BRAG: Just got approved for a home mortgage

[Gone Forever]

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This is actually a really good time to buy. Interest rates are still climbing and LOTS of houses are being foreclosed or have been on the market for a long time. Pretty much anything under 250k is having a really tough time selling in my area. This equates to dropping prices along with the ability to lowball and have the seller pay closing costs.

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I'd agree it's a buyers market and that houses are selling lower than they were at the top a while back. I was simply inquiring as to how much MORE downside there is. If there are more sellers than buyers, and more foreclosures hitting the market, and rates are going up (meaning people can afford less and less), it sounds to me like there is more downside. I'm no expert but simply because they're at a discount doesn't mean to me that real estate is still good in the short term <2 years, thus my question.

Is there something to make you think that we've hit the bottom, that there will be no bubble burst, and that you wouldn't be able to find an even more favorable market for less in 12 months? I'm not trolling - I don't know the anwswer and of course BBV is not the place for such a discussion but whatever. Additional real estate purchases are however possibilities for me, especially in markets hit the worst, (i.e. Florida) however I'm not fond of catching a falling knife. Is there something that makes you think that the trending conditions you stated will not persist or worsen and thereby afford even better deals a year or 2 from now?

Congrats again and gl with you purchase.

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From a broker's stand point the majority of lenders (mainly in sub-prime lending, but, a lot of prime lending too) have totally restricted their guidelines making it way harder for people with poor credit to buy or refi.

Two years ago, I could have gotten a loan done for ANYBODY. ANYBODY. No credit, horrible credit, bankruptcies, judgments, collections like crazy, no money down, no verifiable employment history. It didn't matter. There was a lender somewhere that would finance you.

That's part of the reason the market is as [censored] as it is right now. A ton of people who really had no business even thinking about buying a home were getting qualified and getting into loans and homes they could not afford.

So the wave of forclosures should be slowly coming to an end over the next year as the people that shouldn't have gotten a loan in the first place are replaced by solid homeowners. That's my prediction at least.

[ardubz]

Having friends pay down your mortgage for you is extremely +EV and balla - good job OP.

[Piece of Cake]

Interesing. Thanks for this input.

I was shocked at the prevalence of IO loans a few years back - furthermore I imagine a lot of 3 & 5 year ARMs are about to expire and people will be in for quite a shock when they have to refi.

I'll shutup now - don't mean to hijack OP's thread - you just seemed to know something I didn't (not surprising since I don't know much - about anything for that matter) about real estate turning around and how you determined it was "undervalued" and wanted to inquire further as to why you felt this way. Goodluck again.

[Gone Forever]

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Gone Forever - The loan is NOT an interest only loan. It's a fixed rate loan for 10 yrs and then is adjusted every year for the next 20. Also, the houses I'm looking at are WAY undervalued and will easily appreciate over time as long as I take care of it. Not too worried about that though.


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I was mislead by somebody else's post about it being interest only. It really doesn't matter because you're not really going to be paying down hardly any of your principal over the first 10 years anyway so my comment should still hold some weight.

[Gone Forever]

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Interesing. Thanks for this input.

I was shocked at the prevalence of IO loans a few years back - furthermore I imagine a lot of 3 & 5 year ARMs are about to expire and people will be in for quite a shock when they have to refi.

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Ohhhh, didn't even take those people into consideration. Yes, this is very true. Thousands of people are going to get screwed on this one. This may actually start a smaller wave of forclosures.

[RoundGuy]

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It really doesn't matter because you're not really going to be paying down hardly any of your principal over the first 10 years anyway so my comment should still hold some weight.

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With his downpayment, he will have about $40K in equity on an undervalued $175K home.

This, along with your "HUGE liability" comment, make me wonder if you know what the [censored] your talking about.

Real Estate is nearly always an excellent asset in the long-term (7-10 years or more). Short-term, yes, your comments have some validity, but you need to clarify your time frame.

[Gone Forever]

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Houses are financially dangerous. Most people have been tricked into thinking they're assets, but, the reality is that they are, in fact, HUGE liabilities.

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This is misleading. Please clarify.

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I don't think it's misleading at all. Unless you're strictly buying real estate in order to quickly turn around and sell it at a profit houses are liabilities.

What is an asset? An asset is something that puts money in your pocket.

What is a liability? A liability is something that takes money out of your pocket.

Let's take OP's example of a 175k home w/a 6.5% interest rate.

Monthly mortgage payment: $1106.12 (x12 = $13273.44 per year)

Year's taxes = $3750 (ballpark)
Year's Home Owner's Insurance = $850 (ballpark)
Electric, Gas, Water, HOA Dues, etc. = $3250 yearly (ballpark)

I'm not even going to list periodic repairs that will inevitably need to be made.

For the sake of our argument, let's say our fictional character wants to stay here for 5 years and then he's going to sell.

5 years worth of payments including all bills, taxes etc = $105,617.20

The total amount of principal he would have paid over 5 years = $8850.78

Let's say he got lucky and found himself in an area that's appreciated 10% over the last 5 years. His home is now worth $192,500. He's able to sell his home for $190,000!

Okay. Let's crunch the numbers

Total loan balance at time of sale was $166149.22

Sales Price of $190,000
minus loan amount $166149.22 = $23,850.78

$23,850.78 is cash he'll put in his pocket at the time of sale.

However, he's already paid out $105,617.20 over the last 5 years so he's still -$81,766.42!!!

I'm not saying people shouldn't buy homes. I'm just saying that there is no way a home you're planning on living in over any length of time is going to be anything but a liability. (Barring those rare cases when a market explodes and appreciates 50% or more in a year)

[RoundGuy]

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What is an asset? An asset is something that puts money in your pocket.

What is a liability? A liability is something that takes money out of your pocket.

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Good lord. An asset is something you own. A liability is a debt. If your asset has a higher value than your liability, you have net worth. That's a good thing, in case you didn't realize.

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However, he's already paid out $105,617.20 over the last 5 years so he's still -$81,766.42!!!


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He has to live somewhere! Your logic makes no sense whatsoever. Based on your numbers, the monthly cost on this house over 5 years is $1362.78. If he lives there 10 years this number drops significantly more. Do you think he could rent a house like this for that amount? Of course not.

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I'm not saying people shouldn't buy homes. I'm just saying that there is no way a home you're planning on living in over any length of time is going to be anything but a liability.

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You're making yourself look foolish. This house is huge asset, not a liability. Take an accounting class, and learn the difference.

[Gone Forever]

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It really doesn't matter because you're not really going to be paying down hardly any of your principal over the first 10 years anyway so my comment should still hold some weight.

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With his downpayment, he will have about $40K in equity on an undervalued $175K home.

This, along with your "HUGE liability" comment, make me wonder if you know what the [censored] your talking about.

Real Estate is nearly always an excellent asset in the long-term (7-10 years or more). Short-term, yes, your comments have some validity, but you need to clarify your time frame.

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Well, being that the down payment was his money already, when he sells and gets it back, we can't really count that as profit now can we?

"Undervalued"? This is a term realitors use to get their clients wet.

The bottom line is that when he goes to sell this house, his success will not be based on what his home is ACTUALLY worth, but, what all of the other homes in the AREA are worth.

Why is this?

Because when lenders lend money to people to buy a home they base their assessment of value off of comparable sales (comp's) in the area. Most lenders wont let you get comp's from further than a mile away. If you're in an area by main roads or freeways, most lenders wont let you cross those lines to get comp's even if they're still within the alloted mile boundary. If you're in a major city like Detroit the lenders aren't going to let you go more than half a mile.

All of these restrictions mean that you're home is worth what other homes of the same size and style in a limited area have sold for in the last year. NOT what you're home is actually worth.

Of course you could have somebody show up with a briefcase full of money to buy your house, but, the majority of people are going to need to get a loan.

I had a client that's a builder. He just built this beautiful home. Two stories, finished basement, 4 bedroom, 3 bath w/an attached 3 car garage. This place is easily worth 300k. The problem is that he built this house in an area where there are no houses like it. None close in size and none close in style.

He needs to refi to get out of his construction loan and I haven't been able to find a lender who hasn't told me there is "Insufficient collateral".

What this basically means is that since there are no comp's in the area that are close to this house they can't assess a value to his home.

Obviously this is an extreme case, but, you can clearly see that a house that is "Over valued" doesn't exactly mean it's worth more than any other house in the area.

[AbreuTime]

There were a few recent discussions about the rent/buy decision in the Business/Finance/Investing forum. The fact that the OP is (seemingly) buying at a price that allows his roommates to pay off a significant part of the mortgage, then his decision seems to be a good one. If he's deciding between paying $600 in rent (increasing over the years) and $600 in mortgage payments, the decision is clear. For many people, buying a house is one of the best investments they will make. (This is not to say there are not better investment vehicles.)

For those of you quoting Rich Dad/Poor Dad teachings (definition of asset and liability), you may be interested in some more advanced reading. Search through the BFI forum.