All our eggs in one basket? First time home buyers...
February 21, 2014 4:01 AM Subscribe
My wife and I have been working and saving over the last 4-5 years. We've managed to pay off all of our debts and have gotten ahead. It feels great to be debt free, but we want to buy a house. We found a bank foreclosure that's been sitting vacant for 6 years as it slowly worked through the courts. We have just enough to buy it outright, but that will leave us almost broke. Should we buy it?
It's a 4 bedroom with a non-conforming one bedroom cottage on a 1/2 acre. I think the price we are paying isn't much above the price of the land. The house(s) are almost live-able now but will definitely need some work after 6 years unoccupied. Neither of the inspections came up with any surprises (we had 2 done just for peace of mind). I prefer owning outright, but the 20% down, 30-yr mortgage seems to be the model. I know there are tax advantages to mortgages and presumably other advantages. Without a mortgage we don't need full insurance, though, which is a big savings. At this point we've offered 25% below asking, bank countered with 7% off, we countered 20% below, bank countered with 12% off. If we accept the banks offer now we will be down to about $5k in savings after closing. Our expenses are negligible, so weekly paychecks should get us breathing room (and go towards improvements). It's our first time buying a home. Are we doing it wrong? FWIW, we like projects. We'd rather put our stamp on something than buy a "cookie cutter" home.
It's a 4 bedroom with a non-conforming one bedroom cottage on a 1/2 acre. I think the price we are paying isn't much above the price of the land. The house(s) are almost live-able now but will definitely need some work after 6 years unoccupied. Neither of the inspections came up with any surprises (we had 2 done just for peace of mind). I prefer owning outright, but the 20% down, 30-yr mortgage seems to be the model. I know there are tax advantages to mortgages and presumably other advantages. Without a mortgage we don't need full insurance, though, which is a big savings. At this point we've offered 25% below asking, bank countered with 7% off, we countered 20% below, bank countered with 12% off. If we accept the banks offer now we will be down to about $5k in savings after closing. Our expenses are negligible, so weekly paychecks should get us breathing room (and go towards improvements). It's our first time buying a home. Are we doing it wrong? FWIW, we like projects. We'd rather put our stamp on something than buy a "cookie cutter" home.
You can put 70% down and get a 10 year loan or 50% down on a 15 year loan. If you have a healthy down payment and a good credit score, lenders have all kinds of options for you.
Even if you did 20% on a 30 year loan you could make extra principal payments & pay it off on your schedule while still having a safe cash reserve. Homeownership is expensive.
posted by headnsouth at 4:27 AM on February 21, 2014 [18 favorites]
Even if you did 20% on a 30 year loan you could make extra principal payments & pay it off on your schedule while still having a safe cash reserve. Homeownership is expensive.
posted by headnsouth at 4:27 AM on February 21, 2014 [18 favorites]
An attractive alternative would be to get a mortgage, keep some money around as emergency savings and put the rest of the money in your retirement fund. Right now I'd expect investments to make significantly more than the mortgage rate, so overall this could be a significant financial winner.
If you like the "comfort" of having no mortgage, you can always keep this retirement money somewhere that you could legally cash it out and pay off the mortgage if you wanted or needed to change your mind.
Either way don't skimp on insurance!
posted by emilyw at 4:33 AM on February 21, 2014 [3 favorites]
If you like the "comfort" of having no mortgage, you can always keep this retirement money somewhere that you could legally cash it out and pay off the mortgage if you wanted or needed to change your mind.
Either way don't skimp on insurance!
posted by emilyw at 4:33 AM on February 21, 2014 [3 favorites]
My husband and I bought our short sale home outright using pretty much all of our savings. The process was MUCH easier as a cash transaction. We also immediately set up a home equity line because it is a "fixer upper" and this gives us a lot of flexibility in how we manage renovations.
It's working out great for us but we had other issues (spotty credit history) that would have made it harder to do otherwise.
Good luck!
posted by kiwi-epitome at 4:34 AM on February 21, 2014 [1 favorite]
It's working out great for us but we had other issues (spotty credit history) that would have made it harder to do otherwise.
Good luck!
posted by kiwi-epitome at 4:34 AM on February 21, 2014 [1 favorite]
Don't buy it outright. Get a mortgage. Think of the tax adjusted spread over the cash return on savings as the cost of insuring against something being wrong with the house or some other emergency.
The size of that mortgage is a function of how big that number should be. Buying any house and depleting your savings isn't prudent
However if your expenses are such that you could afford the potential repairs and rebuild your savings at the same time then the calculus might be different. But a prudent mortgage relative to both your incomes and the value of the home isn't a bad thing
posted by JPD at 4:51 AM on February 21, 2014 [4 favorites]
The size of that mortgage is a function of how big that number should be. Buying any house and depleting your savings isn't prudent
However if your expenses are such that you could afford the potential repairs and rebuild your savings at the same time then the calculus might be different. But a prudent mortgage relative to both your incomes and the value of the home isn't a bad thing
posted by JPD at 4:51 AM on February 21, 2014 [4 favorites]
You can do this in two transactions. You can buy the house in cash and get a mortgage (or less tax-advantageous line of equity) later if you decide it makes more sense to you (to free up money, invest elsewhere etc). You might want to shop around and get hard figured to play with while you make up your mind as to what works best for you. (Also, I am super jealous because that sounds like a lovely home).
posted by saucysault at 5:04 AM on February 21, 2014
posted by saucysault at 5:04 AM on February 21, 2014
If I were to buy a house again, I would pay cash.
If you need to get money out of it, you can always get a HELOC or a Loan.
You will save SO MUCH MONEY not having a mortgage (so you pay more in taxes, you'll still save over-all) and think about how quickly you can build up your savings if you don't have a mortgage to worry about.
posted by Ruthless Bunny at 5:09 AM on February 21, 2014 [3 favorites]
If you need to get money out of it, you can always get a HELOC or a Loan.
You will save SO MUCH MONEY not having a mortgage (so you pay more in taxes, you'll still save over-all) and think about how quickly you can build up your savings if you don't have a mortgage to worry about.
posted by Ruthless Bunny at 5:09 AM on February 21, 2014 [3 favorites]
We were in the same position two years ago when we bought our house for cash for pretty much the price of the land. We used all of our savings except about 10k and used that to make the initial renovations (refinished hardwoods, tiled the bathroom, fixed drywall etc.) Now we change things as time and money allow and it's wonderful. There's quite a peace to truly owning your own home and I really recommend it. I'd rather own our modest home than owe 30 years on a huge house.
posted by julie_of_the_jungle at 5:13 AM on February 21, 2014 [1 favorite]
posted by julie_of_the_jungle at 5:13 AM on February 21, 2014 [1 favorite]
Also if you choose to buy remember you have to manually pay your taxes because they won't be rolled into a mortgage. We pay ours a year in advance our federal tax return.
posted by julie_of_the_jungle at 5:17 AM on February 21, 2014
posted by julie_of_the_jungle at 5:17 AM on February 21, 2014
I assume this is an reo. You can get a mortgage but you may be dealing with lender required repairs. Since you have had inspections done talk to your lender.
posted by St. Alia of the Bunnies at 5:21 AM on February 21, 2014
posted by St. Alia of the Bunnies at 5:21 AM on February 21, 2014
Response by poster: I should have mentioned...no local banks will offer a home loan on this particular house because of the condition. No electricity service for 6 years, decks are rotten (though it does/did have a CO). They also don't offer land loans here anymore and foreign lenders won't lend because it's, well, foreign.
We pre qualified for a substantial mortgage when we were shopping earlier, but I don't want to be on the hook for a big amount. We'd need to spend $750k to buy something turnkey. This is substantially less than that.
Presumably once we make some repairs we can get a HELOC if needed. Luckily we have free housing (for now) nearby so we can work on it for a year or so before moving in.
posted by karst at 5:36 AM on February 21, 2014 [1 favorite]
We pre qualified for a substantial mortgage when we were shopping earlier, but I don't want to be on the hook for a big amount. We'd need to spend $750k to buy something turnkey. This is substantially less than that.
Presumably once we make some repairs we can get a HELOC if needed. Luckily we have free housing (for now) nearby so we can work on it for a year or so before moving in.
posted by karst at 5:36 AM on February 21, 2014 [1 favorite]
Best answer: As you said, Banks will not give a mortgage on a foreclosure.
I am a real estate investor, and own over 20 homes right now.
I think you should buy this house. Foreclosure prices are historically low. You will NEVER get it cheaper.
And the return on your sweet equity of repairing the house is worth a lot.
After you own for a year, if it is your primary residence, than you can re-finance if you want a mortgage.
posted by Flood at 5:42 AM on February 21, 2014 [4 favorites]
I am a real estate investor, and own over 20 homes right now.
I think you should buy this house. Foreclosure prices are historically low. You will NEVER get it cheaper.
And the return on your sweet equity of repairing the house is worth a lot.
After you own for a year, if it is your primary residence, than you can re-finance if you want a mortgage.
posted by Flood at 5:42 AM on February 21, 2014 [4 favorites]
Open the HELOC with the property straight away if you absolutely can't get a mortgage. Refinance into a small mortgage as soon as you can.
I write this as somebody who just coughed up $20k to cover out of pocket costs and lost wages after a cycling accident. I live in Canada, have short term disability and supplemental health. These things don't cover everything. You never know. Cash is king
posted by crazycanuck at 6:05 AM on February 21, 2014 [2 favorites]
I write this as somebody who just coughed up $20k to cover out of pocket costs and lost wages after a cycling accident. I live in Canada, have short term disability and supplemental health. These things don't cover everything. You never know. Cash is king
posted by crazycanuck at 6:05 AM on February 21, 2014 [2 favorites]
$5k in savings after closing // Without a mortgage we don't need full insurance, though, which is a big savings.
I think you are being penny wise and pound foolish. As you say, just getting the keys is going to leave you essentially broke. You're talking about scrimping on insurance. You're buying a house that has been unoccupied for more than half a decade. Buying this house is a gamble; buying it with $5K left to spare at closing is like playing Russian roulette.
posted by Admiral Haddock at 6:35 AM on February 21, 2014 [8 favorites]
I think you are being penny wise and pound foolish. As you say, just getting the keys is going to leave you essentially broke. You're talking about scrimping on insurance. You're buying a house that has been unoccupied for more than half a decade. Buying this house is a gamble; buying it with $5K left to spare at closing is like playing Russian roulette.
posted by Admiral Haddock at 6:35 AM on February 21, 2014 [8 favorites]
It is not true that banks won't give a loan on a foreclosure. Most of my job involves representing the seller for REO foreclosed properties (In my case almost entirely VA.) It is true that some properties will not qualify for a mortgage and must be a cash sale but many others can and do qualify, usually with the caveat of getting certain lender required repairs done. I have dealt with people getting conventional insured, conventional uninsured, VA, FHA, etc.
Much depends on the property.
In your case, yes, the home will not qualify for a mortgage. If, as you say, you have a free place to live now, and you have the cash to buy this house, and as you say there are no surprises (make sure a title search is done, btw, also check on any back taxes) I say go for it. The market is hot right now for crap houses, and if you don't buy it someone else will.
posted by St. Alia of the Bunnies at 6:48 AM on February 21, 2014
Much depends on the property.
In your case, yes, the home will not qualify for a mortgage. If, as you say, you have a free place to live now, and you have the cash to buy this house, and as you say there are no surprises (make sure a title search is done, btw, also check on any back taxes) I say go for it. The market is hot right now for crap houses, and if you don't buy it someone else will.
posted by St. Alia of the Bunnies at 6:48 AM on February 21, 2014
I would talk to a fee-based financial advisor (not someone who wants to sell you stuff.) they can tell you if this is a good idea, what other potential sources of financing may be available, and options for what to do with the equity once you're in the house.
Even though a mortgage isn't an option at this point on this house, this is a good time to learn ahead. Go to the mortgage calculators at bankrate.com or similar sites. Enter the info for 20% down and 30 years and see what your payment is. Then start playing with things like what happens if you add $X per month to the payment. You would be amazed at just how much adding $100-$200 per month will do to shorten your mortgage by several years (it doesn't take much extra principal per month to cut that 30 years to 15, seriously.)
Good luck!
posted by azpenguin at 6:51 AM on February 21, 2014
Even though a mortgage isn't an option at this point on this house, this is a good time to learn ahead. Go to the mortgage calculators at bankrate.com or similar sites. Enter the info for 20% down and 30 years and see what your payment is. Then start playing with things like what happens if you add $X per month to the payment. You would be amazed at just how much adding $100-$200 per month will do to shorten your mortgage by several years (it doesn't take much extra principal per month to cut that 30 years to 15, seriously.)
Good luck!
posted by azpenguin at 6:51 AM on February 21, 2014
Tempting, but 5k is not a lot to have in your savings if you are a homeowner....how much are property taxes? What about emergencies? How much will it be to deal with electric? Have you looked at if the wiring and plumbing is still good, since it hasn't been in use for so long? What about if a child stops by and falls through the rotten deck? Once you buy the property, you are liable for things that happen on it. It could be a great adventure though...and possibly net you your dream house. I would not do it, but it could be the right gamble for your family. :)
posted by semaphore at 6:56 AM on February 21, 2014
posted by semaphore at 6:56 AM on February 21, 2014
you don't need to talk to a fee based advisor to recognize that buying a house like this with only 5k to get it livable is a mistake. Perhaps you can get a construction loan that you refi into a mortgage?
Foreclosure prices are historically low. You will NEVER get it cheaper. This is a highly confident statement. You need to know where they are. For example home prices in the Northeast are at historically high levels of price to income.
posted by JPD at 7:18 AM on February 21, 2014
Foreclosure prices are historically low. You will NEVER get it cheaper. This is a highly confident statement. You need to know where they are. For example home prices in the Northeast are at historically high levels of price to income.
posted by JPD at 7:18 AM on February 21, 2014
When we bought our home, we found that the first year involved spending about 5-7k to repair, replace or otherwise improve it. If you are house-rich and cash-poor, this could present problems for you if the water heater fails, etc. Something to think about, perhaps.
posted by Blazecock Pileon at 7:31 AM on February 21, 2014
posted by Blazecock Pileon at 7:31 AM on February 21, 2014
We did this, in the exact same situation, though our leftover savings were about twice that.
Not having a mortgage is very nice.
The cost of making it livable was quite a bit more than we'd anticipated, though, so you might look into a HELOC -- we did have to borrow about $25K over the first two years for remodeling costs.
Also, if you do this, set up an escrow savings account that you don't touch for taxes and homeowners insurance. Figure out how much that will be for the first year and put it aside, then add about 10% of that cost monthly (automate it so you never have to think about it) so when your tax bill comes you're not scrambling to cover it.
And don't skimp on the insurance! Insure your house well and consider an umbrella policy too. Homeowners insurance doesn't really cost that much for what you'll get if you have a disaster or a lawsuit.
If you have enough income to replace your savings relatively quickly, I'd say go for it.
posted by rabbitrabbit at 7:36 AM on February 21, 2014
Not having a mortgage is very nice.
The cost of making it livable was quite a bit more than we'd anticipated, though, so you might look into a HELOC -- we did have to borrow about $25K over the first two years for remodeling costs.
Also, if you do this, set up an escrow savings account that you don't touch for taxes and homeowners insurance. Figure out how much that will be for the first year and put it aside, then add about 10% of that cost monthly (automate it so you never have to think about it) so when your tax bill comes you're not scrambling to cover it.
And don't skimp on the insurance! Insure your house well and consider an umbrella policy too. Homeowners insurance doesn't really cost that much for what you'll get if you have a disaster or a lawsuit.
If you have enough income to replace your savings relatively quickly, I'd say go for it.
posted by rabbitrabbit at 7:36 AM on February 21, 2014
I bought my first house like this many years ago, it wasn't a foreclosure but was close to condemned. Lived in it add I fixed it up learning how to as I went and could afford. It is doable, it is also a massive adventure and luckily I had friends and family with skills I could use. I was however single, doing it with a partner could be a huge strain on a marriage so make sure you are both on the same page.
Buy the house, have a scary year or so the take out a small mortgage of needed to fix any big problems if you don't have the money to fix them going in. if you are good at diy or willing to learn repairs and renovations don't have to be expensive but it will be more than you think, no matter what you budget out will be more.
Just make sure you don't over capitalise if you are planning on moving. Find out what houses like yours in prime condition sell for in your area. Does the house have good resale potential etc.
Also don't scrimp on insurance rabbit rabbit is right.
posted by wwax at 7:41 AM on February 21, 2014
Buy the house, have a scary year or so the take out a small mortgage of needed to fix any big problems if you don't have the money to fix them going in. if you are good at diy or willing to learn repairs and renovations don't have to be expensive but it will be more than you think, no matter what you budget out will be more.
Just make sure you don't over capitalise if you are planning on moving. Find out what houses like yours in prime condition sell for in your area. Does the house have good resale potential etc.
Also don't scrimp on insurance rabbit rabbit is right.
posted by wwax at 7:41 AM on February 21, 2014
Find a contractor and go through the house with them. Get an estimate on what work would need to be done in the first year. I strongly, strongly suspect that it will be more than you can afford, even if you are handy on smaller projects. (You don't mention any construction or electrical experience, so I assume that "we like projects" means things like paint and light carpentry.)
And don't scrimp on insurance. Jeepers.
posted by tchemgrrl at 8:09 AM on February 21, 2014 [2 favorites]
And don't scrimp on insurance. Jeepers.
posted by tchemgrrl at 8:09 AM on February 21, 2014 [2 favorites]
Without a mortgage we don't need full insurance, though, which is a big savings.
What does this even MEAN? Insurance is a few hundred dollars a year (ours is $292 for a $200,000 home).
If you literally spend ALL your money on this home and it burns down the next day, what will you do then?
posted by peep at 8:43 AM on February 21, 2014 [1 favorite]
What does this even MEAN? Insurance is a few hundred dollars a year (ours is $292 for a $200,000 home).
If you literally spend ALL your money on this home and it burns down the next day, what will you do then?
posted by peep at 8:43 AM on February 21, 2014 [1 favorite]
Response by poster: As far as the insurance thing goes, we live in the heart of hurricane country. The cost of insurance on a wood frame house here is about 4%-6% annually. If it blows down, we start from scratch. I'll be more upset about the possessions lost than the house. It's a nice house, but we could do better. Again, the land value is about equal to the bank's offer. Eventually we'd like to build masonry anyway. It's not imminently a tear down, but on a long enough timeline that'd be my intention.
posted by karst at 9:17 AM on February 21, 2014
posted by karst at 9:17 AM on February 21, 2014
Having moved into our turn-key house just six months ago, only five grand in savings after purchase seems completely nuts to me. I agree that you should make sure that you can quickly get a HELOC and do not skimp on insurance. No matter how many inspections you have, there will be surprises. A required sewer repair of random leaks cost us 2,500. You definitely have an advantage in that you don't have to live in your home while you work on it, but be absolutely certain that being filthy and frustrated for months at a time is something you really want to do. Contemplate the worst case scenarios (one of you loses your job, is injured, house is much worse, many things need to be brought up to code to pass inspection, car breaks down, horrible permit process, blah blah blah) and have a plan for how to handle them, even if it is just stress and not purely financial.
posted by oneirodynia at 9:28 AM on February 21, 2014
posted by oneirodynia at 9:28 AM on February 21, 2014
Presumably once we make some repairs we can get a HELOC if needed.
What I am suggesting is that you not presume, and speak to your bank about the liklihood of getting a HELOC on this particular property prior to purchase.
It's good to have a backup plan, aye?
posted by DarlingBri at 9:44 AM on February 21, 2014 [2 favorites]
What I am suggesting is that you not presume, and speak to your bank about the liklihood of getting a HELOC on this particular property prior to purchase.
It's good to have a backup plan, aye?
posted by DarlingBri at 9:44 AM on February 21, 2014 [2 favorites]
Insurance is a few hundred dollars a year (ours is $292 for a $200,000 home).
I pay ten times that much in Florida; rates aren't the same everywhere.
I'd be tempted to do this, even if it left us with $5k, but only because 1) we have a safety net where in a disaster we could a borrow money from our parents; 2) if we were in your shoes and lived in the crappy house while we fixed it up, we'd probably be able to sock away $3-4k/month, so we could pay for some repairs as we went and rebuild savings in relatively short order. If these things aren't true for you, I'd be very, very hesitant.
posted by gatorae at 11:22 AM on February 21, 2014 [1 favorite]
I pay ten times that much in Florida; rates aren't the same everywhere.
I'd be tempted to do this, even if it left us with $5k, but only because 1) we have a safety net where in a disaster we could a borrow money from our parents; 2) if we were in your shoes and lived in the crappy house while we fixed it up, we'd probably be able to sock away $3-4k/month, so we could pay for some repairs as we went and rebuild savings in relatively short order. If these things aren't true for you, I'd be very, very hesitant.
posted by gatorae at 11:22 AM on February 21, 2014 [1 favorite]
I bought my current house - which was a forclosure, with a bank loan. BB&T to be specific, I've been real happy with them, they have a policy (at least here) of not selling notes to other institutions. I had to let the other bank make some minor repairs before closing... (then I had to fix what those idjits did - (No, really, gas water heaters DO need to be vented to the exterior of the building!) Also had to make some repairs myself.
Right now I'm on a 15 year at 2.75%. Not bad. Payments are only slightly higher than a 30 year with its higher interest rate. I would not have wanted to get into this with only 5 grand as savings though.
On YOUR situation - I was speaking to my mortgage rep the other day for a friend, they offer a construction to permanent loan. You have to have a good solid repair write up, and have a "general contractor" do the repairs.
Here in Georgia there are three tiers of contractors,
General, able to build tall buildings in a single bound,
Light commercial
Residential.
While I did not nail it down, I'm pretty sure the licensed residential contractor would be acceptable to the bank, but it would still add some cost to the job.
They will loan up to 80% of the value of the finished job.
If it's just some minor stuff wrong with the buildings, this might be a good avenue to explore.
posted by rudd135 at 6:04 PM on February 21, 2014
Right now I'm on a 15 year at 2.75%. Not bad. Payments are only slightly higher than a 30 year with its higher interest rate. I would not have wanted to get into this with only 5 grand as savings though.
On YOUR situation - I was speaking to my mortgage rep the other day for a friend, they offer a construction to permanent loan. You have to have a good solid repair write up, and have a "general contractor" do the repairs.
Here in Georgia there are three tiers of contractors,
General, able to build tall buildings in a single bound,
Light commercial
Residential.
While I did not nail it down, I'm pretty sure the licensed residential contractor would be acceptable to the bank, but it would still add some cost to the job.
They will loan up to 80% of the value of the finished job.
If it's just some minor stuff wrong with the buildings, this might be a good avenue to explore.
posted by rudd135 at 6:04 PM on February 21, 2014
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posted by DarlingBri at 4:14 AM on February 21, 2014 [7 favorites]