Should You Buy? Try This Formula...
A: For all those out there who are trying to figure out whether they are financially capable of buying, try this simple excel spreadsheet that I designed. It was specifically created for those who currently own a home, thinking of selling, and putting the profits into buying a bigger house. So, naturally, it includes formulas to quickly and easily calculate transaction costs on both sides and add it to your financial profile in making the final decision. However, it can work for those who currently rent, are considering buying, and wondering if they are financially capable.
**DOWNLOAD 'SHOULD I BUY' SPREADSHEET HERE**
*you just need to fill in the green boxes; formulas will come up automatically!
It's not the most complex of spreadsheets, but I still think many will find it useful. Off the bat, there are a few assumptions that you should be made aware of:
ASSUMES - 6% Interest Rate (or $600 per $100,000 of loan)
ASSUMES - No points on loan
ASSUMES - 1.5% of Purchase Price closing costs for Co-op Purchase
ASSUMES - 4.325% of Purchase Price closing costs for Existing Condo Purchase
ASSUMES - 5.75% of Purchase Price closing costs for New Dev Condo Purchase
ASSUMES - Doesn't Include Homeowners/PMI Insurance
ASSUMES - A new dev purchase - Simply change the CELL INFO for B27 if you are buying an existing condo (B18) or co-op (B19)!
These are fair assumptions and are necessary to make this excel spreadsheet feasible for me to develop given the time I have to put into it right now. The biggest variable is your lending rate which obviously will vary, so please keep that into account. I also didnt enter PMI or Homeowners insurance which will add bit to the overall cost of the monthly payments; so please take into account. I didn't do either of these items because I don't know how yet to do the math for them!
THIS IS A VERY CONSERVATIVE SPREADSHEET AND SHOULD ONLY BE USED AS A GUIDE TO GIVE YOU A QUICK GLANCE AT YOUR SITUATION
For the SHOULD I BUY formula, I used an IF, AND statement to tell the program to analyze the data entered and look for a debt/income ratio of at least under 33% and 12 months liquid assets in reserves AFTER closing when advising you to BUY THE HOME!
In the real world, this is not set in stone! Obviously, if you have a debt to income ratio of 25% and only 6-8 months of liquid assets after closing, you might still be fine to pass a liberal co-op board; a condo will be fine! So, again, please use this spreadsheet accordingly!
In the future I will work on making this more complex so that you can enter in whether you are buying a condo or co-op (with their restrictions), and allow you to enter in a loan rate & homeowners insurance so that it is more accurate to your unique situation. For now, use as a general guide and email me if you have a specific question on the result that comes up!
ENJOY!
Posted by A Weissman
Tue Apr 10th, 2007 03:04 PM
Noah:
Great spreadsheet. Very helpful.
Would you say that co-op boards, or mortgage lenders, or both, look more carefully at debt/income ratio, months reserve, credit score, or otherwise.
For example, what about someone with a debt/income ration of 50 or 60%, but who has 150 months reserve?
How would you analyze a scenario like that?
Weissman
Posted by Jason
Tue Apr 10th, 2007 04:12 PM
"someone with a debt/income ration of 50 or 60%"....
with today's mortgage meltdown, few lenders will even approve you the mortgage. the purchase will fail at the lender long before a board package is submitted.
besides....if you have 150 months reserve, you should definitety put more down payment and lower the DTI. i'd put the absolute max at 40% before you're over-stretching yourself.
Posted by Noah
Tue Apr 10th, 2007 06:36 PM
Thx A! And agreed! I would put more money down and take out a smaller loan making the debt/income ratio more in line with 33%...Its equity in your name and your paying less tax deductible costs in interest payment to the bank.
Its not a bad thing!
Posted by Noah
Tue Apr 10th, 2007 07:20 PM
To answer the question about lenders, I think they look at credit score and debt to income ratio the most.
Liquid assets for lenders are a distant 3rd. At least I think so based on what I see. Liquid assets come into play by using more of it, if you are weak in the first two priority areas!
Posted by Michael
Tue Apr 10th, 2007 07:44 PM
For people who dont own and are buying....this doesnt take into consideration rent vs buy, correct? Also, on a 500000 coop purchase...closing costs are 28K? Or does this combine coop and condo?
Posted by Noah
Tue Apr 10th, 2007 07:58 PM
Michael - For a $500,000 purchase, I get co-op closing costs of $7,500; aproximately of course!
As far as the ultimate rent vs buy decision, that is entirely different analysis. Check my post here:
http://www.urbandigs.com/2007/01/fear_of_firstti.html
and
http://www.urbandigs.com/2007/03/making_the_deci.html
Posted by nova
Tue Apr 10th, 2007 11:06 PM
There is a bit of an error in the spread sheet as it takes the highest closing costs (i.e. new development) by default. So even though it calculates closing costs for coop and existing condos too, it is not using the lower ones. You need to alter the cells.
Btw - What about if the debt/income is closer to 20% and months reserve is more like 6 months?
Posted by uwsider
Tue Apr 10th, 2007 11:55 PM
NY Times has a great article for rent v.s buy. Plus a very nice interactive graph to go with it
http://www.nytimes.com/2007/04/11/realestate/11leonhardt.html?ref=realestate
Posted by Noah
Wed Apr 11th, 2007 08:25 AM
Nova - Yes it ASSUMES a new dev purchase by default.
To change, simply do what I said in the post:
ASSUMES - A new dev purchase - Simply change the CELL INFO for B27 if you are buying an existing condo (B18) or co-op (B19)!
Posted by Jason
Wed Apr 11th, 2007 09:29 AM
With 20% DTI and 6mo reserve, you're much better off buying a condo. Few co-op boards allow less than 1 year. (i've seen lenient ones that allow 36% DTI too, but those are the exceptions and not the norm.)
Or you must be allocating too much into other illiquid assets (401k, etc).
Most consumer finance "experts" says you should have 3-6mos of cash reserves in a savings/money market account for short-term emergencies, but i'd think more is not necessarily a bad thing.
Posted by Noah
Wed Apr 11th, 2007 09:35 AM
Agreed with Jason...Your salary obviously is fine, but your liquid is probably a bit light for a co-op board. Try to get that closer to 12 months OR get a family gift into your account 1-2 months before you close to bulk up the account to show 1 year in reserves!
A condo, if economically feasible given the premium, would be fine!
Posted by Nova
Wed Apr 11th, 2007 10:27 AM
I actually went with a condo in the end - i just wanted to check what you thought of my stats.
I was in bschool after a handful of years working and am now rebuilding my cash cushion. So I went conservative on the apartment price and thankfully found something I like very much. So this year I will be rebuilding my cash. Not too bad on school loans now so that helps me too.
Posted by chris
Wed Apr 11th, 2007 02:18 PM
I have a comment about the calculation of # of months of payments in reserve...
I agree that this is important, but for condos (and liberal coops) this may be too stringent given that you can presumably rent the property out and move into a cheaper rental in a cheaper area or smaller place, assuming your purchased property is not already at the bottom of the real estate ladder. This may be harder to do for families, but for an individual or young couple, isn't this a viable ( and not unwise) option?
Or would you advise against making such an exception to your 12 month rule of thumb?
For an example, I currently pay $1600/month for a 1 bedroom in the UES, but a 1 bedroom downtown would cost me ~$3500/month to purchase.
Posted by newbie
Wed Apr 11th, 2007 02:44 PM
Thanks for the useful too, Noah. Have you also come across this one?
http://www.housemath.us/
It takes into account the long term value of owning based on a number of variables.
Posted by Noah
Wed Apr 11th, 2007 04:15 PM
Chris - Yes, this spreadsheet is conservative, especially for condo buyers! If the salary is fine, but liquid assets is too low because you only have 6+ months in reserves AFTER closing, you should still be OK to do the deal!
As long as your job is secure! If you are self-employed, stick to the 12 months reserves to be safe!
Thanks newbie. Ill check it ou!
Posted by Noah
Wed Apr 11th, 2007 06:39 PM
newbie - BIG problem with the SELLING tab of housemath.us.
It takes the downpayment as PROFIT in its calculations. If I buy a $550,000 condo, and it costs $25,000 to do so, and sell for $619,000 in 6 years and pay a $37,000 in costs to sell, it says my after tax profit is $163,000!
Its using my down payment of equity as profit. In reality, it cost me 575,000 to buy, and after expenses I get $582,000 back when I sell at $619,000. Profit of 7,000 in 6 years net net. Question is what that money would earn if I didnt put it into downpayment? Owning this unit obviously would cost more than renting, monthly basis. so it might not work according to this at 2% appreciation annually and 3% inflation.
Posted by Mbt
Thu Jun 3rd, 2010 01:43 AM
I think another reason fees are not being paid and free months not offered is that prices have come down. Apartments are moving but part of the reason is that prices came down to a point at which they will move.
Posted by links of london
Wed Jul 7th, 2010 02:36 AM
You really made some good points in your post