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I bought from a builder (2012) - in an area where a previous builder had filed for bankruptcy. I figured since the builders all share the same labor pool and set of suppliers, the only 'real' differentiator for me was the cost of the land (and location). I did make sure I picked the right layout and design that suited my needs.
As a result, the cost of the land was very cheap ($20K - 30K for .5 acre).
Fast forward 2 years later, I got a post card from the Madison County Office (Property Appraisal / Property Tax). They claimed the home value has gone up by 20% (50K).
Cost of my mortgage is the same as the rent I was paying for a 4 bedroom/2 bath rental home ... except now, I have a 5 bedroom. Yes, I have to pay for HOA. I do spend for various maintenance, but for a brand new home, all I really spend for is the lawn - front and back (which I did too in my rental).
I would consider all that now as part of the cost of ownership. Whereas before, it was just another burden - maintaining for someone else's property that will never be mine. Plus, my property taxes and mortgage interest are tax deductible ... and the home is mine after 20+ years.
Their motivation is getting more money out of you. NEVER NEVER NEVER use the tax appraisal for estimating the value of your home. It could be dead on or way off, but their motivation is quite different. Do you honestly think they are going to lean on the lower end? Reality is if you can get the money you have put in the home as a whole you have done good. Our home was purchase for $165K. The tax office has it at $190K and insurance says it would take $280K+ to rebuild the home. The appraiser appriased the home for $166K basically for the sale price. It was a USDA appraiser. What's it really worth? What someone is willing to pay for it or lend against it.
But as a homeowner's primary residence, you don't look at that like you would a stock. Real estate for some is used for investment purposes, like stock....but for the average homeowner it is not seen that way. People want to make sound investments in real estate but most don't have expectations to fund their retirement on their real estate purchases.
One, paying for a place to live is just reality. Whether you own or rent, you are paying someone, unless someone gives you a free house or you inherit a property. It is what it is. Some don't mind renting forever, and that's fine. Others prefer to build their own equity with a home purchase, and that's their choice (and obviously yours as well since you just purchased). Everyone's circumstances differ.
Factor in that with the additional tax deductions, they came out pretty well. They took what they had mainly built, and rolled that into a bigger home, that they now hold 50% current market equity, in a area with market values that are currently on the rise. They also purchased a property as a short sale and got a fantastic deal on it as well, that house sold for $200k more in 2007 than they purchased it for, the lowest sold comp ever in their neighborhood. No one has a crystal ball and can predict what will happen next year or in 10 years, but they are in a home that they will own outright in 10 years (or less as they are aggressive) and they are paying (again) what they would be paying for rent for not even a comparable property....a property like they purchased would rent in this market for around $2500 a month. They are paying roughly half that. By that same token, no one can predict fluctuations in rentals costs, and as people are pushed out of the market and the demand for rentals rise, the rental prices will increase naturally.
If they had rented all those years, where would they be now? Renting, building someone else's equity, or starting from scratch probably with much less savings due to a higher monthly rental cost. Because their mortgage was so manageable, they were able to build a significant amount of savings as well. It costs most people more to rent than the own in this area, so its safe to assume their rent would have been as much if not more than what they paid monthly towards their mortgage (that house would have rented for about $1700/month, their mortgage was probably half that).
I just purchased a home and I never thought it as an "investment". I think there are far easier/better avenues to invest and make money. What it comes down to is that renting always goes up. A mortgage payment of 1000 a month today is much more than a 1000 a month 15 years from now. By owning there will be a point where I don't have a payment to make. Also, as inflation goes up, the value of the mortgage payment goes down which is a good thing. I'm keeping in mind that I'll have less money when I retire than I do now. The property is mine and I can do what I want with it within reason. The only complaint I have is that I think I should have bought a few years ago when interest rates were slightly better, and I doubt they'll ever go down. I'd like to get to the point of a 15 year note.
For me, the investment is the value in longterm home ownership, not selling a house to make money.
Getting back to interest rates for a minute as well. I'm not sure anyone is taking that into account with the money they make back either off of selling a house the amount of money in interest they paid. If cash is used to pay for a house outright, then sure, money can be made.
Lets say I buy a house for 150K at 4.5 percent for 30 years. After 10 years 60K has been spent on the house, and the payoff is at 120K. For me to "make or break even" that house would need to sell for 60K more 10 years later. That includes no maintainance into the house in that 10 year span, either. Another way of looking at it is that at the end of 30 years, I can the house for the total cost of the loan, which in the case of a 30 year note on a 150K house, is roughly 280K. This can happen, but not likely.
Better than others on here I thought your post was excellent! You don't have to be a Realtor to understand the investment side of home ownership or the value in that.
No you don't, but it appears some realtors can't do simple math. The OP spent $162,700 to have their home appraised for $158K. $145K was the original purchase price. $17700 worth of upgrades and maintenance. Unless the home was in terrible shape I don't see it going below the 145K mark. Even if all the maintenance and upgrades yielded that valuation they spent $17K to increase the value by $13K. How is that a good investment again?
Home ownership is not an investment. It would be a poor one at that. However some people do actually make money after so many years, but it's not too common for the average homeowner. This idea that home ownership is an investment is realtor speak for "I need to sell you this home so I can get my commission". This same idea is what got so many in trouble before the bubble burst. You couldn't go wrong with buying a home. Well we found out otherwise.
Their motivation is getting more money out of you. NEVER NEVER NEVER use the tax appraisal for estimating the value of your home. It could be dead on or way off, but their motivation is quite different. Do you honestly think they are going to lean on the lower end? Reality is if you can get the money you have put in the home as a whole you have done good. Our home was purchase for $165K. The tax office has it at $190K and insurance says it would take $280K+ to rebuild the home. The appraiser appriased the home for $166K basically for the sale price. It was a USDA appraiser. What's it really worth? What someone is willing to pay for it or lend against it.
I FULLY UNDERSTAND that ... but the point of the matter is it did appreciate.
I had it appraised roughly the same time ... it is up by almost the same amount (18% instead of 20%).
So right off the top, you paid 2% more for your house than market value, as you got to pay the government 2% for the privilege of them backing your mortgage. Add in the additional $40 +/- dollars that you pay monthly to the goverment for the sheer privilege of having them back your mortgage, money you will never recoup. It also never goes away either. Probably had seller paying closings costs as well, I'm going to take a stab and say $3000, roughly another 2%. That would cover approximately half the purchaser's settlement charges, so it could be an additional 2% if seller paid all costs. Because sellers ALWAYS factor closings costs into their bottom line, you have to take that into account on the purchaser's end, its really just a legal way to roll the purchaser's costs into the mortgage. That seller would have sold that same house for $162000 with no closing costs, same for them either way.
So, on a $165k house, you actually probably paid about 4% more for the property, at least. Possibly 6% if seller covered all costs which we see quite often. Add in an additional $480 in MIP a year on top of that as well that is literally just flushed away.
And your trying to tell others how to appropriately utilize THEIR money? Holy hypocrisy!
Last edited by LCTMadison; 05-14-2014 at 12:34 PM..
weaver, I don't know what your background or training is, but you obviously don't have any grasp of basic financial concepts so you really need to stop. You're making yourself look ridiculous. (unless you're posting things just to get a rise out of people)
I'm a CPA by training. I don't work in that particular area of finance/accounting anymore, but I have a very solid foundation in accounting and finance principles. The cost basis of ANY INVESTMENT, be it real estate, stocks or otherwise, is WHAT YOU INITIALLY PAID FOR IT, period. It doesn't matter what the inflation rate is. It doesn't matter how much you've had to spend in repair & maintenance because that is an EXPENSE, which does NOT increase the value of the asset!!! It's a cost of home ownership! You do NOT take that into account when figuring the gain/loss on your home when you sell it! From a CASH perspective, yes, sometimes it sucks. I had to replace an entire HVAC unit that bit the dust 6 months before I sold my last house, and guess what? That was cash out of my pocket, but it didn't increase the cost basis of the house because I was simply restoring it to the same condition it was when I bought it.
When you calculate your gain/loss on the sale of a house (or any asset) you take the sales price MINUS what you paid for it. Period. End of story. In real estate, you have realtor & other fees that factor into the cost of selling the home but that is IT. Any "upgrade" you make to your home is just for your personal preference, UNLESS you've added square footage to the home or taken a very old/worn out kitchen and totally remodeled it or something along those lines. And those things DO get factored into an appraisal. But the fact that you replaced carpet? Nope, that's not gonna affect your cost basis. Paint some walls? Nope. Install a new roof? Nope. That's just the cost of upkeep.
From a cash standpoint, if you want to factor all that into how much you "made" or "lost" on a home, that's fine if it makes you feel better. But no one, including the good old IRS, gives 2 sh*ts about how much you spend in upkeep & maintenance. Sales Price minus purchase price = Capital Gain. That's it.
Two seperate financial advisors have talked about making sure that one's 401K is at least beating inflation. So yes, inflation is apart of any investment. If one is in conservative stocks, it still must beat inflation to actually "make" money. From an accounting perspective, inflation has no effect on the bottom line when it comes to operational expens. But that is very different than from an investment perspective. Gains and losses of a house tied into some spreadsheet for expense versus gains will not tell the entire story of the investment. A dollar yesterday is not worth the dollar today. Its worth less. If I buy something today and turn it around and sell it tommorow for the same price, I have in effect, lost money through inflation.
The difference is that what you PAID for the house does not get adjusted for inflation, does it? It is historical cost and will never change. If you paid $150k for a house in 2000, you paid for it with 2000's dollar value. When you sell it, you sell it at TODAY's dollar value, which is usually higher. That's where you get the benefit of inflation.
If your mortgage payment fluctuated along with inflation, then I'd say YES...you're right, you definitely need to beat inflation to make any money. But your purchase price never, ever changes. Think about that for a minute and see if you can follow what I'm saying.
I'm not arguing with anyone because I'm the one who's passed the CPA exam and worked in accounting/finance for 20 years. You're not going to change my mind because I'm simply stated facts...not my OPINION. I'm just trying to explain and make people understand.
weaver, I don't know what your background or training is, but you obviously don't have any grasp of basic financial concepts so you really need to stop. You're making yourself look ridiculous. (unless you're posting things just to get a rise out of people)
I'm a CPA by training. I don't work in that particular area of finance/accounting anymore, but I have a very solid foundation in accounting and finance principles. The cost basis of ANY INVESTMENT, be it real estate, stocks or otherwise, is WHAT YOU INITIALLY PAID FOR IT, period. It doesn't matter what the inflation rate is. It doesn't matter how much you've had to spend in repair & maintenance because that is an EXPENSE, which does NOT increase the value of the asset!!! It's a cost of home ownership! You do NOT take that into account when figuring the gain/loss on your home when you sell it! From a CASH perspective, yes, sometimes it sucks. I had to replace an entire HVAC unit that bit the dust 6 months before I sold my last house, and guess what? That was cash out of my pocket, but it didn't increase the cost basis of the house because I was simply restoring it to the same condition it was when I bought it.
When you calculate your gain/loss on the sale of a house (or any asset) you take the sales price MINUS what you paid for it. Period. End of story. In real estate, you have realtor & other fees that factor into the cost of selling the home but that is IT. Any "upgrade" you make to your home is just for your personal preference, UNLESS you've added square footage to the home or taken a very old/worn out kitchen and totally remodeled it or something along those lines. And those things DO get factored into an appraisal. But the fact that you replaced carpet? Nope, that's not gonna affect your cost basis. Paint some walls? Nope. Install a new roof? Nope. That's just the cost of upkeep.
From a cash standpoint, if you want to factor all that into how much you "made" or "lost" on a home, that's fine if it makes you feel better. But no one, including the good old IRS, gives 2 sh*ts about how much you spend in upkeep & maintenance. Sales Price minus purchase price = Capital Gain. That's it.
You can have a capital gain and still lose money. Capital gain means absolutely nothing other than what you can possibly be taxed on. I can go buy a home for $150K put 50K worth of upgrades in it and sell if for $180K and have a capital gain of $30K. That doesn't account for me spending $50K to increase my home value by $30K. What did I accomplish in doing so? I lost $20K in the sale that I will never get back. When flipping homes the flippers don't care about capital gains. All they care about is: Purchase price + upgrade/fix cost/closing cost < Sale price. That's how it really works for investment properties. It doesn't take a CPA to figure that out.
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I thought your post was excellent! You don't have to be a Realtor to understand the investment side of home ownership or the value in that. 
