First time home-buyer questions

Parent Cafe
1

<p>DS is working as a programmer at a startup in Palo Alto, renting a furnished room and mini kitchen/bath for about 1500/mo. His good friend from HS is also working close by and his parents are looking at getting him a 2 bedroom condo/townhouse in the Mountainview CA area at about 650-850K. DS was asked if he wants to either rent the second room or become a co-owner.</p>

<p>DS has no debt, about $20K in savings thus far, and he was planning a max mortgage of about $2500/month or about 30% of gross.</p>

<p>We’re not familiar with the intricacies of real estate ownership (we just have a simple ten year mortgage that’ll be paid off this year) and need some advice, or at least the different points we need to consider to make the decision. </p>

<p>If he goes as a renter, there are no issues and our involvement is zip, and his home-ownership decision is pushed back to a future date. As easterners, we don’t really know if he should be encouraged to get into the Silicon Valley property market at the earliest opportunity to avoid missing the bus, or if it’s sitting on another big bubble, and he’s best off renting in the foreseeable future. In all likelihood, he’ll stay in that general area, even if not with the company he’s with today. Is it worth considering ownership, and if so, what are the pros, cons, and sticky issues other than the obvious ones like if one wants to terminate, has financial issues, or it doesn’t work out? </p>

<p>Is it even advisable for two unrelated people - just good friends - to share a home and mortgage? DS doesn’t have the downpayment and <1 year credit history. If he goes with a joint ownership, will he qualify if we as parents loan him 20% for the down payment, and are there any drawbacks or other better ways of doing this? What are the considerations if we, the parents, become joint owners? Even on our primary residence we don’t qualify for full interest deduction, and I assume in this case the tax benefits will be even less. Are there any other considerations like gift tax or other such things we need to consider?</p>

<p>I know many of you with better real estate literacy can see obvious benefits, red flags, or points DW & I haven’t even thought of, and I’d appreciate your insight.</p>

2

<p>To own a residence with a friend…I don’t like it. What if the friends have a falling out. One wants to move and the other doesn’t? One wants to fix up the place one way…the other doesn’t? One wants to sink oney into the place…the other doesn’t? What happens when one gets a girl friend? What happens when somebody loses a job…gets sick etc?</p>

<p>If your son wanted to buy an investment property with a friend…after accumulating enough savings…I think that would be ok…</p>

<p>I kmow there is a fine line here…but there is a line.</p>

3

<p>Rent. Ownership has way too many limitations and pitfalls in this situation.</p>

4

<p>I agree with dstark and gouf. I’d suggest that your son rent from his friend’s parents instead of sharing ownership- and even then, I’d be careful with the terms. At some point, one of the boys will want to move. They’re young and unattached, so it’s inevitable. Girlfriends… marriage…job changes… all of that is in their future, even if they remain the best of friends.</p>

5

<p>I agree that he should rent, and you might want to be aware that there are realtors in the Bay area who specialize in just the type of setup you have described. So, you or your son will find people who will be able to convince you of the benefits of buying.</p>

6

<p>I’ve been watching the Mountain View real estate market for the past 3 years, mainly single family homes but have checked out condos as well. The market for single family homes has always been strong because there’s so little inventory available. Mountain View is incredibly hot right now with houses being snapped up within days of going on the market, with multiple offers. The condo market isn’t nearly as hot - there’s quite a bit of inventory. However, for both markets you don’t get nearly as much for your money as other areas slightly farther from Palo Alto. Sunnyvale is more reasonable, as is Cupertino and Santa Clara. These towns aren’t as appealing to young people, naturally, but if my son were to consider buying a condo when he graduates then I’d steer him to those cities to start with.</p>

<p>Given the mobility of workers just out of college, I agree that it would be better to continue renting for a few more years. Yes he might miss out on some appreciation in value, but given that the condo market is much weaker than the market for single family homes, his opportunity cost is less than if he had the money to buy a house.</p>

7

<p>NO, friends should never own a real estae together, unless it is an investment property that they will not occupy together. You will become enemies sooner than later. Either he can afford on his own or nothing(rent)…</p>

<p>Even though you may miss the boat on raising home value in Mountain View, there are still chances later on.(From a Realtor in the area point of view)</p>

8

<p>current rent seems to be high.
One of the reason.s DS will probly stay in Seattle rather move to SJ.
He said that he would move to SF before SJ.</p>

<p>For comparison. DS, center of universe area of Seattle. bikes to work, 1mi. Shared housing of 6, $650 plus Utils</p>

9

<p>I agree, if he likes the guy, rent, do not buy. My niece & her DH co-bought a home in the bay area with friends, as neither could afford to buy alone. Their plan was to own for 5 years, sell and make enough for a down payment on their own home. Everyone warned them not to do it.</p>

<p>They bought before the downturn which meant when the market went south they had no hope of making the down payment they had hoped for, but worse was the day to day living. The two couples agreed, no kids, they other couple chose to get pregnant by the end of the first year. Plus being enmeshed in day to day decisions with some one else and feeling trapped was brutal. Once the first baby came, things were worse. By the time they got out of it a 2nd child had been added to the mix, it was horrible for them.</p>

10

<p>Thank you all. Your arguments make sound sense. Vballmom, especially appreciate your comments specific to the area, and will pass those along. DS is wants to get out of his current living arrangement where he is unable to entertain a bunch of friends, and I’ll pass your suggestions along.</p>

11

<p>He definitely should NOT buy with the friend (with a decent possibility of it being an ex-friend if they live together for a while). There are too many potential downsides. I don’t think it’s usually a great idea to buy right away anyway (assuming it’s right away for him) since he’s better off being mobile and having fewer ties and commitments right now. Renting frees him up for flexibility and opportunities until he sees how things shake out over the next 2-3 years. </p>

<p>I know of someone who started out working at Microsoft in Seattle and bought a house right away. It turns out he hates the Seattle area due to its lousy weather but he’s more tied there now than he would be if he was renting so it makes it more difficult to make the change to move back to sunny California where he’d rather be.</p>

<p>He’s at a startup firm now which might turn out great but has a good chance of going bust as well in which case he’ll be looking for a job again. Of course, he’s in the right area for that and he’d likely land another one within a short distance of Palo Alto/Mt. View but still…</p>

12

<p>I had a co-worker did this in the 90s until he got married and bought out his roommate. It can work out. But somehow it seems like price of the condo in MV is too high, he’s probably end up paying more than he is paying for rent. So it’s best to stay renting.</p>

13

<p>I don’t recommend buying the place with the friend. The primary reason is that if there comes a time when one wants to move out or wants the other to move out, which is likely to happen when one or the other meets the right significant other, valuation of the place is tough. If both want to sell, the market will determine the price and the roommates/co-owners will split the proceeds from the sale. However, where one simply wants to move on, it is tough to determine what his stake is worth, and it may be difficult, if not impossible, for the other to pay what may be a significant chunk of money. I would suggest renting.</p>

14

<p>Here’s a house in your son’s friend’s price range that came on the market yesterday. Two bedroom, 1.5 baths, $825,000. The lot is small for Mountain View which is one reason it’s so cheap. It has a studio in the back yard, probably built without permits. Great house for single guys! The listing agent said she’ll be taking offers any time.</p>

<p><a href=“http://www.redfin.com/CA/Mountain-View/365-Oak-St-94041/home/1246146[/url]”>http://www.redfin.com/CA/Mountain-View/365-Oak-St-94041/home/1246146&lt;/a&gt;&lt;/p&gt;

15

<p>I agree with others, way too risky to own with a friend…I would also advise him to keep his mortgage under 25% of TAKE HOME…</p>

16

<p>It seems that it might be premature at his age and stage in starting his career, even though it means he might miss out on possible appreciation (of course, he might miss out on a further real estate melt-down if that is even possible).</p>

<p>I just want to state that, as DrGoogle states, this has been done and can be done. Years ago, I was a successful broker in Silicon Valley. This was not unusual and the “rubrics” for doing it were out there; I assume they still are:</p>

<ol>
<li><p>The buyers need a well-constructed contract between themselves, by a good real estate attorney, which covers all of the bases: % of ownership, formula for shared expenses, arrangements for buyout if one partner wishes out, whether one partner can force a sale in that event or not, whether one partner can sell his % to a third party… and on and on and on.</p></li>
<li><p>(Note that I have not been active in the current lending environment, so could be a bit off on this) Qualifying for a loan: in general, the buyer(s) cannot borrow the down payment. It can come as a gift from a family member, but not a loan, so your idea of lending his share of the dp wouldn’t work. Of course, if the friend has the downpayment needed to qualify for the mortgage from the lender’s point of view, this may not come into play; however:</p></li>
<li><p>There were (are?) Shared Equity (maybe going under a different name) arrangements. Typically this is between parent and adult child, where adult child has the income to support the mortage and other ownership expenses, but not the down payment. Parent supplies most/all of the down payment. There are contracts for this setup also, specifying how equity appreciation will be handled. Typically, the parents are more investors than owners and will benefit from a portion of the appreciation while not actually being co-owners with the “kids.”</p></li>
</ol>

<p>I’m rusty so some of the details may not be right, but the options are out there. Not saying now is the right time, just that it can be done and there is expertise out there to help set it up properly if someone wants to do this.</p>

17

<p>jmmom,</p>

<p>you are most likely describing a deal that was done during the gogo years of 2005-7 when the credit was loose and the banks are eager to find deals. In today’s market, it is very unlikely to have two guys came out of the collge with green in behind of their ears and pull an 800K home purchase like that. The interest is low, but the credit is hard to come by. I don’t think any “bank” will make a loan with kids without a credit history. You maybe able to find some private investor to make a loan like that with 8-10% interest and perhaps 30% down. Regardless what arrangements they made among themselfs.</p>

<p>I think if OP want, he can buy the house himself and rent to the kids with a lease/option to buy countract, in that, the two kids will be paying mortgages, expenses and taxes. That way, it has less impact if some one moves out and will be able get on the band wagon of appreciation.</p>

<p>IMHO, the housing down turn in PA/MP/MV areas is over, in a near term or longer term point of view, there is very little to lose as the price on single family home did not come down too much anyway.</p>

<p>btw, home prices in the Bay Area did not crash for those homes in the good school district: Cupertino, Lynbrook, Mission SJ, Palo Alto etc, not a drop even in Millbrae, which has the best school in San Mateo.</p>

18

<p>reviewing OP-1,
1500 rent in PA seems to be on the high side according to, craigslist, shared housing. </p>

<p>if your DS is more use to group living (dorm setting) he could find something less expensive but more interactive. If used to apartment living in smaller groups, this maybe the way to go. But Rent! !!! </p>

<p>amazing how much $$$ you can save in housing for use in other endeavors and have more fun. Having. & doing more FUN is our DS motto.</p>