Finances of buying then selling a "starter home"
May 21, 2018 9:38 AM   Subscribe

How deeply ambivalent can you / should you be and still go through with a house purchase? On the one hand, I think it's just cold feet, and on the other, there are things that just might not work long term. I had really wanted to find a "forever" house, but this seems more like a "good for now" house. Is that a mistake?

I've written a lot of versions of this talking a lot about the ambivalence itself, but I think the real question boils down to, if we buy something that is okay for now and then find ourselves wanting to move, how much of a financial mistake is that, rather than holding out for something better now?

I know that "starter homes" are a thing, but I'm not convinced, because I think the area that we'd rather move into at least might appreciate faster.

Even if it doesn't, the gap in real prices between what we're buying and some hypothetical dream home would widen. Let's say we buy a place for $300k and our dream home would cost $400k. (These aren't real numbers, but for example.) After two years of 5% appreciation, the dream home is valued at $441k while ours would be $331k. Then we have to spend six percent on realtor fees, so that $331 would net us $311. So now instead of stretching to afford an extra 100k, we're stretching to afford an extra $130k. (This is probably an underestimate given underwriting fees, transfer taxes, appraisals, moving costs, painting the old place to our favorite colors then painting the new place to our favorite colors, etc.)

I suppose if we saved what we weren't spending on higher mortgage payments, we'd have something like an extra $17k in cash, but still, the gap is 13-15% larger. Oh, and where will interest rates be two years from now? You don't hear a lot of people talking about a future scenario in which rates go down. Meanwhile, our salaries are going up by like 3-5 percent annually.

So I feel like we ought to stretch to get into a house that feels more like a forever home, even if it's got aspects that we have to fix up over time, and that by not doing that, we increase our chances of being priced out forever. Is this a valid fear or am I missing something? It seems like "starter homes" are only a good idea for people whose incomes are growing more rapidly than price appreciation, but since you don't hear that a lot, maybe I'm wrong?

There's a lot more I wonder, like how much effort and money I should be putting into upgrading this place into somewhere I like better (and how much that would cut into saving $17+k for a scenario in which we move), and the emotional side of things might be worth a question of its own, but I think this is the question that's most troubling me right now. Thanks for any advice!
posted by ruff to Work & Money (22 answers total) 7 users marked this as a favorite
The theory is that 1) your costs to upgrading the 'starter' is less than that which the house appreciates because of those upgrades and 2) your earning potential (outside of this asset) will appreciate faster than the real estate market does.

Another consideration is that your total annual housing costs may be less than your housing costs from renting; you get to increase equity and are able to save more each year.

If these conditions don't apply to you, then, yeah...

Or if you're in a hot real estate market and are willing to cash out and relocate to somewhere with lower real estate prices (thereby upgrading on the structure, but likely downgrading on location).
posted by porpoise at 9:46 AM on May 21, 2018

Best answer: Oh man. The world is just the worst for figuring this stuff out. Are you in the U.S.? I recommend picking up a copy of Marianne Cusato's "The Just Right Home." It goes into great detail about all kinds of things that go into buying a home. I'll tell you my little story, when we bought our first home, there were some notions about the "starter home" including from our broker and realtor. I think it's kind of bullshit and I think that concept is pretty much dead. We bought our house at the top of the market in '07. Things seemed so expensive and we didn't have anyone giving us money (like parents or whatever). So, we picked probably a bad location but a great little house for the money. During the downturn (where I was very underemployed and we had a kid), we had our house appraised to try to get the payments down and we were $150,000 underwater. Thankfully, HARP came along and we could refinance.

Two years before our kid starts kindergarten and we start looking for a house with a better neighborhood school and, yeah, a step up from our "starter home." We are at the top of the market again, only worse! Our finances have only gained modestly since we first became homeowners. And everything is ridiculously priced because other markets whose houses are even more ridiculously priced have started moving here. We put in 9 bids and are overbid on every single one. They all cost way too much and all of them (in our range) need work. We have our house appraised again and decide to add on. The financials just make so much sense. We can have a bigger house in our still sub-par neighborhood and if the market stays steady or continues to rise, we could sell it the day after we are done and still come out well ahead. That used to be unheard of, I think.

Do we still talk about some of those houses that we wished we had "stretched" to afford back in '07? Yes. Oh, yes, we do. But, then again, it's possible that we would have had to foreclose on one of those if we couldn't have made the payments.

My advice is just to stop with the "starter home" concept because you never know. I also think that you should be a little bit in love with any home that you buy because they require a lot of expensive maintenance and upkeep and it's better to do that in a location that you love and a house that you find charming and worthy of the work. The financials also need to make sense for you today and in the next 5-10 years. I chided my broker years later about the BS he told me: "Your home property value will increase and your pay will increase, you will be able to refi and get rid of PMI and then in 5 years, if you want to sell, you'll be sitting pretty!" None of that happened.
posted by amanda at 9:54 AM on May 21, 2018 [16 favorites]

So I feel like we ought to stretch to get into a house that feels more like a forever home, even if it's got aspects that we have to fix up over time, and that by not doing that, we increase our chances of being priced out forever. Is this a valid fear or am I missing something?

Well, you also increase the chances of stretching too far, losing the 'forever' house to foreclosure and ending up without even a starter house.
posted by the agents of KAOS at 10:05 AM on May 21, 2018

We bought our first house last year. I’ve thought about this a lot, and continue to think about it as I recalibrate what my “dream home” would be.

Yes, I believe the whole idea of a “starter home” is pretty dated. It’s based on the scenario where a young person just starting out buys a home and with a salary on a true upward trajectory (this is not me – we are already pretty middle aged at the point where we became home-buyers, and our income may not do a lot more than stay ahead of inflation).

Even if our house appreciates, so will the houses we’d want to upgrade to, so barring a salary jump (unlikely) or an inheritance (we will be happy if our parents’ savings cover their own retirement) we will never be able to buy more house than we have now.

You do have to take into account the money you’d be spending on rent if you didn’t have a mortgage, and the fact that rents will also continue to go up. In our case, I figure that about 4 years into home ownership we should be getting ahead of where we were renting (our mortgage + property taxes + insurance are slightly less than our previous rent). So maybe our savings in that regard will be hitting a significant level right around when we’d be looking to move into assisted living.

I’d advise figuring out what you can afford without stretching, prioritizing what you want in a house, and getting comfortable with that being your “forever home.” I mean, maybe it won’t be, but I think that the idea of a “starter house” is a non-starter.
posted by Kriesa at 10:05 AM on May 21, 2018 [2 favorites]

There are plenty of calculators that will show you how the math works out--how long you need to stay in a house to do better than renting an equivalent place. I don't think even "starter homes" are meant to be lived in for less than five years. You will rarely be able to make the math work.

I guess the key consideration for you is: it doesn't sound like you'd be able to buy the non-starter house in a few years anyway. "Stretching to afford" either an additional $100K or $130K is a very bad idea. There must be no stretching to afford in your mortgage. (Literally, this is so simple basic and obvious that you should not consider buying a house until you can bring yourself to accept it. I'm being blunt because this is really important and people just do not want to get their heads around it, but mortgages are a very real risk. You can't always assume that HAMP/HARP will come along to rescue you from risk you couldn't actually handle.) Sure, there's a zone of intersecting years-in-place and closing costs where the lost returns on the closing costs themselves might make the difference between being able to buy the upgrade place and not, and if you are thinking very short-term, you might be in it, but unless you can come up with a reasonable plan to buy the upgrade house in a few years, its existence is basically irrelevant. The real question is whether you like the house itself, and the math discussed above. If it's worth it to you financially and emotionally, then buy. If not, don't.
posted by praemunire at 10:08 AM on May 21, 2018 [3 favorites]

We've had a starter home for 9 years. While I am financially glad we did what we did, there's no pain-free way to upgrade. Due to income-to-debt requirements and the cost of housing in our metro area, we would have to sell first and then buy to upgrade even if we have all the down payment before selling. So, we either would have to make an contingent offer, sell and rent, or just pray the right house is on the market when we sell. (This makes additions to your current home slightly more appealing -- if you can buy a starter home that has the potential to be upgraded to something you would be happy with I'd highly recommend it.)

The more expensive homes are, at least where I live, the greater the fluctuations in the prices so I wouldn't bet your financial well-being on the dream home not losing 20% value or whatever your down payment amount is if you later need to sell. (Starter home prices tend to stay relatively stable or rise while dream houses can vary significantly from year to year, particularly with interest rates going up, less and less people can qualify for the financing for dream homes.)
posted by typecloud at 10:35 AM on May 21, 2018

Related, where this piece is advocating for multi-unit housing over "starter" homes for city-planning, but the arguments against the "starter home" mentality are good: Starter Homes Are Dead, Long Live Starter Homes
posted by jillithd at 11:49 AM on May 21, 2018 [1 favorite]

Shelter is a really emotional thing and it's hard to be circumspect about it even without the fact it's the largest purchase you'll ever make. I wouldn't let a realtor push me into a "starter" home I didn't like at all, but if it's at least as good for you as the place you're renting the risk to you is more in timing the market than it is in the finality of the decision. The emotional attachment also works after you've moved in and made it your home, so you might find that a place that seems like "for now" will feel a lot more like home once you've moved in.

Another thing to keep in mind is that rent tends to go up, while your mortgage + interest won't (unless you get an ARM, but you probably don't want an ARM). Insurance may go up a little, and taxes will probably go up every year, but they increase less than the average rent increase, at least in our market.

You shouldn't forget that a house payment gives you some equity (outside market gains) and rent doesn't give you any at all. Even if the market is flat and gives you no market appreciation, paying a mortgage for five years will "save" you money compared to paying rent, simply through locking a price and paying down some principal.

Most crucially, market appreciation isn't uniform, so your assumption that both the "for now" house and the stretch house would appreciate at the same rate isn't really a good one. One easy way to understand this is a transitional neighborhood, where prices might be depressed relative to the rest of the market, but then might subsequently outperform the market as things change.

Our house did exactly this for the first couple years we owned it, because our neighborhood was "hot" for a while. I'm not saying your neighborhood will necessarily be written up in the New York Times, but in a lot of places it's possible to find neighborhoods that underperform the market for no good reason (or not much of a reason) that will then increase in value quite a bit as the neighborhood's reputation improves. That crazy market appreciation meant that we could refinance after only a year and a half with something like 22% equity. Your market will vary, of course, but when you do your math you'll need a little bit of a feel for whether a neighborhood, or even a specific house, is going to appreciate at a different rate than the market average for the whole city or region.
posted by fedward at 11:58 AM on May 21, 2018

Response by poster: Yes, we're in the US. (West Coast no less.) And stores like amanda's are exactly my concern. We keep trying to answer my ambivalence with "well, if we don't get used to [the things that I have misgivings about*], and if/when we outgrow it, we'll just move," but I can't convince myself that would actually be feasible. (* I do have real excitement about certain things, too. I'm really ambivalent.)

I appreciate the caution about stretching, but I don't think foreclosure would be an actual risk for a long list of reasons (e.g., other assets we're trying not to touch because we deem them for retirement). We're pretty conservative in what we consider to be our housing budget. That said, we don't know if we're going to have a second kid (and 4 years of daycare costs), so if I could justify buying something that's "good enough for now" to keep our budget flexible, I'd like to. But I fear that we should instead be buying something that I feel more confident will work over the long run.

Re: different rates of appreciation, there is a lot of city and private investment going downtown. Every week there are new bike lanes and new apartments and condos being built. So I fear that neighborhoods near downtown (more of my "dream home" scenario) will go up faster than ours, which is far enough away that it won't get the appreciation gains of those other places. I don't think it's priced in yet, because all those new apartments and condos aren't occupied, so the new restaurants and shops haven't opened up yet. Then again, there may be an audience of buyers who would really like our location, which has its own uniqueness (adjacent to a regional park) and could be said to have the best of both worlds (good transit access and nature). But my instinct is that we'll be lucky to appreciate at the same rate as these other desirable neighborhoods.
posted by ruff at 12:10 PM on May 21, 2018

Moving is always somewhat feasible but it's impossible to know what your constraints will be when the time comes. The constraints for us are price to upgrade and the fact that we are pretty picky about what we want and that's also due to having a young kid. And while my neighborhood is still one of the more affordable in the city, property prices have been going way up because everywhere else in the city is too desirable. There were indicators that my location was going to be the "next big thing!" and then it wasn't.

Your best bet is almost always to buy a crappy house on a really nice street or in a really nice neighborhood and then improve it. But if you have kids and need to hire everything out (as opposed to being DIYers), that can be a real slog.

If you are looking at a slightly less-than house and thinking you can just upgrade it, you need to factor in that you might need to move out for certain upgrades (adding a second story, gutting the kitchen/living areas, whatever). If it's a "fixer upper" then imagine an extra $100k in your budget to get it fixed up. If you think you want to add on, really examine how that would happen. Second story additions can basically turn into what feels like a whole new house. They can be quite invasive and costly. If you can add on to the side or back, you're likely in better territory. If everything it needs done is cosmetic - that's even better. But just know you might live with the ugly for awhile if you're tapped out.

I think you need to examine your safety net before stretching for anything. Having been hit by two recessions and having now no family with savings to "catch us," I'm glad we have the option to stay in our home and keep the money that we would have spent trading up. It's a complex soup of anxiety and faith and luck and damn salespeople.
posted by amanda at 12:47 PM on May 21, 2018

Best answer: I bought a starter house 11 years ago, and sold it last year to buy my forever home which is a larger house in a nicer area. My starter home was worth 7% more when I sold than when I bought, but I'd probably sunk about 20% of its value into renovating it (new kitchen, new bathroom, new windows, redecorating, electrical upgrades).

I was able to trade up because my salary increased by a third while I owned the starter home, and I inherited a lump sum that was 25%-35% of its value. Without both of those, I'd have had to pick between bigger house and nicer area. Without either, I would have had to live in my starter home (or something similar) as my forever home.

My brother, on the other hand, bought his starter home in 2008 and its value doubled in 5 years. He then traded up because he had also increased his income and inherited money. If he hadn't bought his starter home when he did he would have been unable to buy it later.

Everything depends on your future prospects, and the prospects of the area that you're looking to buy in.
posted by plonkee at 12:51 PM on May 21, 2018 [3 favorites]

Look, I can't tell you how many people blew their fingers off ten years ago buying something they couldn't afford because "in a year we'll be priced out of the market" or whatever. Tens of thousands of people. Probably hundreds of thousands. You just can't indulge in this line of thinking. You need to think about whether the house is emotionally and financially attractive as a deal now.

It sounds like you are not very enthusiastic about this house. Buying a house as a means of growing your assets so you can buy a bigger house is a fairly roundabout way of doing things. That's not quite what I think of as the purpose of a starter home, but that seems to be how you're reading it. If the house doesn't speak to you, keep renting and put your money in some form of investment while you're saving. There are no guarantees, but you'd have to do pretty badly in the market to underperform a house with closing costs factored in in the quite short term you seem to have in mind. Yes, sometimes houses double in value in five years. But most often they don't. You can't know what the future will be, but you can avoid a lot of heartache by not pinning your dreams to something that is historically quite improbable.
posted by praemunire at 1:12 PM on May 21, 2018

Response by poster: To be clear, I'd hope the house would work for 7 years, if not 25. I'm not buying this as a speculative investment. (I'd choose a very different neighborhood for that.) But there are certain things about it that bug me. I thiiiiink I can get used to them or that on net, they'll feel worth it. But I don't know. And I'm sad about not living in certain neighborhoods (e.g., close to friends), but I'm willing to make that sacrifice assuming the unknowns of this place (e.g., people I'll meet in this neighborhood) work out okay. But who knows. It strikes me as worth a try because it would keep our budget flexible, since this place is ten percent cheaper than the typical place. But since what my husband and I keep saying to ourselves is "well if it doesn't work out, we'll move," that's where I panic at the thought that we might end up totally priced out once that ten percent gets compounded.

And then once I start thinking about having to move, I realize that even if we like it fine and don't end up moving for that reason, the house itself isn't set up well for a family with two teenagers, which assuming we succeed in having a second baby and we're still living here when our toddler becomes a teenager is what we'll be.

Sorry, don't mean to threadsit. I just wanted to clarify the likelihood and timing of having to move. I wish I could figure out a strategy for hedging against the risk that these other neighborhoods might appreciate more quickly so that I could feel confident that we'd have the same options as we do today.
posted by ruff at 2:50 PM on May 21, 2018

Best answer: The cool thing about a forever home is that you can invest into it without feeling bad. That became really important as we had time consuming and unexpected repairs that really tried our nerves.

We REALLY stretched to buy our first (and perhaps forever) home. But we put in place a bunch of mitigating mechanisms and safety nets, some real some more psychological. For instance, since this is a hot market, we rent out rooms and can make great money doing so, and end up with a net mortgage less than the mediocre starter homes we considered. Also, we are psychologically primed that if we have to, we could move out for a few years and rent it out if we have a true financial emergency that makes it so that we can't meet monthly payments. We don't want to do that, but if we had to, simply knowing that we can keep the home that we want for the long run one way or another means a lot.

Why does it mean so much? For some reasons listed above. We knew that a home that would make us happy would be almost impossible now, but not actually impossible (because we got it, but it involved a lot of craziness, the least of which was making ten offers and eventually directly approaching owners to sell to us without an agent involved). However, in the future, with the exponential increases in prices, it definitely WOULD be impossible to buy. In which case, we would have rather set up our lives in a completely different part of the country.

Now, I enjoy watching that exponential increase work in our favor.

So yes, go ahead and overreach for your dream home. Your current and future you will appreciate it so much. Make sure it's for reasons that matter (neighborhood amenities that you love, great schools, proximity to jobs...stuff like that) and not just 'wanna be super cool.' That'll make the pain worth it. HOWEVER be prepared to dedicate a lot more effort to keeping your home than you might have to otherwise. For instance, I'm always managing our finances very carefully to make sure all the puzzle pieces actually fit. There's no autopilot, like there would be with a more relaxed budget.
posted by cacao at 3:28 PM on May 21, 2018 [3 favorites]

Best answer: So I feel like we ought to stretch to get into a house that feels more like a forever home, even if it's got aspects that we have to fix up over time, and that by not doing that, we increase our chances of being priced out forever.

It really, really depends on what the aspects making you unhappy are.

So like: we have a place that doesn't have quite as big a yard as I'd like, and it's not fenced in the way that I want, but it's not a small enough yard that I'm actively unhappy, and I always can fence it in the way that I want later. Or like - my husband kind of hates our flooring in some areas, but we can always change out the flooring later without moving houses. There is an unfinished storage space, and I really wanted a finished storage space, but I can just finish the damn storage space and then we will have the thing I want. My husband wanted a place with grapes and I wanted fruits, but he can just build a grape arbor and I can plant some berry bushes. It doesn't have AC, but you can install AC. And even though we don't have the money for a lot of those fixes right now, I anticipate being able to change that in the upcoming future.

Things you cannot change easily: house size! Neighborhood! Zoning for schools! These things will not be improved no matter how much you work on your house! If they irritate you now, they will always irritate you.

So I think rather than 'starter house' 'dream house' thinking, the best way to think of it is 'what are the bones of your dream house', like, what things MUST it include, and how can you get there from here?
posted by corb at 4:19 PM on May 21, 2018 [5 favorites]

Best answer: We bought a house we could comfortably afford, and it gave us the flexibility for me to drop to part time to stay home with our small kids for several years. If we had pushed for our dream home we couldn't have done that. That said, we bought a house that we love and we never felt like we were settling for something less. I'd be perfectly content living in this house forever, even if it's not glamorous.
posted by gatorae at 4:56 PM on May 21, 2018 [4 favorites]

Best answer: I’m another person who bought a “starter house” waaaay under budget and now I can’t imagine moving. I cannot overstate how awesome it is to have an affordable mortgage - one that requires only one of us to work at all, and only part-time if we’d like.

I was worried when we bought the house that - the yard was in terrible condition, the cabinets were ugly, the floors were in awful shape, we live outside of town, house has no character. We are slowly working on the yard and I no longer notice the other things that once bothered me. And we can afford to fix them if we’d really like to.

My husband and I are very conservative about spending so I’m sure our happiness is largely rooted in that, but I wanted to make a pitch for not “stretching”. And we are two blue collar workers who are solidly below the median income and are managing to accumulate savings because of decisions like this one. If money stresses you out like it does us then I recommend going for the smaller debt.
posted by pintapicasso at 5:25 PM on May 21, 2018 [5 favorites]

Our first house was way under our budget when we bought it (and way, way under a few years later when our incomes were higher). It was small, quirky, and definitely imperfect, but oh boy, was it ever cheap.

We had to sell because of moving for work. Our new place is more of a “forever home” I guess, better neighborhood, better amenities, but I miss how relaxing it is to have housing costs be such a small part of your budget. And our moving was a reminder that you can make plans but life will intrude and force changes.

I would also say that anything about your house can be changed - except it’s location. If at all possible, buy in the area you love and make the house work, maybe with small changes over time.
posted by Dip Flash at 9:43 PM on May 21, 2018 [1 favorite]

I'm about to move to an apartment where I will live for at least 10 years, then maybe my kids another 10+ years. It's nerve-racking because it's my first solo purchase and I had to buy it pure cash (yay no mortgage, boo no cash), but the whole process of contemplating the purchase and move makes me literally sick to my stomach. And this is something I've run the numbers on, that my logical brain is thrilled about, and I do not like our current place. Yet. House-buying and moving are HORRIBLE processes. You are constantly second-guessing yourself. Try to have a logical brain hour to write things out clearly, and cling to that when your gut is screaming "hide in a cave! we should live in tents, so much cheaper! buy the palace!"

When we were looking for places, I was thinking how big to go, how small - I ended up going for the lowest end of my budget and I'm so glad I did. Not just the financial security but the extra money in renovating in the place. As long as the neighbourhood is reasonable, you can do awesome things with interior design to make a place yours and comfortable. So much better to have a small place you can afford designed to be wonderful than a big 'marketable' property that is uncomfortable to live in.

School distance matters enormously once you have kids. Even if you don't have or plan to have kids, it matters to the next buyers of your house, so only ignore that if you definitely won't have kids and plan to stay long-term. Otherwise, buy the small house that makes you feel good and financially safe. It's not a decision you'll regret.
posted by dorothyisunderwood at 9:45 PM on May 21, 2018

Moving is really, really costly. Broker fees, moving $$, all adds up. Moving isn't free either.
posted by Rock 'em Sock 'em at 1:12 PM on May 22, 2018

I'm 7 years in to living in my starter house.

Things I like: my mortgage, taxes, and insurance are super mega cheap (under $500) which is about what you would pay to rent a room in a shared house in the city I'm in. House had good bones, I just made minor cosmetic tweaks.

Why it is still my starter home: Neighborhood (too much drug shit and littering), schools really really bad ( i have a 15 month old)

In my anecdata, I will still need to stretch to afford a more "forever" home, but it will be easier to bear since I have had years to save on living expenses (and did). I couldn't afford a house in a better area when i bought this house, and I still can't buy myself into a much nicer area, but I sure as hell can't rent in a nicer area and I pay way less than renting in my crappy area. The starter has allowed me to save on monthly living expenses and build equity that i can flip into a "forever" home.

I would only stretch for a better neighborhood in regards to crime, safety, and drugs and better schools. Everything else is secondary to that. Open concept granite countertop kitchens don't make the neighborhood any more bearable.
posted by WeekendJen at 2:06 PM on May 22, 2018

I don't think the decision is as cut-and-dried as many. In hot markets it probably makes sense to hedge against getting priced out entirely by buying something "good enough", assuming you don't think you will be forced to move. Especially if you're not looking at your incomes increasing. We bought less house than we could afford, about 25% less, and I think financially it's been a wash even as prices have roughly doubled in the last 15 years. We were at the very beginning of our careers, and had some expectation that our salaries would rise, though. Some family members bought in a traditionally hot area, it ended up being at the top, and they took a bath because the place was just too small. So it's a gamble. What's important to you?
posted by wnissen at 5:20 PM on May 22, 2018

« Older Vestibular Neuritis hearing recovery?   |   Help us furnish our new home Newer »
This thread is closed to new comments.