Meet today's buyer: A saver steps up

It's always interesting to hear from recent buyers, and this e-mail caught my eye. Because the buyer is still in escrow, he asked that I refer to him as "West L.A. Buyer." Here's his story:

"I just wanted to give you and the L.A. Land blog my experience with my recent house purchase. My bid was recently accepted and I am in escrow right now.

"To give you a little background on the kind of buyer I am, I saved roughly $120,000 over the past seven years. I saved it by driving a motorcycle and living in a one-bedroom apartment I sometimes shared. I got out of debt the first year and stayed out of debt, putting all my money into fairly conservative investments. Using that, together with some money from my parents and my fiancee, we were able to put down around 35 percent down on a $385,000 purchase.

"I did wait as I saw the market going up a few years ago and I think now is a good time to buy. Let me caution, though, that the market out there is very mixed. I feel like I got a good deal on my place, but in many of my bids the seller was unwilling to negotiate much lower than their listing price. 

"I'll give you an example.  I put in a bid on a condo in West LA that was small -- only 800 feet, a one bedroom unit with a loft.  I was attracted to the building because it had many amenities, gym, pool, etc.  I noticed that other units recently sold for approximately $385,000 to $410,000. So I began the bidding process at $385,000. The seller was listing this unit for $499,000. They countered back at $495,000. Of course I stopped the bidding process and moved on.

"I give you this example because I think the places available now are a mixed picture. I found some sellers responsive to a bidding process and willing to negotiate around prices that are the current market value. I also found many sellers, though, that still wanted very high prices and were not willing to negotiate.

"For other buyers I would say move on if you find the seller non-responsive, as there are many sellers who are willing to negotiate."

Thanks, West L.A. Buyer, and good luck.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News

Comments

[Ace]

Buying something in the $300k range today isn't a terrible deal. His $385k condo will probably drop another 20 percent in value... but it could easily take another 2 years for the prices to fall.

So, if his condo drops another $77k over the next 2 years, at least he is probably saving $60k in rent. Add in the income tax savings and subtract the real estate tax payments, it could be a wash.

Sure, he could have saved more by buying in another year or so but this deal does not sound too bad. There is a big difference in buying a $300k house in a declining market then buying a $900k house in a declining market.

[Chris Pepper]

If you like the area, the condo/house, and plan to stay there 5-10 years you'll be alright. Congrats on the purchase. sounds like you got a future rental........you gotta start somewhere.

[John D.]

Ace -- condos drop more than houses, typically. I would bet against 20% decline in decent condos from here in WLA. Other places, that might happen.

[bathtub shape]

Congrats on your pending purchase WLB!

However, as someone who has spent several years saving to amass your 120k downpayment you must have some misgivings about further price declines? Afterall, if your condo drops by 30% your downpayment will be erased (and yes this is real money!). I hear realtors pronouncing the "bottom is now" - don't believe them.

House prices plotted aginst time follow a bathtub shape not a "V" - it was this way in the 90s, 80s .... and it will be this way again.

[Steve]

Congratualtions, sounds like you got a reasoanble deal and as you did you cannot be afraid to walk. West LA standards you got a deal, yet I hate to tell what $400K would buy in CO.

[West L.A Buyer]

West L.A. Buyer here. Posting on this blog has been an interesting experience for me. Thanks to those of you who wished me good luck in my new home.
I think most of you were looking for more details and I will try to provide you with some more. Here is what I can tell you. I did do some statistical research on a variety of websites, and for the area in West LA I bought in I figure I got my place for mid to early 2003 prices. As I understand it right now the market has reset to around mid 2004 prices. I recognize that I may lose some money in the next year or two, but I don't plan on moving any time soon and since I got a good deal I figure I'll probably make money on equity only, which is fine by me. You've got to start somewhere.
I could have choosen to live farther out in the city away from my job, my friends, and my fiance's job/friends, but that would mean more driving time, more money spent on gas/car, and more of my life spent away from what I want to be doing.
The neighborhood I am moving in to is close to a major rapid line, and near enough to a future train line that I should be able to take advantage of that in the future as well.
Someone asked if my place is ready to move into, and the answer is yes. It's a nice place, there were no issues found with our inspection and we're ready to move in after a little cleaning. I can tell you my HOA is not too high, under 250 a month, there aren't too many units in the building, and the HOA reserves are solid. My estimate is that once everything is in place I will be paying about 2200 a month for everything, HOA, mortgage, taxes, insurance etc... That is a few hundred dollars more than I think I would have paid rent for this place, but like some of you said you've got to factor in the tax breaks and the principal I gain every month. Here is something else that I think is very interesting. My bid won out over a higher bid because I was preapproved with a bank that hasn't had any financial issues. The other offer even though about 10k higher was turned down because they didn't have as large a down payment, and were preapproved with a lender that is in hot water. Thanks, good luck all of you with your future home purhcases.

[Nick]

"So, if his condo drops another $77k over the next 2 years, at least he is probably saving $60k in rent. Add in the income tax savings and subtract the real estate tax payments, it could be a wash."

See, that's the bad kind of argument, and if you're making this rationalization (which I hope WLB is not), I would strongly advise against buying. Let's look at some example numbers:

Let's assume we're down 30% from peak so far, and we have 20% to go. Say cost to own was only double cost to rent at peak (so it's only 40% greater now), and you have a 30-year fixed at 6%. We'll assume you could get about 5% return on investing money, and you're in a 50% tax bracket on the high end (and not paying AMT). Pretty much the best-case scenario for buying.

- Your total ownership cost for the property is: 1800 mortgage payment + 500 taxes + 100 insurance + 400? HOA (guess) = 2800/month.
- The equivalent rental (per assumptions) would be 2000/month.
- Your total rent over 2 years would have been: $48,000
- Renting, you would have gained ~4000 over two years after taxes on your 85k down payment money
- Total ownership cost (before tax savings) over two years: $67,200
- Total tax deductible interest paid: ~50,000
- Total tax savings: ~25,000
- Equity loss over two years: ~77k

Bottom line (numbers):
- Net money for residence renting: -$44,000
- Net money for residence buying: -$119,000
- Additional cost to buy over two years: $75,000

Bottom line (simple terms):
You approximately broke even before equity loss using the best-case scenario numbers between renting and buying. You spent triple the amount to buy including equity loss, and will need to hold the house for many years to come out ahead.

I _really_ hope this helps someone who is considering buying now make an educated and well thought out decision. I'm not dissing Ace (I'm not sure what numbers he was running, if any), but comments like "could be a wash" can be very misleading, and potentially very detrimental to a buyer who doesn't run the actual numbers. Just trying to help, really.

[It All Happens on the Margin]

Ace:

We stopped "subtracting the tax payments" when we hit AMT-ville.

And judging from the pricing 'round these parts, most buyers would be in the same boat.

The DTI question would resolve that for this particular case.

Oh, and you forgot to add the HOA, HOI, and a reserve for repairs/upkeep. I know, pesky details those non-deductible trivialities.

That reminds me -- the pool heater in our rental went out this past week. It never felt so good to give the pool guy the number of our landlord.

[I live in L.A., too]

Hi, West LA Buyer,

Given no one here has asked yet, I'm guessing there's a logical reason, but I've got to know, anyway ...

Why did you feel it was important to put down 35%? It seems like you could do a lot with the extra 15% above your down payment, like save for retirement or have extra cash on hand in case of emergencies, considerable lost equity, etc. Were you trying to drive down your payments to something you could afford each month, or was there another reason?

Thanks for your participation, and your vulnerability.

[sfvrealestate]

WLA, I wish you much happiness in your new home. As I said to Milla, as far as the nay-sayers go, nobody knows the future.
You and your buying experiences could be a text book case and absolutely dovetail with the experiences of every other serious buyer that I know of or have worked with lately.
Also, $250/mo for HOA is a very good deal. It's really hard to get an HOA fee lower than that AND maintain a building well.

[Ace]

Nick, I don't think we have all of the numbers to run the comparison that you did. The taxes should only be $350 per month and the HOA is $250 per month. The monthly rent could be anywhere from $2000 to $3000 a month depending on the size and location so it is hard to make that comparison. If you use those numbers, you will definately get a different result. I am not saying that buying will be cheaper than owning but it could be close enough to make it worth while for someone that wants to own.

[Nick]

As I said, I encourage anyone considering a purchase to run the real numbers themselves, and not rely on anyone's unfounded speculation that your result will be "different", or it will be "close enough to make it worth while". I just wanted to demonstrate that using realistic numbers, a best-case scenario for tax deductions and rates, and Ace's projection for equity loss over the next two years, the reality was nowhere near break-even, and in fact your total cost to own was roughly 3x your cost of renting. Thus, the unfounded assertion that the costs might be "close" was totally baseless and incorrect, given the assumptions stated.

Hopefully, if nothing else, this will encourage people to eschew optimistic baseless assertions in favor of running the actual numbers.

[Poor Renter]

Nick said:

"...Besides, it has at least one tangible indirect benefit to me: by buying from a seller who was willing to negotiate, and presumably at a below-market rate, he is directly setting a lower comp, and thus directly making all nearby houses a little more affordable."

Don't you think not having a sale at all would put even more downward pressure on the prices in the nbhd?

[Wondering]

Did you figure out what the price of that condo would have been in 1997 plus inflation?

That's all anyone should pay. Period.

[SoCalJim]

Good luck with the new condo and take what people say here with a grain of salt. Everybody wants to be an expert or authority, but quite frankly, blogs are just something to do when you are bored or for people to bitch and moan or criticize to compensate for their own bad decisions or inability to buy. I think we still have a good amount of correction in prices, but what I think (and what everybody else thinks here) really doesn't matter. What matters is that you can afford it, you like where you live, and it works for your family. Buying is not always about $. It is sometimes, and is usually, about other factors. The problem today is that everybody thinks they have to have a "sure bet" of making money in RE (maybe they watch too many of those dumb house flipping shows or are still living in the fantasy land of a few years ago), and their view very short term, but if you plan on living there for awhile or keeping it as a rental after you move somewhere else - who cares. Sounds like the mortgage is close to rent, and unless the air here becomes dangerously unhealhty or an earthquake renders LA unhabitable, you'll be fine despite the naysayers. 385k is a fair chunk of change, but really is not that much for living here. Not to say you got a good deal (I have no idea), but if people can't handle a 385k house w/30 yr mortgage, they should consider moving somewhere else, or go to NYC for a wake-up call to see what it really means to live in an expensive city.

[Joe Shmoe]

The notion that it is always better to buy a house, and that condos are for renting is silly.

As someone who recently purchased a condo (in Chicago), I can tell you that SFH's are hard to come by in most big cities, and that those that are to be found are usually much more pricey.

Vertical cities like Chicago present prospective residents with two options: buy a condo or rent an apartment. That's pretty much it. If you don't want that choice, you live way out in the suburbs.

Ultimately it's a lifestyle choice: Do you want a horrendous commute, and do you want to spend every free minute taking care of a house; or would you rather live close to work, pay an HOA fee, and be done with it?

I'll take the latter. Most sane people would, I imagine, unless they are married with children. Many of us, however, are not in that particular situation.