By: Marc | Vital Dollar Many of us grew up hearing that owning a home is a great investment and renting is just like throwing money away. Because I heard that a lot, I never really questioned it or took the time to look at the numbers for myself. Owning a home just seemed like something I was supposed to do as an adult, so when the time came, that’s exactly what I did. Back in 2007, my wife and I bought our first home. We had been married for about 6 months and were excited to take a big step in our lives in becoming homeowners. We bought a two-bedroom condo in New Jersey (Philadelphia suburbs) for $159,000. Our plan was to live in the house for about 5 years and then move out and keep it as a rental property. But plans changed (more on that later) and in 2010, just over 3 years after we bought the condo, we sold it for $150,000. After realtor fees and other fees that we paid as the seller, we had to take a $7,000 check to the settlement to pay off the mortgage. I always expected to take money to the settlement when I was buying a home, but not when I was selling. In addition to that $7,000, we spent about $1,000 for repairs after the home inspection and we had already spent about $2,000 getting the place ready to be listed. In total, it cost us about $10,000 to sell the house. Losing $10,000 wasn’t exactly what we had in mind for our first home, but to be honest, we were pretty fortunate. The market had tanked during the 3 years that we lived there, and many of our neighbors were in worse situations. The were several other units that were listed for less than ours and had been sitting for months. We got an offer after only 4 weeks on the market and with only 4 people coming to look at the condo. Like many other situations in life, failing with real estate was a great learning experience. Here are 10 of the lessons that I learned.
1. Real Estate Isn’t a Guaranteed Investment
When we bought the condo I knew there was no guarantee it would increase in value. I knew it was possible to lose money on a home, but the reality of actually going through the situation was a very powerful learning experience. I had heard and read so many times that owning a home is a good financial decision that I just took it as the truth without really trying to decide if it was the best move for us at that time.
2. Selling a House is Expensive
When we bought the house we had all of the typical costs and fees like closing costs, the appraisal, the inspection, and property taxes. Looking at those numbers was pretty depressing. It didn’t sting quite as bad because we looked at the big picture and we planned to own it for a long time. When we sold it, we had to pay 6% in realtor fees, a portion of the closing costs that we agreed to pay for the buyer, as well as some other smaller fees. On top of that, we paid several hundred dollars (I think it was close to $1,000) to get our stuff transported to our new house. And depending on the situation, as the seller, you may need to spend more money to get the house ready to sell. As I mentioned in the intro, we spent about $2,000 to help our condo stand out since there were several very similar units already listed. Spending that money hurt since we knew we were already going to lose money on the sale, but I don’t think it would have sold at all if we hadn’t spent that money. The costs of buying and selling a home are very significant, and it’s not something that you should do often if you can avoid it.
3. Buying Isn’t Always Better Than Renting
Looking back, we would have been much better off to rent a condo for those 3 years. There were plenty of units that were almost identical to ours that we could have rented. The monthly rent would have been about the same as what we paid for our mortgage, taxes, and HOA fees, but we wouldn’t have had any of the costs related to buying or selling. There are a lot of factors that you should consider when you’re making a decision to rent or buy, and one of the biggest factors is the length of time that you expect to own the home. In general, if you expect to sell the home in 5 years or less, renting is usually the better financial decision. In our case, we had originally planned to keep the condo long-term, so we didn't give much thought to this.
4. Sometimes Life Changes Your Plans
Although we planned to live in the condo for about 5 years and then keep it as a rental property, we didn’t anticipate career changes that totally threw that plan out the window. When we bought the condo, we both had fairly stable jobs that we had been in for 2 years. But not long after we bought the condo, I started a business on the side and in 2008 (after we’d been in the condo for 1.5 years) I left my full-time job and entered the world of self-employment. I was working online from home, and that meant that I could work from just about anywhere. We started to think about moving to an area with a lower cost of living. We were able to buy our condo for a great price, but in order to move up to a single-family home in our town, we would have had to make a major jump in price. In early 2010, my wife transitioned to a different role within her company that allowed her to work from home. At that time we started looking for houses a few hours away. Although we had hoped to keep the condo as a rental, we didn’t want to try to manage it from a long distance, so we decided it was best to sell. At that point, our lives were completely different than they had been just a few years earlier, and it was a change that we couldn’t really have anticipated. Although there are a lot of factors that you need to consider before buying a home, sometimes your life changes unexpectedly and there’s not much you can do about it.
5. Renting Gives You More Flexibility
Once we were both able to work from home, we had the ability to choose where we wanted to live. The problem was, we had this condo that needed to be sold in order for us to move. Not only did we need to sell it, but the market was pretty bad for sellers in 2010 and we knew it was possible that the house would sit for a long time before it sold. If we had been renting during those 3 years we would have had far more flexibility to move whenever we decided it was time. Without that flexibility, we started to look at houses but we couldn’t make an offer to buy until we had our condo under contract. We actually found a great house that we wanted to buy, but we couldn’t pull the trigger because our condo was still sitting on the market with no offers. Fortunately, a week after we saw the house that we loved, we got an offer on the condo. About another week later we had made it through the 3-day attorney review period required for selling a house in New Jersey and we were able to move forward with an offer on the other house. The lack of flexibility didn’t cost us too much, but we saw that it easily could have prevented us from being able to buy the house that we wanted. In my opinion, greater flexibility is one of the major benefits of renting over owning a home.
6. The Glass May Be Half Full Instead of Half Empty
While taking a $10,000 loss on our first home wasn’t what we’d planned, not everything was bleak. The market was bad for us as sellers, but we were also buyers looking for another house, and we benefited from lower prices. The single-family house we bought in 2010 was available at what we felt was a very good price, and would have probably sold for more just a few years earlier. Feeling that we got a good deal on that house made the pain of losing money on our condo a lot easier to handle. Instead of obsessing about the fact that we lost $10,000 on our condo, we focused on the bigger picture, and that definitely included getting a single-family home at a good price. We were actually happy with the end result, considering everything that had led up to that point.
7. Stretching on a Mortgage Isn’t a Good Idea
When we bought the condo in 2007, we were only able to pay about 5% as a down payment. We had no problem qualifying for the mortgage, but the small down payment meant that we had a higher monthly payment, plus we had to pay private mortgage insurance (PMI). Not to mention, there are a lot of other costs involved with owning a home. The small down payment also meant that we had very little equity in the house, and when property values dropped it meant that we owed more than the home was worth. We were in a hurry to buy our first place, but we really should have waited until we were in a better financial situation. The PMI alone was an unnecessary expense that I wish we would have avoided. Waiting until you have 20% for a down payment can be pretty challenging in cities with a high cost of living, but in our situation (buying a condo for $159,000) we could have waited until we had the 20% saved. When we moved in 2010 we put 20% - 25% down and avoided the same mistake.
8. The Sale Isn’t Done Until Everything is Final
We were extremely excited to get an offer on our condo and get it under contract, but we were nervous about the deal the entire time. The market was bad, and we knew if the deal fell through we might have to wait a long time until another buyer came along. The appraisal was my biggest concern because property values were dropping quickly at the time. But the appraiser gave the property the exact amount that we needed, so we were in the clear there. We were scheduled to close on the condo on a Tuesday morning in May of 2010. The night before closing we got a call from our realtor. The buyer’s mortgage had been rejected at the last minute and it didn’t look like it was going to go through. All of our stuff had already been moved out and was being delivered to our new house later that week, so it was a pretty stressful time. Two months later, the sale eventually went through, but only after the buyer went to a different broker for the mortgage. When it was finally done, we were thrilled to close that chapter and move on.
9. Surround Yourself with Competent People
The only reason the sale of the condo eventually went through was because of our realtor and her connection to a good mortgage broker. The mortgage lender that the buyer had been using said all along that she would get it done, but after a few months of trying she wasn’t able to do it. Eventually, our realtor forced the buyer to work with her contact for the mortgage or else we were going to kill the deal an put it back on the market. Her contact was able to get the mortgage approved and wrapped up in just a few weeks. That experience showed my wife and I the power of working with qualified professionals. Our realtor had many years of experience and she often referred business to this mortgage broker who as also very experienced. The buyer’s agent was a full-time police officer who got a real estate license on the side and this was his first deal. The buyer was one of his co-workers. The mortgage lender they were using was a family friend. The inexperienced realtor and the family friend mortgage lender weren’t able to get the job done. Our experienced realtor and experienced mortgage broker were able to get it done. Without them, we would have had to take a bigger lose or keep the property as a rental and try to manage it from a few hours away. Thanks to that experience, I’m very careful about the professionals I choose to work with. It seems like everyone has a friend or family member who is a realtor. Don’t hire someone just because they’re a friend or family member. Make sure you hire someone qualified or else you could regret it.
10. Some Things are Out of Your Control
When it comes to finances, and life in general, we can plan and try to make the best decisions possible. But in the end, some things are beyond our control. My wife and I planned to own the condo for longer than 3 years, but situations in our life changed and that’s not a bad thing. The issues with the real estate market and the economy as a whole are also outside of our control. We could have done a much better job of considering the possibilities and planning, but other factors were beyond our control. Although we had a bad experience with our first home, I don’t regret buying it. If I had known we would be working from home and moving just a few years later that would be different, but that wasn’t even something we were considering at the time. Sometimes you just have to accept a loss, learn something from it, and move on.