Nottingham, MD

Buy That House: Renting versus Buying

When you do your grocery shopping, do you compare apples with oranges, tomatoes with ketchup, ground beef with steak, or so on and so on? Perhaps you do, but you recognize that there is a difference.

When you look for a place to live, is it appropriate to compare renting to buying? Yes, indeed, it is appropriate, but you must recognize the differences.

Let us assume that the average home sells for $350,000 in a certain area, which depending upon the means of purchase, could mean several different possible monthly payments, but for the sake of discussion, let us say that it is $2,500 per month in a monthly mortgage payment, which would include principal, interest, taxes, and insurance.

If in that same area the average rent is $1,000 per month, then is it appropriate to compare this to the average home which sells for about $350,000 with the $2500 per month mortgage payment?

Even when we consider the tax savings of buying a home and the possible appreciation, it is unlikely that the $1,500 difference between the average purchase versus the average rent will be overcome, but the question still remains. Is it appropriate to compare renting to buying? The answer is still yes, but we must consider the differences.

The average priced home of $350,000 quite likely has 3 to 4 bedrooms and 2 to 2.5 baths, is detached, has a yard, has a basement possibly finished, and a total living area of 1,500 to 2,000 square feet. The average rental at $1,000 per month quite likely has 2 bedrooms and 1 to 2 baths, is part of a rental complex, is located all on one floor, and has a total living area of 1,000 to 1,200 square feet.

When the differences of what we get for the average purchase versus the average rental are compared, it begins to seem absurd to compare the two. The average family with 2 to 3 children and a pet will find it very difficult to live in that average rental.

If the average home were to be rented, it is more likely that it would rent for close to $2,000 and not for $1,000. When tax savings and potential appreciation are considered, then the difference between the purchase with a payment of $2,500 and a rent with a payment of $2,000 will start to go in the favor of the purchase.

Certainly there are other factors to be considered when making a decision on where to live, but it is important that you make an informed decision.

Contact Ron Trzcinski at 410-935-5844 for more information.

Buy That House: Supply and Demand

Supply and Demand: We frequently hear this term, but what does it mean?

Basically stated, the operation of supply and demand is what sets the prices in a market.

In the real estate market when the supply of houses is higher than the demand from buyers for houses, then the price of houses will decline; this is considered a "Buyers Market". When the supply of houses is lower than the demand from buyers for houses, then the price of houses will increase; this is considered a "Sellers Market".

There are many factors which can affect this balance between supply and demand. Some of the major factors include the following:

• Interest rates: the lower interest rates are the more affordable a home becomes, hence increasing the number of buyers; however, as the number of buyers increases the market shifts to a sellers market which leads to increased prices.
• Employment: the better the employment market is the more potential buyers there are, because there are more people with an income available to purchase a home. Also, the more jobs which are created leads employers to competing for fewer and fewer available potential employees, which leads to increased wages, of course, leading to higher affordability, however, as the number of buyers increases the market shifts to increased prices.
• Construction Costs: many factors can affect the cost of construction, such as the cost of energy, transportation, and governmental controls. As these costs go up so does the price of a house, hence decreasing the number of potential buyers who are able to afford the houses, which forces sellers to reduce the price (and profit) of a house. This decreased profit may lead to lower wages and less employment, which takes the market in the opposite direction.

Notice that with each factor, the market is first affected in one direction and then in the opposite direction. This is partly what makes the real estate market move in cycles. This may lead one to wondering when is the best time to purchase a house. All of these factors which affect supply and demand are important, but they are macro level concerns, which require the actions of many, while the decision to purchase a house on the individual or micro level should mainly consider an individuals personal situation first rather than that of the economy as a whole.

Contact Ron Trzcinski at 410-935-5844 for more information.

Buy That House: FSBO; The Seller's Motive

Why does someone decide to sell their house on their own? The number one reason, in the mind of the seller, is to net more money in the transaction. Their belief is that if they do not have to pay a commission to a real estate agent, then they will have more money going onto their side of the ledger.

Why does someone decide to buy from someone who is trying to sell their own house? The number one reason, in the mind of the buyer, is that they will pay less for the transaction. Their belief is that if there is no real estate commission to be paid, then their will be less money needed to complete the transaction.

Notice that both the seller and the buyer think that they will be paying less money, which suggests that they will split the savings. This means that they are both making a choice between receiving the services provided by a real estate agent for a fee or no service for no cost.

The seller supposedly starts this chain of events with the idea that they are capable of performing this transaction without an agent and with the idea that they will be saving the money. If they were going to give any of the savings to the buyer, then it would defeat the main purpose of saving money. If they were going to give the money to anyone, it only makes sense that they would give it to someone who would be giving them something in return, such as a real estate agent. It would be a misperception for the buyer to believe that the seller would be giving any of the savings to the buyer.

Most buyers are not aware of all of the concerns involved in a real estate transaction. In support of this thinking, a buyer who has talked with a "for sale by owner" seller may have experienced the following:

• "You do not need a real estate agent to complete the transaction." This may be true but what does it help other than the seller paying less money.
• "The home was already inspected." Who already inspected the house? Your brother-in-law? Do you have the results? Can I see the report? Was the inspector part of a respectable organization like ASHI? Was it a comprehensive inspection? You may not know what questions to ask. A real estate agent would know.
• "It was already appraised." For what purpose was it appraised? A refinance? How long ago was it appraised? The appraisal may be valid and it may not. The market may be appreciating or it may be depreciating. Will my lender accept your appraisal? A real estate agent would know.
• Who will write the contract? "I have a friend who is a lawyer?" or "We can get a copy from the internet." You know a lawyer who works for free? Is your lawyer familiar with real estate transactions or is he a divorce attorney? Does the internet version have the latest laws and required disclosures? A real estate agent would know.
• Is this a good price? "Such and such house just sold for such and such amount . . ." How long ago is just sold? Is the other house equivalent in square footage, amenities, updates, . . .? A real estate agent would know?
• . . . .

The seller and buyer have one motive in common, to complete the transaction, but otherwise have conflicting interests. The seller wants the highest price possible for the least effort and least cost, while the buyer wants the lowest price possible for the best possible house.

When a buyer uses the services of a real estate agent, then numerous important concerns will be properly addressed, such that (what will likely be the biggest investment that they make in their lifetime) their purchase will be protected. It is likely that in both the long and short term they will save money.

Contact Ron Trzcinski at 410-935-5844 for more information.

Buy That House: 15 versus 30 Year Mortgage

Is it better to have debt for 15 years or for 30 years?

Since, generally speaking, debt is not a good thing, it would be better to eliminate a particular debt sooner rather than later, or within 15 years instead of 30 years. If a house is purchased for a certain amount and the choice is between a 15 year and a 30 year mortgage, then the total outlay to pay off the loan would be less by using the 15 year versus the 30 year. Take a look at the example below:

Loan Amount: $275,000; 5% Down Payment; Rate for a 15 year is typically lower than a 30 year.

--------------15 Year at 5.625%-----30 Year at 6.125%---Equity Difference

Pymt--------$2,265.27---------------$1,670.93------------

Balance:

Year 1------$262,979----------------$271,701--------------$8,722

Year 5------$207,542----------------$256,292--------------$48,750

Year 10----$118,234-----------------$230,899--------------$112,665

Year 15----Paid Off------------------$196,435--------------

What was not considered?

• Note that the monthly payment, in this example, is $594.34 less for the 30 year mortgage than for the 15 year mortgage. One can look at this in two ways; one, by using a 30 year mortgage, one can afford more house, since qualifications are based on the monthly payment; or two, for the same house, a 30 year mortgage will yield a lower monthly payment.
• If one opts for the 30 year mortgage, then one has this monthly difference to invest. Among the many possible investments, the money could be invested in the stock market or it could be used as extra principal for the mortgage. If the money were used as extra principal towards paying the mortgage every month over the course of the loan, then the mortgage would be paid off in about the same time as the 15 year loan, however if in any given month one wanted to use the money for another purpose, such as money towards a vacation, then they would have that option.
• Interest is tax deductible. If the loan is paid in 15 years, then that deduction is no longer available. The 30 year loan continues to provide that benefit.
• The equity in the home means nothing unless one can tap into it. This can be done by selling or by refinancing, which completely changes the mortgage picture.

The correct loan for any given individual varies depending upon their overall financial situation, but there is not an immediately obvious answer as to which loan is more appropriate without reviewing their entire situation.

Contact Ron Trzcinski at 410-935-5844 for more information.

Buy That House: Real Estate and the Normal Distribution

Many things in nature, economics, and other areas have quantitative data which can be normally distributed. If one were to graph this data, it would tend to look like a bell, whereby the majority of the data points would fall in the middle and fewer and fewer points would fall to the left or to the right of this central tendency the further the points were from this center. Generally, this phenomenon is true in real estate. If the sales price from a particular region for like homes sold in a relatively close period of time were plotted, then they would probably form a bell curve. The central tendency would most likely correspond to the average of the sample, and the points which were to the left or right of the center would still be within a statistically predictable distance of the average.

No two houses are exactly alike, if only because they are in two different locations even when they are side by side, although there are usually more factors which make them different, such as livable square footage, lot size, condition, amenities, and so on. Of course, when an appraiser tries to determine the value of a given property, the appraiser will limit the sample to the best comparable properties and then make cost adjustments for the differences so that they most accurately represent the subject property. When these points are plotted without making cost adjustments, then they will likely fall within a normal distribution.

Some banks use this normal distribution, sometimes in lieu of and sometimes in addition to an appraisal, although they do not use it with complete mathematical accuracy. They use an automated value model. Suppose that a particular neighborhood had an equal combination of townhouses and individual houses and that the townhouse average price was $200,000 and the individual house average value was $400,000. If these were lumped together, it would make the townhouses look more valuable and the individual houses look less valuable. If all of the data points were plotted what should occur is not a single normal distribution, but rather two distinct normal distributions. One would notice this immediately by seeing two high points in the curve, or a bimodal curve. (The mode is where the majority of the points fall.) This would be a clear sign that two different types of data were being incorrectly grouped together.

Another example of where this may occur is in "up and coming" neighborhoods. There are some established neighborhoods where the sales prices will fall right into a normal distribution. However, in some types of "up and coming " neighborhoods, there will be a set of houses which are in need of significant work and some houses which have already been renovated and rehabbed. Although the sales may take place around the same time and the houses are similar types of houses, there will be a clear difference in price between the two and it will show up on the graph. Typically when this phenomenon takes place, it is a clear sign that it is an "up and coming" neighborhood.

Contact Ron Trzcinski at 410-935-5844 for more information.