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How to sell a house: sell it for what you bought it for


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2010 Dec 1, 10:34am   4,648 views  17 comments

by Dan8267   ➕follow (4)   💰tip   ignore  

I was renting a house. Since the HOA only allows owners to lease their houses for two years, I moved out about 18 months ago. I learned that the house recently sold. The story is probably very typical of sellers that finally do sell.

The owner attempted to sell the house back in 2007 through Remax with a listing price of $314,900. He got no bids. Eventually, he decided to rent out the house for $20k/yr. I rented the the house for two years and then moved.

The owner put the house back up for sale. About a eight months later it sold for $184,000, see http://tinyurl.com/2ca38an. This is a drop of 42% of his 2007 asking price. But before you feel bad for the owner, consider this. The owner had purchased the house for $137,000 back in 1998. According to the inflation calculator, http://www.westegg.com/inflation/infl.cgi, $137,000 in 1998 translates to $179,462.59 in 2009. So the 12 year appreciation is 2.5% or 0.225% per year, which is basically nothing.

The moral of the story is, sellers who are serious must completely ignore all the imaginary paper gains of the housing bubbles and simply list their houses at the sell price, adjusted for inflation, as when they bought it -- assuming they purchased before 1999, the start of the bubble. And if they don't, I suspect that the retiring baby boomers with little or no savings will drive down house prices further as they downsize in order to finance their retirements.

#housing

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1   Michinaga   2010 Dec 1, 11:13am  

Seems to me that he gained a great deal -- he got to protect himself from the ravages of inflation for over a decade, he lived in the house for nine years and thus avoided all the rent he would have had to pay over that period (profit $180k minus property taxes?), plus he made $40k renting out his house for the last two years he owned it.

He came out way ahead. Now he just has to fins a parking spot for the $184k he got for the house, before inflation has its way with it.

2   TechGromit   2010 Dec 1, 11:44am  

I feel sorry for him he had to sell it. You pay most of the interest on a mortgage the first 10 years, he was probably making some good headway in paying off the mortgage after 12 years assuming he was miking minimum payments. He only had 108k left to pay on the mortgage (Assuming the original note was 137k), which isn't a hell of a lot of money anymore. Unless he was in dire financial problems he would have been far better off keeping it in the long run.

3   bubblesitter   2010 Dec 1, 12:59pm  

Michinaga says

Seems to me that he gained a great deal — he got to protect himself from the ravages of inflation for over a decade, he lived in the house for nine years and thus avoided all the rent he would have had to pay over that period (profit $180k minus property taxes?), plus he made $40k renting out his house for the last two years he owned it.
He came out way ahead. Now he just has to fins a parking spot for the $184k he got for the house, before inflation has its way with it.

????????????????

4   Michinaga   2010 Dec 1, 2:32pm  

Roberto and Bubblesitter, you're responding with incredulity whereas I can't see how the owner could have come out behind. Taxes and fees can't be so high that they outweigh what he would have paid had he rented the house all those years instead of buying it.

Dan had to pay $20k per year to rent this house. That implies that the owner was getting that much value out of it when he was occupying his own home. From '98 to '07, he saved $20k x 9 by not having to hand money over to a landlord.

The interest he might have paid on a loan isn't part of the equation -- that's money you pay for the privilege of borrowing money and spending it now rather than having to save it up yourself. When I bought my condo, I borrowed $27k, and while I actually had to pay back more than that, that excess is my own fault for either not wanting to liquidate my emergency fund or not having the money in hand. It's not really part of the investment in the *house*, strictly speaking.

In getting back his selling price plus inflation, basically he got to live rent-free, paying only taxes and fees, for nine years. Look at it this way: imagine that you had a chance to buy a house, and knew that its selling price would exactly track inflation (it's part of some government housing initiative, let's say). Would you refuse to make this investment, and instead continue to pay rent to a landlord ever month? If it's not worth buying, then that means that housing *must* rise above and beyond inflation just to remain a viable investment. Is that true?

5   xenogear3   2010 Dec 2, 8:54am  

Michinaga says

Seems to me that he gained a great deal

If he bought gold, oil, bonds, or even tech stocks in 1998, he is way ahead of this real estate thing.

The only good thing about real estate is that he can put very little his own money in. Borrow (and play) other people's money.

6   HousingWatcher   2010 Dec 2, 11:30am  

"And if they don’t, I suspect that the retiring baby boomers with little or no savings will drive down house prices further as they downsize in order to finance their retirements."

Where are all these baby boomers who are downsizing? I honestly have yet to meet a single one. Virtually all of the houses for sale in my area are owned by younger people. The baby boomers all bought their houses 20-30 years ago and are mostly debt free. They stay in their houses until death. I know because I've recently been to a number of estate sales.

Most predictions about the Baby Boomers have been wrong. Baby boomers are not doing the usual "Sell the house, move to Florida" thing.

7   HousingWatcher   2010 Dec 3, 10:19am  

Exactly. Anytime an older person leaves my neighborhood, they either go to the cemetry or the nursing home. Most of these boomers have no mortage, so all they are paying are the taxes. And they are not even paying for upkeep. Virtually all of their houses have 1970s kitchens. My mother is actually a hospice nurse, so I get very good insights into the trends of older people, and they certainly are not downsizing.

8   thomaswong.1986   2010 Dec 3, 12:04pm  

"So the 12 year appreciation is 2.5% or 0.225% per year, which is basically nothing."

Irrational Exuberance is a March 2000 book written by Yale University professor Robert Shiller,

The second edition of Irrational Exuberance published in 2005 is updated to cover the housing bubble, especially in the United States. Shiller writes that the real estate bubble may soon burst, and he supports his claim by showing that median home prices are now six to nine times greater than median income in some areas of the country.

He also shows that home prices, when adjusted for inflation, have produced very modest returns of less than 1%/year.

9   Michinaga   2010 Dec 3, 3:58pm  

Apple has indeed increased far beyond anything real estate has gained, but tech stocks in general? (I bought Yahoo and Cisco with some of the first money I ever saved in late 1999. I'll *never* make up the losses I sustained in the first year of owning them.)

The NASDAQ reached 4000 in late 1999 and went over 5000 in early 2000. Today it's at 2591. If you put your money in a NASDAQ index fund on 1/1/2000, you still haven't made your money back. Had you put it in real estate, even if that house lost half its value like the NASDAQ has, you at least would have had a roof over your head all that time. Not so with stocks!

10   justme   2010 Dec 4, 2:14am  

Michinaga says

In getting back his selling price plus inflation, basically he got to live rent-free, paying only taxes and fees, for nine years.

This does not compute, because you left out the specifics of the equivalent rent: How much rent (interest) [A] did he pay to the bank compared to how much he would have paid to rent a similar house [B]?

If (A > B) then he paid extra money for an inflation hedge that turned out to be nothing.

11   Michinaga   2010 Dec 4, 8:17am  

Justme, if he bought the house during a normal period (price ~= 150 months' rent), then the house was "paying" about 12/150, or 8%, to him for every month he lived in it. By the time he sold, he was getting $20k per year, which is nearly 11% of what he sold it for (though I have no idea what his property taxes are).

It's not like this guy was a flipper who bought the house in the middle of the bubble for hundreds of times what it would rent for, and was taking a loss each month he owned it in anticipation of a future price rise. He made a sound investment at that time.

I think that interest should be considered separately as many people borrow more than they really need to (they don't liquidate emergency funds, for example) and are thus paying the bank because they choose to and not because their investment requires it -- and then they compound this by not making additional prepayments to get the mortgage off their backs sooner. But even if you bundle interest into the price of owning the house, the house would have had to sell for a lot more back in 1998 for the interest on his loan to be a bigger albatross than renting would be.

Extremely simplified calculation (feel free to adjust the details if I missed something): he paid $137k for the house at that time. If he put 20% down, his loan was $110k. If that's 3x his salary, he was making just under $40k per year or about $3300 per month. The conventional wisdom is that your mortgage payment can be about 30% of your income. So he can afford a mortgage of $1100 per month. In 1998, mortgages were just over 7% for 30-year and under that for 15-year. Plug in his payment and the interest rate into a calculator -- I used the one at bankrate.com -- and you see that he can make payments of about $1100 on a 6.7% mortgage and have it paid in about 12 years (2010, as it turns out). That's with no refinancing along the way, so realistically he would be done sooner.

Now, how much of that $1100 repayment on a 12-year loan is interest? In the first year, the amortization table says that he will have paid just over $7100 in interest. Add in property taxes in his first year ($1500?) and he's spending $8400 per year to "rent" his money from the bank and his house from the government. So unless this house would have rented for under $700, he was doing OK even with the interest on his loan.

And that's in year 1. For all subsequent years, his investment looks better and better. By the time he sold, he was renting it out for a fantastic return ($20k/$184k or almost 11%). Unless he pulled some kind of shenanigans along the way, he did just fine. He made a good investment and he came out ahead.

12   Dan8267   2010 Dec 6, 12:33am  

TechGromit says

I feel sorry for him he had to sell it. You pay most of the interest on a mortgage the first 10 years, he was probably making some good headway in paying off the mortgage after 12 years assuming he was miking minimum payments. He only had 108k left to pay on the mortgage (Assuming the original note was 137k), which isn’t a hell of a lot of money anymore. Unless he was in dire financial problems he would have been far better off keeping it in the long run.

I didn't get the impression that the former owner was in any financial trouble. He owns a house up north, comes down to Florida with his brother every winter and stays at his brother's house, and is retired. Most likely, he was caching out hist Florida house to live off the income in retirement. I think he was in his late 60s / early 70s, so there isn't much of a long run anyway. With social security, any retirement plans, and the money from the house sale, he probably can live comfortably for the rest of his days.

13   Dan8267   2010 Dec 6, 12:47am  

HousingWatcher says

“And if they don’t, I suspect that the retiring baby boomers with little or no savings will drive down house prices further as they downsize in order to finance their retirements.”
Where are all these baby boomers who are downsizing? I honestly have yet to meet a single one. Virtually all of the houses for sale in my area are owned by younger people. The baby boomers all bought their houses 20-30 years ago and are mostly debt free. They stay in their houses until death. I know because I’ve recently been to a number of estate sales.
Most predictions about the Baby Boomers have been wrong. Baby boomers are not doing the usual “Sell the house, move to Florida” thing.

The oldest baby boomers have just started retiring this year. As such, they haven't started downsizing yet. However, a large portion of Americans do downsize after retirement because they need the cash, but don't need a big house now that their kids have all moved out.

Of course, this doesn't happen the day the boomer retires. As the boomer retire, they will first sell off their stock (long-term bear market in U.S.), perhaps converting it to cash, money-market funds, or short-term bonds. Years later, they will begin downsizing. We won't see this for a few years, but remember, the downsizing of boomer houses will last an entire generation. As such, a think the downward pressure on residential real estate will last about 25 years.

Generation X is simply too small to make up for the loss of baby boomer demand. And the Millennials are so far into debt from college, they have to buy the bank a nice house before they can buy themselves a starter one. So I don't see the Milennials driving demand for home purchases for many years. -- If you haven't seen the debt burden that today's 22 year-olds have, it's scary as hell.

The important thing to remember is that as baby boomers retire, they will consume their savings. This will be a major decline in the demand and a major increase in the supply for whatever investments the boomers had invested in. I suspect that Housing and U.S. stocks will have to endure a generation-long bear market as a result. I don't think that bear market has started yet, but it will start within the next five years.

14   Dan8267   2010 Dec 6, 12:58am  

cab says

Apple Computer at that time was somewhere around $13 a share. Now it’s around $317. Extreme example maybe, but that sorta eclipses the great deal he gained…

A bit off subject, but important... One thing to remember about tech stocks is that for every Apple, Microsoft, or Google, there are tens of thousands of Pets.com that go bankrupt. This was true during the personal computer revolution of the 1980s and the Internet revolution of the 1990s.

In the mid-to-late 1990s, everyone knew that the Internet was the future and that new companies would become super-rich and make billionaires. The two problems were:
1. Everyone knew this, so everyone wanted a piece of the pie.
2. No one knew which company was going to make it, so everyone bought everything.

It turned out that this resulted in a grotesque overvaluation of the tech industry as a whole. As a result, by mathematical necessity, the average investment lost a lot of money. The lesson was that during a land rush, most rushers lose.

People seem to forget about the companies that didn't make it in the 1980s PC revolution or the 1990s Internet revolution. And as such, they think that the time was a quick, easy, and reliable way to get rich.

Also, consider this. If everyone is expecting some industry to return huge profits to investors, it becomes a self-defeating prophecy. The expectation cancels out any opportunities for investors.

15   Dan8267   2010 Dec 6, 1:04am  

justme says

Michinaga says

In getting back his selling price plus inflation, basically he got to live rent-free, paying only taxes and fees, for nine years.

This does not compute, because you left out the specifics of the equivalent rent: How much rent (interest) [A] did he pay to the bank compared to how much he would have paid to rent a similar house [B]?
If (A > B) then he paid extra money for an inflation hedge that turned out to be nothing.

Perhaps I should have clarified the former owner's situation. He was retired and a snowbird. This was not his primary house. So, he would not have been spending rent money for shelter. The house mentioned in this post was just an investment and vacation property.

Yes, he does have to pay HOA, taxes, and at least minimum upkeep expenses. However, the point I was making in the post is that the would-be sellers need to realize that the selling prices of homes tends be the same as their purchase price, in the long term. This is true regardless of the taxes and other expenses that come with owning a house.

16   Dan8267   2010 Dec 6, 1:07am  

Michinaga says

(I bought Yahoo and Cisco with some of the first money I ever saved in late 1999. I’ll *never* make up the losses I sustained in the first year of owning them.)

That's the thing about buying tech stocks as soon as they IPO. It's really a crap-shoot. Since everyone wants to get in on the IPO, the stocks may be very overvalued. You really can't tell. Hell, the "professionals" can't even tell.

You could end up doubling your money over a few years like with Google, or you could end up losing most of it like with Yahoo. It seems the smart money uses the strategy of gambling with other people's money. That way, heads you win, tails your client loses.

17   Dan8267   2010 Dec 6, 1:08am  

cab says

You can’t eat a house (unless you’re a termite).

Speak for yourself. I intend to live in a Gingerbread house.

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