Buying a home is always better than renting right? I do not think that myth is valid anymore. There are many risks in buying a home. I study economics and have studied the housing market and prices in depth. I know what I am talking about.
- Housing prices are inflated – No matter what a real estate agent tells you, it is in most cases better to build your own home, yourself. US housing is inflated still in 2012, as are the European home prices. Below I will do the math.
- Renting is not always bad if you factor the time value of money. I still prefer home ownership but all factors need consideration.
What are the risks in buying a home
This is a list, and it is not complete of connected to buying a home that you would not have when you rent an apartment.
Investment risks when buying a house
I have an investment background so let me start off by saying you have to consider the present value of the costs. Do not listen to your grandmother telling you ‘to buy a house deary’, look at the numbers.
- The opportunity cost of investing in an alternative investment is very high because all your cash and future income stream is tied up into one asset your home, which may or may not appreciate.
- Your home is an undiversified investment, so if the market tanks as it has, game over.
- You do not own your home the bank does. Do not think you own your home until it is paid off 100% and you have money in the bank for taxes and repairs.
- A lot of cost connected to home ownership, such as repairs and insurance and fees and potential hazards you have not considered.
- Condos are a rip off. Community living is not the way to go unless you are in the right community. You have to pay community fees like 500 dollars a month (to me that is rent) and there are so many rules.
- If you lose your job, game over, this puts a lot of stress on you.
- If land values fall, game over. Your home is such a leveraged investment that a 10% drop in your home price could be 50,000 drop in price. This is huge.
- No flexibility in lifestyle change you must stay in that home or go through the hassles of moving with all the cost connected to it.
- Banks make money, you have to consider why, because you are paying a rate of interest, this means on a long term mortgage after all fees and cost are considered diversified you will pay twice the value of your home. You are better off saving the money and investing it in a portfolio and paying in cash.
Example of how over priced homes are
For example, my condo I live in sold for over $300,000 a few years back. Now it is marketed prices and appraised at $100,000; although I see foreclosed units for $80,000 which people are buying, but you have to still pay a $400 dollar association fee every month. The units needs a lot of work. For a $80,000 I could build a beautiful home, if I did it smart and not go for package deals like most Americans.
Building deals are getting into other people’s problems and it is better to have everything new. I would pay personally maybe $20,000 dollars for a unit. I am not saying that is the right price, but at 20k maybe, but even then I do not know. Home prices is determined subjectively. Do not look at the actual or tax value or real estate discounted price. Ask yourself how much of your hard earned savings are you will to pay.
Real estate agent considerations when evaluation the risks of buying a home
- In my personal experience real estate agents lie. I know you are saying, no Mark this is not true but yes it is. They see you as nothing more than a meal ticket. They are not your friend, ever.
- Prices for some real estate markets have gone down 15 years in a row. Yes this is true. It is a myth that real estate appreciates, despite what Realtors tell you.
- You could get ripped off and I know people personally who have.
Rent or own a home comparison
I would highly recommend using this rent vs. buy calculator. However, adjust the assumptions, do not use the default assumptions. This risks of buying a home calculator will tell you in dollars and cents but does not consider other factors such as job instability.
It will compare the present value of costs and you will see the real risk of buying a home.
What do I do? I am renting a flat in the city and will wait until I have the cash on hand to buy a house. This will make my life low stress, fun and reduce the risk of buying a home or really eliminate it. Nothing beats owning a home in cash. But to get there, you might have to lease a home for a while. Be patient.
Rent Buy or build a home – What I learned living in Eastern Europe
Build. Unless you are a rich executive and can afford to pay these prices today, build. Let me explain the math.
The cost of a concrete block at HomeDepot is $1.35 and can be as low as $1.20 a block. That means for a whole house you have all the blocks for a couple thousand dollars at home. Of course you need floors, roofs, doors, electric, water permission etc. But still for a few thousand dollars you have the base.
You can go to your county, and in most cases sign an agreement that you are the owner/builder. A homesteader if you will. You will not flip or rent the house in a year after you build it, but live in it. You will build it yourself. This means in most cases you can hire unlicensed guys, Mexican legal workers a fraction of the cost or Eastern European builders. Believer me they know what they are doing.
In Poland, most people after the foundation is layer but the bricks up themselves. It is fun. Then you have to put a roof on quick but there are basic materials for this.
If you are clever you do not need too many permissions and fees from the county because you signed this agreement. You will need inspectors etc of course but not a big fee. Do not let people scare you and tell you stories of builders. It is because they work with contractors and subcontractors who make their money off of you. They want to get paid and their value added just like the real estate agent is questionable.
The way Polish people build their houses, and they last hundreds of years in cold hard weather., is blocks and do it yourself. After your concrete block house is built you can add red brick as an outside wall and insulation in between.
Red brick solid construction colonial house not a cheap house made of straw
To have a beautiful square colonial red brick house, not some cheap builders frame house with thin boards and dry wall might be only $40,000 dollars. It will be beautiful if you put shutters on it and paint the trim. It could sell for many time that.
What about the raw land?
You can buy this in the country cheap or you can buy an old house tear it down and not have to put in the infrastructure. Often the total cost is 10k where I am. Because clearing land, impact fee and sewer, power lines etc can run a lot.
You can also check alternative home building methods like Bamboo, earth or manufactured homes. But I prefer the above or log homes. Of course if you are a rich man, than you can just buy a house. The question is are you that rich?
If you do not have the courage to build yourself:
- Build with someone like D.R. Horton if you like package deals. It is the most cost effective way for the non-do-it-your-selfer. The firm has a good reputation and I have had building inspectors tell me they are solid constructions. On the down side they are cookie cutter in terms of materials and still frame houses. But still I priced it out and is cheaper than buying from the secondary home market.
- Build yourself is the best, Do you really want to buy someone else problems and most home have problems.