FINANCIAL CONSIDERATIONS

Posting #7 Deferred Maintenance / Deferred Decorating / Making It The Way You Want = Becoming House Poor

When you buy a new home, all of this stuff in the prior postings on this topic are included in the monthly mortgage payment and spread out over 30 years. Too often, when people buy a used house they become “house poor” because all their disposable income is going towards deferred maintenance (part #3), deferred decorating (part #5) and making the house the way you want (part #6). Living in a house poor mode has all kinds of unintended consequences, which will be discussed in later postings, but the simple fact is this approach is not financially prudent.

For example, if the “deferred decorating” of $10,000 and “make it the way you want cost” of $15,000 was amortized in a loan when you build a new home, the monthly amount would be $134.21 per month and the interest is tax deductible. If you were able to invest the $25,000 at the same time at an annual interest rate of just 2% and made the monthly $131.21 payments out of $25,000 plus interest accrued, you would still have 16,616+/- after ten years in your account, assuming a 30% tax rate. If you were lucky enough to earn 10% percent interest, you would have $34,011 in savings after servicing the payment and tax obligations on the interest income after ten years.

Of course after ten years you would still have approximately $11,440 owed on the amount amortized. If you net the $16,616 you still come out more than $5,000 ahead. If you earn 10% on the amount invested, you would be more than $23,000 ahead. Bottom line becoming house poor is financially a bad decision!

Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.

Purchase Price

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,791.64

Utilities                                   $        291.67           $        141.67 (Posting #2)

Deferred Maintenance          $        250.00           $            0.00 (Posting #3)

Go Forward Maintenance    $          50.00 $            0.00 (Posting #4)

Total                                       $     1,933.72 Mo     $     1,933.31 Mo

Deferred Decorating             $   10,000.00 Once $            0.00 (Posting #5)

Make It The Way I Want        $   15,000.00 Once $            0.00 (Posting #6)

House Poor                            $     5,000.00 Once $            0.00 (Posting #7)

FINANCIAL CONSIDERATIONS

Posting #6 I Love the House…if it only had ______________(you fill in the blank) = Even More Cash Our of Pocket

On top of differed maintenance discussed in part #3 and deferred decorating discussed in part #5, you have the issue of “I just don’t like it the way it is” problem. I think it is fair to say that it is virtually impossible to find exactly what you want when buying a used home.

The kitchen might not actually need updating per sea, but you just “hate it” for whatever reason. I meet clients all the time who “hate” certain parts of their existing home they live in (that seems perfectly fine to me), but haven’t changed it for whatever the reason. Living with something you hate is an alternative to not changing it, but is the type of solution that eventually will lead to moving. Good for our business…but not necessarily the best financial decision.

Houses that have “potential” is really a house that is going to cost you a bunch in the end to realize that “potential”. Opening up rooms, adding additions, finishing basements, major remodeling is very expensive. For example, if you buy a house for $150.00 per square foot and then remodel rooms for $200.00 per square foot, you now have invested $350.00 per square foot invested in certain parts of your house. We all know a kitchen can easily cost $25,000 to remodel. I have seen people spend a 100,000.00 too! I admit the $100,000 kitchen remodel will not automatically come with a new home when thinking about the cost differential but the initial cost per square foot you paid for that square footage becomes duplicated and is wasted money. If you remodel a 10’ x 15’ kitchen and paid $100.00 per square foot for your house (minus the land), you are duplicating $15,000.00 in cost.  The more rooms you do this to, the more it will cost you. Not too smart is it?

Conversely, a new home can be exactly the way you want it and will always be cheaper. It will have the space where you want it.

Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.

Purchase Price

Description Used New

Mortgage                                $ 250,000.00           $250,000.00

Utilities Savings Added        $            0.00           $   28,000.00 (Posting #2)

Deferred Main Added            $            0.00           $   46,500.00 (Posting #3)

Go Forward Main Added      $            0.00 $     9,250.00 (Posting #4)

Total                                       $ 250,000.00           $ 333,750.00

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,791.64

Utilities                                   $        291.67           $        141.67 (Posting #2)

Deferred Maintenance          $        250.00           $            0.00 (Posting #3)

Go Forward Maintenance    $          50.00 $            0.00 (Posting #4)

Total                                       $     1,933.72 Mo     $     1,933.31 Mo

Deferred Decorating             $   10,000.00 Once $            0.00 (Posting #5)

Make It The Way I Want        $   15,000.00 Once $            0.00 (Posting #6)

Posting #5 Outdated Decorating = More Cash Out of Pocket

In addition to differed maintenance, there is also the issue of differed decorating and updating. How much does new carpet cost, a new kitchen remodel, a new bathroom remodel, add a missing deck, painting, etc? The answer is…a ton. In fact, major remodeling typically cost nearly twice as much per square foot as compared to building new from scratch. Over time, if you remodel the entire house might actually be spending more per square foot than if you just bought new to begin with. Crazy thought isn’t it? Even if the used house just needs new carpet, paint and maybe a mild make over in the kitchen and baths that can add up to 10-20,000 in a heartbeat.

Again, in effort to be fair, I am using a very conservative $10,000.00 for deferred decorating, but this number can easily be much-much-much more. Home Depot, Lowes, Menards sell billions of dollars of merchandise each year. There are thousands and thousands of remodelers making a very good living across America. Those dollars are going somewhere, aren’t they? Of course a new home does not have any deferred decorating. You get the colors you want, the tile you want, the hardwood floors you want, etc. included in the purchase price.

Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.

Purchase Price

Description Used New

Mortgage                                $ 250,000.00           $250,000.00

Utilities Savings Added        $            0.00           $   28,000.00 (Posting #2)

Deferred Main Added            $            0.00           $   46,500.00 (Posting #3)

Go Forward Main Added      $            0.00 $     9,250.00 (Posting #4)

Total                                       $ 250,000.00           $ 333,750.00

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,791.64

Utilities                                   $        291.67           $        141.67 (Posting #2)

Deferred Maintenance          $        250.00           $            0.00 (Posting #3)

Go Forward Maintenance    $          50.00 $            0.00 (Posting #4)

Total                                       $     1,933.72 Mo     $     1,933.31 Mo

Deferred Decorating             $   10,000.00 Once $            0.00 (Posting #5)

FINANCIAL CONSIDERATIONS

Posting #4 Go Forward Annual Maintenance Cost Considerations = Cash Out of Pocket

Different than differed maintenance costs, which is the compounded deferred maintenance that accumulates over time and becomes due and payable at some point in time, there is also the go forward annual maintenance costs. This might seem like a nuanced consideration, but actually it is not. An Amaris custom built green home is built with durability in mind. We actually conduct a durability analysis on every home we build and develop durability measures for each home. The results of this building practice is higher quality, better performing homes that cost less to maintain. If a home needs gutters to manage water we include them. We always install an active radon fan that not only serves to protect the family against radon poisoning, it keeps the basement floor dry. What is worse than a damp basement? Overall, we install better products that tend to hold up better over time. For example, when we do install vinyl siding on customer request, it is always one product which is the best on the market. I have applied a conservative $600.00 per year in go forward maintenance differential between an Amaris custom built green home and a used home built to the minimum state building codes ten two fifty years ago.

Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.

Purchase Price

Description Used New

Mortgage                                $ 250,000.00           $250,000.00

Utilities Savings Added        $            0.00           $   28,000.00 (Posting #2)

Deferred Main Added            $            0.00           $   46,500.00 (Posting #3)

Go Forward Main Added      $            0.00 $     9,250.00 (Posting #4)

Total                                       $ 250,000.00           $ 333,750.00

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,791.64

Utilities                                   $        291.67           $        141.67 (Posting #2)

Deferred Maintenance          $        250.00           $            0.00 (Posting #3)

Go Forward Maintenance    $          50.00 $            0.00 (Posting #4)

Total                                       $     1,933.72 Mo     $     1,933.31 Mo

FINANCIAL CONSIDERATIONS

Posting #3 Deferred Maintenance = Additional Upfront Expenditures

All materials, products and equipment have a useful “design” life and fail over time. Some things last longer than others. A roof might practically last 15-20 years, while a foundation will last possibly a hundred years or more. A dishwasher built today will probably last about 10 years and so on.

The design life of homes built in the last 30 years is on the order of about 50 years. This is because products have become plastic, hollow, cost reduced, mass produced, etc. Builders use these products to keep the initial house price low. The problem is this stuff just isn’t built to last as long. A used home of just twenty years old, will have a number of things that need replacing or will need replacing very soon.

Calculating the yearly maintenance cost to replace and update products at end of life is a complicated analysis that involves calculating the design life of each product and the cost to replace it. However, if you use a simple straight line depreciation method you can get an idea of the yearly maintenance costs. A $250,000 house (less $50,000 for the land) divided by 50 would indicate a $4,000 per year average maintenance cost.

The problem with this approach is that maintenance tends to be deferred over many years and accumulates to a certain point in time where everything breaks at once and needs replacing. Used houses, especially those “good deals” typically have a ton of deferred maintenance. This is especially true of bank properties. Often bank properties have to be purchased “as-is” “where-is”, which means you take all the risk. Even minor things, like just bringing the yard back up to snuff can cost as little as $3-5K or possibly tens of thousands depending on the size of the yard and associated issues. Replacing a furnace system can cost $5-8K, replacing an A/C system can cost $3-5k, replacing a roof can cost 7-10k, replacing a rotted deck 5-10k, and on and on it goes. Every used home has thousands of deferred maintenance except a few meticulous homeowners that take extraordinary care of their homes. Those homes typically are not sold at that great deal price and there is a reason for it.

A new home has zero differed maintenance. This is another huge hidden cost of buying used.  For the example below, I have used $3,000.00 per year in deferred maintenance costs, which is very conservative figure. $250.00 per month in deferred maintenance cost translates into $46,500 in additional purchasing power, which is added to the mortgage amount.

Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.

Purchase Price

Description Used New

Mortgage                                    $ 250,000.00           $250,000.00

Utilities Savings Added        $                 0.00           $   28,000.00 (Posting #2)

Deferred Main Added            $     __       0.00 $   46,500.00 (Posting #3)

Total                                             $ 250,000.00           $ 324,500.00

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,741.99

Utilities                                        $        291.67            $        141.67 (Posting #2)

Deferred Maintenance          $        250.00 $            0.00 (Posting #3)

Total                                             $     1,833.72 Mo     $     1,833.66 Mo

FINANCIAL CONSIDERATIONS

Posting #2 Energy Efficiency = Lower Energy Bills Forever

An Amaris built custom home is built significantly above code requirements and can save you 50% or more in energy costs as compared to another new home built to a HERS score of 100 (e.g. the minimum requirement for a house built to today’s code). If you are buying a used home that was built ten, twenty, thirty, forty or fifty years ago more the energy savings is greater. In general, the older the home the greater your energy costs will be.

Lower energy bills reduce your monthly budget expenditures forever or the difference can be applied to the purchase price of the home to increase your purchasing power yielding the exact same monthly payments. See example below:

Purchase Price

Description Used New

Mortgage                                $ 250,000.00           $250,000.00

Utilities Savings Added       $            0.00 $   28,000.00 (Posting #2)

Total                                        $ 250,000.00           $ 278,000.00

Cash Flow

Description Used New

Payment @ 5% interest         $     1,342.05           $     1,492.36

Utilities                                   $        291.67 $        141.67 (Posting #2)

Total                                       $     1,633.72 Mo     $     1,634.03 Mo

Energy savings is not the panacea answer when considering building new versus buying used, rather it is just the obvious starting point. However, most buyers fail to consider energy costs when comparing homes and yet there can be big differences from one home to another in terms of energy costs, especially a much older home versus one built by Amaris Custom Homes today.

In addition, energy costs will continue to rise year after year roughly based in the inflation rate (at a minimum). After just ten years at a yearly inflation rate of 4% a $291.67 energy bill turns in $415.13 per month, a $141.67 energy bill turns into $201.64. This means the savings increases as energy cost increase. As we see in the example above, applying the initial monthly payment difference in energy costs to the purchase price could increase your purchase power by many thousands of dollars.