Buying A Home
Creative ways to buy a home you may not have considered...
So you want to buy a place of your own but can't figure out how to pull together the necessary cash and financing? If you're willing to think creatively, there are several offbeat ways to buy your first home.
The fixer upgrade When you can't afford what you want, look for what you can afford and use it as a stepping stone.
Case in point: Jamie C, 46, and her husband bought an $80,000 two-family house about six years ago. They renovated, sold it and invested in a $200,000 two-family place in a nicer town. In a few years, they'll repeat that process and buy their dream house.
Their first house was far from ideal, but the down payment was only $5,000, and the rental income allowed them to pay for repairs without incurring more debt. After the sale, they walked away with more than $30,000. Ditto in their new home, but the rental income is higher, so they'll save more toward their next purchase -- enough so that they can buy the new house and keep the rental property as an investment.
Pros: There are plenty of lower-priced houses out there in need of repair, and the income from a tenant can help both with repair costs and mortgage payments. Even in overheated markets, there's little likelihood that the value of homes at the low end will suffer in a slump.
Cons: This method isn't for the impatient or the status conscious. To save money, the couple did many repairs themselves, and it will be almost 10 years before they can settle into their dream house. Just be careful not to buy a place where the cost of repairs will eat up any profits you might make when you sell.
The shared load If buying your own property is prohibitive, consider buying into a dwelling with shared ownership. There are several options here, with varying levels of complexity and commitment. One of the most common uses a legal form of ownership called "tenants in common."
The friendly option: It's possible to buy a property with a friend you trust, sharing the mortgage and the title. This form of ownership is called joint tenancy, and it's the way most married couples hold property.
Case in point: In 2003, Bryan, 34, bought a three-bedroom house with a buddy for $299,000. They each put down $10,000, and they rent out the third bedroom to a friend, which helps cover costs.
Pros: The two are only paying slightly more than they would in rent, while they're building equity and the house is appreciating.
Cons: The legal particulars of joint tenancy vary from state to state, so you'll need to check with a lawyer. Under joint tenancy in many states, any owner can force the sale of a house or transfer ownership rights without the permission (or even knowledge) of the other owners. The costs and all decisions about maintenance and financing are shared equally, which is fine so long as everyone agrees.
The instant neighborhood Cohousing has its origins in Europe and is practically like buying a neighborhood along with your house. Residents own one of a group of small homes clustered together and share ownership of the land.
In 1992, Tom M and his family bought a small (1,150-sq.-foot) 3-bedroom house for $157,000 in a cohousing development on Bainbridge Island, Wash. A similar private home would have cost about $185,000 then, or 17% more, Tom estimates.
Pros: In many cases, property prices are lower than market. And though houses tend to be smaller, residents share ownership of the common facilities. "We had a 5,000-square-foot common house, with guest rooms and dining rooms where you could entertain large groups," Tom says. Residents may cook meals together or swap babysitting time.
Cons: Cohousing is largely a blue-state phenomenon with vaguely utopian overtones, but it's slowly spreading throughout the country. You need a high tolerance for meetings, because many decisions have to be made jointly by the owners. When selling your property, there may be some restrictions, and the buyer has to want to join a communal setting.
The parental plan Saving enough for a down payment usually requires some kind of a sacrifice, so don't rule out living with family.
Case in point: Saddled with hefty school loans and about $25,000 in credit card debt at the end of their medical residencies, Sonya C, 37, and her husband decided to move in with his parents for a year to pay off their plastic and save for a down payment. "People thought we were crazy," she says. "But it worked out really well."
Pros: Can you say super savings? Within 15 months, Sonya had paid off their credit cards and saved enough to put $50,000 down on a four-bedroom colonial in Long Island. "And we're all still speaking to each other," she jokes.
Cons: Mixing family and finances can be a stress cocktail. To diffuse tension, Cottone says, discuss money and expectations up front (everything from paying rent to doing chores). And though your savings will make you feel flush, "don't see it as extra," Sonya says. Stick to your savings strategy or you'll be living with Mom and Dad for years.
The no-money-down Hail Mary It can be tough to save enough cash for a down payment, but in certain circumstances you can finance your way around it.
Pros: You can buy a house without any upfront cash.
Cons: You need to have nerves of steel (in case property values drop) and be willing to live in contractor hell for a few months. And if your credit is less than stellar, this may not be an option at all.
The susu-super saver This simple saving strategy goes by different names in different communities, but the method is the same. Members of a "susu" contribute a fixed amount each week or month for a certain period (e.g. $200 a month for 10 months). At regular intervals, one member gets a specified payout in cash. .
Case in point: Laverne, a single mother in her 50s, has participated in over a dozen susus over the last 20 years. Right now she's in a 26-week susu in which each member will get $7,000.
Pros: Although the amounts are small, usually under $10,000, a disciplined saver could participate in several susus to fund a down payment.
Cons: Only communal pressure and the honor system ensure that everyone gets their turn (and that folks don't default). And your money doesn't earn interest.
But wait, there's more In the course of excavating all these options, I came across a wide array of federal, state and local programs designed to help first-time buyers and low-income buyers purchase a home.
For example, you may be able to borrow from your 401(k) or take money from an IRA (you escape the 10% early withdrawal penalty, but not income taxes). The Federal Home Loan Bank sponsors programs that match savings, $3 for every $1 put aside. There are loan subsidies for buyers in rural areas and in inner cities, too.