A reader of the blog sent the following link to a compilation of blog posts directed to first-time homebuyers, and asked that I pass it along.
The web page, titled The First-Time Home Buyer Guide: 100 Must-Read Blog Posts, looks to offer advice on a variety of topics; ranging from: To Rent or Buy? to Questions to ask when buying a condo.
Of note, the posts were written by a variety of bloggers throughout the Webosphere. Kudos to the person(s) who took the time to compile the list.
Click on the image to go to the list
Sully
I clicked on To Rent or Buy. This was the first item shown (2nd paragraph):
There are many advantages to owning a home. Homeowners build personal wealth through equity, there are tax advantages and it allows you the flexibility to create your own personal style. Go ahead and paint that room red or blue or green…whatever you want!
….yep! Too soon old, too late smart. 🙂
DonC
Yikes! The Rent or Buy page just contains a lot of standard real estate agent pap.
The tax advantage claim always annoys me. There is a tax advantage when you sell but not otherwise. Yes you can deduct your mortgage interest payment from your taxes but you then have to add in the interest you received from the money that you would have otherwise spent on the house.
Unless you can get a higher interest than your mortgage rate the tax deduction is ephemeral. If you don’t have extra money, so you won’t have any income, then you need to evaluate how much leverage you want to carry. IMO that seems more a life investment question than a tax question.
The condo page was much better BTW. It didn’t really get to the crux of the question — which is how many more foreclosed condo units are going to hit the market — but it was getting there.
billddrummer
To Sully,
From where I sit, there are as equally compelling advantages to renting.
You’ve got more flexibility if you want to relocate–just move, and at worst, you’ll be out a month’s rent.
Your monthly living costs will probably be lower than purchasing, because in most cases, rent expense doesn’t equal the cost of a mortgage payment plus escrow deposits.
Typically you don’t have to pay for repairs on a rental property, but you bear 100% of those costs when you purchase. Same with taxes and property insurance.
You can only build wealth if prices are rising after you purchase. If they aren’t, you gain nothing on your cash investment.
And finally, unless you are a cash buyer, you end up with a large debt to service for many years into the future.
Those are the reasons I’m content with renting.
Sully
billd, maybe you missed the point. I was attempting (poorly perhaps) to show that realtor hype hasn’t changed much from the bubble days. Also, I too, get annoyed when I hear the tax advantage used as a reason to buy.
coming home
There’s one more advantage to owning, but I’d be glad to hear from anyone out there what the situation is in Reno.
I am currently serving in the US military overseas. Specifically, I live in Australia. The bubble here makes what happened in Nevada look minor league. Think 1,000 sqft apartments for >$450k. No kiddin. Can elaborate if anyone’s interested, but as soon as China hiccups, Australia will catch pneumonia.
Back to the point. In the last 2 1/2 years I have been kicked out of my rental in Sydney twice. We are good renters, and dutifully pay our $950 every week (that’s how it’s done here, and that’s how much it costs). Unfortunately, though, we keep selecting places that are so desirable that our landlords decide they’d rather live there than collect our rent. Seriously.
As pessimistic as I am about Nevada real estate, my wife and I are planning to move back to NV, where she grew up.
We don’t want to ever get kicked out again. At least when you own, you can control your own destiny, as long as you can afford your mortgage payment. Maybe I need to readjust my thinking though. Maybe NV landlords are happy to collect rent indefinitely. Would be interested to hear if any out there have an opinion on that issue.
tom
Don commented that:
“Unless you can get a higher interest than your mortgage rate the tax deduction is ephemeral.”
That approach is valid, but to do a thorough job, it is quite a bit more complicated. We do those comparisons in helping the client in choosing various courses of action in estate planning, involving QPRTs, GRATs, sales to intentionally defective Grantor Trusts, and in comparing other techniques.
The best way to do a valid comparison, such as renting vs. purchasing, is to include tax consequences along with an after-tax opportunity cost analysis, on both sides of the ledger. You may need to run after-tax growth on a side fund in your comparison. You should also give some (arbitrary) assumed rate of growth, long term, even if quite low, on the asset acquisition side of the ledger, in looking at a purchase (less unrecognized gain to be building-in above basis to be triggered upon later sale), or if you think values are declining, plug in a negative factor on that side.
The result will typically turn on the assumed rate of asset growth vs. the assumed earnings of the side fund. Remember that in the purchase side, the WHOLE value would be factored into the growth calculation, not just the down-payment, whereas on the rental side, the saved monthly outflow, compounded, constitutes the opportunity fund, which grows. Also, the higher tax bracket of the client, the more of a play factor becomes the tax deduction.
The subjective factor not capable of putting into the comparison is whether one gains anything psychologically satifying by ownership, i.e., personal happiness by seeing their garden grow, sitting on the patio in the sun knowing their equity may be building–the things that are personal parts of ownership. Alternatively, possibly the lack of worries on the same subjects favor renting. But those things are not capable of calculation, although they may be present.
Sully
coming home, I was renting for two years. One of the reasons I decided to buy was my landlord was in danger of default (which just occurred BTW).
Other than that, I see no reason why you couldn’t rent here and feel more secure then you do down under. And the rent is much cheaper here to boot. So, the only reason I would think you have for not renting is the fact you think your landlord will default on his property and you can check the county records to see if its free and clear.
Still, it might be a good idea to rent for awhile (if you’re not pressing) just to get your feet on the ground. You said your wife lived here, but have you?
Also, the area may have changed since she was here last and might not be “the place she left”. I see that in California in places I lived many years ago, hardly recognize it today.
billddrummer
To Sully,
Valid points. From a realtor’s point of view (present company excepted, naturally), there’s no compelling reason not to buy. Ever.
Thanks.
CommercialLender
Comin’ Home,
Good to hear you again 😉
Just so happens, today is your lucky day Downunder…. I have a great 3br place off Robb Drive in desirable school district, nice place, clean, fenced lot, views… and its YOURS for a song! When did you say you need the place? 🙂
Steve Herschbach
Hi,
I can add another item to the 100 list – get some cash!
I’ve been watching the Reno market for months, seeing mostly leftovers from last summer. Then on Friday 2200 Lindley goes to market. 1940 house, pretty much original. Apparently original owner. Who died in December. Estate sale. Main attraction – next to and overlooking Virginia Lake. Listed at only $259,000.
It makes my radar Saturday, and already two offers on property and more in the works. They are holding offers to open on Tuesday. Bloody weekend, I’ve got no time. Go to bank Monday morning, gets Wells Fargo PriorityBuyer pre-approval. Flurry of paperwork with my realtor, Fed-Ex off an earnest money check.
I know the thing is going to go for higher than asking. I’m in a position of simply wanting what I want at a price I’m comfortable with. The house in this case will need to either get replaced or have $100,000 dumped into it to fix numerous issues. Nothing serious just lots of stuff to fix.
I figure I have to go over $300,000 and really love the location so what the heck – I offer $312,000 on Monday.
Offers opened Tuesday by the estates realtor. I have high offer by a decent margin. My realtor says looks good, we can fast-track a close. Offers go to trustee for review.
Who accepts lower price from a buyer with cash.
I do not know yet what the final sale price was, but I think I was high offer by a decent amount, so they were willing to sacrifice a good chunk of change for cash now. Of course financing has issues, but what annoyed me more than anything is they did not come back and say “hey, you are high offer but we want cash”. I would have wrote a check for $50,000 non-refundable and had the balance in a few weeks. But they just went with lower offer for cash now.
So lesson learned. I’ll get the cash together over the next few weeks so next time I’ll be set to be making that cash offer if need be.
The Reno market may be dead for overpriced property. Anytime you ask more than something is worth you are not going to get much interest. But that does not mean there are not buyers. The market from my perspective looks to be at a hot boil for properties that are priced right. This sucker went to market and sold in four days. Lots of cash buyers lurking and waiting to pounce. It looks to me that people like me who go in with traditional means get spanked, and then also turn to cash. So the percentage of cash sales goes up.
Anyway, I’m not that bummed as the place would have been a lot of work for me. Sure would have been nice to walk out the backyard and down to the lake though. I’ll be curious to see what the property did sell for, and I will watch and see what the new buyer does with it. I think that was the first house on the lake, and the property has tons of potential.
E.Edward
OH LOVELY…Now we get to look forward to the “Hurry Hurry the tax credit is about to expire”… Here it comes, There get-ten ready to throw it-n-overdrive.
There has never been a better time in History to be renting! Among all the other problems, People are vacating reno faster than a Realtor with a commission check,
Typical self serving Realtors making there case to purchase now will never hold water…Theres a hundred+ reasons why this market will continue to Fall…..And I have Yet to see-em come up with any tangible realistic reasons why it Won’t?
No rocket science here,… RENT-ON!….Just my opinion
Sully
Steve, you might have gotten involved with an uninformed trustee. I made an offer over a year ago to a trustee (cash) was a bit lower than another one. They did call me back and asked to keep my offer on the table (twice actually), even though they were planning on accepting the slightly higher offer. I told them no, as I didn’t want to hang around waiting for the other offer to qualify for a loan. In your case I think the trustee should have let you know the status and give you the opportunity to offer cash also. Maybe Guy can explain why they didn’t.
Reno Ignoramus
I realize this post is not on topic, but I’d like to get some thoughts from you all.
1014 Waverly is located in the Cottages in Caughlin Ranch. It sold new in 1999 for $255K. It just sold, for the first time since 1999, a few days ago for $310K. So, it went up about 20% in value over the last 11 years. Here’s my question: if the bubble had never happened, and the market had proceeded in “normal” fashion, would the house still have gained 20% over the last 11 years? Or more? Or less?
My mother lives in the Cottages, and so I have been following the sales over the past several years. As a point of interest, I note that a house similar to this one sold for about $510K in 2005. So this is a $200K haircut off the bubble high.
Your thoughts will be most appreciated.
geopower
Steve,
thanks for the update on 2200 Lindley, I was curious what would happen there. I toured it last thursday. The location was great, but you’re right the house needs a lot of work. If it’s any consolation, there are a lot of similar old homes in nice neighborhoods that are owned by family trusts in Reno. They seem to come on the market at a pretty steady rate of a few every month. And it sounds like you’ll be ready to move decisively next time. Good luck
Sully
RI, I did a calculation based on my own figures for offering prices. I came up with 300 – 308 range. So, the 310K price is close. Only problem is I use zillow for some input and they don’t go back to 1998 which was my target year initially. Also,any amenities above normal (average) would push my estimate a bit higher.
Steve Herschbach
Hi Sully,
Well, who knows. The old lady does not seem to have had a husband or kids so depending on where the money from the trust is going maybe the trustee just did not care that much and just wanted to get it done and over ASAP. Or maybe the trustee knew the cash offerer so they got the nod. To put something on the market Friday and wrap up Tuesday seems a little weird to me. Obviously shopping the property to get the best price was not the goal.
geopower
Steve,
FWIW, it listed on Wednesday, not friday. Still a short turnaround.
Sully
Steve, I’ve seen many of these REO’s going in the same manner, for sale sign goes up, an hour later the listing is changed to Pending/Call. Like someone was camped out in front waiting for the sign to go up. So your gut feeling is probably correct.
geopower
Sully, not a REO, family trust sale. Sorry to be a nitpick, I just don’t usually have much to contribute, so I do when I can.
Sully
geo, I realize the difference, I was just commenting that I have seen REO’s going in the same manner that this particular trustee sale went. Kinda saying that this was not an uncommon occurrence here. I have noticed that RE offers are presented in a bit of a different manner then they are in California. Example: the first offer in line is presented, then the seller has to accept or reject before the next one is presented, etc. Order doesn’t seem to matter in Nevada, unless its a tie then first come gets it. At least, thats what I have run into.
Martin
I have some familiarity with estate sales. If there is only one beneficiary, and the offer is on terms acceptable to that beneficiary, then the trustee has no obligation to get a better deal. There is nobody else to complain. Often, the successor trustee who is selling the property is also the beneficiary anyway. If there is more than one beneficiary, then all would have to agree to the price. As a practical matter, I frequently see that when these elderly people pass, they leave behind sometimes fairly older adult children. Often the children just want to get the deal done, and don’t have interest in holding out for the last dollar. Thus a cash offer is often first accepted even over a higher financed deal.
I find RI’s question about the Cottages house to be very interesting. Have we worked the bubble out of the market? My first impression is that a 20% appreciation between 1999 and 2010 seems pretty unbubble like. I suppose the answer is not so simple and that it depends on what house in what neighborhood.
DonC
RI asks “Here’s my question: if the bubble had never happened, and the market had proceeded in “normal” fashion, would the house still have gained 20% over the last 11 years? Or more? Or less?”
The rule of thumb is that residential real estate appreciates about 2% per year above the rate of inflation. So I’d think 20% over 11 years, given that we had some inflation during the period, is on the low side. (But that assumes an area has an economy that isn’t going down the hopper — think Detroit).
A 2% return above inflation isn’t bad BTW. The net-net (meaning after inflation, commissions, and taxes) return on stocks or other like assets would probably be in the 2%-3% range. 3.5% at the most.
MikeZ
[DocC] “The rule of thumb is that residential real estate appreciates about 2% per year above the rate of inflation.”
2% more than inflation? Per year? Whose rule of thumb is that?!
I would expect nothing more (nor less) than the rate of inflation over a longer term and a normal market period.
Internet inflation calculators based on historical CPI data tell me that $255K in 1999 is $325K in 2009.
Tom
Martin, you commented that:
“If there is only one beneficiary, and the offer is on terms acceptable to that beneficiary, then the trustee has no obligation to get a better deal.”
Note on this subject:
This may be considered generally true for a trustee (not necessarily for an Executor) as a matter of fiduciary obligations owed to the trust, IF the buyer is an arms-length, unaffiliated purchaser. However, if the sale involves an affiliate of that sole beneficiary in a “related party” transaction, in a trust which is taxable for Federal Form 706 purposes, irrespective of the sale being within six months of the date of death or the alternate valuation date, then that trustee better have a good appraisal supporting that price point. The Treasury will otherwise have something to say about it — they want to squeeze out every dime of either taxable inclusion for death tax purposes, or recognized gain above the fresh start basis on the 706 for capital gain purposes.
We have had sole beneficiaries ask if they can try to swing sweetheart deals to move valued assets out of a family trust at bargain prices, through a sale to an affiliate, then inherit the net proceeds back, instead of the appreciated asset in kind. By using that “sale” as pegging the property value for 706 purposes, their goal is to try to reduce the estate tax load. Understandable objective, but full documentation is needed and a sale even if close to the elected 706 valuation date, generally won’t be accepted for Form 706 valuation and basis adjustment purposes if made to an affiliate, related entity. The IRS back there in the rear view mirror is closer than it appears. 🙂
Current law is confused on this subject through year-end.
We will have to wait and see what happens with Estate Tax reform next, which also includes either new carry-over basis rules, or may re-enact the fresh start basis rules, as of date-of-death, which should be of interest to blog readers whenever a probate or decedent’s trust sale is involved.
If Congress remains busy with health care, or the next phase of Transforming America, hinted to be immigration reform (aka Legalization, Naturalization, and Registration), there may not be time or attention to tackle Estate Tax reform as well.
Reno Ignoramus
Thanks Sully, DonC and MikeZ.
My impression is that the 20% gain over the 11 years is pretty close to pre-bubble appreciation. Perhaps a bit below. However, I owned a house in Reno from 1985-1990 that had zero appreciation. In 6 years, it appreciated nothing. I sold it for $750 more than I bought it for 6 years earlier.
I agree that 20% from 1999 to today is below what inflation has been during that period. Real inflation anyway. I think we all know that the official CPI numbers are suspect. And recall that before the near collapse of the world economy in 2008, the official annual CPI numbers were in the 3-3.5% range.
smarten
Hey Tom –
You being in CA., are you aware of the fact that there’s apprently an Assembly Bill pending which would repeal favored real property exchange state income tax treatment in CA? How does that make you feel?
Tom
Smarten, I think Calif and Fed legislative majorities are going to get in their licks ASAP and before November, while they have a chance.
inclinejj
AB2640 Seeks to Repeal 1031 Exchanges in California
March 15, 2010
First of all, for those of you who dropped me a note wondering if I was still alive, rest assured I am. Thanks for the concern.
Now to the pressing issue, a bill within the California state assembly which seeks to repeal the tax benefits of 1031 exchanges in California. We’ve been discussing for a while here the likely pressure on lawmakers to seek to repeal Proposition 13, at least for commercial properties. Given the perceived difficulty in toying with Prop 13, it seems some have decided to go after 1031 exchanges instead.
AB2640 seeks to repeal 1301 exchanges for California income tax purposes effective January, 2010. Given that the state tax rate is at some 9.5% right now, this would have a pretty big impact on the benefits of investment property ownership, particularly in California.
The bill was introduced by Juan Arambula. To contact your local state representatives, use this lookup tool to find him or her, and their contact information.
Sully
It would be interesting to see CA repeal prop. 13. I sure wouldn’t want to be a member of either senate or assembly if that happened. If the state can’t control spending with limits in place, how does anyone expect them to do so without limits. So far every tax increase I’ve seen has failed at the polls. I might have missed one or two, as I don’t follow that close anymore. That alone should tell the lawmakers something, maybe they need it printed out for them in large type. NO MORE TAXES – CONTROL THE SPENDING. Good luck with that. 🙂
DonC
A lot of people would probably be better off without Section 1031. I was just talking to someone who sold their ranch and, in order to avoid tax, moved the proceeds into what are essentially income producing strip mall partnerships. Hasn’t worked out so well.
A lot of these tax provisions end up being the tail that wags the dog. Too many lawyers and financial advisers spend too much effort, and make too much money, avoiding taxes while losing sight of the larger investment goals. It would seem preferable for investment decisions to be made based on the merits of the investment rather than on tax consequences.
On the theoretical side I don’t know of any economic justification for Section 1031. Just seems like another special interest loophole.
From an equitable standpoint, if you hold real estate you already get very favorable tax treatment. It’s not obvious why you’d want to heap more special tax benefits on a sector which gets more than its fair share to begin with.
DonC
Sully – Markets work best when capital and labor flows are free of distortions. Prop 13 severely distorts capital flows and prevents land from being put to its highest and best use. You’d probably get higher economic growth if you repealed it.
What has happened over the years is that we’ve seen a host of methods around it which end up distorting the market even more. New construction always has Mella Roos, which is basically a higher property tax but it’s not called a tax. Also on the residential side, if over a certain age you can sell and still claim your old basis in the new property. It’s just a messy patchwork.
On balance Prop 13 is a major part of the problem. The more general problem is that everyone wants services, the public service unions wants those services to be expensive, and no one wants to pay for them. Take that to a legislature filled with idealogues and you end up with what we have.
Sully
DonC; I’m quite aware of how Prop 13 works. I voted for it back in 1978. Also, it was the main reason I stayed in California for as long as I did. But even that couldn’t offset the public service employees unions and idiot legislators. That coupled with Davis increasing the size of state govt by 25% and just getting fed up with all the million dollar spending programs (DMV database for one) that ended up in the trash can.
Real estate isn’t what has been bringing economic growth to California, maybe you haven’t heard about Silicon Valley yet. You should check it out, thats where the money’s at.
The only thing the state wants is more money, regardless of how they get it and with no strings attached to it.
I wonder how happy you’ll be when a future governor (in state of the state message) tells you that retirement benefits (to retirees) now exceeds the total cost of current active employees? San Jose (when I left) was spending 67% of its budget on labor related expenses (wages,benefits, etc) or ‘labor burden’ if you prefer.
At any rate, I don’t have to put up with it anymore so I really don’t care what they do. I’ll just work to make sure it don’t happen here!
Steve Herschbach
Quote:
“geopower said, in March 18th, 2010 at 11:12 am
Steve,
thanks for the update on 2200 Lindley, I was curious what would happen there. I toured it last thursday. The location was great, but you’re right the house needs a lot of work. If it’s any consolation, there are a lot of similar old homes in nice neighborhoods that are owned by family trusts in Reno. They seem to come on the market at a pretty steady rate of a few every month. And it sounds like you’ll be ready to move decisively next time. Good luck”
Thanks geopower. I missed this post and appreciate the sentiment. Fact is we have already found another property we like – and polar opposite at that! Story later.
My business partner just did a cash deal for a place in Florida. Know another guy who just did a deal in Phoenix. There are places like Alaska that did not get involved in the bubble and now are not taking the hits. So we have money and are looking at places that did get hit looking to get a buy.
Anyway, more later. You guys have helped me a lot. Thanks!!
DonC
Sully – The problem with Prop 13 is that over time it just distorts the market. And, as you point out, it didn’t really limit spending.
I don’t fault the public service employee unions for trying to negotiate good deals for their members. They’re supposed to. The problem is that, as in many instances, it’s all about other people’s money. In this case politicians are more than happy to spend money in the out years because they know they’ll be gone and the bill won’t have to be paid out of their pockets.
So how have you liked Reno?
Sully
DonC, much better thank you.