Selling To Renting Opinions

homersgardenMarch 19, 2010

I would like some insight/thoughts on the following scenario.

I have a friend who owns their home (has a mortgage). They bought when prices were high and their payments are a lot for them, but they are making it. The neighborhood they live in is established and is one of the best in our area (many historic homes, a great park, good school). The home is smaller and needs some renovations, but it has a huge yard and her husband can do all the work himself. They are making it every month, but things are tight. They recently had a third child which wasn't in their original plans.

She told me they thinking of selling their house and renting. She claims they want out of the area (feels crime is on the rise, and things in outlying areas are not so great) and have their eyes on an area about 40 minutes away. She says they think they will sell the house (They will make possibly 15,000 when they walk away...when I say make I mean they will pocket. They have put a lot more into the house than that)and pay off all their debt and move into a rental for a few years and save for something else.

I have told her to really think this through because I have always been told owning is better than renting. I feel they are making a big mistake and will regret it. I am posting here, because she has repeatedly asked for my advice, but I want to make sure my feelings aren't getting in the way too much. Here are some other things I think of in this situation...

1. All of their friends (and many family members) live within five miles of current home. They have three young children.

2. She is a flight attendant and is out of town at least two-three days a week.

3. Her husband works construction and has long hours (when he is working)

4. They do not know much about the area they are thinking of moving to other than it looks cute.

I can see that getting out of debt and not struggling each month would be enticing. However, they are not desitute. They live okay. I could also see them doing this if in a few years the potential for their income to go way up was there. However, they won't be seeing any major income spikes. She will get increases, but his income is not likely to go way up. I fear that with the way things are going in a few years they may have hard time getting into something else...they will essentially be looking at a house similar to what they have now. I think her thought is that in a few years they are going to be able to buy in a nicer, newer neighborhood and reality is (at least in my eyes) that doesn't seem realistic. What things could I share with my friend that I might not be seeing? I would love for her to stay in her current home because I see it having so much potential and being in a great neighborhood. I think my biggest concern is they are being unrealistic about where they think they should end up. I also feel like she has no idea what renting will be like with three children. Along with that, I fear they won't save and in three years they will not have money to put down on a house. Again, I would just like some insight so when she asks me again I can share all viewpoints with her. Thanks!

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Well, it's interesting, because no one can predict how well they'll do when selling, whether they'll get $15,000. or sit on the market forever - things are still pretty volatile out there. But on the other hand they might be more relaxed not to have the place taking every cent. Have they considered refinancing? I agree that the long term view re purchasing again might not be too realistic, but maybe they'd get something less ambitious than what they have now, and be happier about it (sounds like they might have overreached to begin with... what else is new!). Renting-to-save though does seem like a bit of a dream because it is so hard to discipline yourself to save 'for the future' and watching the money go to a landlord is frustrating too. Have they considering renting out a room (after making sure it meets legal standards for renting)? A bit of a concern is that they had a third child unplanned - of course it can happen to anyone, but these days only teenagers should be that careless, and I wonder what it says about their level of all-round maturity considering their tight finances.

    Bookmark   March 19, 2010 at 4:57AM
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"I have always been told owning is better than renting."

Then you have been lied to. Financially, it completely depends on the relative price of owning vs renting. It is perfectly reasonable to rent a place and put the savings aside each month for a future goal. Unless you know the actual numbers, you are in no position to make a recommendation.

Besides, this is not just a financial decision. A man who works long hours, has 3 little kids at home, and a wife who travels - he may not went to spend the rest of his time on a fixer-upper and yardwork. When the wife is home, I'm sure she wants to actually see her kids and not get sucked into an endless home renovation. They also probably want to live in a neighborhood they feel safe in NOW, not one that might improve in 5 years.

    Bookmark   March 19, 2010 at 8:40AM
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Bill I see your point. The house they live in now is fine and doesn't need any renovations...they want renovations. You couldn't find a more safe neighborhood than the one they currently live in so I think what I am seeing is their expectations may be too high or they are financially worse off than what she is telling me. I usually don't offer advice, but in this case she continually asks what I think they should do.

    Bookmark   March 19, 2010 at 11:30AM
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What would be the difference between the rent payment and their mortgage payment. If it is minimal, then staying put would probably be a good idea. If there is a big difference between rent and mortgage, then selling and renting may be a good idea.

    Bookmark   March 19, 2010 at 11:50AM
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"She claims they want out of the area (feels crime is on the rise, and things in outlying areas are not so great)"

Doesn't sound like she feels the same about the safety of the neighborhood as you do.

    Bookmark   March 19, 2010 at 12:06PM
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Just a little reminder about people here... there are certain people who, no matter what the issue, no matter when, will always ask for advice, constantly wanting your opinion, etc. However, if you're patient enough, you'll see that it's a habit, and goes on all the time about everything, and in the end, they never seem to take anyone's advice, but go off and do their own thing anyhow. Don't get sucked in - or at least take it all with a grain of salt. It's flattering to be asked a lot, but also disappointing when the advice is ignored and guess what - they're grown-ups too, and will make their own decisions in the end (or should get help already!).

    Bookmark   March 19, 2010 at 1:09PM
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Owning is not always a better deal than renting, especially in the short term.

In the long term rents tend to increase while fixed rate mortgages stay the same (payment may change for taxes and insurance, but principal and interest are fixed).

No one rents houses for less than the carrying cost, though on a house rented for many years the mortgage payment may be many years old.

I often just break even the first few years of ownership in a rental house (before depreciation), but as rents slowly increase my fixed mortgage means the house starts having a positive cash flow, and when the mortgage is aid off becomes very positive.

They need to investigate the costs of renting very carefully and then compare it and ownership after taxes.

Renters who think they are not paying property taxes, mortgages, etc. are only fooling themselves.

It is built into the rent.

Even the cost of my insurance policy on the rental gets rolled in. It is less than a full up policy since it does not cover contents, but the renter should still be covering their possessions anyway.
My policy will pay me for repairing the house.
The renter's policy will pay them for the contents.

    Bookmark   March 19, 2010 at 2:46PM
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We recently bought a resale home. A month later, a bargain rental came up. The investment income I typically earn from the amount now tied up in a downpayment would have paid the rent, insurance and utilities on the rental home. But, of course, I wouldn't have had the pleasure of upgrading and maintaining a 50-year old home with an out-of-date floorplan while dragging a gaggle of kvetchers with me a daunting 15 minutes away.

IOW, it depends.

How to keep friends: don't give them any advice, even when they say that's what they want.

    Bookmark   March 21, 2010 at 6:24PM
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There are some people who really shouldn't own for various reasons. If she is gone a large part of the time, and he works long hours and they have kids with all the bites that takes out of time.....they could even be perfect for condo living. No 'unknown' expenses looming in the distance. No yard maintenance. No renovations. No commitments, other than a lease. They may have feelings off deflation for sinking money into an investment, only to see it turn upside down. They may really be craving for money in the bank and no debts. There may be a lot of things they aren't telling you, only just enough to get you to 'affirm' their already made up minds. Maybe they don't want to live near their relatives. Maybe they just need a change.

It isn't always dollars and cents.

    Bookmark   March 21, 2010 at 10:15PM
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"...they could even be perfect for condo living. No 'unknown' expenses looming in the distance."

Except those annoying 'special assessments' when anything major needs to be done.

Even if the reserves are their, they need to rebuild them after a major expense.

    Bookmark   March 22, 2010 at 10:26AM
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You can get slapped with special assessments on any property if you think of it. But, you do have a point.

    Bookmark   March 22, 2010 at 3:11PM
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I mentioned lease. I didn't say buy a condo unit, lease one. The assessments aren't the renter's problem. Short term anyway.

    Bookmark   March 22, 2010 at 3:12PM
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