When Should You NOT Buy a Home? - Houses to Homes Podcast

Buying a home isn't for everyone. And it's not for every situation.

If your finances are not built up enough to comfortably (key word: comfortably) handle the purchase of a home, including closing costs, down payment and all, it's best to get that in order before making that big of a purchase if possible.

Also, while owning a home makes much more sense than renting in the long term, questions arise if you're looking in the shorter term. Depending on how long you're going to stay in the house, it may not make sense to put that money down if you're not staying long enough to recoup the costs in equity before you sell again.

Episode transcript:

You know, how long are you going to be somewhere? If I'm going to be in town for a year and a half and then I don't know what's happening… It's, in my opinion, probably not right for you to buy at that point because you're going to be underwater on your closing costs alone. 

So Bobby, our media guy, who's always on the other side of the camera, who never likes to jump in front of it unless he's doing crazy stunts around the town, asked us a very interesting question. He said, “When would you ever advise somebody to NOT buy?” Danny, take it.

Yeah. Not buy, okay. I mean, number one, if you're not financially prepared for a home purchase. Okay, there is - I think you earn the right to purchase a house by being fiscally responsible over time. You know, you have to have enough savings to be able to do it. You have to have your financial house in order. In my opinion. Again, this is my opinion. I believe you have to have your financial house in order to be able to handle the responsibility of those payments so you don't get yourself in trouble later on, by, now I can't afford these payments and, you know, then you have to sell very quickly or you have to, you know, it goes into situations like a foreclosure, bankruptcy that you don't wanna talk about or topics for another podcast. But I think - so being financially responsible, right? And there are a variety of loan products that can fit for different financial situations. So when I say fiscally responsible, ‘have your financial house in order,’ that doesn't mean that you have to have the full 20% down and you know, all that kind of stuff. Part of what I'm saying when I say financially responsible and, you know, in a good financial position is, are you going to be able to make the payment every month, on time, nonstop, and sleep well at night? I want my clients sleeping well at night.

Right. And not living for a mortgage.

Yeah. And I've had that conversation multiple times where I say, guys, I mean, I know that you really love this house, but can you sleep at night or are you going to stress about these payments? Like, it's not worth it to me for them. I don't want anyone living like that where they're totally stressed about it.

Or what about, do you have an emergency fund? If you're purchasing a home and you're you know, you might be purchasing it at your ultimate price point. Are you going to have the money to replace your furnace when it goes out on you in the middle of January?

Right.

You know, that's anywhere from $5,000 to $10,000. Do you have that set aside? Yeah. And if you don't, you might have great credit where you can go out and get finance for it, but now you have an additional monthly bill. So if you don't have that emergency fund, or at least that cushion in your monthly debt to income, you should probably wait a little bit longer too.

Yeah, and obviously we're not financial advisors.

Thank you. Hashtag #don't get me sued.

Yeah, well, I mean, we're not. But I know from my personal experience purchasing my own homes and rental properties that you can get in trouble if the money's not there.

Right. And my first house I bought, I had absolutely no business buying that home when we bought it for the price that we paid for it.

Yeah.

Luckily I was able to get out of it and sell it, but…no way. Looking back at it, if I was my daughter or if I was giving advice to a client like me, I would have been [like], “No, you need to cut your budget in half. Stop trying to one up the Joneses and live within your means.” There's no way. I shouldn't have done it.

So that's one of the big reasons, in my opinion, would be, you know, your financial situation. And you had mentioned another couple would be, if you don't know where you're going to be.

Yes, that's a big one.

You know, how long are you going to be somewhere? If I'm going to be in town for a year and a half and then I don't know what's happening… It's, in my opinion, probably not right for you to buy at that point because you're going to be underwater on your closing costs alone.

Right.

Because your closing costs can be anywhere from 2 to 5 to 6% of your purchase price. Okay. And then if you're only there a year and a half… So let's take - I'm going to run these numbers off my head and everybody's going to see that I'm either good or not good at math here. But let's say the purchase price is $300,000 and your closing costs are 3%. So that's $9,000 out of your pocket just in closing costs. Now, if you turn around and have to sell that property a year or a year and a half later just to cover your purchase, closing costs, you now have to sell at at least $309,000. And that does not include any realtor and commission fees that you're going to have to pay, which, our fee, our brokerage charges 6% – 3% to the seller and 3% to the buyer. So there's another 3% or 6% on top of that that you're going to have to pay, in addition to your Michigan transfer tax and your owner's title policy and all those things. So there's thousands of dollars in transaction fees that are there, and there's a real good chance that the market, even when it's screaming, probably isn't going to go up enough in a year to cover all of your, just, basic transaction costs.

Let alone profit.

Yeah. And so that's not a – I don't like to see people go out and throw money. Sure. As a real estate agent, what I love from a money standpoint is to sell you a property today, and then also buyer’s agent’s commission, and then turn around in a year and collect the seller's agent commission. Okay. Sure. From a business perspective, yes. But that's not what's right for the client. And my responsibility is to do what's right for the client. You know? And so you guys, someone shelling out that kind of money just to turn around and…

Shell out more.

Shell out more because they didn't know where they were going to be and that could have been avoided. That's certainly a time I would say, don't don't buy until you figure out what's going on.

Luckily, the past few years, buyers in that situation have been able to break even. But as the market stabilizes…

It's that's just a gift from the market, though.

Yeah, exactly. Can't guarantee those results will continue. It's a gamble. And I know it stresses me out as an agent. It's one of the things I say quite often when I'm taking buyers out. Like, I don't only look at this house [as] ‘How is it going to work for you guys today?’ I'm looking at it as ‘How am I going to sell this home in a year or two years or three years from now?’ Especially a lot of my clients - I get a lot of military clients. And, you know, if they're still active, they're usually here for about 2 to 3 years before they have a change of duty. So every house I sell to them, I'm like, okay, what's my two year plan? What's my three year plan? Are we getting a good enough deal on this where I can get them to walk away with some money in their pocket? And if they're at the end of a 2 to 3 year tour, I might look at them and say, okay, well, are we sure we want to buy?

Yeah.

So it's not always great for everybody, but for the majority, if you're financially stable, you know you're going to be sticking it around for a little bit, buying is usually better, but it's not for everyone.