Million-dollar thought experiment

I was talking with some friends recently and the topic of housing came up. Even with the recent declines, housing in the Seattle area is still ridiculously expensive. According to the bubble blogs, prices are back down to where they were in May 2006, but things were overpriced back then too, so it doesn't help as much as it might.

During the conversation the idea of group-purchasing and sharing costs came up. It piqued my interest, so I decided to run the numbers and do a thought experiment.

Imagine a group of three friends who want to buy a house together. Let's say they are looking for something in the range of $1 million. How well would it work?

If each person can put down $100,000 as a down payment, the total mortgage on the house would be $700,000, or $233,333 per person. As far as I can tell from reading Wikipedia's "co-tenancy" page, it looks like each person would have a separate mortgage on their portion of the house. So each person would get a $233K mortgage, which at current 30-year fixed rates, would come out to about $1350 per month.

This $1350 number surprised me. It's a bit more than I currently pay in rent, but it's nearly the same.  Since it's fixed, it wouldn't go up either, unlike apartment rent. I am sure that in a couple of years my rent will easily be more than $1350 and continue to increase.

Of course, there are additional costs associated with owning instead of renting, such as property taxes. But by my quick calculations, it looks like those would be roughly compensated for by the income tax deductions for mortgage interest (yay for the "ownership society").

So if I could pay what I'm already paying and use it to build up equity rather than throwing it down the drain, it certainly seems like a good idea.

What kind of house could you get for a million dollars? This is where it gets interesting. I did a search for houses nearby where I live with at least 3 beds/baths in the approximate range of $1 million. Here are a couple representative houses:

House #1: http://www.redfin.com/WA/Redmond/13524-157th-Ct-NE-98052/home/450085

$1,075,000

house 1

This is a pretty decent house, with 4,000 square feet, 3-car garage, 4 bedrooms, 3.5 bathrooms, and a half-acre of woodlands.

House #2: http://www.redfin.com/WA/Redmond/17304-NE-144-St-98052/home/450854

$989,000

House 2

This house is a bit older and smaller, but a bit less expensive as well. It also has the requisite 4 bedrooms, 3 baths, 3-car garage, as well as a rather large back yard for the horses to run around in.

Both houses are vastly better than my current apartment, but I could still live in one of them and pay about what I'm paying now. Something seems impossible here - what's the catch?

As best I have been able to figure out, the catch is probably the fact that you would have to live with two roommates, and it would be significantly more complicated than a regular apartment since you would all own the same house. As soon as one person wants to move out, get married, or make improvements it becomes a huge hassle for everyone. In the worst case scenario the house might suddenly need to be sold out from under you because your roommate went bankrupt or got deported.

Still, having to have 2 roommates does not seem that bad, compared to the greatly increased quality of living and the financial benefits of ownership. Am I missing something obvious?

Posted on July 15, 2008
Comments (10) Trackbacks (0)
  1. I don’t think you’re leaving anything out, except that you may be underestimating property tax, insurance, utilities, and upkeep costs on a place like that. I also imagine it might be harder to get a good loan if ownership is split, but with $100k downpayments, it can’t be too hard. 🙂

    I imagine the reason it doesn’t happen more often is the lack of a group of people who want to live together and can afford to make $100,000 down-payments.

    Cooperative housing has quite a few adherents, which seems similar.

  2. You’re probably right – maintenance, upkeep, and that kind of stuff probably add up pretty quick. But on the other hand, you’d still only have to pay 1/3 of those costs so they might not be too bad.

    And yeah, finding a group of people who all like each other and can make 100K down payments might be difficult.. hmm..

  3. According to Redfin, the property taxes are $10,617/yr and homeowners insurance would be roughly $6,000/yr. If three people live in the house, taxes and insurance would be $461.58/person/month (in addition to the mortgage payment). Also, a lender might be a little nervous about a set up like this since none of the tenants are married. I’m in the process of buying a house with my fiancee and we had to do some extra paperwork because we weren’t technically married yet. But, with such a large down payment, there are some ways around it.

  4. I’m not gonna shoot down your idea. I’m a fan of it.

  5. The 100k downpayments and the coordination of three independent, unmarried people is all you have going against you. If you can get people to agree, sounds like an awesome plan. Just imagine the parties. 🙂

  6. Hi, Eric! I’m all for buying over renting. But (aside from the additional expenses part) I think I’d have a hard time finding three friends I’d want to live with. It’s not like you’d be sharing a dorm room or apartment that you’d know you’re eventually going to abandon. It’s a investment that everyone would have to agree to keep up and keep up for a specific period of time. I mean, what do you do if you or one of the co-owners wants to move (due to work or love or whatever)…how could you sell one third of the house? What do you do if you have a co-owner who is a jerk and scratches up that beautiful hardwood floor? Is he solely responsible for fixing it? How do you prove it? Sooooo…I think YOU could buy, maybe not a million dollar home, but something really nice, and not have to worry about the roomies. That’s what I did! Love it (except for the HOA fees…)Good luck!

  7. Yes, I agree. I think that finding roommates who are decent people and will be able to live there for several years would be the most difficult part of the idea, and probably would be why it won’t work in practice. Hmm..

  8. Wow those homes are awesome! But what would happen when you got married?

  9. Did you find your 2 other people yet ;-). I’d love to move into that house

  10. I wasn’t able to find 2 other people yet. All my friends are bums.

    Actually I was talking to someone who said that you can’t split the mortgage 3 ways – each person would have to individually qualify for the $1 million mortgage, which obviously wouldn’t work. I’m trying to figure out who is right (maybe the Wikipedia info only applies to the UK).

Trackbacks are disabled.

Me

Apps

CubeCheater Piratizer

Search

Archives

Site Tasks