Ask The Readers: Is This Affordable Housing Opportunity A Good Deal?

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Despite the drop in housing prices in many areas, I have still been noticing an increase in “affordable” housing projects that are meant for people earning around the median income level – not only low-income households. Even back in 2005, for many areas the median house cost between 6 and 12 times the median annual income. A cousin of mine had to line up and enter a lottery simply for the chance at buying an affordable housing development, but didn’t “win”. I saw a model unit of the condos, and they were very nice.

However, the obvious catch is that because you are buying well below market price, you can’t just turn around and sell it at market price. A reader AM recently e-mailed me some details about an opportunity in his area below. (I have edited it minimally for spelling and brevity.)

I am asking for your view on one of my biggest financial purchase – the home. It’s a newly built home in a great community, offered under affordable housing scheme of the county & city, so there are restrictions about selling the house and the price of resale. As buying a house is an investment also so I wanted to be double sure that is it a good ides to buy such a house. The covenant for resale says:

The “Resale Value” shall be derived from the Base Price of the property. The “Base Price” is the original price paid by the buyers now intending to sell the property. The Resale Value shall be equal to the Base Price plus an amount equal to 1.125% per calendar quarter for each year from the date of the original sale to Buyers to the date of the agreement for the resale from the buyer to a new purchaser, compounded quarterly.

Does this seems a reasonable enough return. Price of house under this scheme will be around $350,000 but similar new houses in the same community costs around $550,000. Obviously as per the covenant when I offer the house for sale at a later time first right of purchase is of County’s if county declines or doesn’t responds in 30 days it can be offered in market but only buyers with income restrictions can buy it (which will be lifted if it remains unsold for 3 months) but the new buyer will have to abide by resale value set by county. The term of covenant is 15 years, I can sell it at market price after 15 years but i can keep only the price as described above in the resale price, rest will go to county.

Does this sounds like a reasonable option both from getting a house and investment perspective? Reason I am interested in this is because I can not buy a normal house now for another couple of years and from next year I will be above the qualified income limit.

This must be near an urban area, if “affordable” housing is $350,000! This development also seems to be separate single family houses instead of the condos I am more familiar with. On the surface, the agreement seems to guarantee a yearly return of 5%, assuming the property is indeed priced at such a steep discount. A year or two ago, 5% might have been scoffed at – but now, I’m sure lots of people wish their house would appreciate 5% each and every year.

But is this a good deal, all things considered? Some thoughts:

  • How’s financing? If you are getting a mortgage with 6% interest on something that will appreciate 5% per year for the first 15 years, is that good? Don’t forget the upfront costs to a mortgage like closing costs.
  • How much to rent a similar place? I asked, and the reply was $2000-$2200 per month. Even with no money down, this would make the mortgage payment about the same as rent. (Assuming 30-year fixed-rate mortgage at current averages of ~6.1%.)
  • Do you plan on staying? Is this house really what you want, or are you changing your desires (either making them bigger or smaller) to fit into this opportunity. If so, you might not need to worry about what happens in 15 years or so.

I’m sure I’m overlooking some things. Please, ask more questions about details of the offer and/or add in your own opinions in the comments below.

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  1. Siggyboss says

    There is no such thing as buying “below market price.” – a marketing gimmick. Any voluntary price is the market price. The home is worth the going rate for that area and comparables; nobody cares how much you or someone else paid for it. If you think it’s affordable and you like it then buy it. I’d also consider speaking with an attorney about the restriction on the re-selling the house for a certain price – might be an unenforceable restriction on alienability of property.

  2. LargeTalons says

    This seems like a prime example of the government meddling in the housing market. Its this kind of manipulation that causes the crazy fluctuations in the housing market. I would personally stay away from a deal like this. The objective here for the government is to provide affordable housing, not provide an investment opportunity. Unless you really do plan on living there for 15 years, this sends up all kinds of red flags for me. What are the limitations of renting the property if you need to move? Is there a re-capture tax if you break the income limit before you sell? Maybe I’m just paranoid, but I’d avoid this type of government shenanigans like the plague.

  3. With the rent being almost the same as a mortgage payment, I would rent for the couple of years it would take you to be in a position to buy your own house without all the restrictions.

    If you rent, you leave all the liability to the owner(not YOU). And your costs are the same.

    If you are wanting to make an investment, there are other places you can make 5% or more. Hell, you can make almost that amount in a savings account. Save your money for when you can buy a property that can make you as much as it’s potential truly is.

  4. Let us not forget the CPI is increasing at over 4% per year, and that is NOT counting food and energy costs. So almost all of his home ‘appreciation’ will be eaten up by simple inflation. I don’t believe that a home is an investment, and the period that it was considered so was just a fad. Unless he feels the need to hurry up and buy I see no reason for him to jump into this creative home pricing scenario. I don’t think anyone believes that the housing market will improve in 2008 so why pull the trigger on a house now?

  5. Hmm. Bad reviews so far, but I like it. The amount you’ll save on mortgage payments $200,000 less than similar homes will make up for some of the lower resale value, assuming prices do go up in your area. If prices go down, you’re still safe. Similar houses could drop to $400,000 and you’d still make your profit. Figure out first if you want to buy at all. I wouldn’t buy just because of the program, but if you know you want to buy, this might be the program for you.

  6. dan isaacs says

    I think the point is to make sure that the housing remains affordable. Int his case, with home values looking to remain pretty stable, you could at least cover your Realtor fees in 2 years. Heck, I live in an area pretty unaffected by the greater housing crisis, and in 3 years, I saw a %10 increase in my home value. That’s not too far off of what would be permitted under this agreement. And if that means you’d still be 100K under “market”, you’d be assured a quick sale.

    As I see it, the city/county is subsidizing your acquisition costs, and if they want to insure their subsidy lasts more than 1 owner, more power to them. As for this being “meddling”, you can choose not to participate. I fail to see how capping the increase in sale price to a reasonable growth rate on top of giving you a low price to begin with can reasonably be construed as contributing to wild market fluctuations. By all means, explain that claim if you wish.

    I’d stay away, but then, I’m not low-income. My priorities may be different if I were.

  7. It’s a shame that they offer you something that looks really desirable, and then weigh it down with those uncomfortable restrictions. I like the idea of a lottery to get into these units, and I can understand a certain period of time to hold the property (I’d say 5 years should be enough). Of course, you don’t want people getting affordable housing and then re-selling it just to make a profit. But that whole 1.125% annoyance would haunt me. Even though after 9 years, it would be selling at today’s market value and would quickly catch up to future market value. So that 15 year thing is just bull anyway, the price would already (most likely) be at market value by then. And anything you make over this market value (would be 727,624), you would give to the county? That’s a little weird, probably not a problem really, but it just makes the whole transaction uncomfortable. And then you have to worry if your buyer is gonna like this clause, which they probably won’t. Who knows, though, because this sounds so annoying, it will probably turn out to be a good investment.

  8. ThePessimist says

    You should think of your home as a place to live, not as an investment. Consider that, if you sell through a normal realtor, you’ll pay a 6% commission. That means you’d have to live there for 15 months just to break even.

    If it’s a place you would buy anyway, and you plan to live there for years, then it probably makes sense. Your mortgage would be $200K smaller than buying a similar place at market price. At 6%, that’s $12,000 a year you wouldn’t be paying in interest. That means you’re getting 3.4% of the purchase price a year in reduced mortgage interest, which makes up for some potential missed appreciation.

    But ANY real estate purchase will wind up being a bad deal if you don’t stay in the home for very long…

  9. Via e-mail from another reader:

    Can you convert it into a rental property if you decide you want to move somewhere else? With a low mortgage in a nice area, you could get decent rent and keep the home for investment purposes, but if you HAVE to live there or sell, that limits your flexibility… Just something to keep in mind, I guess. Comes to mind because we – due to job situations – decided to rent our house out to move closer to work. If we had to sell (during this down market), we would have taken a big loss.

    That brings up another question, if the markt is down, do you still get the deal of 1.125% increase on value / sale amount per calendar year? (Assuming market isn’t down even lower than whatever that total would be, in which case it doesn’t matter, as you can only get what you can get from a buyer.)

    Do you have to sell it back to the city/county? Or can you sell it to a buyer, under same city/county guidelines?

    As you can see, the possible limitations on flexibility would be my biggest concerns with a program like this. While the price is obviously great, you never know where life will bring you, and flexibility can be so important. It is no good – in my claustrophobic opinion – to end up “stuck” somewhere in life, when you have better opportunities elsewhere…

  10. Independent George says

    I think the most important factor in evaluating price is the market rent on a comparable property. This is a natural floor to housing prices (with the caveat that market rents can decrease just as easily as sale prices), so any price on the same level should be considered a good bargain.

  11. To answer some of the questions asked above(Jonathan posted this on my request):
    1. Renting of place is not allowed as it needs to be primary place of residance.
    2. first right of purchase is of County’s if county declines or doesn’t responds in 30 days it can be offered in market but only buyers with income restrictions can buy it (which will be lifted if it remains unsold for 3 months)

    yes, its a place which i would consider buying anyways( if I could get something reasonable) as its close to my office and i am sure i am going to live there for some years (not sure about 15 years though).

  12. I wouldn’t do it unless I needed the discount. It comes with too many restrictions that could potentially bite you in the rear end if you need to sell before the 15-year mark.

  13. Joshua Katt says

    Stay away.

    You don’t know who your neighbors will be and with these types of restrictions they aren’t going to be the cream of the crop anyway.

    Despite the convent about not renting, there will be tons of illegal rentals and turnovers when the original owners wise up, want to move and now see what they are locked into. The government isn’t going to have the time or resources to enforce any of this so the neighborhood will spiral downhill from here.

    Case in point, about 15 years ago on LI, NY I signed up for a similar quasi gov’t lottery for some 30 lower income new houses. I drew something like 200 on the waiting list. Much to my surprise 2+ years later I got a phone call saying we were now eligible for a house as everyone was turning them down. I did too when I saw a 5 year (only!) restriction on selling it plus the commuter RR running through the development.

  14. I own a below market unit in a very nice condo building. There are about 12 of 150 units that are in the program. The resale value is tied to increase (or decreases) in median income as a percentage.

    As an investment: do not buy.

    As a home: you can own a much nicer home for a fraction of the price. You certainly can get a great value.

    Don’t forget: you can write of interest expenses and closing costs for tax refunds.

  15. If cost to rent = mortgage, then your decision to purchase is ruled by your desire to own a home.

    Buying a home generally involves increased risk, and in this case, your tradeoff for that risk is a small amount of equity over the next few years. Between inevitable repairs and taxes and lack of mobility a purchase like this only makes sense if you feel these limitations are adequate risks for home ownership.

    I just don’t want to hear any of these people complain that they “can’t move” or that “they’re stuck paying more mortgage than the house is worth”.

  16. With the whole economy crashing and burning it’s getting pretty scary out there. Run on banks? What is this, 1929 all over again?

  17. What about the savings that could be had on locking in this monthly payment. Not only do you end up with the house you want at a lower monthly cost, but when the rents go up year after year, your cost stays the same.

    I looked at something similar for myself and ended up not doing it for 2 reasons. 1. The location/condo wasn’t a perfect match for us. 2. I didn’t plan to live there long term.

    If this truly could be right for you and your family then perhaps it’s a great deal. I think forward to your retirement or to your next home purchase. When everyone else has lots of home equity, the hope is that you’ve saved that extra cash and have a similar non-equity related nest-egg.

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