Cheaper Housing Options For The Mortgage-Battered

(This article is part of a weekly guest column by Claire Moylan*)

Housing used to be a solid investment, but it has become less so over the years. Now, we don’t know with any certainty when housing will recover enough to be worth looking at it as an investment again. Of course, the American Dream is all about owning your own home, and this has plenty of emotional payback, but if you want to just buy a home as an investment, you might want to compare several choices: renting an apartment or home, co-housing, and buying a smaller home.

How Housing Has Changed
There were red-hot areas in the United States that were seeing double digit appreciation on homes. Now, these same areas might be experiencing thousands of dollars in devaluation. Until the inventory in housing starts to lessen, the odds of getting a home that will retain or gain in value is an iffy proposition in some markets. Even if you find a home you want to buy, it has also become much more difficult to qualify for a mortgage because even lenders have gotten scared. Gone are the days of no down payment. Now, you will be expected to have at least 10% available for a down payment. Your credit score will also be very important. Your income will be scrutinized much more severely to make sure that you can make the payments on the home. If after all this, you qualify, you still might find your lender has collapsed and the deal has been canceled. If you do not qualify for the home, you still have an option to rent until the market changes or your financial situation improves.

Why Renting Can Be Good
Renting can be a positive experience, when compared to owning a home you can’t afford. You won’t be responsible for maintaining the structure of the apartment or home that you rent. In a market where the housing prices are dropping, people who own housing may try to meet their financial obligations by renting it out instead of selling it. This can lower the price of rentals. You can get all of the emotional benefits of being in a house without feeling the pain of having a mortgage over your head. You won’t get any tax write-offs, however.

If you don’t mind being in an apartment community, you can also wait for the housing prices to bottom out in a more luxurious setting. Apartment complexes do many things to attract renters, adding pools, clubhouses, and sometimes even on-site gyms. Any money you save when renting can be put aside for your down payment, when you see the housing prices start to recover slightly.

Co-Housing To Share Expenses
Some people get tired of buying a house with everything in it and instead opt for co-housing communities. These communities can offer a very neighborly feel and they share many resources too. You probably won’t save money on a price per square foot basis, but the homes are also built in these ecological-friendly communities to be smaller and more energy efficient than today’s standard McMansions. People who live in these communities are usually more involved in sustainable living and are apt to share anything from tools, to kid’s toys, and everything in between. Often, such communities have childcare options for the people living within the community that can be a substantial savings for family with children. Many offer community meals that can help save on food and preparation costs. The common areas are maintained and held in common ownership by all the members of the co-housing community. This means that you probably will have to give some of your time back to the community on a monthly basis.

Living Within Your Means
Sounds old-fashioned and boring, but it’s also the best way to have a sound financial footing when buying a home. It also means that if prices drop, your loss is less too. Most experts agree that drops in housing prices are temporary and if you plan on living in a home more than five years, you probably can ride out some if not all of the damage. In the meantime, you can get a smaller home that you can afford with your income. This will give you a tax write-off and the capacity to build some equity. This is good for people starting out buying their first home or for those who wish to downsize. By buying a smaller home, you save money on the mortgage, on the utilities, and on maintenance too. Plus, you won’t be tempted to buy a lot of extra stuff you don’t need to fill the house up. While it may not be the house of your dreams, it can be a very wise step towards your final goal of getting into another home that does meet the standard for being the home of your dreams.

About the author: Claire Moylan is a freelance writer specializing in ebooks and custom-tailored articles for niche websites. You can view her portfolio online or check out her constant content page for more information about her writing assignments.

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SJean said...

I'm interested in cohousing. Probably more in a theoretical way than actually doing it... But I tried to consider it for my move to LA in a couple months, and I can't find much. It seems to still be pretty new and hard to find.

Anonymous said...

Do you see many people purchasing properties on contract anymore?
We are from the Midwest and are currently purchasing our home on contract from the original owner.
This is the second house we have purchased by that method.
I was just wondering how common that is around the country?

xshanex said...

great article! Very down to earth and moderate view on an emotional subject that ranges from renters for life to the buy at any cost crowds

I am currently a renter as is my girlfriend as we wait for the real estate market to normalize from a frenzy to who knows what! We're saving for a downpayment at the moment so when the decision is made we'll be ready.

She initially wanted to buy when she moved due to being able to afford the area after a pay increase and moving to a lower cost area. After checking into the prices in her town/area it did not make sense. The duplexes were running from $260-300k but rented for $1200-1400 a month. The SFH were $275-400k and rented for $1500-1900. Since moving there almost a year ago the latest figures show that the area homes dropped somewhere between 9-12% YoY and there's more for sale and the builders have hundreds of homes still to be built in her neighborhood. When we were there last December and since she moved many homes that we looked at buying are still for sale but at $50k less than then.

It comes down to would I rather own a smaller old house farther from work and in a so-so neighborhood or would I rather live in a dream community in a new to 3 year old energy efficient house 2 miles from work and save $700 a month? It was an easy choice for us

ispf said...

sjean: I don't know much about cohousing, but found this directory of cohousing communities - thought you might find it useful in case you are still looking.

dawn: I feel like a babe in the woods - I don't even know what exactly purchasing properties on contract means :(

xshanex: Thanks for the compliments about the article! I like Claire's writing style and so invited her to write a guest column on this blog!

About your decision to rent, my sister is in the exact same situation. She was planning to buy a house this summer, but with all the bubble news at that time, they decided to hold off for a while. Am I glad they did! I think for both you and my sister, the decision to wait and not jump heard first will really pay off in the long run!

Anonymous said...

ispf ... I should have been more clear, sorry! We purchased the property directly from the owner with a contract between us drawn up by our lawyers. Our present home we purchased on a 15 year contract and make the payments directly to the owner. Of course paying interest on the principal financed through the contract.

ispf said...

Dawn: Thanks for the clarification! That sounds similar to "lease-to-own" purchase option in our area with the main difference that the contract period around here is usually just 3 - 4 years. I read about it briefly when we were looking for our home, but we found very few (if any) houses on the market with this option. If I may ask, how did you find the seller the first time around who agreed to a 15 year term? I can't seem to wrap my mind around the fact that someone can wait for 15 years to sell their home! :)

Anonymous said...

ispf - I believe the people look at it more as an investment. The current property we are purchasing at 6% interest which they're earning on the principal amount we paid for the property. It's a guaranteed return on their investment plus they keep the deed and title to the property until the contract is paid in full. If we default they get the money we have paid plus the property. We have never had a problem with this method. We have our lawyer do a title search to make sure there aren't outstanding leans or other messes. We save money on closing costs and fees the bank would usually charge. We usually find these properties without having to use a Realtor which also saves fees. These deals are hard to come by, but we usually find them through a more word-of-mouth type thing.

ispf said...

Dawn: Again, Thanks for the information. That is interesting.

From the seller's perspective, it is almost the same risk as being a land lord - ie, if the buyer does not make monthly payments you need to evict etc. As a matter of fact it seems like it may be lesser headache than renting out since you don't have to worry about maintenance!

It seems like it is more risky for the buyer though. If the deed is with the seller, what guarantees that he will not try to scam you over the next 15 years by say taking out a second mortgage or something? Also, if for some reason, you cannot make your payments, then will lose all the money paid and not have a property - but by going for a conventional mortgage, you will have atleast the option to sell it below market value and recoup some of the costs. Just wondering what motivated you to take the risk!

(If you ever write about it on your blog, please do let me know - I would love to link back to it and share it with the other readers).

Anonymous said...

ispf - I guess the first time we did it was when we were 19 and didn't really have any credit. We actually bought our first house together before we were married. It was actually a fairly common way of purchasing homes around here. I think the biggest thing is to make sure and have all your ducks in a row. We never purchased without our lawyer doing all the title searches, making sure the abstract was up to date, etc. There was always a clause in the contract that the seller could only use a certain percentage of his equity in the property ... which consistently got smaller as we paid down the principal. They would be in default if they violated the clause. Another thing we did was as we approached the last year of making payments we would have the lawyer check everything again. I don't know ... we were young, ambitious, and naive I guess. Luckily it worked out for us. We are actually related to the person we are purchasing this property from ... so I believe we are o.k. We also have purchased 5 additional properties with conventional mortgages. Purchasing properties on contract ... what can I say? All the kids were doing it back then!

ispf said...

Dawn: Wow, your first house at 19? That is impressive! Those look like good times when people still trusted each other! Regarding "all the kids were doing it back then" - I can say a lot of things about all the things kids were doing when I was 19, but somehow none of them involved buying a house (or anything else remotely 'responsible'! :)

Good luck with your current purchase - and again, thanks for the info!

Anonymous said...

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Smart Equity said...

The most crucial thing when it comes to housing is the satisfaction of owning a house.