If you’re still paying rent, it’s time to grow up and buy yourself some equity. There’s a reason they call owning a home the American dream.
Details magazine, August 2002
It’s time. You’ve got the job, the wife, the kid (or maybe you’ve only got the job). You’ve finally moved the bed off the floor, the books off those milk-crate bookshelves. No more Queen posters, no more stroke mags. You’ve lost all your wisdom teeth, and your virginity is but a fond memory. You’ve been bar mitzvahed and confirmed and learned the Sun Salutation and memorized your mantra. You’ve been through every rite of passage you thought a guy could go through, but now it’s time to get serious: Go buy a house.
You’ve already noticed the subtle signs: That sixth-floor walk-up studio just isn’t cutting it anymore. You casually drop the fact that you’ve never had to pay a four-figure rent, but then the guy next to you lets slip that his mortgage broker found him a 40-year fixed at one point above prime. Even if your new mortgage is more than your old rent, paying any rent at all is just throwing good money after bad: When your lease is up, the only thing all that money has earned you is a couple of pennies of interest on your security deposit. Meanwhile, the first ten years of most mortgages are tax-deductible. In other words, you’re getting money back.
But be warned: Home-buying is a contact sport. Think Xtreme Escrow or the Giant Down-Payment Slalom. It’s all too easy to get burned your first time off the bench. Here, we replay the game tapes of four guys who’ve just trotted off the home-buying gridiron. They’re sweaty, they’re bruised, but the exhilaration of Game Day has left them pumping their fists. They’ve reached the end zone of homeownership.
Although buying a house may seem like an Olympic event, even weekend warriors can play this sport: The only essential equipment is a fistful of cash and a passable credit report (and sometimes not even the fistful of cash). But that doesn’t mean the scrimmage is easily won. Photographer Matt Hranek and his wife spent three years talking to real estate agents and combing local newspapers in search of the perfect piece of property in upstate New York. “You get sick of hearing things like ‘real fixer-upper,'” Hranek says. “We would drive around and pass a completely dilapidated house and look at each other and go, ‘Diamond in the rough, just waiting for a handyman-$450,000.'”
Hranek finally found his dream parcel by accident, as he was walking past the window of a Manhattan broker he hadn’t even known existed. The wait was worth it. “We got there, and it was like, ‘Wow, I think this is it,'” Hranek recallsâ€“even with a “big fat nasty ugly mobile home” on the grounds. But the double-wide was quickly disposed of, and Hranek bought an Airstream trailer that the couple stays in until a dream house is builtâ€“using rock from the two bluestone quarries on the propertyâ€“for another $150,000 or so. “It wasn’t just about investment, it really was about falling in love for us,” he says. “You’re shown these opportunities maybe a couple of times in your life, and you can either embrace them or walk away.”
Even if your perfect house isn’t on the market just now, it may still be a good idea to buy. “Owning a home is the American dream,” says Liz Bayless of Fannie Mae, the government-chartered agency that is Americans’ largest source of home-mortgage financing. “What matters is getting your foot on the rung of that ladder toward building wealth through the appreciation of home value. It’s a financial investment that has done well decade in and decade out, as far back as we’ve been keeping statistics. If you keep that perspective, you needn’t worry so much about whether the countertops in the kitchen are exactly the right color.”
And not everyone dreams the same house dream. Who’s to say that Hranek, in his wide-open space, is any happier then Len Nannarone in his gated subdivision? “This is a really up-and-coming area,” Nannarone says proudlyâ€“it’s home to many of the Sacramento Kings. “They say in ten years it’s going to be the next Beverly Hills.” Nannarone, a former M&A lawyer who has also done the legal work on dozens of house closings, relied on his knowledge of the industry to close his own deal. At the county deeds office, he learned that the seller was going through a divorce and had just taken a second mortgage to buy her ex-husband out of the property. Figuring she needed to make a fast buck, Nannarone offered her 10 percent less than list price. She accepted.
Getting to know the seller is a good strategy, but getting to know a good real estate agent can help just as much, as UT psych professor Brad Love found when he left Chicago for Austin and called an agent he describes as “a Texas grande dame” for advice. “Despite all social norms known to me,” he says, “I ended up staying in a spare room at her place for a week and drank beers at night with her husband by their pool. I think I was a surrogate kid. I almost got set up with her wayward niece.” Instead, she set him up with the house he now lives in.
Even if you become fast friends with your agent, make sure you have a lawyer. “It’s funny how many people will actually go out, look at a property, sign the document, enter into all of the legal stuff, put the money down, and only then go find a lawyer,” says Nannarone. “And then find out that everything’s screwed up but they have no way out because they’ve already signed the documents.”
The details of financingâ€“interest rates, closing costs, mortgage insurance, points, ARMs, and equityâ€“can be a dense and forbidding thicket. Bayless recommends Fannie Mae’s Homepath.com, which walks prospective buyers through all phases of the process, complete with glossaries and online calculators that can tell you everything from how much of a monthly payment you can afford to how small a down payment you can get away with.
Then consult a mortgage broker about your credit history. If you do qualify for a mortgage, make sure to get pre-approved. “When you offer a bid on a house,” says the Motley Fool’s Robert Brokamp, who’s responsible for much of the Web site’s Home Center, “the seller will find it more appealing that you can actually get a mortgage.” One common mistake of first-time home-buyers, according to Brokamp, is to let a bank or mortgage broker dictate how much house they can afford. Bayless agrees: “Many lenders may tell you that you can qualify for a mortgage that’s larger than you would actually be comfortable paying,” she warns.
While a good rule of thumb is to keep your total housing nut below 30 percent of your gross income, Brokamp says, the industry is no longer guided by such strict ratios. In some cases, a mortgage need not be pegged to your income at all. Bond trader Ted Murphy, who recently closed on a $2 million Hamptons party palace, got a “low-documentation” loan that required no disclosure of his income. In return, Murphy took on a higher-rate adjustable mortgage and plunked down a whopping $500,000 instead of the 20 percent that’s the norm. (Of course, there’s always an escape clause: refinancing.)
Many first-time buyers aren’t aware of the variety of mortgage alternatives that exist. “The goal,” says Len Nannarone, “is to buy as much house as you can and keep the payment as low as you can.” Nannarone put 20 percent down and got a “jumbo loan” that carries a lower monthly payment but which must be paid off or refinanced after only 10 years instead of 30. “I figure in 10 years I’ll have made enough money to pay it off.” If not, he’ll pay what he can and refinance the rest.
Murphy’s down payment alone would buy two entire houses in middle America, where the average price of a home is nearly $200,000. But home buyers with more modest bank accounts can often find ways to avoid coming up with the usual 20 percent down payment. After saving for almost a year, Brad Love realized there was no way he was going to be able to come up with the $47,000 down payment on the $235,000 house he wanted in Austin. He came up with a 10 percent down payment and, to avoid the private mortgage insurance he would have had to buy as a result, got a second mortgage for the other 10 percent. He has since consolidated the two at a lower interest rate, reducing his monthly payment by more than $350.
As far as a home being a good investment, that depends on how long you plan to stay there. “You shouldn’t buy a house unless you know you’re going to be somewhere for about three years,” Brokamp says. Plan to stay put until your property appreciates to its purchase price plus whatever fees and interest you paidâ€“usually three to five years.
“When you see how much you’re paying for a mortgage and how much other people are paying in rent, you’ll be happy,” Brokamp says. “And if the market continues to go as it is, you’ll be very happy when you hear how much your neighbors’ houses are selling for.” Just remember Hranek’s words before you begin cruising the listings: “If you start looking, you’re going to find it,” he cautions. “So be prepared.”
#1 â€“ Wild Kingdom
PROPERTY: 130 undeveloped acres in Sullivan County, upstate New York, including a double-wide trailer on property with working plumbing, septic, and electric
DOWN PAYMENT: 20 percent ($30,000)
TERMS: 20-year fixed
INTEREST RATE: 7.5 percent
MONTHLY PAYMENT: $1,661.44
CLOSING DATE: July 2001
BUYER: Matthew Hranek
AGE: 35, married
ANNUAL INCOME: “In the six figures.”
CURRENT LIVING SITUATION: floor-through apartment in Greenwich Village
COMMUTE: “The process of getting to a place for me is intensely important. When I get on the Long Island Expressway to visit friends in the Hamptons, it’s like someone’s dropping salt in my eyes. This way, we drive north on these pastoral roads and all this decompression happens, and then you get there and you open up the gate and it’s time to drink beer and pee outside.”
I HAVE A DREAM HOUSE: “More than owning a house, more than saying, ‘I have equity,’ we love the idea that we have this piece of wild America, that we have the control to keep it as pure and as untouched as possible. Fifty or 100 years from now, I really hope that it stays as wild and unchanged as it is right now.”
#2 â€“ Love Shack
PROPERTY: two bedrooms, one bath, 1,100 square feet, near University of Texas campus, Austin
DOWN PAYMENT: 20 percent ($23,500 plus $23,500 from a second mortgage)
FIRST MORTGAGE: $188,000 in a 30-year fixed at 8.375 percent
SECOND MORTGAGE: $23,500 in a 15-year fixed at 9.150 percent
CONSOLIDATED MORTGAGE: $206,900
TERMS: 30-year fixed
INTEREST RATE: 6.5 percent
MONTHLY PAYMENT: $1,307.75
CLOSING DATE: February 2001
BUYER: Brad Love
AGE: 29, single
PROFESSION: professor of psychology, University of Texas
ANNUAL INCOME: $70,000
LAST LIVING SITUATION: a “squalid” apartment in Austin
RENT: $500 a month
COMMUTE: Rides his bike (10 minutes), walks (25 minutes), or rides the bus (15 minutes) to campus. “It’s like a little socialist country here. The buses are free if you’re going to the school.”
I HAVE A DREAM HOUSE: “Everybody wants to have some independence and not be hassled. It’s nice to have a place you can take pride in; when you really clean something well or replace it, you don’t feel like you’re being a sucker. In Austin, it’s stability too. Rents go crazy and up and down here [because of the tech boom and bust], and it’s just nice to be able to count on a place.”
#3 â€“ Suburban Gothic
PROPERTY: four bedrooms, two baths, three-car garage, 3,200-square-foot ranch house on a quarter-acre in a gated community, greater Sacramento area
DOWN PAYMENT: 20 percent ($66,500)
TERMS: 10-year jumbo loan (fixed)
INTEREST RATE: 6.1 percent
MONTHLY PAYMENT: $1,680
CLOSING DATE: April 2002
BUYER: Leonard Nannarone
AGE: 33, married, one baby boy
PROFESSION: CEO of Millennium Partners Management LLC, a dental-practice management company
ANNUAL INCOME: $250,000
LAST LIVING SITUATION: shared a 900-square-foot apartment in Manhattan with his wife
COMMUTE: “Since I’m the CEO of a company, I can go into work when I want: I go in at like 10:00 a.m. and stay till 6, so I avoid traffic. The commute’s really easy. It’s a 30-minute drive into Sacramento.”
I HAVE A DREAM HOUSE: “It’s great! You have your own yard, you have your own house, I have a little workshop in the garage. In an apartment, you live by somebody else’s rules: you can’t do this, you can’t do that, you can’t park here, you can’t park there. When you have your own house, it provides you with so much more freedom and so much more of a relaxing atmosphere. If you want to knock down a wall, you can do it. Owning your own business and having your own homeâ€“that’s like the ultimate American dream.”
#4 â€“ Beach-Blanket Bond Trader
PROPERTY: eight bedrooms, five baths, two-car garage, two ponds, heated pool, tennis court, on 7.7 acres in Bridgehampton, Long Island
PRICE: $2 million
DOWN PAYMENT: 25 percent ($500,000)
MORTGAGE: $1.5 million
TERMS: 40-year adjustable
INTEREST RATE: 5.476 percent
MONTHLY PAYMENT: $6,222
CLOSING DATE: June 2002
BUYER: Ted Murphy
AGE: 33, single
PROFESSION: mortgage-bond trader
ANNUAL INCOME: “Put it this way: To qualify for the mortgage, I had to be north of $300,000 a year.”
CURRENT LIVING SITUATION: shares an apartment with a married couple in Tribeca.
RENT: “My rent situation makes it compelling for me to continue renting in Manhattan versus buying.”
COMMUTE: He just sold a 1995 Land Rover to buy what he calls “the ultimate beach vehicle,” a custom-restored 1975 Land-Rover 101 Forward Control.
I HAVE A DREAM HOUSE: “I have a pile of gear I’ve been shoehorning into a Manhattan apartment. Now I have a place I can put eight windsurfers, four surfboards, three or four bikesâ€“and actually use all that stuff, which is kind of neat.”