Buy the least expensive house in the most expensive neighbourhood

neighbourhood house for saleBE PICKY WHEN HOUSE SHOPPING

 

Typically we like to buy quality when we shop which included shopping for our home. This is why we scoured every available neighbourhood around our city for the best deal.

The only thing we don’t like is paying full-price which meant we had our work cut out for us. Thankfully, it worked out in our favour.

When buying a house you want to make sure that if you are buying a $400,000 house that the neighbourhood matches the price tag or you might struggle to sell as fast as you’d like down the road.

This is why we hear over and over not to over-renovate but then again a smaller house in a bigger neighbourhood might have more luck finding a buyer than a house that costs far more than smaller surrounding homes.

Today I have an email from a guy who is a first-time home-buyer with his wife and wants to know if they should spend the money and get the biggest house they can or a smaller house but in a more expensive area.

Note: If you have a question for me please send me a detailed email similar to below so I can base my response on as much information as possible. Thanks.

Dear Mr.CBB

My wife and I just turned 30, no kids with have 2 small car loans and about $5000 in other debt to pay back. We both work in our field of study and gross about $115,000 a year between the two of us where we both typically receive a yearly bonus or salary increase.

We both invest in our retirement along with the Tax Free Savings Accounts. As well, we both have pension plans with our employer with mine being a defined benefits plan.

What was interesting about finding your blog was that you post your monthly budget and are now mortgage free. Although this is not so common it’s nice to read about success stories from everyday people who simply live a frugal lifestyle and invest their money in the right places.

My wife and I would like to follow in your footsteps working towards debt freedom. We’ve followed closely reading all of your blog posts and I must say it’s not really anything out of the ordinary. It’s mainly common sense earning, spending and saving.

My wife and I both use a budget but not just any budget we use your free budget. I thought you might be happy to hear that and it works great for the two of us. We’ve customized it and it’s simple to use.

What we want to know is:

Should we buy a house with a smaller price tag in a sought after neighbourhood over buying a slightly less expensive house in an average part of town?

The odd neighbourhood in our city is tough and has some violence and break-ins but this could happen just about anywhere. We also want to live somewhere that homeowners take pride in their homes which helps keep the resale value up.

We have looked at neighbourhood after neighbourhood and have narrowed it down to three and one of them has very expensive homes but there are a few that would fit our price range. Not the price range the mortgage broker gave us but our budgeted price range.

We could easily afford the larger homes but are still not sure if we are making the wrong decision buying smaller and not stretching ourselves thin financially. We could do it without issue but realize that anything could happen and want to go in with our eyes open.

We actually went and knocked on a few doors to see if anyone was selling and one couple said yes they were going to downsize this summer and to keep a look-out. We loved the house and they even gave us a quick tour which we didn’t ask for, they offered. I guess if they have prospective buyers at the door and the house is neat and tidy, why miss that opportunity?

My wife and I talked about it and have been approved for a large mortgage which we don’t want to spend in full. We don’t want to struggle financially like so many people are these days after purchasing a home and still want to raise a family.

We have the down-payment ready but are also wondering if we should simply buy a bigger home the first time and just live in it until we retire and raise our family rather than selling to upgrade down the road?

The good thing about their house is that it is a bungalow which is great for resale I’ve heard plus the houses are very big in the neighbourhood. Their home is a smaller home but not tiny. It’s around 2500 sq feet which is nothing compared to the 4000sq ft + houses in the area but it’s more than enough space for a family.

I was told by friends that we should just buy the biggest house we could afford in a nice neighbourhood but I’m not sure if that would benefit us now. Home buying can be very confusing but we know we only have limited time to figure it out before their house goes on the market.

  • How did you and Mrs. CBB figure out how big of a house you needed and what neighbourhood to buy in?
  • Is it worth buying the bigger house or the smaller house in the bigger house neighbourhood?

Thanks,

CBB Reader

Hey,

Thanks for sending me your question today. Keep in mind I’m not a real estate agent just a normal guy who has bought and sold a few houses over the years with 1 being in Canada.

I’ll share with you a bit about our home buying story but ultimately I would suggest contacting a professional that can work with you one on one. There are many aspects of home buying that you want to discuss with your wife especially what might happen if one of you gets ill and needs to take time off from work. Also, think about whether you could survive financially on maternity leave benefits or one income in the event of job loss.

Buying a big house may be great but that doesn’t always mean it’s the best option.

We also didn’t want to buy a massive house that came with a big mortgage but living in the same area with pricey homes didn’t bother us one bit. In most neighbourhoods that have million dollar homes it would be a struggle to find a house our size hidden up the road.

 

 Get ready to show proof you are ready to buy

 

When buying a family home you must leverage lots of money and if you don’t at least have 20% as a down-payment saved you may scramble to find ways to find that money so you aren’t paying Canada Mortgage and Housing Corporation fees (CMHC fees). The good thing is that it sounds to me that you both have the down-payment and have looked into CHMC fees.

Housing costs including maintenance are expensive, that’s not a secret and don’t get me started on the cost of water and hydro and other utility bills. Our last hydro/water bill for 2 months was just under $600 CDN and we don’t have a big house. It’s not always the first time home-buyers that find themselves house poor either.

Before you go to the bank or mortgage broker to get your first mortgage you will need to do a few things which may differ depending on where you go.

For the most part you will need

  • Obtain proof that you are employed full-time
  • Proof you have the funds for a down-payment
  • Make sure your credit rating is in good standing

That’s scary stuff to some people especially first-time home-buyers who may have recently graduated or those who have lots of debt in their name. Personally, if I had lots of debt I’d rent and work on paying that off first before jumping into the housing market. How much is lots? Well, that’s for you to decide.

Everyone buys a house for their own personal reasons BUT for those of you who think that buying big is the way to go at least make sure you have a plan B in place just in case something were to happen. Only 2 months after we bought our marital home my wife was laid off. We never dreamed that would happen but we were very happy we purchased the smaller house where we easily could have budgeted for a larger one.

You will always have more to lose in my opinion if you have to sell a bigger home especially if the interest rates go up. When buying a more expensive home you are also paying a premium for the extra space over the life of the mortgage so be aware of this.

Over at Free Money Wisdom the example Kevin who blogs at Out Of Your Rut share with figures really puts the monetary aspect of owning the more expensive home into perspective.

Let’s say you have a choice in buying Property A that needs some tender loving care for $200,000, and Property B that’s in mint condition and selling at $225,000. You plan to put 20% down in either case, and take a 30 year mortgage for the balance. The down payment on Property A will be $40,000, while on Property B it will be $45,000.

He goes on to detail how over the life of the mortgage the difference of just $107 a month between both mortgages will be a staggering $38,520 over the life of the loan. Most people don’t run the numbers as Kevin has here which is imperative. You must know exactly what you are signing up for and whether it is worth for you.

So here’s where we’re at: you’ll pay an extra $5,000 on the down payment for Property B, plus an extra $38,520 in mortgage payments, for a total of $43,520!

The other is that if you are young and have no kids or one or two kids you don’t really need a McMansion unless of course money is no object. We know a couple who lives in a million dollar home and can hardly maintain it. They are selling just about anything they can in the house to make extra money to get by.

When Mrs. CBB and I bought our house it literally took us forever to go through the process. It started with the wife and I going over our finances a few times to make sure we knew the numbers we were working with were accurate.

 

The right neighbourhood holds value

 

After obtaining the mortgage go-ahead from the bank we now had a mortgage number to play with while shopping for our first home together. I can tell you that the number the bank offered us is not even close to what we spent buying our home.

We weren’t surprised to hear how much they would give us with our more than 20% down-payment, no debts and no kids to pay for. The reality is we knew one day we wanted to have at least one child which happened just last year. Our budget has been affected and it’s only bound to get more expensive although we are still the frugal couple we’ve always been. We spend money where it needs to be spent and save where we can.

Did this call for a massive home? Not really. We were more concerned with where in the city we were purchasing the home. We already knew some areas that were cut from the list right from the start and others we would compromise on.

There were a few that were hot neighbourhoods and if we could get in we knew we would likely have no issues selling our home in the future. You know, the “Sought-after area” always is a hot market.

 

Start house hunting armed with information

 

Equipped with one of the best real estate agents we could find and trust (that means someone who gives 110%) we set off on our house buying journey. We looked at houses that were in the $700k range right down to the cheapest houses we could find in an older part of town. It was nice to gain perspective and to see what houses had to offer for their price-tag.

My wife and I both love older homes with wrap around porches but that meant moving to a part of town that was too far from my work. Part of the compromise was not only size and cost of the home but distance to work and schools in the area.

We weren’t so much concerned about stores and shopping in the neighbourhood because that only meant more traffic. We wanted a nice neighbourhood that was good to raise a family where we didn’t have to worry about our house and vehicle being broken into every night.

My wife once lived in an area of the city when she first moved here and had her vehicle broken into many times. She rented from an apartment building and it got to the point where she left a note on the window saying, “Please don’t smash the window, the door is unlocked” to ward off vandals.

When she bought a house in the up and coming new area of the city that is close to the highway it was nice at first but her new house had so many issues she decided to sell rather than argue with the builder.

Some builders these days slop houses up so fast and good luck trying to get the builder back in without a fight even with a home owners warranty. Read that fine print! It’s all about the money and the cheapest fittings possible.

Houses in that area today are well over double what she originally paid back in 2005. They are still building and it has more than tripled in size and has many shopping centers surrounding it.

The other area we were considering also was new builds but too far of a drive for me to work. There were no schools and involved driving into the city for shopping. Although that wasn’t a deal breaker, it was just a bit too far out from work and increased the travel time by more than double just because of city traffic.

Finally, we found a house in a neighbourhood which has a lovely newer elementary school, a small plaza with a few shops and about 10 streets. Most of the houses looked well out of our price range as they are huge.

When we drove around with our realtor we asked her why she brought us to this area since we weren’t interested in going overboard with the mortgage. She assured us that among all the million dollar homes there was a street that had affordable family homes.

We were intrigued and sure enough there was this magical street that we had never heard of. There was one house for sale for which we booked a viewing and fell in love with right away.

The only problem was the original owner was a smoker so the house smelled of smoke and the walls were yellow. It’s pretty disgusting what smoking inside a home can do to the walls and fittings.

The houses in the area were anywhere from 15-25 years old at the time we bought so not that old but not brand new. The good thing about buying a home that is established is that someone else hopefully sorted out any issues that may have come up over the years.

Our home is a custom-built home as are almost all the houses in our area which means they weren’t slapped up in a jiffy. We actually have space between the houses and a decent sized back garden.

Depending on where you buy in the Greater Toronto Area (GTA) you will find bigger lots with smaller houses or bigger houses with smaller lots. If you want both the big house and the big lot be prepared to pay the big bucks that comes along with it. Get your wallet out if you want into the heart of Toronto but the GTA is huge and offers plenty of cities for first-time home-buyers to break into.

So, we literally bought the house that same evening after a money bashing session back and forth. We had money deducted for the smoking and of course upon inspection. The inspector looking back was a huge waste of money since there were so many things he missed even though he came highly recommended.

To be honest I walked around with him and what he looked at I could easily have done myself or called in a tradesman which I plan on doing the next house we buy. I’m not suggesting you don’t get a home inspector, I’m just saying I’ll pass the next time around.

I did my due diligence to the best of my ability as a first-time home buyer in Canada but next time I’ll take over and get the right people in. Live and learn I guess.

Nestled among all of the pricey homes in our tiny neighbourhood we bought our lovely family home for $265,000 which is virtually unheard of today. A similar home built by the same builder on our street a few months later sold for over $300,000 and the following year another over $400,000.

The couple who bought the $400,000 home has since sunk at least another $100,000 into the home doing renovations over the years. They know that they are in a great area and that homes never last more than a week or two on the market.

Some would say they would never re-coup the money they put into their home but our agent said they will. The housing market is hot right now but even so where we live is the most desired neighbourhood in the city. Many of our neighbours are the original owners and they have said of the houses they have seen up for sale they go fast.

If we went to sell our house today in the state it is in (partly renovated, unfinished basement) we could sell it for well over $400,000. That’s over $150,000 more than when we bought it only 7 years ago. Our discounted price was for smoking in the house, burn marks in the carpets, needed a roof and a few other things that just weren’t maintained. We also bought our house in the height of the economic collapse in 2008-09 when many properties that were listed suddenly became cheaper.

Remember, house prices will never continue to rise at the rate they did the past few years. Eventually the housing market corrects itself and the rise in house prices will return to a more modest rate. Don’t assume your going to make a fortune on real estate.

We also haven’t sunk that much money into renovations yet either and when we do finish them up we can expect and even bigger return if we sell. The major cleanup of the walls, painting and changing of every outlet and light fitting wasn’t that bad budget wise for us. Compare that with what we would have paid for the house had there been no smoking inside we can’t complain.

We continue to monitor the houses that are listed for sale in our neighbourhood and watch the market to see what’s hot and what’s not.

What we are glad about is that we didn’t spend more than we needed to which enabled us to pay our mortgage in full by 5 years and become debt free before our son was born.

Now our son gets to enjoy debt free living as much as we do and he gets his own room, bathroom and eventually a finished basement with other areas he can utilize not to mention a decent backyard. As he gets older he can go play all sorts of sports up at the school with his friends.

Sure we could have bought a bigger home but since we wouldn’t utilize the space it made no sense to spend money on heating a bigger home, paying more taxes and more cleaning and maintenance. Time is money.

In the event that we want to sell in the future, house prices are relative so what we sell this house for we will end up sinking into another house. That house may be a bit bigger but with a comparable difference in price.

Since we bought a mid-range size home and paid it off quickly we now hope to save more money so we can be cash buyers for a move into a bigger home, possibly with a pool. If not, this house is more than enough for us for the time being and we can enjoy drinks in the kiddie pool and make family memories.

What helps us sleep better is knowing that we are in a good neighbourhood and that buying a smaller house in an area surrounded by elite homes almost guarantees us that our house will sell.

In the end, you will have the last say as to whether you purchase a 900 sq ft bungalow or a 9,000 sq ft mansion. How your finances are handled is up to you.

You have already read my personal thoughts and feelings on the matter, but you don’t have to take my word as gospel. After all, you are your own boss in this world, you have to live with the decisions you make.

P.S Thanks for using our budget and the rave review, I appreciate that.

Did you check out the neighbourhood when you bought your house? Would you buy a smaller house among bigger homes even if you could afford the bigger homes?

 

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Photo Credit: FreeDigitalPhotos.net/Khunaspix

Mr. CBB
Mr. CBB was born and raised in the United Kingdom who then moved to Canada where he is a permanent resident. He recently became a father to a very busy toddler who allows him to be a kid at heart. He bought his first house at the age of 21 after University and his second at the age of 24. Both Mr.CBB and his wife are Debt and Mortgage Free and they did it all in under 5 years using a Budget. Canadian Budget Binder is a place where he shares their financial experiences with his readers and hopes to learn about theirs. Welcome to CBB!
Mr. CBB
Mr. CBB

Comments

  1. I believe RE in Canada is getting bloated but I’m definitely glad we own our home outright. I would love to live in Toronto where my wife is from but it’s now way overpriced. RE is local, find a place you want to stay and buy. I truly believe the days of flipping houses to make a lot of capital gain are over. Great post, thank you!

  2. Christine Weadick says:

    Lots of good advice here. We got this house on a low ball price as it was a foreclosure and the bank was losing money on it every day it sat on the market. It was also in need of work…a lot of it. It still needs a lot of work even after 23 years but that is what can happen when you buy a house that is over 100 years old.
    If you find a deal on the handyman specials I hope you are capable of doing a lot of the needed work yourself. Personally I would be fine with a newer house that didn’t need as much work. My niece and her fiancé just bought an older house that hasn’t had much done to it in a long time. They have painted the whole house and are putting in new floors throughout. They knew the right people to call to get things done on the sale as she is a law clerk and does a lot of real estate work. That was a big help to them as he didn’t know this stuff.
    There are books to be had on buying a house, ask at your local library, that would be a help to this couple. The two I remember looking over were Canadian so the information would be good… Good luck with buying your first house, sounds like you will do well.

  3. This is excellent advice! I’m constantly reminded of it when I watch DIY renovation shows on Netflix. I’m surprised at how many people don’t know this already. Great article and great advice!

  4. When we bought our house we first looked at school districts. This is in the US, but possibly it’s similar in Canada. We chose the best school district we could afford. Then we looked to buy the cheapest house in one of the best neighborhoods of that district. Our house was not luxurious, but it met our needs. We have 4 bedrooms that were well used by our family of 6. The house has super insulation that has saved us so much money in heating and cooling bills over the years. Most importtantly to us, our kids got a very good education in the public schools. They all got college scholarships which helped our budget as well. All 4 of our kids have professional careers and 2 of them have advanced degrees. Our goal was to help them be able to support themselves and their families. Living in a good school district was an important part of making that happen.

  5. as frugal expert I would always recommend buying smaller and cheaper house in good neighborhood,
    Why?
    – because it lot of cases can be sold for more money,
    – because with small investment of 30K you can raise value of home for 100k
    – because big house brings bigger costs and bigger taxes

    • Thankfully we did especially with the hydro price hikes. Our neighbours with the big houses are complaining now that their hydro bill will be like a mortgage payment. It’s getting crazy out there.

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