Real Estate | Squirrelers

Waterfront Living Is Not Always Worth the Risks!

May 022013

A number of times, I’ve heard a few people I know talk about how great it would be to live by the water. This generally meant living by the beach, but in a few other conversations referred to living right next to a lake. In any case, there is true appeal for some people to living next to a body of water, whether it’s for the scenic views, sunsets, sound of waves, or simply tranquility. To the point that they’re willing to pay a premium for the privilege.

I guess I do see the appeal to some degree, but it’s not a big deal to me. Having views would be kind of neat, but I don’t get any excitement out of living right next to water. Certainly not to the point where I’d even consider paying any more to live there. Actually, in some cases, I think it’s riskier to live right on the water, and that properties right there should be worth less money that those a bit further away.

In other words, perhaps some waterfront property should be discounted as inferior to property a little further inland.

The reason? Natural disasters!

Really, think about how destructive water can be. Some recent flooding around here has gotten me thinking about how flooding and water damage can really wreak havoc for homeowners. The thing is, it shouldn’t be a surprise in many cases. We know that weather happens, so to speak, so in many situations it’s a matter of time before there is an impact on our lives.

I think of this river that’s nearby here, which it seems like every decade causes flooding – with people feverishly working to sandbag and protect property. I wonder why on earth they ever bought property by the river in the first place? They had to know that there is flooding periodically, so why build or buy there?

Sometimes, tragically, we see a lot of destruction in hurricane-prone areas. I don’t see the appeal to building a home or buying a home right on the ocean, in areas that historically are put at risk by hurricanes or tropical storms passing by. The same concept could actually apply to tsunamis. Driving down the coast of Oregon some years ago, I was taken aback by seeing a tsunami evacuation route sign. I had never heard of major tsunamis hitting the U.S. mainland. Well, then we saw the tragic tsunami in Japan occur, and out come a few stories about how one could hit our west coast at some point.

It seems like another example of emotions and home-buying being linked sometimes. Logically, we know that we could be put at risk financially – or even personally – by living in certain areas. But, the emotional appeal of living certain places sometimes overrides logic. Sometimes it’s a matter of thinking through the science of risk, as one would in other financial situations.

Ultimately, is the risk worth the reward? For some it is, but I’ve always had a different view on it. Put me in a place that’s devoid of those types of rewards, and I’ll be totally fine!

My Questions for You

Why do you think it is that waterfront living is so popular?

Is it appealing to you, or are you basically indifferent to it like me?

Do you think many folks think through such risks?

Is This a Good Time to Invest in Real Estate?

General, Real estate 8 Responses »

Feb 072013

Over the last few years – actually, more than that – we’ve seen a lot of people lose a ton of money in their homes. Prices in many parts of the country cratered, and it seems like stories of declining prices were prevalent in most places.

Here in the Chicago area, I’ve seen prices drop measurably over the last 5 or 6 years. There were places that saw homes go off the market very quickly, and have multiple bidders, turn very quiet. As if they were parts of ghost towns, nearly devoid of buyers, with tumbleweeds blowing by. Interesting, because this is an area that has a large corporate and business base, and is quite diversified overall as the center of commerce between the coasts. If it could be like this here, what could things be like elsewhere?

We’ve heard all kinds of stories about houses that could be bought for a massive discount from prices of not too long ago. Places like Miami, Phoenix, and Las Vegas come to mind. Detroit might be the poster child, as there are plenty of homes there that could be purchased on a credit card! Go check real estate listing for that city, on a major site. You’ll find plenty of homes under $1,000. Of course, there’s often a very, very god reason that homes are priced so low.

Anyway, I’ve noticed over here that after some years of falling prices, there appears to be some stability. This isn’t based on a scientific, professional assessment of tons of data, but rather from just a person checking websites here and there and looking at prices within a few different suburban areas. Where there had been steady price declines, there now appears to be a leveling off. In fact, I’ve seen some areas with prices that are surprisingly healthy, given the previous declines.

With interest rates still very low, and prices leveling off, I wonder if the window to purchase true bargain real estate is closing. Is this a good time to buy real estate?

While my interest is primarily for living purposes at this time, there are others who might see this an opportunie time to invest. If one could take out a super low interest loan, and rent out while ensuring the vacancy rate is kept low, a really solid rate of return might be had in this present environment. Additionally, there is the possibility of future asset value increases as well. Sort of like getting dividends and seeing capital appreciation on a stock.

Real estate can be a component to one’s long-term investment plan. Many people have done very well, and have been able to grow net worth this way. There are plenty of personal finance bloggers that invest in real estate, and operate as landlords!

What Do You Think?

Do you see prices stabilizing where you live?

Do you think the window of opportunity to get a low-priced home is closing, or do you see prices continuing to drop?

Have you considered investing in real estate as a landlord?

How Much Money Should be Saved for Home Repairs and Maintenance?

Real estate 24 Responses »

Sep 102012

I remember when looking for my first home, a condo, and never giving a second thought to potential home repairs. The building was new

Home repairs don't have to break the bank

construction, so I didn’t think of the need to do future work.

While that did end up being the case, things are vastly different when buys an older home. In particular, an existing single-family home can require more work and money than the new condo example. This is something that might only be given a passing thought by new homebuyers, but should really be given much more attention and consideration. The practice of saving for home repairs is important indeed.

Why do we need to save for repairs and maintenance?

A first-time homebuyer, particularly one buying a pre-existing house, should think carefully about such expenses. Additionally, one must always remember that the difference between apartment expenses and homeowner expenses is not just the rent payment versus the mortgage payment!

The reality is that stuff happens with houses. You can’t just call the landlord or management company to fix a problem. Rather, you’re responsible. The scope of things for which one becomes can vary depending on the type and age of home. That being said, here is a small sampling of the types of bigger expenses that might come up:

Roof repairs or replacement
Siding
Gutters
Air conditioning
Carpeting/flooring
Plumbing

Things happen. Often they can be unexpected (plumbing, in my experience) or planned (carpeting). Some expenses can be minor, other can be large. Thus, while home repair costs can be irregular in nature, they do add up overall.

How much to budget for home repairs and maintenance?

Well, that again depends on the type and age of the home. In general, I think that it’s a decent framework to view the home’s value as a starting point on which to base a budget. Then, taking 1.5% (as an average) of the home’s value and saving it each year for home repairs and maintenance is a general guideline that seems to work. Again, with expenses being irregular, this is an average cost. Some years more, some years less. Money not spent in one year can be saved for future expenses.

Translating this into a budgeted monthly amount for home repairs, let’s take the following example:

Home Value: $200,000

Average annual repair budget: $3,000

Monthly budget: $250

My Questions for You

What do you think of the 1.5% figure for home repair savings?

Do you budget regularly for home repairs, and set money aside accordingly?

Do you agree that many first-time buyers don’t spend enough time thinking about these ongoing costs?

Underwater Mortgages and the Current Real Estate Market: Buying Opportunity or Not?

Real estate 13 Responses »

May 282012

The word “underwater” would normally connote literally being under the surface. I would usually think of the ocean, or maybe being in a

This house is interesting - as is the current real estate market

swimming pool and going under. Either way, actual water would be a part of the instant reaction when hearing that word. Not money, right?

Well, if you’re a personal finance blogger, the word underwater might now bring to mind real estate-related issues! I came across an article from the LA Times that referenced some data showing that over 31% of U.S. homeowners are now underwater on their mortgages. So, just over 3 in 10 homeowners here in the US have been hit by the real estate problems in this particular way.

When one is underwater, more is owed on the mortgage than the value of the actual home. A very simple example might be a case of someone who put down $40,000 on a $200,000 home, thus owing $160,000. If the value of the home suddenly dropped by 25% to $150,000, the home would be worth less than the amount owed on the mortgage. The homeowner is now underwater on the mortgage.

Even more staggering is a figure noting that of those who are underwater, 15% owe at least double the amount of their home’s value! Applying that to the 31% figure noted earlier, one can say that almost 1 in 20 homeowners in the U.S. have a home no more than ½ of what they owe on the mortgage!

With such abysmal figures, it makes me think once again about whether or not this is a good time to buy a home. It sure seems like a much better time to buy for somebody currently renting! But regardless, with home prices dropping so much, people who held off buying a few years ago have to be thanking their lucky stars they stayed on the sidelines.

Is this a good time to buy? Well, prices have dropped despite interest rates being exceptionally low by historical standards. The thing is, I wonder if prices have more to drop. I suspect that there are quite a few people who would like to move, but are probably overpricing their homes. Why? If they are underwater or close to it, they don’t want to take a paper loss on a home sale. My guess is that there are some homes for sale that are at lower prices than they would have been a few years ago, but not low enough. People just don’t want to take a big loss.

With such stats, I wonder if we’re becoming a less mobile society for the immediate term. If you buy, it’s not like you can expect to resell quickly as you might have been able to a decade ago. With less movement in the market, people seem to be stuck in place a bit more.

My takeaways:

In some markets, home prices might still have some room to drop, and we might not have seen the price floor yet
If you buy, utilize all available data when making a home purchase. The short sales out there might really wreak havoc with market values.
Be prepared to view your home as being a much less liquid asset than it might have been a decade ago. In other words, be ready to stay there for a while, even longer than you need to, so like the place you’re getting.

My Questions for You:

What are your thoughts as you read that almost 1 in 3 homeowners is underwater on their mortgage, and 15% of that group owes twice as much as the home value?

Does this surprise you in terms of how high these figures are?

Do you tend to view this as a buying opportunity to be taken advantage of now? Or, do you think that the market will likely head lower and that buying now could be premature?

Low Interest Rates and Falling Home Prices: What Gives?

Real estate 28 Responses »

Feb 222012

20 years ago, back in 1992, a 30-year mortgage here in the U.S. was running at around a 9% interest rate. 10 years ago, back in 2002, this same type of mortgage was generally around a 6.5% rate. A quick look at a mortgage calculator can tell you what kind of impact a big drop in interest rates can have on one’s mortgage payment. Keeping that in mind, it’s quite interesting how low today’s interest rates are.

A quick check I did, as of this writing, showed 30-year loans having interest rates of under 4%. Consider the comparison of approximate rates across time:

1992: 9.0%

2002: 6.5%

2012: 4.0%

Clearly, while there were some ups and downs between those years, it’s clear that 30 year mortgage rates at historical lows is basically the current situation. If you want to buy a home, and need to borrow some money in order to do so (like most people), this appears to be a time to get a loan at a very low rates compared to recent times.

This gets me thinking, though, about the direction home prices have been going: down. Of course, no two real estate markets are exactly alike, but I’ve taken a look around what’s probably a fairly typical market: my local one here in suburban Chicago. What I’ve noticed over the last few years is that prices have continued to slide on a regular basis. Now, the declines may not be as steep as what might have been seen in many other areas, such as certain parts of Florida, Nevada, Arizona, and other locales. However, I’d say that in the last 5 years, prices seem to have dropped 25%. That’s just a ballpark estimate based on my own observations, and the actual figure might be different – but you get the idea: home prices have declined.

What’s interesting is that despite interest rates trending lower, home values continue to slide in some places.

What is this telling us about the economy, and where we are today versus the past? It makes you wonder when the market will truly stabilize, and what it will take for housing prices to stop falling and perhaps go back to the old patterns of slow but very steady increases? Not gains like we saw in the housing bubble days, but at least holding value as we saw in pre-bubble days.

What’s interesting to me is that while we are getting more “mobile” in terms of technology, but less mobile in terms of being able to move as easily.

My Questions for You

How has the housing market been in your area?

Do you think it’s a bigger issue that despite interest rates being so low, many housing markets continue to show declining prices?

How long do you think it will be before the housing market here in the U.S. will straighten out?

Mortgage Insurance: The Unsung Hero for the First-Time Homebuyer

Real estate 2 Responses »

Jan 152012

The following is a post by Sasha Kahn, with information provided by Genworth Financial

I remember when my parents bought their first house, the house that my younger sister was born in. The house that my parents still live in. Prior to buying, we’d lived in a rented apartment over a garage that was a part of a large estate. Even though the property was over ten wide-open acres, the apartment itself was the size of a two-car garage. I have no idea how they managed to live there with a young child who was probably bouncing off the walls half the time. But it was the seventies; and I guess things were different then.

When they closed on the house, they were immensely proud, as if the house itself affirmed that they’d become the adults they always wanted to be (as if having two children wasn’t enough!).

Fast-forward a few decades (my entire lifetime), and now I’m the one looking to buy my first home along with my husband. But I feel none of the eager, youthful enthusiasm that I remember carrying my parents through the process. Instead, there are financial worries, a depressed housing market, a terrible economy and the looming worry that at any point either of us could lose our jobs.

We are lucky enough to have my parents offer to help with the down payment. But even that doesn’t meet the lender’s preferred 20%. Enter mortgage insurance – which in the end is what made buying the house a reality.

Not to be confused with mortgage life insurance (which pays off a mortgage if the homeowner dies or becomes disabled) or homeowners’ insurance (which protects homeowners from loss due to theft, fire or disasters), private mortgage insurance, or PMI, protects the lender and investor from loss, not the borrower.

My first reaction to needing to buy PMI (aside from the clutch of anxiety seizing my stomach) was that this was just another loan that would need to be paid off. But on closer examination, I understood the benefits. First of all, it’s affordable. One loan with mortgage insurance is often a lot cheaper than taking out two separate loans. There are tax benefits as premiums are tax deductable, and without it we wouldn’t have been able to close on the house.

There are other benefits as well. Genworth Financial for example, offers job loss protection so that you can continue to make mortgage payments if you lose your job. It can help you prevent foreclosure. On the lighter side, Genworth’s mortgage insurance also offers some perks in the form of discounted offers and special rebates from certain vendors like Sears and Bed, Bath & Beyond so that you can get to the fun part of owning a home.

There are no guarantees in life. And my husband and I are still anxious about the leap we’re about to take. It will be expensive. We’ll have a mortgage to look forward to for what seems like the rest of our lives. But we both hope to make this a home filled with a lot of happiness.

Oh, and my mom just called me to celebrate the final payment on their own mortgage. The last $25 had been sent off to the lender – and the house that they bought in their twenties was all their own.

Considering Emotions vs. Logic when Buying a Home

Real estate 16 Responses »

Nov 202011

I got into a conversation a few weeks ago about the idea of “stretching” to buy a nice home. The idea that was given to me was that it’s worth it to pay a little more than you might want to right now, in order to get a house that’s a bit out of your comfort zone financially.

The justification was that over time, your income should go up, while the mortgage payment will be fixed. Thus, what seems like a big payment now based on what you see in an E-Mortgage calculator will seem much smaller later. Additionally, the idea went, if you buy a bigger home up front, you won’t have regrets later.

This isn’t the first time I’ve heard this. And just like I did that prior time, I argued against the notion of stretching once again.

Admittedly, I think that I might be in the minority when it comes to such a belief. When I bought a condo way back in the day, I was in the majority of first-time buyers that simply didn’t fully understand all the nuances of mortgages, they payments that go along with them, and where they can fit into your overall finances. Luckily, I ended up selling the thing for a small profit. Hooray! However, there are clearly some people who weren’t as lucky, and got burned.

My guess is that they didn’t run the numbers, didn’t have a household budget, and didn’t really plan enough for the payments. What I think many people with financial literacy issues do is just listen to what the lender tells them they could afford. Then, they spend that much. After that, they just try to figure out how to live on the rest.

Why? Good question. My guess is that for many people, a home is an overly emotional investment. Somehow, it’s looked at as worth spending a ton on because it’s a place you’re actually living. Or, there’s an assumption that a home is always a good investment. Or, perhaps, some people still think that the bigger the interest payment, the bigger the tax benefit, thus take out a big loan (NO!).

Whatever the case is, I think it’s important to separate emotions from the decision to buy a home, as much as realistically possible. More importantly, think in terms of wants versus needs.

For example:

Is it truly necessary to buy a newly constructed home, or can you live in a 20 year old house?
Do you actually need that 4th bedroom, or can you make do with 3 bedrooms?
Does your lot have to have a huge yard, or can you live on less space?
Do you really need to have granite counter tops, or can standard counters work for now?

By thinking about wants vs. needs, we can truly be willing to understand that when buying a house, we’re making purchasing tradeoffs just like we do with other decisions. The difference is that the stakes are likely much higher here.

You can end up spending a ton more money to get something you want vs what you need, and end up having to work harder and for more years to make those extra payments on the wants versus the needs. Plus, as we’ve seen, homes aren’t always liquid assets, and they can actually decline in value quite a bit in the wrong circumstances.

Bottom line: While emotion and preferences of course have a place in the home purchasing process, I think it’s important to buy a home primarly based on logical needs, not emotional wants. To those who think that this takes away from the enjoyment of life in some way, I’ll come back by saying that it probably enhances the enjoyment of life, as you’ll have less pressure and more free time due to having to spend less money on the home.

My Questions for You:

Do you think it’s a good idea to stretch for a more expensive home, or do you think it’s best to find a home that fits your current financial situation very comfortably?

Do you also think that many people let emotions get in the way when buying a home, or do you think that a home is a much different type of purchase in which emotions are a big part of it?

First Time Buyer Mistakes

Real estate 4 Responses »

Oct 082011

Purchasing a new home is a major decision that faces many consumers in the US. First time homebuyers are often in danger of making mistakes that can jeopardize their financial wellbeing. Read on for information about the most common mistakes first time homebuyers make.

One of the first mistakes new homebuyers make is not researching how much house they can actually make. New homebuyers should use a mortgage calculator to help them determine how much they can afford to pay for a home. They should immediately speak with a trustworthy home lender to help them use the mortgage calculator and get preapproved for a home loan. This prevents homebuyers from choosing a home that is beyond their budget. By speaking with a home lender and using a mortgage calculator, they can find the right type of home for their pocketbook.

Sometimes, first time homebuyers do not choose a home because of repairs that need to be made on a house. This could also be a mistake. Some problems in the home can be fixed quite easily. Unattractive wallpaper can be replaced, scratched hardwood floors can be repaired and dirty carpet can be fixed by using carpet shampoo. Instead of focusing on cosmetic blemishes, a savvy homebuyer should look beyond the superficial and make wise decisions based on price and overall condition of the house.

First time homebuyers may fall in love with a home, but forget that all houses require regular maintenance. Eventually, pipes may leak or a roof may need to be replaced. It’s important to factor in repair costs when determining if you can afford a home. Keeping a home in excellent shape can sometimes be quite costly, but homeowners need to be prepared when these expenses arise.

Whenever a person thinks about purchasing a home, he or she should hire an inspector to inspect the home for serious defects or problems. Some potential homebuyers do not hire a professional home inspector. This is an expensive mistake. The home they plan to buy may be plagued with mould. It may even be infested with termites or have poor insulation.

Another mistake first time homebuyers make is not including property taxes in the budget. Property taxes often rise the longer a person lives in a home. Failing to factor these costs into a budget can cause the new owner to become overwhelmed by the amount of money that must be paid to the government in taxes.

People on the hunt for a new home sometimes think that foreclosed homes are virtual goldmines for house hunters. They feel that they can receive a better deal on a foreclosed home. In reality, the foreclosure may not be worth as much money as the previous owner owed to the bank. The market value of the home may have dramatically decreased. Homes in foreclosure are also more likely to be vandalized since they may sit vacant for months. This will lead to costly repairs for the homebuyer, increasing the amount they have invested.

Save Time and Money by Hiring the Right Home Improvement Contractor

Real estate 16 Responses »

Sep 212011

Do have something you’d like to improve in your home? It seems like many people always have some kind of running list of things they would like to get done at home. Some of them can really make a home feel much more livable, and even improve marketability to potential buyers.

When doing renovations, one can always take the DIY route, or pay someone to get the work done for you. Personally, I lean toward hiring a professional over DIY for some things that require more specialized knowledge or time. Why spend inordinate amounts of time and money unless you can do it right?

Anyway, if you do go the professional route for major home improvement projects, it’s good to be careful. For example, I know that a close family member picked out one person for a particular project, and it turned into a disaster where the guy wouldn’t show up and left work half-finished. To avoid situations such as that, it’s a good idea to do your due diligence when hiring someone to work on home improvement projects.

Here are tips for finding the right home improvement contractor:

Have a clear vision of the project. Before talking to any potential candidates for the work, have a very good idea of exactly what you want done. This will save time and avoid any misunderstandings later. Plus, you don’t want to risk having the scope your project expanded later, and pay for things you never originally intended to get done.
Ask family and friends for referrals. Sometimes, for many of us, it’s a big unknown as to whether or not the person we’re considering for work will be good or not. One could try Angie’s List (I haven’t, but would be interested to do so sometime), but family and friends are right there to answer questions – provided they live close enough to have used someone you could potentially hire.
Get At Least Three Bids. This is important. Going with the first person you speak with might seem easy and expedient, but you often need to get different quotes. Personally, in my work experience when hiring vendors to do projects, I’ve generally sought out at least 3 vendors for bids. Granted, these were not home improvement, but marketing/finance related projects, but the concept holds. Make the project expectations clear with each, so you can compare each contractor on an apples to apples basis.
Ask for References, and Call Them. Someone may talk a good game, provide a good quote, but have limited experience. Again, call them to verify the quality of work and capabilities of the contractor you are considering hiring.
Be Careful With Payment Agreements. Make sure that you arrange for payments to be made in such a way that doesn’t give the contractor too much up front. Once money is in hand, there’s less incentive to hustle and get the job done as well. Arrange for payment to be made in installments as milestones are completed. This could have helped the family member to whom I referred earlier.

My Questions for You:

What do you think of this list? Is there anything you’d like to add to it?

What have your home improvement or contractor experiences been like?

Refinancing a Home

Real estate 17 Responses »

Sep 192011

When it comes to buying a home, there is often much excitement. A new place to call home and make new memories can be source of much joy. Of course, there can also be some nerves in the whole process as well. Most of us aren’t fortunate enough to buy with all cash, and thus end up taking out a mortgage of some kind.

I remember buying my first condo, at about the time when many others I knew were buying their first homes – either condo or single family home. Now, some of us are more interested in personal finance techniques and applications than others are. For those of us that have an interest in this area, we pay closer attention to what a mortgage means, how they work, etc. There are many others who simply buy what they’re told they can afford, stretch themselves with the biggest loan possible, and just sign on the dotted line hoping for the best. Clearly, there’s a range of experience out there!

Soon after my first condo was purchased, I recall having dinner conversation with a local couple with whom we had become friends. They had purchased their first home about a year before mine was purchased, and were carrying a 30-year mortgage. My home also had a 30-year mortgage. Sounds the same, right? Well, not really. Aside from their property being a bit more expensive to begin with, they had bought at a time of higher interest rates. Between the two time periods of their purchase and mind, rates had dropped almost a point. Or, more accurately, they paid an extra percentage point of interest. It might have been slightly more or slightly over, but it was around a point. I’m guessing they didn’t spend too much time looking for a good rate, not being too financially oriented.

Anyway, the guy in the couple directly asked me the rate I got, and when I told him he seemed a bit surprised. I mentioned the topic of refinancing, as if I had been in his place, I’d be looking to refinance my home.

Now, of course it might be uncomfortable for some of us to talk about financial issues with friends in such a comparative manner. I rarely feel good about letting anybody know that I got a better deal than they did, even if I was directly asked. There are some cases, however, where I might say something for the sole reason that I’d like to help out in some way. In this case, I tried to make the case that they could save thousands of dollars by refinancing, particularly since they were planning to stay there for a while.

Here’s what I’m talking about:

Let’s say someone has a $250,000 loan, and is paying 5% interest on it over 30 years. The monthly payment on that mortgage will be about $1,342. If you simply lower the rate by 1%, down to a 4% interest rate, the payment will be about $1,194.

That’s a $148 difference per month! Multiply that by a larger number of months, and it adds up. Of course, there are costs to refinancing. However, if one is going to be in the home for the long haul – like the couple I mentioned – it would be worth it. When interest rates drop by a significant enough margin, refinancing becomes a real option for some people – depending again on how long they are planning to stay in the same place.

Admittedly, and for full disclosure, I didn’t refinance my own home at the time. I had a good reason though: I didn’t anticipate being in my place for too long. So, I can’t speak to this with direct experience of my own. Additionally, while I knew that their home was more expensive, I didn’t know their exact loan amount. However, the ballpark math clearly points toward refinancing as a good option for that couple.

I wonder why they were so leery about refinancing? Maybe it was inertia, fear of the unknown, or competitiveness? The guy seemed to get a bit worked up (while his wife’s eyes clearly mocked him), and I could see a silly competitive side come out. I suppose sometime people are just like that by nature. Whatever. I do know that there could have been some savings for them, and I tried to help by suggesting refinancing:)

My Questions for You:

Have you ever refinanced? Or, in retrospect, wished you had?

How much do you monitor rates before you try to do so?

Older Entries