Can I afford to buy this condo?
May 27, 2017 8:01 PM Subscribe
I know you are not my lawyer, accountant or real estate agent. I live in Los Angeles where rents are sky high and buying anything decent is ridiculously expensive. I need some advice about whether I can afford to buy a specific condo. I have made an offer and received a counter offer (along with six others who also made their own offer) and we have until Tuesday to reply. Please give me the benefit of your insight into the real estate and condo-buying experience.
I currently live in a rent controlled apartment that I can afford now fairly comfortably but the rent will go up every year 3% so eventually (maybe 6 or 8 years) it will become too expensive.
I'm in my early 50s and single and have a steady job, but I'm not anticipating a huge salary increase any time soon. I found a 1-bedroom condo in probate that is in a complex I love, nearby where I live now. It is in great condition and is extremely upgraded. I made an offer along with 7 others and the estate has countered all of us with an amount (OBO) and also said we must remove the appraisal contingency. I have enough for the down payment and closing. The monthly payments (including principle, interest HOA and property tax) are about $800 per month more than I pay now. I currently pretty much spend all of my money (I do save some for retirement but could do a bit more) and $800 more for housing is not doable. My parents offered to pay my property tax for the first year or two, which will bring the payment within $400 of my current rent, and I think I could manage that. And I currently have no tax write-offs save for contributions to my IRA, and with this purchase I would have $1200 per month interest, $400 monthly tax and could write off office space in my home as I work from home, so I stand to get much more back from taxes.
My question--should the money I will get back from taxes make this doable for me, or is this an unsustainable proposition? In the current market, which shows no sign of slowing down (there is very little available housing inventory right now and almost none in the $400k - $500k area. Things sell within a week.) There are a lot of buyers paying cash as well, so it is a competitive climate. Also, in this climate I have no doubt I will be able to sell or rent this place easily, if necessary down the line.
I currently live in a rent controlled apartment that I can afford now fairly comfortably but the rent will go up every year 3% so eventually (maybe 6 or 8 years) it will become too expensive.
I'm in my early 50s and single and have a steady job, but I'm not anticipating a huge salary increase any time soon. I found a 1-bedroom condo in probate that is in a complex I love, nearby where I live now. It is in great condition and is extremely upgraded. I made an offer along with 7 others and the estate has countered all of us with an amount (OBO) and also said we must remove the appraisal contingency. I have enough for the down payment and closing. The monthly payments (including principle, interest HOA and property tax) are about $800 per month more than I pay now. I currently pretty much spend all of my money (I do save some for retirement but could do a bit more) and $800 more for housing is not doable. My parents offered to pay my property tax for the first year or two, which will bring the payment within $400 of my current rent, and I think I could manage that. And I currently have no tax write-offs save for contributions to my IRA, and with this purchase I would have $1200 per month interest, $400 monthly tax and could write off office space in my home as I work from home, so I stand to get much more back from taxes.
My question--should the money I will get back from taxes make this doable for me, or is this an unsustainable proposition? In the current market, which shows no sign of slowing down (there is very little available housing inventory right now and almost none in the $400k - $500k area. Things sell within a week.) There are a lot of buyers paying cash as well, so it is a competitive climate. Also, in this climate I have no doubt I will be able to sell or rent this place easily, if necessary down the line.
L.A. has a history of boom and bust, and I think they are near the end of a bubble now. In your early 50's, are you going to live there the rest of your life? Because I wouldn't at all be sure you could get your money back any time you want. I have a friend who waited until what they thought was the end of the market crash in the early 90's and bought a house for what they thought was a steal. It took 10 years for the market to get back up to what they paid for it.
posted by bongo_x at 8:12 PM on May 27, 2017 [5 favorites]
posted by bongo_x at 8:12 PM on May 27, 2017 [5 favorites]
Another risk to take into account is condo assessments. You could buy the place and a week later be on the hook for thousands of dollars in roof repairs or something.
Do you have any information on the condo association and whether it's well managed? Do they have strong cash reserves to protect against surprise assessments?
posted by Blue Jello Elf at 8:33 PM on May 27, 2017 [8 favorites]
Do you have any information on the condo association and whether it's well managed? Do they have strong cash reserves to protect against surprise assessments?
posted by Blue Jello Elf at 8:33 PM on May 27, 2017 [8 favorites]
No. You should only buy if it's cheaper than what you're able to rent. Not only would you leave yourself with no cushion, you would be far exceeding your available budget trying to pay for this place. What happens when a repair is needed? You can't call your landlord, you can't move. You're completely screwed.
This is not the condo for you.
posted by phunniemee at 8:44 PM on May 27, 2017 [12 favorites]
This is not the condo for you.
posted by phunniemee at 8:44 PM on May 27, 2017 [12 favorites]
So...you're going to move to a place you can't afford NOW because you're afraid you won't be able to afford your current place in five+ years? And you don't really save anything right now? And your elderly parents are going to subsidize this? You cannot afford this. You should spend the next 6-8 years increasing your income and planning where you are going to move in your retirement that you can afford.
posted by Snarl Furillo at 8:45 PM on May 27, 2017 [32 favorites]
posted by Snarl Furillo at 8:45 PM on May 27, 2017 [32 favorites]
[I] could write off office space in my home as I work from home
Renters can already claim home office space deductions. The home office deduction isn't going to be particularly large; keep in mind you can only deduct space that you use exclusively for business. In other words; your bedroom can't be deducted (since you sleep in it). You could, however, deduct the portion of your rent that includes the desk you sit at.
I stand to get much more back from taxes
If you want to make this argument, you should be able to quantify it. What's your income? With an income of, say, $75K, you have a marginal tax rate of (about) 16%. However, you only get anything back from taxes from interest/property tax that exceeds your standard deduction of $6,350. With your proposed taxes/interest, you'll have about $2,056 of tax savings in your first year, which will vary depending on how much your property taxes go up and your interest goes down as the mortgage amortizes. That doesn't get you to where you said you need to be to afford the condo.
I currently live in a rent controlled apartment that I can afford now fairly comfortably but the rent will go up every year 3% so eventually (maybe 6 or 8 years) it will become too expensive.
With your rent controlled apartment, you don't have to pay for HOA assessments, property maintenance, or any of the other uncontrolled expenses that owners have to pay. I generally consider a rent controlled apartment to be an asset you don't willingly give up, especially for something that is more expensive.
I strongly doubt that you can save money buying a condo, especially as none of your numbers indicate a significant savings from buying. I'm not sure why you're scared of your rent going up, but not afraid of, say, your condo complex's roof collapsing (happened at a condo complex I lived at) or HOA members refusing to pay their HOA dues because of foreclosure, resulting in the HOA having to temporarily increase fees on everyone else to make up for it (also happened to me).
If you are really concerned about rising costs, start saving that $400-ish you think you can save right now and use that to pay for rent increases in the future. I did a quick Excel simulation with $1,500 rent right now, increasing at 3%/year, then saving the difference between that and $1,900 (ie, first year, you save $400/mo, second year you save $355/mo, etc). If you get 5% return on your savings and a 0% increase in your income, you'll be able to live with those savings until about December 2035.
posted by saeculorum at 8:48 PM on May 27, 2017 [21 favorites]
Renters can already claim home office space deductions. The home office deduction isn't going to be particularly large; keep in mind you can only deduct space that you use exclusively for business. In other words; your bedroom can't be deducted (since you sleep in it). You could, however, deduct the portion of your rent that includes the desk you sit at.
I stand to get much more back from taxes
If you want to make this argument, you should be able to quantify it. What's your income? With an income of, say, $75K, you have a marginal tax rate of (about) 16%. However, you only get anything back from taxes from interest/property tax that exceeds your standard deduction of $6,350. With your proposed taxes/interest, you'll have about $2,056 of tax savings in your first year, which will vary depending on how much your property taxes go up and your interest goes down as the mortgage amortizes. That doesn't get you to where you said you need to be to afford the condo.
I currently live in a rent controlled apartment that I can afford now fairly comfortably but the rent will go up every year 3% so eventually (maybe 6 or 8 years) it will become too expensive.
With your rent controlled apartment, you don't have to pay for HOA assessments, property maintenance, or any of the other uncontrolled expenses that owners have to pay. I generally consider a rent controlled apartment to be an asset you don't willingly give up, especially for something that is more expensive.
I strongly doubt that you can save money buying a condo, especially as none of your numbers indicate a significant savings from buying. I'm not sure why you're scared of your rent going up, but not afraid of, say, your condo complex's roof collapsing (happened at a condo complex I lived at) or HOA members refusing to pay their HOA dues because of foreclosure, resulting in the HOA having to temporarily increase fees on everyone else to make up for it (also happened to me).
If you are really concerned about rising costs, start saving that $400-ish you think you can save right now and use that to pay for rent increases in the future. I did a quick Excel simulation with $1,500 rent right now, increasing at 3%/year, then saving the difference between that and $1,900 (ie, first year, you save $400/mo, second year you save $355/mo, etc). If you get 5% return on your savings and a 0% increase in your income, you'll be able to live with those savings until about December 2035.
posted by saeculorum at 8:48 PM on May 27, 2017 [21 favorites]
do not buy the condo. phunniemee is right.
if in 6 to 8 years you can't even afford rent controlled in your city, maybe think about looking for a job elsewhere.
it sounds like even if you got the mortgage and all that went well, one significant repair issue would be a problem for you, not to mention all the crazy stuff that goes on in HOAs when people are noncompliant or negligent or broke or getting foreclosed on etc., very little way of predicting how much that might cost.
save what you don't spend instead.
posted by zdravo at 8:54 PM on May 27, 2017 [4 favorites]
if in 6 to 8 years you can't even afford rent controlled in your city, maybe think about looking for a job elsewhere.
it sounds like even if you got the mortgage and all that went well, one significant repair issue would be a problem for you, not to mention all the crazy stuff that goes on in HOAs when people are noncompliant or negligent or broke or getting foreclosed on etc., very little way of predicting how much that might cost.
save what you don't spend instead.
posted by zdravo at 8:54 PM on May 27, 2017 [4 favorites]
No. Sorry.
posted by aramaic at 9:03 PM on May 27, 2017 [1 favorite]
posted by aramaic at 9:03 PM on May 27, 2017 [1 favorite]
I ended up saving money by buying a condo in LA county. People would tell me what they were paying in rent, and it seemed so much more than what I remembered paying just a few short years earlier while my loan payments stayed basically the same. Additionally, with the appreciation when I eventually sold it after 10 or so years the money I made off-set everything I had paid in interest over the life of my loan.
However, I was not at the edge of what I could afford, and it sounds like you are on the other side of the edge of what you can afford. Be aware that your property will increase in appraised value for tax purposes around 1% per year, so your property tax will get more expensive in much the same way your rent controlled apartment will.
posted by willnot at 9:21 PM on May 27, 2017 [1 favorite]
However, I was not at the edge of what I could afford, and it sounds like you are on the other side of the edge of what you can afford. Be aware that your property will increase in appraised value for tax purposes around 1% per year, so your property tax will get more expensive in much the same way your rent controlled apartment will.
posted by willnot at 9:21 PM on May 27, 2017 [1 favorite]
Best answer: I don't understand this. You're saying your current rent controlled place is $1000 a month, and will go up 3% per year, and in 8 years that will make it too expensive. In 8 years rent will be about $1266 / month - or $266 a month more than you're paying now, and is more than you can afford. And yet you're asking us if you can afford $800/month more? Or even only $400 a month more with your parents help for only a couple years? I get that in the states mortgages have all sort of tax deductions that I'm unfamiliar with, but even with your parents help, you cannot afford this by your own admission. You're already cutting it very close to the edge - what will you do when the hot water tank needs to be replaced or something else needs repair? Right now your landlord is on the hook for this types of repairs. Once you buy something, that's coming out of your own pocket.
posted by cgg at 9:54 PM on May 27, 2017 [15 favorites]
posted by cgg at 9:54 PM on May 27, 2017 [15 favorites]
Also, in this climate I have no doubt I will be able to sell or rent this place easily, if necessary down the line.
That's what everyone who bought ten years ago thought, too. Then the bubble burst, and countless people who thought they could sell or rent easily found out that they couldn't. That's not to say that the factors that drove the bubble last time are identical this time around, but it does mean that you're essentially betting on the market continuing to grow indefinitely. That is not a bet I'd take.
posted by the return of the thin white sock at 10:01 PM on May 27, 2017 [3 favorites]
That's what everyone who bought ten years ago thought, too. Then the bubble burst, and countless people who thought they could sell or rent easily found out that they couldn't. That's not to say that the factors that drove the bubble last time are identical this time around, but it does mean that you're essentially betting on the market continuing to grow indefinitely. That is not a bet I'd take.
posted by the return of the thin white sock at 10:01 PM on May 27, 2017 [3 favorites]
I agree with zdravo, you can't afford to buy the condo but not only that, you're being priced out of your city. If I were you I'd take a long, hard look at whether you really need to be in L.A. or whether you'd be better off moving somewhere else where the cost of living is more reasonable and you could afford to buy. Depending on what your job is you might be able to find something new where you'd take a relatively small hit on income in exchange for a massive improvement in affordability? If this is possible I'd start job searching right now because if you wait until you really can't afford your rent-controlled place - well, job searching in your late fifties is not going to be a walk in the park.
posted by hazyjane at 10:12 PM on May 27, 2017 [1 favorite]
posted by hazyjane at 10:12 PM on May 27, 2017 [1 favorite]
Will your bank even make the loan without an appraisal? Mine wouldn't.
I think that is a deal breaker right there.
posted by SLC Mom at 10:58 PM on May 27, 2017 [3 favorites]
I think that is a deal breaker right there.
posted by SLC Mom at 10:58 PM on May 27, 2017 [3 favorites]
No. You should have 6 month of emergency savings to live on. If you can reduce gour spending and save enough for down payment, closing, and 6 months savings, then closer. But also monthly you need mortgage layment plus HOA plus about .5% of your mortgage for maintenance (Maybe a bit less since this is an expensive condo). Maybe you can cut way down on your spending to afford that monthly but maybe you can't or don't want to.
You are not close to having these things now which is why everyone is warning you this is a financial disaster. I want to buy a nice place to! But wow my finances are not in order either.
posted by Kalmya at 3:15 AM on May 28, 2017
You are not close to having these things now which is why everyone is warning you this is a financial disaster. I want to buy a nice place to! But wow my finances are not in order either.
posted by Kalmya at 3:15 AM on May 28, 2017
I actually don't know how you can drop the appraisal condition. I mean you can do anything, but if you drop it and then the bank appraises it $50,000 less than you offered then you have to come up with the $50k. And you HAVE to because you've signed a contract to buy the condo and the seller will sue you if you don't complete the deal.
What are the finances of the condo owners association like? Are there any special assessments coming up? You could be required to pay $10k at any time in addition to your condo fees if the roof needs replacing or anything like that.
But realistically, if there's seven offers on the table someone is likely to bid higher than you. Multiple offer situations are terrible and just drive the price up. Your agent is counseling you to drop the appraisal condition because you're competing with other offers that are all cash and that is opening you up to a really dangerous situation. I would not buy this condo and I would get a new agent.
posted by TheLateGreatAbrahamLincoln at 5:29 AM on May 28, 2017 [9 favorites]
What are the finances of the condo owners association like? Are there any special assessments coming up? You could be required to pay $10k at any time in addition to your condo fees if the roof needs replacing or anything like that.
But realistically, if there's seven offers on the table someone is likely to bid higher than you. Multiple offer situations are terrible and just drive the price up. Your agent is counseling you to drop the appraisal condition because you're competing with other offers that are all cash and that is opening you up to a really dangerous situation. I would not buy this condo and I would get a new agent.
posted by TheLateGreatAbrahamLincoln at 5:29 AM on May 28, 2017 [9 favorites]
I currently pretty much spend all of my money
Are you saying you spend it all on necessities/living expenses, or that you could easily have $400 left over every month? If it's the latter, why not try that for a while--sock $400 away automatically into an interest-bearing account and see where that leaves you next year?
I get that ownership is an investment but ownership means that you're on the hook if the roof caves in on day one. If you don't have savings for things like that, "can probably afford it" isn't enough.
posted by kapers at 6:02 AM on May 28, 2017 [1 favorite]
Are you saying you spend it all on necessities/living expenses, or that you could easily have $400 left over every month? If it's the latter, why not try that for a while--sock $400 away automatically into an interest-bearing account and see where that leaves you next year?
I get that ownership is an investment but ownership means that you're on the hook if the roof caves in on day one. If you don't have savings for things like that, "can probably afford it" isn't enough.
posted by kapers at 6:02 AM on May 28, 2017 [1 favorite]
I mean you can do anything, but if you drop it and then the bank appraises it $50,000 less than you offered then you have to come up with the $50k. And you HAVE to because you've signed a contract to buy the condo and the seller will sue you if you don't complete the deal.
This is what I was going to write. An offer with no appraisal contingency is a recipe for disaster if you aren't paying cash. You're legally promising the seller that you'll buy the property even if the bank says they aren't comfortable loaning you the money.
posted by Nonsteroidal Anti-Inflammatory Drug at 7:27 AM on May 28, 2017 [3 favorites]
This is what I was going to write. An offer with no appraisal contingency is a recipe for disaster if you aren't paying cash. You're legally promising the seller that you'll buy the property even if the bank says they aren't comfortable loaning you the money.
posted by Nonsteroidal Anti-Inflammatory Drug at 7:27 AM on May 28, 2017 [3 favorites]
Response by poster: Thank you everyone. My gut agrees with you all, that this is a risky situation that I can't afford. I am meeting with a tax professional tomorrow, but I will 99% not pursue this. Re: the lack of an appraisal contingency, my agent tells me that we can still back out based on physical inspection and that there is also a loan contingency, so if I can't get a loan I can get out of it. That seems a little sketchy (physical contingency option) because the place looks to be in great shape. Not sure about the loan contingency option.
posted by parkerposey at 7:39 AM on May 28, 2017
posted by parkerposey at 7:39 AM on May 28, 2017
The loan contingency doesn't help you here. If you offer $300k for the condo, have your offer accepted, and the appraisal comes in at $250k, the bank will still happily give you a loan for $250k and you will not be able to exercise the contingency. Further, if you are in a market where waiving appraisal contingencies is common, you will not be able to get away with an inspection contingency for a competitive offer.
posted by saeculorum at 8:52 AM on May 28, 2017 [2 favorites]
posted by saeculorum at 8:52 AM on May 28, 2017 [2 favorites]
I currently have no tax write-offs save for contributions to my IRA, and with this purchase I would have $1200 per month interest, $400 monthly tax and could write off office space in my home as I work from home, so I stand to get much more back from taxes.
Just quickly on this point--your IRA deduction is an "above the line" deduction meaning you get it even if you don't itemize deductions. In contrast, you must itemize to claim the mortgage interest and property tax deductions and they are in lieu of the standard deduction, not in addition to it. As saeculorum pointed out, the standard deduction is $6350, so subtract that from the total of the deductions you think you'd be getting. In this case you are looking at about $1070/month in deductible expenses beyond the status quo, not $1600.
posted by mama casserole at 9:09 AM on May 28, 2017 [2 favorites]
Just quickly on this point--your IRA deduction is an "above the line" deduction meaning you get it even if you don't itemize deductions. In contrast, you must itemize to claim the mortgage interest and property tax deductions and they are in lieu of the standard deduction, not in addition to it. As saeculorum pointed out, the standard deduction is $6350, so subtract that from the total of the deductions you think you'd be getting. In this case you are looking at about $1070/month in deductible expenses beyond the status quo, not $1600.
posted by mama casserole at 9:09 AM on May 28, 2017 [2 favorites]
This thread is closed to new comments.
If you have the flexibility to work from home, can you expand where you're looking? Plus talk to a tax professional about the tax implications.
posted by Threeve at 8:07 PM on May 27, 2017 [3 favorites]