Can I afford this 2.3 million dollar home?

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bltn
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Re: Can I afford this 2.3 million dollar home?

Post by bltn » Fri May 31, 2019 2:51 pm

cmoney2011 wrote:
Fri May 31, 2019 9:14 am
New wrinkle.

Let's say we can buy the land and delay construction for 2.5 years.

Let's say the interest rate on the land loan is 5.5% and we pay off the entire balance in 24 months.

Let's say at the end of 2.5 years we have 1 mil saved to put down (including value of land, current home equity and cash).

We'll have paid about 55k in interest for the land loan over 2 years, but will have acquired 1 million in equity for the property.


Any takers?
Cmoney2011

Interesting question. If you're sure the location is what you want, wait for 2-4 years and decide about the construction at that time. The carrying costs on the raw land shouldn t be too high. Pay off the land loan asap.
In a few years you still have the option to build the originally planned big house, or find a smaller house somewhere, or build a less expensive house. The land would probably be a good investment to hold a long as you would like.

Two points for consideration.
1. Maintenance costs for a big house will be big. And a big house will be a major step in lifestyle creep. If a big house rather than a more modest house is necessary for your happiness, than by all mean buy the land and accumulate for a few years before building.
2. If you acquire a larger, comfortable home, less expensive than your current plan, you might have more room later on to acquire a vacation home. My family took this route, and our vacation home, on the beach, has become more valuable than our main home. And with the kids gone, we re living in les then half of our current home. Go figure.

I have partner who built a large house a few years ago. He is now a bit of a slave to the house with the large mortgage. And the house is so nice, it could be hard to sell. You shouldn t have these concerns, but these are the tendencies that people experience when building/buying big houses. Maybe something to think about before your next upgrade!!

My daughter and her husband might be in your financial situation in a couple of of years. I m going to recommend that, with possible changes in their economic situation in the future, that they accumulate as aggressively as they can while conditions for this are favorable.

Best of luck to you guys.

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Misenplace
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Re: Can I afford this 2.3 million dollar home?

Post by Misenplace » Fri May 31, 2019 2:53 pm

cmoney2011 wrote:
Fri May 31, 2019 9:14 am
New wrinkle.

Let's say we can buy the land and delay construction for 2.5 years.

Let's say the interest rate on the land loan is 5.5% and we pay off the entire balance in 24 months.

Let's say at the end of 2.5 years we have 1 mil saved to put down (including value of land, current home equity and cash).

We'll have paid about 55k in interest for the land loan over 2 years, but will have acquired 1 million in equity for the property.


Any takers?
OP, if this is a truly custom build (architect, designed for lot, custom builder not tract developer), you can expect your final build price to be anywhere from 25-50% higher than the original cost estimates when you sign the contract. Ask me how I know.
Also, don't forget landscaping- add on another 10-15%.
This post by you^^^ might be a good idea. You can take time to think over your plans, and perhaps build when things are less busy. The construction business is cyclical, and it is easier to get good tradesmen during a slow down.

cherijoh
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Re: Can I afford this 2.3 million dollar home?

Post by cherijoh » Fri May 31, 2019 2:57 pm

cmoney2011 wrote:
Fri May 31, 2019 1:13 pm
a bit over 2 acres, 5,000 ish sq ft
...
It will be average to below average in price and size for the neighborhood.
How does your family fit within the demographics of this new neighborhood? I had a neighbor who decided to move to a "better" neighborhood and a much upgraded house when the city was doing a school redistricting that threatened to put the neighborhood kids into mediocre middle and high schools. (There was too much pushback so the plan was cancelled, but that is another story...). I ran into her about a year after their move and she was suffering buyer's remorse because everyone in the new neighborhood was considerably older, as well as being dual-income professionals who were all very focused on collecting toys and judging people based on their perceived "success". None of the new neighbors were at a similar stage of life and the kids hated it and wanted to move back to the old neighborhood.

cmoney2011 wrote:
Fri May 31, 2019 1:13 pm
Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood than be the guy with the biggest house on the street. I’m interested in quality, not pretense
Also, beware of the behavioral psychology traps that can befall people building custom homes where normal caution in spending is thrown out of the window because of all the zeroes already in the price tag. :shock: Those "little" additions of $10K here and $5K there can add up quickly if you get into the "forever home" mentality and misplace your analytical thinking skills when it comes down to choosing every little detail.

randomguy
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Re: Can I afford this 2.3 million dollar home?

Post by randomguy » Fri May 31, 2019 3:16 pm

cmoney2011 wrote:
Fri May 31, 2019 2:39 pm
For the record, just checked COL index. The SUBURB I’m considering has a median home price of nearly 800k.
How big of suburb are we talking? 10k people? 800k is getting pretty far into HCOL areas and a 2.3 might not be much of an outlier the same way 2.3 is an outlier in a MCOL area of 300-400k houses.

Either way you can afford the house. At worst you lose a million on it. With you income, you can afford (but might not like) a loss like that. Buy the house and help our economy:)
Last edited by randomguy on Fri May 31, 2019 3:28 pm, edited 1 time in total.

EnjoyIt
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Re: Can I afford this 2.3 million dollar home?

Post by EnjoyIt » Fri May 31, 2019 3:24 pm

cmoney2011 wrote:
Fri May 31, 2019 2:24 pm
KlangFool wrote:
Fri May 31, 2019 1:25 pm
cmoney2011 wrote:
Fri May 31, 2019 1:13 pm

Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood than be the guy with the biggest house on the street. I’m interested in quality, not pretense
cmoney2011,

<<I’m interested in quality, not pretense>>

This does not apply to someone buying a 2.3 million 5,000 square feet house.

<< Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood >>

I would rather have a bigger and more expensive gorgeous house in a cheaper neighborhood. You could spend less and get a bigger house in a cheaper neighborhood. But, you choose this neighborhood. So, this is a status thing. But, how would you feel when you actually live in this neighborhood where almost everyone else has a bigger and better house than you. And, you cannot avoid your neighbors except by moving out.

Will you really be happy in this neighborhood? Have you ever live in this kind of neighborhood?

KlangFool
I don’t frequent this forum, but I get the impression you’re a bit of a troll.

Plenty of reasonable people like expensive things for reasons other than wanting to impress other people. As discussed above, this is a new build. There aren’t many new developments in my city with lots of the size and quality I’m interested in.

Finally, for a number of reasons, I’d rather not be the guy with the giant house living among the plebs.

Can we get back to the original discussion?
KlangFool is not a troll. He has been around this forum for a long time and has seen/experienced a lot in his life and lives around him. His experiences put him on the more conservative side.

Just realize you are not the first person on this forum talking about buying or building an expensive house in a MCOL area. Many of us who have been around and experienced life have seen what you are about to do before. And although you don’t see it now, 10-15 years from now you will reflect on what everyone has said and realize how right everyone was.

njdealguy
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Re: Can I afford this 2.3 million dollar home?

Post by njdealguy » Fri May 31, 2019 4:09 pm

cmoney2011 wrote:
Fri May 31, 2019 2:24 pm
KlangFool wrote:
Fri May 31, 2019 1:25 pm
cmoney2011 wrote:
Fri May 31, 2019 1:13 pm

Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood than be the guy with the biggest house on the street. I’m interested in quality, not pretense
cmoney2011,

<<I’m interested in quality, not pretense>>

This does not apply to someone buying a 2.3 million 5,000 square feet house.

<< Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood >>

I would rather have a bigger and more expensive gorgeous house in a cheaper neighborhood. You could spend less and get a bigger house in a cheaper neighborhood. But, you choose this neighborhood. So, this is a status thing. But, how would you feel when you actually live in this neighborhood where almost everyone else has a bigger and better house than you. And, you cannot avoid your neighbors except by moving out.

Will you really be happy in this neighborhood? Have you ever live in this kind of neighborhood?

KlangFool
I don’t frequent this forum, but I get the impression you’re a bit of a troll.

Plenty of reasonable people like expensive things for reasons other than wanting to impress other people. As discussed above, this is a new build. There aren’t many new developments in my city with lots of the size and quality I’m interested in.

Finally, for a number of reasons, I’d rather not be the guy with the giant house living among the plebs.

Can we get back to the original discussion?

KF isn't a troll but I suspect some sarcasm in the advice here, as he usually talks about treating net worth conservatively in terms of not buying too much house that can obscure it being less liquid than other assets.

Advice of buying a giant house for an amount much higher than average in the neighborhood is definitely a recipe for a very hard time in reselling if/when the need arises as suggested by many others in the thread.

cherijoh
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Re: Can I afford this 2.3 million dollar home?

Post by cherijoh » Fri May 31, 2019 4:48 pm

randomguy wrote:
Fri May 31, 2019 3:16 pm
cmoney2011 wrote:
Fri May 31, 2019 2:39 pm
For the record, just checked COL index. The SUBURB I’m considering has a median home price of nearly 800k.
How big of suburb are we talking? 10k people? 800k is getting pretty far into HCOL areas and a 2.3 might not be much of an outlier the same way 2.3 is an outlier in a MCOL area of 300-400k houses.
I wanted to check and see how expensive some of the ritzier neighborhoods were in Charlotte, NC where I live. I ran across an interesting website called Niche that shows median home prices by neighborhood as well as the size of the neighborhood and various rankings for school district, crime, etc. Overall, the median home price for Charlotte is ~$225K, but I did find one very exclusive neighborhood close to uptown with a median home value of over $1M (but less that 2700 residents). There were several houses currently on the market in ths neighborhood for prices in the range of $2M - $2.5M.

JackoC
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Re: Can I afford this 2.3 million dollar home?

Post by JackoC » Fri May 31, 2019 4:55 pm

cmoney2011 wrote:
Thu May 30, 2019 6:26 am
EnjoyIt wrote:
Wed May 29, 2019 11:35 pm
Is this a high cost of living area, or are you going to be living in one of the most expensive houses in town?
Neither. It’s a high cost of living area in a medium cost of living city. It will be average to below average on the price spectrum for the neighborhood. We are currently living in a small starter home we purchased when or incomes were much, much lower. It is now simply too small for our family. Our savings reflect only a few years of our current income.
I guess there's a 'privacy' consideration even under a screen name? Anyway up to you but job and location does matter I think. My assumption was either Wall Street people NYC area, high end tech people Silicon/Bay, or high end doctors anywhere else. I deduce now it's most likely the third.

In inner NY area $2mil+ houses aren't necessarily big, our house is 2.2k sq ft and Zillow says it's that much now. Not sure I'd pay that much if in the same situation as we were 25+yrs ago when we bought it, when price was way less even adjusting for CPI. But I might still, the alternative being long commute which I believed would have a negative impact on my earning potential, or else quite small. I guess Silicon/Bay would be similar though I know less of the ins and outs of locations there.

If very high paid in non super-HCOL area no way would I personally pay that much for a house. But you're not me. Numbers wise it's affordable, or not unaffordable compared to what loads of people do proportionally at lower incomes and prices as has been pointed out. Security of income, is it possible besides personal events there will be a complete overhaul of the health system that puts a lot of pressure on very high MD incomes? I've no idea and I guess it's a dangerous path to go down moderation-wise on this forum to further explore that idea. I'm willing to assume you know better than I the security of your income, and of course you know whether you're actually a doctor which I don't. :D

randomguy
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Re: Can I afford this 2.3 million dollar home?

Post by randomguy » Fri May 31, 2019 5:42 pm

cherijoh wrote:
Fri May 31, 2019 4:48 pm
randomguy wrote:
Fri May 31, 2019 3:16 pm
cmoney2011 wrote:
Fri May 31, 2019 2:39 pm
For the record, just checked COL index. The SUBURB I’m considering has a median home price of nearly 800k.
How big of suburb are we talking? 10k people? 800k is getting pretty far into HCOL areas and a 2.3 might not be much of an outlier the same way 2.3 is an outlier in a MCOL area of 300-400k houses.
I wanted to check and see how expensive some of the ritzier neighborhoods were in Charlotte, NC where I live. I ran across an interesting website called Niche that shows median home prices by neighborhood as well as the size of the neighborhood and various rankings for school district, crime, etc. Overall, the median home price for Charlotte is ~$225K, but I did find one very exclusive neighborhood close to uptown with a median home value of over $1M (but less that 2700 residents). There were several houses currently on the market in ths neighborhood for prices in the range of $2M - $2.5M.
It would be interesting to see a graph of sales prices and DOM for the area. I am not shocked that 2 million dollar homes exist all over. The question is how easy they are to unload versus holding them for 3 years waiting for a buyer. 1 million dollar houses are "pretty" affordable by the professional 2 income couples (i.e. 250-300k of income. ). But the income distribution drops off pretty sharply as income goes up. There is probably an order of magnitude less buys at 2.3 million.

cherijoh
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Re: Can I afford this 2.3 million dollar home?

Post by cherijoh » Fri May 31, 2019 7:02 pm

randomguy wrote:
Fri May 31, 2019 5:42 pm
cherijoh wrote:
Fri May 31, 2019 4:48 pm
randomguy wrote:
Fri May 31, 2019 3:16 pm
cmoney2011 wrote:
Fri May 31, 2019 2:39 pm
For the record, just checked COL index. The SUBURB I’m considering has a median home price of nearly 800k.
How big of suburb are we talking? 10k people? 800k is getting pretty far into HCOL areas and a 2.3 might not be much of an outlier the same way 2.3 is an outlier in a MCOL area of 300-400k houses.
I wanted to check and see how expensive some of the ritzier neighborhoods were in Charlotte, NC where I live. I ran across an interesting website called Niche that shows median home prices by neighborhood as well as the size of the neighborhood and various rankings for school district, crime, etc. Overall, the median home price for Charlotte is ~$225K, but I did find one very exclusive neighborhood close to uptown with a median home value of over $1M (but less that 2700 residents). There were several houses currently on the market in ths neighborhood for prices in the range of $2M - $2.5M.
It would be interesting to see a graph of sales prices and DOM for the area. I am not shocked that 2 million dollar homes exist all over. The question is how easy they are to unload versus holding them for 3 years waiting for a buyer. 1 million dollar houses are "pretty" affordable by the professional 2 income couples (i.e. 250-300k of income. ). But the income distribution drops off pretty sharply as income goes up. There is probably an order of magnitude less buys at 2.3 million.
I definitely agree with you about being more difficult to sell when the house is that expensive. I was just surprised that there were neighborhoods outside of some pricy lake-front property on Lake Norman where the neighborhood averaged over $1M - Charlotte is nowhere close to being a HCOL area.

FYI, I pulled up the address for the house currently listed at $2.495 M in that neighborhood and checked it on Zillow. The house was purchased by current owners for $874K in April 2003. They originally listed it at the beginning of April for $2.695M and just dropped the price for the second time last week.

DownToThis
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Re: Can I afford this 2.3 million dollar home?

Post by DownToThis » Fri May 31, 2019 7:43 pm

Have you looked at days on market for the neighborhood for similar prices houses? That might be a good indicator of how hard it will be to sell should the need arise

bltn
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Re: Can I afford this 2.3 million dollar home?

Post by bltn » Fri May 31, 2019 9:13 pm

As I read the last page of replies and put myself in your situation, I get a bit more concerned about building a custom house for 2.3 million dollars in a community where the median house appraisal is 800,000.
Buy the land, if you can pay it off in a year, then sit on it for two or three years . Then you can look again at your options. If I couldn t buy the lot for cash or financed over a year or less, I wouldn t buy it now.
Knowing whaI know now, I would take my time with this decision. Your ideas about your forever house might change.
Your rate of accumulation is commendable. This will give you more options in the future.

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MossySF
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Re: Can I afford this 2.3 million dollar home?

Post by MossySF » Fri May 31, 2019 9:57 pm

AlphaLess wrote:
Fri May 31, 2019 12:09 am
MossySF wrote:
Thu May 30, 2019 11:55 pm
I can already tell my kids don't have anywhere close to the same talent/ambition/focus I had at their ages so it's a good thing we live way beneath our means.
Just curious: how can you tell?
At my son's current age (13), I had already:
* learned computer programming on my own from looking at source code of other programs
* soldered together my own computer equipment from instructions downloaded off BBS groups because I couldn't afford to buy it myself
* learned to play multiple sports without any coaching or instructions -- just from playing with friends, practicing by myself (e.g. hitting/throwing balls against the wall) and experimentation
* read entire 1000 page history/science books in a day nonstop without taking a break
* draw like a fiend -- only grey pencil though, parents had no money to afford art supplies for anything fancy

In other words, even at that young age, I could envision a target in my head, focus on it and nothing would interrupt me ... other than bathroom breaks. No time for food though -- with poor immigrant parents working, there wasn't any food in the house ready to eat anyways.

My kids these days, I tell them to read history assignments for 30 minutes ... and within 15 minutes, they're grabbing their smartphones or switching browser tabs on the sly to watch videos. It's the curse of the smartphone world -- really really really short attention spans. (Thank god my kids JUST missed the "put an iPad in front of your baby so you have peaceful dinner at a restaurant" phase -- OMG it's like a bomb going off if the iPad in front of them runs out of power.) The saving grace is everybody else my kids will be competing with in school & work will have the same issues.

AlphaLess
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Re: Can I afford this 2.3 million dollar home?

Post by AlphaLess » Sun Jun 02, 2019 11:36 am

MossySF wrote:
Fri May 31, 2019 9:57 pm
AlphaLess wrote:
Fri May 31, 2019 12:09 am
MossySF wrote:
Thu May 30, 2019 11:55 pm
I can already tell my kids don't have anywhere close to the same talent/ambition/focus I had at their ages so it's a good thing we live way beneath our means.
Just curious: how can you tell?
At my son's current age (13), I had already:
* learned computer programming on my own from looking at source code of other programs
* soldered together my own computer equipment from instructions downloaded off BBS groups because I couldn't afford to buy it myself
* learned to play multiple sports without any coaching or instructions -- just from playing with friends, practicing by myself (e.g. hitting/throwing balls against the wall) and experimentation
* read entire 1000 page history/science books in a day nonstop without taking a break
* draw like a fiend -- only grey pencil though, parents had no money to afford art supplies for anything fancy

In other words, even at that young age, I could envision a target in my head, focus on it and nothing would interrupt me ... other than bathroom breaks. No time for food though -- with poor immigrant parents working, there wasn't any food in the house ready to eat anyways.

My kids these days, I tell them to read history assignments for 30 minutes ... and within 15 minutes, they're grabbing their smartphones or switching browser tabs on the sly to watch videos. It's the curse of the smartphone world -- really really really short attention spans. (Thank god my kids JUST missed the "put an iPad in front of your baby so you have peaceful dinner at a restaurant" phase -- OMG it's like a bomb going off if the iPad in front of them runs out of power.) The saving grace is everybody else my kids will be competing with in school & work will have the same issues.
Thanks for the explanation.

From my vantage point here, I feel like there is a missed opportunity.

Certainly, they will never be like you (motivation, curiosity, and skill), but your opportunity is to make them better.
"You can get more with a kind word and a gun than with just a kind word." George Washington

finite_difference
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Re: Can I afford this 2.3 million dollar home?

Post by finite_difference » Sun Jun 02, 2019 11:53 am

My rule of thumb:

Monthly house cost (principle, interest, taxes, insurance) = PITI.

Monthly net income after taxes = MNI.

PITI/MNI <= 25%.

It’s a rule of thumb so it’s not perfect. But generally the lower the ratio the less house poor you will feel.
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh

retire2022
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Re: Can I afford this 2.3 million dollar home?

Post by retire2022 » Sun Jun 02, 2019 3:43 pm

cmoney2011 wrote:
Fri May 31, 2019 9:14 am
New wrinkle.

Let's say we can buy the land and delay construction for 2.5 years.

Let's say the interest rate on the land loan is 5.5% and we pay off the entire balance in 24 months.

Let's say at the end of 2.5 years we have 1 mil saved to put down (including value of land, current home equity and cash).

We'll have paid about 55k in interest for the land loan over 2 years, but will have acquired 1 million in equity for the property.


Any takers?
I do construction from financing side of work, will you be able to carry the land taxes until you are ready to build? Depending on your state/county/area post construction property taxes maybe higher after the home is built. This is a risk/variable you need to factor in.

Do you have a development team? Do you qualify for a construction loan? Would you consider a high end Modular construction contractor? What is the labor force like in the area you are planning to build?

You will need experienced tradesmen you can trust, sorting out which will be a part of your team won't be easy, you need a third party construction monitor and know quality control and have hands on experience with construction and possible green construction techniques.

You need a lawyer/Architect familiar with AIA 101 or AIA201 boilerplate contracts with language to ensure the cost of materials and labor won't go up.

You may require liability insurance if you will be the GC and or Workmen compensation or if the builder or workers get hurt.

Have you experienced building from ground up to completion? I don't mean hands on, but more of seeing a large project.

I worked with a developer who had to go into contract with an out of state manufacturer to build Modular units because labor is hard to obtain.

I have the same issue with my summer home which I alluded to, after my architect designed my house, it went out to bid, and three of the contractor just came back with a number. No paper guarantees that the price will go up or if they are able to walk away from job.

You may require some form of guarantees from the GC, how will you keep the cost of materials fixed?

Do you know how to compare "Trade Payment Breakdown" or "Schedule of Values" your architect should complete a set of plans and specs, and the GC should be able to give you a value for each of the trades.

You will be competing with all other construction subs in the area, right now there is a labor shortage.
You may want or desire payment and performance bond from the GC for failure to complete job. If you ask for this it will show the GC you don't trust them.

Lots of things to consider and this is very risky, I had a contractor pulled out of job, and payment and performance bond was called in, the GC losted their "pawned asset" and they failed to complete the job and the insurance or bond will kicked in.

This particular situation, the GC sued the developer, because the insurance company had seized the GC asset in order to obtain bond.

This is typical in the industry, and a 10% hold back (retainage) at the end for total construction cost is nationally acceptable.
so NOT easy as you think.

Good Luck
Last edited by retire2022 on Tue Jun 04, 2019 1:57 pm, edited 3 times in total.

Larry2623
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Re: Can I afford this 2.3 million dollar home?

Post by Larry2623 » Sun Jun 02, 2019 4:38 pm

If you really feel the need to ask at your income level...I would say no! Mostly kidding...

thepicard1
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Re: Can I afford this 2.3 million dollar home?

Post by thepicard1 » Sun Jun 02, 2019 4:51 pm

cmoney2011 wrote:
Thu May 30, 2019 9:17 pm
EnjoyIt wrote:
Thu May 30, 2019 7:39 pm
OP,
I’m curious on your opinion now that you have heard some contrarian views of why not to get the house even though everyone agrees you can comfortably afford it.

Has anything swayed your decision or are you still going ahead with the build?
I’m really struggling with the decision, tbh. We’re quite conservative by nature so the various risks some have posed are weighing on me heavily. I’m not so much worried about affording the house and making the payments. More worried about having a significant portion of net worth tied up in illiquid house.

I think the odds are strongly in favor of everything working out just fine, but I’ll feel like an absolute clown if they don’t and I ruined my financial picture by making the classic mistake of buying too much house. Ugh.
OP, DS and I are in the bay area, made a similar decision last year. We paused our search for a while, came back with more money, more earning power and bought around your price range. Never looked back, honestly at making 800k - 1m a year, we don't even notice the mortgage ... Good times may not last forever, but you shouldn't be so conservative.

You're buying a place that fits the bill, that you really love. That's rare and will get rarer where you are. I say bite and stop fretting.

afan
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Re: Can I afford this 2.3 million dollar home?

Post by afan » Sun Jun 02, 2019 7:57 pm

To put some round numbers to it, I would not be interested in building or buying a $2.3M house if my networth was under $10M.

I don't see the difference between borrowing the money, buying the land and building a house or borrowing the money, buying the land, paying off the loan, then borrowing again to build the house.

I don't understand how the value of the land can be considered part of the down payment for the construction. If you sell the land then you have reduced your need to borrow. But you no longer have a lot on which to build.

Both involve a lot of debt, on a networth that will be low compared to the cost of this project.

Is this somehow a unique opportunity? Do you need to get in before they change zoning and buying later would prevent you from building? Is this the only lot in the area, or in the country where you could imagine living?

Why is there a rush to do something now? That is a bad mindset to bring to a big financial decision.

As I said, I would want far more in investments before even considering such a house. If I were to keep thinking about it, I would set aside any decisions for a year or two. Then put housing back on the agenda. Shop around. Look at other options.

Meanwhile build a total asset value at which a house of this cost might be reasonable. You are not there yet. By the time you get there, you may find that your tastes have changed.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

Topic Author
cmoney2011
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Mon Jun 03, 2019 9:39 am

afan wrote:
Sun Jun 02, 2019 7:57 pm
To put some round numbers to it, I would not be interested in building or buying a $2.3M house if my networth was under $10M.

I don't see the difference between borrowing the money, buying the land and building a house or borrowing the money, buying the land, paying off the loan, then borrowing again to build the house.

I don't understand how the value of the land can be considered part of the down payment for the construction. If you sell the land then you have reduced your need to borrow. But you no longer have a lot on which to build.

Both involve a lot of debt, on a networth that will be low compared to the cost of this project.

Is this somehow a unique opportunity? Do you need to get in before they change zoning and buying later would prevent you from building? Is this the only lot in the area, or in the country where you could imagine living?

Why is there a rush to do something now? That is a bad mindset to bring to a big financial decision.

As I said, I would want far more in investments before even considering such a house. If I were to keep thinking about it, I would set aside any decisions for a year or two. Then put housing back on the agenda. Shop around. Look at other options.

Meanwhile build a total asset value at which a house of this cost might be reasonable. You are not there yet. By the time you get there, you may find that your tastes have changed.

Yeah, the time factor is related to the fact that the lot is a rare opportunity, the likes of which will likely be unavailable in the future.

The total cost of the project is 2.3 mil including land. So obviously the value of the land can be considered equity in the property.

Erwin007
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Re: Can I afford this 2.3 million dollar home?

Post by Erwin007 » Mon Jun 03, 2019 1:21 pm

Meaty wrote:
Wed May 29, 2019 6:30 pm
cmoney2011 wrote:
Wed May 29, 2019 6:26 pm
Hi all, some advice please.

Interested in buying a dream home in ideal location next year for 2.3 million. Would plan on staying for a long time, possibly forever. Price is a bit shocking, but after months of scanning the market, it seems to be the best option for our taste.

Mid 30s, married, one young child.

Home equity: $90k on $300k loan, current market value approx $400k. Year 4 on 5/1 ARM at 2.75%

Retirement accounts (combined): $330k

Taxable (earmarked for retirement): $835k

Cash: $300k

Non-mortgage debt: None

Income: Combined annual income $850k, will increase to 1-1.2 mil next year. Fairly secure employment.

Annual savings:

$11k for Roth conversions x2

$38k for 401k x2

$276k in taxable, earmarked for retirement

$120k in high yield savings for down payment.



In one year, should have cash for at least 20% down on $1.8 mil loan.

Upcoming expenses: $12k annually for 529 plan; $20k annually for childcare


These numbers seem insane. I know what the affordability calculators say, and I know we can find financing, but do normal people find these numbers reasonable or just out of control? Looking for some perspective here.


Thanks in advance-

MMC
Technically you can probably afford it. That said, if it were me, I wouldn’t be willing to take on 2 million dollars of debt. That’s about equivalent to the lifetime earnings (pretax) of the average person
I’m not sure how that line of thinking is helpful since their income will be 1.1-1.2 million per year.

randomguy
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Re: Can I afford this 2.3 million dollar home?

Post by randomguy » Mon Jun 03, 2019 1:35 pm

Erwin007 wrote:
Mon Jun 03, 2019 1:21 pm
Meaty wrote:
Wed May 29, 2019 6:30 pm


Technically you can probably afford it. That said, if it were me, I wouldn’t be willing to take on 2 million dollars of debt. That’s about equivalent to the lifetime earnings (pretax) of the average person
I’m not sure how that line of thinking is helpful since their income will be 1.1-1.2 million per year.
Yep. To some extent think how stupid this discussion would be if they said they were making 110k/year and asking if the could afford a 230k house. Now it isn't exactly the same but as the OP has a bunch of choices (i.e. get a nice 700k house and retire 5 years earlier) that you don't get at the lower end.

As far as procrastinating, that is pretty much always the best financial option BUT you are giving up time. Your family is only young once so if this place is going to make them happier you have to balance that out.

EnjoyIt
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Re: Can I afford this 2.3 million dollar home?

Post by EnjoyIt » Mon Jun 03, 2019 3:06 pm

cmoney2011 wrote:
Mon Jun 03, 2019 9:39 am
Yeah, the time factor is related to the fact that the lot is a rare opportunity, the likes of which will likely be unavailable in the future.

The total cost of the project is 2.3 mil including land. So obviously the value of the land can be considered equity in the property.
As others who have built their own homes have noted, if the estimate on the project is $2.3 million you will likely be spending significantly more and another large chunk of cash to properly furnish such an abode for a family who "have a taste for aesthetically pleasing things."
cmoney2011 wrote:
Fri May 31, 2019 10:38 am
Some people have a taste for aesthetically pleasing things.
This can and likely will cost you north of $3 million once built and fully furnished due to your tastes.

A colleague of mine just finished a $2 million projected home which ended up costing $2.54 million and took 2 years to finish and for them to move in. Her family has a taste for aesthetically pleasing things as well.

frugalmama
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Re: Can I afford this 2.3 million dollar home?

Post by frugalmama » Mon Jun 03, 2019 3:15 pm

If this is for a much larger home, etc. make sure you also are considering the maintenance. In a much more elite neighborhood, other costs often go up a lot too - sometimes 2 homeowner associations, stricter expectations regarding things like lawns, etc., higher air conditioning bills as you have more units, etc. Those are the things that keep me from moving out of my current home to a much larger more expensive home. Not because you can't afford it...as you can..but rather, do you want to spend that money on those things. I do not. My friend thought she did, she bought the house, and now wishes she had mine.

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Re: Can I afford this 2.3 million dollar home?

Post by DesertDiva » Mon Jun 03, 2019 3:16 pm

I like "aesthetically pleasing things" too. I go to local museums for that. Maybe a subscription to Architectural Digest would be in order.

In the end, it's the OP's decision as to what course he will take.

EnjoyIt
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Re: Can I afford this 2.3 million dollar home?

Post by EnjoyIt » Mon Jun 03, 2019 3:58 pm

DesertDiva wrote:
Mon Jun 03, 2019 3:16 pm
I like "aesthetically pleasing things" too. I go to local museums for that. Maybe a subscription to Architectural Digest would be in order.

In the end, it's the OP's decision as to what course he will take.
Absolutely. At the end of the day, financially, OP can swing it especially if income increases as expected.

Valuethinker
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Re: Can I afford this 2.3 million dollar home?

Post by Valuethinker » Tue Jun 04, 2019 4:01 am

cmoney2011 wrote:
Mon Jun 03, 2019 9:39 am
afan wrote:
Sun Jun 02, 2019 7:57 pm
To put some round numbers to it, I would not be interested in building or buying a $2.3M house if my networth was under $10M.

I don't see the difference between borrowing the money, buying the land and building a house or borrowing the money, buying the land, paying off the loan, then borrowing again to build the house.

I don't understand how the value of the land can be considered part of the down payment for the construction. If you sell the land then you have reduced your need to borrow. But you no longer have a lot on which to build.

Both involve a lot of debt, on a networth that will be low compared to the cost of this project.

Is this somehow a unique opportunity? Do you need to get in before they change zoning and buying later would prevent you from building? Is this the only lot in the area, or in the country where you could imagine living?

Why is there a rush to do something now? That is a bad mindset to bring to a big financial decision.

As I said, I would want far more in investments before even considering such a house. If I were to keep thinking about it, I would set aside any decisions for a year or two. Then put housing back on the agenda. Shop around. Look at other options.

Meanwhile build a total asset value at which a house of this cost might be reasonable. You are not there yet. By the time you get there, you may find that your tastes have changed.

Yeah, the time factor is related to the fact that the lot is a rare opportunity, the likes of which will likely be unavailable in the future.

The total cost of the project is 2.3 mil including land. So obviously the value of the land can be considered equity in the property.
You can afford to do this. Without knowing whether this is a very HCOL area, it's hard to judge value. In London that's a suburban 5 bedroom home price-- a quite ordinary 1930s house on a 50' x 140' lot.

Is it wise? Probably not. But if it is a once-in-a-lifetime chance then that has to be considered as a factor.

A couple of points:

Equity = Value - debt

So you can't count "the value of the land" in your equity *except* as it counts towards the value of house + land.

The other main point is that whatever your budget is for a custom build, add 40-50% for contingency + changes that you *will* make.

Square footage is another issue. More square feet = more cost. That's straightforward. But you have to size a house that other people will buy - and that's a problem if you are in the land of monster homes (sounds like it). 2500-3000 square feet is all a family of 4 needs, but people buying in that bracket tend to want more (of everything).

And fixtures and fittings appropriate to such a home will cost another bomb - think high end kitchens (easy to spend $80k; wait until you start pricing Viking ranges!) & furniture.

Remember location, location, location. You may love this lot, but will other people? I read the NY Times and was seeing up the Hudson River Valley you see amazing 8 bedroom Federal style homes (ie 1800s) selling for $500-800k. Unbelievably cheap. Turns out they have property tax bills that are like $30k a year, and heating (oil!) bills than can be $10k+. Did I mention maintenance?

Valuethinker
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Re: Can I afford this 2.3 million dollar home?

Post by Valuethinker » Tue Jun 04, 2019 4:04 am

bltn wrote:
Fri May 31, 2019 2:51 pm
cmoney2011 wrote:
Fri May 31, 2019 9:14 am
New wrinkle.

Let's say we can buy the land and delay construction for 2.5 years.

Let's say the interest rate on the land loan is 5.5% and we pay off the entire balance in 24 months.

Let's say at the end of 2.5 years we have 1 mil saved to put down (including value of land, current home equity and cash).

We'll have paid about 55k in interest for the land loan over 2 years, but will have acquired 1 million in equity for the property.


Any takers?
Cmoney2011

Interesting question. If you're sure the location is what you want, wait for 2-4 years and decide about the construction at that time. The carrying costs on the raw land shouldn t be too high. Pay off the land loan asap.
In a few years you still have the option to build the originally planned big house, or find a smaller house somewhere, or build a less expensive house. The land would probably be a good investment to hold a long as you would like.

Two points for consideration.
1. Maintenance costs for a big house will be big. And a big house will be a major step in lifestyle creep. If a big house rather than a more modest house is necessary for your happiness, than by all mean buy the land and accumulate for a few years before building.
2. If you acquire a larger, comfortable home, less expensive than your current plan, you might have more room later on to acquire a vacation home. My family took this route, and our vacation home, on the beach, has become more valuable than our main home. And with the kids gone, we re living in les then half of our current home. Go figure.

I have partner who built a large house a few years ago. He is now a bit of a slave to the house with the large mortgage. And the house is so nice, it could be hard to sell. You shouldn t have these concerns, but these are the tendencies that people experience when building/buying big houses. Maybe something to think about before your next upgrade!!

My daughter and her husband might be in your financial situation in a couple of of years. I m going to recommend that, with possible changes in their economic situation in the future, that they accumulate as aggressively as they can while conditions for this are favorable.

Best of luck to you guys.
I think if the lot is perfect you should consider grabbing it. The house can wait a couple of years.

Can you get a mortgage on land without a house on it? That comes into the "Develop & Construction" type of loan that banks do? Much shorter term, and much higher risk for the bank, therefore far more equity required (50%+).

However it will also come with carrying costs. Insurance is vital (in case someone injures themselves on your land, and sues). Property taxes can be quite steep. It won't stop with the mortgage.

international001
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Re: Can I afford this 2.3 million dollar home?

Post by international001 » Tue Jun 04, 2019 4:52 am

frugalmama wrote:
Mon Jun 03, 2019 3:15 pm
If this is for a much larger home, etc. make sure you also are considering the maintenance. In a much more elite neighborhood, other costs often go up a lot too - sometimes 2 homeowner associations, stricter expectations regarding things like lawns, etc., higher air conditioning bills as you have more units, etc. Those are the things that keep me from moving out of my current home to a much larger more expensive home. Not because you can't afford it...as you can..but rather, do you want to spend that money on those things. I do not. My friend thought she did, she bought the house, and now wishes she had mine.
Yes.. you can expect maintenance 2% of house value a year (That's a standard). Also, try to estimate your utility bills.
Is it possible to check for how much would actually a house like you sell in that neighborhood, and how long it would take to sell, in case you have to?
During the financial crisis, I have seen friends in that situation (at a lower scale)

Think that happiness is asymmetrical. If you end up loosing a lot of $, your happiness will go down a lot if you end up with less money (and with leverage it may), much more it would go up if you get your dream house. So crunch all the numbers and make sure you are prepared for the worse case scenario. With your income and your possibilities, I wouldn't risk it not being even prepared for the 0.1% chance black swam event.

My personal preference is playing smart the hedonistic treadmill.

typical.investor
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Re: Can I afford this 2.3 million dollar home?

Post by typical.investor » Tue Jun 04, 2019 5:04 am

cmoney2011 wrote:
Mon Jun 03, 2019 9:39 am
Yeah, the time factor is related to the fact that the lot is a rare opportunity, the likes of which will likely be unavailable in the future.

The total cost of the project is 2.3 mil including land. So obviously the value of the land can be considered equity in the property.
Ok, so buy the lot already. It seems you want to.
cmoney2011 wrote:
Fri May 31, 2019 10:38 am
I think the odds are strongly in favor of everything working out just fine, but I’ll feel like an absolute clown if they don’t and I ruined my financial picture by making the classic mistake of buying too much house. Ugh.
It doesn't have to be 2.3 mil if you don't want it to be, does it?

You say it'd be average. I bet a little smaller than average house would be attractive to a wider range future buyers who could always add a guest house or addition should they need.

And if it works out as you say, and the more expensive one would be fine, then just spend more traveling around the world or enjoying other fine things.

Can't you get the aesthetics you want for a little less (and save on future taxes etc.)?

My only real concern though would be climate change and if it's in an area that might see some impact (either on the property or access road).

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cmoney2011
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Tue Jun 04, 2019 8:42 am

Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.

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ResearchMed
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Re: Can I afford this 2.3 million dollar home?

Post by ResearchMed » Tue Jun 04, 2019 8:49 am

cmoney2011 wrote:
Tue Jun 04, 2019 8:42 am
Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.
Is this an option you would have, or is this binding?
Also, would it defin "beginning construction"?

And can I assume that $10k a very small percentage of the price? (But what if land value goes up, if the agreement is binding?)

As an aside, who is the seller, and why are they interested in doing this?

RM
This signature is a placebo. You are in the control group.

retire2022
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Re: Can I afford this 2.3 million dollar home?

Post by retire2022 » Tue Jun 04, 2019 9:28 am

cmoney2011 wrote:
Tue Jun 04, 2019 8:42 am
Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.
In government funded projects, esp if public funds are involved there is usually a purchase option usually with commercial lots and two six month extension contingent upon financing with public dollars. This is risky on the buyer as well as the seller, if financing is not obtained, it is an opportunity lost to move ahead.

mountain-lion
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Re: Can I afford this 2.3 million dollar home?

Post by mountain-lion » Tue Jun 04, 2019 10:39 am

EnjoyIt wrote:
Fri May 31, 2019 3:24 pm
Just realize you are not the first person on this forum talking about buying or building an expensive house in a MCOL area. Many of us who have been around and experienced life have seen what you are about to do before. And although you don’t see it now, 10-15 years from now you will reflect on what everyone has said and realize how right everyone was.
Lots of people are very happy in their fairly big houses even with all the extra money and hassle a large house adds.

It isn't that unusual. I know a couple with two children at home that moved into a 2,000 square foot house in a VHCOL area from a 7,000 square foot house in a LCOL area. The new house is quite nice, but nothing like their old house, and the wife was sad, but dealt with it.

After about ten years, and the children leaving, they moved back to the LCOL area into a house even bigger than their original.

They are very happy there. They do have the money to afford it, and aren't taking any dumb risks by doing so. But still.

If you aren't made happy by a large house, then no worries. But some people are, and if spending money that way makes them happy, then I'm not going to judge.

It is in no way inevitable that people will regret a large house. Possible? Sure, but you might also regret keeping your standard of living lower than you need.

Life is short. Do what makes you happy while managing your risk.

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cmoney2011
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Tue Jun 04, 2019 11:13 am

ResearchMed wrote:
Tue Jun 04, 2019 8:49 am
cmoney2011 wrote:
Tue Jun 04, 2019 8:42 am
Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.
Is this an option you would have, or is this binding?
Also, would it defin "beginning construction"?

And can I assume that $10k a very small percentage of the price? (But what if land value goes up, if the agreement is binding?)

As an aside, who is the seller, and why are they interested in doing this?

RM
It gives both seller and buyer the right to transfer property at the date agreed upon. Seller gets to take back the land to sell to someone who will build in a more timely manner (as seller is developing the whole subdivision and wishes to have a complete product, etc). Buyer gets to offload the land if something changes and no longer wants to build.


10k is roughly in the 2% range of the price of the land.

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cmoney2011
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Tue Jun 04, 2019 11:23 am

mountain-lion wrote:
Tue Jun 04, 2019 10:39 am
EnjoyIt wrote:
Fri May 31, 2019 3:24 pm
Just realize you are not the first person on this forum talking about buying or building an expensive house in a MCOL area. Many of us who have been around and experienced life have seen what you are about to do before. And although you don’t see it now, 10-15 years from now you will reflect on what everyone has said and realize how right everyone was.
Lots of people are very happy in their fairly big houses even with all the extra money and hassle a large house adds.

It isn't that unusual. I know a couple with two children at home that moved into a 2,000 square foot house in a VHCOL area from a 7,000 square foot house in a LCOL area. The new house is quite nice, but nothing like their old house, and the wife was sad, but dealt with it.

After about ten years, and the children leaving, they moved back to the LCOL area into a house even bigger than their original.

They are very happy there. They do have the money to afford it, and aren't taking any dumb risks by doing so. But still.

If you aren't made happy by a large house, then no worries. But some people are, and if spending money that way makes them happy, then I'm not going to judge.

It is in no way inevitable that people will regret a large house. Possible? Sure, but you might also regret keeping your standard of living lower than you need.

Life is short. Do what makes you happy while managing your risk.
Thanks- refreshing perspective probably shared by a silent majority.

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ResearchMed
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Re: Can I afford this 2.3 million dollar home?

Post by ResearchMed » Tue Jun 04, 2019 12:17 pm

cmoney2011 wrote:
Tue Jun 04, 2019 11:13 am
ResearchMed wrote:
Tue Jun 04, 2019 8:49 am
cmoney2011 wrote:
Tue Jun 04, 2019 8:42 am
Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.
Is this an option you would have, or is this binding?
Also, would it defin "beginning construction"?

And can I assume that $10k a very small percentage of the price? (But what if land value goes up, if the agreement is binding?)

As an aside, who is the seller, and why are they interested in doing this?

RM
It gives both seller and buyer the right to transfer property at the date agreed upon. Seller gets to take back the land to sell to someone who will build in a more timely manner (as seller is developing the whole subdivision and wishes to have a complete product, etc). Buyer gets to offload the land if something changes and no longer wants to build.


10k is roughly in the 2% range of the price of the land.
Okay, but do *both* need to agree, or can one of them force it on the other. That is, if you haven't started to build MUST you sell it back and the seller MUST buy it back?

If property is indeed scarce there, you might not want to sell at a haircut.

Just be clear about who gets to decide what.

It sounds like some of the "special" financial products where the downside is capped (nice, of course), but the upside might be capped "more". Why would the seller agree to this? Risking 2% in case it appreciates 10% or more, etc.?

Two years to break ground isn't all that long if you are just thinking about it and don't have the "ready to use" building plans (and also all permits, etc.). How is "construction has begun" defined?

I'm less concerned about this "cost" to you, given your situation. We have nothing like your income. We "risked" $10k on a new build, and IF we had needed to walk, we were fully prepared to, but we didn't want someone else to get the last of the properties that could still be customized; we built, closed, and it worked out fine :wink:

I'm a bit concerned if the land will be unavailable and you were just delayed... What then?

RM
This signature is a placebo. You are in the control group.

Topic Author
cmoney2011
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Tue Jun 04, 2019 12:52 pm

ResearchMed wrote:
Tue Jun 04, 2019 12:17 pm
cmoney2011 wrote:
Tue Jun 04, 2019 11:13 am
ResearchMed wrote:
Tue Jun 04, 2019 8:49 am
cmoney2011 wrote:
Tue Jun 04, 2019 8:42 am
Anyone ever hear of using a repurchase agreement to protect against loss in case of need to sell?

In this situation seller agreed to buy back land in 2 years if no construction has begun at a $10k discount from purchase price.

Of course there will be other losses including loan interest and property taxes (and closing costs), but this at least ensures than land can be sold if something changes between now and desired construction date.
Is this an option you would have, or is this binding?
Also, would it defin "beginning construction"?

And can I assume that $10k a very small percentage of the price? (But what if land value goes up, if the agreement is binding?)

As an aside, who is the seller, and why are they interested in doing this?

RM
It gives both seller and buyer the right to transfer property at the date agreed upon. Seller gets to take back the land to sell to someone who will build in a more timely manner (as seller is developing the whole subdivision and wishes to have a complete product, etc). Buyer gets to offload the land if something changes and no longer wants to build.


10k is roughly in the 2% range of the price of the land.
Okay, but do *both* need to agree, or can one of them force it on the other. That is, if you haven't started to build MUST you sell it back and the seller MUST buy it back?

If property is indeed scarce there, you might not want to sell at a haircut.

Just be clear about who gets to decide what.

It sounds like some of the "special" financial products where the downside is capped (nice, of course), but the upside might be capped "more". Why would the seller agree to this? Risking 2% in case it appreciates 10% or more, etc.?

Two years to break ground isn't all that long if you are just thinking about it and don't have the "ready to use" building plans (and also all permits, etc.). How is "construction has begun" defined?

I'm less concerned about this "cost" to you, given your situation. We have nothing like your income. We "risked" $10k on a new build, and IF we had needed to walk, we were fully prepared to, but we didn't want someone else to get the last of the properties that could still be customized; we built, closed, and it worked out fine :wink:

I'm a bit concerned if the land will be unavailable and you were just delayed... What then?

RM
I’m interested to hear details of your experience with this.. care to share more?

I think the language is a bit vague because it’s not a hard deadline. I get the impression from the builder that he just doesn’t want me to sell the property to someone else. He believes the value is good so he wants first right of refusal to buy the land back.

retire2022
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Re: Can I afford this 2.3 million dollar home?

Post by retire2022 » Tue Jun 04, 2019 5:09 pm

op

recent Richard Florida (author who coined creative class) article on people who are relocating less, which could be of interest: https://www.citylab.com/life/2019/05/mo ... ck/590521/

EnjoyIt
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Re: Can I afford this 2.3 million dollar home?

Post by EnjoyIt » Tue Jun 04, 2019 5:35 pm

mountain-lion wrote:
Tue Jun 04, 2019 10:39 am
EnjoyIt wrote:
Fri May 31, 2019 3:24 pm
Just realize you are not the first person on this forum talking about buying or building an expensive house in a MCOL area. Many of us who have been around and experienced life have seen what you are about to do before. And although you don’t see it now, 10-15 years from now you will reflect on what everyone has said and realize how right everyone was.
Lots of people are very happy in their fairly big houses even with all the extra money and hassle a large house adds.

It isn't that unusual. I know a couple with two children at home that moved into a 2,000 square foot house in a VHCOL area from a 7,000 square foot house in a LCOL area. The new house is quite nice, but nothing like their old house, and the wife was sad, but dealt with it.

After about ten years, and the children leaving, they moved back to the LCOL area into a house even bigger than their original.

They are very happy there. They do have the money to afford it, and aren't taking any dumb risks by doing so. But still.

If you aren't made happy by a large house, then no worries. But some people are, and if spending money that way makes them happy, then I'm not going to judge.

It is in no way inevitable that people will regret a large house. Possible? Sure, but you might also regret keeping your standard of living lower than you need.

Life is short. Do what makes you happy while managing your risk.
Indeed. If one can afford it, they should do what makes them happy. Everyone is different and desires are different. Most people have pre-conceived notions on what will make them happy. Some are correct, while others may be off. And then there is the value of purchased happiness. Paraphrasing the white coat investor, [As high income earner, one can buy whatever they want, but they can't buy everything they want.] There is a limit and choices have to be made. Someone may enjoy driving exotic cars, but to do so they have to cut back on vacations or nicer home furnishings. Would that person be happier not having the car, but having more travel and nicer things at home? Was the exotic car the wisest choice? Sure living in a big home with gorgeous fixtures, a game room, large theater, beautiful pool and yard is fantastic. Who would not want that? But is there a better use of the money that would provide even more happiness than those things?

How many people do you know that drive fancy cars while living paycheck to paycheck and always complaining about money? They love their cars, they think the cars are making them happy, but in reality they are nothing but trouble and that money should have been used else where. In this post, OP can afford said house with all the amenities. If OP is right about how happy this house will make them, then it will be a wonderful decision. If they are wrong and realize what a mistake it is, hopefully the mistake won't cost them too much. Even if it does, it will not be a life altering error.

Everything will change when moving from an average neighborhood to one of the most expensive in town. Expectations change, desires change, kids grow up a certain way. Everything is different

bluebolt
Posts: 894
Joined: Sat Jan 14, 2017 9:01 am

Re: Can I afford this 2.3 million dollar home?

Post by bluebolt » Tue Jun 04, 2019 6:44 pm

EnjoyIt wrote:
Tue Jun 04, 2019 5:35 pm
Everything will change when moving from an average neighborhood to one of the most expensive in town. Expectations change, desires change, kids grow up a certain way. Everything is different
I live in one of the most expensive neighborhoods of one of the most expensive cities in the country. However, many people here mow their own lawn, do their own gardening, shovel their own walks, etc. They all could afford six figure cars, but drive $30-$60K ones. Most of them send their kids to the (very good) public schools in town. They shop at Target & Trader Joes. Even though the average home price is about what OP is buying, it doesn't feel like a keeping-up-with-the-Joneses situation.

Obviously, YMMV, but it is nice when you live among folks who you feel all could be Bogleheads. I don't know how rare that is, but buying an expensive home doesn't necessarily mean you are living among folks who are status driven.

EnjoyIt
Posts: 2243
Joined: Sun Dec 29, 2013 8:06 pm

Re: Can I afford this 2.3 million dollar home?

Post by EnjoyIt » Tue Jun 04, 2019 6:48 pm

bluebolt wrote:
Tue Jun 04, 2019 6:44 pm
EnjoyIt wrote:
Tue Jun 04, 2019 5:35 pm
Everything will change when moving from an average neighborhood to one of the most expensive in town. Expectations change, desires change, kids grow up a certain way. Everything is different
I live in one of the most expensive neighborhoods of one of the most expensive cities in the country. However, many people here mow their own lawn, do their own gardening, shovel their own walks, etc. They all could afford six figure cars, but drive $30-$60K ones. Most of them send their kids to the (very good) public schools in town. They shop at Target & Trader Joes. Even though the average home price is about what OP is buying, it doesn't feel like a keeping-up-with-the-Joneses situation.

Obviously, YMMV, but it is nice when you live among folks who you feel all could be Bogleheads. I don't know how rare that is, but buying an expensive home doesn't necessarily mean you are living among folks who are status driven.
Nice example. Maybe it is because you are in a HCOL area and every home is expensive in the entire city. OP is moving to a MCOL and buying in a small area that very well maybe the most expensive in town. Sounds like you got lucky or I'm totally off.

ysette9
Posts: 80
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Location: Bay Area, CA

Re: Can I afford this 2.3 million dollar home?

Post by ysette9 » Tue Jun 04, 2019 7:09 pm

Interesting that you mention your kid is 13. If you buy land and wait for a couple of years to start the planning/permitting/building process, that puts the oldest kid at 15. Add on 2 years for the entire construction activity, and your oldest will have one year to live in the house before presumably going off to college. To me this would indicate that you should plan on designing the forever home as a retirement home, sans kids. I have family members who are two people living in a 3500 ft^2 house. They use about 1/3 of their house and the rest sits empty (okay, except for their stuff) until the cleaning ladies come to vacuum. How do you envision two people using 5000 ft^2? Do you have unique hobbies or other considerations that would use that space?

My coworker did something sort of similar. She had wanted to upgrade and expand their ugly 1960s ranch house for years and years but couldn't get her husband on board. When he finally did change his mind and decide he was ready, her two kids were in high school. So she acknowledged the silliness of doing this big remodel when they were only going to be a family of 4 living there for a bit longer, but in her case she viewed it as her one and only chance to get her husband on board with doing anything at all, so she embraced it. Others have touched on it, but just to reiterate, every person I've witnessed do a large remodel/build project has gone over budget and at least 50% over schedule. In two cases I saw friends whose general contractors walked off the job part way through, leaving them to step in to project manage. One project went a year over schedule. In both cases it was tough on them to balance that with kids and two careers, so just vet your construction people carefully.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

Topic Author
cmoney2011
Posts: 42
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Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Tue Jun 04, 2019 8:34 pm

ysette9 wrote:
Tue Jun 04, 2019 7:09 pm
Interesting that you mention your kid is 13. If you buy land and wait for a couple of years to start the planning/permitting/building process, that puts the oldest kid at 15. Add on 2 years for the entire construction activity, and your oldest will have one year to live in the house before presumably going off to college. To me this would indicate that you should plan on designing the forever home as a retirement home, sans kids. I have family members who are two people living in a 3500 ft^2 house. They use about 1/3 of their house and the rest sits empty (okay, except for their stuff) until the cleaning ladies come to vacuum. How do you envision two people using 5000 ft^2? Do you have unique hobbies or other considerations that would use that space?

My coworker did something sort of similar. She had wanted to upgrade and expand their ugly 1960s ranch house for years and years but couldn't get her husband on board. When he finally did change his mind and decide he was ready, her two kids were in high school. So she acknowledged the silliness of doing this big remodel when they were only going to be a family of 4 living there for a bit longer, but in her case she viewed it as her one and only chance to get her husband on board with doing anything at all, so she embraced it. Others have touched on it, but just to reiterate, every person I've witnessed do a large remodel/build project has gone over budget and at least 50% over schedule. In two cases I saw friends whose general contractors walked off the job part way through, leaving them to step in to project manage. One project went a year over schedule. In both cases it was tough on them to balance that with kids and two careers, so just vet your construction people carefully.
You’re either confused or I made a typo. Kid is not even close to 13.

ysette9
Posts: 80
Joined: Sat Jun 20, 2015 4:09 pm
Location: Bay Area, CA

Re: Can I afford this 2.3 million dollar home?

Post by ysette9 » Tue Jun 04, 2019 8:56 pm

Sorry. That must have been someone else’s post I read.

Carry on.
Let us go then, you and I, when the evening is spread out against the sky, like a patient etherized upon a table.

jes74
Posts: 2
Joined: Thu Mar 07, 2019 12:12 am

Re: Can I afford this 2.3 million dollar home?

Post by jes74 » Tue Jun 04, 2019 10:08 pm

Unlike most others, I would encourage you to buy your forever house now. You can easily afford it.

The biggest thing you don't mention is education. Private school almost everywhere is 50K/year. At current rates, that's a $1.6M mortgage per kid. Less with taxes/maintenance/etc. but you get my drift. I told my wife a decade ago that rather than pay for private school, I would move into a $1.5M-$2.0M house in the town of her choice for the free schools (in a place like Lexington, MA that buys an OK house on an OK lot). And save a bundle with two kids.

This is why I'm currently moving from a 350K house to a $1.0M house. Yes its a nice house. But its the two attached tickets to the school system I want.

Buying the lot may buy you time. With the inherent problems of construction you need time and a substantial cash reserve since you're going to be pretty tight. You probably need a 20% construction reserve and a 10% furnishing/finish reserve in addition to the 20% down payment. Is a compound possible? Build a fancy three car garage with 2BR/LR/Kitchen over it and live there for 2-3 years while the main house is being built? One of the richest guys I knew growing up (out in the country) lived in a 1BR apartment and then a mobile home for 2+ years while building a house of your magnitude. Depends on the timing you need for your family (when does school start :) -- are you happy in your current house? This would be much easier if you were buying a finished house due to your low cash reserves.

You also need to think about exit strategy. I'm moving to a very fancy neighborhood of a fancy suburb. My house is the small house on the street -- the houses on the water are $3-$4M. They are very difficult to sell right now -- super rich people want to live in the main city and send their kids to private schools or they want to build brand new for $5-6M. $2.3M invested around here means you will realize $1.8M after one year on the market. Be sure you can handle that mentally and financially. Even if you don't plan to move, doesn't mean you won't have a family crisis, your wife won't cheat on you, etc. Went to a nice tag sale a few weeks ago -- very custom house, beautiful finishes/pool/outdoor space, biggest in neighborhood but on only OK lot, $2.6M in. Sold after two years for $1.8M. Furnishings sold as a fire sale. 10-20c on the dollar. Divorce. $4M house down the street. Same thing.

But you're rich enough that you can follow your dream. You'll need to move fast if circumstances change. You may lose $1M in a crisis. That's why you work hard -- so you can chase your dreams. Losing $1M would be a setback, not a catastrophe for you. If this is truly forever, and your family is committed, go for it.

Topic Author
cmoney2011
Posts: 42
Joined: Thu Aug 20, 2015 9:10 pm

Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Wed Jun 05, 2019 1:07 pm

jes74 wrote:
Tue Jun 04, 2019 10:08 pm
Unlike most others, I would encourage you to buy your forever house now. You can easily afford it.

The biggest thing you don't mention is education. Private school almost everywhere is 50K/year. At current rates, that's a $1.6M mortgage per kid. Less with taxes/maintenance/etc. but you get my drift. I told my wife a decade ago that rather than pay for private school, I would move into a $1.5M-$2.0M house in the town of her choice for the free schools (in a place like Lexington, MA that buys an OK house on an OK lot). And save a bundle with two kids.

This is why I'm currently moving from a 350K house to a $1.0M house. Yes its a nice house. But its the two attached tickets to the school system I want.

Buying the lot may buy you time. With the inherent problems of construction you need time and a substantial cash reserve since you're going to be pretty tight. You probably need a 20% construction reserve and a 10% furnishing/finish reserve in addition to the 20% down payment. Is a compound possible? Build a fancy three car garage with 2BR/LR/Kitchen over it and live there for 2-3 years while the main house is being built? One of the richest guys I knew growing up (out in the country) lived in a 1BR apartment and then a mobile home for 2+ years while building a house of your magnitude. Depends on the timing you need for your family (when does school start :) -- are you happy in your current house? This would be much easier if you were buying a finished house due to your low cash reserves.

You also need to think about exit strategy. I'm moving to a very fancy neighborhood of a fancy suburb. My house is the small house on the street -- the houses on the water are $3-$4M. They are very difficult to sell right now -- super rich people want to live in the main city and send their kids to private schools or they want to build brand new for $5-6M. $2.3M invested around here means you will realize $1.8M after one year on the market. Be sure you can handle that mentally and financially. Even if you don't plan to move, doesn't mean you won't have a family crisis, your wife won't cheat on you, etc. Went to a nice tag sale a few weeks ago -- very custom house, beautiful finishes/pool/outdoor space, biggest in neighborhood but on only OK lot, $2.6M in. Sold after two years for $1.8M. Furnishings sold as a fire sale. 10-20c on the dollar. Divorce. $4M house down the street. Same thing.

But you're rich enough that you can follow your dream. You'll need to move fast if circumstances change. You may lose $1M in a crisis. That's why you work hard -- so you can chase your dreams. Losing $1M would be a setback, not a catastrophe for you. If this is truly forever, and your family is committed, go for it.
Thanks for your input. Interesting hearing stories from people facing similar decisions.

Broken Man 1999
Posts: 2931
Joined: Wed Apr 08, 2015 11:31 am

Re: Can I afford this 2.3 million dollar home?

Post by Broken Man 1999 » Wed Jun 05, 2019 4:34 pm

cmoney2011 wrote:
Fri May 31, 2019 2:24 pm
KlangFool wrote:
Fri May 31, 2019 1:25 pm
cmoney2011 wrote:
Fri May 31, 2019 1:13 pm

Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood than be the guy with the biggest house on the street. I’m interested in quality, not pretense
cmoney2011,

<<I’m interested in quality, not pretense>>

This does not apply to someone buying a 2.3 million 5,000 square feet house.

<< Would much rather have a gorgeous house that is slightly smaller and less expensive than most houses in the neighborhood >>

I would rather have a bigger and more expensive gorgeous house in a cheaper neighborhood. You could spend less and get a bigger house in a cheaper neighborhood. But, you choose this neighborhood. So, this is a status thing. But, how would you feel when you actually live in this neighborhood where almost everyone else has a bigger and better house than you. And, you cannot avoid your neighbors except by moving out.

Will you really be happy in this neighborhood? Have you ever live in this kind of neighborhood?

KlangFool
I don’t frequent this forum, but I get the impression you’re a bit of a troll.

Plenty of reasonable people like expensive things for reasons other than wanting to impress other people. As discussed above, this is a new build. There aren’t many new developments in my city with lots of the size and quality I’m interested in.

Finally, for a number of reasons, I’d rather not be the guy with the giant house living among the plebs.

Can we get back to the original discussion?
KlangFool is not a troll, but he comes from a mindset that reflects his culture, and also has suffered from multiple unemployment stretches. I have never been unemployed, but had I been unemployed during my career, I would believe I would certainly have been less aggressive in my spending for housing. At one time I had multiple children in college, so I get totally what KlangFool does. Everyone's experiences colors their perceptions of what is OK for them.

Your ratio of income to housing isn't out of line at all. You are certainly capable of this housing.

Buy your home, you will be fine.

I also like nice things. Our home was nicer than most of my children's friend's homes. All except for her friend whose father was my neurologist. His house was beautiful. No way I could have afforded it. Her friend followed in her father's footsteps. I would guess she lives in a pretty nice home as well.


Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven than I shall not go. " -Mark Twain

Topic Author
cmoney2011
Posts: 42
Joined: Thu Aug 20, 2015 9:10 pm

Re: Can I afford this 2.3 million dollar home?

Post by cmoney2011 » Thu Jun 06, 2019 12:14 pm

Misenplace wrote:
Fri May 31, 2019 2:53 pm
cmoney2011 wrote:
Fri May 31, 2019 9:14 am
New wrinkle.

Let's say we can buy the land and delay construction for 2.5 years.

Let's say the interest rate on the land loan is 5.5% and we pay off the entire balance in 24 months.

Let's say at the end of 2.5 years we have 1 mil saved to put down (including value of land, current home equity and cash).

We'll have paid about 55k in interest for the land loan over 2 years, but will have acquired 1 million in equity for the property.


Any takers?
OP, if this is a truly custom build (architect, designed for lot, custom builder not tract developer), you can expect your final build price to be anywhere from 25-50% higher than the original cost estimates when you sign the contract. Ask me how I know.
Also, don't forget landscaping- add on another 10-15%.
This post by you^^^ might be a good idea. You can take time to think over your plans, and perhaps build when things are less busy. The construction business is cyclical, and it is easier to get good tradesmen during a slow down.
I understand going over budget is common, but 50%? That's insane.

bltn
Posts: 472
Joined: Mon Feb 20, 2017 9:32 pm

Re: Can I afford this 2.3 million dollar home?

Post by bltn » Thu Jun 06, 2019 9:49 pm

The only house we ever built was our current vacation home at the beach. I had an opportunity to get a desirable lot at a good price in an area where comparable lots were becoming more scarce. I bought the lot as an investment/potential home site. Two years later, in a hot market, our realtor came to us with an offer for about five times what what we paid for the lot. That was my price! But my wife talked me into building on the lot anyway! So our beach house had an opportunity cost as well as a real cost. We re now both glad we have the house, ten years later, despite some hefty maintenance costs.

Get the lot. Then you have the option to make the final home decision in the future.

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