The Buy vs. Rent Choice

Real Estate Agent with Pacific Union Real Estate-GMAC

Recently, a client I'd been working with for quite a while mentioned that he was thinking that he'd stay here in the Bay Area for 2-3 years, and then move away.  Always paying attention to serve my clients' best interests, I said, "hey; we should rethink this home purchase gameplan, then."

We talked about what is known (and NOT known) about market trends for the next couple of years, for his locations and for his price point, because these can be very different than for other locations and price points.  We talked about transaction costs--he had already seen my buyer's costs spreadsheet each time we've made an offer, unique for his city and purchase price, estimating escrow fees, city transaction fees, inspection fees, and homeowner insurance fees, among others. 

But he wasn't thinking about these as transaction costs to be recouped, and definitely wasn't thinking about what the "seller net proceeds" sheet would look like when he went to sell--the brokerage fee, staging fees, and recordation costs.  That is, between the 2% of costs to buy and 6.25% of costs to sell, excluding loan fees, and any surprise repairs and staging, he needs about 10% appreciation in the coming three years to make buying pan out.

While he hasn't yet made a final decision, I suggested that he take a look at two sites:  includes an NPV analysis, allows you to enter inflation and discount rates, clearly reflects interest rate deductibility, and allows you to do the math over a range of periods ("what if we move in x years? y years?").    But doesn't seem to reflect transaction costs--the not-insignificant costs of actually buying, and then selling, the house.

The New York Times has a nice tool which DOES allow you to including these figures if you go to the "advanced" menu (and who wouldn't, given that the basic menu leaves so much of the analysis out??).  See  

I can't tell if the New York Times site reflects the deductibility of your mortgage payments--it references "owner fee" deductibility, just under the HOA fee field, leading to confusion.  While there are many who would argue that one shouldn't make choices based on tax effects ("I'll buy lunch for everyone because I can claim it as a business expense!"  Not!) there's no doubt that the net cash flows change depending on your tax bracket and so on.

So if you're on the fence about buying vs. renting, take a look at these buy vs. rent calculators!




Comments (2)

John Mulkey - Waleska, GA
Housing Guru

Maureen - Great advice, especially in today's environment. And while buying is usually a good deal for most consumers, it's not for everyone. One point I always make is to remind potential buyers is that home buying is a leveraged purchase. Many times buyers simply calculate return on the cost, which, of course, doesn't accurately reflect ROI.  In this market I'd advise anyone to rent if they think they might move within the next year. The market is just to volatile.

Aug 20, 2009 11:25 AM
Maureen Kennedy
Pacific Union Real Estate-GMAC - Piedmont, CA

Thanks for that great point!

Aug 22, 2009 06:18 AM