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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 adventure 
    Participant
    Status: Spouse
    Posts: 1183
    Joined: 10/24/2016

    Everyone I have talked to keeps mentioning how much “equity” we will be building by renovating this house at this “low” purchase price.

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    So, we did this.

    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.

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    I do. Is a great mental relief for me.

    It is a lot of work and there is substantial risk that it will cost more then expected.

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    It will. Double your estimates, and it still will.

    It works for our marriage to live in a not perfect house. Apparently it doesn’t for many. We bought a place, today zillow has it up 81% from what we paid. In that sense, I’ve made more on the house than at my job. I think that’s a bit high, but whatever. We do love the neighborhood. We could have been happy elsewhere too. What we do believe is that we could die happy in this house. We have zero interest in moving/looking  (moving to scandanavia aside…)

    What the calculations overlook is the cash is has taken to get the house fixed up (and the extra 100K we’d still like to spend on new windows, fence, deck, another bathroom, and solar). The NPV of cash is significant.

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    A question for you adventure. Say you had bought the place, not improved it.

    1. How much (%) would you be up from what you paid

    2. How much would you be up (%) with with improvement from what you paid : (current value-initial cost-improvement costs)/(initial cost+improvement cost) ?

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    Hey.

    1. When we bought the place, 3/3 toilets didn’t work. And my foot went through the kitchen and master bath floors during the inspection due to rot/leaks. So, some level of work was required to make it livable.

    Tough to guess. Of the 80% (zillow…) increase, easy 50% is our efforts to bring into 2018’s, from 1960s.  Other 30% is the neighborhood.

    2.  Ha, interesting. I answered #1 off of a gut guess. Then I did the math for #2, based on your formula. Excel says: 50.095%

     

    I’d also say, if we had just stayed renting, and not paid for this stupid large mortgage and easy six figures of cash remodel stuff (read: buy home depot stock), we’d be about done with our 6 figures of student loan debt 2 years in. Ugh. So, I guess we have a house (still needs 50-100k of work) and loans, but we are happy with the little corner of the world and our garden.

    Edit: I’d also add that I don’t think I could sell the place today for the zillow price, it’d be 10% lower, I think!?.

    #191172 Reply
    Avatar NWMD 
    Participant
    Status: Physician
    Posts: 11
    Joined: 07/15/2018

    It is interesting how this thread turned into a discussion about pools and sunrooms, haha.

    I feel more confident in the decision to not buy the house now. I think I am just going to save up a proper down payment and looks for something cheaper in the same school district.

    Do you guys have any advice about the best place to save a downpayment of around 200-300K. I was thinking about just buying bonds index funds in a taxable account. PoF seems to recommend a money market fund.

    #191178 Reply
    Avatar adventure 
    Participant
    Status: Spouse
    Posts: 1183
    Joined: 10/24/2016
    I was thinking about just buying bonds index funds in a taxable account. PoF seems to recommend a money market fund.

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    Just buy cheese.

    … index funds are risky, and could go down. Money market has a lower return, but is usually just tbills, and shouldn’t lose value. If you’re looking to need the cash w/in 5 years, a MM is probably a safer bet.

    #191180 Reply
    Liked by Zaphod
    Dreamgiver Dreamgiver 
    Participant
    Status: Physician
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    Joined: 03/09/2017
    Earnest refinancing bonus

    Majority of my short term reserves are in VUSXX. 2.33% yield with no state income tax due.

    #191195 Reply
    Avatar StarTrekDoc 
    Participant
    Status: Physician
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    Joined: 01/15/2017

    If you need capital preservation utmost, then cash reserves.  If you can tolerate a bond fluctuation, then go ahead—really depends on how solidly you’re committed to buying a house +/- fixer vs smaller in that community.

    #191432 Reply
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 951
    Joined: 11/21/2017

    It is interesting how this thread turned into a discussion about pools and sunrooms, haha.

    I feel more confident in the decision to not buy the house now. I think I am just going to save up a proper down payment and looks for something cheaper in the same school district.

    Do you guys have any advice about the best place to save a downpayment of around 200-300K. I was thinking about just buying bonds index funds in a taxable account. PoF seems to recommend a money market fund.

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    The house may not be a bad investment. In fact if it is mainly land value in an appreciating area it could be a very good investment.

    A few things I would also bear in mind:

    1. Don’t be suckered into renovators delight. Very few MD’s will be able to manufacture much in terms of renovation appreciation after taking into account their time value of labour.

    2. Take advantage of principle residence CGT exemption. For me this means buying something as close to 1M with as much land value as possible.

    3. If there is nothing wrong with the land, then you maybe better off buying this over a cheaper house with less % land value – if you are just looking at investment return. Just make sure there is nothing that degrades the land value a lot like easements, sewer line, power lines, or anything that makes significant areas of the land not buildable on.

    4. Your return will depend very much on being able to not succumb to the urge to renovate – i.e renovate as little as possible. If you are looking at just return then I would not renovate at all. This is very difficult as your significant other and family/social pressures will be there for you to improve the livability of the place. The more you can keep it a dump the less capital outlay will be required, the greater will be your final return. So if the place is not livable, this can be a problem. I would not be averse to buying something barely livable if I was young though and your S.O agrees to it.

    5. It would be a a very long term “flip”. You would be living in a below average house for say 3-5 years, then sell it to someone who wants to knock down rebuild. You then pocket the capital gain (which could be high or zero) in that period capital gains tax free, which is sweet. And in the meantime you get to live there !

    6. You could improve it to your dream house, but you might be better off knocking it down and rebuilding.

    If I was young, and still single, my dream situation would be to buy a property with large land value (90% plus) and rezoning potential – say 5 acres rural near residential fringe around 1M with some chance of rezoning to residential smaller blocks. I would select an absolute dump that was barely livable. Then sell it in 5-10 years. And aim not to do any renovating or improving at all. With wife and children, there is no way my wife would want to live in the sticks, on a farm, so this is not at all possible. But the land value does tend to appreciate whereas building does not so I would select more land if possible, within what S.O will accept.

    Also remember you are short 1 house, which I think is risky. If there is a housing boom then you can get screwed if housing appreciates 50% in that area, which it often does during a 2-4 year boom. It’s painful being on the other end of that.  If you can afford it, I would tend to buy earlier.

    Your original idea to buy it for land value is a good one as long as the land is good. The idea that you get any equity from renovating is fanciful. But your return could be great long term if the % land value is high (70% plus) and the area has long term capital appreciation potential. At the very least it offsets you being short 1 housing block in an area you want to live.

    Good luck with it all.

    #191625 Reply
    Liked by adventure
    hatton1 hatton1 
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    Status: Physician
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    Joined: 01/11/2016

    I just bought a house hence my lack of recent posts..  I am financially independent so I paid cash.  My old housed was built in 1979.  New one was built in 2008.  I have extensively renovated the old house.  I put in lots of granite, onyx, and marble.  I have custom (Clive Christian knock-off cabinetry).  I do not expect to get any money from these upgrades.  I just hope to sell the old house.  In this area people lose on renovations.  I have made the mistake of hiring an interior decorator.  She wants me to do all kinds of things to the new house.  I am not sure that I will do anything other than moving some light fixtures and change a back splash. I cannot imagine anyone wanting to move every 5 years.  It is hard work.

    #191631 Reply
    Avatar Dont_know_mind 
    Participant
    Status: Physician
    Posts: 951
    Joined: 11/21/2017

    I just bought a house hence my lack of recent posts..  I am financially independent so I paid cash.  My old housed was built in 1979.  New one was built in 2008.  I have extensively renovated the old house.  I put in lots of granite, onyx, and marble.  I have custom (Clive Christian knock-off cabinetry).  I do not expect to get any money from these upgrades.  I just hope to sell the old house.  In this area people lose on renovations.  I have made the mistake of hiring an interior decorator.  She wants me to do all kinds of things to the new house.  I am not sure that I will do anything other than moving so me light fixtures and change a back splash. I cannot imagine anyone wanting to move every 5 years.  It is hard work.

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    Congrats hatton, that sounds great. Enjoy the new house !

    Fire the interior decorator and do very minimal !

    “In this area people lose on renovations.” – probably not just in your area, most areas.

    #191635 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 3059
    Joined: 09/18/2018

    @hatton1,
    So sorry to hear about you recent illness. Interior Designer Disease can be difficult, time consuming, and expensive. I am sure if you post a picture of the backsplash, you can get a great diverse solution going.

    As you said, that kinda blew through your spending budget this year.

    #191644 Reply
    Liked by childay, hatton1
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 3063
    Joined: 01/11/2016
    As you said, that kinda blew through your spending budget this year.

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    I few this as getting the right type of house to age in place.  It is costing some $$$$ but much less than many real estate transactions I read about.  Once it is all done my spending will go down.  What is money for anyway?

    Congrats hatton, that sounds great. Enjoy the new house !

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    I do think you are right about land values.  Location…….

    #191650 Reply
    Liked by q-school, Tim
    Avatar StarTrekDoc 
    Participant
    Status: Physician
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    Joined: 01/15/2017

    Renovation is for own, unless it’s broken, then it’s really not renovation anymore but repair/replacement.

    It Could help in selling, but most folk will readily tell you only kitchen and primary bathrooms come close to return values….if you do it smartly…..not Decor everything.

    The closer one keeps to standard layouts, traditional tastes, and standard grade materials to that location…the better your return dollar.

    The danger of renovations is that one easily ventures off this path.

    Hatton, welcome back! Retire, new job, new home. What a busy 2018 you had…..

    #191695 Reply
    Liked by hatton1, Anne
    Avatar StarTrekDoc 
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    Status: Physician
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    Joined: 01/15/2017

    Hatton, Totally forgot to say…hope the new job is 50miles further to get that moving expense deductible!

    #191698 Reply
    Liked by hatton1
    Avatar Tim 
    Participant
    Status: Accountant
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    Joined: 09/18/2018
    I few this as getting the right type of house to age in place.

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    Did you get your housekeeper to stay with you?

    #191731 Reply
    Liked by adventure
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 3063
    Joined: 01/11/2016
    I few this as getting the right type of house to age in place. 

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    Did you get your housekeeper to stay with you?

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    Yes  She also helps with my dogs

    #191837 Reply
    Avatar NWMD 
    Participant
    Status: Physician
    Posts: 11
    Joined: 07/15/2018

    So we decided to walk away from the house. We only ended up losing the cost of home inspection which was ~$500.

    I still have mix feelings (FOMO) about whether we should have gone forward with the purchase, but I think that is normal with most tough decisions. The house ended up going back up on the MLS for around a week and is now down again. I’m not sure what they ultimately got for it. We ended up offering $850K take it or leave it and they left.

    I’m sure we would have to spend at least 300K to make it perfect, 150K to make it okay. Because we live in a HCOL area, labor costs a lot more so things like kitchen and bathroom remodels are at least twice what they would cost in the Southeast where I grew up.

    I think we’ll be ready to buy once we save up more a traditional downpayment. I was super nervous about taking 401K loans to expedite the home buying process, then being stuck with mortgage, renovation costs, and 401K loans as fixed costs for the next few years.

    Ultimately, I think we need have appropriate expectations before we buy. We will likely need to settle for a less ideal house if we want to stay in this city. I think reaching FI is more important to me than the “dream doctor house” anyways.

    Thanks again for all the advice.

    #206294 Reply

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