The newlyweds thought buying a condo in 2010 made sense. If they'd come to me earlier, I would have explained why renting was smarter.
1. Condos Are Especially Risky
One of the units in the couple's building is now in a short sale, with a price below what Maria and Victor paid. Whatever that unit sells for can become the new "value" for every other comparable unit in the building. Moreover, if one unit goes into foreclosure or a lengthy short-sale process, other owners often wind up shouldering a larger share of common charges.
2. Prices Can Always Dip Lower
Victor mentioned that they bought their unit for well below what it sold for a few years ago. That's irrelevant; all that matters is its current value. They paid $311,000 for their condo last year. Another unit recently failed to sell at $280,000. Suddenly, the great deal they got doesn't seem so great. That doesn't mean I'm against buying today, but I'd bid at least 20 percent below today's fair market value to provide some cushion if prices fall.
3. A Profit May Take Many Years
In a normal market, homes should appreciate at about 4 percent a year—but these aren't normal times. And when Maria and Victor eventually sell, they'll likely spend 10 percent of the sale price on the agent's commission and other expenses. That means they need at least 10 percent appreciation to break even, and we can't assume that will happen in the next five years. The good news is, the couple love their condo, so they were open to my suggestion to stay put until a move makes financial sense.
*Names have been changed.
Suze Orman's most recent book is The Money Class: Learn to Create Your New American Dream (Spiegel & Grau). To ask Suze a question, go to oprah.com/omagazine_talk.
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