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Champagne living or a beer budget?

Posted by Rona Fischman  July 20, 2009 02:53 PM

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Sam Schneiderman, Broker-owner of Greater Boston Home Team continues his Monday series.

I was recently talking with an economist about helping him buy his next home. As we were discussing his wants and needs, of course the subject turned to price.

This gentleman, who we will call George (not his real name) has been around the real estate block a few times. He has lived in several cities and is now retired. We spoke about homes he has lived in over the years and he reminisced about his first apartment, a suburban single family home that worked well as he was raising children and the condo he is in now. Now that his children are grown, we discussed his desire to spend his retirement years in an urban condo where he can walk to most amenities.

As we discussed his targeted price range and condo fees, George shared his philosophy about home buying.

George told me that he has always explained to people that choosing one’s home is a lot like choosing hotels when traveling. You can choose a budget motel on the outskirts or stay at a luxury hotel in the middle of it all. The quality and location of the accommodations will obviously influence the experience. Not quite rocket science, but surprising to hear from an economist because most people that I know that work in the financial world place more emphasis on budget than lifestyle.

Obviously George has budget limitations like anyone else, but his experience in suburbia in an earlier home located in an area chosen more to meet his budget than satisfy his soul has influenced his current decision.

Several days later, I was at an open house in a vibrant urban area. A young couple was admiring the property and seemed interested in the home. They asked questions and volunteered that they had purchased a really great home in suburbia and he felt trapped in a community that did not meet his needs. It was “too far out”. He wanted to walk or bike, not drive 5 minutes just to get a cup of coffee.

The scenario that I am describing is not uncommon. I often talk with people that don’t like where they live but bought for some reason that had not been well thought out. The point is that after you decide to move it’s important to get your lifestyle priorities in order before looking at homes to buy. Before you step into your first open house, you also need to know which you are less likely to compromise on; budget or lifestyle.

So, what’s most important to you?
It would be great to get advice for our first time buyer readers from those who’s homes aren’t quite living up to their expectations.

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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9 comments so far...
  1. My advice for first time buyers is to think a lot about where they might be in five years, as opposed to right now. When we bought our first place it was a two-bedroom condo on the second floor in Somerville. It was great at the time, but in only a couple of years we had a baby. Soon getting baby stuff up to the second floor was a hassle, taking the dog down a flight of stair in winter to pee was that much more annoying, and we started looking at the local schools for the first time. We moved before #2 arrived.

    If I knew then what I know now I'd have rented and saved through the first baby. Then it would have become more clear what we needed/wanted in a home. Not to mention that we wouldn't have become accidental landlords! :-)

    Posted by accidental landlord July 20, 09 05:09 PM
  1. Different strokes for different folks. I know folks who wouldn't trade the comfort and tranquility of the suburbs for city living, yet I know folks who wouldn't trade the type of lifestyle you get in the city (You can put me in the group who prefers the city lifestyle). I do get a bit jealous from time to time when I see the kind of living the subburbs allow with the large yards and quite streets. No matter what the preference of lifestyle there is one thing that both in Mass have in common. Both are still overpriced.

    Posted by Joe July 20, 09 05:14 PM
  1. We've recently relocated to the Boston-Metro West area. I can see advantages and disadvantages to suburban living and the same for urban living. You and your readers are right in that people need to think about where they'll live - or want to live in the next 5 years, especially in these uncertain financial times.

    We would have purchased a home already, but we've seen so many homes which eventually sold anywhere from 20% to 40% off their original list price in Medfield, Sherborn, Dover, etc., that we're glad we continued to rent.

    Even though we sold our home in Carmel, California and can pay cash (over $1M)if we wanted, with all the upcoming PRIME and Alt-A short sales and foreclosures about to come onto the market later this year, economics and the political theater from Washington has played into our hands.

    Posted by Victor July 20, 09 06:51 PM
  1. Great thoughts! We chose to buy based on being within easy walk/bike/T of our friends, work, and congregation. Living in a dense urban area fits with many of our values around community participation, access to the arts, and treading lightly on the earth. Having lived in rougher areas, we were undeterred by constant traffic, occasional police visits, and loud neighbors, if those were the tradeoffs for a city place we could afford.

    However, as our little one gets more active, I do wish we had a yard. Our container veggie garden would be lower-maintenance if it were in the ground. For all my community-mindedness, I'm seriously considering things like motion-sensor lights, a shed with a lock for the bikes, and a higher fence where our teenage neighbors use our lot as a cut-through. We discuss ditching it all and moving, but we know that if we did, we'd go to the other extreme and get a homestead, skipping the 'burbs entirely.

    Posted by Carolyn July 20, 09 09:36 PM
  1. I agree with Victor and accidental landlord. Except I personally would not recommend buying in this market unless you find the home of your dreams and are planning to stay put for 20 years or longer. The largest housing bubble in history has popped. Prices are collapsing and we are still a long way from the bottom. The concept of a "starter home" is a non-starter. Anybody who buys now with traditional 80/20 financing and will almost certainly be underwater in 5 years. Renting is a much better option for the near term.

    Victor, congratulations on timing your sale. Welcome to Boston!

    Posted by Lance Stapleton July 21, 09 08:54 AM
  1. Lance,
    One complicating factor in the rent-vs-buy computation is just what Rona's talking about in this post: quality. Students make up such a huge portion of the renting population in Boston that it's tough to find a quality apartment to rent, unless you want to live in a "luxury condo" building. Interest, taxes, maintnence, and depreciation/decline in price (I think I did my math assuming a 20% drop over 2 years) on a place you buy add up to only a little more than rent on a comparable place, and there are a lot more high-quality options on the buying side (plus, you can improve the quality of your home directly if you own it.)

    Posted by James July 21, 09 11:24 AM
  1. Carolyn,

    I bought in Dorchester ten years ago using the same reasoning. Bonus is that I have a nice sized yard (I also like to garden and I have a dog). And things are actually pretty quiet/uneventful in our neighborhood. Could not be happier with my decision.

    Posted by Susan July 21, 09 11:35 AM
  1. James... Just curious, where are you looking that you are finding deals where rent covers ownership/carrying costs even after assuming a 20% price drop in 2 years? What is the price point? Care to share your numbers and assumptions? Feel free to post MLS numbers if you have them.

    Not saying what you say isn't possible or that you are wrong. But based on my recent experience it seems too good to be true... Then again, maybe I am just looking in the wrong places.

    Posted by Lance Stapleton July 21, 09 03:58 PM
  1. Lance,
    Sorry, you're right. I dug out my notes, and I was assuming 10% drop in 2 years, 20% drop in 5. Confused the numbers in my memory.

    Also, I'm talking really rough estimates. Say you're looking at a 3-BR apartment (half of a 2-family) near Davis Square. Call it $350k. Mortgage/cost of capital is something like 5% interest, plus 1% net tax (propery tax minus reduction in income tax) and 1% maintnence. Over 2 years, that's 14%. Add in the lost value, and we're talking about something like 24%, or $85k.

    Rent on a decent 3-BR in that area can run $2500/month. Over 24 months, that's $60k. So assuming a steep drop, you're out an extra $25k if you buy. Throw in the $8k from the stimulus, and it's a $17k loss. Not a winning strategy, clearly, but it's in the same ballpark, especially if you put a premium on owning (e.g. you like being able to modify your living space).

    (I'm not including transaction costs becasue I'm comparing buy-now vs rent-then-buy, so I figure I'll pay the transaction costs eventually. And I'm not including principal payments because they're not a net transfer of wealth.)

    Posted by James July 22, 09 11:43 AM
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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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