Buyers, don't forget 5-year rule
published Thu, 26 Mar 09 10:27:06 -0700

Tara-Nicholle Nelson
Inman News

Q: My friends and family are all pressuring me to buy a home. I'm totally obsessed with HGTV, and love to go to open houses in my neighborhood, just to look. I would love to own my own home, and can well afford to. My only concern is the commitment. It seems like such a big, long monetary commitment, and sometimes I'm not even sure if I want to stay in this area much longer or explore some more. I do live in a high-priced area, and sometimes I worry that if I do decided to stay here, and I don't buy in the next year or so, I might end up priced out of ever buying in this area.

A: If you read this column regularly, you know by now that I am usually bullish on buying. For most folks, that can afford to buy, and want to buy -- buying strategically is usually a good thing to do. However, you are very wise to take seriously the deep level of commitment involved in homeownership, especially in this market.

Mindset Management

Despite the volatility in home values, it is a great time to buy, so long as you are planning to hold the property for the long term -- five years is about the shortest time you would want to be planning to own the home, although this is somewhat geographically specific. If the idea of owning the property for a five-year time frame is just more commitment than you are interested in making, then buying may not make sense for you. Note that the commitment you would be making would be a commitment to owning the property and fulfilling the financial obligations of a mortgage, property taxes and other ownership costs -- not necessarily living in the property, or even in the area.

In terms of the size of the monetary commitment involved, many first-time homebuyers overestimate the cash it takes to buy a home and what it costs to own a home -- especially since home prices have come down so much. The reality is that in many areas of the nation, when you adjust for the tax advantages of homeownership, you can now buy an entry-level home for the same amount you'd pay to rent on a comparable property. Also, the amount of "cash to close" currently required to buy a home is much less than most buyers assume. Many buyers are closing escrow with as little as 3.5 percent of the purchase price into the transaction, especially since sellers are often covering closing costs. Before you awfulize that buying a home will involve great costs over time, if you're truly interested in buying, you should obtain a reputable mortgage professional's estimate of how much you'd have to come up with to close, and what your costs of ownership would be like for the rest of the loan.

With all that said, if you are not really that interested in buying, and are writing because of the pressure you feel from your family and friends, don't do it. Period. Buying is, as you suspect, a major emotional and financial commitment, and you should not do it because someone else wants you to. Enough said.

Need-to-Knows

If you are interested in exploring the prospect of buying without the die-hard commitment, consider taking a lease-option on a home you think you might like to buy. In a lease-option or lease-purchase arrangement, you essentially rent the place but retain the option to purchase the home at any time for a certain number of years (two or three years is the norm). You might pay somewhat higher rent, but the landlord/seller agrees to place some portion of that rent in a savings account for you to use as your down-payment money if and when you decide to buy the place. ...CONTINUED

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Many sellers right now are very motivated to sell, and more will agree to a lease-option than in a normal market. Another advantage is that the purchase price is set at the time you agree to the arrangement; at a time right now, when prices are low, that can skew in favor of the buyer-tenant. Yet the biggest advantage is that other than the lease commitment, you are not committed to buy. You lock in a price now, but have the term of the option to decide whether you are OK with the financial commitment of ownership and with staying in town on a longer-term basis.

Most property listings will specify that the seller will consider a lease-option if that is the case, however you can also often approach the landlord of a property that is up for lease or, even better, the seller of a property that has been for sale for a long period of time, to see if they are amenable to a lease-option arrangement. A couple of caveats -- make sure that you don't pay a large up-front option fee or nonrefundable deposit, and take care not to agree to excessive rent or purchase price. You should get the advice of a Realtor and even a real estate attorney to make sure you are getting a good deal for the current market, and that you have a properly worded agreement and other protections in place.

The other thing you might consider doing, especially if you are really worried about buying while conditions are favorable, is buying a highly rentable property. If you live in a high-cost-of-living area and you think you might like to be there in the long run, you may want to invest in a property and plan to hold it as a rental property even if you move away. If you go this route, you should conduct your house hunt keeping in mind that you might need to rent the place in the future, so get educated about local rent and eviction control ordinances, and buy a place with features and a location that will be attractive to future prospective tenants.

Action Plan

1. Get clear on whether you want to buy or those around you want you to buy.

2. Decide whether you are up for committing to own a home for at least five years or so.

3. Explore the possibility of a lease-option.

4. Consider buying a place you can rent if you decide to move out of town.

Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

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