resource but should concentrate on making it clear of any liens. I was just trying to suggest that it may be better than a loan from 401K if one exhausts all other alternatives...





I read that article by irvineRenter about cultural pathology and it is definitely a very good read.





In our case, we are trying not to overstretch beyond our means, although we may be a bit jaded by RE market of SoCal in last three years starting to believe that $400/sq. ft is a great deal...





Other constantly nagging thing on our minds is not being able to provide a bigger living space to our kids while they are growing up and when they need it. This is more emotional than anything else though.





I appreciate all these comments from you guys and already feel more comfortable eliminating option 1 and option 3.
 
<p>FYI the bank will kick you out. Check out the comments <a href="http://www.irvinehousingblog.com/2007/03/19/the-plot-thickens-in-fraud-park/">here on Fraud Park</a> and you can see how two people renting from the same group of fraudsters who had to move out once the bank took it. When a bank takes a home it is not regarded as the same as a sale to a new owner that would have to honor the lease. Banks don't want to be property owners and they really don't want to be landlords.</p>

<p>I am not a Lawyer but someone posted the legal reason why the bank can kick you out. It may be on the Fraud Park post's comments. There are a lot of comments to read. </p>
 
<p>graphix,</p>

<p>I think you are referencing a unique situation where the renters signed a lease with "straw owners" and were paying rent to folks that didn't own the house. In other words, there was never a valid lease. Not sure though, I didn't read all the comments. Can you confirm if I'm understanding this correctly? Then there is the issue of "rent skimming" -- another complicated scenario.</p>

<p>But nonetheless, your comments raise important distinctions. I was wrongly assuming (and we all know what that leads to) that the lease was in place before the mortgage. This is how it works:</p>

<ol>

A landlord's sale of the house ordinarily is <em>not</em> itself ground for evicting tenants in lawful possession, because a purchaser with knowledge of the tenancy (actual or constructive knowledge), takes title <em>subject to</em> existing leasehold interests.

Leases <em>senior</em> (first-in-time) to the trust deed encumbrance (mortgage) continue in effect after the foreclosure, precluding eviction of the preexisting tenants. [Note - this includes senior leases that have been assigned to new tenants]

On the other hand, leases <em>subordinate</em> (junior) to a deed of trust (mortgage) --either because created <em>after</em> recordation of the trust deed (mortgage) or because the leases <em>expressly provide</em> they will be subordinated to any deeds of trust or mortgages placed on the property (this is a common lease clause) --are <em>automatically extinguished</em> by a foreclosure sale ... absent agreement to the contrary.

</ol>

<p>As y'all can see, this is a rather complicated area. And I didn't even discuss the difference between judicial foreclosures and nonjudicial foreclosures!!</p>
 
<p>Skeptic - Maybe I am weird but that all made perfect sense and I have a follow up question too. I just wanted to point out many of the foreclosures involve fraudsters like the one in the Fraud Park post. So what you basically are saying is if there is a loan I.E. refi while the lease is in effect then and only then does the lease stick since the lease was senior to the loan. Also if you do not have a copy of your lease you are out of luck too.</p>

<p>Now to really complicate things what if there was a first mortgage from say 1/05, a lease from 4/05 and a second mortgage in 12/06. Then they default on the second and then the first and then foreclosure. Does the tenant get kicked out or can they stay? I only ask because it sounds like you have much more of legal mind than I do. If you do not know the answer or don't feel like looking it up because I ramble off like a two year old with questions like this no offence will be taken.</p>

<p>As for rent skimming don't you love how the tenant is entitled to damages? I don't think they have the money since they were rent skimming in the first place good luck in collecting damages.</p>
 
<p>Skeptic & graphrix - you guys make some greats points. After reading your posts, I definitely want to stay clear of any rental where the owner is bleeding. Too many bad scenarios and too much risk. </p>

<p>That being said, it pretty much rules out most new construction as the majority of it that is being rented out is by specuvestors. </p>
 
<p>stillConfused,</p>

<p>It sounds like waiting for the correction to run its course is putting a lot of stress on your family life. Under this circumstance, option 4 may be your best bet.</p>

<p><em>"(4) Around December, purchase a new home from builder for hopefully bargain price (at least at that time). "</em></p>

<p>Here's why:</p>

<p>1. For the next 2-3 years, the best deals will come from builders or buying foreclosures/auctions.</p>

<p>2. December is a good time to get a bargain from the builders b/c they will be under pressures to generate revenues for 2007.</p>

<p>3. The bargain will serve as a "cushion" for you when prices go down. Sorry to say this, even with the cushion, you'll lose money b/c the correction is just starting & it has a long way to go. But, hey, there's more to life than money ... Your wife's & kids' happiness might be worth it.</p>
 
<p>I really don't understand why people have such a high need to own the place they live in.</p>

<p>Sure, owning your own dwelling is comforting and feels "safe" and gives a certain stability. But to me, this seems like a false sense of comfort, especially in Irvine where TIC/HOAs/etc. keep a strong grip on the property even after the sale though fees, rules, price control, etc.</p>

<p>Yes owning vs. renting means noone can everforcefuly throw you out. I still don't see that as a good enough advantage to cut down on one's lifestyle as you will have to in the current market with owning vs. renting.</p>
 
<p>As mentioned, at only 11% spent on housing I would say you are "underspending" on housing. You could easily afford twice or even three times as much and rent a fairly lavish home - at a cost less than what it could to buy.</p>

<p>"I am sure you know that these incomes only look good to begin with, but our take home pays are very small and we can not save much after considering following....





12% in rent (after tax)


10% in ESPP


6-7% social security/medicare???


35% federal/state taxes


7-8% charity


30K/year in 401K


1000/month in after school care for kids


500/mo in fast food


200/mo at restaurants


300/mo gas


600/mo groceries


auto insurance


life insurance


health insurance


medical expenses


vacations


occasional big ticket items


cable/internet/cellphones/other utilities"</p>

<p>I am not sure what you mean here. Everything in this list apart from social security, medicare and taxes <strong>is</strong> take home pay and is discretionary. Yes, you need to eat but you're not "forced" to spend 1300$ in food every month. So I'm not sure what you mean by "our take home pay is very small here" sorry...</p>
 
<strong>muzie</strong>





Actually "take home pay" should read "money available after all expenses".....(sorry for my poor choice of words)





I am not denying that some of the discretionary expenses can not be avoided... but on the big ones...





charity (gathering good karma, religious thing)


after school care (without it, both of us would not be able to work)


food (wife has a longer commute and I don't know how to cook, so I have no other choice)


401K (I don't have confidence that 30 years from now, social security program would help much)
 
Still Confused - It took me three years of talking with, cajoling, coercing, and sweet talking my wife to get her ready for the time, ( Aug of 05 ), when we would sell our home and rent a house instead. I don't have the answer for you. Maybe just logic, written figures, and constant talking will help. We had to leave our first leased house after one year, because our landlord wanted to sell. That was rough. But, we went on a two month vacation of the US in a large RV, and came back to lease another house. Logically, I know this is a better time to rent than to own, and our investments from the proceeds of our house sale are doing great, but everyday I have pangs to own our own home. The plan is to buy a home for cash in a few years.
 
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