Should I make the plunge (6%, clause, agent, investment)

[MusicCityMom]

Hi all,
You've been so helpful in my few posts in the past--and I log in quite often to get a sense of how people on this forum are thinking about the real estate market. I'm one of those people who don't add much to the conversation but benefit from yours.

I'm in the offer--counter offer stage of buying a house and it's a frightening place to be. I think I'm getting a solid deal on a good house in a fantastic neighborhood. But if the economy continues to tank and I lose all my equity like so many others...ack.

So, I was hoping I could post my research and get your sage opinions on whether I should do the deal.

I live in Nashville and am buying in the 37212 area, right near Vanderbilt and in a great school district. Historically a very strong neighborhood.

The house is 1164 s.f. just the right size for me and my small son. It also has a newer (2001) outbuilding in the tiny back yard with electricity that could be a great studio workshop. Comes with all appliances. Seems to be in good shape.

The negatives? Might have moisture issues, looks like a wet backyard that could use a good french drain or something. There seem to be some soft spots in the wood siding. Only 1 bathroom. Great den (for the kids to play in), but only entry is through the master bedroom. I will have no problem with the awkward floor plan for the next several years, but guess when my son gets out of elementary school in 6 years I might start having issues with him and friends trooping through my bedroom. In general, everything is old (1935) but *seems* well maintained. The seller had an inspection and shared it. There were some leaks under the kitchen sink and refrigerator that have supposedly been fixed in the past two weeks. Any signs of mold were cleaned up. The roof probably has 5 years left. If we get to the contract stage I'll get a thorough inspection of my own.

Here's the money. Originally listed at $329.9. Dropped within past few weeks to $314. Last weekend, had a 2-day open house and dropped to $279. Agent said seller got married and moved in with her new husband and combined families, so is motivated to sell.

Comps are very few. In past 3 months, my agent and I found 3 that are in the same size range (1287-1460) with an average $ per sf of $225. Actually, the house with 1460 s.f. was my dream home, a fabulous place that sold for $217 per sf within 30 days. This house (the one I might buy) has been on market about 90 days or so. The seller bought the house in May 2007 for $280,000. Last sale price was $198,000 in October 2001. Looks like pure 6% appreciation for previous buyer with some lovely custom wood plantation shutters added and the new outbuilding. This seller re-tiled bath and replaced tub.

The market in this area? Last year, same 3 months, there were 21 houses old for an average of $219 sf. This year, there are 12 houses for an average of $193 sf.

I know I will pay more per sf for a smaller house. My initial offer, based on the low end of comps, was $259,000. She countered with $274,000. I'm considering meeting her almost halfway at $264,000.

Oh, and I'm pre-approved for an 80-15 loan--great credit score, 5.75 with 1 1/2 points interest rate. on the primary, 8.375% on the second. Have a solid job and money in the bank. Very very little debt. I do consulting and teaching on the side and can pay off the second loan in 2 years, 3 months without changing my budget at all.

I'm looking to buy a house to live in. Wish I could get huge gains but what I really want is to be able to not lose money and hopefully make some by the time I sell way down the road.

Should I do it? Should I pass because some great economic stimulus is around the corner and I would miss out? Should I pass because I should expect to lose equity over the next year?

Thanks...

[Brandon Hoffman]

You know what? Those are all fabulous questions and I wish we could help. The best thing you can probably do is ask the agent the market trends for the last couple of months and along with your agent figure out what direction you're headed. Conditions can be fixed after inspections so don't sweat them as much. If you are comfortable, move forward and enjoy your home.

[oldmanbob]

Sounds like the market moves fairly fast, in the area you are looking, and equity should not be a concern, especially talking like you will be there for 5 years plus. The counter sounds great, and given the loation, you would probably have no problem with leasing or renting it, as all those students with plenty of money. So good luck, and if you like it, go for it. The market, had pretty much reached bottom, and should rebound fairly quickly, certainly by time you would want to move.

[cohdane]

It's hard to gauge and maybe that's a good sign. Maybe. The appreciation from 2001 till now is a little much, but the improvements you cited cover at least SOME of that.

In my opinion (just one anonymous internet opinion), the house WILL lose value in the coming year, based on the general economy which is breaking lots of records on the downside (real estate responds to recessions and this one is shaping up to be a DOOZY). Plus, just a little searching turned up a few articles that show Nashville is not "immune":

Nashville home sales, prices continue decline - Nashville Business Journal:

Down housing market challenges agents | www.tennessean.com | The Tennessean

Nashville Housing Market // BlogCatalog Topic // BlogCatalog

If you intend to live in the house a LONG time, neither the current downturn (assuming it's not too deep), nor the size of the house concern me. Frankly, I think you'll be ahead of the curve with a small house when people start looking for carbon/energy efficient homes and downsizing for baby boomers in another 15-20 years. Also, even though Nashville is being effected by the downturn, it looks like at least the bubble part of the correction won't be as bad: Fiserv Case-Shiller(R) Home Price Insights: Despite Housing Crisis, Nashville Shines... | Reuters

Then again....this is a crazy economy. It sounds like you're financing 95% of your loan and you're a single mom. Do you have a fallback? I can understand why your knees might be knocking. There are a lot of economists throwing around the "D" word right now and we all had grandparents who told us what that means.

I know this is a lot of waffling from me, but if you've read my posts, you'd know I'd be the first to shout "DON'T DO IT" if I didn't think the numbers looked at least reasonable.

The only wildcard in here is the economy. The DOW broke 8000 today for the first time in 5 years. The Producer Price Index just announced the biggest one-month drop since they started keeping records in 1947. GM's worst year since 1945. Lowest consumer confidence since 1967. Lowest home builder confidence since they started keeping records. Etc. Etc. Etc. Plus....no one has any idea what the new administration will do. The NAR is asking them to give buyers 4.5% mortgages. No idea if they'll bite, but this crazyworld, so who knows.

So, the only question is...do you feel lucky, punk?

(Sorry about that last bit, it's just how I feel as a prospective buyer.)

If you can truly afford the payments and you're not too spooked by the economy AND you love the house? Go for it.

GOOD LUCK IN YOUR DECISION.

[GnosticCyn]

You are having typical buyer fears. I hear the same questions in good times. What you need to ask yourself is this, are you making an investment or buying a home? I know most people will say both. But no, it really needs to be one or the other. Let me explain,
If you see this as an investment then you look strictly at the numbers – market trends, appreciation, current local and national economic conditions.
If you look at it as a home then the only numbers you look at are what you can afford for the mortgage, taxes, insurance, and maintenance. The future of the economy is not important, because you have a home not an investment that can be used later as an ATM machine.
Time was when home owners only thought about owning a home. They didn’t worry about resale value. We focus too much on future values for resale and equity loans. Owning a home means painting the walls the colors you want, ripping out the carpet if you don’t like it, not worrying about the landlord raising the rent or deciding to give you notice to move. It is a peace of mind.
Yes, in this day and age, most homeowners only keep their homes for seven years (in Southern California it’s four years), but it’s a home, not a get rich quick scheme. Deciding whether or not to buy, in what ever economic climate, depends more on how you view the purchase than on predicting the future.

Sorry if this is blunt and sounds cruel, but sometimes we just have to get out priorities straight in life.

[Gretchen B]

All great points made in the above threads. If I were in your situation I'd probably proceed very cautiously - not so much because prices may soften some more before they rebound, but because of what could be issues for resale in the future. While I agree wholeheartedly with GC about the reasons for purchasing a home, I don't think one can ignore resale value down the road, especially when buying a "starter" home.

As long as "a" home in this price range is affordable to you now, then in the long term you should reap the benefits of tax breaks, plus hopefully build some equity. What concerns me a little bit about this particular home are the issues with the obsolete floor plan and 1 bath. Those types of things aren't easily changed without a great deal of expense, and they can affect the livability of the house now as well as hurt its resale value in the future.

You don't know how many times I'll hear a seller say something like, "this was going to be our last home so we remodelled it with the special room for my husband's train collection . . . " Well, you get my drift - they have a home that's very tough to sell because it's so unique. So just proceed with caution and be sure that just because you don't mind having 1 bath and a den that's accessed only via the master bedroom, that that won't be a big negative for other people and cut down on potential buyers for the property when you've outgrown the house.

Lastly, make sure the contract is written in such a way that you may cancel it without penalty if you find that there are some major repair issues. A home of that age needs a thorough home inspection. It's standard here in AZ for the buyer to have the option to cancel within the inspection period if there are things he finds unsatisfactory. Hopefully your standard contracts there in TN have some sort of similar clause to protect the buyer.

You sound like you've really done your homework and have your finances in great shape to purchase a home. I'd just want to make sure it's the right home.

[MusicCityMom]

Wow, thanks for all the posts.

Gretchen B, I agree with you that one cannot ignore resale value. This would be a starter home for me--and I can't afford to lose my equity. I'm not looking for an ATM, but rather a good solid first rung on the property ladder. I've made two poor homebuying decisions in the past where I lost money--the big difference now is that I am single again and in charge of my finances. I feel a big responsibility to make a good decision for my little family. I went to see the house again last night and I think the floor plan could be okay--it has a nice living room/dining room/kitchen in the front of the house with a huge rocking chair porch. For resale, I could see it as a great house for a young couple before they have their first child. But you're right--the floor plan would limit the number of sellers, no doubt. In the past, what would typically happen with a house like this in Nashville is someone would swoop in to buy it and just add on a second floor because homes in this neighborhood don't come up too often. I don't think I can necessarily count on that in the future, though.

Cohdane, your post hit all my nails right on the head. I WANT a small home, I've had a 3500 sf home and didn't even walk through most of it. I know how I live and I like the idea that it contributes to a greener lifestyle. This home is actually within walking distance to one of the top-rated public elementary schools in the city and to my work. I currently rent a 740 sf house and it is just too small for me and an active 4 year old boy--the house I am considering has that extra den that will change my lifestyle for the better.

I also agree that 95% financing represents risk. I've run my numbers 6 ways from Sunday so it's all about manageable risk, which is difficult to determine in this economy. My budget is based on my primary job and the PITI fits. The 15% is the risk. My options are: (1) use my additional income to pay it off in 2.3 years to increase my quality of life now; or (2) use that money in addition to the 15% of my monthly income I already put toward savings/retirement. Clearly the more conservative choice is (2), which leads to making a decision based on luck...

You asked a GREAT question--do I feel lucky? I've had a pretty charmed life despite some rather large bumps in the road. I'm an optimistic worrier, I guess. But mostly, I'm of the school of thought that you make your own luck.

I have indeed read many of your posts and your dialogues with Humanoid, Fairmarketvalue, and others. So, in trying to make my own luck on this home purchase, I'm wondering: is there a magic number that will buffer me against further market depreciation? Nashville is going to continue for at least a few months to remain stagnant AT BEST (imho). Please excuse my naivete, but:

If the house sold 5/2007 for $280,000 (basically representing 6% appreciation per year since last sale in 2001), and if I can get it for $265,000:

Does that buffer me against likely future depreciation (let's estimate 5-7%)? Here's my dumb question--should I think of future depreciation against the $280,000 or against whatever I bought the house for, in this case $265,000? If the latter, it doesn't seem to matter WHAT I buy a house for, it's lose-lose.

Thanks for all the advice!

[Gretchen B]

One thing that you mentioned in your last post, MCM, is that homes rarely come up for sale in this neighborhood. You know what they say - location, location, location, and buying a home in a desirable neighborhood is definitely GOOD for resale. It sounds like you've mulled over the floorplan issue and it may not be a deal killer after all. And who knows, the Master bedroom with a "sitting room/office/den" could very easily be attractive to a young professional couple down the road.

I continue to be amazed at your level-headed analysis of the property. I think you can have confidence that you'll make a good decision based on what you know about the house and your local market.

[MusicCityMom]

GretchenB,

Thanks so much for the vote of confidence! Believe me, I've worked hard over the past few years to educate myself on financial awareness. I'm talking to my Realtor in a half hour. I'll let ya'll know if I get it or not....

[cohdane]

You seem like you're head is screwed on right. As for "living a charmed life" and "making your own luck," I can fully appreciate that without a skeptical eye. You know what you've lived and what you've accomplished.

People who make their own luck are well-equipped for times like these. The fact that you don't sit on your hands and crie in your wool when a bad card comes up makes it sound like this could be the right time for you. Your stoic/realist attitude towards a 5-7% drop is a good sign, too.

I agree with Gretchen about the location, if it's always in demand, that says it all. A future buyer could always remodel and build up if they wanted to.

Still keeping my fingers crossed for you!