Vail Valley: Should you buy a new or used home?
Vail, CO, Colorado
In these economic times we all want to make smart decisions financially. With interest rates as low as 3.25 percent, buying a home sounds enticing. Sometimes however, buying so-called bargains bring hidden costs and long-term disadvantages.
In years past we have seen housing prices go sky-high and beyond. Buying real estate in the Vail Valley was a win-win situation. Most buyers could buy and re-sell within one to three years and make an additional 30 to 40 percent on their original purchase price. Times have changed. In fact, in a down market buyers get even more carried away with the idea of buying low and selling high. Here are a few reasons why this may not work:
• During the last 20 years it appeared as if values for real estate would never reverse. Tax benefits and protection against inflation were the driving factors for the American desire for home ownership. In an inflationary market that is driven by relatively low interest rates this expectation will be fulfilled. However, for the next five to 10 years the American economy may struggle.
• Most likely the economic down turn will result in much lesser wealth generation from real estate. If the values go up 2 or 3 percent per year it will take several years until a home buyer can turn a real profit. The commissions and closing costs for a sale are about 6 percent and in order to recover these expenses as well as the cost of home ownership buyers are looking at four to five years of residency at minimum.
• As homes get older there is not only physical deterioration but an actual obsolescence problem. Compare the room heights and bathroom sizes of a home built in the 1970s with one in the late 1980’s or with one built today. From very small rooms we went to huge areas and hall-type bathrooms only to get back to right-sized facilities today.
Retrofits are virtually impossible for older homes. At what point can a buyer really not recover their money for a home improvement due to age? How much is the actual depreciation of a home vs. the actual value of the lot? These are questions any buyer has to answer if they are considering the purchase of an older home.
• Today, homes feature high efficiency windows, better insulation, durable and fire-resistant roofing systems and more. On average a $400,000 home has an overall cost savings package valued at up to $40,000.
All items in a new home are still under warranty while a home buyer of a bargain home will have to plan this investment directly into the purchase decision. Just in the last few weeks directions have been handed down to home appraisers that these items are to be considered in the appraised values of properties. It makes you wonder what the long term effect of these evaluation changes may be for the future of the aging home base.
• Buyers qualify for a certain amount of loan and often get carried away with the adage of buying the largest possible home they can afford. This may be a severe mistake and could lead to “house poverty.” Overall a larger home is much more expensive to maintain than a smaller home.
Most families have a head count of four or five, which translates into a three- or four-bedroom home. In a down market, the temptation to purchase a much more expansive home for a distressed price is great. Items like taxes, heating and air-conditioning cost, cleaning, general repair and maintenance may be a very unpleasant surprise. If then the resale market is not developing as expected this purchase could mean long term suffering rather than enjoyable home ownership.
In short, if you are looking for a home, know that there are plenty of options. Whether or not you choose to buy new or used, beware of the shortcomings and deals that seem too good to be true. Always remember to clearly identify your needs and ownership objectives as well as the expected holding term and your financial abilities. It may be wiser to purchase a right-sized new home that fits the family’s immediate life style and minimizes house problems than to speculate on a possibly elusive boom market with resulting budgetary inflexibility and financial hardship for the entire family.
Anna-Maria Ray is involved in the McHatten Creek Ranch project at Gypsum.
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