Help me pull the trigger on buying our dream house!
January 19, 2011 6:49 AM   Subscribe

Help me pull the trigger on buying our dream house!

We are in the process of trying to buy home we really like, and I'm having some issues pulling the trigger. So, I'd like any advice you guys could give me around our situation.

My wife and I are living in a very small 900 square foot house we bought about 5 years ago. It's in an "artsy" part of town (Indianapolis), but also very urban. I'm 36 and she's 31 and we are ready to start a family, and move out of this area and to the burbs as our current living situation wouldn't be ideal for a kid. There are issues with crime, inferior schools, etc.

My wife bought us this place before we were married, and we used a "stated income" program and did a 80/20 mortgage to avoid PMI. I'm fairly certain that these types of loans were what caused many people to lose their houses, but we were careful to not into a home beyond our means and we've never missed a payment or even been late. We chose this type of mortgage because my wife had great credit, but I made most of the money but had poor credit (score in the 500's)..

Fast forward to now.. I still make significantly more than my wife, but my credit has been repaired and is right around 700.. I can now qualify for a house on my own, and we've been hunting for a better place for about a year. We found one we like and want to move forward, but I'm scared to do this without having first sold our current home. I've done the numbers and here's what I've come up with:

Total net household income monthly = $6120

After all our bills are paid and BOTH house payments (current & new) we'd be left with $2245 monthly for gas, groceries, entertainment and savings.

We've both never followed a budget before, so question #1 would be: Is $2245 a month a doable amount to "live on" till we sell the old house?

I did a test post on Craigslist offering to rent our current house, and got a lot of interested replies..I'm not sure if we should just try to sell the old place straight away, or rent it..(the mortgage on the current place is $750, and the new house mortagage would be $1660)

I know I'm asking some questions that are hard to answer..But I'm hoping you guys can chime in with any advice on our overall situation and maybe see any red flags that we haven't thought of. My wife doesn't appear to be stressed at all about having 2 house payments till we sell the old place, but I'm nervous about it.

This new house we've found is amazing, and we'd be really happy there for the long haul. It's move in ready, and doesn't even need any updates. I have 24hrs to respond back to their counter offer.

Part of me is saying "Go for it!" and another part is saying "Is this smart?"..

Any tips or advice would be great
posted by Hellafiles to Home & Garden (19 answers total) 1 user marked this as a favorite
It sounds as if you've thought this through pretty well already. $2245 monthly strikes me as generous for gas, groceries, entertainment and savings, for 2 people in Indianapolis. How much do you spend on gas, groceries and entertainment now? Will your commutes get longer and increase your gas spending? Is the expected savings amount in line with your goals? I'd triple-check your assumptions. Does that figure include rental income? Have you ever actually been a landlord? Is the price on the new place in line with the market? What would happen if one of you lost your job?
posted by jon1270 at 7:15 AM on January 19, 2011

Best answer: As background, in the vast majority of cases these days, I am pro-renting, anti-buying. Particularly now--when total occupancy costs over time in many cities highly favor the renter. (See: New York City, Miami, San Francisco, possibly Chicago, many smaller cities.)

In your case, the purchase prices are clearly low; the mortgage payments also sound quite reasonable, even with you paying mortgages on both houses.

You did not include property taxes in this but I'm assuming they're manageable. You should include those and other expected expenses in your total occupancy cost calculation.

Think of $2245 a month as $500 a week. Assuming you both have health insurance and are having taxes withheld from your pay (that the $6120 a month is your after-tax take-home), there's no reason at all that you can't live on $500 a week. There's actually no reason you can't actually put money into savings at $500 a week.

If I were being strictly practical in your case, I would try not to have a child until the older house was sold. Or at least well-occupied with a trusted renter.

I also think that if this is your dream home, and if for that house your monthly total payment is something like $2000 a month, counting taxes and insurance, *and* you feel like you have arrived at a good purchase price, *and* the roof is not in immediate need of replacement, and you don't need to spend more than a couple grand after move-in (carpets, dishwasher, whatever), then that is something you should *definitely* pull the trigger on.
posted by RJ Reynolds at 7:16 AM on January 19, 2011

What could you rent out the current place for? Do you have the time and inclination to screen tenants and repair their faucet?
posted by salvia at 7:28 AM on January 19, 2011

I don't see where you've factored in childcare costs into your budget. Is your wife going to quit work? Use daycare? And don't forget all the kid stuff you're going to have to buy. Also, factor in greatly increased transportation costs since you'll be in the burbs now.
posted by yarly at 7:34 AM on January 19, 2011

Response by poster: Thanks for the great responses. Both mortgage payment amounts I mentioned include taxes and insurance, PMI, etc.

Salvia, I could rent the current place out for about $50 or $60 more than the mortgage payment. And no, I'm really not interested in being a landlord, I was just keeping it as an option to get money from the old house coming in.

I'm also not looking to make ANY money on the old house. I just want to be done with it. It's in much better shape than when we bought it, and we've done many upgrades that I'm willing to walk away from as the "cost of doing business" :)

Also, the mortgage on the old house is FHA so it's "assumable".. I'm hoping that will evebn make it easier to get rid of.
posted by Hellafiles at 7:35 AM on January 19, 2011

Best answer: I think you're ready. You've put a lot of thought into this, so buy a house! If you wanted to be even more preapred, I'd sketch out what your current budget has been this past year, and see how your 2010 rate of spending compares to the $2245/month you're predicting to have after buying the new place.

As someone buying houses in Indianapolis, you're probably more qualified than we are to guess whether now's a good time to try to sell the old house. You did a test ad for renting, so you've got renting as a fall-back position, but unless owning and managing a real-estate rental empire is part of your long term plans (which it totally can be) you do want to sell it. There's no reason not to try selling first, with rental as a fall-back position. How do you know when to take it off the market and start renting? As example math, if your monthly expenses are $2500, and your cash savings account after the house transaction has $6000 in it, $2500-$2245=$255 that you're losing each month. After 12 months, your savings will be halved. So in that case, you can set a limit for losses you're willing to take, and say you'll take the house off the market and get a renter if it hasn't sold in a year.
posted by aimedwander at 7:36 AM on January 19, 2011

Response by poster: @Yarly, as fate would have it, my wife is the director of a child care company, so we'd get to have our kid attend the center where she works, and also receive a 60% discount. So we lucked out on that set up.
posted by Hellafiles at 7:37 AM on January 19, 2011 [1 favorite]

Salvia, I could rent the current place out for about $50 or $60 more than the mortgage payment.

To me that makes the situation fairly safe, especially if you didn't include that rent money in the $2200 figure.

You will want to deduct from rental income a 15-20% vacancy rate and some costs (e.g., potentially an accountant, since taxes may become more complicated).
posted by salvia at 7:49 AM on January 19, 2011

You don't need to do a formal budget, but I'd make a quick list of what you're spending now and see how that squares up with the 2245 - if all that's stopping you is that you haven;t sold the current house, nothing you've said makes me think that that's a stumbling block here.
posted by mrs. taters at 7:52 AM on January 19, 2011

Best answer: I don't think that $50 to $60 more then the mortgage payment would be worth it. I mean, if you just cannot sell in this market then fine but as an investment, no way. You have to maintain it, replace things when they break etc. Not to mention the hassle of dealing with the tenants.

Sounds like you are in a good position to go ahead and buy the new place.
posted by d4nj450n at 7:57 AM on January 19, 2011

Yeah, you've given this lots of thought. Don't miss out on a great house/dream home because of a less than perfect market.

Pull the trigger. Put your house on the market. If you don't get a well qualified offer in the first 30 days I'd rent it. Contract with a rental company if you really don't want to be a landlord. They'll take a percentage, but you'll still be better off for having the majority of the mortgage offset by that rent. The only reason not to do this is if that neighborhood is getting progressively worse over time instead of holding steady or improving.

Good luck!
posted by FlamingBore at 7:58 AM on January 19, 2011

A few people I know have rented out houses for various reasons. For many of them it has gone well, but in a couple of cases it has been very very bad. There has been

- trashed houses
- stolen furniture
- a small leak ignored until it got much worse and turned into an unholy mess
- ruined relationships with neighbours
- failure to pay the rent for months on end, causing longwinded eviction attempts
- tenants who moved out without saying anything, leaving the door wide open for weeks
- one set of tenants who were discovered dead in the house by the management company, although they continued to pay their rent by automatic bank transfer for some time after their deaths.

Two of the places in question were managed by management companies, which didn't prevent the chaos.
posted by emilyw at 8:13 AM on January 19, 2011

A couple of things: Spend 300 dollars and talk to a tax accountant and a real estate attorney and find out the tax liability and find out what the implications would be if you did have to lose one of the two properties due to job loss/etc. Know what your exit strategy is and how to plan for it before going in to the situation. Would either mortgages be non recourse/etc, and save accordingly. There may be things you can do to account for the income property that are advantageous tax wise.
posted by iamabot at 8:19 AM on January 19, 2011

Best answer: Yes, talk to a pro. We started going with a fiancial planner a couple of years ago, and he lead us through some useful discussions. Also, get a good real estate agent in your corner.

Then spend a painfully long period of time with a spreadsheet making sure your budget & estimates are accurate. Use a year or more in credirt card statements and utility bills, for example, to project your cash outflow.

Then, if that all looks good, GO FOR IT. We moved last October (suburban Rhode Island). We got a P&S signed on the place we wanted, and sold our little house in two weeks. We went from six people with one bathroom to three bathrooms -- heaven! The fact that all the appliances are dying simultaneously as though from a terible disease doesn't bother me as much as it might because, hey, three bathrooms! A quieter street! More rooms! Gas not oil heat! More kids in the neighborhood! Etc.! Etc.!
posted by wenestvedt at 9:11 AM on January 19, 2011

I assume you've already refinanced the original 80/20 1st/2nd mortgage on your current home? If not, I bet it's worth your while to do so!

Even if the rate savings aren't there (which I find hard to believe if it's a 5 yr old mortgage), just simply not having a 2nd mortgage on a property is very advantageous for "worst case scenario" planning. Having a 2nd mortgage can prevent you from doing a short sale or deed-in-lieu if for some reason you need to bail on your current home's mortgage after you've bought the 2nd home.
posted by de void at 10:27 AM on January 19, 2011

After all our bills are paid and BOTH house payments (current & new) we'd be left with $2245 monthly for gas, groceries, entertainment and savings.

Unless you have an insatiable coke and hookers habit, you sound pretty stable and ready to buy the new house. I make way less than 2245 per month myself (total, not just the leftover money) and manage to hold down fort, drive, eat, and stay entertained. If you don't want to be a landlord, don't - just sell the first house, especially since you mentioned you're ready to basically just walk away from it and not concerned about profit.
posted by WeekendJen at 10:45 AM on January 19, 2011

Response by poster: @De Void, yep we refinanced a couple months ago and got 4.75% versus the 9% it was at before on the line of credit :)

Thanks everyone for the tips and making me feel better about this overall!
posted by Hellafiles at 10:59 AM on January 19, 2011

I'm going to tell you our story. I don't think you should overvalue what I'm going to say, but you seem interested in knowing what you might not have thought of.

We found the right house for us a little more than three years ago. We decided to buy before selling our condo. The math seemed to work out fine, and based on our perception of market value, we didn't think it would take long to sell.

Six months later, the condo remained unsold, without our receiving an offer. We rented it to the parents of my sister-in-law's fiancee, who seemed like a very responsible dude. For the two years of the lease, they paid rent in full, although they started paying twice monthly instead of on time. We listed the condo again a little less than a year ago, three months before the end of the lease. They stayed in the condo on a month-to-month basis.

Months passed with no offer. One of the tenants, not interested in moving, started yelling at buyers and following them around as they looked at the condo, telling them all the problems he thought it had. Then my sister-in-law left her fiancee almost at the altar. A few months after that, our tenants started paying about two-thirds of the rent owed each month. Their son no longer was returning our calls.

We have just now accepted an offer on the condo. Our tenants tell us they have no money and cannot move out. We are not sure whether the sale will happen.

This seems like an especially good time to sell before buying. If you were looking for a year before finding one house you liked, YMMV, but if you did go into contract to sell, it seems to me you would have a high number of houses for sale available, and a good likelihood of a motivated seller.

If nothing else, I would advise discussing with your wife whether you would be willing to take less for the house than you think it's worth, and discussing it using real numbers.
posted by troywestfield at 11:03 AM on January 19, 2011

Lots of great advice above, and will share my story if only to help focus your thinking.

Somehow we ended up on the opposite coast and ended up being a remote landlord. Bought a house in 2007 in an expensive part of Maryland, that two years later was too small (due to the arrival of a surprise baby). Tried to sell the house we were renting out in California twice (the first time it went vacant for a full six months before we caved in and rented it out for six months, the second time we put it on the market determined to sell it).

The goal: to sell two houses in order to get a nicer, larger place. The California market had tanked since we moved out East, and was still in decline during the time we tried to sell it.

The happy ending: we had to lower and lower again our asking price for the California place, until at last (a full 7 months on the market while vacant) we found a buyer at what we thought was a bargain price, as low as we could stomach. We put the house we were living in in Maryland for sale six weeks afterwards, and had four busy months of many open houses and showings (this was in the Spring of 2010 when there was a ton of activity). Obtained two nearly full-price offers that both fell through, and saw a dramatic slowdown in the summer, all the while looking for a larger / more suitable place.

And a place we were looking at the very beginning of our search in November 2009, by May 2010 had dropped their price twice both times at 10% each time. So we did the calculations, and figured we could take a small loss on our then-current home if we did a conditional offer on the new place. The new place we offered almost 10% below their final asking price - now almost 30% lower than the original Oct 2009 asking price! And the sellers accepted our conditional offer, with only 5 days to lock in a buyer of our current home.

So we drop the asking price some 6%, and sure enough a very strong offer came in. The negotiations only took 3 days! The buyer had seen our place four or five times, and it was the asking price that flushed them out. The close of escrow on both places happened within a week of each other, and with a few weeks of rent-back time allowed a very smooth transition from one house to the next.

While not a 'dream house' I can certainly say everyone is thrilled with the new space. Every time I come home I think, 'I actually live here in this awesome neighborhood in this very spacious and comfortable place, with a lot of room for the little guys to run around in'.

And of course thanks to rates in the mid-4% range (okay I know that they've risen a bit) the payment on the new larger place with the enlarged square footage, huge lot and correspondingly higher mortgage, is now smaller than the old place that had no less than 55% of the space of the new one! So it was a win/win all around - a lower carrying cost for a much larger and nicer property.

Congratulations on the repair of your own finances and putting yourselves on such a firm foundation. When I bought my first place at the age of 30 I had a lot of fear about making the payment, and these many years later laugh about how small that payment was, relative to the payments I'm making today. But if the cash flow is positive, and sufficient thought put into the decision for such a long-term, illiquid investment, it pays off great dividends.

On renting out your current place, it really depends most upon your temperament in dealing with tenants first, and then secondly your expectation for the current market conditions in your locale (as far as what other expert real estate professionals you trust think the next several years holds for the market in general in your area). There are many horror stories of people who don't have the stomach for being a landlord; for our situation we've had a lot of experience with it so it wasn't terrible.

Best of luck to you.
posted by scooterdog at 9:19 PM on January 19, 2011

« Older Advice and support for someone with no family   |   How to Hold Open a Door Newer »
This thread is closed to new comments.