Free Money Finance

The Best Strategies Now for Home Buyers and Sellers

Parade magazine recently listed the best strategies now for home buyers and sellers. Since I'm potentially a buyer and a seller and am fairly knowledgeable on the subject (we've been looking for a new home for over a year now), I was quite interested in what they had to say. Let's start with their list of what buyers should do now:

• Be an attractive risk.
• Buy only what you can afford.
• Choose your loan carefully.
• Lowball ’em.

Here's where we stand on each of these:

1. I think we're sitting in a good position as we have a good credit score and will be making a significant downpayment.

2. Of course. It's part of my formula for buying a house.

3. We'll be looking at a 15-year fixed, though we plan to pay it off much faster than that.

4. Of course. Prices are certainly going down dramatically.

Here are Parade's suggestions for sellers:

• Think twice before you sell.
• Find the best broker.
• Make sure the price is right.
• Know which way the wind is blowing.

From what I've seen, many sellers are still not pricing their homes correctly. I don't know if it's because they think their homes are worth more than what the market says or if they NEED a certain amount of money out of the house and are thus pricing it high. Whatever the reason, most sellers are not "making sure the price is right." I think this is a big reason why homes listed at $500k are selling for $400k -- they should have been priced at $425k to start with!

More thoughts on the Subprime Crisis

Here’s a response to this morning's Marotta post on the causes of the subprime crisis as well as some of the comments on the post.  It's from an investment professional at a global financial services firm and frequent FMF reader. 

"If you continue to not agree with the explanation, then please, counter his arguments, or provide an explanation of your own."

Post wasn't addressed to me, but I'll gladly take the bait.  I'll start with the explanation of my own.  In short form, my explanation is that greed of prospective homeowners and greed of large lenders collided, creating an environment where both believed they could be rewarded for their behavior despite the fact that it led to the current situation.

From the borrowers' perspective this is simple.  Buy a house nicer than you can afford by using an ARM to make artificially lower payments in the short term, continually refinance as long as prices go up, turn in the keys when prices go down and your ability to refi goes down with them.

From the lender's perspective, here's how greed explains the situation without having to resort to any particular ideology:

(1)  Many issuers are not the same people as the ones who end up "holding the bag".  Several mortgage lenders are still in great shape because of their business model -- put subprime borrowers into mortgages, securitize the mortgage pools and sell them, receive a fee annually for servicing the mortgages (i.e. collecting the mortgage payments and distributing them to the securities holders).  Comparisons of average subprime collateral characteristics prove that this led to the crisis.  Lenders such as CIT group who issued loans with the intent of keeping those loans (as opposed to selling them in a securitization) tend to have issued subprime mortgages with lower average loan-to-value ratios, higher average FICO scores, and lower rates of delinquency and fraud.  Meanwhile, lenders who securitized large quantities of loans and thus were not the ultimate risk-takers in the transaction issued loans to lower FICO borrowers at higher LTV ratios, and those loans have performed significantly worse.

(2)  Greed drives financial markets.  Lending money to subprime borrowers in 2007 was no more insane to buying the IPO of a tiny unprofitable web-based tech company in 1998, or buying an S&L bond in the 80s, or buying stocks on leverage in 1929.  The longer a particular class of securities continues strong performance without any reminders of the risks inherent in the investment, the more demand the investment community has for that class.  People now understand that tech was a "bubble", prehaps because retail investors -- individuals -- were heavily involved and lost a lot of money by providing capital to companies incapable of providing a return on that capital.  However, prehaps because the investors who provided capital to subprime mortgage borrowers were institutional rather than individual for the most part, there is apparently a thought that they were "too smart" to actually issue those loans.  Newsflash, institutions lost alot of money in the tech bubble too.  They are far from infallible, and actually have driven most of the asset price bubbles in recent global history, including subprime, tech, Japan, S&Ls and what may be the next bubbles in commodities and/or emerging markets.

To counter Mr. Marotta's arguments:

(1)  There is no link between the CRA and subprime -- The CRA was enacted in 1977, but the subprime lending that caused the current crisis exploded a full 25 years later.  Even from Clinton's 1994 revisions, the explosion in volume of subprime lending did not take place until 8 or 9 years later. Clinton's goal for home ownership, according to Mr. Marotta, was met in 2000.  Subprime crisis has to do with loans issued in 2006 and 2007 for the most part.  In late 2004, Bush announced plans to sharply weaken CRA regulations, but subprime lending grew by leaps and bounds in 2006 and 2007 relative to 2002 and 2003. Again, why don't the timelines agree? 

(2)  CRA doesn't even apply to most subprime loans.  Less than 25% of subprime loans were made by institutions fully governed by CRA – most were made by independent mortgage companies fully outside CRA’s jurisdiction. Furthermore, lenders subject to the CRA have engaged in dangerous lending less frequently than other lenders.  Janet Yellen, president of the San Francisco Fed, said that independent mortgage companies NOT COVERED BY THE CRA made high priced loans at more than TWICE the rate of banks and thrifts.

(3)  If the CRA was really to blame, then wouldn't the lenders have raised he** by now about how the government forced them to lose money?  Why is the rhetoric around Barney Frank's FHA proposal centering around the phrase "government bailout of irresponsible lending" without even a squeak of protest from the allegedly irresponsible lenders?  Answer for yourself.

(4)  A house is not a liability.  A mortgage is a liability, a house is an asset.  Accounting 101.  A home can be an excellent asset if you do what FMF has done and pay off your mortgage as rapidly as possible.  You no longer make mortgage payments or pay rent -- if you find yourself unemployed, nobody can take your home from you.  FMF could share links on the topic of why home ownership is generally a good financial idea. (See Why It’s Smarter to Buy than Rent as an example -- though what's happened the past two years may change the numbers a bit.)

(5)  Mr. Marotta decries the fact that "nobody listens to economists", implying that economists generally think that this government regulation caused the subprime crisis.  Untrue.  For example, the economists who wrote the NYT Best Selling book "Freakonomics", as well as their colleague Itzhak Ben-David, blame the same thing that I do -- securitizations driving lack of due diligence by lenders.

So do University of Chicago economists Benjamin Keys, Tonmoy Mukherjee, Amit Seru, and Vikrant Vig (PDF).

Economists Carmen Reinhart and Kenneth Rogoff note that the causes of the subprime crisis are extremely similar to 18 earlier post-war banking crises in industrialized countries.  Note that those crises and countries didn't have Bill Clinton or the CRA to blame.

The list goes on.  The economic consensus today was that the incentives system was broken – the people responsible for doing the due diligence on an individual mortgage loan (the lender/originator) was typically not the same person who was taking the economic risk if the loan ended up going bad.  The real blame rests in the fact that markets are not happy risk-free things that merrily chug along at equilibrium returns every year.  Markets have *risk*.  Market participants cycle between extremes of fear and extremes of greed like a pendulum.  The subprime environment of 2006, like the internet-startup environment of 1998, is gone for now and unlikely to return in our generation, because investors have learned more about the true measure of the risks involved in these investments.  But the best explanation for those two bubbles, as well as the many other investment bubbles in history, is that for many years a certain class of investments provided strong returns and caused investors to fall asleep at the wheel, ignoring the underlying risks of an investment because those risks had not come to fruition for years.  When the risks became realities, investors found themselves full to the gills with overexposure to those risks, and wondered how they could have been so stupid to begin with.

Misc Sources:

Prepared testimony on The Community Reinvestment Act (PDF)

Did Liberals Cause the Subprime Crisis?

Made an Offer on a House -- Seller Smoking Crack

After about a year of looking at homes, we finally found one we liked. It was the size we liked, the age we liked, in the location we liked, and so on. It wasn't perfect by any stretch of the imagination, but it was very nice and one that the entire family agreed was good.

So we looked at the recent comparative sales of similar homes in the area and made an offer Saturday based on those. We didn't give them an "it's so low you probably now hate us" sort of offer. It was slightly below the current market (maybe $5k or so) and given the climate of ever-falling prices, I thought it was a solid offer. That said, it was still $50k below their asking price.

We just heard back today that they said "no thanks." They weren't budging off their price. What? In this market? Are they crazy? I can understand sticking to your price if you're at (or even close to the market's price), but when you're way over -- what's the point? Of course we don't know what issues they're dealing with and trying to balance, so it's hard to get into their minds. We'll watch this one with interest and see what happens. Should be interesting to see where the selling price eventually lands.

Still -- I thought we had one.

"Our" House Sold

For those of you following along and wanting some closure, this house just sold -- for $425,000. It didn't quite get down to the $350,000 we offered, but it was closer to that than the original $549k list price.

Home Sales and Prices Decline

New home sales plunge:

Sales of new homes plunged in March to the lowest level in 16½ years as housing slumped further at the start of the spring sales season. The median price of a new home in March compared to a year ago fell by the largest amount in nearly four decades.

The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.

The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

For those of you interested, we started looking at homes again last weekend (now that winter appears to be gone) and will do so this weekend as well. The hunt for a bargain is on!

Good Suggestions for Selling Your House in a Tough Market

Lots of good comments to my post titled Is It Worth It to Pay Your Real Estate Agent a HIGHER Commission? The post itself wondered if it was worth it to pay real estate brokers more than the going rate in order to sell your house faster. Here are a few of the comments that I thought were worth highlighting, starting with this one:

Your readers might be interested in reading all the pieces by the Freakonomics guys. I first read about this in the book, Freakonomics, but they go on and on in their blog about the value (or lack thereof) a real estate agent brings to a transaction...worth the read.

I've read the book and basically they say hiring a real estate agent doesn't help you get a better price on your home. But what if you paid a higher commission than everyone else? Would that help you break through the clutter and get your house sold faster and at a higher price? Here's what another commenter said:

As a RE investor and defense contractor that moves around frequently, I've sold many houses, and learned this lesson the hard way. IT WORKS.

The biggest bang for the buck is on the Buyers Agent side. Ask your listing agent what the going rate is in that area for buyers agents, then up your buyers agent commission by one half to a full point above the going rate. Above that is probably excessive, and brings diminishing returns. The typical buyers agent is usually on the lighter side experience-wise, and the extra commission could mean a lot to them. When they pull a list of homes for the buyers to see, your house will be near the top of the list if the commission is extra in most cases.

On the Listing Agent side, it's important to be at the going rate, but not really above it. The agent you select is probably going to use his/her existing marketing program. Do some research, find the listing(selling) agent who is the Superstar in your market. They make a lot of money, and usually are not going to work any harder for an extra half or one point commission. In a slow market you don't want to undercut them, but paying the extra isn't likely to change much here.

You can try the conditions as others have mentioned with dates and prices, but I've found Superstar agents are EXTREMELY BUSY, and do not want to be bothered or spend the time on it. Upping the Buyers Agent commission is simple, takes only a minute and they usually don't have a problem with it.

One similar note, I've had good luck with www.Iggyshouse.com. (I have no affiliation with them, just a customer). It let's you list your house and pay NO LISTING COMMISSION. It puts your house in MLS the same as an agent, the buyers agents will call you for showing instructions. You can set the buyers agent commission to what you want, I recommend putting it a little above the going rate for your area. See the site, it has all the details.

Finally, here's a useful tip -- one that says the key to getting your house sold is to find the right agent:

Great topic, esp in this real estate climate. I like the idea of doing SOMETHING different to sell your house in this market, and a bigger commission might be a nice motivator for real estate agents. Or would it? In the book Freakonomics, the authors make the point that agents would rather sell MORE houses at lower prices (and lower commissions). The volume of sales is what truly drives their incomes. This makes sense. Would an agent rather sell three $200,000 houses at 6% or two at 8% ($36K vs. $32K)? Hmmm.

So what to do? Well I just finished a year long process of selling my father in law's house. And I have some learnings. We started off trying to sell it without an agent. That turned out to be penny-wise and pound foolish because, yes, we would have saved on real estate commission, but ultimately we were unsuccessful in selling it, and we wasted a couple months. Next we hired a family friend to be our agent. And this was just dumb. We wasted 8 months with him. Turns out he's a great guy, but not much of a real estate salesman. We couldn't sell the house, and we may have ruined the friendship. Plus he had us lower the price a couple times--he kept saying, "We'll just bring it down, _,000 and that's really where it needs to be to sell." Stupidly, we listened to him, even though my spider sense was telling me that we were priced correctly and that wasn't the problem.

So finally, I decided we needed a fresh start, and that meant a new agent. This time I wasn't messing around, so I did a little research and sought out the best agent in town--and by best I mean the one who sells more real estate than anyone else. Nothing speaks like results, I figured. So I found a list of the top selling agents in town, interviewed three of them, and chose one. We made the switch, had an offer within three weeks and were closed three weeks later.

So what did this agent do differently? She doesn't charge any more. But she does understand that getting this done quickly is in EVERYONE's best interest, oh and she actually markets and doesn't just hope--what a concept.

So my $0.02 is to skip directly to this step. In my market, the Business Journal has a list of top selling agents, so finding them wasn't hard. Unlike in many parts of the market, it won't cost you anymore, and the results will likely be much better.

So maybe finding the best agent is the key to success.

What do you think?

How to Hold Down Your Day Job and Still Get Started in Real Estate Investing

This is an excerpt from Emerging Real Estate Markets: How to Find and Profit from Up-and-Coming Areas by David Lindahl, reprinted by permission of the publisher, John Wiley & Sons, Inc. Copyight © by John Wiley & Sons, Inc.  All rights reserved.

Getting Your First Deal in an Emerging Market

Before you invest in emerging markets, you need a plan.  This will be your roadmap to success.  Investors who simply jump into an emerging market—or any market-- without a well-though-out plan are usually not very successful and waste a lot of time and money.  You must find what type of property you want to invest in, a great property manager, and do your research on the property you want to own.  I always teach my students to hope for the best and be prepared for the worst.   Ask the existing owner what the highest vacancy rate has been and analyze how difficult it might be to replace tenants.  It’s also important to stress test your proposed investments by actively looking for flaws. All of this will save you time and money.

The Supreme Importance of Time Management

Of course you know that becoming rich in real estate does take some time and effort.  But I have two pieces of very good news:

• The right systems can reduce that time to a minimum; and
• The actual time needed is small enough to be realistically done by a person with a full-time day job. 

My most important requirement for a road toward financial freedom was that it not take too much time.  The fact that you can simply plug in my systems will save you even more time. 

Where You Should Start

Obviously, few investors can start by investing in really large properties, and you want to start with properties in your comfort zone.  During the first couple of years I focused on smaller properties and gained experience, learned from my mistakes, and worked on expanding my comfort zone.  Also many larger buildings will throw off enough cash for you to hire a professional manager.  This frees up a tremendous amount of your time to find other great deals and multiply your wealth.  The big difference between doing small deals and large deals is not how much time they take to manage—it’s that you get paid a lot more money to do the bigger deals.

How to Save Time and Money When Investing in Emerging Markets

One important thing to saving time and money is doing a direct mail campaign.  This is simply sending mailing pieces directly to the owners of the kinds of properties in which you are most interested.  You can get a list of owners from the assessor’s office of the city in which you are interested.  Ownership and tax records are public information. 

Another HUGE reason you must contact property owners directly: Agents concentrate on selling properties that are already listed.  They want to move their existing inventory, and keep those sellers happy who have listed properties with them.  By sending letters directly to a large number of property owners in a city, there’s a good chance you’ll learn of a property NOT currently listed for sale.  This could be one for the best deal s in town—and ONLY YOU know about it, because you directly contacted the owner.  Another great source for lists of property owners are mailing list brokers which you can use Google or another search engine to find. 

Just think about how easy it is to contact property owners in any city in America.  For about $130 or so, you can get the names and addresses of 1,000 property owners.  This enables 1,000 property owners in an emerging marketing to think about you and the fact that you are ready and willing to buy their properties.  Be selective and you can send FEWER letters at LESS cost saving you MORE time.

Another key to success is to delegate tasks to other people.  Many people are happy to take on other part-time work.  Employ them to do all sorts of jobs, like signing and stuffing envelopes, taking them to the post office, and so on. 

Start Investing Part Time

I encourage my students to think big.  As you will discover, it’s often just as easy to do a big deal as it is to do a smaller one. 

Believe it or not, in some cases, it’s easier to find financing for a big deal than for a small one!  That is because the bigger property produces much more rent and has relatively lower expenses (per tenant).  Banks feel reassured that there will be more profit, making it easier for you to pay the mortgage. 

An advantage of multi-family properties is that you can start investing in them on a part-time basis.  After all, you won’t be managing them—you’ll have a professional management company do that.  This is not so with single-family homes, where most investors end up doing much of the management work for themselves.

Do NOT make the mistake of trying to save a few dollars and manage your apartment building yourself!  If you do, you will not be in the investment business; you’ll instead find yourself in the tenant business.  If you go that route you will burn out.  You’ll then joining the ranks of amateurs who say “Apartments?  I tried that!  What a joke!  I’ll never invest in apartments again!”  Those same losers who were in the tenant business will get out by selling their properties at a discount to people like me (and soon you), at a steep discount!

In the real estate world, you simply hire a property management company and let them do the work while you sit back.

The way I look at it, you should be in this business to create freedom and wealth, not to create just another job for yourself!  Plus you’re not the one who will pay for the property manager—your tenants are.

Stock Investing Versus Paying Off Your Mortgage: Guess Which One's Been a Better Deal the Past 10 Years?

Here's an email I recently received from a reader regarding a Wall Street Journal article titled "Stocks Tarnished by Lost Decade":

The article goes on to state that, adjusted for dividends and inflation, the S&P 500 returned only a 1.3% ROI from 1998 to 2008.  Interesting to me because, in discussions about whether to pay off a mortgage, the advocates of investing typically use ROI's of 8% or more.

If you assume inflation over the 1998 to 2008 period of 3%, and dividend return of 1% (adjusted for taxes on the dividend), then add on the ROI of 1.3%, you get a return of only 5.3%.  This does make it much more attractive to pay off a 6% or 7% mortgage - or even one as low as 5.5% - as opposed to investing.  Factor in the risk factors of certain years being down instead of up, and paying off a mortgage looks even more attractive.

The above said, I've got sizeable investments in stocks.  If you're looking at the very long term - more than 10 years - they're where you want to be.  The problem is that certain advocates of leverage on houses don't realize the level of risk they are taking.  True diversification involves analysis of all the risks involved.

Just my $.02 worth.

I think this was a thoughtful and well-balanced comment and gives a fairly good perspective on the investing versus paying off your home debate. In the end, there's not one correct answer (there never is, is there?) but depends on your circumstances, goals, willingness for risk, and a gazillion other factors.

Is It Worth It to Pay Your Real Estate Agent a HIGHER Commission?

Check out this story from MSN Money:

Jim McCarty decided a year ago to give real-estate agents an added incentive to guide buyers past the clutter of for-sale signs to his vacant four-bedroom house about 20 miles outside Minneapolis.

He agreed to pay his agent an 8% commission, which would be split (55% to 45%) with the agent representing the buyer. Full-service agents in the past few years have been charging 6% commissions and frequently less. Discount brokers charge much less.

McCarty's investment property was under contract within a month for just under the asking price of $324,000 despite competition from about a dozen similar houses for sale in the development, his agent said.

"I wanted more agents to show the property," said McCarty, 70, who is a speaker on leadership and business-growth strategies. "I was willing to take a little bit more of a hit and pay a higher percentage. But if the house is sitting there vacant, you want to move the house."

Do you think this is a good strategy or a bad one?

On the plus side, it certainly gets agents excited and probably does result in more showings. Furthermore, they probably "sell" a property with a higher commission harder when they do show it.

On the negative side, wouldn't the homeowner be better off putting the cost into a reduced price to attract more buyers? And what if you offer a higher commission and the house doesn't sell faster or at a better price than average? Haven't you just wasted your money?

Maybe a compromise is in order. For instance, what do you think of the idea that there would be a 2% extra commission if the house is sold at or above a certain price and by a certain day? This would be a very clear incentive-based offer -- if the place is not sold for your price and within the time limit, nothing extra is paid. That sounds like a better deal to me.

What do you think? I know there are some real estate agents who read this blog -- I'm especially interested in your take on this issue.

Ten Money Lessons From March Madness

The Street has a list of ten money lessons from March Madness that includes some really good points. I thought I'd highlight some and comment on them. Here's the first one:

4. Defense Is as Important as Offense

While offense is the exciting part of the game, defense is just as important to winning. A team with great offense but no defense won't last long in the tournament. Great defense can also make huge contributions to winning games by creating more offensive opportunities.

Creating wealth and investing it is the offense of personal finances, while protecting that wealth is the defense. Getting the proper insurance and creating an emergency fund are just as important to your financial health as creating the wealth in the first place.

The old saying goes that "offense wins games, defense wins championships." And it's true in money management as well. I've discussed this before in My Wife and I Make a Great Super Bowl Team.

And while insurance and emergency funds are important, The Street misses out on the biggest and best defensive step to help grow your net worth: controlling your spending. In fact, if you can play good enough defense in this area, you can improve your financial situation even if you don't play very good offense. Need examples? See Generating a Great Net Worth on a Small Income and How to Get Rich on $20k a Year.

6. It's Little Mistakes That Kill

More often, small mistakes made over the entirety of a game, rather than a single big mistake, will cause a loss. Teams spend hours working on fundamentals to prevent those little mistakes from happening. While a team with a lack of mistakes won't be noticed in a game, those teams that make a lot will be and will usually be found on the losing side.

It's just as important to work on the fundamentals of personal finance such as earning more than your spend, not wasting money on things you don't need and investing money for the future. Learning to work on those fundamentals day in and day out is essential to building quality finances.

This is really the key to success in personal finance in my opinion. Do the basics day in and day out for years and years. If you do this and are consistent at it, you'll become well off in the long term.

On the other hand, even small mistakes can derail your success.

10. Staying Calm Wins Games

March Madness games come with a lot of pressure. They are played over national TV with the best teams across the nation. For a team to win, it must learn how to respond to the pressure without panic and keep to its game strategy.

The same is true with personal finances. There will always be times when things go unexpectedly, and you will be under pressure to change from your game plan.

Having the patience and being able to remain calm when others would normally panic and make mistakes will not only help you survive these situations, it may even show you opportunities to improve your finances.

Boy, there's no better advice than this today. Those people who stay calm with their investments and their real estate holdings will likely emerge from the economic troubles our country is having with STRONGER finances than they had going into it.

Live Like a New Yorker in Your Own Home Town

Here's a guest post from Susannah who blogs at How to Live Well on Nothing a Year.

Any New Yorkers here?  Then you know about that Holy Grail of urban housing, the rent-controlled apartment.  From World War II until the 1970s, rent-controlled apartments were considered a way for cities to maintain lower-cost housing for poorer residents.  It's estimated that in 1997, 1.1 million of the 1.7 million apartments in NYC were rent-controlled.  The median rent for those apartments was $545, according to the 1990 census, compared to $1350 a month for non-rent-controlled apartments.  (Yes, nearly 20 years ago.)

Imagine renting a two-bedroom apartment in Manhattan for $545 a month.  (Imagine renting a broom closet in Manhattan for $545 a month!)  There are a couple of wrinkles, though: your rent is set the day you move in.  If you moved in in 1974, your rent may still be $545 a month.  But if you move out, the next tenant's rent readjusts to market rate--which may be $2450 a month.  If you have a rent controlled apartment, you guard it with your life: in 1997, 88% of tenants living in rent controlled apartments had been there for more than 25 years.

Stories like these make me envious.  Yes, I too could live in Manhattan, if I had the foresight to get an apartment there at the age of 6 months.  As an aspiring novelist, I've thought about moving to New York City.  I've gone as far as apartment hunting.  And that was the end of that.  Due to my lack of planning as an infant, an apartment in NYC is priced out of my reach.

And then, about a year ago, I discovered a cute two-story semidetached with wooden floors and big windows--in my hometown.  The best news of all?  It was rent-controlled.

You too can discover rent-controlled housing in your area.  We call it "home ownership."

The new rent control

Of the many advantages of home ownership, a stable monthly payment is the one most often overlooked by prospective buyers.  And that makes sense--when you buy, your monthly outlay is equivalent to or greater than the monthly rent of a comparable property (more about that later.)  It doesn't seem like a deal to shell out that huge hunk of cash every month for the next thirty years. 

I'm going to speculate that in 1975, paying $545 a month for that Midtown apartment was a nasty shock, when there were bigger places going for $75 a month in Podunk, USA.  But after a decade or two, your payment starts to look much better.  The same force that has made that $545 apartment more desirable than dinner with Tom Cruise will make your mortgage into a laughable sum in thirty years.  (No, I meant inflation, not Scientology.)

"Not the same," you say.  "You have to pay up front for the home."  So you do.  On the other hand, after 30 years, you stop paying rent altogether.  Is it worth the initial outlay?  Well, how many landlords give you back a percentage of your rent when you move out?

"But you have to do your own maintenance when you buy!"  Sadly, the same is true for many rent-controlled apartments.  Rent control is a frustration for landlords because they are making so little and are often unable to sell very valuable property out from under their tenants.  Many try to chase out their stubborn tenants by ignoring all repairs and improvements.  Is that illegal?  Of course.  But it's still a big problem.  A smart rent-control tenant has a wrench and knows how to use it.

"Your insurance and taxes may go up!"  This is true.  One assumes you have renter's insurance in your NYC pad, so that cost may be even, but property taxes are an issue.  On the other hand, those property taxes are deductible, and increases are often capped for as long as you own the home.  (In my area, they're capped at a 3% per year increase.)  And, as a renter, you're indirectly paying your landlord's property tax, but you don't get the tax break.

If you own your own home with a fixed-rate mortgage, your payments stay essentially the same.  This is a big benefit for anyone trying to live on commission or freelance work.  As inflation eats away at the cost of your housing, you will find yourself progressively better off.  Stability isn't just for the people who pay off their mortgages early.  It's built into the homebuying experience.

Make it a frugal hack

I see someone in the crowd gearing up to address the other benefits of home ownership.  But we're skipping them.  To treat your home like a rent-controlled apartment is a valuable frugality hack.  And let me tell you why:

• The average American thinks of home equity as wealth.  But it is only accessible through consumer debt in the form of a HELOC loan.  And, until the home is sold and the profits locked in, the market can turn and leave a homeowner stranded, without the income to continue to live above his means, and with debts that may threaten the home itself.

• The idea of "resale value" has been used to justify 10,000 granite countertops and 100,000 new showers.  Do you really need them?  What was wrong with the old ones?  Could you pay in cash?  No one asks these questions because of the delusional concept of "investing in the home."  I hate to break it to you, but that new deck is an expense, not an investment.

• The myth of can't-lose real estate investing has been exploded, along with the credit and housing markets.  You can lose money on a house.  It can become worth less than it was when you purchased it, and you can find yourself in the hole with no way out but foreclosure.  It's happening every day.

• You won't necessarily grow into your mortgage--perhaps you'll want to change careers or stay home with kids.  What you can't afford today is something you shouldn't buy. 

How does this relate to rent control?  If you think of your home and your mortgage primarily as a housing expense, you are less likely to succumb to living outside your budget, buying a home you can't afford, or overpaying in a high-priced market because everyone else is doing it.

Go house-shopping and apartment shopping at the same time.  Knowing the rental market is the single best way to evaluate the true value of a home.  Figure out the initial premium you'll have to pay in order to lock in a cheaper "rent" for fifteen or thirty years.  Remember that it's a waste of money unless you intend to stay for a few years, and figure out how many years it has to be.  In some markets, rent is so much cheaper than buying housing that I'd advise you sit down and decide: do you want to stay where you are and rent?  Or do you want to move in order to own a home?

Naysayers will tell you that it's always going to be much more expensive to buy than to rent, and your costs will have to be made up for by counting on appreciation.  They're wrong.  My home payment is almost exactly the same as the rental of a comparable home down the street, and I bought only a year ago.  By thinking of my mortgage payment as paying for housing instead of as OMG!!! THE BEST INVESTMENT EVER!!!!, I steered clear of the little house I fell in love with and bought a bigger, nicer, and only slightly less-cute house at a much better price.

I thought buying was good.

I'm a big advocate of buying a home.  But home ownership should be about finding a long-term place to live, and settling there.

• Your home shouldn't substitute for financial management and investment. 
• It shouldn't be a cash cow. 
• It shouldn't be an emergency fund. 
• It shouldn't be a status symbol. 

By focusing on the actual monthly financial benefit of your house payment (the stabilized price for shelter), you can avoid being caught up in the phantom financial benefits.  If your neighbor down the street sold his place for $20k more than you paid to buy, no one has put money in your checking account.  When you write a mortgage check for only 75% of what rent would cost you, that other 25% is a real savings, in your hands today.

Remember: renting isn't throwing money down the drain.  It's paying for a roof over your head.  Your mortgage has the same primary purpose.  Ignore the investment aspect of home ownership and look at it as a way to stabilize your housing costs.  Your home's equity will probably grow whether you're thinking about it or not.  But don't gamble on it.  Count on your guaranteed benefit: the joy of paying a 2008 price in 2028 dollars.

Signs of the (Housing) Times

The current situation in the real estate market is making for some strange news these days. For instance:

• Homeowners are setting their homes on fire rather than give them up (or in hopes of getting insurance money)

• Homeless people are moving into empty homes.

• People are selling PARTS of their homes (flooring, baseboards, etc.) in order to try and save the home.

Strange indeed. And I bet we haven't seen anything yet.

Be Careful with Home Equity and 401k Credit Cards

Here's a guest post from Emily at Credit Cards Blog.

Credit cards mean different things to different people. Some see them as a way to get by when unexpected expenses arise. Some see them as a necessary evil that enslaves them to crippling debt. Others see them as an investment opportunity and funnel their 0 percent APR credit lines into a high-yield savings account to make money.

It should be noted, however, that the advent of the home equity credit card and 401(k) debit card should frighten even the hardiest plastic user. Misuse of these products can result not just in debt, but in the loss of your home and future financial security.

HELOC credit cards

The Federal Reserve explains a home equity line of credit, or HELOC,  as "a form of revolving credit in which your home serves as collateral." A HELOC functions like a credit card and is slightly different from a home equity loan, which functions more like a mortgage. A home equity loan is one lump sum used for one major expense. A HELOC allows you to draw multiple times as needed for a certain period of time, such as 10 years, and it can be accessed by electronic transfer, check or a home equity credit card. You pay back only what you use in addition to interest, which is set at a variable rate. This means your rate will fluctuate, for better or worse. Interest paid is often tax deductible, which can reduce borrowing costs.

Over the past few years, banks have begun issuing HELOCs in the form of credit cards to consumers. Harris, a financial service organization, recently launched a MasterCard that allows customers to access their home equity line of credit through the card. The card can be used like a credit card or as a debit card for ATM withdrawals. Chase also has one, called the Chase Equiline Platinum Visa.

The Federal Reserve says most people use HELOCs for major expenses such as education, home improvements or medical bills rather than day-to-day expenses. But by utilizing this line of credit with a credit card, it is easier to spend frivolously on mundane purchases. Your home is probably your largest asset, and it is something you may not want to put at risk by living above your means. If you fail to repay the loan, your house will be foreclosed.  As if we haven't seen enough of that lately.

CNN Money says HELOCs are ideal for those who have already paid off their first mortgages and want quick access to cash in case of emergency. Remember: While your home equity is more easily accessible in the form of plastic, it's one debt you can't afford to default on.

401(k) debit cards

For those who don't know, 401(k)s are employer-sponsored retirement plans. A set portion of the employee's income is paid directly to the investment account, and taxes are deferred on the money and earnings until funds are withdrawn. If you try to take the money out before age 59 1/2, you are subjected to harsh tax penalties. You can take a loan out from your 401(k), but the loan must be repaid within five years if you are still with the company, and interest is charged. If you take a loan out and then leave the company, you must pay the 401(k) loan back within 60 days, or you are charged extra fees and taxes.

Now some companies offer employees a debit card, called ReservePlus, which allows loans to be taken from their 401(k) accounts. Once employees are approved for a loan, they receive the debit card, with which they can take out as much as they want from the loan. ReservePlus functions as an ATM card that can be used to withdraw cash or buy goods and services. It has been around for a few years, but its popularity has been growing.

According to an article on The Street, the loan doesn't begin until money is actually taken from the account and usually lasts around five years. Employees are billed directly, and pay back much as they would a credit card. Some employers offer revolving loans, allowing employees to remove and return money as needed.

Using these cards should be a last resort. The extra taxes and fees imposed upon 401(k) loans add up. The Washington Times wrote an article about the dangers of 401(k) cards and quotes a financial planner, Stuart Ritter from T. Rowe Price, who says these cards are a bad investment. Ritter says for every $10 you take out in loans, you only have about $6 of it to spend after expenses, so you're essentially losing a third of your money. "You're also giving up money to spend in retirement, so you are by definition lowering your lifestyle in retirement," Ritter tells the Times.

One perk of the card is that employees can pay off the loan in a time frame of several years, even if they leave the company. That is not an option with a regular 401(k) loan, so that may be helpful for some. One major downfall of the debit card is that its interest rate is higher than that of traditional loans. According to The Street article, ReservePlus loans typically have interest rates 2.9 percent higher than the prime rate.

While a major financial crunch may cause you to fall back on your retirement savings, remind yourself how long you've been stashing that money aside so you can enjoy old age comfortably. This money should be left alone if possible. If taking a loan from your 401(k) is your only option for an emergency situation, it may be manageable, but pay it back as soon and as fast as you can. Otherwise, I'd suggest using a 0 percent APR credit card to avoid the tax penalties, high interest rate and additional fees.

Think first

Most Americans have abandoned the saving mentality and prefer to make purchases on credit, which can be dangerous. Before you borrow against your home or drain your retirement fund, ask yourself if it's really worth it. Determine how vital the purchase really is, because these loans are complicated and can have dire consequences if mismanaged. Ask yourself if it is possible to spend a few months saving up instead, or if there is a low-interest credit card that could better do the job. Using the HELOC or 401(k) cards may work well for some financial crises, but they are not ideal for people who just want another way to live above their means. If you are highly concerned about your finances, before taking such a drastic step, consider meeting with a fee-only financial planner. He or she can help determine the wisest path for you.

How to Make Money in This Housing Market

The Street has some thoughts on how to profit from the housing downturn. In particular, they list how to profit if you're an upwardly mobile buyer -- the category I fit into. Their thoughts:

Say you're in a $300,000 home and want to upgrade to a $450,000 house. To do so in a stable market, you'd have to pay an extra $150,000 (ignoring the extra costs involved with moving). But if both houses suffer a 10% price decline, that difference drops to $135,000: Your home is down $30,000, but the new house drops $45,000.

Yep, my thoughts exactly. Now make the spread even bigger (say $200k house to a $400k house) and you've got an even bigger savings. ;-)

They also make the following comments:

The trick to getting a deal on the home of your dreams is to find a home currently owned by a motivated seller -- someone who desperately wants to offload their home, perhaps because of high mortgage payments, a job offer out of state or simply a deal that's about to close on a new house.

One key indicator of a motivated seller is the number of days a house has been on the market. Another hint is the number of times the sellers have dropped the price.

This is exactly the situation we're dealing with. The owner moved out of state and is very motivated to sell (he's lowered the price $100k already.) He's just not motivated enough for us, yet. We're giving him time to stew and we're sure the price will drop some more in the coming months.

We have an advantage over many other buyers (and against sellers) because we know the market we're looking at very well. The reason we're so knowledgeable is that we spent last spring, summer, and fall scouring over hundreds of properties (looking at 30 of them) and we know what the market has offered and has to offer. And in particular, we know what homes were on the market last year, then removed for a month or two this winter before being placed back up for sale. This gives the appearance that the house has only been on the market for a little while, but savvy buyers know differently -- that a given house may look like it's just been put up for sale, but has really been available for a year or so. This gives you a lot more insight when setting a price and negotiating a final deal.

Of course, your agent can and should be telling you this information anyway, but I prefer to know it myself as well.

The piece ends with some absolutely great advice:

As you look at houses, remember to take your time. If a house doesn't seem quite right, don't feel like you have to compromise. With so many houses on the market, you've got plenty more to choose from.

Exactly. There's no hurry. Simply sit back, keep your eyes open and watch the prices fall. ;-)

Getting Closer to Buying a Home

Remember this house? It was taken off the market for a bit and just came back on. It's now priced at $450k. Since it started at $549k and we offered $350k, their new "opening bid" price is now smack in the middle of where they were and where we were. I had my agent call and ask if they'd reconsider our offer, but no luck yet. Let it sit. Time has a way of softening up a stubborn seller. :-)

When Should You Refinance Your Mortgage?

If I had a mortgage, I'd be looking at whether or not I should refinance it. Rates have dropped enough recently that it might save me some good money. And though I don't have a mortgage, many readers here likely do, so I thought I'd post on an MSNBC piece that lists when you should and shouldn't consider refinancing. But before we get to those, let's look at their general rule-of-thumb on when it makes financial sense to consider refinancing:

Many lenders say closing costs related to a refinance aren’t worth it if you’re shaving less than 50 basis points (0.5 percent) off your current interest rate, or 25 basis points with no closing fees.

Wow, things have changed a lot since I had a mortgage in the Dark Ages. Back then, the rule was to make a switch only if you saved 200 basis points (2% interest) so you could cover all the associated fees. I guess fees have dropped a bit since then, huh?

Ok, now on to their lists. Here's when you should consider refinancing:

• You have a fixed or adjustable mortgage with an interest rate over 6 percent.
• Your credit score is over 650.
• You live in an expensive urban market and have a mortgage over $417,000.
• You’re eligible to refinance to an FHA loan.
• You have at least 10 percent equity in your home and aren’t FHA-eligible.

And now the list for when you shouldn't consider refinancing:

• Your interest rate on a fixed loan is below 6 percent or you plan to move soon.
• Your credit score is below 650 or your credit report has blemishes.
• You have less than 10 percent equity in your home.
• You live in a “declining market.”
• You’re self-employed or want to pursue a “stated income” or “no-doc” loan.
• You’re facing foreclosure.

Can't say there are really any surprises here. If you have good credit, a higher-rate loan, and any sort of decent equity, seems like you should be set. Others may find the road a bit harder to travel.

Anyone out there refinanced yet? Anyone planning to? Or maybe you're waiting for rates to drop again?

Foreclosure Tours Hit Grand Rapids, Michigan

I was walking on the treadmill the other night watching the news when I saw a story on a local foreclosure tour. I'd heard of them before (60 Minutes featured a piece on them recently), but didn't know that there were any in my area. If you're not familiar with them, here are the details:

• A realtor gets a group of foreclosed homes together.
• He charters a bus to take people around to see the homes on a given day.
• People pay an amount (in this case $25) for the tour.
• The realtor hopes to sell homes while the buyers hope to find great deals.

For more specifics on the one here, check out the following:

• Overview
• About the tour
• Why buy

According to the news story, the local realtor plans to keep these up for quite some time:

"My goal is to continually run these because it's obviously going to be a big dilemma here in 2008 and in 2009."

I'm thinking of going on one of these. If for no other reason, it should be a great learning experience. At best though, I could find a new home!

A Good Reason to Pre-Pay Your Mortgage?

In Wondering About Pre-Paying a Mortgage Versus Investing I talked about my past disposition towards pre-paying a mortgage over investing but how my view might be changing. A thought-provoking comment was left on that post as follows:

Something to chalk up to pro-prepaying a mortgage that I don't see mentioned as often on PF blogs as it should is that if you have kids in college, the equity in your primary residence does not count toward your FAFSA basis for need-based scholarships and grants. Nonetheless, it does matter for many private schools. So, I could see primarily investing in a mortgage pre-payment if you had a kid going to school and you thought it might make the difference in their getting some grants and such.

A good point, but for us I doubt we'll qualify for any need-based scholarships or grants. That said, for people who do qualify for such options, pre-paying a mortgage might be a better option. Then again, if you're qualifying based on need, isn't it likely that you won't have much extra left over to make additional mortgage payments?

5 Ways to Find Deals on Foreclosed Homes

Yahoo suggests five ways to find deals on foreclosed homes as follows:

1) Search bank websites.
2) Look up government-owned listings.
3) Visit your county's offices.
4) Pay for a foreclosure-listing service.
5) Work with a real estate agent.

I've noted before that I'd be willing to buy a foreclosed home if I could find one that met our criteria and offered us a great savings -- but there's no great way to find them. Yeah, I've known about the options listed above for quite some time, but I'm not sure many are worth the effort. My take on each of these:

1. It's probably like trying to find a needle in a haystack. The chances of finding something here is pretty slim, I'd guess.

2. Fairly time consuming, and time is not something I have in abundance.

3. Fairly time consuming, and time is not something I have in abundance.

4. Probably the best alternative for me. Here's what Yahoo says about #4:

Some companies, such as RealtyTrac, offer comprehensive foreclosure listings for a fee. At RealtyTrac, $49.95 a month gets users access to around a million listings that cover about 75 percent of the nation's counties. They include homes already in foreclosure as well as those approaching it. Users can make offers online for many of the properties, which aren't binding but get the process started, says spokesman Daren Blomquist. Users usually work with either the agent or owner listed in order to complete the purchase. The database also provides estimates of the property value based on comparable sales in the area, which Blomquist says helps buyers determine whether they are getting a good deal.

My only questions: anyone out there used a service like this? Is it worth it?

5. I've tried this and thought I had an agent that was "connected" and knew of upcoming foreclosures. It's turning out that she wasn't as connect as was advertised -- at least not in the area/price range I'm looking for.

Buying a Foreclosed House -- Not as Easy as You May Think

According to the Wall Street Journal, housing foreclosures are going to skyrocket:

The number of foreclosed homes is expected to quadruple this year, adding one million properties to the market in 2008 and again in 2009, according to Lehman Brothers.

So you'd think it would be easy to buy a foreclosed home and get a great deal. But the Journal says that isn't the case:

Despite the growing number of foreclosures across the country, there are few bargains to be found at auctions. For one thing, you'll be competing against savvy local investors who know how to gauge a property's real value. What's more, many properties are mortgaged so steeply that banks often ask for bids that are higher than the properties are worth.

But all hope isn't lost in the quest for a bargain:

There are other ways, though, for a determined buyer to tap into the foreclosure market. One is buying a home in "preforeclosure" directly from the homeowner. Another, more-promising route: buying a home that failed to sell at auction and has been put back on the market by the bank that holds the mortgage.

This is one issue that I'm facing as we look for a new home. I'd be open to buying a foreclosed home, but there's no readily available listing of them. So an individual either has to put in a TON of time and effort to MAYBE find a home they'd consider acceptable or know someone who does (like an agent that's connected in the local market.) I've found what was supposed to be a connected agent, but she's not showing much success to date.

I think the way these foreclosures will help us is that they'll flood the market with homes and the resulting supply will drive down prices overall. It could still be a brutal year or two for home prices, which is one thing we'll need in our favor if we decide to make a move.

Help a Reader: Refinancing a Mortgage

Here's a question I recently received from a reader:

I purchased my home 6 months ago with an FHA loan at 6.34%.  When I started the loan process, rates were under 6% but by the time I found the house and started actually getting the loan, they were up to 6.34%.  I have been watching the Bankrate website and noticed there is about a 2% spread in interest rates across the US.  Currently, the Nebraska average for an FHA loan is 6%.  In Texas, I found that a couple of banks were offering 5.38%.  Do you know if it would be possible to refinance out of state and get this kind of deal?

Anyone know the particulars on this sort of loan?

Help a Reader: Calculating Loan Options

Here's a recent request I received from a reader:

Currently, I have a loan where the original loan amount is for 204,500 with a 4.75% ARM for 5 years.  Since September 2004 when we bought the home, I have knocked the principle down to 158,500 and I estimated that by the end of the ARM in about 1.5 years, I will have the principle down to 141k.  At that time the loan could potentially jump up by 2% and than 1% a year after that to, I think, 12%.

How do I calculate whether it is better to stick with the current loan now with the possibility of the rate jumping way up or to refinance now while the rates are low with either another ARM or 15 year mortgage on the current principle, 158k?  Because home loans are not simple interest I am having a hard time calculating whether it's better to have a smaller loan (158k) on a 15/30 term or my current term where more money is finally going towards principle since I paid the principle down.

Do you have any advice for him?

Buying a House You Can Afford is a Key Financial Move

Crosswalk lists seven common home-buying mistakes couples make during the early years of marriage as follows:

1. Assuming property values will always go up.
2. Being blinded by emotion.
3. Too much window-shopping.
4. Trying to “win.”
5. Counting on raises.
6. Overspending.
7. Getting the wrong loan. 

To me, this is a pretty good list, and not just for couples. Most buyers could learn something from the seven items above. And since what they say works well with my formula for buying a house, I'll give it a thumbs up. ;-)

The key is #6. If you overspend on a house (in other words, buy a house you can not afford), doing everything else right probably won't save you. And if you buy a house you can afford, making a few other mistakes along the way won't hurt you that much.

Wondering About Pre-Paying a Mortgage Versus Investing

My formula for buying a house allows users to "become debt free in 7-10 years." Personally, we haven't had a mortgage payment in over 10 years and I've detailed why we advocate paying off your mortgage. That said, I'm starting to have second thoughts on the issue.

As many of you know, we've been looking for a new house for almost a year. We'd like to move to a different area of town and have a bit of land as well. I have a fairly good down payment saved up and my plan had to always pay off the new house in 5-7 years max -- maybe as few as two or three years. But with mortgage rates as low as they are, it seems like paying off the mortgage early may not be the best way to grow our money. Instead, we could put the extra into index funds and likely make several percentage points more in return.

I know many people have advocated this method here before, but I've always rebutted it because that's not what we did (and that's what this blog is about -- how I've grown my net worth and how you can do the same doing what I did/am doing) and because the trade off was so close to being a wash (when we paid off our house, rates were 8%, so faster mortgage payments were a pretty decent return.) But things have changed in the rate world and maybe we'll take a different direction with our next house. Maybe.

I know that we're disciplined enough to keep saving/investing rather than spending our "extra payments" -- something that's a downfall for many who decide not to pre-pay a mortgage (they simply spend the extra they have left over, make no financial progress towards investing and don't pay down their mortgage either.) But I'm sure my wife will resist the idea. She's a "get rid of all debt" sort of person.

What's really got me thinking is this Consumer Reports piece on pre-paying your mortgage. The highlights:

While paying your mortgage is definitely a good idea (the alternative being possible foreclosure), whether to take cash you might otherwise invest and pay the loan off ahead of time is a trickier calculation. The decision has become even more complex lately given the ups and downs of the stock market and the downs and more downs of the housing market.

Our statisticians created a computer model to compare prepaying a mortgage with investing in a Standard & Poor's 500 Index mutual fund during a variety of market conditions.

It turns out that while home may be where the heart is, it's usually not where the heartiest returns are. True, in recent years and for short periods since 1969, home prices have climbed as much as 16 to 27 percent a year in some regions. But on average, they rose only about 6.5 percent a year during that period.

The longer you own your home, the less likely it is that mortgage prepayment will be the better choice.

Aside from the cold, hard numbers, there are other reasons you might choose one option over the other. If you need access to your money in an emergency, for example, it will be almost instantly obtainable if it's in a mutual fund and much harder to get to if it's tied up in your house.

On the other hand, many people find peace of mind in paying off their mortgages and owning their homes outright, especially as they approach retirement. That can make an investment in your mortgage a worthy choice, psychologically if not financially.

Still, the bottom line, according to our Money Lab, is this: Although there are exceptions, chances are you'll be better off putting extra money into a good mutual fund, not into prepaying your mortgage.

What's your take on the issue? Assuming someone actually follows through on the strategy, which is better -- investing or pre-paying -- in your opinion?

Help a Reader: What to Do with a House

Here's a question I recently received from a reader:

I've lived in my house for 9 years and tried to sell a couple years ago. The house didn't sell because the market started to turn and we decided to not get emotionally involved and stay. Now I'm faced with some major repairs. I need to replace the roof, windows, siding, soffit, fascia and gutters. The house is 20 years old and the builder used builder grade materials that have reached their end of life. I've found a reputable contractor through a referral that will complete the entire job for $26k. I'm finding this to be a very competitive bid. The house would be completely redone after this work, both inside and out.  Problem is I can't overcome the functional obsolescence. 

My concern is I will need more space as my kids grow older. I think we'll need to move in the next 5 years or so. At this point the extra space needed is more of a want than a need. We have 3 br, 3 full baths, but are lacking a basement.  For a family of 4, one would think this is sufficient. You know how it goes, though, the accumulation of stuff over the years is ridiculous and the thought of having a home office and basement is nice.  We do love our area, though.   

In the spirit of living below your means, I will have the house paid off in 7-8 years (I'm 34, wife doesn't work) and we are on track financially. With that said, would you stay for the next 5 years, possible longer, and complete the repairs or does it make sense to "band-aid" the repairs and move. The transaction costs alone of selling and buying are leading me to stay. This is a difficult decision.

What would you advise him to do?

Dave Ramsey Dishes Out Mortgage and Homeownership Advice

As I noted previously, Dave Ramsey was in my city a few weeks ago dispensing his brand of money management. I just ran into an interview he did while he was here and I found the following comments interesting

The only debt Ramsey allows in his program is for a mortgage, and only a 15-year fixed-rate mortgage. If you can't afford a 15-year mortgage, Ramsey is quick to point out, "you bought too much house."

I found these thoughts interesting not because I was surprised to hear Dave saying a mortgage is the only debt you should have (I think everyone knows he's very anti-debt) but because of the 15-year mortgage and "you bought too much house" comment.

Part of my formula for buying a house is to buy a house you can afford. In the past, I've also given a suggestion on what a house you can afford actually is and I've taken a lot of heat about it. Why? Because many people think there's no way to buy a house in their area given those parameters. But at least I would allow for a 30-year mortgage (though I'd suggest you try and pay it off early.) Not Dave. It's either a 15-year mortgage or no house. Wow. You all should have a field day in the comments section with this one.

The interview went on as Ramsey commented on the housing situation in Michigan -- which is among the worst in the U.S.:

Ramsey went further in warning not to be scared of buying a home right now.

"West Michigan's economy isn't going to be down forever," he says. "Five years from now, if you bought a bunch of real estate you're going to look like a genius."

This is part of my thinking in buying a new home. yes, we want to move anyway, but I think the housing market will eventually bounce back and I'm hoping what's a "good deal" today will become a "good investment" a decade from now. Only time will tell if it works out this way.

The Five Steps to Buying a Foreclosed Home

Just got this in the mail -- the book Are You Dumb Enough to Be Rich?: The Amazingly Simple Way to Make Millions in Real Estate. Obviously, it's about making money at real estate -- which is a topic I'm usually not that excited about (seems like so many "make money in real estate" books are full of hype.) But this one looks different. I haven't gotten to start it yet, so we'll see for sure.

But today, here's a portion of the book that describes the five steps to buying a foreclosed home:

Foreclosure Step 1: Contacts make contracts.

Take a few hours in the next three days and call at least five different banking institutions or finance companies in your areas to find out who represents their foreclosed/REO property. Call every auction company in the yellow pages and ask them if they auction real estate. Google search for the foreclosures in your market with city and state specified. You should start to see several deals per month that are attractive.

Foreclosure Step 2: Establish the BST or market value.

Establish the “traditional” market value of the property through comparable sales. Get comps from agents, realtors, and brokers or become an affiliate member of the local board of realtors. Without the traditional market value of the property, you have no idea if the price you are bidding is a value or not.

Foreclosure Step 3: Have the cash ready for a quick close.

We know we are going to have cash involved if we are dealing with an institution on a foreclosed property. Start lining up your funding, speak with your investors, watch your interest rate. Don’t give the farm away on what interest rate you are willing to pay.

Foreclosure Step 4: Make the offer.

When you are dealing with the representative of an REO property, the only offer they are interested in is a contractual offer. You will have to use the state-approved “Purchase and Sales” contract. Make sure your offer is favorable for you. All offers represented by agents, realtors, or brokers must be in contractual form or they don’t exist.

Foreclosure Step 5: Create deposits.

This is a friendlier way to say “sell the property.” Think of marketing as creating deposits. Peter Drucker said: “We only get paid for two things, marketing and innovation.”

As you may know, we're in the market for a new home and a foreclosed property might be an option for us. We have a new real estate agent who's handling steps #1 and #2 for us and I'm saving up for a big down payment taking #3 off the list (that is, when I'm not moving it into the market.) We'll handle step #4 when we find the right place and there's no need for us to deal with step #5 -- we plan on living in the home.

I'll let you know if I like the book. I hope to read it over the next month or so.

Help a Reader: Roofer Problem

Here's an email I received from a reader:

We have had 3 different leaks in our roof over the past few months.  We called out a roofer to repair the leaks.  Now, for the second time, one of the leaks he was supposed to have fixed has reappeared.  We paid him $700 for this effort as I see value in getting the job done right and I know that I could not do the job as well as a professional.  I also feel that this sort of thing is something that should definitely be handled by someone who knows what they are doing so as to avoid damage to the home.

So now that one of these leaks has again reappeared, we are faced with a few options:

1)  pay the same guy $400 more to replace the valleys in a better attempt to fix the issues
2)  demand a refund, whole or partial?, and use that money plus more toward replacing the entire roof to ensure there are no further problems (with a different contracter)
3)  keep asking him to come out and fix his work...he provides a 6 month warranty on the work

We have been in this house for 1.5 years and plan on staying for another 5 probably.  The last thing I want to do is spend more than necessary but I don't want to keep dealing with shoddy fixes either.  I'm only 26 so these kinds of issues are still something with which I have little experience.  Not like the good ole days when the housing people of the university would come fix any problems you had when you lived in the dorms!

Hopefully you or the readers have some insight into the best financial decision we should make.

What would you tell him to do?

We Got Another Realtor

As many of you know, my wife and I have been looking for a new home since the spring of last year. We'd like to live in a different area of town, closer to work, friends, and church, and have a bit more land as well. The fact that housing prices have taken a big dive has helped too -- maybe we can pick up something at a very attractive price. We're not in any hurry, and if we don't find just the right property, we're content with staying where we are now.

Our real estate agent was one we ran into while looking at homes. She had a listing and we wanted to see it. We liked her once we met in person and told her we'd be willing to look at homes she presented us. She set us up on her automated system -- I get emails from the MLS when something comes up that matches our criteria. Then if we want to see some of them, I contact her and she shows us the homes.

This system works well for covering the homes on the MLS, but there are other homes that are falling through the cracks -- homes for sale by owner, foreclosures/pre-foreclosures, etc. When I asked our agent about foreclosures in particular, she suggested I contact some banks. She didn't have any sources and didn't seem interested in developing any. Needless to say, I wasn't impressed with her response.

At a party a couple weeks ago, a friend told me about an agent he'd been working with. Seems she helped his son buy a foreclosure at a great price. He also told me that a local bank had offered her 50 foreclosures to sell for them. I got her name, contacted her, and she's now helping us too. In the few days we've had her as an agent, she's shown us houses we've never had access to before (they were foreclosure/pre-foreclosure homes). In addition, she's gotten us information such as what loans are against the various properties, etc. In other words, she's providing a great service and really taking action -- something I really wanted/expected our first agent to do. She's even come up with some creative thoughts -- buying a smaller-than-wanted house and adding on (since builders are looking for any sort of work now, they're working on the cheap.) I think she'll open up a whole new world for us.

BTW, she also buys, refurbishes, and sells homes for investors. I haven't talked to her much about this, but it could be an investment opportunity for us in the future.

I'll keep you posted on what happens (it may prove to be interesting having two agents). There's not much out there now, but our new agent said that many homeowners will start listing their homes in late February, so I expect an upturn in available choices relatively soon.

If you're interested in some of the various aspects of our house-hunting efforts so far, check out these posts:

• We Made an Offer on a House, They Laughed at Us

• What I Might Do with My Old House When I Buy a New House

• Real Estate Meltdown in Full Swing

What Makes a House Recession-Proof?

What makes a house recession-proof? MSN Money says that good homes sell even in a bad market. They then detail what they consider to be a "good home." Their list and my comments:

Location -- You've heard it before because it's true: Location matters. It matters most, in fact, when it comes to holding value under pressure. Why? Because houses are replaceable, but land is not. If you've got a spot everyone wants, your place will sell faster and for a better price than a similar house elsewhere.

Yep, the game is still "location, location, location." BTW, location also takes into account factors like the neighborhood, schools, safety, culture, public services, and infrastructure.

The "progression" principle -- This rule of thumb says better homes bring up the value of a not-so-great house nearby. (And lesser homes subtract from nearby property values.) The lesson: Don't buy the best house on the block. 

An old rule-of-thumb. I guess it's true after all. Thank goodness -- we have a house almost 50% more expensive than ours just across the street and several double ours down a few houses.

Single-family homes rule -- Condominiums lose more value in a down market, and they lose it faster than single-family homes, says Terry Bernhardt, a Portland, Ore., home appraiser.

Yep, been there, done that. My wife and I each had condos when we got married and it took us two years to sell them both.

Some trends endure -- In Bernhardt's market, the craze is Craftsman bungalows. He thinks it's a durable trend. Craftsman homes have charming, slightly nostalgic designs that include covered porches, a mix of indoor and outdoor living areas, higher ceilings and lots of architectural details, including moldings trim, stair rails, and built-in nooks and bookcases.

Not sure if there are any trends around here. I haven't run into any during my searches.

Low carrying costs seal a deal -- Buyers may face a shock when confronted by the real cost of a home, in addition to the taxes and mortgage payments. The carrying cost of a house -- including homeowners insurance, utilities, upgrades, deferred maintenance and, in some markets, landscaping and snow removal -- can make a deal unattractive.

That's one advantage we have if we decide to sell our current home -- our carrying costs are low.

Market peculiarities matter -- As with politics, all real estate is local, so learn your particular market inside out. (Before you buy, get an education as you interview prospective sales agents. Ask each one what's selling and why.) Apply this knowledge by keeping the home's next owner in mind when you buy or build.

Isn't this just another way of saying "consider resale price when you buy"?

Broad appeal -- In a shrinking universe of buyers, homes with the broadest appeal hold their value best. The homes most in demand are three-bedroom, two-car-garage houses with at least two bathrooms. Keep this in mind when you're thinking of remodeling. When comparing the wisdom of adding a new, high-end kitchen, for example, versus a bedroom addition to your two-bedroom home, the addition is probably your best bet for durable value.

We surpass the bedroom/bathroom requirements, so we're good here. BTW, we're looking for more than two bedrooms and at least two bathrooms.

Attractive bathrooms and kitchen -- These rooms, with all their costly plumbing, wiring and cabinets, have the highest value per square foot of any in the house. Investing in their upkeep props up a home's price, says Portland appraiser Bernhardt. Extravagance isn't helpful. Buyers are simply looking for well-appointed, updated rooms with good layouts and appliances.

I think our kitchen and bathrooms are looking a bit dated. I think this one is a negative for us.

Upgrades for energy efficiency -- Improvements to a home's energy efficiency promise a lower cost of upkeep, so buyers pay attention. Good investments include highly efficient windows, beefed-up insulation, new siding and appliances.

Does a new roof count? We got one a couple years ago. I'm not seeing many energy upgrades in the homes we're looking at.

Overall, I'm not sure this piece taught me anything new, but it did confirm many of the house-value issues that I've considered important.

Now all I have to do is find just the right one...

Eight Reasons Why Your House is Unsellable

MSNBC gives us a list of eight reasons why your house is unsellable. Their thoughts:

• Small houses
• One bathroom
• No air conditioning
• Fuse boxes
• Spiral staircases
• Basement laundry rooms
• Popcorn and stucco ceilings
• Basements with outside access only

They also list several trends on their way out that we all should avoid:

• McMansions
• Separate living and dining rooms
• Small master baths
• Standard-size garage doors
• Football-size decks

This is a pretty good list in my opinion. I've been looking at homes for over eight months now and I agree that any home with more than one or two of these issues is a "loser" and will be hard to sell. That said, here's my #1 reason why most houses aren't selling:

The seller is not pricing the home anywhere near what the market will pay for it.

Sure there's been a big drop in home prices, but there are still a ton of sellers who aren't realistically pricing their homes. They're listing them at what they'd like to get out of them or what they need to get out of them -- neither of which has any impact at all on what someone is willing to pay for them. And by the time they get the clue that their home is priced too high and they knock off $10k or so, the market has moved even farther down and they're still way over-priced.

My solution as a buyer: bid low. Bid very low.

Of course this isn't exactly working for me as I've yet to find a new home -- but at least I'm not buying an over-priced one. ;-)

Don't Panic in Rough Financial Times

Here is a GREAT piece from Ben Stein advising us all not to panic in the uncertain economic times we're facing. Sure, the stock market's been rocky, the dollar is in the toilet, and the real estate market has collapsed. That said, it is NOT a time to panic. A few thoughts from Ben:

The stock market fluctuates. It's had five good years in a row, with some of them very, very good. Even with recent corrections, at the of end of 2007 it was higher than it was at the beginning of 2007, and dramatically higher on the Dow than it was at its peak in 2000 -- and that doesn't include dividends.

That's right -- the stock market MADE money in 2007. Read the financial press and you'll think it was down 20% or something. And while it may be down in 2008 (no one knows what will happen), the high likelihood is that in the long-term it will be up 8% to 10%. So if you have a longer than 10-year time horizon, go ahead, invest away!

In fact, it's now the perfect time to make some long-term investments:

If you're a long-term investor, it signals a time to buy. The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

Exactly! When the market goes down it's a great time to buy.

I have a lot of cash on the sidelines right now since I'm saving up for a major downpayment on the new home we hope to buy this summer. But I've used some of it to buy more shares of stock index funds lately. Of course I have my 401k money being invested every month too. In addition, part of my paycheck goes directly to Vanguard to be invested in the market. Yep, I'm buying as much as I can now. Don't know how long it will take for me to see a decent return on the money I'm investing now, but I have time to wait. I won't need it for another 20 years or so.

Next, Ben shares an amusing perspective:

The whole reason you get paid so much more to be in the stock market than in cash is that it fluctuates so much. You get paid to be scared.

Ha! I guess lots of people are making sure they earn that extra return!

Next, he suggests that if you find a home you really like, go ahead and buy it. he says not to worry about the market going down further. Here's why:

The history of home prices tells us that when housing reaches a peak, it falls (of course), but then when the next wave comes along, that wave lifts housing higher than it was at the last peak -- often far higher. In the meantime, you get to live in the home rent-free -- with the "imputed rent," which is sort of a dividend composed of the rent you would have had to pay if you'd lived in the home as a renter.

I'm hoping (and somewhat expecting) this happens to us. Here's what I think has a good chance of happening: We'll find a home this summer, snatch it up, watch its value fall for a year or two (though slightly as we're buying in a decent area and only bidding at the very bottom of the price range), stabilize in the next couple years, then start to take off. I have no fear that we'll lose money on the purchase -- especially at today's cheap (and getting cheaper) prices.

How I Paid Off My Mortgage

The following is a re-posting of a piece I originally wrote on Get Rich Slowly. Since it's part of my personal story, I wanted to add it to this site as well. It's been modified a bit from the original.

This post started when J.D. from Get Rich Slowly asked me what it felt like to be debt-free. He’d read on my blog that I had no debt and was curious about it. In particular, he asked me how I managed to pay off my mortgage (the biggest debt most people have) as well as how it felt when we did so. That's what this post will cover.

Just to note, the purpose of this post isn’t to debate whether or not paying off all debt is a good idea (versus only making mortgage payments and investing the rest, for example), so I’ve purposely left it out. My goal is simply to tell you our story — what happened and how we did it. From there, you can decide whether or not this path is for you. Since my wife and I are debt-haters, this option simply seemed natural to us. In addition, I can also tell you that living ten years without any debt has been a great feeling.

In the mid-90’s, we moved to the southern part of the U.S. Here’s how we paid off our mortgage in 1997 and haven’t had one since:

• We spent less than we earned starting as soon as we got married in the early 1990’s. We saved quite a bit, combined it with some previous savings and the equity from the sale of our Northeast home, and were able to come up with a down payment of about 35% of our new home’s value.

• We bought a house we could afford. Instead of stretching to buy the biggest house possible, we decided what we needed in a house and purchased a place that met those criteria. In the end, we only borrowed about 60% of what the bank said they’d let us borrow.

• We applied everything we could to retire the mortgage: extra payments (from still spending less than we earned), pay raises, bonuses, income from a side business, my wife’s income, and gifts. If money came in, it usually went to paying down the mortgage. However, we did not sacrifice what we considered to be better investments, such as fully funding my 401k.

• Within five years, we had the house completely paid off. We lived there a few more years, then when we moved to Michigan, we sold the house and paid cash for our new one. It’s now been ten years since we’ve had a mortgage.

In the early years, I got the biggest thrill out of paying extra on the mortgage. I’d make an additional payment and wipe out six to eight payments at one time (Quicken would show me the results.) During the first year, I eliminated several years of payments on a 30-year mortgage (something like eight years) and the thrill of making such great progress simply built and built into a snowball of enthusiasm. Each payment I made had a dramatic impact on the total, which fueled more payments, which had more impact, which fueled more payments and so on and so on.

Then there were the big hits — when I got a bonus or when we decided to forego a big vacation to put it against the mortgage. These large impacts to the debt made a huge difference and added fuel to the fire.

As we got close to paying off the entire amount, we were looking for anything we could find to put towards the mortgage. When the day came when we paid off the whole thing, we were thrilled, but I don’t think we realized the comforting feeling that was to come.

It’s been a long time since we’ve had a mortgage, so much of the “newness” and “excitement” has worn off. But it’s been replaced with a very peaceful feeling. You often hear the words “debt freedom” talked about, but can’t really grasp what they mean unless you are free from debt. I can honestly say that there is a great financial peace in knowing you don’t owe anyone anything.

Since we’ve paid off our mortgage, we’ve been able to save a bundle and give more to charitable causes we support. We’re now on track to retire by age 55 with more than enough to live on and no debts outstanding.