Home ownership is supposed to be part of the American Dream, right? I started hearing of the benefits when I was 23 and fresh out of college. People told me I should stop ‘throwing money away on rent’. By buying a condo I would start ‘building equity.’ When I got married I could use the equity I built and trade up to a bigger place. And when we started having kids we could repeat the cycle to an even bigger place.
Sounds great, right? I thought so. I bought the dream, and the hype and a one-bedroom loft condo in Chicago back in 2006. That seemed like a great decision until I had to sell the place nine years later. Home ownership may be the American Dream but selling a condo is a fucking nightmare.
Looking back, the math in the story of the ‘starter home’ doesn’t add up. Nobody told me before I bought the condo what it actually cost in time, money and stress to sell one of these bastards. Had I known these things I probably would have rented the entire time and been better off for it. This article is my personal crusade to give aspiring condo owners a moment of pause before they take the plunge and buy. With The Big Short hitting theaters, here are seven things to keep in mind…
It dawns on me that I could have simply rented at the same fucking address for the previous eight years. I would have maintained the exact same lifestyle… and might have saved more than $10,000.
1. Building Equity vs. Throwing Money Away on Rent
So what does it mean to ‘build equity’ through home ownership? Most people need to take out a mortgage to buy a condo. That means a bank loans you money to buy it. That means you have to pay interest on the loan. But with each monthly payment you also pay a bit of the loan down. That’s how you ‘build equity.’
An added bonus is you get to deduct all of the interest you pay on your loan from your taxable income. That can save you thousands of dollars on taxes in a year. You can’t do either when you pay rent, hence the term ‘throwing money away on rent.’
That’s the financial upside of owning a home in general. Now let’s get to all the downsides of owning a condo…
2. Personal Expenses: Something Breaks, You Pay For It
With ownership comes responsibility. If the oven breaks down suddenly, who has to pay for it? You! Had you been renting, that would be the landlord’s responsibility. Not only are you paying in money, you’re also paying in time. Someone needs to wait around for the handyman to show up and do the repairs. I hope you have a flexible arrangement with your employer and can work from home. Otherwise, you’re burning paid time off to sit around and wait.
During my nine years of home ownership, I had approximately $5,000 in repairs, which required many days of sitting around waiting for the handyman to show up.
My point is that sooner or later something in your home will break and it’s on you to fix it. Those expenses indirectly eat into the ‘equity’ that you’re building up, whether you realize it or not.
3. Shared Expenses: Homeowners Association and Condo Dues
A condominium is a multi-unit property where each unit is individually owned. The property has a shared space. That shared space has expenses, like electricity and water utility bills. The homeowners association for the condo makes sure these bills get paid. That means every month you have to pay a homeowners fee to cover your share of the operational expenses. That seems fair, right?
The problem is you have very little control over what gets included in the fees and how much the association spends on things. Every year the fees went up for me. When I sold the fees had ballooned to over $500 per month. Not only was that a significant personal expense (which doesn’t add to ‘building equity’ at all), it also makes the condo that much harder to sell, because what buyer wants to tack on an additional $6,000 a year in housing expenses?
And that’s just the operational expenses. There’s also the dreaded “special assessment.” There are sometimes expenses beyond the month-to-month operational expenses. For example, the roof is leaking. That needs to be fixed and the homeowners association pays for it with a special assessment. Don’t live on the top floor? It doesn’t matter—the roof is a shared space and it’s your responsibility to help pay to fix it. That kind of seems fair, right?
The problem again is that you have little control over these one-off expenses. The homeowners association has control, and if they are inept then you’re up shit’s creek. For example, my building had a $3,500 special assessment to replenish its cash reserves. Nothing broke. Nothing needed to be fixed. The homeowners association just wanted more cash. Excuse me, but what the fuck?!
You have two alternatives when the homeowners association levies a bullshit special assessment on you: Sell your condo, or take over the homeowners association via coup d’etat to kick out the yahoos on the board. Both options suck.
The fees for selling a home are really high (as I will explain later) and any buyer is going to demand some money back for an impending special assessment. These two factors can decimate all that ‘equity’ you have built up in the blink of an eye.
If you decide to go the coup detat route, you’ve just signed up for a thankless part-time job that pays $0. Don’t worry, you’ll make up for it in spades with the piles of grief heaped upon you by other disenfranchised owners in the building.
I had to pay about $8,000 in special assessments while I lived in the condo. Just like personal expenses, this money indirectly ate right into the equity I built up.
“Let’s try BRAD.” If you get that reference, congratulations, you’re as old as we are.
4. Selling Fees
No one told me when I bought a condo how much it would cost to sell one. Surprise, surprise, it costs a lot! The realtors get a combined 5 percent of the selling price of the condo, and there’s an addition 1.5 percent (on average) that goes to the lawyers and title company to make sure the banks get paid and ownership is transferred legally.
That 6.5 percent may not sound like much at first glance, but that is a shit-ton of money if you do some quick math. For example, say you bought a condo for $200,000 (the median price at the end of 2014 was $202,000). You’ve owned for five years (the median duration for owning a home is 5.9 years), and are now selling it again for $200,000. (You lucked out that the home maintained its value. We now know that is not a guarantee.) How much is it going to cost you to sell? About $13,000! How much ‘equity’ did you build up in those five years by paying down your mortgage? $14,150 (based on a 30year fixed rate loan with an interest rate of 4.5 percent & 20 percent down payment). In other words, you’ve netted $1,150 and a 0.6 percent annual return. To put that into context, a money market account would give you 1.1 percent.
My point is that if you buy a condo, you should plan to live there for a long time. Not three years. Not five years. Not even 10 years. More like 15 years. Frankly, you should only sell when you absolutely have to. Trust me.
5. Lack of Flexibility
One thing in life that’s guaranteed is change. You could get a different job, get married, have kids, or have something else big happen. For me, that was taking a new job and moving from Chicago to Portland, Oregon.
When something like that happens, guess what, your one- or two-bedroom condo no longer suits the life you have, and now you have a financial anchor tied around your ankle. Getting rid of that anchor comes at a significant cost (as mentioned above). It also can also take a lot longer to sell than you might think.
I had my condo on the market for nearly four months before the sale finally closed. My new employer wasn’t going to wait for me to sell my condo before I started. I had to move before I even got an offer to buy. I was literally paying to live in two places at once. My bank account was leaking like a sieve. I lost about $3,000 while the condo was collecting dust, sitting empty back in Chicago.
6. Ownership Premium: Monthly Rent May Cost Less
Here’s a dirty little secret few people will tell you: Paying rent could cost you less than your mortgage and related monthly home ownership costs. I know this because I rented my condo out for a year before finally selling it. The amount of rental income I was getting from my tenants was $125 less a month than what I was paying to own the condo. That’s $1,500 a year!
It dawns on me that I could have simply rented at the same fucking address for the previous eight years. The only difference would be renting vs. buying. I would have maintained the exact same lifestyle… and might have saved more than $10,000.
(Slaps palms on forehead.)
7. Adding (or Subtracting) It All Up
When I bought my condo in 2006, I did the responsible thing and made a 20 percent down payment. (As an aside, if you can’t pay 20 percent, you can’t afford the condo. Reality sucks, deal with it.) That was about $45,000. When I sold it I got about $62,000. At first glance, my profit looks like $17,000. Not great, but many people have done worse over the years. But let’s look at all the costs of home ownership that eat into that figure…
Special Assessments: $8,000
Paying for an Empty Place: $3,000
Those costs reduce the profit on my nine-year investment to $1,000. That is an annual return of 0.24 percent. To put that into context, inflation is currently 0.2 percent. So I barely beat inflation. (Take that, inflation!)
I suppose that’s better than losing money, but had I invested the condo down payment in a low-cost index fund instead, I would be about $20,000 richer than I am today.
My overall point? The financial benefits of condo ownership are completely overstated. You need to own a home for decades, not years, before it can really start to be profitable. How many people do you know who have owned the same condo for decades? I’m guessing none, and that’s the basis of this warning. Know the costs and risks of home ownership before you buy. There are a lot more of them than the people who want you to buy a condo will ever reveal.