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How
to buy safely in 2009 |
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If
you have read Where
is the Market Going? and Is
it a Buyer's or Seller's Market, you have, I hope, concluded
that it is almost inevitable that house values around Barrie and in
the GTA have fallen and will not rise as they have in the past. You
will also understand that we might be on the verge of collapse
comparable to the 1990-95 housing meltdown, or worse.
If
you read When Should
I Buy? you've also concluded that, even if prices will fall, it
still might be the right time to buy despite the risks.
Let
me recap. If you have 25% of your purchase price as a downpayment,
you can buy without worry as long as you can can see yourself living
in the home for 5-10 years. If prices do drop, they will recover by
the time you're ready to sell. That means you'll get back what you
are about to pay for the home. If there's a job transfer or a divorce
in your future though, you might want to hold off. |
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If
you don't have 25% down, is it still a lost cause? Not necessarily.
There is a way to buy now and still not get in trouble if the value
of your house falls.
The
issue for you as a buyer is your debt:equity ratio.
If
you buy with 5% down, and the house then drops 20% in value, the
bank will be calling and asking how you're going to come up with the
cash to bring your mortgage ratio back to 95/5. (That's a $38,000
shortfall on a house bought for $200,000 today.)
To
buy today, you will need a downpayment and a strategy that will get
you over that harrowing call from the bank. Here's my plan for you: |
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During
the last crash, house values in Barrie fell 24% between the peak in
1990 and the bottom of the market in 1995. In some parts of the GTA
the loss was as high as 34-40%.
That
crash was a worst case scenario, well...unless you consider the
Great Depression, but let's not go there.
There
are as many opinions about where the Canadian economy and the resale
housing market are going as there are experts to have those opinions.
The
consensus seems to be that the US economy is in or on the verge of a
recession, but the jury is still out on what kind of impact that will
have on the Canadian economy in general, and on the housing market in
the GTA.
If
you're buying in a rapidly growing area, like Barrie or the rest of
the GTA, the potential drop in values should not be as bad as they
were in the 90's crash.
Let's
do the numbers. If prices drop 15%, and you bought with 5% down. How
do you increase the value of your $200,000 home by $28,500 so that
you can keep your mortgage at 95% of your home's value?
You
do it by using your handyman and design skills, and calling in a few
favours from friends, to turn a "distressed" property into
a "desired" property. |
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I
recently helped a couple buy a home that they cleaned up and sold
for 34% more than they paid for it 2 years earlier. They only cleaned
and painted, installed a gas fireplace, and reshingled the roof.
You're
looking for a house that is in disrepair because of neglect, but not
abuse. You can add $10,000 in value to a house by cleaning up and
decorating a neglected home in the $200,000 range.
That
brings your shortfall down to $18,500.
You're
also looking for a house with an unfinished basement. Finishing a
basement adds finished living space to a house, which increases its
value. It's all about you though!
The
finished basement can take many shapes. If it's a house that a young
couple with children will buy, it's a place to send the kids to play.
Wide open spaces with a tiled floor, a finished ceiling and finished walls.
It
doesn't have to be elaborate. You just want the bank's appraiser to
check off "finished basement" on his forms. You just gained
$5,000-10,000 in value.
(You
cannot finish a basement using hired labour and still recover the
costs. You have to be able to do the labour yourself. Read Finishing
a Basement if profit is your objective.) |
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You won't
have the breathing room that
you will need to cover the remaining few thousand dollars missing
from your home's value if
you max out your mortgage at the top end that
your bank said they would lend you.
Think about
the potential numbers again. If market values drop by 30% across the
board, the buyer with the $300,000 house will suddenly have lost
$90,000, while the buyer with the $100,000 condo will have only lost $30,000.
Think
small. By buying a less expensive house, you will suffer a smaller
loss, but you will also have more borrowing power left over because
you haven't maxed out on your mortgage.
If you
qualify for a maximum mortgage of $200,000, you should be shopping
for a house with a market value no higher than $170,000. That still
leaves you with equity, outside of the house, that you can leverage
with a line of credit to top up your mortgage.
That
flexibility, combined with the value that you have added to your
property by resurrecting a neglected house and finishing its
basement, will keep the bank off of your back while property prices
fall and then recover. |
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I
understand the risks of buying in this uncertain market. For you,
that means I can help you buy safely. You won't have to worry about
losing your house if market values fall. That's why you should contact
me today, and get the ball rolling. |
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