Three and a half years ago Peter and his GF sold their condo for $295,000. “We’ve been renting ever since,” he says. “Today that same condo can be bought for less than my selling price.” He likes being a renter – “It’s great, expenses are low and we’re mainly liquid.”
But, Peter’s wrinkly Boomer parents won’t stop ragging on the guy. (“It’s an issue for them since a lot of their net worth has been built from real estate.”) And they just came in for the big kill.
“At lunch yesterday my dad presented me with this: they would sell their place and buy a place with us. They would occupy most of the house and we would have our own separate space. The house would be about 1.5 mil to 2 mil. We would have to come up with $350,000. Our ownership percentage could be somewhere around 15% to 30% depending on what we buy.”
“However I feel incredibly uncomfortable about this. Mainly because of the value of the home and ridiculous interest payments I would pay if I put little down. Not to mention back at home living with the parents. Why is renting such a blasphemy? Right now I rent for $1300/m is a really nice place and life could not be better. I just wish I could save more but my motorcycling habit gets in the way. I enjoy the blog. What should I do?”
Peter, it’s a trick. One of several things has likely happened. They lost all their money buying Facebook when it hit $45 a pop for eight minutes on Friday, and don’t have enough now to close on a property they went firm on last week. Or they plan on buying this place with you living in the basement, overdosing together in the tub on Cialis, then teaching your sorry renter’s ass a lesson by leaving you the monster. Or they’re adopting, and need some live-in siblings. Or they simply love and immensely pity you.
In any case, run.
For starters, the last thing you need to get messed up in is familial fractional ownership. This almost never works out well, and usually leads to strife and bad feelings (unnecessary in your case). Deeds put into multiple names can result in major issues when one party wants or needs to sell, plus when bank financing is involved, everyone ends up being equally on the hook. Never, ever do this.
Worse, what self-respecting blog dog wants anything to do with a two million dollar suburban pile of bricks and sheets of pressed glue-filled corn flakes? There’s absolutely no long-term future for this kind of real estate, and if it weren’t for your delusional Bee Gees-loving parents, no buyers would exist. Besides, if you do this deal, how the hell will you ever get out? There’s nothing to sell to a third party. No marketable equity. Just an eternity with your mom. Yow.
Speaking of oppressed renters, let’s do Jocelyn:
“Here’s an idea,” she suggests. “why don’t you write a blog posting called ‘a guide to telling people why you don’t want to buy a house.’ I’m totally and completely stumped/frustrated now on what to say to people. My poor mother is at a loss for words when my aunt says to her ‘why don’t Jocelyn and Paul buy a house’.
“And she replies ‘because now is not a good time’- only to hear ‘she’s been saying that for years and so and so have made money off of their house…’ AND ‘she’s just throwing money away on rent’. I’m desperately trying to be courageous. But it’s a jungle out here. Help me Garth.”
It’s a phat idea, Jocelyn. And it shall be done.
Actually I’ve run a few columns in past months showing the actual math of renting versus owning similar digs, and the result is always the same: on a cash flow basis, renting costs a third to a half less than owning, even factoring in today’s dirt-cheap mortgage rates. This is universally true when you take into consideration the opportunity cost of owning – which is the income an owner forgoes on money tied up in equity.
The only time owning wins is when there are consistent capital gains in the value of the real estate – enough to overcome the huge costs of buying (including land transfer taxes) and selling (realty commission). But, your meddling, irritating, prune-dried aunt counters, doesn’t a house always go up in value?
No, is the answer. Not always. In the absence of steady economic growth, stable jobs and constant inflation, annual rises in real estate values are not to be expected – and that’s the environment today. Now add in some awesome current risks. Cheap rates have caused excessive borrowing, reckless buying and inflated house prices. In fact, never before in history has shelter cost this much, even as family incomes fall behind the cost of living.
Nothing goes up endlessly. Demand wanes when debt hits these levels. Listings jump, then prices fall. The pattern never fails to repeat – and is playing out now in lots of markets. But there’s more. The banks will soon be forced to adopt more stringent lending standards. Mortgage rates have nowhere to go but up. The agency which insures loans, letting banks loan to anyone with a pulse, is about to hit its debt ceiling. And (see poor Peter’s letter above), those damn Boomers will bomb the market when they try to convert their pathetic palaces into cornea and knee replacement money.
Jocelyn, sweetie, it’s time to face facts.
Your aunt is possessed. Run.