Devil's Advocate 

Buy More House Than You Need

Devils Advocate Logo
This is a Devil's Advocate post.

I haven’t written a Devil’s Advocate post in a while, the last one was about how you shouldn’t move from job to job (and that one was a month away from the DA post before that), but this one is a doozy and quite appropriate given our current home and mortgage climate. A lot of folks now are in trouble because they bought too much house. They were able to buy too much house because credit was cheap and lenders were greedy, so a lot of riskier ARMs, no credit down, no documentation-type loans are now impacting the rest of us.

This is about the time you say: “Woah woah, Jim, slow down. You’re going to give us a post about how we should buy more house than we need after just telling us that people’s live have been beaten down because of unscrupulous lending?”

Yes. Now, here’s where I pull out a bit of a wordsmith on you, I’m recommending that you consider buying more house than you need, not more house than you can afford. Ah ha! I’m sure you all can appreciate the subtle distinction between the two and it’s the latter that got people in trouble. Here’s why you should buy more house than you need…

You Will Grow Into Your House

I’m engaged and I live in a house with approximately 2400 square feet, four bedrooms, three and a half bathrooms (one of the bedrooms and full bathrooms is in the basement, so it’s a bit of cheating in the listing). Two people don’t need 2400 square feet of space, they could easily live in a 900 square foot apartment and many do. The fact of the matter is that the townhouse we’re in is much bigger than we really need, but the idea is that you grow into a house. Since the transaction cost of a new home is so high, you want to look a few years into the future and consider how much house you’ll need in the future instead of just how much you’ll need now. 900 square feet is fine for two, but it’s not so good if you have more. 🙂

Happiness Is More Important Than Money

Some would argue that it’s more important to save your money, buy only as much as you need right now, and plan for the future. I would argue that that’s a bunch of crap. Retirement is very important but your happiness right now is just as important, there’s no sense needlessly suffering now just as there’s no sense in ignoring the future and blowing all of your money today. In that middle ground you’ll find that if having a larger home, enjoying the more luxurious features, and living a little in the now makes you happy then by all means get a little more house. I’m extremely happy in my home right now, it’s more than we need, but it’s not so much that I’ve leveraged the future in order to buy it. It’s not a mansion, it’s not ridiculous, but I’m happier in this home than I would be in a 900 square food condominium.

Transaction Cost of Changing Homes Is High

As I mentioned earlier, the transaction cost of changing homes is extremely high. After you consider all the fees, taxes, and other costs related to the selling of your home and the purchase of a new home, you’re talking thousands and thousands of dollars just to change your address. So, you would like to reduce the number of times you need to do this by purchasing a little bit more than what you’ll need right this moment. Ask any mother (or father, whoever buys the clothes) you know and ask them how they purchase clothing for their young children. If her kid is a size X, she’s buying a size x+4 because that little tyke is going to grow out of that size in about five minutes. It’s the same idea, but on a larger scale.

Higher Priced Home Means Greater Appreciation

If your home appreciates at 4% a year, then wouldn’t it be better to have that 4% be working on $300,000 than on only $100,000? Well of course it would be! The higher the price your home commands, the greater is appreciable base is. While you do have greater costs associated with a more expensive home, the fact of the matter is that the nominal dollar amount of the appreciation is going to be so much greater with a more expensive home.

In closing, it’s important to note that when I say, as a Devil’s Advocate, that you should buy more house than you need right now, I also want to recommend that you keep within your budget as well. I mean you might want to consider stretching a little bit but don’t leverage your future just because you “might” need it one day. Consider buying more house than you need, but don’t buy more house than you can afford.

 Devil's Advocate 

Buy That Home Warranty

Devils Advocate Logo
This is a Devil's Advocate post.

This DA suggestion comes by way of Foobarista, whose neighbor recently had their furnace fixed “for free.” A home warranty is a warranty on the appliances and mechanical systems of your home, such as a furnace, and is most often offered for the first few years of a home and most people suggest that you don’t get it because of its cost. When you consider what can possibly break in your home and how much the deductible is, there aren’t going to be many things breaking that the warranty will cover. It will, however, become useful if something catastrophic happens which is the point of insurances anyway, right? So, why should you get a home warranty?

You’re Likely Cash Strapped Right After Closing
It’s very likely that you won’t have a lot of cash on hand right after closing because you’ll put as much as you can towards the initial downpayment, so it’s crucial that you get some sort of protection if there’s a larger than marginal chances something bad could happen. Now, if all of your appliances are brand spanking new and the building is brand new, you can probably skip on the warranty. If you have a 15 year old water heater or a 20 year old HVAC, you might want to consider the relatively small cost of the home warranty as a hedge against a bad situation. Now, a busted water heater or failing HVAC isn’t a hazardous situation (you can work around both of those), but imagine if your roof collapsed or if you discovered termite infestation missed by the inspector – now you’re talking dangerous situations you need to have resolved ASAP (assuming the warranty covers it). Different warranties cover different things, so if you do get one, be sure to double check what it covers.

Peace Of Mind Is Priceless
You might say that this is what the insurance companies want you to believe, that you’re not buying insurance but instead buying peace of mind and you’d be right – it’s what insurance companies say but it doesn’t make it untrue. Some people worry more than others and for those folks, insurance buys them peace of mind and likely a few more years in their life, don’t discount that. Peace of mind is a wonderful thing when you don’t have it and if you can get it on the cheap, by all means get it!

Remember, this is a Devil’s Advocate post so the conventional wisdom says you don’t want a home warranty (the deductible is killer! $100 deductible is huge when your payouts are counted in the hundreds) so do your research, I just wanted to offer up the other side for debate.

 Devil's Advocate 

Rent Forever, Don’t Buy A Home

Devils Advocate Logo
This is a Devil's Advocate post.

With the new year comes the inaugural post for my new series, the Devil’s Advocate posts, where I try to argue the other side of common sense personal finance advice (read the Devil’s Advocate series introduction post). This post will tackle one of the cornerstones of well-accepted advice: rent as little as possible and buy a home as soon as you can, renting is just like throwing your money away. I think that, like all one-size fits all advice, is completely wrong and here’s why.

Renting Keeps You Flexible
When you rent, you can pick up and move almost whenever you want, with very little penalty (perhaps an early termination fee of some kind); when you own, selling a home can take a very very long time. You lose a lot of flexibility when you “put down your roots” and this is one the biggest reasons why you shouldn’t buy. When you want to look for a new job, you’re restricted to looking in the geographic area around your home. If you ever get a job offer in another area, you have to go through the headache of selling your home before you can take advantage of it. If you rented, you could just end your lease, rent a moving truck (avoid U-Hauls!), and just go.

Someone Else Does The Repairs
When you own your own home, every time something breaks, you have to fix it. Every time something breaks and can’t be repaired, you have to fork over the cash to buy a new one. A new refridgerator costs thousands, a new washer and dryer is on the hot side of a thousand bucks, a new dishwasher can set you back a couple hundred bucks, and that’s just the cheap stuff. When you rent, hopefully your landlord will take care of all of your problems, fixing things that need fixing, replacing things that need replacing, and if you pick your landlord correctly, it’ll be a corporation with deep pockets.

Owning A Home Is More Expensive Than It Looks
With renting, you do throw your money on rent because you never gain ownership of the place you’re renting. However, when you own a home, you also throw your money away on other fees and taxes that never go towards your home ownership. For example, you’ll pay property taxes, homeowners association dues, condominium fees, and any number of other fees associated to the area your home is in – none of which go towards the equity in your home. For example, on my home, I pay about $3,000 in property taxes each year plus $30/month for HOA fees, and $500/yr for a parks and recreation fee.

Renters Insurance Is Much Cheaper
When it comes to home related insurances, renter’s insurance is ridiculously cheaper than homeowners insurance – oftentimes ten times cheaper. I was able to get renter’s insurance when I was renting for as little as $7 each month but now I’m paying for homeowners insurance at $55 each month – a difference of $576 each year.

Home Prices Can Go Down Short-Term
One of the cornerstones of the argument to buy a home is that home prices always go up. I’m not one of those haters who sees the current housing market and is ready to throw falling prices into the faces of all those people who bought a home (I bought one last May, arguable near the peak of the housing prices nationally), but if you treat the housing market like any other market, you’ll recognize that in the long run every market will go up (yay inflation). The problem with that theory is the fact that while you can invest in the long term, reality forces you to live in the short term and in the short term the market can go down. Is this a strong enough argument to rent? Likely not, hence being placed last in the set, but it is a consideration.

Owning a home is something seriously significant, it’s a life changing decision, unlike investing in a 401K, which would likely not change much in your life right now; and so it’s not one that should be entered into lightly. My honest opinion is that the general rule of “buy a house, stop renting” is probably the most strongly believed but most weakly defensible of the common sense personal finance advice concepts out there.

Please weigh in! If you have an opinion, one way or another, I hope you will share it!


Claiming the Energy Savings Tax Credit

One of the main reasons why I purchased new windows and sliding glass doors for my home was because I cashed out vacation time from my former job, approximately two and a half weeks worth of pay, which helped soften the blow of a $7,000 purchase. Another reason why I purchased them now was because of the Energy Policy Act of 2005 which provided me the opportunity to claim a tax credit of 10% on the new windows and doors, up to $500. Since the total cost of the project was $7,000, I’ll be able to claim the $500 as long as the windows and doors qualify and the installation cost is under $2,000 (installation costs are not included in the deduction). On the first point, windows and doors must meet 2000 IECC & Amendments to qualify. As for the second, I will have to call up Castle to find out how much was “installation” and how much was for materials.

(Click to continue reading…)

 The Home 

Homeowners Happier Than Renters

Infinite TownhousesTake this quote from a 2003 study by Robert Dietz, professor of economics at Ohio State University, titled “The Social Consequences of Home Ownership” [.PDF, 180kb]: “You are happier and more satisfied with your life[,] your children are better educated and less likely to get into trouble[,] your daughters are less likely to become pregnant as teenagers[,] you vote more often and are more active in your community[,] you are more likely to recycle and less likely to get mugged.” (I added in some comma’s and the emphasis was mine) Doesn’t that add a little wrinkle into the rent vs. buy question?

Essentially, what it comes down to is that homeowners feel more vested in a community than renters do. I didn’t really care who my neighbors were when I rented because I was probably moving in a year, not so with my neighbors now. I’m more likely to be active in my community now because I know I’ll be here for a while. I’ll be more active in the political process because those decisions will now have lasting effects on my life and my finances.

On a personal note, I know of friends who own row homes in the city who have gone to town hearings on construction permits for roof decks. A rule is that if you construct a deck, it can’t block the “view” of your neighbors and anyone can challenge your permit for that reason. If you rented, you don’t care if a deck blocks your view. If you own it, you certainly do care because you don’t want to see another deck in the way of your view of the cityscape, you want to see the cityscape!

(Photo: paytonc)

 The Home 

Painting Your House

Blue Paint BucketOne of the first things most people do when they buy a new home is to repaint some of the rooms. In the house I bought, many of the rooms were already freshly painted (including a great red room that has grown on me, I’m a huge fan of red) but my girlfriend insisted that we paint some of them. I’d never painted any of my rooms in college (when I lived in a fraternity) or either of my two previous apartments because the walls weren’t mine. My work was going to go towards someone else’s stuff… but now that I have a house, I’m painting my walls.

(Click to continue reading…)

Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2016 by All rights reserved.