The Value of Home Equity (another "Should I buy this house?" post)

Home Mortgages and Home Buying The Value of Home Equity (another "Should I buy this house?" post)

  • Avatar NWMD 
    Status: Physician
    Posts: 15
    Joined: 07/15/2018

    I am currently in a situation where I am trying to figure out the true value of home equity. I am a 31 yo MD working a HCOL west coast city (median home price ~$725K per Zillow).

    I have no students loans or other debts. I have around $220K in tax deferred retirement accounts saved so far. I make around $350K per year, hopefully will be closer to $400K in the next few years (though not guaranteed). I love my job and city and don’t want to move anywhere else. My spouse (non-physician) and I are expecting and we were originally planning on buying in the next few years before this “opportunity” was presented. We are currently renting for $2,400 per month.

    I was recently presented with an opportunity to buy a “fixer upper” for $900K. The house next door is identical in floor plan and size. It sold for $1.7 million in 2017, now worth near $2 million. I would probably need to put around $100-200K in work to get the house in top shape (new kitchen, new bathrooms, finish the basement). We are planning on living in the house and not flipping it. We love the neighborhood, house style, yard, and it is in the best school district.

    Everyone I have talked to keeps mentioning how much “equity” we will be building by renovating this house at this “low” purchase price. I like the house but I am having a hard time deciding if this is the right move. The mortgage will certainly violate WCI’s 2x income rule, but it seems like the returns on investment might make this rule worth breaking.

    I was hoping for some feedback. Thanks!

    #190374 Reply
    ENT Doc ENT Doc 
    Status: Physician
    Posts: 3571
    Joined: 01/14/2017

    I wouldn’t do it, personally.  Not only is it out of your price range, but you’ll have to pay more for both upkeep and taxes when the house gets reassessed.  Indeed the house might jump up in value.  But if it’s such a good deal why hasn’t it been snatched up yet by people who are professional flippers?  They have better ins, know contractors who can get in, upgrade, and get out quickly and get that 40% markup.  Curious who presented you this “opportunity”.  You haven’t described how much of a down payment you have saved, but even if you did have a 20% down payment, the loan you’d need to take out in order to have money for these upgrades would set you back over $6000 per month, nearly $4,000 more than what you are currently paying.

    #190379 Reply
    Avatar fasteddie911 
    Status: Physician
    Posts: 310
    Joined: 05/31/2016

    I’d ignore the equity talk and just look for a house you want to live in for many years.  If this house checks all the boxes, except the fixer-upper part, and there’s no better options and/or you don’t mind fixing it up, I’d consider it.  But is also depends on what kind of shape it’s in, if it’s unliveable or just outdated.  I too live in a HCOL area and your salary and house price doesn’t make me balk, of course it depends on your area but my area that type of situation is pretty normal.

    #190381 Reply
    Avatar Anne 
    Status: Physician
    Posts: 1240
    Joined: 11/07/2017

    How much is your down payment?

    Does/will your spouse work?

    What is your spending outside of housing?  How much are you saving this year?

    Is it a fixer upper only cosmetically or also structurally?  If you say cosmetically, are you sure about that?

    I think you are underestimating the cost of renovation.  And also underestimating how awful going through a renovation would be when you have a new baby.

    #190382 Reply
    Lordosis Lordosis 
    Status: Physician
    Posts: 2186
    Joined: 02/11/2019

    Fixing up a house blows unless it is something you like doing.  There is a reason it is cheaper to buy and old house and fix it up.  It is a lot of work and there is substantial risk that it will cost more then expected.

    With those things in mind you have a good income.  No debt and good savings for early career.  Either someone helped you along or you did a lot right.  When you do everything else right you can afford to make mistakes.  Not saying that getting this house is a mistake but it could be.

    “Never let your sense of morals prevent you from doing what is right.”

    #190392 Reply
    Liked by adventure
    Avatar Kamban 
    Status: Physician
    Posts: 2577
    Joined: 08/01/2016

    I would probably need to put around $100-200K in work to get the house in top shape (new kitchen, new bathrooms, finish the basement).

    Click to expand…

    I think you are underestimating the cost of renovation. And also underestimating how awful going through a renovation would be when you have a new baby.

    Click to expand…

    As Anne said you are vastly, vastly underestimating the cost of the renovation. You really think that a new kitchen, bathrooms and basement will come under 200K in a HCOL west coast place, let alone 100K. You are getting emotionally attached to the house, being suckered in by the low price.

    Even in my new house the bathrooms needed a change in configuration after framing and the cost of the changes plus tiling it was well over 75K. Have you looked at the price of cabinets. Flooring? Countertops. And there is the cost of tearing it down. Think more like 400-500K rather than 200K. And even that might not include full basement renovation.

    #190403 Reply
    CordMcNally CordMcNally 
    Status: Physician
    Posts: 3059
    Joined: 01/03/2017

    How were you presented with the opportunity? Most people aren’t in the business of making great deals to people they don’t know and many times even to friends.

    “But investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
    ― Benjamin Graham, The Intelligent Investor

    #190411 Reply
    Avatar hightower 
    Status: Physician
    Posts: 1501
    Joined: 12/07/2016


    You make about what I make.  You’re younger than me (I’m 37) and you are in much better financial shape than I was at your age.  The only other difference is you live on the west coast and I live in the Midwest.  We own a home here.  It’s worth probably 500k.  We have a 275k 15 year mortgage with a fixed rate of 3.25%. I have one student loan of 64k at 2.6% which I’m holding onto.

    Why am I telling you this?  Because I could not fathom spending 900k on a house, let alone a house that needs a full renovation on the expensive west coast.  We bought our house for 140k as a “fixer upper.”  I can tell you from experience it will cost you at least 2X as much as you think to renovate and it will take 3-4X longer than you think to accomplish.

    At 900k, even with a 400k income you’re starting out over budget.  You’ll need 180k for a proper 20% down payment on the un-renovated home to get the best mortgage terms/rate.  Where will the cash come from for the renovation?  A construction loan will require a much larger down payment if that’s the route you’re going, otherwise you’ll have to cash flow all the costs.

    I love the west coast.  I visit friends in LA frequently and I would love to live there, but the cost of home ownership is absolutely absurd/obscene.  And I do not think it’s going to last.  We were just in LA last week on our way home from Hawaii and we were looking at houses for fun.  I couldn’t believe how much some of them cost for what they were in terms of size and condition.  There were 800 sq/ft homes going for 2.7 million in areas that we’re that great.  I honestly feel sorry for anyone out there that wants to own a home because if you’re not making over a million dollars a year, you really shouldn’t even be thinking about it.  It’s crazy.

    Anyway, my advice to you is to stay put.  You’re in a comfortable situation right now with great numbers at your age.  If you continue to do what you’re doing now, you’ll be in amazingly great financial shape in no time.  When you’re my age, you’ll be a millionaire, debt free, and your options for housing may be better at that time (if the market drops you might actually be able to buy a move in ready home for a reasonable price). If you feel the need to upsize due to the little one on the way, rent a bigger place.  Remember that your rent is the maximum you’ll have to spend on housing each month.  But, if you own a home, your mortgage becomes the minimum you’ll have to pay each month (property taxes, utilities, unexpected repairs, regular maintenance, etc all add up very quickly).

    Also, this statement bothers me “returns on investment might make this rule worth breaking”.  There is no return on investment unless you sell the house.  If you plan on staying there for 20-30 years (which is unlikely based on statistics, most people move every 5-10 years), you might make some money back, but if you add up all the true costs of owning that home, you might not turn any real profit.


    #190422 Reply
    Zaphod Zaphod 
    Status: Physician, Small Business Owner
    Posts: 6339
    Joined: 01/12/2016

    I question why on earth its still on the market if its such a good deal. Its likely late cycle, man it would suck to take a couple years of effort and money to fix the place up and try to sell or access the money in a recession.

    Do you know much about home renovation or will you be contracting it out? Either way its fun until its not. I distinctly remember a phase of getting my rental prepped where it was so much fun…then where I wanted to do anything else and was over it.

    Is the point to having the house and be fixed up to have a bunch of equity at some point? That doesnt do much unless you access it or move of course, its not a bad thing but fixing things up does not guarantee an increase, especially not the one you’re hoping. I’d talk to people who do this in the area, ask around, etc…get an actual feel. This sounds like a huge undertaking on an asset that is already expensive for a first try kind of thing.

    #190428 Reply
    Lordosis Lordosis 
    Status: Physician
    Posts: 2186
    Joined: 02/11/2019

    Why can all the butterfly farmers and paper mache artists on house hunters afford these homes but physicians cannot?

    “Never let your sense of morals prevent you from doing what is right.”

    #190430 Reply
    Avatar ifonlyFI 
    Status: Physician
    Posts: 100
    Joined: 08/23/2017

    I’m going to differ a little in my opinion although I recognize that the sage advice from prior posters carry much more weight than mine.  I live in a much higher HCOL on the west coast.  $900k buys you nothing down here.  If a person in my area is in the market for a house, such an opportunity (if actually true) that you describe would be very tempting.  Regardless, when I first started out as an attending, I bought a very expensive house that I sold after 10 years.  I had intentions of making a lot of money in appreciation which turned out not to be the case.  I am currently homeless, mortgage less, and just pay monthly rent.

    If you are inexperienced in real estate, you may be better off learning what happens to that property without buying so you will be ready to recognize which homes offer you the best value and meets your family’s “happiness” needs.

    good luck!

    #190445 Reply
    Avatar danesgod 
    Status: Spouse
    Posts: 77
    Joined: 09/12/2017

    I don’t know exactly what market you speak of, but in the Bay Area the cost of fixing up houses is mostly baked into the price. I don’t believe you’re getting a 900k house that needs 200k worth of work and the house next door is worth 2MM. It doesn’t add up. You’re getting some combination of a weird off-market deal, there’s more wrong with the house, and/or its going to take a lot more than 200k to fix it. If this were not the case, someone would have bought it for flipping already, perhaps the realtors involved or their personal circle. Think about it: this investment can double their money. Something’s fishy.

    All that said, WCIs rules about incomes vs mortgages (2-3x) simply don’t apply to HCOL / vHCOL areas. You’ve got a few options on how to deal with this: move, continue renting, save more for a down payment, or take calculated risks. I think going to 3-4x income in HCOL areas can be done while still minimizing risk.

    We recently bought a home in SF with a mortgage closer to 5x; this is risky. We’ve tried to mitigate that risk in a number of ways with the ultimate back-up plan being that we simply leave the Bay Area. In the best case scenario, we locked in a house/interest rate/taxes at a today’s rates, we like the area and wife can walk to work, the schools are good, we will hopefully live here forever. But, I’m not living with the illusion that this isn’t risky. House rich/cash poor is extremely common on the West Coast.

    Edit: I still look at houses as consumable items. Maybe more as an low/modest returning investment for your children. You’re going to live there for a long time hopefully. So to answer your title, I don’t see a lot of “value” in home equity. Buy to stay put, when you’re ready. Buy real-estate investment properties to make money.

    #190455 Reply
    Avatar NWMD 
    Status: Physician
    Posts: 15
    Joined: 07/15/2018

    I think the reason it was not bought by any flippers was essentially poor advertising. They are an older real estate agent and older seller that were not very motivated and made multiple errors on the listing (wrong number of bedrooms, bathrooms).

    We don’t have a lot of other expenses. I did not count my spouse’s income as I don’t want to be dependent on it for this decision to work in case they ultimately want to stay home or work part-time.

    Regarding other expenses, I have a pretty high savings rate now (around 50%) though I suspect this may change with the baby. That’s why I was able to pay off loans and max out retirement accounts almost three years after residency. We will probably need a new car in the next few years, other than there is nothing obvious upcoming expense I see.

    Regarding the nitty gritty, I am planning to put only 5% down on a physician loan. We are going to arrange a home inspection next week where I can hopefully get an idea on how much is wrong with the property and what it will cost to fix it.


    #190496 Reply
    Avatar Gamma Knives 
    Status: Physician
    Posts: 172
    Joined: 06/25/2017

    A $2 million home for $1-1.1 million. It sounds too good to be true which (despite a poor listing) makes me think it is too good to be true. I think (just my humble opinion) that Seattle, Portland, SF, and so forth are due for a correction in housing values. That may be coming soon or may not be for a few years (or maybe never what do I know). My concern is that I hear people buying at these high prices with the rationale that values are only going to go up. This sounds like a bubble to me.

    Do you have experience in fixing up homes? How did you arrive at the $100k-200k cost? Housing can be an inefficient market but it is not usually that inefficient. This could be great for you but it has the potential to be an absolute nightmare that could be an albatross around your neck for years. Best of luck.

    #190506 Reply
    White.Beard.Doc White.Beard.Doc 
    Status: Physician
    Posts: 965
    Joined: 02/06/2016

    This might be a good opportunity, and it might be a disaster waiting to happen.  If you are interested in this house, be sure to get a top quality inspector to investigate everything that might be wrong with it.  Are their structural issues?  Or just old bathrooms and kitchen?  If the old plumbing works, you could live there and take your time with any renovations.  But all those renovations might be a stretch once you take on that big mortgage.  Proceed with caution, but it might be worth looking further at this potential opportunity.  Just be careful you don’t get in over your head.

    #190592 Reply
    Liked by radnater, hatton1

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