Comparisons of Buying Against Renting
Legal Aspects of Real Estate
There is often controversy in regards to whether to buy or to rent. It is a hard decision in today’s market, not to mention it is one of the most significant financial decision one will make in their lifetime. There are many things to consider before deciding to buy a home. Income security, do you have enough of a down payment, location, size, how much “house” can you afford, old or new, can you afford the upkeep, to impound or not to impound, lender, type of mortgage, just to name a few.
COMPARISONS OF BUYING AGAINST RENTING
First, consider what you can comfortably pay each month for housing. The location will determine your down payment/security deposit, insurance, home owner’s association, and taxes. However, if you decide to rent of course some of these costs will not exist. If you decide to buy a home, you will need to determine what mortgage provider, what type of mortgage and if or how much of a down payment is required will be imperative. There are also government programs that if you qualify, may help you make your decision. Veterans may qualify for a VA loan with no down payment requirement, which is government back loan. The Veteran only has to meet two requirements; served at least 180 days of active duty and was honorably discharged to qualify for a VA mortgage (Nemeth, 2011).
If you are a first-time homebuyer, you may qualify for a Federal Housing Authority (FHA) loan. An FHA loan typically requires a down payment of 3% of the total sale price of the chosen property. Based on the lender calculations it can sometimes be less. The government also backs this loan and was developed to stimulate the real estate market by helping first time homebuyers (Nemeth, 2011). While there are several types of loans to consider, they will require more money down then the two previously mentioned options. One option is a Purchase Money Mortgage (PMM) which offers the consumer less cost, and fewer people involved which allows for a faster underwriting process (Nemeth, 2011). And a Graduated Payment Mortgage gives the consumer lower payments at the beginning of their loan and higher payments at the end of the loan. This type of mortgage may be ideal for someone who is purchasing for a short period or is fresh out of school and just starting their career. You should be careful of how much you spend on their mortgage consider your DTI (debt to Income) ratio and not go over 50% of one’s net income (Tisdale, 2016).
When a consumer chooses to buy in sub-divisions, condominiums, or co-ops, there is usually Homeowner’s Association Fees. These fees can vary in amounts and are made monthly. Homeowner Association Fees usually include maintenance for common areas, insurance, reserve funds, contingency funds, personnel, and property management and must be paid, or a lien may be placed on the home, so the homeowner should consider the fees as a regular monthly living expense.
Maintenance for the common areas would include repairs and maintaining the common areas and the amenities that are used by everyone in the community or condominium. Insurance is a must to provide protection for the building structures and the community property. Utility payments cover the cost of the utilities necessary to maintain common areas such as lighting, water, heat, and air conditioning. Reserve funds are used to cover the cost of future renovations or additional amenities, and repairs that are not recurring or regular maintenance. Contingency funds are used for things that are not foreseeable. Personnel funds cover the cost of persons who are hired to cover maintenance, repairs, lawn care, and other salaried positions that are needed. Professional property management is personnel that is hired to make sure that all HOA rules and regulations are being followed, collects fees, and sees to all the proper personnel are hired to ensure safety and quality to the common areas.
While the considerations for renting is just as crucial as consideration for buying, renting a home requires the tenant to pay a security deposit and first month’s rent up front. When considering renting, the tenant should know what the laws are about the deposits paid, what is included in the rent, and what happens when the tenant breaks the lease or when are they allowed to break a lease. The consumer may also be responsible for paying an application fee. When the consumer is looking to rent a condominium, or co-opt, they will be responsible for a deposit, first month’s rent, and renters insurance at the very least. One may use a figure of about 1% of the purchase amount for a rental property (Kirkpatrick, 2013). If a potential tenant rents a home that was purchased at $250,000 the typical rent at 1% would equal to $2,500 per month in rent. This is an excellent way to determine if one wishes to rent or buy.
If a person is renting, they are not obligated to pay a mortgage but must pay the landlord a specific amount of money each month for access to the property. In many cases, the landlord will have a tenant pay the amount of the mortgage or over the mortgage amount. This would include property taxes and HOA fees if applicable. In essence, the tenant may end up paying the mortgage and additional ownership costs without being aware, but will not benefit from paying them.
An example of this would be a tenant that is unable to pay rent on time. The tenant should have contacted the landlord but did not in this case. The landlord after three days chose to file for eviction. The judge would look at the case and give the tenants a set time to leave. Once the grace period is over, the landlord is then allowed to file for eviction. The landlord may also file for eviction if the tenant breaks any rules listed on the lease agreement.
When purchasing a home, the buyer becomes responsible for repairs, maintenance, pest control, taxes, and insurance. These additional costs can add up to more than a buyer can pay. There are many things that could go awry in a new or resell home, and while insurance may cover some of the expense, it will not cover all. There are deductibles that must be met with insurance policies. Condominium owners are not immune to damages because they may have to cover the cost of damages of an entire building (Mears, 2014).
In the year of 2013, it was typical for annual maintenance on a purchased property was 1% of the purchase price, but this may not be an accurate figure when many studies show that homeowners often spend about 1-4% annually on repairs to the home (Kirkpatrick, 2013). In California, if a homeowner should decide to have the lawn done by professionals, the cost could add up to $1200 a year. If the homeowner lives in a condominium or co-op, this service is included in the homeowner’s association fees.
When looking at renting, one should look at the pros and cons when renting from individuals or property management companies. When the landlord is an individual, it may prove challenging to get things done quickly, especially when things happen during regular sleeping hours or holidays. Property management companies have a staff to attend to matters even after standard business hours. Living in rental property absolves the tenant for liability to most repairs of the rental property. If the garbage disposal fails or the air conditioner stops working it would be the owner’s responsibility to have it repaired.
On the other hand, if the damage is done by the tenant then tenant is responsible for the repairs. Such as, a tenant who has a dog that likes to chew on molding or carpet, then that tenant is responsible for that repair. This is also why most properties that allow pets require an additional pet deposit.
When renting a property, the tenant is often required to have renters insurance, because the property owners insurance does not cover the tenant’s property. Tenants must purchase their insurance policy, known as renter’s insurance to cover their personal belongings in case of natural disasters, damages caused by the tenant, or if something such as fire or flood should happen. The average cost of a renter’s insurance policy in California is less than $200 annually (Trusted Choice, 2017).