Comments on: Buy Now, Move in Later?

By: Janis Mara

Janis Mara — Tue, 19 Aug 2008 19:37:50 +0000

Thanks, Red, I appreciate it! Hmmm, prices have been falling for about two years now, would you say? So maybe if this downturn is like the other, prices will keep declining for another year, perhaps?

By: Red

Red — Mon, 18 Aug 2008 18:43:01 +0000

Janis:
Prices dropped rapidly in the first couple years, then dribbled up and down. Maybe 3 years of quick drop, then 4 years of bouncing along. Roughly…

Heres a link:
http://www2.standardandpoors.com/spf/pdf/index/CSHomePrice_History_072943.xls

Note that from 90 to 96, 30 year interest rates were dropping from highs of over 10% to lows in the 7% range, and the peak overprice was much less; so… things ARE different this time.

By: Janis Mara

Janis Mara — Sat, 16 Aug 2008 04:19:54 +0000

Hahahaha Red, thanks so much! I googled and found more than 100 acronyms for RBA, none of which seemed to apply, so I appreciate it.

Also, thanks for the info on how long the last slump lasted. But, did prices actually decline for five years, or did they fall and then stay low for that period?

By: Red

Red — Fri, 15 Aug 2008 21:35:52 +0000

RBA means Real Bay Area. San Jose used to be in the Real Bay Area, but was removed when home prices dropped. Home prices never drop in the REAL Bay Area; thats because the RBA is different.
;>)

JohnnyComeLately is right, with no price negotiated in advance, what you are paying is just rent. A pre-negotiated price is an Option, and options cost money. Note that when prices are declining, options expire unused and are a 100% loss. This Rent to own strategy is for when prices are declining, like now. The big kicker is the right of first refusal; if you really want the place, you can have it for what someone else is willing to pay. With you living in it, that tends to be quite a bit less than it might otherwise be. So you pay less than owning it would cost, until the owner gets real on the price. Last time around, prices declined from 1991 to about 96, then went up very slowly to about mid 1998 (SF Case-Shiller data).
So in this rent to own scenario, you have maybe 5 or 6 years to finish saving your 20% down payment.
What if it gets foreclosed? Well, that will drop the price right quickly, won’t it? And think how happy the bank would be to have an offer from the tenants, who they would thereby not have to evict.

By: Janis Mara

Janis Mara — Fri, 15 Aug 2008 05:20:59 +0000

Hey there, JohnnyComeLately! Haven’t seen from you before – glad you chimed in! I don’t know what the RBA is. If you can clue me in on that, I can probably tell you whether or not San Jose is in it.

By: JohnnyComeLately

JohnnyComeLately — Thu, 14 Aug 2008 19:53:57 +0000

Tough to beat renting here in the RBA (is San Jose in the RBA ?)

http://www.burbed.com/2008/07/13/san-jose-1-of-34-cities-where-its-still-better-to-rent/

IMHO, RTO works only with an agreed upon process for setting the price at sale time, otherwise
its just rent.

By: Janis Mara

Janis Mara — Thu, 14 Aug 2008 16:31:19 +0000

Aiee! Hadn’t thought of that! Along with abandoned pets, the real victims of the foreclosure mess are renters, don’t you think? I mean, you can blame a homebuyer for not doing his or her homework, but nobody expects renters to check the financials of their landlords!

By: Colin

Colin — Thu, 14 Aug 2008 05:34:43 +0000

Surely the flaw in a rent to own scheme is that the owner simply throws in the towel, stops paying the mortgage and either walks away or gets foreclosed on?

By: Janis Mara

Janis Mara — Thu, 14 Aug 2008 01:31:26 +0000

Oh, I see – it’s not really a big deal to make such an arrangement. Sounds like a great way to make the plummeting prices work for you!

By: Red

Red — Wed, 13 Aug 2008 23:06:38 +0000

My friends were doing it around 1993-96, there were lots of new, high end homes that couldn’t be sold for what the owners owed.
Let me give you a current example: Santa Cruz, New, $1.2 Million home, 2800 sq ft on 7000 sq ft lot, 4 blocks from the beach, 2 blocks from the Yacht harbor back entrance. I looked at it, really liked it, but $1.2M is too much. After 6 months, they put it up for rental on Craigslist for $4500 a month last October. I figure that they are eating about $4000 a month.
In this case, you wouldn’t even have had to make the rental offer, the owner did that for you. Getting the “right of refusal” agreement is easy, doesn’t cost the owner anything, gives them an instant “second bidder”.
The reason this works: it takes years for folks to realize that Real Estate does NOT always go up. They will bleed money for years rather than take a loss from what they, at one time, thought the home was worth. ( For the unfortunate that bought near the peak, they have no choice; the amount of money that would have to be brought to the closing is too much to raise, but they can afford to bleed a bit for years while waiting for the value to return.) Giving them hope of a Sale makes them happy, while you wait for the dismal bottom to finally be obvious: buying really would cost you close to renting, and prices are stable.