Category Archives: Home ownership

There has never been a better time in the history of America to buy a home

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Mark the day. I’m officially bullish on the housing market. I believe that we have hit bottom on both interest rates (within a few bps) and residential real estate prices. Of course there are pockets all over the country where prices haven’t completely bottomed out yet (e.g. south Florida). And there are various statistics that still point the other way. But the reality is when the numbers officially point to the turnaround, then the turnaround already happened. I think that time is now. And hey, if Cision wants to name me the fourth most influential personal finance expert in the nation, then I might as well use my influence. Right?

Don’t stop reading and call your REALTOR. Read this whole post, digest it, and then evaluate how, or if, it affects you. And if you skip the bottom part of this post that discusses who should buy and who shouldn’t, then you will get what you deserve. That’s not a good thing. Your diligence in trying to understand what I’m saying is crucial.

The two measures that support my assertions are interest rates and housing prices. Let’s take a close look at both.

  1. Interest rates- Mortgage rates remain at historic lows. It has never been less expensive to borrow money to buy a home. According to the chart below (courtesy of mortgagenewsdaily.com), rates have fallen consistently since 1980. My best guess is that mortgage prices will stay very low for the next 12-18 months. To me, this means that 30 year fixed rate mortgages will stay well below 5%. Rates are currently in the mid 3% range. The lower the rates, the lower your payment will be. Or the lower the rates, the more home you can afford. You decide which route you would like to take. Just stick to my 25% rule. Keep reading. Look at the rates over the past 40 years (below).
  2. Housing prices- The housing market crash is now a good thing…if you are wanting to buy a home. Inflation-adjusted housing prices have returned to normal levels. They were absurd from 2002-2007. Those housing prices were driven by banks lending money to people that never should have been able to borrow money. This drove demand, thus prices increased. It was basic high school economics. But now lending has tightened, foreclosures have driven prices down, and the realistic capitalist in me knows that this is a good thing. I hated seeing people lose their homes. But I don’t hate seeing people get denied loans that they shouldn’t get. It’s not a matter of sympathy. It’s a matter of economics. If everyone starts getting loans again, despite the fact that they shouldn’t, then we will repeat the housing market crash. The big banks have a small amount of culpability in the housing crash, but I believe that the majority of blame lies with the consumer. That is unless you believe that McDonalds is liable for obese America.

Why mortgage rates matter

Let’s examine a current interest rate (3.75%) and a “normal” interest rate (6.0%). Below you will find the first 24 payments of a 30 year fixed rate mortgage for each rate. The comparison is meant so show the relative affordability of today’s mortgage rates.

The first 24 payments at 3.75% 30 year fixed rate mortgage

The payment of $926.23 is acceptable if your net income is $3704.92 or more per month (based on Pete the Planner’s Ideal Budget). That translates into a gross annual household income of about $60,000. Thus a family with a $60,000 household income can afford a $200,000 mortgage because the mortgage payment based on a 3.75% rate ($926.23) is 25% of their household income. The 25% allocation towards housing is the foundation of being able to truly afford home ownership. But it’s not the only factor. More on that later.

The first 24 payments at 6.0% 30 year fixed rate mortgage

The payment of $1,199.10 is acceptable if your net income is $4796.40 or more per month. That translates into a gross annual household income of about $75,000. Thus a family with a $75,000 household income can only afford a $200,000 mortgage if interest rates were at 6.0%

Additionally, getting a mortgage at 3.75% versus getting a mortgage at 6.00% will save you $98,233.15 over the life of the loan. That’s nothing to scoff at either.

Depressed housing prices

Sounds depressing, right? Wrong. Depressed housing prices means that homes are more affordable than they have been in the last several years. In fact, sales prices have depreciated 25.2% over the last 5 years in Indianapolis, IN (for example). Homes aren’t only for sale, but they are now ON SALE. You can use the historically low mortgage rates to buy more home…if you so choose.

Of course there’s a big but

Are you excited? If so, things are about to get real. All the above information is great, but we are neglecting one major factor. Should YOU buy a home?

There are two groups of people: people who should buy a home, and people who shouldn’t. This isn’t measured once and judged forever. These two groups are constantly reassessed. It’s quite possible, likely, and encouraged that someone who is in the “shouldn’t own” camp on February 1st, 2012, could find himself in the “should own” on February 1st, 2013. If you can’t afford a home now (by my measure, not the banks), don’t get angry. Just get going. Put yourself in a position to be in the “should buy a home” group.

There are three main factors to consider when assessing your ability to afford a home. We dealt with the foundation factor earlier (mortgage payment at 25% of your net household income). But there are two other factors.

  1. Mortgage payment no more than 25% of your net income- While you can get approved for more, I suggest that you try to keep your allocation to 25%. In fact, just buy less house. Don’t push the limits. If you “underhouse” yourself, then your life can be much more fun.
  2. Down payment of 10%- Yes, I realize that you need 20% equity to prevent Private Mortgage Insurance (PMI). But there are other ways around that. My 10% requirement is based on the fact that if you can’t afford to scrap together a 10% down payment, then how are you going to afford the expenses of a homeowner? How are you going to be able to replace that furnace? How are you going to be able to keep your yard looking nice? How are you going to be able to afford an increase in property taxes? If you can’t put 10% down, then don’t buy a home this time around.
  3. Stay in the home at least 5 years- You expose yourself to great risk when you move into a house on the premise of moving again within five years. Not only was this a popular strategy during the real estate boom of the 2000s, but it had a name: starter home. “Oh, we’ll just move into this house for a couple of years until we can afford more house.” Wha wha what?!?!?! Your goal should never be to constantly afford more. A grounded person’s goal is to constantly need less. Be a homeowner to own the home…long term.

Other considerations

There has never been a worse time to get an Adjustable Rate Mortgage (ARM). If rates are at historic lows, then that means that they are most likely going to rise. ARMs adjust every 3, 5, or 7 years. This means that your mortgage rate, if adjustable, will rise just when mortgage rates find their “normal level.” You don’t want to be in the middle of this normalization. Get your 30 yr or 15 yr fixed rate mortgage now, and leave the ARMs for people that can’t read historical rate charts.

Be smart. Don’t grow into your payment. I said that the housing market is coming back, not employment. Many a young person has put him/herself in a terrible spot by projecting desired income and using that information to make a housing decision. If you have the 10% down payment, then just follow the 25% of household income rule, and you can’t go wrong.

Emailer wants to repair credit to buy a house again

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Last week was a HUGE week at PeteThePlanner.com. Cision ranked me as the fourth most influential personal finance expert in the nation. I get a tremendous amount of email from people all over the country. It’s one of my favorite parts of my job. The emails are always VERY REAL questions. They are specific, heartfelt, and quite vulnerable. And I always think there’s something to be learned from everyone of them. We may not have the same problem (as the emailer), but many of us have the same spirit. We’ve made mistakes, we want a do over, and we want to to stop stressing out over money. We just want our lives back. The email below is the perfect example.

Hi Pete

I’ll start by saying my wife and I have made some pretty terrible financial choices and need to do a much, much better job. We were not taught financial responsibility and while we tried (not with the best effort or result) to fake it we’ve fallen into some of the cliché traps you’d expect. We used credit irresponsibly in our 20′s resulting in a bankruptcy in 2002. We tried to right the ship but my wife lost her job and we had late payments, a few collections and even a judgment or two over the last several years. We’ve ignored debts/collections and I’m tired of living with my head in the sand. We’ve entered into a lease-to-own contract for a home we would very much like to purchase, we have until April 2013 to obtain financing and I know we are going to need to build credit to be able to obtain the loan.

Pete – I guess what I’m saying is, I need help. I’ve dug myself a hole and I need help getting out of it. I’m willing to put in the effort and make sacrifices as necessary but I need that experience and additional push that a professional can provide. We need advice on how to build credit and do credit repair. We currently lease-to-own our home and outside of what I’d call our day-to-day living expenses, we have roughly $7000.00 in debt. The debt is a 2 personal loans and 1 collection account. We have no credit cards or auto loans at this time. I’m certain we need to do better with our monthly spending. We do eat out vs. grocery shop far too often, but for the most part I think a look at our lifestyle costs (internet, cell phones, etc.) need to be looked at and maybe slimmed down

Where do I start? Can you recommend a legit credit counseling service? You hear about so many of these places causing more harm than good. I just don’t know what to do to break the cycle and escape from this terrible financial position. I want to be secure; I want to be able to know I can obtain a mortgage and provide for my family. This is no one’s fault but my own, I know this, and I’m ready to change.

I am sorry my email is all over the place. It appears this email has become part confession and part plea for help.

C.E

Do you sense the stress? Its palpable, isn’t it? There’s so much here to address: technical issues, philosophical issues, and behavioral issues. I’m not saying this guy is screwed. I’m just saying that most financial problems stem from both technical and philosophical shortcomings. We’ll address these issues separately. I needed more info to answer the questions so I emailed this person and learned the following: $60,000 household income, he has a 401k at work but no other savings, his current rent payment is $925 per month.

This is a very involved question. I will deal with parts of his question today, and then the credit building stuff tomorrow. Deal?

Technical Issues

C.E. is currently in no position to buy a house. He is not a homeownership candidate. Unfortunately for him, someone might actually loan him money next year. The absolute worst conclusion to his story would be for him to buy the house next April. Based on the income numbers he provided me, C.E.’s take-home pay is about $3500 per month. That means that his rent payment is 26% of his take-home pay. All other things being equal, 26% of income going towards housing would be acceptable per Pete the Planner’s Ideal Household Budget. However, the rest of his financial profile suggests struggle. He’s struggling.

A prospective homeowner should have 10% of the value of the home they are purchasing as a down payment AND an emergency fund on top of that. C.E. currently has zero dollars saved, has debts in collections, and owes personal loans. All of these characteristics are the opposite of a prospective homeowner. This doesn’t make him stupid or dumb. It just makes him mislead. He is mislead that homeownership will solve his financial problems.

Philosophical Issues

Peer-pressure is a mamma jamma. It can cause some weird decisions. The overriding social philosophy of Americans that homeownership is the best way to go, is quite strange. I kinda get it, I’ve personally felt that way in the past, but given what’s happened in the last five years in the housing market, I can’t understand why anyone would be in a hurry to jump back in.

C.E. mentioned two personal loans that also need to be repaid. I can’t, under any circumstance, given the information above, recommend that C.E. pursuit homeownership in April 2013. He mentioned that he and his wife have made several bad decisions. I believe that this is primarily due to philosophical issues.

Tomorrow we will continue this conversation by giving credit rebuilding tips and I’ll give you my perspective on credi counseling.

Are home improvement projects really investments?

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During my junior year of college (circa 1999), I decided that I should have a “Clooney.” Yes, a Caesar. Yes, a terrible terrible haircut…for anyone who doesn’t look like George Clooney. I thought it was pretty awesome. I kept telling myself it was awesome. Even my fiancee’ (now known as Mrs. Planner) thought it was bad. As did my friends. As did my parents. But I am strong willed. I just KNEW it was awesome. I just really wanted awesomeness to be the case. It was not. Just because you have a thoughtful desired outcome doesn’t mean that your perception is reality.

Take for instance, home improvement. The term itself is a sales pitch. Something that is improved must be worth more money, right? I don’t know. Ask new Coke. The operative term that we are dealing with today is value. There’s personal value and there’s resale value. The confusion between the two concepts goes a long way in explaining why people make so many home improvement mistakes. To extend my earlier example a bit: my bad haircut had high personal value, yet very low resale value.

This all became relevant when Mrs. Planner and I decided to finish our basement. Don’t worry, we didn’t take out a home equity line of credit (HELOC) or use emergency reserves. We saved from scratch. As we were discussing the design plans one thing became abundantly clear, BS justifications had become a factor. “Well, we could spend the extra money and do ____. It will only go to increase the value of our home.” I had to step away from the situation, and treat it like someone had asked me my opinion about their situation. Did more expense equal more increased value? There has to be a tipping point, right? There has to be a baseline of some sort. $10k into a basement remodel may increase the home’s resale value by $10k, but a $25k remodel may only increase the home’s resale value by $14k. Unfortunately, every situation is different.

We have to have a baseline. We must. Therefore, here is a list of home improvement projects and how much of the expense of the improvement may be recouped by an increase in resale value.

  1. Basement or other unfinished space finishing- 50-90%. Thus a $30,000 basement improvement would potentially lead to an increased resale value of $15,000-$27,000.
  2. Kitchen remodeling- 70-120%.
  3. Painting- Up to 300%
  4. Bathroom addition- 90-130%
  5. Bathroom remodel-65-120%
  6. Window/door replacement- 50-90%
  7. Deck addition- 65-90%
Source HGTV

Just about everyone has heard that swimming pool additions add absolutely no resale value, and in some cases can decrease property value based on the high cost of maintenance. But did you know that landscaping doesn’t add much value either? It may add curb appeal, but it won’t add a great deal of resale value. Both of these things add a great deal of personal value, and if you have the financial resources to fund these purchases, then have at it.

No matter what project you choose, using debt to fund these home improvement projects is not a great idea. Check that. It’s a great idea…according to your bank. But then again tanning is a good idea, according to tanning places. You’re house is NOT A PIGGY BANK. Although you can borrow against it for things that you deem to be important, you should not. Did I mention that my assertion is now supported by…the Great Recession of 2008?!?!?! The financial meltdown that we are now (arguably) exiting was fueled by homeowners that stripped equity out of their homes. Home improvement projects funded with HELOCs was a bank marketing gimmick gone awry. It was a bad idea then. It’s a bad idea now. And it will always be a bad idea. Fund home improvement projects with money that you have saved. And by saved I mean “in addition to your emergency fund money (3 months expenses).”

But what about sweat equity? Sweat equity is real. Basically, sweat equity is the concept of doing the work yourself, and not paying labor costs to finish a home improvement project. If you have the skills, then doing some of the work yourself could really improve your chances of increasing the value of your home in proportion to your expenses. Labor expenses often double the cost of home improvement projects. If you knew what the hell you were doing, a $10k (with labor) bathroom remodel may only cost you $5k (by doing the work yourself). This would almost guarantee that you recoup your costs via increased resale value. However we now have a J-Lo problem: a big but. The big but is: if you don’t have the skills to complete a home improvement project, your attempt to do so could result in big big big trouble. Not only could you ruin something, but you could break the law, get hurt, and anger your spouse. In other words, it’d be like if you went on Spring Break and everything that could go wrong, did go wrong.

The bottom line is pretty simple

  1. Choose your projects wisely
  2. Be realistic about how much your home’s resale value will actually increase
  3. Don’t go into debt to remodel
  4. Utilize sweat equity when applicable

 

******BTW, there’s no way that I’m posting a picture of that haircut. Not good.

Underhouse yourself to live more life

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I’m with you. I have no idea what in the hell this blog title actually means. But it’s exactly what I’m talking about. If you don’t push the limits on your budget allocation towards housing, then you will have the freedom to have more interesting life experiences.

Want to experience life? Then you need to get out of your house. Want to get out of your house? Then make sure that your house isn’t holding you as a financial prisoner.

Paging Dr. Hypothetical. Dr Hypothetical, you have a call on line 1:

Let’s say that your household income is $75,000. After taxes, healthcare, and other paycheck deductions, you bring in about $4300 per month. Pete the Planner’s ideal household budget tells you that you can spend up to 25% of your net income on housing. And in this example that would equal a maximum housing expense of $1075. What most of us do (and yes, me included) is try to spend as much on housing as we can up to the point of restless nights. Not only does this manufacture undue stress, but it precludes us from spending money on other things. This is true whether you are buying or renting.

What would happen if you only allocated $750 per month to housing? That’s 17% of your net income. What would be different? A great deal would be different. And this is because many of us spend MORE than 25% on housing. We spend 30-40% of our net income on housing. This is not only dangerous, but restricts you from living life. For example 35% of a $75,000 gross household income is $1,505 per month. This high payment can prevent vacations, prevent savings, and prevent you from living and enjoying life. Compare that to having a housing expense of $750 per month, and you can quickly see life becomes a bit more fun.

Does this work for everyone? Nope. Could it work for you? Possibly. There is no reason to make yourself house poor. It just doesn’t make financial sense. We often justify getting in over our heads by calling a home an investment. Whether it is or not is certainly debatable. You know what else are investments? Investments. But you don’t see anyone busting their ass and stressing out in order to invest.

And don’t forget that pushing the limits on housing will also force you to spend more on utilities, insurance, and furnishings. That house that you are forcing yourself to afford costs a great deal to fill with stuff.

There will be a time in your life when allocating 25% of your income towards housing will make sense. Until then, live. Go do stuff. Get a passport. Get it stamped. Just be smart about it. You could have awesome vacations and experiences 5-10 times per year if you financially allow yourself to do it. There’s nothing wrong with spending money on fun, as long as you do it responsibly.

Just inherited $90k, now what?

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I love getting your email questions. I really do. I received one the other day that may be one of my all time favorites. Check it out.

Pete

Love your blog, there’s a lot of great advice on it.  Between you and Dave Ramsey I can almost always find the answer to any question of situation.  Thanks for putting so much information out there!

I come from a family that has a horrible relationship with money.  On one end of the spectrum family members practically hoard money and can’t have a logical conversation about buying anything that costs more than $10, and on the other end my “most successful” family, makes 7 -figures and still manages to have a negative net worth.  So figuring out money has been a challenge for my husband and I and we really don’t have good person to run ideas by… So I thought I’d ask you.

We currently have about 6K in savings that we don’t touch in the event one of us would loose a job.  We make a combined 102K a year.  We have almost 220K in student loans left to pay off.

My husband just inherited 90K.  Some think we should stick it under the mattress, and others think it would make a great down payment on a 500K home.  Neither of those a good option, clearly, so here is what we were thinking.

We don’t have any children yet, 20K of the 90K would go towards adoption.  With the other We would like to purchase a property for $70K.  Our 3 options are a property ready to go, one that would cost $20K and need about $40K in work, and a lot that is $20K with a house plan that we can build for $40K.  Although we could start the adoption process now, we were told it is much better if we have a house, rather than saying we would be moving out of our tiny 1 bedroom when we adopted.

Our thought is, if we didn’t have to pay rent/mortgage each month, it would take us a lot less time over all to finally pay off that $220K in student loans.  But we are wondering if we are hurting ourselves in the long run by not throwing that $90K at student loans initially.

Any thoughts, just wondering if it sounds like a good idea?  I think I’ve thought of everything, but I thought I would run it by a third person for some feedback.

M.A.

Awesome question. You have the chance to make an AMAZING decision right now. I have seen several people inherit much more than $90k, and in most cases the money was either wasted, or it didn’t provide the sort of impact that this $90k will have on you. Here is what you need to consider.

  1. Taxes- Don’t forget about taxes. I don’t know the details of your inheritance, but don’t forget to set some aside for Uncle Sam. That is unless you inherited the money from your deceased Uncle Sam. If that’s the case, then I’m sorry for the Uncle Sam reference. This is spiraling out of control. Just pay your damn taxes.
  2. Emergency reserves- Having only $6k in savings given your $100k income is a bit worrisome. I’m not going to lose sleep over it, but you should. You should have AT LEAST three months expenses set aside. You make at least $6k net per month. That means that if your expenses are anywhere near your income, then you need $18k set away. I think you should at least put $4k of the $90k in savings to get you up to $10k, and then set money aside from your income on a monthly basis.
  3. Student loans- I’m not going to lie. $220k in student loans made me throw up in my mouth a lil bit. That’s a ton! I usually tell people that student loans are like a having another house, but one that you can’t live in. But you are talking about getting a house that is 1/3 the cost of your student loans. Based on my ideal household budget, you can put 25% of your household income towards housing. Since you don’t plan on having a house payment, you can put that hypothetical $1500 per month towards your student loans (that’s in addition to a what you are already paying towards those loans). Let’s assume for a second that you don’t pay anything in interest (which obviously isn’t the case), it’s going to take around 12 years to pay off these student loans with $1500/month payments.
  4. Your house- So you want to be a homeowner? Cool. I’m glad that you are thinking straight in regards to not using the inheritance as a down payment, but instead viewing the inheritance as a full payment. This restraint will serve you well. Just know that you will still need to pay property taxes, insurance, increased utility bills, and maintenance expenses. I’m not trying to piss in your Cheerios, I’m just letting you know that paying cash for your house won’t end the costs associated with homeownership.
  5. Adoption- Congrats! What a great decision. Not to get all sappy here, but adding a family member in the wake of losing a family member is a wonderful thing. However, it’s been my experience (assisting several peeps over the years) that adoption will cost more than $20k. I hope this isn’t the case for you, but I believe it will be. Just know that you may need to set more aside for the adoption than you think.
All in all, M.A., you are in a pretty sweet spot. But the decisions you make now will impact you greatly over the next few decades. I believe that you are thinking straight, and I hope that my “things to consider” helps you even more. 

5 signs that you bought too much house…and what to do next

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One of the most common financial problems facing Americans today is “owning too much home.” And by owning, I mean in the process of owning. In other words, securing a mortgage for a house in which you can’t afford to live. This is a very serious problem. If this happens to be your problem, then you need to address it ASAP.

What sort of problems can “too much house” cause?

Well, lots. High utility costs, high maintenance costs, and high stress levels to name a few. But low housing liquidity and high foreclosure risks are what would keep me up at night. Housing liquidity is used to describe how easy it would be for you to quickly sell your home at an “acceptable” price. The lower the liquidity, the harder it would be to get rid of your house in an “emergency” situation (job transfer, budget contraints, etc). Unfortunately as you will see below, some of the same signs that illuminate the fact that you can’t afford your house, also prevent you from selling your house in a prompt manner.

Foreclosure risk is real for those that can’t afford the home in which they live.

  1. You have no equity- How much of your house do you own? Your answer will determine whether or not you are in a “healthy” housing situation. Equity, of course, is the amount of ownership that you have in something (in this instance, your home). Do you have less than 5% ownership of your home? If so, then you are in too much home. What? The market fell and ate up your ownership? Yes, that stinks, but you still are in too much home. Low equity = home selling difficulty. Remember our brief discussion about housing liquidity? Home equity can prevent you from having housing liquidity issues. Low equity isn’t the end of the world, but fire is falling from the sky if you have low equity combined with one or two of the following signs.
  2. Your payment is 40% of your monthly income- According to Personal Finance Expert Peter Dunn, the maximum amount of your monthly income that should be dedicated to your mortgage payment is 25%. It is quite possible that if your mortgage payment ranges up to 30-35% of your income, you will still be alright. But if 40% of your household income goes to pay your mortgage, then you could be in really big trouble. This isn’t always the case, but it is often the case. The more you spend on housing, then less you can spend on…everything else! This means that you most likely can’t save money, can’t pay off debt, and can’t go on vacation. It is quite common for people that have a major debt issue to mistake a too much house problem for a debt problem. Having a high housing cost percentage leaves you very little room for error.
  3. You can’t afford to keep up with yard and house maintenance- Haven’t mulched in 2 years? Can’t afford to paint your house? That’s a sign that you can’t afford the house in which you live. If you have to go into debt in order to perform the most basic of home maintenance, then you can’t afford your home. The worst part is that neglecting upkeep will only make your too much house problem worse. Your property value will suffer from your lack of attention. This increases housing liquidity concerns.
  4. You have unfurnished rooms- What’s the point of having a room that you don’t use? Sure, guest bed rooms and other such rooms occasionally aren’t used. I’m not suggesting that you buy furniture that you can’t afford, it’s just that you might be in over your head. There is a ritzy section of the city in which I live that is famous for having gigantic homes with no furniture. You don’t have to have a perfectly decorated home, but there is something incredibly odd about buying a $750,000 and then not having enough cash flow to furnish the damn thing. Right?
  5. You struggle to afford property tax increases- I believe that it was Henry David Thoreau who once said, “no, I’m not going to pay property taxes.” Okay, he may not have said that…actually he probably did…but anyway. Sorry Hank, no one likes paying property taxes. No one. Property taxes will consistently increase either through increased tax rates or increased property values. Not being able to afford this increase is a major sign that you are in trouble.

If you are “guilty” of at least 3 of these problems, then you have a serious problem. Not being able to afford your current home should not be taken lightly. That stress you are feeling…yeah, it’s real. This problem will not solve itself. But acting in haste will only worsen your problem. I do think that you need to get some professionals involved. You should contact a licensed and trusted realtor to give you an estimate of what your home is worth. You need information. Whether you sell your home or not, you need to know where you stand. The solution very well may be that you should sell your home. This is a terribly tough decision, but it could save the rest of your financial life.

So you aren’t going to sell you home, now what? You MUST turn to your budget. Don’t know how much you should spend on stuff? Then use this ideal budget. If you can’t afford your house, then you are likely committing too much of your household income to your mortgage payment. This means that you either need to make more money or spend less money. Spoiler alert for the rest of your financial life: those are always the two options. In some cases you might want to consider getting an additional job. This should help you temporarily raise your income so that you can take another more permanent course of action (such as selling your house).

If you do sell your house, then you are unlikely to have a ton of equity for a downpayment on another house. Take this as a sign from God. Don’t buy another house. Rent. Renting is not second place. Renting is one of the smartest financial decisions that you can make. The crazy thing is that you can probably rent a house in the same neighborhood in which you currently live…for less than what you are currently paying for your mortgage.

I can’t emphasize my final point enough: time will not solve this problem. Only three things solve the too much house problem: spending less money, making more money, or selling your house. And in most instances, you need to do all three. Don’t be embarrassed. Be empowered. You are about to take control of your out-of-control financial life. And don’t forget, I’m here to help.

Working with a Realtor just makes more sense.

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According to a 2010 National Association of Realtors study:

 For Sale By Owner (FSBO) Statistics

FSBOs accounted for 9% of home sales in 2010. The typical FSBO home sold for $140,000 compared to $199,300 for agent-assisted home sales.

FSBO Methods Used to Market Home:

  • Listing on Internet . . . 27%
  • For-sale-by-owner Web site . . . 11%
  • Yard sign . . . 46%
  • Friends/neighbors . . . 39%
  • Newspaper ad . . . 12%
  • Open house . . . 14%

Most Difficult Tasks for FSBO Sellers:

  • Getting the right price . . . 23%
  • Preparing/fixing up home for sale: 18%
  • Selling within the planned length of time: 14%
  • Having enough time to devote to all aspects of the sale: 13%
  • Understanding and performing paperwork: 10%

Misdefining success can crush you

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“Here’s the deal, Pete. I’m a successful guy. I make over $200k per year, I drive a BMW, and live in a $500k house. But we can’t get ahead financially. It’s a constant struggle. We are actually racking up debt. What are we doing wrong?”

I get some form of this question at least twice per week. It comes in different forms, but I usually hear “why don’t my high income and superior intelligence result in financial stability?”  It’s actually a pretty simple answer: high income and superior intelligence have nothing to do with financial stability. They can, however, provide you things that you can mistake for financial success. And this is where the party begins. And by ‘party’, I mean ‘misery’.

I’m about to ruin a Dan Brown book for you. But if you’ve read one, then you’ve read them all. In The DaVinci Code the characters are looking for the Holy Grail (the cup used at The Last Supper). Loooooooong story short, the Holiest of Holies…wait…I think that’s different. Okay, the long-sought after cup isn’t actually a cup. The “big secret is different” than what the characters were expecting. (This isn’t where I reveal that I am actually a descendent of Jesus Christ. Although I did grow a beard this week). My point? You can run all over the world trying to find what you are looking for, but setting your sights on the wrong prize will lead to failure every time. The same can be said for your financial life.

Take a moment and ask yourself “what does financial success look like?” Does it mean that you have the perfect job? Does it mean that you make $300k per year? Let’s define success for you, and then make sure that it makes sense. Let’s make sure that your definition won’t actually lead you to a financial catastrophe. I think through my own journey of “success” discovery, and I shake my head in awe. I almost screwed up badly.

Over the last 12 years, I have defined my own idea of personal success in several different ways. I’m going to share these with you. I’m embarrassed by some of them, but I’m pleased with my current definition of success.

The earliest and saddest success goal that I had was to “make more money than my dad did.” I shuttered having just typed those words for the first time. I’ve done several a-hole things over my lifetime, but trivializing my father’s life’s work by setting my income against his, is as bad as it gets. I truly feel shame for this. My dad reads my blog. Pops, I’m sorry. Dick move by me. Thank God my brain has continued to develop.

Next was a $1000 watch. I wanted to buy a TAG Heuer watch. Every successful person that I knew had either a Rolex or a TAG Heuer. I’m not much of a Rolex guy, so the TAG was the watch for me. I set a sales goal in the first year of my career, hit the goal, took $1100 cash into a jewelry store, and bought the watch. I was so proud. I was a success. What a dick. I’m so embarrassed by this time in my life that I can’t even bring myself to wear this watch anymore.

My next definition of success was to “be able to afford whatever I wanted”. Okay, that’s not terrible, but it’s not great. This definition had me “chasing dollars” to accomplish my goal. I have found that to be a fruitless journey. Being “able to afford whatever I want” doesn’t really work because my idea of “afford” is pretty subjective. Most people get into financial trouble because they buy things that they subjectively think that they can afford, when in fact they objectively cannot.

My current definition of success has me feeling very peaceful. To me, success is not striving to have more, but constantly needing less to feel satisfied with my life. I don’t want to strive to have more. I want to strive to be comfortable with less. Since I have taken on this definition, my income and wealth have grown substantially. For example, several people have complimented me on my wedding band. It cost me $12. I tell them this. Mrs. Planner gave it to me for our 10 year anniversary because it’s the one I wanted. People don’t believe me that it costs $12. It’s a very cool looking ring. They are in even more disbelief when they see that I have no shame over wearing a $12 wedding band. This wedding band has taken on dual meanings for me. First and foremost, it’s my sign of commitment to my marriage. But second, it’s my daily reminder that money WILL NOT define me.

What are you striving for? Will it lead to financial ruin? My current definition of success may not work for you, but that’s okay. Create your own definition.

You didn’t qualify for the loan. Oh, and you’re terrible at soccer

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Chances are, you sucked at soccer. Now whether anyone told you this or not, is actually more important than the actual suckiness itself. But you most likely got a trophy for being the worst kid on the worst team. Some people view this as sweet and fair. However I view this as a financial disaster waiting to happen. I’m not suggesting that the worst team in the league is executed. I’m just suggesting that they have to make do with their juice box, oatmeal cream pie, and not a trophy. Sometimes knowing the truth allows a person to move on. And when appropriate, do better. But when we coddle peoples’ failures, and make them un-failures, then we risk hurting the person more.

Has a bank ever turned you down for a simple mortgage loan? And by simple, I mean a 30 year fixed mortgage. If so, then you probably shouldn’t buy a house in that moment. If you have to “get creative” with the loan (e.g. interest only, Adjustable Rate, etc.), then you really can’t afford the house itself. You failed to qualify. But it’s what you do next, that makes all the difference in the world.

When rejected for something significant like a mortgage or a car loan, you basically have two choices. If you choose wrong, then your ignorance of failure (in a bad way) will persist. Here are the two choices.

  1. Learn from your financial failure- If you choose to learn from your failure then this means that you take the time to assess the situation, and make yourself better. Did one bank reject you for a loan? I don’t necessarily suggest bulling forward to find a bank that won’t reject you. You need to take the time to figure out why the bank viewed you as a poor credit risk. Use the failure as an opportunity to succeed. Don’t ignore the failure, which would direct you toward a bigger failure.
  2.  Get a yes- “Mom, can I go outside and play?” I ask. “No,” my mom says. “Dad, can I go outside…” You know how that goes. Getting the answer that you want to a question isn’t progress. Don’t mistake “getting a yes” for perseverance. Perseverance is way over-rated. If a legitimate bank rejects you, don’t keep trying to find different ways to borrow the money that you never should have borrowed. It’s not your RIGHT to borrow money. It’s privilege. And it’s a privilege that you haven’t earned.

There are a great number of people who purchased homes between 2001-2007 that have an incredibly rude awakening coming their way. They bought something that they couldn’t really afford. I refuse to place blame on the banks for this situation. Since when do we rely on other people to tell us how much money we can afford to spend? Your bank may have loaned you money that they shouldn’t have loaned you, but don’t forget that means that you borrowed money that you shouldn’t have borrowed. You will never get rejected for a loan that you can truly afford. And you will never make a poor housing decision if you know what you can truly afford.

Rejection is a tell. Rejection is a clue that something isn’t right. The car dealer tells you that you can’t get the car deal that you want? Then this is a major clue as to what the situation really is. I have no problem with the popular concept of “rejecting rejection”. Often times I try to push through business and financial adversity. But “rejecting rejection” means that you still need to proceed cautiously and responsibly.

Be tenacious. But don’t be tenacious for the wrong reasons. Fight for your right to succeed, but don’t fight blindly for a “yes” in the face of an important “no”.

Small financial mistakes are worse than big financial mistakes

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Have you ever bought a car on a 6 year car loan? That’s okay. You can easily fix that. Have you ever had an interest-only mortgage on your home that later caused you trouble? That’s okay. You can easily fix that. Have you ever had a bad dining-out problem? Uh oh. That’s kinda a big deal.

As people have shared their financial lives with me over the years, one thing has become abundantly clear: mistakes cause more financial problems than emergencies do. This means that your financial success is more dependent on your behavior than it is mother nature, Greek Gods, and/or bad luck. Your ability to avoid mistakes, and then correct past mistakes, will be the key to your financial success.

In studying peoples’ mistakes I have learned that there are two primary types of financial mistakes. Big mistakes. And little mistakes.

Big mistakes (house, car, education, career, or family/money mistakes) seem as though they will create the biggest problems. However, small mistakes actually can do the most long term damage. It’s because small mistakes are created with poor behavior and habits, while big mistakes are based on poor judgement. Learning your lesson from a big mistake is actually quite easy. Did you buy too much house? Fine, don’t do it again. Lesson learned. Do you spend too much on convenience dining-out? Uh oh, this is going to be challenging. Why? Because of all the habits involved. Big mistakes are usually caused by a lack of knowledge. You didn’t know that you should buy a house that is the maximum amount that the bank lets you buy? Well, you shouldn’t. Lesson learned.

In order to stop making small mistakes, like too much convenience dining out, you must change a tremendous number of habits. You must become a better grocery shopper. You must become a better cook. You must become better at time management. You must become a better planner. You must improve your will power. Etc.  All of these skills/habits must improve to correct one simple mistake.

Most people find themselves predisposed to either big mistakes or small mistakes. They usually have a grip on one, but not the other. I’d rather run across people that make big mistakes because they are easier to prevent in the future. Whether you know it or not, this entire website is dedicated to helping you prevent/fix mistakes. I mainly focus on small mistakes because they are the hardest to fix.

There is the rare occasion that I run across someone that makes both small and big mistakes. This is a problem. Not only does this person have to change their habits, but the big mistakes that they made will make it harder to fix their little mistakes. The big mistakes usually affect cash flow on a longer term basis. It can be a very frustrating process for them. It literally takes years to fix someone in this situation. But THAT’s OKAY!! The alternative isn’t a good choice either. Not addressing your financial mistakes is shockingly common, and predictably a terrible idea.

So, what kind of mistakes do you make? And are you committed to fixing them?