Is It Time To Buy A House? Not So Fast…

A big part of my day job is to speak with people about their real estate decisions. I live in San Francisco and help clients in the San Francisco Bay Area and Lake Tahoe market, which are fairly expensive places by most standards. 

I have had more than a few recent conversations that have consisted of me telling my clients, “Don’t buy a house right now.”

That’s weird for someone who makes a living by selling houses, right?

This isn’t some sort of lame attempt at reverse psychology or me being contrarian for the sake of being contrarian. This is my career and I’m in it for the long-haul. 

There are plenty of people out there who SHOULD buy a house in this market and I have clients in that camp as well.

What are some of the biggest reasons not to buy a house right now? Let’s take a look.

You don’t have a compelling reason to buy a house right now.

Compelling reasons to buy a house:

• A child on the way or a an aging parent who needs to move-in.
• Empty nesters who don’t need all the space they needed when they had kids living at home.
• Loss of a job.
• Divorce, death or disability.
• A great investment property opportunity has presented itself.

Non-compelling reasons to buy a house:

• FOMO: Fear that prices will continue to rise and if you don’t buy now you’ll never be able to afford it (Markets are cyclical and they always adjust, but we don’t know when or why until after the fact).
• Because your peers are doing it.
• Pressure from your significant other, parents, friends, co-workers, etc.

You haven’t done projections with the financial impact on your monthly budget and tax situation.

Do you have a written budget? Many people do not and that’s okay. It’s easy to create one. There are a bunch of free tools out there that make it easy. Go to Mint.com and sign up. After hooking all your banking and financial accounts to Mint, budgeting will be simple.

Your monthly expenses will change when you own real estate. You should be prepared for that. Things like replacing old appliances and fixing roof leaks can be large and unexpected expenses. Don’t let them spook you–have a financial plan to deal with them. The first step is taking an honest look at your finances to be sure you can handle unexpected expenses should they arise.

You haven’t researched real estate market cycles.

As Warren Buffett says, “Be fearful when others are greedy and greedy when others are fearful.” Most people who buy a house aren’t concerned with real estate market cycles. Trying to “time the market” is a fool’s game and you won’t win that one unless you’re lucky.

While trying to time the market is a horrible idea, you should understand what’s happening in the market. Real estate is a local business so you’ll want to take a close look at the local market.

Are prices higher or lower than they have been in the past? How fast are prices moving? Is there a shortage of inventory or is there excess inventory? Are there outside forces affecting the market, like Amazon moving their headquarters to your city or Sears laying off hundreds of employees in your city?

You don’t have at least six months of cash reserves.

This is a simple one. Do the math. You’ll want to have at least six month of expenses saved in a cash (or cash equivalent) account for easy access before you buy a house. Use the projected monthly expense number that includes the mortgage payment amount to do the calculation.

You have credit card debt.

Get rid of that shit. You know you need to do it, so get it done. No excuses.

There are a gazillion strategies for paying off credit card debt, but this is all you need to know:

• Stop using your cards. You can resume responsible usage once they are all paid in full.
• Transfer as many of your balances as you can to the card with the lowest interest rate.
• Pay the card with the highest interest rate first (not the highest balance) because that’s the one costing you the most in interest charges. Be aggressive about it. Only pay the minimum on the rest of them.
• Consider selling some of your possessions or getting a part-time job to increase your payoff velocity. You need to become obsessed with paying off your credit card debt.
• Unrelated to paying credit card debt, but good to know: Keep your cards open even if they are paid in full. Why? It has a positive effect on your credit score.

Of course, it’s fine to be a heavy credit card user if you pay your balances every month. There are some GREAT options out there that allow you to earn big rewards if you use your credit card to pay for everything, like my favorite card. (You get $50 for free if you click on that link and sign up.)

Why do I love that card so much? A few reasons. I mostly love the hefty rewards. They’re amazing and VERY generous. Their customer service is top-notch as well, which is always nice when it comes to financial institutions. Go get one.

You wouldn’t be able to rent your new property and cover the monthly mortgage payments.

The monthly mortgage payment you make on your property is broken into four parts: Principal, interest, taxes and insurance (P.I.T.I. for short)

• Principal: The money you borrowed.
• Interest: The fee the bank is charging you for the privilege of borrowing money from them.
• Taxes: Government fees charged for the use of property in your area.
• Insurance: Includes property insurance (property damage, liability, earthquake, etc.) and mortgage insurance (if you don’t have enough equity in the property, you will have to pay mortgage insurance, which protects the lender in the event of a default).

Take your total monthly mortgage payment and compare it to the rental rates for similar properties in the area.

Craigslist is a good place to start for comparable rental properties and what renters are willing to pay. The “asking rate” on Craigslist might not be the final rate paid by renters, but it should give you a ballpark idea of what to expect.

If your monthly mortgage payment will be drastically more than the monthly rental rate, think twice before proceeding. If something bad happens (loss of job, work transfer out of town, etc.), you don’t want to be stuck with a huge monthly expense.

On the other hand, if you had to rent the property and the rental rate covers your monthly mortgage payment, you’re golden.

You don’t have 20% or more for a down payment.

There are mortgages out there that only require a small down payment if you qualify. The best examples are FHA (Federal Housing Administration) loans, which only require a 3.5% down payment and VA (Veterans Administration) loans which don’t require a down payment at all.

Private mortgage insurance (PMI) is an especially nasty cost, thanks to the widespread misbehavior during the years that led up to the financial crash of 2008.

If you don’t have at least 20% equity in your home, you’ll be forced to purchase private mortgage insurance to protect the lender when you buy a house. The rules used to be a little looser, but those days are over.

PMI is not optional and it takes some doing to get it removed from your monthly mortgage payment if you start with less than 20% equity and eventually get to 20% or more in equity.

Your job or industry is not secure.

“Software is eating the world.” -Marc Andreessen

There are very few professions that are safe from being made obsolete by computers and robots.

While it will take some time for all of us to be replaced, some professions will be affected sooner than others. Like, very soon. See this post about AI writing software to get an idea of what’s happening.

Are you a truck driver? There are about three million truck drivers in the US, which is equivalent to about 1% of the US population. “Truck driver” is the most common job title in MOST states.

I’m not even going to talk about all the jobs RELATED to truck driving right now–we’re going to pick on the truck drivers today. Sorry y’all! It’s not personal. Truck drivers are a good example of what’s next for all of us.

FOR EXAMPLE, there was an entire fleet of self-driving trucks that quietly made their way all the way across Europe in 2016.

There were no accidents, no driving errors and no issues getting themselves across country borders.

Holy smokes.

If your only income is from driving a truck and you have no other job skills right now, I’d think twice about your plan to buy a house and get a mortgage based on your truck driving income.

(On the other hand, it would be a pretty savvy move to buy some cash-positive rental properties while you can still qualify for investor mortgages based on your current income and credit, but that’s an article for a different day)

Technology is advancing at breakneck speed right now. Entire industries are going to disappear as software and robots are created that can do those jobs better than humans.

You watch those reality TV shows about house flipping and think it will be easy to make a quick buck.

Can you make money flipping houses? Of course.
Do they teach you everything you need to know on TV? Of course not.

First of all, please stop watching those shows. Turn off the TV and read a book. The shows are staged and orchestrated so they fit the preferred narrative. They are NOT an example of real-life on a TV screen.

The best book I have read about real estate investing is this one. MOST of the books on real estate investing in the world have some sort of gimmick that doesn’t work in every market or some sort of after-product to sell you (coaching, an online course, etc.).

The Millionaire Real Estate Investor has nothing to sell you and there are no gimmicks. It’s simply a collection of best practices from successful real estate investors who have been there and done that.

(Fun side note: The guy who taught me how to invest in real estate is profiled in the back of the book…and worth about half a billion dollars when the book was published.)

Zillow says you’re getting a good deal.

One way I like to demonstrate I am a weirdo in the real estate industry is that I loudly proclaim that I LOVE ZILLOW. Specifically, I LOVE ZESTIMATES.

Zestimates are computer-generated valuation estimates for real estate. The software makes a guess about the value of a property and displays it for all to see.

Zillow gets a lot of flak from the real estate industry. They deserve some of it, but not all of it.

The biggest complaint about Zestimates is that they are WAY off on their estimates. In fact, when the Zillow CEO sold his personal house a few years ago, the Zestimate was off by 40%. That’s not a typo.

So why do so many real estate professionals hate Zestimates? It’s simple. Zestimates frequently tell homeowners that their house is worth much more than the actual market value. That creates headaches for agents.

Now the agent has to argue with a seller (who always believes their house is worth more than it really is) based on a piece of software’s best guess about the value. Overpriced houses don’t sell and then the agent is blamed for not marketing enough.

Pro-tip: There is no amount of marketing that will cause a buyer to overpay for a property. Think about it…would you buy a house for more than it was ACTUALLY worth just because there were a bunch of open houses or full-page ads in the newspaper or sexy professional photographs? No? Me neither. So why do so many sellers think the marketing (or lack thereof) is to blame for their overpriced house sitting on the market for months?

Homeowners rarely want to hear how much their property is actually worth.

For some reason, this is especially true when a website that has a thoroughly documented history of being incorrect shows them a market price that’s WAY above market value.

Funny how that works.

Zestimates are imaginary prices and should be framed as such. There have been dozens of attempts and tens of millions of dollars spent trying to automate the valuation piece of a real estate transaction. All the automated tools are still garbage.

Every property is unique and every local market is constantly in flux. Computers might be able to provide accurate valuations and appraisals someday, but not anytime soon.

The rest of the negative noise around Zestimates comes from the real estate professionals who think they are in the “information control” business, where consumers were forced to talk to a real estate agent to learn about homes for sale and the process to buy a house.

Before the internet, those agents could survive in the business by controlling information.

It was a bad consumer experience, but the agents made sure they got paid by wedging themselves in the middle of the information control apparatus.

Good news! That ship has sailed and consumers are now more informed than ever. There are dozens of high-quality websites empowering consumers with real estate information these days.

A great real estate agent can still save you thousands of dollars, but consumers no longer need to rely on agents for all the information they need to make educated decisions.