5 types of people who probably should not buy a home
Be it through your own natural, inherent tendencies or through parental coercion, the usual human progression is go to school, get a job, get married, have kids..... and buy a home (actual order may vary).
The urge to buy a home can be pretty strong. People get tired of renting, putting up with thin walls and noisy neighbors and feel like they are throwing money down the toilet. Potential buyers can feel like they are getting left behind by the market and if they don't buy NOW, they will be priced out forever. And some people want to buy just because that's what you're supposed to do.
However, for some people, buying a home might not be a good idea for the particular time they are in in their lives. There's more to owning a home and there's nothing wrong with renting. At certain times, buying a home and taking on all the commitments associated with home ownership are best deferred to when you are really ready to make the leap.... both emotionally and financially.
NOW might not be the right time and later just might be perfect. And sometimes, maybe you shouldn't by at all unless you are willing to look at the concept of home ownership differently?
If you fit one of the following categories, then maybe step back and reconsider your situation.
All you see are dollar signs and a quick profit
In a hot real estate market, home prices go up and up. You think that if you buy a home now, it will automatically go up in value and you will make a tidy little profit in a couple of years.
NOBODY but nobody knows with certainty what the real estate market will do. Not Joe down the pub, not the Federal Reserve, not the investment bank guy using sophisticated predictive software, not the high forehead Harvard professor in the corduroy jacket with patched elbows, or the NYC taxi driver (“I had Elvis in the back of my cab last week”) and yes, not even your Realtor (although we all have our own opinions). With hindsight, some will be proven correct and proclaim, "I told ya so!" But that’s hindsight; not current, indisputable certainty.
Also, real estate goes in cycles, usually around 7 years. But as to how long a particular cycle will last and how a big difference there will be between the top and bottom of the cycle, again, no one knows. 2006 was not that long ago and a lot of people didn’t see that one coming or choose instead to stick their heads in the sand.
Unless you are an experienced real estate investor or flipper, my advice is to look at your home as first and foremost as a HOME and as an investment second. Investors and flippers are not immune to getting burned by the market changing direction. All going well, the home will go up in value while you own it. However, going in with the attitude of making a quick profit and leveraging up to a bigger home is a quick few years might end up in future disappointment.
You would have to way over-extend yourself to afford the home
Although you might be able to just scrape in under the requirements to qualify for enough of a mortgage to buy a home, step back, sit down and have an honest conversation with yourself. Can you REALLY afford to buy that home? Also, are you making huge compromises on location and condition of the home just to get your foot in the door?
Take a look at your current financial situation. Look at your various monthly expenses including student loans, car loans, speed boat loan (what was I thinking!!) and credit card debt. Do you have to borrow money from your family for the downpayment, will you be able to pay that back and will it affect your relationship with them? Add all up those expenses along with your mortgage payment and be honest with yourself, can you really afford to buy that home? Also, because of your credit situation, are you paying a much higher interest rate than if your finances were in better shape?
If you buy the home, will you have any emergency / rainy day funds that you can rely if needed? For example, if you were laid off from your job and it took you six months to find a new position, would you be able to keep making those mortgage payments?
There’s more to life than owning a home. There’s a thing called LIFE and you’ll need some money to enjoy it; going on vacations, beers with your buddies, not having to buy all your clothes at Goodwill. Don’t end up house-rich, cash-poor and resenting the mortgage millstone hanging around your neck.
If you come to the realization that no, I really can’t afford to buy right now, no worries! Wait a while, pay off some of your debts and improve your credit rating and start saving for a downpayment. There will always be more homes for sale. Guaranteed.
There's a good chance you will be relocating in the near future
If you know for certain or there’s a pretty good chance that you will be moving in the near future, then buying a home is not a good idea, even in a hot real estate market.
When you drive a brand new shiny car out the showroom door it is now automatically worth about 10% less. In the case of a home, when you close and are handed the keys, although the home doesn’t lose value like a new car, indirectly, the home’s net value is now less than what you just paid for it. Why?
Because if you were to turn around and try and sell the home the next day, you have now become the seller and are liable for all the expenses associated with selling a home. You would have to hire a Realtor, pay their commission as well as the buyer's agent, pay Federal Excise tax (1.78% in WA state), plus title insurance, escrow and other fees. You could try to save some money by going the for-sale-by-owner route (FSBO) but the odds are stacked 9 to 1 against you. Even if you were successful, you would still have fees like paying the buyer’s agent, excise tax etc.
To break even, you would need the market / the value of your home to go up enough to cover the costs of selling the home…unless you are willing to make up the difference in cash at closing for a net loss.
Right now the market is moving up, but if the market goes down, you have to allow enough time to ride out the storm and for prices to go back up. I usually tell buyers not to buy unless will be staying for at least 5 years.
Couldn’t I just rent it out? Maybe. If you bought a house or townhome you would be free to rent your home. If you purchased a condo, there might be a rental cap in place that prevents you from renting your unit and you’d need to get on the waiting list. Also, will the rental income cover all your expenses including mortgage, property taxes, any HOA dues plus maintenance and repairs? You might have to hire a property management company who will want 10% of any rental income and probably a whole month’s rent to find new tenants. Most property management companies don’t do an awful for their monthly fee. It's a good gig.
It's not the right time for you personally to buy a home
Doubtless, you have seen that flogged to death, cheesy real estate cliché: “It’s a great time to buy a home!” (and it's twin "It's a great time to sell a home!"). In real estate land it's ALWAYS a great time to buy (and sell) regardless of whether market is rocketing upwards, plummeting downward or just chugging along at a nice steady pace.
It’s a great time for who? You or your real estate agent?
Yes, I admit, I’d love to sell you a home right now, but NOW cannot possible be the right time for every Tom, Dick and Harry to buy a home. Everyone’s situation is different. Everyone is at a different place in their life and just because the market is going gangbusters and you don’t want to “get left behind”, don’t buy a home just because you feel pressure to do so. Only you personally will know if now really is a good time to buy.
A good agent who has your best interests at heart should be able to ask you the right questions to help you determine if you might be better off waiting a while, be that a few months or a few years, even if you can afford to buy a home right now. If you don't have butterflies in your belly and are excited about buying a home, then that's nature way of telling you not to buy at this time.
Buying a home with someone else but you're unsure just how strong that relationship is.
Buying a home can be an expensive proposition and many hopeful buyers cannot afford a mortgage by themselves. So how do you get around that? Answer; buy with a friend be that your spouse, partner, long term girlfriend or your best friend forever (subject to change). By pooling your resources you will be able to afford a lot more than if you were buying individually.
If you have just walked down the aisle and your head is full of confetti and the world is a aglow and a beautiful place, then absolutely go buy a home together and live happily ever after.
However, if you are in a marriage / partnership that is treading thin ice, then buying a home together is probably not going to save the marriage. Divorces are stressful and selling a home during a divorce can get ugly quickly.
What about buying with friends? First time buyers often struggle to get into the real estate market due to college loan debt, not being at their full earning capacity and possibly having a less than ideal credit rating. Joe might not be able to quality for enough of a mortgage to buy a home but if Joe buys with his buddy Jason, they can now afford to buy and say good riddance to their landlord dependent days.
The good news is that Joe and Jason now have a home. However, is the Joe-Jason bro-dacious friendship strong enough to survive the responsibilities of home ownership? What if Joe quickly comes to the realization of “Jeeze, I never realized how annoying Jason can be!” (Jason is probably thinking the same thing). What if things turn sour or one wants to the sell and the other doesn’t and neither can afford to buy out the other?
If you are going to pool your resources and buy with someone else, you need to be really sure that they are good fit and you need to plan out and discuss in advance how you will address potential issues that might arise down the road. And absolutely never ever, buy a home with charming Charles who you just met a week ago over cocktails!
Here's a great article from the New York Times article on different families who made the leap and bought property together.
In summary, owning a home is great but make sure now is the right time for you personally to make the leap. There will always be more homes for sale.
Here are some other excellent resources and sage advice:
Buying a home versus renting in 2017 from Ilyce Glink
The pros and cons of buying with your significant other from David. .O'Doherty.
How to handle home buying pitfalls from Lynn Pineda.