Advice for naive first-time home buyers
April 15, 2013 4:39 PM   Subscribe

My boyfriend would like to stop paying his ridiculous rent in the Bay Area (San Jose) and buy a property for the first time. The maximum down payment he can put down is $80K, which allows him to buy a place worth $400K at most. We don't like our options.

This property is intended for him to live in by himself initially, but I will move in at some point (I'm nearing the end of school and living at home right now). He is going to buy the condo by himself, but in a few years, I hope to be working and able to contribute to the purchase of a house.

We've been looking at condos and townhomes, but with a $400K limit, the options are few and unappealing. We've been looking at 2 bedroom condos in decent areas. Even if the listing is for below 400, the bids drive it up to well over. Our realtor tells us now is a good time to buy with the low interest rates and with the relatively low prices of homes (as they are quickly on their way up), but I hear from other sources that as soon as interest rates go up, house prices will go down. Also, that a condo or townhouse with no land will not accrue much value at all and it wouldn't be wise to put basically all his savings into an iffy property in an unpredictable market where we might lose money on the house.

I think we're looking at buying a property now more out of fear of rising house prices than anything else, which is not a good feeling to operate from. Would it be smarter to save up a few more years until we can afford a house, or will housing prices have risen up too far out of reach? Are we overlooking some options?

Thank you.
posted by massofintuition to Home & Garden (16 answers total) 9 users marked this as a favorite
Response by poster: I forgot to add: He works in Newark, and I expect to work near downtown San Jose and possibly all over. So we've been looking in North San Jose and even Milpitas.
posted by massofintuition at 4:47 PM on April 15, 2013

See if your bank/mortgage broker will structure the loan as an 80-10-10, that is: 80% first mortgage fixed, 10% home equity line of credit variable, 10% down. Don't go for more debt than you can service, obviously, but that can turn a stretch into a purchase + enough money to do all of those "new-to-you" home repairs that inevitably crop up.
posted by straw at 4:55 PM on April 15, 2013

Bay Area urban and suburban real estate is far more stable and expensive than you'll see in other parts of the state and country. Unless you're willing to look in far exurban areas, I would not assume that prices will go down as a result of interest rate increases. Desirable areas will likely continue to be both competitive (as you've seen with the over-bidding trends) and high-priced and will likely only become more-so. Listen to your real estate agent if they have experience in this geographic area. Other general rules for real estate won't necessarily be valid in such a in-demand and expensive region.
posted by quince at 4:59 PM on April 15, 2013

Our realtor tells us now is a good time to buy...

Have you every heard of a Realtor telling their client it's a bad time to buy? No, you haven't. If you buy, your Realtor gets paid. If you don't, she doesn't.
posted by jon1270 at 5:02 PM on April 15, 2013 [22 favorites]

How many years are you/your boyfriend planning on staying in the condo? It sounds like less than 5, which is risky for any kind of real estate. Buying and selling is expensive and can eat up any gains or even put you in the red.

Your realtor is partly right about it being a good time to buy. What he's not saying is that inventory all over the Bay Area is really low. This means that anything that's nice gets bought within days of listing (or even before it hits the MLS) often for way over asking. It's especially bad on the lower end of the market, where you are.

I think you have some options:
- compromise on something - location, size, etc. - enough to find a place you like in your budget
- keep shopping and hope you get lucky (this is what we did, it took us 2 years to find our place)
- keep renting and saving until you can afford the place you really want

Option 3 isn't that terrible. Owning is expensive. For example, our water heater burst while we were on vacation and flooded the garage. The next day the furnace broke. Repairs for both + damages was around 7k. Could your boyfriend's finances handle emergency expenses like that that can come up suddenly?
posted by tealcake at 5:05 PM on April 15, 2013 [2 favorites]

Is putting less money down an option? The drawback with putting less than 20% down of course is that you have to pay PMI, but that is also tax-deductible and can be removed when you have 20% equity in the property. Also my complex is FHA-approved which means you can put down as little as 3.5%.

Putting less money down means you can have a cash cushion for unexpected repairs, but you'll definitely want to get a home inspection before you close.

MeMail me if you want details about my complex - it's in San Mateo, not sure if that's convenient for you.
posted by bendy at 5:08 PM on April 15, 2013

You are artificially limiting yourself to $400k. You can get an FHA loan and put down 3.5% if that opens more doors for you and you can pay the PMI.
posted by tylerkaraszewski at 5:10 PM on April 15, 2013

Renting is an awesome option for young people whose lives are going to be changing in the foreseeable future. Renting preserves your ability to move for work. Renting off-loads the costs of home ownership on to somebody else and gives you freedom and flexibility. Renting lets you save your cash in an money-making investment account so that it grows, instead of sinking it into a building that you'll have to keep pushing money into for the next 2 or 3 decades.

If you're not happy with the rental unit you're/he's in now, find another. Time is on your side. Preserve your options for as long as possible until you're both in stable, long-term careers and you've got a fat down payment put away to lower your borrowing costs and you've still got a good solid cushion of cash AFTER choosing a house.

tl;dr: house-buying is for people who have more money than they need, not "just enough"
posted by Mary Ellen Carter at 5:17 PM on April 15, 2013 [15 favorites]

It's impossible to predict if it's a good or bad decision really. The longer you plan on staying there, and the lower your loan amount is, the lower your risk is typically. The higher your rent is compared to a mortgage, the lower your risk is.

Renting gives you more flexibility, but with that flexibility comes costs. On average, in the long haul, buying is better than renting. But that doesn't mean your specific situation won't be an outlier either.
posted by garlic at 5:26 PM on April 15, 2013

Buying a house now because it may be more expensive later is a terrible reason to buy a house.

Wait to buy a house until you are ready to live somewhere for the next 10+ years. Wait until you know exactly what neighborhood you want to live in, where you want your kids to go to school (if you plan on having kids), and where it will work out well with your commute. Wait until you want to do things in your living space that you can't do in a rental.

Housing prices will not rise at the same rate they did before, that just isn't sustainable and we all know it now. Interest rates will rise at a crawl if they rise at all. The chances of you buying a house and then making any money when you sell it (or breaking even) is very small unless you are there for a long time.

Don't forget, the price you pay for the home doesn't include the costs of fixing everything that goes wrong once you're in it. We've already had to spend over $7k in repairs on our house this year, with an estimated $5-6k more that will have to be done this summer. It's all stuff that would be covered if we were renting.

The quality of living space you will get per dollar is always going to be higher if you rent than if you own. There are very few downsides to renting, and many downsides to home ownership. Until you are really ready to settle down for the long term, rent and save as much extra money as you can, so that when it comes time to buy a place, you'll have a lot of options open to you.

Another thing to think about: If all of the places you'd like to live are at the very top of what you could possibly afford, what will likely happen is that you'll buy an expensive place, and then spend the next few years of your life avoiding doing anything fun that might cost money, so you can afford to pay your mortgage. It's better to rent a cheaper place, have a little bit of excess money, and get to enjoy life while you're young.
posted by markblasco at 5:31 PM on April 15, 2013 [3 favorites]

A couple of cliches to hopefully help:
* the deal of a lifetime happens every weekend.
* the more you look, the more you know.

So, don't rush. If you take your time, you'll get a solid understanding of the market and you'll be able to find a deal that is great for you. I spent 12 months looking for my first place, and while only intended to spend a few years there, I ended up spending 10 years there and did quite well when I sold it.
posted by dantodd at 5:42 PM on April 15, 2013 [2 favorites]

Don't buy out of fear. Don't buy with an eye to making a profit. Buy because you are ready to set down roots and because you LOVE the neighborhood and the house.

Based upon what you've said, I would keep saving and wait to buy a house when I'm ready to marry and start a family.
posted by Ruthless Bunny at 5:48 PM on April 15, 2013 [5 favorites]

Stretching to buy is just a terrible idea. The unexpected home repair and other associated costs that come up are enormous, inevitable, and incredibly stressful if you're already stretched. If you can avoid having to buy in the bay area, avoid it. Nothing you've said suggests that you need to buy.
posted by fingersandtoes at 9:54 PM on April 15, 2013 [2 favorites]

Now is a great time to buy. Interest rates are at historically low levels. In the future they may go down but it's much more likely that they will rise. Bar another great recession housing prices are unlikely to go down in the Bay Area. They are far more likely to increase.

Therefore you are in a race between your rising income and savings and housing prices/interest rates the relative position of those two items determine how hard it is to buy.

Frankly, $400k is not a lot in the Bay Area and you have to be realistic about what you can afford. Also, the housing market is incredibly competitive right now. There is a lot of investment money that continues to pour in and quite honestly it is making it damn near impossible for 1st time buyers to compete. Your Realtor can give you a better feel for the types of property you're looking for. But I recently tried to buy a single family home (as an investment) with 50% cash down. We made nearly 10 above the asking prices offers before we gave up. We lost every time to all cash deals all 10~20% above asking price.

My advice is get started on the ladder. Buy what you can afford - make sure your monthly payment is well inside your income capability. Buy in the best area you can afford. Buy something you like - while being realistic.

On the flip side all this investment money pouring into the market has to drive rents for these properties down at some point. So an alternative might be to look to exploit that to cut your rent expense so you can save faster for a bigger down payment. Instead of renting an apartment look for a SFH, maybe share the rent with some friends.
posted by Long Way To Go at 11:18 PM on April 15, 2013

The quality of living space you will get per dollar is always going to be higher if you rent than if you own.

What? I'm in a similar in-demand market that several AskMe threads about buying houses have popped up with relation to, and this is just not true in a lot of places. Around here the rent on places is far above what it would cost to actually buy them and has been so since a bit into the recession. It continues to amaze me as I hear the payments people are making on places compared to rent.

I'm aware you're on the hook for a lot of other costs, all repairs, etc but at least in Seattle rents have far outstripped purchase prices for a while. Me and my partner could have bought the house she was renting a year ago for barely more than what were paying for a small-ish one bedroom apartment now. And it was a 3 bedroom house with lots of recent work/upgrades in a nice part of town.

It's to the point that a lot of people I wouldn't expect to be buying places are just to get off the treadmill of paying rent into the ether. There's plenty of other good points made by you and other people in this thread, but when you're in a super competitive rental market this just doesn't seem to be true. Landlords are charging a premium to the people who can't afford a down payment or want the flexibility.
posted by emptythought at 12:55 PM on April 16, 2013

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