Suppose you were a renter interested in a house I own. In fact, it’s a brand new home I just finished building. I tell you that I’ll let you move in for no money down, but you’re going to be paying a monthly amount of $200 to $400 more than the market rent value of the home, and you also have to pay for all repairs and maintenance not covered by the warranty. You also have to install the grass in the back yard and pay for any other improvements you’d like, such as new ceiling fans or window coverings. And you have to pay my HOA fee too. Also, you have to remain in the house for 3 to 5 years. If you decide to move before then, you have to come up with $10,000 to $30,000 out of your pocket as a “move-out” fee. If you don’t have the cash, your credit gets hosed and you get to pay inflated interest rates for the next 7 years on anything you buy, such as a car, due to your bad credit.
Sounds like a crappy deal, right? Well that’s exactly the deal that new home builders are offering you when you decide to buy a cheapo home (that you can’t afford, but that they’ll sell you anyway) in a far flung subdivision for zero down. You get the exact financial equivalent of what I just outlined above. In return, you get to think you “own” the home. I believe many renters are better off renting while putting into savings the amount they are saving each month by having a lower rent payment than their mortgage would be, and avoiding the repair and maintenance costs of owning a home.
As I was reading this morning’s paper, the little voice in my head was, as usual, making commentary on the builder ads. Let’s have a look at what I mean. On page 1 of Section E of today’s Austin Statesman, the headline reads:
Centex offers incentives in new Green Meadows neighborhood
Transaltion: Demand isn’t what it needs to be in that area (Buda). Lowering prices isn’t what builders do, so they offer incentives instead, hoping to attract young couples or singles with reasonably good credit but no money.
Centex is offering incentives on several homes that are ready for move-in. “Buyers who hurry can take advantage of a very low interest rate on a great selection of homes when they close by March 31 (2007)”.
“This low rate is part of the ‘Key to the Sweet Life’ sales event, and buyers will also enjoy zero total move-in on these select homes, which means no downpayment, prepaids, or closing costs.
Transaltion: Read my first paragraph above. That’s the deal if you buy a new home zero down. And you’re not avoiding the downpayment, prepaids and closing costs. They simply get rolled into your loan and you own more than the house is worth the day you move in.
“The affordability of our Sierra Collection makes these homes perfect for the first-time buyer.
Translation: “First time Buyer” = “Renter”. Stop Renting! Buy a Home! You don’t have to have money to buy a home from us!
Now, I’m not knocking Centex in particular, they are a good builder based on what I know and have heard. They have good floorplans too. And I’ve been to most of the new home neighborhoods in Buda and I think those places would be swell for Buyers who have saved at least a 5% or 10% downpayment, clearly understand the costs of owning versus renting, and who know they won’t have to sell and move in the next 5 to 10 years.
It bothers me that the real estate industry, and especially new starter home builders, do the exact same thing with first time buyers that credit card companies do with freshmen college students. They make it very easy for young people to get way over their heads into debt. And what happens after these newbie home owners move into their new home? Their mailbox is stuffed for the next 6 months with furniture offers, new car deals, “no payments until 2009″ rent to own deals, and such. These furniture hucksters know that the young new home buyers can easily be sold on outfitting the new home with some new furniture – especially if they don’t have to start making payments for 18 months (while the unpaid interest accumulates unless you pay the full balance at the end of the 18 months).
If the Realtors, Mortgage people and New Home Builders (not to mention car dealers, furniture salesmen, etc.) really cared about people, our industries and sales people would do a better job of educating at least some people out of bad decisions to go deep into debt during their early financial years when they should be focused on saving money and building career skills. Loan standards should be higher. Instead, we’re all trained to “make the deal happen” whatever it takes.
I’m not sure why I picked today to rant about this. Just trying to do my part to offer another viewpoint to those people who become intoxicated with the idea of owning a first home. If you can’t sell it and walk away with money in your pocket, you don’t own the home, it owns you. Don’t do it unless you’ve considered all the implications and potential downside of owning something you can’t pay off should you be forced to move unexpectedly.