…or “Why I decided not to buy a condo right now after all.”
Since I keep having to tell people the story, then I figured I might as well write it down. It might also be a good reference for me.
OK. So here’s what happened.
Late in 2009, I started getting serious about home shopping. For all the obvious reasons (independence, taxes, space, etc, etc.) it felt like the right time. Throw in the fact that I just landed a great job, interest rates were 5%, the government was giving away $8,000 in tax credit, and Washington State was going to loan me $10,000 for a downpayment– and everything seemed absolutely perfect! Or at least, that’s what everybody in the real estate business would have you believe…
During that time my boss had made a few offhanded comments about how it was an absolutely terrible time to buy a house. I didn’t dismiss him outright, I just believed that the condo I was looking at was a special situation– after all it had come down $100,000!
The particular condo I was looking at had been on the market for about a year. In that year, it had come down in price from $360,000 (or so) to $258,500. AND it is right next to my brother’s place– Bonus!
In January I decided to get serious about shopping, and make sure that I checked out the competition. I visited about 10 other condos, and was not impressed with any of them. The value/dollar ratio was seeming better and better to me. I started making preparations to buy, and I got pre-approved for financing (absurd gobs of money!) in early February.
After pre-approval, I finally made an offer of $245,000 on the place. I was scared out of my mind! I signed about 50 times in 15 pages that I was serious about buying this place– and I was. It happened that I made my offer on a Wednesday, and I heard nothing for two days, until Friday afternoon. They rejected my offer of $245,000 and made a counteroffer of $255,000. I decided, now that it was almost too late, I should really talk to my boss and get the lowdown on why now is a terrible time to buy.
He proceeded to blow my mind.
I stopped by his office Friday evening after work, and he was nice enough to give me a lecture for about an hour and a half. He showed me charts, graphs, articles, ratios, etc, etc that proved I would have to be monumentally stupid to buy right now.
This is the one that stuck with me:
SO. After all of that happened. I had a $255K counteroffer on the table, which I let expire, much to the seller’s disappointment.
After a week or two of contemplating whether or not to make another offer, I decided I would, and I sent the following message to my real estate agent. (This is pretty much the stuff that my boss showed me.)
After considering my options, I will go ahead and make an offer of $202,000.I believe this offer is in everybody’s best interest:
- At an appreciation rate 4%, $202,000 represents a fair value for their property, and a healthy margin too.
- $250,000 represents a 6.86% appreciation rate.
- If this rate were sustained, then our children would never be able to buy homes because prices would outstrip inflation.
- $350,000 represents an 11.45% appreciation rate.
- I believe this is the best price they can get, now, or within two years.
- Their time is valuable. I know it is obvious, but the sooner they can sell, the sooner they can move to where they want to be.
- Money is valuable. Again, it’s obvious, but the sooner they can sell, the sooner they have more cash flow available.
- Every indicator available points to a continued decline in real estate prices
- Foreclosures are expected to increase after January, adding even more low-priced supply to the market.
- After March 31st, the government will discontinue buying mortgage-backed securities.
- Without that subsidy, interest rates are widely expected to rise, reducing buying power.
- The first time home buyer tax credit will expire in April, lowering demand from FHA buyers (40% of the market).
- The Seattle market is still reaching new lows, according to the Case-Shiller
index. December (the latest available month) marked a new 4-year low in
home values for the area.- Existing home sales dropped in January.
- New home sales have hit a new record low in January.
- The bubble has not been fully corrected yet.
All of this indicates to me that buying a house now will most likely mean some depreciation, even at $202,000.
So why would I still be looking to buy at this price?
- One year’s worth of rent payments, at $1,300/month for a comparable
apartment, is worth $15,600. The delta between that and my projected mortgage payment would be relatively small.- Assuming that depreciation did not continue too far into 2011, the direct tax and cash flow benefits for me owning my own home would outweigh the downside.
- The price of a mortgage is really low right now. 5% is a rate I‘ll not soon see again.
- $8,000 tax credit is an added bonus.
- Most importantly, after only 3-4 years I would have a good chance of being able to sell this home for at least the same amount of money. At a purchase price of $250K, I do not believe that is the case.
I realize, after my initial offer, that this one will be more difficult to evaluate independently. However, this offer more accurately reflects the current demand of the market, and I sincerely believe there will not be a better offer available anytime soon.
I would like to present Martin & Susie with this information. I think it is important that both sides have the full context of what this deal means for the other party. I have mentioned my reasons for wanting to buy in spite of the market. I would like to know their reason for selling– if for nothing else besides context.
I did not expect a response to my “insulting” offer, but the sellers surprised me. They actually let my agent know that they probably would have sold at that price, but were now underwater on their mortgage. It’s a sad situation.
Luckily, I have avoided that fate.
Update: For fun, I will track the price of the nearest condo on Zillow. I want to see where it is at in about 18 months, versus where it is at today.
12517 NE 23rd Pl # A-1, Bellevue, WA
Zestimate $236,500
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