Free Money Finance

The Greatest Detriment to Building Wealth

Here are some interesting thoughts from Stop Acting Rich: ...And Start Living Like A Real Millionaire on why your home has so much of an impact on your wealth:

What we don't realize is that the true cost of living in certain homes and neighborhoods is unseen but truly devastating. I believe the greatest detriment to building wealth is our home/neighborhood environment. If you live in a pricey home and neighborhood, you will act and buy like your neighbors. In other words, human beings have an innate tendency to act and be like those around them -- to fit in -- and even compete. The type of home we live in and where we choose to live often takes the greatest toll on our financial wealth, and from it, all other perils flow.

Ok, there's more to come on this topic, but let's stop here for a moment. He says that buying a big home that you really can't afford (that's what he's talking about mostly -- reaching for something well beyond your means that sucks the life out of your finances) is "the greatest detriment to building wealth." Wow. Greater than over-spending in other areas? We'll see in a minute, but he'll say that your home influences what else you spend money on, so if you're over-spending in other areas, much of it is due to where you live. That's why he says it "often takes the greatest toll on our financial wealth" as well as from it "all other perils flow." Food for thought, huh?

Here's some more detail:

The more expensive, the more affluent neighborhoods are a vortex of sociological forces. The more affluent the neighborhood, the more its residents spend on almost every conceivable product and service. From cars to haircuts, and from wine to watches, those living in "prestige estates" spend more. We take consumption cues from our neighbors. If many of our neighbors have a much higher level of income and wealth than we do, we will have set ourselves up to lose the war before we have even begun to battle.

Think about all the things we see in our neighborhoods that influence our purchases: new/nice cars, lawn service, remodeling/house upgrades, bikes/toys for kids, swimming pools, yard equipment, and on and on and on. Let's face it, the Joneses that most people are trying to keep up with are the ones next door! And if your neighbor has a huge expensive house with all the latest "stuff", you're very likely to match (or even try to surpass) what he has. And if you stretched in the first place to buy the home, then you're in trouble trying to buy all the other stuff too (think this sort of sounds familiar?)

The author goes on to tell what the truly wealthy do when it comes to home buying:

Contrary to popular belief, however, most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth. In essence, they ran their households like a productive business. It is not only about how much you make. More important, it is how much you keep. And the "keep" component begins and ends at your home address.

A few thoughts:

1. Notice how he didn't say something like "most of the self-made millionaires I have studied have one thing in common: they made a ton of money." Nope. Instead, the path to wealth involves buying a home (and living in a neighborhood) that you can easily afford.

2. Both making money and controlling spending are important to wealth generation, but notice which is more important (and much more controllable by the way)?

3. This has been my personal experience as well. Looking back, one of the key reasons we've been able to grow our net worth is because we bought a home we could easily afford and thus our associated expenses have been at the level that we can handle them financially. It's still a very nice neighborhood, but is well below what the bank would have loaned us based on our income. Yet another reason to decide for yourself what you can afford in a home -- don't let a bank or real estate agent tell you what you can/should spend. (That said, I think banks are a lot more careful these days than they were when we bought our home 10 years ago.)

Why Many Homeowners are Having a Tough Time

Here are some interesting thoughts from the preface of Stop Acting Rich: ...And Start Living Like A Real Millionaire:

The reason why so many homeowners today are having a difficult time making ends meet goes way beyond mortgage payments. When you trade up to a more expensive home, there is pressure for you to spend more on every conceivable product and service. Nothing has a greater impact on your wealth and your consumption than your choice of house and neighborhood. If you live in a pricey home in an exclusive community, you will spend more than you should and your ability to save and build wealth will be compromised.

My research has found that most people who live in million-dollar homes are not millionaires. They may be high-income producers but, by trying to emulate glittering rich millionaires, they are living a treadmill existence. In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more.

My thoughts here:

1. I understand completely what he's saying. When we were looking to move, I had estimated that the upgrades we needed to the new (bigger, more expensive) place would have cost us at least $20k initially (that doesn't count moving costs or fees to sell our home) and another $5k per year more in maintenance/on-going expenses. And we were looking at a home in the $350,000 range. Imagine what the costs would be on a million-dollar place!

2. Following that thought, just think what happens to the people who get Extreme Makeover homes. It's no wonder that many of them go into foreclosure or have to be sold -- even though they aren't in a new/more expensive neighborhood, costs for home maintenance are now way, way more than they were before.

3. We saw several high-priced homes on a recent tour of model houses. Some of our thoughts were along the lines of "boy, I'd hate to have their gas and electricity payments."

4. In the above, there's more keep-up-with-the-Joneses stuff going on.

5. The "treadmill existence" here is what The Difference: How Anyone Can Prosper in Even The Toughest Times called living "paycheck to paycheck." Again we see this from another set of research.

6. Wow. That fact on three times more millionaires living in homes under $300k than million-dollar homes is very interesting. BTW, our home is well under $300,000 in value.

7. I would be remiss if I didn't mention my formula for buying a house. Seems like the statements above bear out that this is good advice. :-)

Seven Red Flags for Home Buyers (And an Update on Our Home Search)

Kiplinger lists seven red flags for home buyers as follows:

• Poor water pressure. Aside from issues of comfort and convenience, low water flow may indicate plumbing problems, such as corroded pipes that will need to be replaced down the road.
• Ceiling stains. Something’s leaking.
• Troublesome doors. If you have one bad door, it may simply have been installed incorrectly. But more than one may indicate a serious structural issue, such as a foundation that has settled or framing that is deteriorating.
• Overloaded electrical outlets or lots of extension cords.
• Exterior features that slope toward the home. A porch, patio, driveway or grading that slopes toward the home all but guarantees water in the basement.
• Odors. Cigarette smoke and pet odors can be hard to get rid of. And if a home smells too clean -- heavy with the scent of cleaning products (especially bleach) or plug-in deodorizers -- the seller may be trying to cover up an odor, such as mold or urine.
• Synthetic stucco siding. This must be installed precisely or else moisture will be trapped behind it, resulting in mold and decay.

A few thoughts here:

1. Some sellers don't get how important these are. We've seen many homes with one or more of these problems and the sellers are either oblivious to the sort of impression they leave or they think buyers are idiots.

2. Don't count on your real estate agent to point out problems like these. In my experience, agents will actually work to downplay these issues with comments like, "Oh, that's very common" or "You shouldn't worry about that" or "You'll only need to do ________ (something easy) to fix that." Don't believe them.

3. Notice how three of these deal with water damage (and the results of water leakage). Water is one of the most destructive forces to your home -- if not the most destructive.

As an update for those of you following along, we've all but abandoned the idea of moving to a new home. We started the process with the intention of only moving if we found the exact right fit (within reason, of course.) After three years of looking, it appears that we won't be able to find a home we like in the location we like with the land we like for a price we like. We're still keeping our eyes open (our agent sends us email updates now and then), but at this point the idea of a move is all but over. Instead, we're focusing on a few upgrades to our current home to make it an even better place to live.

How to Buy a Home You Can Afford

The following is an excerpt from America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need, courtesy of FT Press, imprint of Pearson. Originally published in "America, Welcome to the Poorhouse." Like the author, I've also suggested guidelines for buying a home as well as talked about the economic advantages of moving.

While I can’t wave a magic wand and make homes affordable in high-cost regions, those of you who are currently renting in the Northeast and California may need to consider finding a home in an affordable region that could also be a good investment because the local economy is strong. That was the subject of my first book, The Cost-Conscious Home-Buyers’ Guide, published in 1991.

The solution to the affordability crisis now is the same as it was when I wrote that book: if you can’t stand the heat, get out of the kitchen. If homes are unaffordable where you live, consider moving to where they are affordable.

For my first book I selected 20 areas within shooting distance of the national median home price at that time, $93,000. I also selected destinations that were judged to be among the 100 fastest growing between 1977 and 1987 by the forecasting firm of Data Resources Inc. in Metro Insights. Finally, I eliminated all metro areas that scored lower than 100 in the Places Rated Almanac’s “overall category,” which took into account education, culture, climate, crime rate, and other factors in all metro areas.

As in my first book, in this chapter I am ranking locations by Places Rated Almanac’s ranking of “best places to live” features—because you want to look for not just a job and an affordable home but a desirable destination that will attract potential buyers of your home. To meet my criteria, the regions had to rank in the top 100 of the 379 regions nationwide.

Unfortunately, most of the regions I had picked for my first book either have become so unaffordable that they would no longer qualify or have become “riskier investments” due to the slumping 2008–2009 economy. In addition, because home prices have become ever more unaffordable, I needed a huge amount of wiggle room on home prices—more than tripling the ceiling to $300,000 because if I moved it any lower I’d lose too many top Places Rated Almanac rankings. Yep, that’s how much home prices skyrocketed in 18 years! (All median home prices are from the National Association of Realtors.)

The six regions I chose for this book are Portland, Oregon; Denver, Colorado; San Antonio, Texas; Austin, Texas; Houston, Texas; and Raleigh, North Carolina. These regions were selected based on the following economic rankings: Moody’s Economy.com, requiring that the region rank in Moody’s top quintile, in the top 50 by the Milken Institute and among Inc. magazine’s Top 20.

Moving is not for everyone and you have to consider carefully before you pull up stakes. But if you can’t afford a home where you currently live, it’s worth the time and effort to check out your options.

What’s more, these regions may offer you the same or better amenities than you’d enjoy in your current destination. Whether it’s features such as the gorgeous Columbia Gorge outside of Portland and some of the best food I’ve ever eaten inside of Portland; the multitude of skiing, urban trails, and white-water rafting in the Denver area; the Latino cultural events and rodeos in San Antonio; the mind-boggling array of indie rock, bluegrass, and reggae experiences in Austin; the world-class, year-round symphonies in Houston; or the museums, best-of-Broadway shows, and live concerts in Raleigh, these regions are incredible experiences and affordable places to live. Good luck and happy house-hunting!

Eight Steps to Buying a House at a Good Value

The following is an excerpt from America, Welcome to the Poorhouse: What You Must Do to Protect Your Financial Future and the Reform We Need, courtesy of FT Press, imprint of Pearson. Originally published in "America, Welcome to the Poorhouse." For a similar perspective, see my suggested guidelines for buying a home.

Once you start house-hunting, you need to consider features that make the house a solid investment—not just ones that meet your family’s needs, but will be attractive to the next buyer.

1. First, shop around for a mortgage. Why so soon? You’ll need to get preapproved by a bank for a home loan up to a certain ceiling—actually, many real estate agents will require preapproval because they don’t want to waste time showing homes to potential buyers who can’t afford them or won’t be approved for a mortgage. Make sure you specify that you want to be qualified for a fixed-rate mortgage. While you’re not bound to borrow from the lender and it’s not obliged to offer you the loan, the lender will probably require you to pay an upfront, nonrefundable-if-you-don’t-get-a-mortgage-from-them fee of a couple hundred dollars—and may also require a nonrefundable deposit too. Preapproval means you’re actually starting the loan process with a lender—filling out an application, letting them go through your credit, etc.—but approval typically hinges on the property passing a satisfactory appraisal and inspection(s). That’s why you should shop around for a mortgage and a lender before you ask for a preapproval. A good place to do this is on the home page of HSH Associates under the heading: Browse Lenders and Rates in Your State: http:/ /www.hsh.com/.

2. Once your approval is ready and you’re ready to “shop,” research neighborhoods by their school ranking even if you don’t have or intend to have kids because the home will be more valuable to the next buyer. Typically, the state education department will have the rankings of the school district’s average SAT score, the percentage of kids who go on to college, the student-teacher ratio, and other important criteria.

3. Check out how close the prospective home is to schools, along with recreation facilities: ball fields, parks, playgrounds, pools, etc. Again, these are features that may not only appeal to you but also make it a good investment for the next buyer.

4. Check out the appearance of nearby homes; you’re not just investing in a home, but a neighborhood.

5. If possible, only consider homes with features that make your home a good investment for the next buyer: at least two bathrooms, a basement, three bedrooms, and a two-car garage (assuming that your prospective home is in the suburbs).

6. Consider a “bargain” home—not only fixer-uppers if you’re handy with a hammer, but a small home on a large lot in a great neighborhood that can be expanded.

7. Before you make an offer on a house, “test-drive” your potential commute to work at rush hour.

8. Even if a home inspection is not required in the area where you’re house-hunting, have the house inspected before you buy so that you don’t wind up with expensive repairs.

An Example of How One Couple Paid Off Their Mortgage

I've detailed how we paid off our mortgage and I'm always thrilled when a reader reports that they have done the same. Today, here's a story of how one couple completed this financial milestone:

We did it – we paid off our house on 11 September 2009. We didn’t do it in any sort of a conventional way, and we were told by a LOT of people all along that we were “doing it wrong.” Yeah? What do they know?!

This is the VERY abbreviated story, but here’s how we did it.

In 2000 we moved from Phoenix, where had two high-paying jobs and a rented house, to Bozeman, where we bought a very modest house. Cost of living in Bozeman is pretty high and prevailing wages are pretty low, and that modest house was as much as we wanted to pay.

We decided before we moved to Bozeman that we eventually wanted to buy a lot and build a straw bale house and pay it off “as quickly as possible.” And when I say “we wanted to build” I mean that WE would do the building, not hire someone to do it for us – which is what people usually mean when they say “we’re building a house.”

Anyway, after a couple years we bought a 1-acre lot. It was a little more than we wanted to spend, but it was the best price we could get for something close enough to town. Then we sold our Bozeman house for a fair profit, moved into a camper, and started building on 18 May of 2004! We moved in to a VERY unfinished house that December, after the trailer was frozen solid (this is Montana, after all), and continued working on the place one room at a time. For a long time we lived in a messy construction zone, doing our best to keep the dust out of our clothes and our food. It was, shall we say, rustic living conditions! My wife cooked on a woodstove for nearly five months before I got the kitchen useable!

We didn’t have a construction loan because no bank wanted to finance a novice building a very unconventional house. (I’d never built anything bigger than furniture before I started building the house!) I’m an engineer, it’s in my DNA, and I was an electrician in college, so I’m pretty handy with stuff and I can figure out how to do things. And I printed a quote, I think from Henry Ford, and posted it on the construction site: “Whether you think you can or think you can’t, you’re right.” I live by that philosophy to this day.

We built the house using cash from our full-time jobs, and also (are you ready?) credit cards!! In 2004 money was CHEAP, so we got 0% cards and ran ‘em up. I have stellar credit, so even when the 0% ran out I still had very low rates, and I could rotate the balances to new 0% cards.

The only work I hired was the concrete slab foundation. We did EVERYTHING else ourselves, which saved a tremendous amount of money.

After about 1-1/2 years we got a bank to give us a debt consolidation loan –NOT a mortgage because they couldn’t get an appraisal on a straw bale house. The total loan amount was about $70k, and it was a five-year balloon loan. Since we had such a hard time getting even that loan we decided that we didn’t want to try to refinance when the loan was due, so we decided we’d do our darndest to pay off the whole thing!

The math works out to only $14000 per year, or about $1200 per month. I think most people pay more than that for a conventional mortgage. The difference is that our loan amount was so small to begin with because we invested so much of our TIME to make it happen.

We make pretty good wages for this area, but we’ve lived frugally ever since we started building. We’re not deprived: we travel to Europe every few years to visit my parents, partake in our hobbies, invest a little in the 401ks and Roth IRAs, and we still put a lot more money into building the house and yard.

Now that the house is paid off we’re socking away a TON of money into the 401ks and Roths. We need to make up some lost time there, but since we’re only in our late 30’s we still have a lot of time to save. And since we don’t have a house payment (!!!) we don’t need so much money for retirement anyway.

There’s more than one way to pay off a house. We took a pretty difficult route, but we now have a comfortable and beautiful (and still not finished!) house and NO DEBT.

No doubt that this method is a bit unconventional (it's like being your own house contractor on steroids) but they followed the basics of my formula for buying a house and now they have no debt at all. Good for them!

I like that they are keeping expenses low and socking away a lot of money -- they do need to make up for lost time. FYI, I don't recommend paying off your mortgage if it means stopping your long-term sayings because time invested is the single-most important factor in the performance of your investments, and once it is lost, you really have to save a ton to catch up. It appears that they'll be able to do this and given the market, they probably did better by being out of it for the past several years (otherwise they might have lost money), so maybe timing is working in their favor.

When to Pay Off Your Mortgage

Here are some thoughts from the great personal finance book Grow Your Money!: 101 Easy Tips to Plan, Save, and Invest. They list when to pay off your mortgage as follows:

• If you've contributed generously to your available retirement plans, including your retirement savings plans at work and an IRA. While there are lots of financial benefits to reducing your mortgage sooner rather than later, tax-advantaged retirement savings plans offer better ones.

• If you've paid off all other higher-interest loans, including credit card loans and car loans. It makes no sense to make extra payments against your, say, 6 1/2 percent mortgage while you've got an 11 percent car loan and 18 percent credit card balances.

They then detail the savings associated with paying off your mortgage early. If you have a $150k house with a 6% 30-year mortgage, you'll pay a total of $325k if you take 30 years to pay it off. If you simply make bi-weekly payments (versus monthly), you'll pay $285k and have it paid off in 24 years. And if you add an extra $300 to your payment every month, you'll pay $235k and own the house in 17 years. Pretty big difference, huh?

When we paid off our mortgage, we did exactly what this book recommends: we had eliminated all other debt and we kept saving fully for retirement. I know, it's not easy to do this, but if you create enough of a gap between your income and your expenses, you can do it. (This is why I'm always talking about growing your income and keeping your expenses low. If you can do these two things, a LOT of financial doors will open for you.)

I'm sure there will be those who will pipe in about the "tax savings" associated with carrying a mortgage, etc. Go ahead. Just remember that it's a tax deduction, not a tax credit. IMO, it's not a great deal compare to the peace and security of owning your home outright. I can say from experience that it's been GREAT not having a mortgage payment for the past 12 years. :-)

Cheap Home Security Options

Our neighborhood homeowner's association has a Yahoo group where neighbors post everything from party-at-the-park announcements to ideas on how to handle speeders in the neighborhood. A couple weeks ago, someone posted that there were a series of thefts in our area. These were mostly opportunistic thefts (people taking stuff out of unlocked cars and open garages) and none near our house, but it got me thinking that I need to consider some home security upgrades. So I started identifying the list of possible options.

Here's a list (it's a short version -- believe it or not -- the actual list is MUCH longer) I collected from Yahoo Answers, How Stuff Works, and Crime Doctor of the top ways to protect your home from a burglar (as well as miscellaneous tips). And yes, I know that some are repeated (just said in a different way), but I liked both ways they were noted and thus included them all. Here goes:

• Leaving your porch light on

• Having automatic timers on. your lights.

• Make sure your exterior doors are deadbolted and your windows locked.

• Apply security film to all your windows.

• Have a 6' fence (not chain link) around as much of the back half of your house/yard as possible.

• Buy a set of motion detector alarms for about $20, or even a whole system, and they work on their own with no monitoring. It's the loud noise that drives the bad guys away anyway.

• I was told a Beware of Dog sign will actually do more good than an ADT sign. You can pick one up at any discount store.

• Your house should appear occupied at all times. Use timers to switch lights and radios on and off when you're not at home.

• If the entrances to your home are dark, consider installing lighting with an infrared detector.

• Trees located near windows or shrubbery that might shield a burglar from view can be major flaws in your home-protection plan. Consider your landscaping plan in light of your protection needs.

• Dogs are good deterrents to burglars.

• The majority of home and apartment burglaries occur during the daytime when most people are away at work or school.

• Although home burglaries may seem random in occurrence, they actually involve a selection process. The burglar's selection process is simple. Choose an unoccupied home with the easiest access, the greatest amount of cover, and with the best escape routes.

• The first step is to harden the target or make your home more difficult to enter. Remember, the burglar will simply bypass your home if it requires too much effort or requires more skill and tools than they possess.

• Experienced burglars know that the garage door is usually the weakest point of entry followed by the back door.

• Windows are left unlocked and open at a much higher rate than doors. An open window, visible from the street or alley, may be the sole reason for your home to be selected by a burglar.

• Get to know your neighbors on each side of your home and the three directly across the street. Agree to watch out for each other's home.

• Allowing a neighbor to have a key solves the problem of hiding a key outside the door. Experienced burglars know to look for hidden keys in planter. While on vacation - pick up newspapers, and flyers. Offer to occasionally park your car in their driveway.

• Interior lighting is necessary to show signs of life and activity inside a residence at night. Light timers are inexpensive and can be found everywhere. They should be used on a daily basis, not just when you’re away.

• Another important area to be well-lighted is the perimeter of your home or apartment especially at the entryway. Exterior lighting on the front of a property should always be on a timer to establish a routine and appearance of occupancy at all times.

• Security lights with infra-red motion sensors are relatively inexpensive and can easily replace an exterior porch light or side door light on single family homes. The heat-motion sensor can be adjusted to detect body heat and can be programmed to reset after one minute. These security lights are highly recommended for single family homes.

• Alarm systems are effective deterrents with visible signage. Home and apartment burglars will usually bypass a property with visible alarm signs and will go to another property without such a sign.

Ok, so we can break these down into three groups IMO:

• Stuff we already do
• Stuff that would be useful but is too expensive
• Inexpensive options that will get us most of the way there (we're not trying to secure Fort Knox here)

Here's the stuff we already do:

• We check our doors every night before we go to bed to make sure they are locked.

• My wife and/or kids are home most of the day, so one of the biggest security protection practices possible kind of happens automatically at our house.

• We know our neighbors, watch out for each other's home, have keys for other's homes (and they have ours), pick up each other's paper, mail, and trash when the other is out of town, and even drive into their driveway to leave tracks in the snow when they are gone during the winter.

Things that would be nice but are a bit too expensive include:

• Getting a dog. Ha! ;-)
• Putting a fence around the whole back yard.
• Installing a security system.

Inexpensive options that I think we will use:

• Get some automatic lights installed around the outside of the house. Some in the front that are on timers set to turn on and off at various times with a few others (sides and back of the house) set up with motion detectors (especially by our two garage doors and the back door).

• Apply security film or something else that blocks the view from the door windows into our garage.

• Get a security system sign and/or small ones to put on the windows. I'd consider the "beware of dog" sign, but I don't want my home to look like the Vegas strip (too gaudy).

• Get some internal lights/timers.

• Consider planting some rose bushes around our front windows. I have them in front of one set of windows, so why not the other? They would certainly make for a prickly entry into our home. :-)

It's really a pretty simple list, but one I think will upgrade the security of our home dramatically. Anything I missed or should consider?

Your Home Never Was an Investment

A couple years ago I asked if your home was an investment or not. The main question was whether or not you should count on your home to deliver good, solid gains over its lifetime (like you'd expect from an investment) or if it was simply a place to live and possibly get moderate gains, but not expect much more. As you might imagine, opinions were divided on the subject.

The reason I'm bringing it up again is that I found this Wall Street Journal piece that says home ownership never was a road to riches. A summary of their thoughts:

Columbia Business School’s Christopher Mayer, who has studied housing markets, says our experience with home-price gains is pretty typical. Home appreciation nationally has run about 1% above inflation over time.

The big price run-ups from the late 1990s through 2006 or 2007 were an aberration. The biggest value you derive from home ownership isn’t appreciation. “It’s being able to live in it,” Prof. Mayer says, and avoiding the rent you would otherwise have to pay.

Once you add in imputed rent and subtract property taxes, Prof. Mayer estimates, my 2% annual home-ownership return looks more like 6%.

That’s why you should buy as much home as you need—but no more. A bigger home than you need isn’t an investment—it’s an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesn’t make it a smart move financially.

A few thoughts on this topic from me:

1. 6% isn't bad these days. Then again, compare it to what stocks can/should do over the long-term and it's way below "investment" grade.

2. I think home ownership is an investment of sorts as it's part of your overall asset allocation. As such, owning at least a basic home is part of a good investment strategy (when looked at from a broad perspective) IMO.

3. That said, you don't need to buy more than you really need. As I've shown, it can be really costly to do so.

4. My general feeling is that you should use my formula for buying a house -- a home that fits your needs and budget -- and use the surplus to invest (versus socking most of your savings in your home) if you're seeking to maximize your net worth.

Of course, if you simply want a bigger/more expensive home and can afford it, then go for it. Just don't count on it earning you what you'd get from alternative investments.

Why Do People Do This?

A few weeks ago we went out to look at potential new homes. The last one we saw that day was a foreclosure. On paper it seemed like it might be a good deal -- decent size, only a few years old, lots of land. Our agent told us that the selling agent had said the kitchen cabinets had been taken out and we've seen foreclosures before so we knew it could be rough. Still, we couldn't even imagine what we'd find inside.

When we opened the door we saw that the place was trashed. The carpets were soiled, the kitchen was gutted, the walls were scraped, some of the woodwork was scratched -- even the register vents were smashed in. But it was soon to get worse. Much worse.

We went downstairs and noticed something all over the floor. They looked like mini mushrooms. Then we realized what it was -- mold/fungus. The carpet had gotten wet somehow and been left there to sit. Now a forest of mushrooms/toadstools (I don't even know what to call them) were sprouting in the carpet. We then looked up and saw that the ceiling had been partially destroyed and it was BLACK with mold. All over the place. We told the kids to touch nothing and we beat a hasty retreat out of the place.

On the way back home, we talked about what had likely happened:

• Someone borrowed to buy/build a home.

• He somehow wasn't able to make the payments (lost a job, simply mis-managed his money, etc.)

• The bank took the home back.

• On the way out, the guy did everything he could to trash the place -- to make it worth less and to hurt the bank's investment.

Now I can understand someone being upset and even being mad at the bank (maybe they treated him unfairly). But even so, does a good, decent, person do something like this? Why not simply acknowledge there are tough times, that life isn't fair sometimes, and move out with at least your honest name in tact? No, instead he had to leave a scorched earth in his wake and simply reinforce that he wasn't the sort of person you'd want to be around anyway. No class at all.

We've seen a lot of foreclosures and this sort of behavior isn't uncommon. Each time I wonder why people do this, what they hope to gain, and why they simply can't turn the page with a bit of dignity and treat others (even if it's a mean, despicable bank) the way they would want to be treated.

Anyone with any compelling insights on this one?

Now's the Time to Buy a House

The following is a guest post from Marotta Wealth Management.

For years I've been annoying local realtors by claiming that real estate values were headed lower. Over the past few years, I've been advising young clients to rent and wait for better deals. And I've been suggesting that those who are holding real estate waiting for it to go back up will probably see their property decrease in value before it goes up.

Early in 2005 I coauthored the column "We Could Be in a Real Estate Bubble" with my father George Marotta. We wrote, "Home values may be peaking and ready to correct." We explained that "Delinquency among the less creditworthy 'sub-prime' market that accounts for 10% of mortgages has jumped to 8.07% from 4.5% in 1999. Delinquencies on FHA loans that make up about 15% of mortgages are at a 30-year high of 11.8%.

"As a result, Americans' equity in their homes, net of debt, has dwindled to 57%, compared with 85% a half-century ago. But those are averages. Thirty-nine percent of homes are owned free and clear, but the remaining homeowners have average debt burdens exceeding 80% of the value of their homes. Mortgages over 80% of the value of the home offer little margin of safety should home prices level off or should they fall as much as 20%."

We ended the column with this prediction: "What can be suggested is that the housing prices boom shows signs of weakness, and that they may correct or at least underperform for the next few years. Higher interest rates will slow housing growth in 2005, but the bubble, if it is a bubble, could pop as late as 2006 or 2007."

Our prediction was accurate. Real estate continued to rise through 2005. But it was relatively flat in 2006, underperforming the markets that appreciated over 15% that year.

Two years later, in "Breaking Spaghetti: A Seven-Year Financial History," I wrote, "Many homeowners with adjustable rate mortgages have seen their monthly payments increase 50%, due to the higher rates. With the sudden jump in monthly mortgage payments, many are finding they can no longer afford to stay in their homes. The rate of late payments and foreclosures has continued to rise leaving many lenders on the brink of bankruptcy themselves. "

Again, the prediction was accurate. In 2007 the Cohen & Steers Realty Majors Index turned negative, losing 18.03%. Residential real estate did even worse. Apartments suffered one of the largest declines, down 25.4%.

Since then, real estate has continued to decline. The Charlottesville Area Association of REALTORS reported that real estate prices declined 8.5% during the first two quarters of 2009 compared with the first half of 2008. The median home price fell to $247,000, a drop of $22,900 over the first half of last year. Midyear sales were down 28% compared to the same period last year.

Although inventories have started to contract slightly, the average days on the market stands at 125, well above a healthy market average of 90 days. Homes priced above $1 million are spending nearly 226 days on the market.

Nathan Rothschild offered the contrarian advice to "Buy when there's blood in the streets and sell to the sound of trumpets." It is time to consider buying residential real estate. The bottom is forming, although it may continue to do so through early 2011.

So this is the time when you should be looking for deals, which must begin with sound planning. I'm going to give you four pieces of important advice.

First, don't be afraid to make a radically low offer. Even 50% of the asking price is OK if that's what you think it is worth. Foreclosures are going for 20% or 30% of the assessed value in some regions of the country. In this market, if your first offer is accepted, you probably bid too high. When we purchased our house in Charlottesville in 1990, it took seven offers and counteroffers before we reached agreement with the owners.

Second, be patient. Some remarkable deals will be available over the next two years but only for those who are patient, amenable to making a ridiculous offer and willing to walk away. With 3,600 active listings, you can afford to wait for a deal.

Third, know how to structure your purchase to maximize your tax savings. First-time home buyers are eligible for an $8,000 refundable tax credit if the purchase is made before December 1, 2009. As long as you have not owned a house during the past three years, you are eligible for first-time home buyer status. The credit is refundable, meaning the IRS will write you a check even if you don't pay taxes. Phaseouts start at $150,000 for married couples and $75,000 for other taxpayers.

To receive some of that government money, it doesn't matter who pays the mortgage. You may want to consider helping your children or grandchildren buy their first home so they can receive the tax credit. The laws are complex enough that you should talk to a comprehensive financial planner to structure the best intergenerational financial plan and maximize everyone's tax rates and itemized deductions.

Finally, be sure not to miss out on the low mortgage interest rates. But don't buy down any points. Most families do not keep their homes long enough to justify the cost of buying down the interest rate on their mortgage.

My parents' mortgage when I was growing up was at 4.00%. I never thought rates would get anywhere near that low again. When my wife and I bought our first home, we were able to assume a 12.5% mortgage when rates for new loans were at 18%. Today you can get a 30-year fixed mortgage with no points for as low as 5.0%. Rates are at historical lows, so the next few years are the time to take advantage of them.

There's blood in the street, so don't miss this opportunity to look for a great real estate deal.

The Cost of a New Home

As many of you know, we've been looking for a new house for three years now (this is the third summer we've been "shopping".) From the beginning, we said we'd consider moving if we could find a great place at a big discount. Now after looking for quite some time, I'm not sure it's "worth it" for us to move after all. Let me tell you why.

What we're really looking to upgrade on is the location (city of residence) as well as the outside (acreage) of our current home. We'd like to live in a nicer township (with better schools, closer to church and friends, etc.) as well as have a bit of land to do some gardening, have a place for the kids to run around, have a dog (yes, an expense, I know), etc. We like our current house and have said several times that we'd be satisfied if we could simply move our current home onto seven acres in the township we want to live in.

But it's not that simple, of course. In real estate, every property is different from every other one. And we can't move our home (I guess we could, but we're not going there.) So we're looking for the combination of a nice house, a decent amount of land, and a location that's in our targeted area. Oh yeah, and we want it at a discount (as noted above.) Finding such a place is turning out to be a lot harder than we expected.

Granted, we're being picky. But why not be picky? We have a house we like, that's 100% paid for, and that’s in a neighborhood that's "fine." So we can afford to be choosey. And we have been. In all our searches, we found only one place that we liked enough to place a bid on, but the sale didn't go through (FYI, it sold this spring for $20,000 below what we were going to pay for it.) But we did learn a lot from the process.

To give you a feel for our situation, here's a quick summary of what we're facing:

• Homes that are comparable to ours in the city we like on the acreage we want are about $250,000 more than the value of our current home at current market rates. Is the extra amount worth paying? More on this later.

• NO ONE that has a home that meets our criteria is in the desperate/"let's unload it at any price"/foreclosure sell-off phase. No one. And rest assured that after three years we know the area well, what's being offered, and what's being sold. There's nothing that's met our discount criteria out there (even the home we bid on was much more than we wanted to pay and certainly was nowhere near a firesale price.) Now these homes are dramatically discounted from their one-time values, of course, but we're not really looking for that. We're looking for an almost unbeatable deal that's below current market value. Again, we're being picky and only buying if the right opportunity comes along.

• That said, we did see two homes recently where the seller's agent simply said the price was "write up an offer." One of the homes had been on the market for $750k (an outrageous price) and was down to $499k. The other was similar. But even a lowball offer is going to put these homes $150k above the value of our current place unless we go with the we're-too-embarrassed-to-even-bid-this price. Besides, we're not so sure that we like either of these homes anyway.

So now that you know what we're up against, let's look at the costs of a move and how they could impact our finances. Here's a quick review:

• As I noted, any house that meets our criteria, barring a miracle purchase, will cost between $150k and $250k more than our current home.

• If we move, I estimate we'll have $20,000 in one-time costs associated with the move. This includes everything from work on the new house we'd likely want done, paying movers, buying new items needed for the new home (for instance, our 15-year-old push mower isn't going to do the job on three acres of lawn), etc. This estimate is obtained from a detailed budget I laid out when we thought we were going to move to the last hose. So while it could be off one or two thousand dollars, it's not off by much.

• A new house like the one we're thinking of would add about $5,000 extra in expenses to our budget. Taxes will be more, heating will be more (most places are heated with propane), yard care will be more (someone will need to plow the usually long driveway in the winter), and so on.

Now we can afford this, but the question is do we want to pay this much? After all, the cost is pretty high. For instance:

• Assuming the cost of the house is $150k more than the value of our current home, we'd have almost $400k less (assuming an 8% return) in net worth after ten years by buying the home (I'm assuming we'd invest the difference.) Over 20 years, we'd have almost $935k less.

• If the cost of the house is $250k more than the value of our current home, we'd have almost $600k less (assuming an 8% return) in net worth after ten years by buying the home (I'm assuming we'd invest the difference.) Over 20 years, we'd have almost $1.4 million less.

• Now, of course, the new home would increase in value (theoretically), so some of these losses would be offset. Let's say the home would appreciate at 4% per year versus the 8% if the money was invested. At $150k cost of new house over old, we'd still be out $86k after 10 years and over $330k after 20 years. At $250k incremental cost, the numbers are down $144k after 10 years and $552k after 20 years.

• That said, the gains in the house are very illiquid while the amount, if invested, would be very liquid. Big difference.

The biggest financial impact of this decision is how it affects the year in which I could retire. Even at $150k extra cost, I'd need to work several more years than I would if I kept and invested the money. At $250k, I'd have to work much, much longer.

So, where does that leave us? First of all, we need to think about the costs associated with the move. If we can get the low price we initially planned for, the cost isn't that big of a deal given we'd pick up the benefits that made us start looking in the first place. But if we have to pay a premium versus our plans, it's likely not worth the cost. I'd rather have the money, the financial flexibility, and a much earlier retirement.

The "Secret" to Selling Your Home Quickly

Here's a story from my local TV station's new program. It was billed as "the key to selling your home quickly even in this tough market." The piece started with a few homes that had sold very quickly -- one in nine days, one in 13 days, and a couple in just hours. So I was intrigued. What was the "secret" to selling your home quickly? Here it is:

The asking prices were low, and the owners showed a willingness to take a loss.

Hey, I've got an even better idea. What if you gave your home away for FREE -- I bet it would really move quickly then!!!!!

Can you say "duh"? Of course if you price your home to sell quickly then it will sell quickly. Is this really "news"? Does someone at the station think they're really informing us of something new?

Anyway, the spot was good for something. It gave me a chuckle and some fodder to rant about today. ;-)

Four Home Upgrades Worth the Tax Break

MSN Money lists four home upgrades worth the tax break as follows:

• Adding insulation - Insulation is the cheapest home improvement that qualifies for the tax credits, says Karen Schneider, a spokeswoman for Energy Star. And by installing it you could save up to 20% on your energy bills.

• Replacing windows and doors - Before, tax credits for windows and doors were capped at $200. Now you can get up to $1,500. But that's only if those doors and windows meet certain criteria.

• Installing air conditioners - Energy Star estimates the retail price and installation of a 5-ton central air conditioner at more than $1,700. That's hardly cheap, but these systems need to be replaced only once every 10 to 12 years, Schneider says.

• Putting on a new roof - Assuming your roof is around 15 years old, replacing it with a metal or asphalt roof that meets Energy Star requirements will help keep your home cool by reflecting the sun's heat, especially if you live in a warm location, Schneider says.

We could actually be in the market for three out of four of these. The details:

1. We need a bit of insulation added to our attic. It's been on my to-do list for years, maybe this is the incentive I need to get it done.

2. We have several windows that need to be replaced. Thought about doing it last year -- glad now that we waited.

3. Both our AC and heater are on their last legs, so we'll probably be doing this one for sure.

4. Doh! We put a new roof on two or three years ago. Dang!

How about you? Any of these look worthwhile?

And for those of you interested, here are some more ideas for saving while also going green.

How's Your Home Stack Up in Your Neighborhood?

While reading this Bankrate article on buying a model home, I ran into this quote that I wanted to talk about a bit:

It's much better to own the most modest home in an expensive neighborhood than the most expensive one in a modest neighborhood, in terms of value appreciation.

I'm sure most of you have heard this saying (or something similar like "never buy the most expensive home in your neighborhood) at least a few times. It's a good rule-of-thumb. If you own the most expensive home in an area you are limiting the market for its resale. Why is that? Because people that buy more expensive homes generally want to live in more expensive neighborhoods, not one that's a step or two down from the home they're buying.

We are smack in the middle of our neighborhood's homes. There are several much bigger/more expensive and several smaller/less expensive. Most homes are comparable to ours in both size and value.

One good thing for us is that we have some of the nicer homes very near to our home. One is right across the street and another is across the street and down a couple houses. These homes have a value of at least $100k more than ours -- roughly 50% higher than the value of our home. In addition, there are a few more expensive homes just around the corner. One belongs to friends of ours. Tough thing for them -- they're trying to sell their home (at a price almost twice the value of our home) and they're having zero luck. But they can't take the price down because they need to get a certain amount out of it. They're stuck.

Anyway, what about you? Where's your home's value in relation to the others in your neighborhood?

The Fastest Ways to Get Your House Sold

In their May issue, Money magazine lists the best fast fixes to get your house sold as follows:

• Boost curb appeal
• Update a bathroom
• Spruce up the interior
• Revive a dated kitchen

After looking at probably 50 to 75 homes over the past couple of years, I think I'm at least reasonably qualified to comment on these. Here goes:

• Personally, I don't give a TON of weight to curb appeal as long as the home meets some minimum requirements (it's in good shape from the outside, good access, major plants are in nice condition, etc.) I have two reasons for this: 1) I'm going to (very likely) change around the landscaping anyway -- I MUST have a rose garden in my new place and 2) I don't want landscaping that's going to require five hours every weekend to maintain. This said, I realize that first impressions are VERY important to most people and when selling our home, we'll be doing all we can to make the initial impression a very positive one.

• There's nothing worse than an old, dungy bathroom (other than maybe an old, dungy kitchen.) A bit of paint, new fixtures, and decent lighting goes a long, long way with very little cost. Just a few simple touch-ups can take a bathroom from floundering to fantastic.

• Again, paint is key when updating the interior. It's amazing how much different a room looks with the right color of fresh paint ("fresh" in the sense that it's not scuffed, dirty, etc.) And paint is pretty cheap, btw.

• From what I've seen, reviving a dated kitchen can make a HUGE difference, but it can also costs a fortune. The biggest issues are usually cabinets and appliances, which are both expensive. Besides, who wants to spend a ton putting in oak cabinets when the potential buyers prefer cherry? My advice is to do the best you can for as little money. Touch up the room with new paint. If the appliances are hideous, move them out if you're not living there (better a kitchen with no appliances than one with bad ones.)

How about you? Any thoughts/comments/suggestions on the above?

Why You Should Put 20% Down When Buying a Home

The following is a guest post from the Virtual Money Coach.

Here is a very good reason to try and save 20% of the purchase price as a downpayment on your next house.  Most everyone is aware that if you put 20% down, the bank gives you the option of escrowing your taxes and insurance.  If you were able to save 20% in the first place, then you are probably pretty diligent with money and this strategy will work very well for you.
 
Let's assume that you bought a new house for $200,000 and put a 20% downpayment, financing the remaining amount of $160,000.  Your monthly payment consists of the principal and interest ($1,200) plus the taxes and insurance ($800), for a total of $2,000 a month.  Lets say that you clear $6,000 a month after taxes from your job.  Your monthly cash flow will look like this, assuming you are paid on the 1st and 15th of the month:

1st:
Paycheck                           $3,000
Mortgage                            ($2,000)
Other Expenses                  ($750)
Positive Cash Flow              $250
 
So for the first of the month, you have a positive cash flow of $250.  Therefore, your next pay period looks like this:

15th:
Paycheck                           $3,000
Other Expenses                  ($750)
Positive Cash Flow              $2,250
 
Notice how much extra cash flow you have on the 15th versus the 1st?  The mortgage payment is causing a tight cash flow on the 1st.
 
Now here is my strategy.  If you put 20% down on the house, you don't have to pay the taxes and insurance with your principal and interest payment.  You can save it yourself out of whichever paycheck you want (you must be very careful about knowing the exact amount you should be saving).  So look at the difference between making the principal and interest payment on the 1st and saving the taxes and insurances on the 15th:

1st:
Paycheck                            $3,000
Mortgage (P&I)                     ($1,200)
Other Expenses                    ($750)
Positive Cash Flow                $1,050

15th:
Paycheck                            $3,000
Save (Taxes & Ins.)              ($800)
Other Expenses                   ($750)
Positive Cash Flow               $1,450
 
Your positive cash flow for the month is still $2,500, but now it is spread out over both pay periods.  You will have more cash flow (and more wiggle room) on the 1st, just in case some unexpected expenses come up, and you know they will ;-)

10 Mistakes First-Time Home Buyers Make

Smart Money lists ten mistakes first-time home buyers make as follows:

1. Not knowing how much house you can afford.
2. Assuming foreclosures are great deals.
3. Letting your true feelings show.
4. Failing to find a good buyer's agent.
5. Underestimating the costs of owning a home.
6. Failing to budget for property taxes.
7. Assuming your first offer will get accepted.
8. Skipping the inspection.
9. Doing too much too fast.
10. Failing to include a contingency clause in the contract.

Here's my take on each of these:

1. Don't let a bank tell you how much you should borrow. Figure out what you can afford (including your down payment) and get a home in that price range. Then again, others think you should buy more house than you need. I MAY agree with this -- as long as it's not more house than you can AFFORD.

2. Foreclosures can be good deals, but they also often come with a lot of baggage (like the homeowners trashing it before they left.) Just go in with your eyes wide open and expecting there to be "surprises" and you'll be prepared to potentially by a foreclosure.

3. Never let your true feelings show. To anyone (especially your agent.) We even tell our kids not to comment on the home when they go in with us. They can say whatever they want to to us once we're back in the car, but while we're in the house/with the agent, they aren't to comment good or bad on the place. One final note: if I like a place, I often comment to our agent how this or that is a problem that I don't like. Then, if we get to the buying stage, I can bring up the issue as a reason I'm not 100% sold on the place. (Yes, buying a house is a HUGE game, unfortunately.)

4. Having a bad agent can be a real drain on you in many ways -- physically, emotionally, financially, etc. Believe me, I know. Thankfully, there are ways to pick a good realtor.

5. There are all sorts of costs in buying a home. General maintenance goes without saying, but also consider the one-time costs of painting, carpeting, new furniture, etc. that you'll need to buy if you get a new home.

6. Real estate taxes go up, but hardly ever go down (at least much), even in this economy.

7. I've NEVER had the first offer accepted and I've never accepted the first offer as a seller.

8. You're going to buy something for a few hundred thousand dollars (most likely). Don't you think it's worth it to pay $400 to see if it's in good shape? Money well-spent IMO.

9. Goes along with #5. Not only do you need to budget for everything, but don't worry about doing it all within a month or two of moving in. We plan for a six to twelve month time period before we got fully settled.

10. Good thing we had a contingency clause in our most recent deal or we would have been stuck with a major problem.

There are two posts of mine that I think are especially helpful for someone thinking of buying a home. They are My Formula for Buying a House and What I Learned from Almost Buying a House. Check them out if you're interested in knowing more of my thoughts on purchasing a new home.

Pay Down Your Mortgage or Sock Money Away for Retirement?

The following is an excerpt from the book The Sound Mind Investing Handbook - A Step-By-Step Guide To Managing Your Money From A Biblical Perspective 5th Ed.

“If we can’t afford to make extra principal payments on our home mortgage and at the same time put money into our retirement plan, which should have the priority?” . . .

. . . is a question I receive quite often. Unfortunately, there’s no one-size-fits-all answer—your age, your tax bracket, what you would do with the tax savings from your mortgage interest, how long you expect to live in your home, and your general attitude toward being debt-free all play significant roles.

Let’s say that two readers of this book who have different goals are each wrestling with this question. Rob is leery about the long-term health of Social Security and wants to begin building his retirement funds immediately. Mort thinks being in debt is more of a concern and plans to use any monthly surplus to make additional principal payments on his mortgage.

For comparison purposes, let’s make their two situations identical: They both have new $120,000, fifteen-year 6% fixed rate mortgages; both can set aside $1,100 out of each month’s paycheck (their monthly mortgage payment is $1,013, leaving them each an extra $87 for payment of the principal or investment in a retirement account); both are in the 31% tax bracket (25% federal plus 6% state), and both have the opportunity to contribute to a retirement plan at work that will earn 8%, which is 2% more than their mortgages are costing them.

When they make their first month’s mortgage payment, $600 of it is tax deductible as interest expense. This will lower each of their taxes by $186 a month (31% of $600). What they do with that $186 savings can make a big difference.

Let’s assume that both Rob and Mort would like to get their hands on that savings sooner rather than later. They would get it back when they filed their income tax returns anyway, so why wait? So, they both change the withholding instructions they give their employers so that about $186 less is withheld for income taxes each month. By adding that amount to the extra $87 left from their monthly surplus, they each now have an extra $273 to work with. Rob contributes his $273 into his company’s 401(k) plan while Mort takes his $273 and makes an extra principal payment on his mortgage.

Now here’s where it can really get confusing. To construct an accurate picture, we have to recognize that Rob gets a second tax deduction—this time for putting money into the retirement plan. Rob’s $273 contribution is worth another $85 tax savings, which he could then also put into his 401(k). But then that $85 contribution would save him an additional $26 in taxes, which he could also put into his 401(k). But then that $26 . . . well, you get the idea. If Rob took maximum advantage of this, he could ultimately put $396 into his company retirement plan that first month (his $87 monthly surplus plus the tax savings of $186 for mortgage interest plus another $123 in tax savings for contributing to the company 401(k)).

Assume that both men are able to take the maximum advantage of the available tax savings as the years pass. Mort pays down as much extra on his mortgage each month as he can and pays it off completely in a little over 11 years. At that point, he shifts all the money he formerly put toward his mortgage each month into his retirement plan. He also adjusts his withholdings to take maximum advantage of the tax savings his contributions create.

At the end of fifteen years, their experiences can be summarized this way. Both men had the same out-of-pocket expenditures—$1,100 per month over fifteen years, totaling $198,000. In return, they both accomplished paying their $120,000 mortgage loans in full and were able to invest for retirement. It’s interesting to note that, although they proceeded according to different time tables, Rob and Mort ultimately saved an equal amount ($35,043) on their taxes. This was due to each of them always taking full advantage of the tax-deductibility of mortgage interest and 401(k) contributions with their surplus dollars.

The important difference in their financial situations after 15 years is found in the value of their retirement accounts. Rob’s 401(k) grew to $107,092 and Mort’s to $79,392. Although they had both saved the same amount in taxes which could then be invested for retirement, Rob’s savings were “front-loaded.” That meant he could put them to work in his 401(k) earlier than Mort could. In this way, Rob was able to take greater advantage of the tax-deferred compounding of profits. The difference in his 401(k) would have been even greater if Rob’s employer contributed matching funds. Mort’s retirement account later came on strong, but Rob’s head start was too great.

Should you follow Rob’s example? Perhaps, but not necessarily. To make it work, you’ve got to be able to aggressively use all of the tax savings, and more important, you need 15 years of relative stability in your job, the economy, and the tax code. That seems to be asking a lot from the next decade.

The advantages of following Mort’s approach are: It more quickly provides the security of debt-free home ownership, which will better enable you to weather any economic storms; in case of an emergency, the wealth in your home is more accessible than assets tied up in a retirement plan; and while Rob’s return in the 401(k) could fall or (even turn negative), Mort’s interest savings on his mortgage is guaranteed.

I Fought the Law and the Law (Mostly) Won

Here's a quick summary of my recent bout with the local tax authorities regarding my home's tax assessment:

• Got my tax notice (not the bill, simply the form stating what my new taxes were based on) on Saturday, February 21.

• The notice accounted for a 4.3% drop in both the appraised and taxable value of our home, a reduction of just under $150 in taxes this year.

• The actual value of our home is much closer to 11.3% down versus the last notice (at best). How do I know this? Because our home was for sale at this price for a month last fall when we thought we'd bought a new place. We had NO ONE interested, hence, as I said, this is "at best."

• The notice said that I had three days to call an assessor if I didn't agree with the numbers (the very next Monday through Wednesday, February 23 through 25). Recall, I got the notice on the 21st. Gee, thanks guys, for giving me plenty of time to consider the issue.

• I called the assessor's office on February 23 and was told that I could come in (no appointments made) and talk to an assessor. If I wasn't satisfied after that, I could appeal to the board a few weeks later.

• So on the evening of the 23rd I spent a couple hours developing a presentation on my rates and history, valuations of comparable properties that had sold near our home (got from my realtor), listing of my home when it was for sale, etc. By the time I was done, the packet was about 50 pages long (I included a page for each comparable home sold.)

• I visited the assessor's office on February 24th. I had to wait my turn (about 20 minutes) and fill out some mindless paperwork that basically was covered in my presentation. But I completed it, then met with an assessor.

• He was very friendly, but also a bit overwhelmed. I can only imagine the number of people contesting their assessments. He looked at my documentation and commended me on the research and presentation. He also told me something I didn't know -- foreclosure sales don't count in any comparable figures the assessors can review. Yep, you got that right. So while the actual value of my home is way lower because of foreclosures in my area, assessors (and me as well) can't count them when developing an assessed/taxable value for my home. What a rip!

• He told me I would get a response by mail in a week or so and I could appeal that if I didn't like it. On March 4 I got my new tax notice and they'd lowered both the assessed and taxable values by another 1.1%, lowering my taxes by another $37 a year. Basically, they threw me a bone.

Now I had to decide whether or not to fight it with the board. Given the facts that: 1) they were probably going to allow very little changes from here on out, 2) I couldn't count foreclosures in the comparable numbers, 3) the time and effort I'd have to take (time off from work, etc.) versus the savings just wasn't worth it, 4) the timing of the appeal -- it was a day after I planned to be out of town for two days which gave me little time to prepare, and 4) I hope to be moved from this home soon anyway, I decided to stop here and call it a day.

Still I left the process with a bitter taste in my mouth. Sure, I saved a bit and my taxes will be almost $200 lower this year, but they're at least $200 higher than what they should be. I pity the poor people who don't know how to fight back at all and/or don't look at their notices for a couple days and realized they are too late to challenge them. They have no chance at all except to take whatever valuation they've been assigned.

Anyone else out there appealed their real estate taxes successfully (or not)? What happened?

Related: Looks like I'm not the only one with a beef.

How Most People Got into Their Mortgage Mess

Here's an interesting exchange from my post titled How to Postpone Foreclosure. It starts with this comment:

Another way to postpone (or even eliminate) foreclosure...

-make your payments as agreed.

I know it's not a very popular idea, but it works!

One reader (Laura S) took exception to this and said:

What a very insensitive remark. Don't you think most people would make their payments if they could? Of course there are dead beats and people living beyond their means but there are many that face foreclosure due to a series on unfortunate events. Medical expenses, loss of job, divorce, death of bread winner, just to name a few. It could happen to anyone. Although my family is doing well and we've worked hard to prepare for those kinds of emergencies, I never take for granted the life I've been afforded.

Which then led to this insightful comment:

I am a foreclosure attorney and unfortunately Laura S is off the mark. The majority of my foreclosures are people who have either (1) bought too much home for their income, (2) watched too many "Flip this Home" shows and thought that real estate was easy money, or (3) people who had a history of not paying their debt but somehow miraculously was able to buy a home. There are very few who have had an unfortunate event in their life and are facing foreclosure.

Everyone always asks me who do I blame in this mess and I blame everyone. I blame the banks, I blame the government, I blame home buyer, and I even blame those of us who turned a blind eye to the whole mess. Where was the average joe when all of this was going on and knew this was too good to be true?

Very, very interesting...

How to Postpone Foreclosure

If you're looking to fend off foreclosure, here's a trick that will buy you some time -- three words: "produce the note."

The idea is that mortgages are sold, re-sold, and re-sold again over and over in today's market -- so much so that the bank that eventually owns a mortgage will have a tough (and lengthy time) trying to find the original note that proves you owe them money. This can buy valuable time for those looking to do everything they can to hold off foreclosure as long as possible.

Not sure how well it works, but details are here (watch the video) for those interested.

Paying Off a Mortgage by Brown Bagging Your Lunch

I've written about how we paid off our mortgage as well as how we all can save money by taking our lunches to work, but this piece by Crown Ministries (pdf -- page 14) tells the story of a guy who combined the two ideas. He started brown bagging his lunch to work and put the money he was saving against paying off his mortgage. The details:

The daily savings of brown-bagging my lunch was about $5 per day. That’s $5 times 21 working days per month, or about $105 savings per month, which is good in and of itself. But if I had not been intentional about it, the $105 that I saved would have gotten lost in the shuffle and spent in some other way. That’s when I developed the Index Card System.

The Index Card System ensures that the money we intentionally save by means of brown-bagging our lunch, or any method of cost saving, gets redirected purposefully. Here’s how it worked for me. I took ordinary index cards and wrote “$105” and the months “January” thru “December” on them and put them in with the rest of my bills. Each month that my mortgage was due, I treated the index card as a bill and used it to pay an additional principle payment on my mortgage. I simply wrote “Principle payment only” in the memo, and the bank applied that money against my mortgage balance. None of that money went toward interest. The full amount went directly to reduce my mortgage balance. As a result of sticking to the Index Card System, I knocked seven years off the life of my mortgage and saved almost $14,000 in interest.

Think about that. By simply applying the money saved from brown-bagging a lunch, it is possible to knock many years off the life of your mortgage and save potentially tens of thousands of dollars in interest. Anybody have a taste for peanut butter and jelly?

What a great example of the fact that if you can keep small spending under control, you can have a MAJOR impact on your net worth. With one simple change over a long period of time (he doesn't say how long, but paying off his mortgage didn't happen overnight), this man dramatically improved his finances. Many of us can do the same -- if we simply make a small change here and there and have the discipline to see it through.

One other note: I'm sure it just wasn't the savings that helped him pay off his house early. He probably bought a house the "right" way.

When Does It Make Sense to Refinance?

Here's a piece from the Wall Street Journal that addresses the issue of when it makes sense to refinance your mortgage. Their answer:

If you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won't be paying monthly bills long enough for the savings to cover the costs.

If you plan to stay in your home for years, and you are currently in an adjustable-rate mortgage, you should strongly consider a refi. ARMs are incredibly dangerous. Refinancing into a 30-year fixed-rate loan may not cut your current monthly payments by much, but it gets rid of the risk that those payments will suddenly skyrocket.

Refinancing also usually makes sense if you are currently paying a much higher rate, though few homeowners are any more.

As a rule of thumb, Greg McBride, economist at Bankrate.com, looks for a payback period of a couple of years. "Generally, if you can earn the costs back within two to three years, and it's a home you're prepared to stay in for much longer than that, it's usually a good thing," he says. But if the savings are more marginal, you need to do the math.

This isn't an issue we're dealing with since we haven't had a mortgage in over a decade, but I know many people are grappling with this topic. In fact, one of the guys in our office is going through this process now -- should he refinance, if so, where's the best rate, etc.

How about you? Anyone out there going through the decision-making process regarding refinancing?

Frugal Millionaires on Investing and Mortgages

Here's an excerpt from the book The Frugal Millionaires: 70 millionaires anonymously share their ideas about money to help each other and you. Today we're seeing what the millionaires have to say about investing and mortgages. There's lots of good advice here -- as you would expect. After all, these people are doing pretty well financially.

FYI, these are some representative tips from The Frugal Millionaires. There are over 800 tips in the book. The frugal millionaires are only referenced by their initials. The author signed a confidentiality agreement that the millionaires' identities would never be disclosed in exchange for them saying whatever they wanted. If they chose not to have their initials used they were given the initials AFM which is an acronym for Anonymous Frugal Millionaire.

INVESTING

SLL – Rules of investing in stocks:

• Rule #1: Don’t invest in anything you don’t understand. You are buying a piece of a business, not “betting” on price movement. Read books on investing.

• Rule #2: Assess your risk tolerance. What’s more important, the safety of what you have or growth? Pick the longest time horizon. Longer is better.

• Rule #3: Have a good reason to purchase, like good management or if the stock is undervalued.

• Rule #4: Diversify. Buy funds until you know enough to buy individual stocks. Look for low expense ratios.

JTA – The best advice I can give you is to invest your money or go into a business that pays you when you are awake, sleeping, eating and/or on vacation. Otherwise, start investing early and be patient. Be weary of get rich quick schemes. When everyone was at the water cooler talking about stocks or became a day trader in the late 1990’s it should have been a sign to get out of the market. When everyone was a part time speculative home builder in the early 2000’s it should have been a sign to get out of that market.

B&GH – I never wake up in the middle of the night screaming, “Oh God, I have too much of my money in cash!” Hope for the best but plan for the worst. When your stocks are up 10%, take that money off the table and move it into safer things. Decide how much you are willing to lose and put the rest in safe places. Don’t confuse amusements with investments. Cars, boats and planes are amusements.

DMG – Constantly look for ways to increase your rate of return by 1%. It will make a difference.

MORTGAGES

AFM – Don’t be a slave to your mortgage. Don’t believe real estate agents, loan officers and seemingly “rich” people when they say that you should “stretch and buy big.” Your home and mortgage should reflect what your goals are. My goals involve family and freedom. That means that I wanted a house that was nice, big enough for a family, etc.…but not so expensive that both my wife and I would have to work –or– that I would have to work in such a time-suck job that I’d never be home. Where’s the freedom in that scenario? The result: my wife has never had to work, we’ve never been late on a payment or had to dip into investments. Why? Because we were never over-extended in the first place. That has kept our wealth growing and our sanity and freedom intact.

S&AW – Don’t buy the biggest house you can “afford.” Buy a house that won’t be viewed as a financial burden. Nothing makes you less mobile than a mortgage you can’t fund.

AFM – Stick with a 15 or 30 year conventional loan. Don’t go for the tricky ARMs (Adjustable Rate Mortgages) or interest only deals…you won’t like it when they adjust or if/when the real estate market goes down.

AFM – You can only afford a house when your income, after taxes and expenses, allows you to: 1) Save for your children’s education, 2) Save for your future, and 3) save for short term needs.

How to Get Mortgage Relief

Quite frequently I have a commenter ask me how they can get some relief on their mortgage because they are having trouble paying it, the interest rate is about to reset, etc. I don't know what to tell them exactly (I've never had this trouble) but here are the five steps MSN lists for getting mortgage relief:

• Step No. 1: Gather information. There are two keys to getting a workout: being able to explain why you're in trouble and what you can afford.

• Step No. 2: Call your lender. Most major lenders have workout departments that do nothing but talk to troubled borrowers. You can reach these departments by calling the lender number on your bill or by calling a hotline dedicated to workouts.

• Step No. 3: Fill out the paperwork.

• Step No. 4: Consider a contingency plan. If you don't qualify for a standard workout, all is not necessarily lost. If you think you've been unfairly denied, ask to speak to a supervisor or write the president of the bank a letter clearly and politely spelling out your case.

• Step No. 5: Ask about other options. Sometimes, when you don't qualify for formal relief, you can still get some sort of accommodation, like a short respite from payments that allows you to find a job or sell your house.

Of course, two ways you can get your finances back on track if you can't afford your mortgage are to make more money and save more money. I currently have hundreds of ways to do either of these (at the preceding link), so check it out of you're having mortgage trouble and are looking for ideas to get out of it (or even if you're doing well and want as big a spread as possible between your income and expenses.)

Top Five Home-Buying Blunders for 2009

US News lists the top five home-buying blunders of 2009 as follows:

1) Buying for the short term: With home prices at the national level expected to continue declining throughout most of next year at least, 2009 won't be a good time to try to turn a quick buck in the real estate market. Many homes that are purchased in 2009 will lose value in the short term.

2) Not understanding what's happening in your local market: Although it's easy to get caught up in the gloomy national housing trends, prospective home-buyers should be paying more attention to what's going on in the market where they are considering purchasing property.

3) Not scouring for deals: With the fall in home prices expected to continue for some time, 2009 will be a buyer's market. As such, people considering purchasing a home should understand that they are in the driver's seat and be on the lookout for deals.

4 ) Purchasing a foreclosure just because it's cheap: While foreclosures can offer home-buyers big discounts, such properties sometimes come with a great deal of baggage.

5 ) Overly aggressive buying: Even if you've found the perfect property, make sure it is something you can reasonably afford.

As a person who's in the house-buying market (and who may actually get a place in 2009), this piece was quite interesting to me. Here's my take on the list above:

1. It's interesting that they think home prices will keep going down through 2009. If this is the case, we shouldn't be in a rush to buy a new place. That's really nothing new for us. We've been looking for two years, so nothing has rushed us yet. ;-) That said, if we found a place, we'd certainly want to live in it for quite some time, so the time element they discuss here is not an issue for us.

2. After two years of looking, endless online searches, and seeing 50 different homes, we're pretty familiar with the local market. Unfortunately, most sellers aren't. Many are still holding on to two-years-ago pricing -- and thus their homes are just sitting on the market. Wonder if the dam will break in 2009.

3. Oh yeah, we understand we're in the driver's seat alright -- that's why we're even considering a move! Plus we're very attractive buyers (high credit rating, good down payment, no debt, etc.), so we have all the cards in our favor. Of course, you still need a cooperative seller to make a deal.

4. Of course. You don't want to get a "great deal" on a place just to discover it's on top of a toxic waste dump. We'd only buy a foreclosure after a complete inspection.

5. Again, a no-brainer. Unfortunately this wasn't common sense for many buyers the past five years, and it's one reason we're now in this housing mess (people bought homes they couldn't afford.) But my formula for buying a home ensures we will only buy something easily in our price range.