Wednesday, September 14, 2005

Condo decision

My dream home is a Frank Lloyd Wright house in the middle of a lush green forest. I can just see it in my mind. Everything from the clean sharp lines to the spiral staircases to the leaded glass windows and the dark shellacked floors and the forest outside... But until I find a suitable location to do justice to Wright's genius, and the ghost of my favorite dead architect to come build it for me, I have to content myself with cute little cubbyholes in space that offer unimpeded views of the majestic Mount Rainier. Come to think of it, it's not such a bad deal. Mount Rainier is just as beautiful as any work of architecture, past or present, and the view, generally, is free.

Yes, I went for the condo. Several factors, mostly financial, decided me, but no less important was the fact that once finished it will be a) the tallest building (tallest residential building for the fact-checkers) in Seattle and b) have the most stunning view of the mountains from the roof garden. I know that doesn't exactly sound like the most strategic decision ever made but don't worry, that was only the cherry on top of the icing. My decision was cool and calculated and financially motivated. That said, if there wasn't even a small personal incentive for me, something to make me catch my breath and feel a quickening of the pulse, would I have gone for it? Probably not. Why? Because I know myself. I need life to be exciting.

But, this isn't about my many shortcomings. It's about journaling my financial progress this year. So let me jump to the 3 main money factors that cinched the deal for me:

1) I get to lock in the current offer price of 399k. Similar condos in the area are listed for 500k. Even if the much-promised bubble burst rolls around in the next 18 months, prices will have to drop by more than 20% for me to lose money in this deal.

2) I mentioned running some calculations in my first post. What I did was to figure out my loss or gain from renting vs buying and then comparing the two for the 30 year, 20 year, 10 year etc periods for both the best and the worst case scenarios. The calculations are in 3 linked excel spreadsheets which I will try to post later in case it's useful to someone but for now, here's the simplified math:

Loss/gain by renting = Future value of investment - total rent outlay where future value of investment is calculated as downpayment $ + monthly contribution equal to the difference between monthly payment & rent till the difference becomes zero, compounded annually at 10% and total rent outlay is calculated as total rent paid over time with rent increasing 3% annually.

Loss/gain by buying = Future value of home - total home outlay where future value of home is calculated at 7% appreciation/year for best case and 20% loss then 3% appreciation for worst case and total home outlay is calculated as mortgage payments (including interest) + condo fees + property tax - tax break for the same time period.

In the 30 year calculation the difference was noticeable. Even in the worst case example, buying put $120k extra in my pocket compared to renting. In the best case example it was well over $200k. It will take me 3 to 7 years to break even after I start making mortgage payments and this still bothers me a little but in 7 out of the 10 total scenarios I ran, buying was substantially the better move over renting.

3) The fact that this is a pre-construction condo allows me to buy it with a lot less money than I would need for one that's ready for occupation. In my case, provided I get pre-qualified, I can put down as little as 10% now and then 5% a year from now and lock in the 399k price. Plus, getting pre-qualified now means I also get to lock in a lower interest rate in the event interest rates rise in the next 18 months.

So, there you go. Now I am the proud owner of a home that hasn't been built yet! Well, almost that is. I have to get pre-qualified and I have 15 days to do that. After that I have 7 days from the signing date to back out if I want to so technically, I can still pull out but I don't plan to.


At 9/15/2005 4:11 AM, Blogger Money Turtle said...

Ok, now it's official! Congrats once again...

At 9/15/2005 7:59 AM, Anonymous Anonymous said...

tallest building in seattle? I thought bank of america tower was tallest and I don't recall any buildings planned to be taller.

At 9/15/2005 8:27 AM, Anonymous sleeplessinseattle said...

congratulations mmb!

anonymous, I recognize the pictures but don't want to give mmb away ;) It's one of the tallest condo buildings planned and is build developed by the building company co-founded by ex-Microsoft co-founder Paul Allen. Those two boys like things big.

At 9/15/2005 11:06 AM, Anonymous Jonathan@MyMoneyBlog said...

Cool! How many square feet did you get for that cool half-mil?

At 9/15/2005 11:47 AM, Blogger mmb said...

Thanks. I should feel good about this shouldn't I? Instead my sense of panic seems to be growing. I just took on a $399k liability!

Jonathan, it's 950 sq ft and 399k, not half mil.

By the way, this is the tallest Seattle residential/condo building that has been approved for construction. 34 floors. That can change of course as other builders step in. Seattle downtown development is booming.

At 9/15/2005 6:34 PM, Anonymous sarah said...

I recognized it too. I live right across the corner from all the giant billboards. so when's the party?


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