Archives For Buying a house

Looking to make the most of your open houses? The following three tips can help up your open house game.

  1. Digitize

For REALTORS® who want to enhance the Open House experience for prospects and bolster their own system for capturing leads, Open Home Pro fits the bill. An excellent alternative to paper sign-in sheets, this free download offers users the ability to create a comprehensive digital experience for prospects through sign-in forms, photo displays, customized questions, and automated thank you messages.

No more wasted time trying to decipher handwritten sign-in sheets that offer little other than a name and email. Based on your customized questions, this innovative program will send you a list of leads who don’t have an agent or have a home to sell, or who are pre-approved for a mortgage. Open Home Pro also allows users to easily export collected data to a CSV file.

  1. Deliver

Handouts make great icebreakers and takeaways at any Open House, and Realtors Property Resource® (RPR®) makes it easy to create them. The real estate data platform offers REALTORS® several customizable reports perfectly suited for Open Houses. Start by offering an RPR Property Flyer. Branded with your name and contact info, the flyer offers just enough data about the property to give clients a solid understanding of its attributes, including photos and insights on how you came to the list price via comps.

Two of RPR’s flagship reports seen frequently at Open Houses are their Neighborhood and School Reports. The Neighborhood Report presents an in-depth portrait of the people who live in a target area, in addition to key economic and quality of life indicators. The report also includes median list and sales prices, listings and sales volumes, and per square foot pricing on sold homes.

Similarly, RPR’s School Report report summarizes student populations, testing outcomes, parental reviews, and ratings about a public or private school. Must-have information for parents.

Here’s a tip: Print a few of these insightful reports to showcase on a kitchen table and when the supply dwindles, ask potential buyers for an email address. From that spot, use your tablet or phone to retrieve your saved reports from the RPR website and send it to the client in just a few quick clicks.

  1. Drip

Another radically simple idea for converting leads to clients post-Open House is to create a homes by email campaign. Here agents can send newly listed homes to prospects via an automated delivery system offered through their MLS. When a home is listed that meets your client’s specific criteria (location, square footage, number of bedrooms, price), the listing is automatically delivered to the client, complete with your personalized greeting. This type of drip campaign will keep your client in the loop and requires little to no effort on your part.

For more information, visit www.narrpr.com.

4 home lease-option questions
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4 home lease-option questions | Hero Images/Getty Images

If you lack a down payment or your credit is subpar, it can be frustrating when you find the home you want. A lease-option — a contract that allows you to buy a home after your lease term ends — can be a solution to the problem.

What is a lease-option?

A contract in which a landlord and tenant agree that, at the end of a specified period, the renter may buy the property. The tenant pays rent plus an additional amount each month. At the end of the lease, the renter may use the cumulative extra payments as a down payment.

Also called:

  • Rent-option
  • Lease-to-buy option
  • Rent-to-buy option
  • Lease-with-option-to-buy
  • Lease with option to purchase
  • Rent-to-own

Before you sign, have a lawyer review the contract. And ask the following 4 questions.

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How is the deal structured? | Portra Images/Getty Images

How is the deal structured?

Usually, part of your rent is credited toward your future purchase.

“A rent-to-own contract needs to be devised so that the full rental amount is more than market rate for that size, style and age of home in that specific neighborhood,” says Marcy Imperi, a Realtor with Century 21 HomeStar in Highland Heights, Ohio.

Imperi says that if you’re paying market-rate rent, a lender may not credit any of the funds you paid to your landlord toward the purchase. Talk to a lender so you understand how you can qualify for a loan in the future.

RATE SEARCH: Comparison-shop for a VA loan today.


Who's responsible for what? | Andrejs Zemdega/Getty Images

Who’s responsible for what?

A good lease-option agreement will put in writing who is responsible for maintenance, repairs and upkeep, Imperi says.

Renters need renter’s insurance and owners need landlord’s insurance. Both renters and owners should keep good records of payments for the lender when you apply for a loan.

The agreement should spell out who is paying for any association fees and utilities, too.

RATE SEARCH: Shop FHA-approved lenders today.


How will the deed be transferred to the buyer? | Andrejs Zemdega/Getty Images

How will the deed be transferred to the buyer?

Buyers should know ahead of time the deposit needed to complete the purchase, says Jeff Lesley, a broker and Realtor with Century 21 Sweyer & Associates in Wilmington, North Carolina.

“If the sellers are taking the risk of removing their home from the market for a deferred lump sum of cash flow, then what nonrefundable commitment do they have from you?” asks Lesley.

Imperi says buyers and sellers who agree on a purchase price in advance should include a clause in the purchase agreement that the sale is contingent on an appraisal. Home values can fluctuate during your lease period, so it’s important to know if the price can be adjusted before you buy.

RATE SEARCH: Find a low-down payment mortgage today.


What happens if you're not ready to buy when the contract ends? | Andrejs Zemdega/Getty Images

What happens if you’re not ready to buy when the contract ends?

Lesley says there should be a clause in the contract about your options, particularly if your credit still isn’t up to par.

“Unless you’re working on credit repair and have a solid plan to be eligible for a loan within 2 years or less, this is just a rental, not a rent-to-own,” Imperi says. “If you’re enrolled in a credit repair program, you should be sharing progress updates with your landlord.”

Understanding your rights and responsibilities in a rent-to-own agreement is essential. If you don’t, you could end up in a rent-to-rent situation without making any progress toward homeownership.

Thursday, 2 Jun 2016 | 9:26 AM ET

It looks so easy on TV. Buy a bargain-basement house, pull up some nasty carpet, re-tile the bathroom, paint away the wall stains and sell it for a hefty profit.

It’s not, however, all those popular shows that are driving the flipping market today. It’s pure and simple prices — and profit. There is a severe lack of good quality, turn-key homes for sale, and that has created a seller’s market across the nation, even for those reselling homes.

After cooling off in 2014, home flipping is on the rise again — its share of all home sales is up 20 percent in the first three months of this year from the previous quarter and up 3 percent from the same period a year ago, according to a new report from RealtyTrac, which defines a flip as a property bought and resold within a 12-month period.

While flipping today is nothing like it was during the housing boom a decade ago, when investors used risky mortgages, it is reaching new peaks in 7 percent of the nation’s metro markets, including Baltimore, Buffalo, New Orleans, San Diego and even pricey Seattle.

Dana Rice, real estate agent and home flipper, at her latest project in Bethesda, Maryland, a very small colonial, within walking distance to shops and Metro.

Diana Olick | CNBC
Dana Rice, real estate agent and home flipper, at her latest project in Bethesda, Maryland, a very small colonial, within walking distance to shops and Metro.

“While responsible home flipping is helpful for a housing market, excessive and irresponsible flipping activity can contribute to a home price pressure cooker that overheats a housing market, and we are starting to see evidence of that pressure cooker environment in a handful of markets,” said Daren Blomquist, senior vice president at RealtyTrac.

That’s because flippers today largely use cash — 71 percent did in the first quarter of this year. Compare that to just 27 percent who used cash at the height of the housing boom. That helps keep most flippers conservative, but it also exacerbates the problems for entry-level homebuyers, who are facing one of the tightest housing markets in history. They simply can’t compete against all-cash buyers.

Usually flippers look for distressed properties either in the foreclosure process or already bank-owned. These are not always listed on public sale sites. There are fewer of those today, so flippers are moving to the mainstream market, creating that new pressure.

“A telltale sign is when flippers are acquiring properties at or close to full market value. Those markets are so competitive that even the off-market properties flippers are looking to buy are not selling at much of a discount — and there may be very few distressed properties available,” said Blomquist.

Examples of these markets include San Antonio, where Blomquist says flippers are actually purchasing at a 7.8 percent premium above estimated full market value, as well as Austin, Texas; Salt Lake City; Naples, Florida; Dallas and San Jose, California.

Despite the premium to buy, flippers are still seeing growing gains in profit. Home flippers realized an average gross profit of more than $58,000 in the first quarter of this year, the highest since the third quarter of 2005, according to RealtyTrac.

Real estate agent Dana Rice and her husband flip houses in the tony D.C. suburb of Bethesda, Maryland. Prices there are well above the national median, and there are few distressed properties. Instead, they target old, small fixer-uppers. Even those command a hefty purchase price up front, but they can also offer big rewards.

“I didn’t want a teardown. There is so much character in this part of Bethesda,” said Rice. “I don’t think that everybody wants a brand new build. There is a hole in the market because not everyone wants to do a renovation. If you put a little bit of effort in, these numbers can be huge.”

Rice purchased her latest project, a very small colonial, within walking distance to shops and Metro, for $680,000. She expects to put half a million dollars into the renovation, adding both square footage and high-end finishings; she is confident that in this competitive market she will see an 18-25 percent return on investment.

“It’s like birthing a baby. … If you’re overpriced, you’re dead in the water.” -Dana Rice, real estate agent and home flipper

“It’s like birthing a baby,” she said, noting that she will wait to list it until she feels the market is just right. “If you’re overpriced, you’re dead in the water.”

The lack of inventory is certainly a double-edged sword for flippers. Their initial investment price can be high, and flippers are often competing against local builders, who may want to tear the house down and put something up that is twice the size. On the other hand, not everyone wants or can afford a huge, new, expensive home, and that gives flippers the edge.

“The key here is that there is particularly a dearth of listed inventory in good condition,” said Blomquist. “That is the inventory flippers are competing against when they sell.”

Nothing can kill a sale faster than a dated, closed-in kitchen area. Many of today’s buyers see the kitchen as the home’s command center, and not just a place for cooking and eating. They want the kitchen to be many things at once, hence the rise in popularity of what is known as the multifunctional open-concept kitchen.

Read more: 9 Modest Fixes for the Problem Kitchen

If your clients are looking to renovate an existing kitchen, or you need to advise them on building one that’s brand-new, the Washington Post shared some background on how they can design a kitchen space so that it’s functional in many different way.

“Whether you are renovating existing structure or building new, architects fully recognize the need for space that is designed for movement and flow,” says Stephanie Brick, senior designer at Sustainable Design Group, in Gaithersburg, Md. “There are still rules and important elemental guidelines — you do not want to just delete all of the walls on your first floor. But by being selective in the design, materials and professionals you work with, you can easily achieve a space that does not merely react to, but anticipates, your bustling lifestyle.”

The two main considerations when designing a multifunctional space are wall placement and storage. While it may seem like an easy solution to knock down walls, Brick says there are other architectural solutions, like open doorways, that can give a similar effect while keeping the space architecturally interesting.

Being as honest as possible about individual organizational and storage needs is key when creating a multifunctional kitchen. For some owners who want to use the kitchen as a makeshift homework area or as a place to handle their bills, adding storage for these needs will be necessary. If your clients do a lot of cooking and entertaining for large groups, they will want to make sure the kitchen has space and storage to accommodate that process. If the family has small children, the kitchen can be designed with their safety in mind.

Brick has one final piece of advice when designing this type of kitchen space. “Honesty with your architect is key to creating a strong working relationship and delivering an equally beautiful and functional space in your home.”

Source: “How to create a live/work/play space at home,” The Washington Post (June 8, 2016)

via Now Trending: The Multifunctional Kitchen | Realtor Magazine

Field Guide to Lease-Option Purchases

(Updated April 2016)

Lease-option agreements* are common when acquiring personal property—such as dishwashers, washing machines, automobiles, and TVs—but are not as common for the acquisition of real property. Lease-option agreements are generally utilized in residential real estate acquisition when a home buyer would like to purchase a home, but needs to repair her credit rating in order to secure a promissory note and mortgage. The lease-option agreement allows a buyer to lease a property for a set period of time—typically between 1-3 years—with the option to buy the property at a contractual future date. “The negotiated option is typically a percentage of the price for example, one to five percent, and is credited, along with the rents and a rent premium, to the purchase price if the lessee buys the property. If the option to buy is not exercised, the buyer will lose the option fee and rent premium.” (Real Estate Law (link is external), p. 227). Read the articles below to learn more about this alternative real estate financing option. (H. Hester, Information and Digitization Specialist)

*Also known as lease-to-own, rent-to-own, lease/purchase, lease with an option to purchase, or real options.


E – EBSCO articles available for NAR members only. Password can be found on the EBSCO Access Information page.


Lease to Own: The Basics

Is rent-to-own the future of housing? (link is external), (HousingWire, Jan. 14, 2016).

Investors Bank on Rent-to-Own Comeback (REALTOR® Magazine, July 29, 2015).

How do Lease Purchase Agreements Work? (link is external) (SFGate, n.d.).

How Do I Get a List of Rent to Own Homes? (link is external) (realtor.com®, July 25, 2012).

How Do I Find A Rent To Own Home In Bristol, Pennsylvania? (link is external) (realtor.com®, May 10, 2012).

How Do I Find A Realtor To Explain The Rent To Own Option? (link is external) (realtor.com®, Apr. 6, 2012).

Lease-to-Own Contracts (link is external), (UCLA School of Law, 2012).

Lease options are back: proceed carefully (link is external), (Realty Times, Oct. 25, 2011).

Sale-Leaseback Transactions: Price Premiums and Market Efficiency (link is external), (Journal of Real Estate Research, Apr.-June 2010). E

Informal Homeownership in the United States and the Law (link is external), see page 132. (University of Texas School of Law, 2010).

How lease-options benefit sellers, buyers … and their REALTORS®? (link is external), (CRE Online, n.d.).

Thought about lease-to-own transactions?, (REALTOR® Magazine – Speaking of Real Estate blog, Aug. 6, 2009).

Renting to Own (link is external), (realtor.com®, n.d.)

Case Studies & Examples

A Valuation Framework for Rent-to-Own Housing Contracts (link is external), (The Appraisal Journal, Summer 2014). E

Lease-to-own deals offer options in sluggish Tampa Bay housing market (link is external), (St. Petersburg Times, Oct. 23, 2011).

Can I get a lease option with bad credit? (link is external), (realtor.com®, May 5, 2011).

A Growing Housing Imbalance (link is external), (Mortgage Banking, Oct. 2011). E

Raising Capital Through Sale-Leasebacks (link is external), (Public Management, June 2010). E

Tax Implications

Individual Taxation Developments (link is external), (The Tax Adviser, Mar. 2012). E

Comparing Accounting and Taxation for Leases: Certified Public Accountant (link is external), (The CPA Journal, Apr. 2009). E

Tax Considerations for Buying and Selling Property with a Burdensome Lease (link is external), (Journal of Accountancy, 2009). E

Government Publications & Programs

State Agency Lease/Purchase Program (link is external), (Washington State Treasurer’s Office, n.d.).

Recent State Agency Lease/Purchase Interest Rates – Real Estate Only (link is external) (Washington State Treasurer’s Office, n.d.).

Definition from Washington State:

Lease/Purchase Obligations (Real Estate) — Lease/purchase obligations are contracts entered into by the state which provide for the use and purchase of real or personal property, and provide for payment by the state over a term of more than one year. For reference, see RCW chapter 39.94 “Financing Contracts.” Lease/purchase obligations are one type of lease-development alternative.” (Financial Budget Instructions Glossary of Terms (link is external), Washington State Office of Financial Management, n.d.).

Non-Mortgage Alternatives to RE Financing (link is external) from Reference Book – A Real Estate Guide (link is external), (California Department of Real Estate, 2010).

LFC Hearing Brief (link is external), (New Mexico Legislative Finance Committee, Dec. 2007).

Instructions for the Lease/Purchase Analysis Modeling Tool (link is external), (Idaho State Leasing Dept. of Administration, n.d.).

eBooks & Other Resources

The following eBooks and digital audiobooks are available to NAR members:

eBooks.realtor.org

Smart Guide to Real Estate: Step by Step Rent to Own, (Kindle and ePub)

Investing in Rent-to-Own Property, 2010 (ePub)

Investing in Real Estate With Lease Options and “Subject to” Deals, 2005 (ePub)

Books, Videos, Research Reports & More

The resources below are available for loan through Information Services. Up to three books, tapes, CDs and/or DVDs can be borrowed for 30 days from the Library for a nominal fee of $10. Call Information Services at 800-874-6500 for assistance.

Who Says You Can’t Buy a Home! (link is external) HG 2040.5 R25w (2006).

Field Guides & More

These field guides and other resources in the Virtual Library may also be of interest:

Sale-Leasebacks & Synthetic Leases

Seller Financing

Information Services Blog

Have an Idea for a New Field Guide?

Send us your suggestions (link sends e-mail).

The inclusion of links on this field guide does not imply endorsement by the National Association of REALTORS®. NAR makes no representations about whether the content of any external sites which may be linked in this field guide complies with state or federal laws or regulations or with applicable NAR policies. These links are provided for your convenience only and you rely on them at your own risk.

Home Buying Tips

October 20, 2006 — Leave a comment

Step-by-Step Home Buying

Buying Hints & Insights

Submitted by Professionals

Home Selling Tips

October 15, 2006 — Leave a comment

Step-by-Step Home Selling

Home Selling Hints & Insights

Submitted by Professionals

1. Start at the Street. Pretend you are a prospective buyer seeing your home for the first time. What do you see from your car? Make your home so inviting buyers will get out of their comforting cars and walk to your front door. Place fresh seasonal flowers, in pots or planted, along the front walk or by your front door.

2. Make Repairs. Lubricate squeaky door hinges, fix dripping faucets, and make sure toilets flush properly. You get used to the minor faults in your home, so ask a friend to inspect for minor defects.

3. Exterminate. One bug or spider, dead or alive, can cause some buyers to leave immediately.

4. Remove Clutter. Not only does a neat, organized house feel larger and more inviting, clutter-free homes give prospective buyers a chance to see the home’s features.

5. Deep Clean. Remove dust, spiders, and odors.

6. Depersonalize. Pack your personal mementos and photographs. Give your buyers the opportunity to visualize their personal effects in your home.

7. Lighten Up. During the winter months, use bulbs with the highest wattage recommended in light fixtures. Add small table lamps for extra lighting. If you have room on your kitchen and bathroom countertops, a small decorative lamp adds a warm glow with a designer’s touch.

8. Wash Walls or Repaint. Fresh paint gives you the best return on your money.

9. Clean Carpets or Replace. You may be accustomed to the way your carpet looks, but what do buyers see? If you’re selling to first-time home buyers, they most likely won’t have the money beyond the down payment to pay for new carpeting. Move-up buyers expect perfection, even if they want to tear it all out.

10. Consider having your pets taken care of by family or friends. Some home buyers are allergic to pets, while others will be turned off by pet odors. You get accustomed to your pets’ odors, but these scents drive buyers away.

With a little thought and effort, you can persuade buyers that your house exceeds their expectations– and is worth getting out of the car.

Copyright © Jeanette J. Fisher

Date: Tuesday, July 18, 2006 @ 12:53 PM EDT

Topic: Selling

Top 5 reasons buyers won’t commit to purchase

Spring is the traditional peak sales season for houses and condos. Summer is also usually very good until the traditional August slump, especially for families who want to relocate before school starts. More prospective home buyers are in the market at this time of the year than during any other season.

But 2006 is proving to be a bit different. Although 2005 was a record home sales volume year, the number of residence sales has slowed this year. There could be several reasons, such as adverse weather in many areas and slowly rising mortgage interest rates. In a few communities home sales prices have taken a slight dip so prospective buyers might be waiting to see if desperate home sellers reduce their asking prices. Another reason for waiting to buy a house or condo is the inventory of available listings is slowly rising, thus offering more homes available for sale. In summary, for most communities it is definitely a “buyer’s market.” That means there are more homes listed for sale than there are qualified home buyers. The result can be bargain prices for savvy home buyers.

TOP FIVE REASONS SOME HOMES DON’T SELL.

If your house or condo is listed for sale with a successful realty agent in your

vicinity, there are five key reasons your home might not sell although nearby comparable residences are selling:

1. THE ASKING PRICE IS TOO HIGH. By far, this is the top reason a home doesn’t sell. Although you might be just testing the market, prospective home buyers are very smart and they know an overpriced listing when they see it. Worse, their buyer’s agents won’t even bother showing homes with asking prices above recent sales prices of comparable nearby homes.

For this reason, if you want to get your home sold during this peak sales season, it is vital for your listing agent to keep you informed on a weekly basis of recent comparable home sales prices. Perhaps it’s time for an asking price reduction.

To illustrate, I was recently in Minneapolis. On my drives around the city and its suburbs, I was amazed at the considerable number of “price reduced” hangers on home-for-sale signs. That shows motivated home sellers (and their listing agents) are becoming more realistic.

2. THE LISTING AGENT DOESN’T MAKE THE HOME EASY TO SHOW. Well over 50 percent of home sales involve a listing agent and a buyer’s agent. If the listing agent makes it difficult to show a home, such as requiring the listing agent be present for all showings, this discourages buyer’s agents.

Unless there is a security reason, listed homes should always have a multiple listing service (MLS) lockbox key easily available for buyers’ agent showings on short notice. As an investor, I’ve often bought a house with for sale signs I saw on the way to inspect another house. Lock boxes are especially important for buyer’s agents with out-of-town transferees who have a short time available to inspect homes for purchase.

A related problem can be the listing agent wants to “double end” the home sale by getting both the listing portion and the selling portion of the sales commission.

Although rare, some listing agents refuse to put their listings into the local MLS, thus preventing showings by buyer’s agents. Or they might not put their listings on the Internet at www.Realtor.com and other Web sites where 70 percent of today’s home buyers start their searches before contacting a local realty agent.

3. CONDITION OF THE HOME. Most home buyers want to purchase a residence in near “model home” condition where all they have to do is turn the key in the front door and move in. However, if the residence requires considerable work, that turns off all but the most die-hard bargain hunting home buyers.

Fixer-upper homes appeal to a very limited market of home buyers. Sometimes known as “bottom fishers,” they will purchase such homes only at bargain prices, well below what can be obtained with modest fix-up work such as painting (the most profitable improvement of all), repairing, and cleaning.

Word quickly spreads among local real estate agents when a home “doesn’t show well.” Buyers’ agents will only show that residence to their bargain hunters, usually investors, who want to purchase far below market value.

4. “AS IS” HOME SALE CAN BE A RED FLAG TURN-OFF. Closely related to homes that don’t show well are those listed for sale in “as is” condition. The term “as is” means the seller offers the residence in its current condition and will not pay for any repairs. However, the seller must still disclose in writing to buyers all known defects, such as a leaky roof or a bad foundation.

Personally, I’ve bought many “as is” houses at bargain prices. But I always include in my purchase offer a contingency clause for my professional inspection approval. If I don’t approve the written report of my inspector, then I can cancel the purchase and get my good faith deposit refunded.

Whenever possible, home sellers should not offer their homes for sale “as is” because it is like waving a red flag in the buyer’s face. A better alternative is for the seller to obtain a professional inspection report and have the recommended repairs made before listing the home for sale.

Of course, when a home needs a major repair that the seller either can’t afford or doesn’t want to make, then an “as is” sale at a reduced price is advisable.

5. INEFFECTIVE MARKETING METHODS. In today’s home “buyer’s market” in most communities, listing agents and do-it-yourself “for sale by owner” home sellers must use every marketing resource available. Most effective is the for sale sign on the front lawn. A close second is weekly newspaper advertising, especially for a weekend open house. In third place is Internet advertising, especially at www.Realtor.com and other Web sites.

In addition, listing agents have the local MLS and their special networking among agents who represent prospective buyers for the type of house or condo listed for sale. The local Association of Realtors is an especially effective resource to spread the word about a desirable home listed for sale. A key part of this sales technique is the “broker’s tour” where only local agents are allowed to inspect a home for possible later showing to their buyers.

The best listing agents also use additional marketing methods, especially for their more expensive listings, such as color brochures and postcards mailed to nearby homeowners who may have friends who want to move to the area. Very expensive homes warrant the listing agent spending “big bucks” advertising residences in real estate magazine ads and offering Internet virtual tours.

CONCLUSION: Selling houses and condos in the current buyer’s market requires hard work by successful listing agents. If your home has been listed for sale with a successful realty agent over 45 days and without any purchase offers, it’s time to discuss the five key reasons some homes don’t sell with the listing agent and make adjustments to get your home sold.

By Bob Bruss

There are two basic reasons for purchasing a house:1) to provide shelter and accommodation and

2) as an investment, to provide an investment return through rental income and capital appreciation.

The question of shelter is easily answered. If you are considering buying a house, decide on the type of house that you would like to live in. Say you want a certain neighbourhood because of the quality of life, the schools for the kids and the access to highways and rapid transit for commuting to work. Have a look around for a house for rent that meets your needs. If there aren’t any, it’s obvious that you have to buy a house to meet your shelter requirements. However, if you are reasonably flexible, you should be able to find a house for rent that is suitable. Compare the rent on this house to the mortgage payment, taxes and maintenance costs that you would have to make if you bought this house or a similar one.

For example, let’s say that you’ve found your dream house on Easy Street in the beautiful Hills of Richmond and you can buy it for $245,000 or rent it for $1,700 per month. Let’s compare the two options. With a down payment of $45,000, you’d have a mortgage of $200,000. At current rates of around 7%, the monthly mortgage payment would be approximately $1,200. Taxes would be about $1,800 per year, which works out to $150 per month. So the total monthly cost of buying would be $1,350 per month plus maintenance costs. Adding in a $250 monthly maintenance cost, the total monthly expenses would be $1,600 per month. If we wanted to be exact, we would recognize that the $45,000 down payment could be left in the bank and earn an interest rate of 5% in a GIC which would be $2,250 per year before tax and around $1,200 after tax, or around $130 per month. This would offset our rent, so our total rental cost would be $1,700 less $130 or $1,570 per month. Thus, the rental cost of $1,570 per month is pretty close to the total monthly cost of $1,600 of purchasing the house.

It looks like the cost of buying a house is pretty close to the cost of renting. This is one reason that the housing market is booming in the summer of 1996. Mortgage interest rates are at their lowest levels in years and housing prices have not really started to recover from their 30% price decline between 1990 and 1996.

This brings us to the second reason for buying a house, the investment potential. As in all things financial, cash flow is king. If an investor can buy a house and rent it out for more than his total costs, he will buy the house. As we have seen, housing prices have combined with low mortgage rates to make the rent from a house fairly similar to the mortgage cost. If the investor charges a higher rent or takes a shorter mortgage term with a lower interest rate and lower payment, the house will almost “pay for itself”. This puts a significant floor under housing prices, and has helped to stabilize the market in the last year or two.

This compares to buying being far more expensive than renting in the peak years of the housing market in 1988 and 1989. It was not uncommon for a house valued at $400,000 to be renting for only $2,000 per month. Mortgage rates were high, almost double the current level, meaning that the rent should have been well above $4,000 per month to cover the mortgage. In this environment, however, house prices were increasing on a daily basis.

People were diving into the housing market and talking up their successes at cocktail parties. People seriously believed that if they did not buy a house they would never be able to afford one. Whenever someone pointed out the great disparity between rental rates and mortgage carrying costs, the response was that housing was not like other things, it had a “special value”. Financial experts were advising that buying a house, because of its tax-free capital gains, was the best thing for one’s financial health (they didn’t mention the possibly of a capital loss just before the 30% decline). Now housing prices are down considerably and some financial experts are suggesting renting because of “baby boomer demographics”. They paint a spectre of looming overhang of baby boomers wanting to sell their monster homes all at the same time (and retire from their earnings in the stock market!). On a cash flow basis, buying has seldom been more attractive.

This shows that psychology has an important impact on housing values. When something is going up in price, market participants and experts find reasons why that should be the case; when something is falling in price, experts justify why that should be the case. Most times it pays to be a contrarian and go against the grain of market sentiment. Where were all these persuasive demographic statistics at the market peak in housing prices? The real support comes from, as with all investments, the cash flow characteristics.

Should you buy a house? If you need one for accommodation and find one reasonably priced versus renting, it is probably not a bad time.

As in all things financial, get a variety of opinions. Talk to your banker, your real estate agent and anyone else who can shed light on the subject. Good Luck!