A Frugal Dad reader (Tracy) recently wrote to get my opinion on a housing dilemma she and her husband find themselves in. To summarize, the couple recently relocated to be closer to both their jobs and bought a “fixer-upper” that turns out to need more work than they originally thought. The purchase was made a bit hastily because their home sold quickly and the buyer wanted to take ownership in just three weeks. With buyer’s remorse setting in, and the couple finding themselves quickly outgrowing their space, they are wondering if a remodel/expansion is in order, or if they should try to find something else to buy (which is difficult given the options in their immediate vicinity).

I asked for Tracy’s permission to post her story here and allow Frugal Dad readers to offer their advice. I’ve provided my response below her original email, and hope you will do the same in the comments section.

From Tracy:

I have a burning question that ties in with a topic you’ve touched on before; your advice was, (I think I remember this correctly): When purchasing a home, “buy a starter home and stay there.” In our situation, our starter home was in a small, suburban tract community about 40 minutes away from my work and an about an hour from my husband’s. Throw in some heinous weekday commuter traffic and a couple of daycare stops (after a couple of years) and we decided we were spending way too much of our lives in vehicles. So, we purchased a 30-yr-old fixer much closer to our places of work and now our commutes are down to about 20 minutes each, one way. Right now, that’s about the only good thing we can say about the place!

We sold our first home much quicker than anticipated, and our buyers were relocating and really wanted to be in our home in three weeks. So we had to find a home and move in very little time. We’d narrowed down our choices to two houses in the same neighborhood. We made an offer on one, a sprawling ranch with an open layout that we both loved. The inspection came back with structural damage, as well as a number of other costly items; the seller was not willing to negotiate the price to offset fixing the items, nor was she willing to fix them, so we rescinded our offer. The other home came back with a clean inspection, but had many cosmetic issues such as 30-yr-old green shag carpet, layers and layers of floral wallpaper, etc.

Now, three years later, we’ve made a few updates but still have a long way to go. The kitchen, which I thought was “quaint” when we were under the gun to find shelter, is actually barely functional and doesn’t really meet our needs as a family of four. It has one operating drawer for utensils, and only about six cabinets for dishes, pots, pans and food. There is no pantry.

The huge yard with lots of flowering shrubs (mostly azaleas) was a big plus when we were buying the place, but last summer they contracted a disease and promptly died, leaving us with gaping holes in the yard after mercifully putting them out of their misery earlier this year. There are also drainage issues with the property that we’ve been told would cost about $3500 to correct. Also, our minivan barely fits in the narrow one-car driveway, and when people stop by to visit–forget it. We’re forever moving vehicles to prevent blocking someone in.

The other items add up to about $14,000 in repairs/upgrades: Painting or removing the dark paneling in the den, replacing the green carpet with hardwoods or laminate, adding a freestanding pantry to the kitchen, replacing cracked tile in the bathrooms, replacing a cracked shower door, widening the driveway, etc.

We’ve only been there three years, so we don’t have a lot of equity to tap into for a second mortgage, nor do we want the added expense. Our current mortgage is about $1300. The average cost of homes in the neighborhood is around $190,000 (up from $165,000 when we bought the place). Most of the homes for sale in the neighborhood are about the same age with virtually no upgrades; ones that are fully updates go for much more, around $250,000, which is out of our price range. Newer homes in our range are generally about 30-40 minutes away, which would put us back at square one.

What do you recommend? My husband is reluctant to move, knowing that it’s a stressful ordeal, and often costly, even if the new mortgage ends up being less than what we’re currently paying. Thanks for any help!

Tracy, your story is probably not that uncommon from others around the country. I’ve known people who have taken on “fixer-uppers” for a variety of reasons and suddenly they find themselves without the motivation or means to continue. It’s a cautionary tale for taking on such projects, but you are here now, so let’s consider your options.

I guess my first question would be how much of the “cosmetic” issues could you live with, in the short term? Ugly carpet, a narrow driveway, and paneling in need of paint are certainly not ideal, but far from untenable. I’d recommend prioritizing these jobs and saving for them in a dedicated savings account. Things like drainage issues and leaky shower doors should be a priority as they can lead to further damage, while cosmetic items can be prioritized much lower.

Depending on how handy you and your husband are, perhaps some of the work can be done yourselves. Painting is a relatively low-cost project that can make dramatic changes to a space without much investment, assuming you don’t have to pay a paint crew to do the work. I’m not particularly good with flooring and tile work, so I’d probably have to hire someone for those projects. Ask around at work or at church to see if you can find someone reputable to do the work, or perhaps find a colleague who would like to tackle the project on the side.

Basically, my advice is to move slowly. What’s gotten many of us into trouble as a consumer society is impatience - the need for instant gratification. It sounds like you aren’t interested in taking on new debt, and that’s a good thing. Stick to that! It will take longer to make these repairs if you have to save up the cash, but at least you will own your new driveway, new floor and additional pantry, outright.

For the benefit of other readers, this is a good example of why I stress that there is no shame in renting. I’m not sure it was even an option in Tracy’s case, but assuming her and her husband had rented for six months to a year they could have bought some time to fully explore all available options before buying their next home. What would be your advice to Tracy and her husband?

Photo by justinbaeder

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I know a guy who just got married and has already started the obligatory house-hunt exercise with his new bride. He asked me about the timing of buying a house in the context of overall market conditions and I asked him if he was financially prepared for homeownership. “Not really, but we’re married now and I just hate throwing money away on rent.”

Photo by: Fr Antunes

“Renting is like throwing money away every month.”

This is a fairly popular idea sold by the anti-rent crowd, including realtors, mortgage brokers and banks. In fact, there are many times when renting makes the most financial sense, particularly when you consider the costs and added risk of mortgaging a house. My newlywed friends have some debt to pay off, and have very little in savings. Just because they technically qualify (according to a bank) for a mortgage loan doesn’t necessarily mean they should take one.

“If I rent I won’t be building equity.”

Building equity in a home is not the only way to grow your net worth - there are plenty of other investment opportunities. Some could make the argument after the recent housing bubble burst that real estate is no longer a “sure” investment, even though I believe over the long term it is certainly safer than others. Think about it - there will always be new companies, new technologies and new services created over the years, but as far as I know we haven’t figured out how to invent new land. It is this limited supply that causes real estate to appreciate at a fairly reliable rate over the long term.

So renters cannot participate in this appreciation. Worse things could happen if you buy without adequate savings established. You could buy more house than you can afford and eventually be forced into foreclosure. You could buy a house that requires costly repairs at your own expense (versus passing the repair bills on to a landlord). You may be required to buy private mortgage insurance on top of your payment, homeowner’s insurance and taxes, making for a costly monthly payment. The potential negative consequences for premature homeownership are endless. Conversely, renting frees you from many of those consequences. You do not need to worry about large repairs, taxes, PMI, and homeowners insurance (although renter’s insurance is a good idea to protect your contents).

“Homeownership is the American dream.”

I know it is, and a noble one. However, it is not wise to dig too deep a financial hole for yourselves early in a relationship. The first couple years of marriage are tough enough without struggling to meet a mortgage payment. The average homebuyer commits thirty years to a mortgage payment of nearly $1,000 a month. Thirty years is an awfully long time to commit $12,000 a year (or more). Consider renting the first six months to a year to get to know each other, and the area where you decide to settle.

“Rates are at an all-time low.”

True, but even the lowest rates don’t make sense if you are really stretching to take on a mortgage payment that you cannot afford. Consider lowering the bank’s suggested 28/36 debt-to-income/obligations ratio to a more comfortable level based on your income. In the book The Ultimate Cheapskate, author Jeff Yeager advocates “buying a starter home and staying there.” Over time you may make improvements to the home, or expand if necessary, but your goal should not be to trade up every few years, a practice that continues to push your mortgage payments further into the future. I personally think this is great advice, and something many newlyweds should strive for. If you cannot initially buy a starter home, look for a starter rental and move up when you can, but then stay put and pay off your mortgage early to speed up your plans for financial freedom.

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As I mentioned a few weeks ago our family is considering a move to smaller, more affordable housing in an effort to pay off our remaining debts, and finance a few larger expenses coming up with cash. If we stayed in our current home we would likely have to finance those expenditures (orthodontics, replacement car for my wife, etc.) and I would consider that a move in the wrong direction.

We are willing to sacrifice just about anything but school zones, as education is important to us and private schools are an expensive alternative to a quality school system in our current area. It isn’t easy to buy smaller, because most people see that as a step back, when the “American dream” is to constantly buy bigger and better. However, for us it is a personal decision at our family level and we are not overly concerned with what others think. Besides, if we do buy a smaller home and pay it off early, imagine the wealth building we could do with no house payment and no other debts!

The thought of packing, moving and unpacking makes me cringe. When we moved to a new city a few years ago I swore I would never voluntarily move again because it is just such a hassle. However, times have changed and I now see the value in downsizing. I imagine much of what is in our current home will not fit in the homes in our price range, and that’s fine. We’ll have a few yard sales, donate to worthy causes and give away remaining items to friends and family.

On the flip side, downsizing our living quarters should help reduce our monthly bills. Lower house payments, lower utility payments and less maintenance costs should help increase our monthly cash flow towards debt repayment and savings. Our long term, seven-year plan is to pay off this house and our remaining debt and then build wealth like crazy. We’ve lost some ground thanks to bad financial decisions in our 20s, but plan to make up for it this decade by making some sacrifices early on. A paid-for, appreciating home will be a valuable asset in the next decade as the housing market rebounds (and it will). We will then be in a better position to buy or build what will likely become the home we “retire” in.

While we are still a few months out from making a move, a drive around our city Sunday confirmed the neighborhoods we are interested in. We saw several homes in our price range for sale that appeared to be just what we were looking for, but we still have some work to do on our current home before we can pull the trigger. Driving by the houses I could almost feel the “house fever” building inside of me, and I had to remind myself that impatient, impulsive decisions are almost never the right decisions, especially as they relate to finances. We are doing things the right way, and at the right pace.

Image Credit: D’Arcy Norman