Flutterby™! : due diligence buying a house 2007-07-16 23:50:01.565975+00

due diligence buying a house

2007-07-16 23:50:01.565975+00 by Dan Lyke 11 comments

We're actually seeing various real estate agents admit that the market is softening out here, and prices getting reduced, and although we've been saying that we're going to wait two years before we buy (for various personal financial reasons), we ran across a relatively small house with huge curb appeal in a neighborhood we love, that also happened to have a ginormous garage, and that put us in a "learn everything we can" mode. The take-away from that, which is the right one especially given that there are some work issues that'll be shaking themselves out over the next few, was "back to the original plan". So this one's here so that when I see that "perfect house" sometime in the future I can go back and get a shot of reality: Marin Real Estate Bubble: What is due diligence when buying a house?, a list of things to beware of when buying.

#Comment Re: made: 2007-07-17 16:15:40.42533+00 by: meuon [edit history]

I'd walk around and knock on doors. Bike the greater neighborhood, visit the neighborhood at some different times (evenings).. local shops, grocery stores, etc.. drive/walk/bike to work from that area. And do your own "comparitive market analysis" - You and I saw how Realtors cherry pick their CMA's.

Lastly, if it's not too late. Talk to a true Buyers Broker, not a person that both sells and buys acting as one.

And make sure you don't end up "house poor" and you have to be happy with that house, even if the market goes sour. Is it worth the price to YOU?

Yeah, the "house poor" discussion is one where Charlene and I still need to do some communication, but we're making progress on that front. The main thing we both want is the ability to customize the house, but the economics out here are still just completely whacky. We'll wait another two years and see what happens then, I guess.

I looked at the comments on the site you linked to. Many people were pointing out that if you restricted your loan to 25% of your income and bought a $600K house with 25% down, you'd have to be making about $225K/year to afford it.

What's missing from this equation is that home ownership is an American Fetish. We say we are "wasting money" paying rent. But most of your mortgage payments the first decade or so are almost entirely interest. So you are paying rent to the bank. You won't get the money back out of the house because you aren't building principle very fast. A better deal is to invest your down payment and rent a place (especially in odd markets like the Bay Area or Boulder). Owning a house also limits your mobility - you are less able to move to another area for greater economic advantage.

The only time it really makes sense is when you want to stay in one place forever. Buy a house that's hard to afford at first because you'll get a good tax-write-off in the mortgage interest. Eventually, your payments will seem small because of inflation (unlike rent, which will keep going up).

I've found that areas where there is a built-in economic advantage in terms of job availability, the housing prices are rather high. This makes perfect sense. This is, of course, why I want to land a teaching position at a university in the classic, small "College Town" like Blacksburg, VA, or Athens, GA. Housing is cheap because there is little job availability but my long-term job prospects are solid.

Yeah, the other thing that's a downer is browsing the "comparing what you can get for $800k in the bay area (an 800 foot fixer upper that needs a new roof and has grass growing through the sidewalk) versus elsewhere (a city block)", and it's all about job availability.

Oh, and Eric, your point about "when you want to stay in one place forever" is further compounded in California by the infamous "Prop 13": Because the tax price is what you bought it at, buying a house and living in it forever has that advantage.

I've only done a few really smart things in my life.. having a "paid for" house is one of them. And yes, I bought this place for what a down payment would be in San Francisco. But then, the local job market is.. interesting.

Prop 13: Very nice! That also makes buying an extreme fixer-upper quite the deal.

My parents have been browsing houses in upstate New York, where you can still get houses for well under $100/sq ft. There are also colleges up there!

But consider, what you'd probably want to do is drop about $500K on a place that's barely livable. Spend as little as possible to make it livable for the next few years. Then, when the income vs. mortgage balance starts tipping again in favor of income, do another round of renovations (or raze the place entirely). I've been out there often enough to know that there is a significant economic advantage to being in the Bay Area and a decent advantage to being in Marin County.

You know I've worked for several software companies in Tennessee that tried to take the perspective of "the cost of living is so cheap here, we can do things for lower contract bids". None of those businesses are still around. The Dot-Com I worked for couldn't get West-Coast VCs to take them seriously so they played the Nashville/Birmingham market but never got beyond angel investing.

Re "Upstate New York", I've been hearing about how bad the prices in the Northeast are, but I went to Zillow and looked up the house that my family lived in in high school. They claim more than 3k square feet (that must include the basement), the lot size is an acre, the distance from NYC is a little far, but people commute further out here, and it's near to Danbury and Bridgeport and the coastal towns of Fairfield County (where real estate makes Marin look downright cheap). My parents sold it in 1985 or '86, for somewhere just under $200k, just before the boom of that area boosted it to at least $300k.

There are a number of places in economies that I wonder at the amount of friction, how pronounced geography is is one of them.

In 2001 I bought a house on the east side of the Housatonic River in Connecticut (in New Haven county instead of Fairfield county) and sold it 10 months later at 123%. But I had to pay short-term gains tax on the sale. According to Zillow, it's now worth 172% of what I paid for it. If only I could have waited, and avoided paying those damn short-term gain taxes!

Totally agree with the buyer broker comment. Another keyword is "exclusive buyer's agent." More info about the concept can also be found here: http://buyersagent.com/subpages/exclusive.html

They're Metro DC (we used them) but I think the principles generally hold nationwide. I recommended the idea to a friend of mine in Palo Alto and she had a good experience.

re the rent comparison in the first few years when you're mostly paying interest - it's true that you're not building much equity *if the house is not appreciating* -- but these things cycle and it's not about staying in the house forever, but staying long enough to be on the good side of an appreciation curve.

I know CA is crazier than DC even, but we found another factor came into play. Once we were "landed" - a whole lot of things became a lot easier for us - easier access to credit at better rates (which is mostly sitting unused, but it's still nice to have), better deals generally, and once the house appreciated a bit, a lot more flexibility financially. This also corresponded, timewise, with decent increases in our earnings, too, so there are confounding correlations, but I'm convinced the house has been an enabler for many things.

Sometime back in the 40s or 50s, the Academy declared Geography dead. But it keeps coming back to bite us!

Geography is intricately linked to everything in life. If it doesn't seem that way, then your geography simply has a fairly limited extent. So you are still linked strongly to geographic effects. Economics are just beginning to knock on the door of Geographers. On the CU campus, the Economics building is right next to the Geography building - but there is essentially no interaction except when the lone men's room in our building fails.