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What is the monthly payment?

December 22, 2011

Being the contrarian investor, I have been selectively investing in real estate recently. Real estate in general could easily decline further than it has, but I feel the least desirable location and method of purchase limits the number of competitors and minimizes the downside risk of pricing declines.  

When I say “least desirable locations,” I’m not talking about slums; rather, I’m referring to locations where price drops have been the greatest. Also, the least desirable method of purchase is short sales or court house auctions. Court house auctions might render the best deals, but you really need to know what you are doing and it can require a lot of time…more time than I have. So I focused on short sales while looking at properties

Anyway, this is not investment advice — remember I don’t offer investment advice — this is only a rather long introduction to a topic that has fascinated me for some time. We seem to enter into monthly financial obligations with little thought of the total cost obligation. In other words, “Just how do we plan on paying for it?” 

I have a good friend that calls me for personal budget advice. His problem is he looks at everything from the perspective of, “what will my monthly payment be?” But monthly payments add up over time: $50 here, $75 there, and on and on it goes until you realize the monthly payments have completely eliminated any discretionary funds and the ability to save.

I enjoy golf and had looked into joining a country club (although not too seriously). I have many friends who don’t want to belong to a country club because they like to play various courses.  The reason I never seriously considered joining was the monthly charges. Most country clubs have three costs associated with joining: initiation fee, monthly maintenance costs and a monthly or quarterly minimum charge for food and beverage.  

What I have noticed lately is that country club members around where I live are offering to give up tens of thousands of dollars in initiation fees to get out of their membership. Why? Because the monthly fees are adding up. Month after month of maintenance and food and beverage minimums can easily add up to $5,000-$10,000 per year. I have never seen essentially “free” country club initiation fees in my lifetime, but it is a sign that people have discovered that they can’t afford the monthly costs.

I was recently looking at some condos for sale near where I live. The price drop has been most remarkable — in the 75 percent range. One particular condo unit, a two bedroom, two bath, clean property was listed at $48,000. In my opinion it was a real steal, and even though I would not have to finance this purchase, I used a mortgage calculator to see what the monthly payments would work out to be. It was a ‘stupid’ low payment, but with condos you have home owner association (HOA) fees. I hate HOA fees because you have so little control over how much they increase. The HOA fees for the particular unit I was looking at cost more than the monthly payment for a conventional mortgage on the condo itself…by about 40 percent! 

I believe as home buyers begin to think about the weight of monthly charges, HOA fees will be a drag on certain homes. We must be smart consumers. Monthly payments do matter. My friend who calls for budget advice seems to struggle with buying used cars. He obviously spends too much time on car lots where he is an easy mark. More than once my friend has called and told me what a great deal he just made on trading in his old used car for a new used car. “But Jon,” he argues. “My monthly payment is the same as the car I just traded in. I got this new used car for the same that I was paying for my old car.”

What he seems to forget, and I always remind him, is that he only had seven months of payments on the old car and now he just signed a contract (again) for seven years of monthly payments. Since my friend does not have good credit the car salesman puts him in a long-term, high interest rate loan. He pays the sticker price of $30,000 for a used luxury foreign vehicle that is really worth only $20,000, but by the time he makes all his interest payments he will have paid $40,000. If he had kept his old car, he would have had a total of $3,269 left to pay and then would have been free of any car payments. Instead, the scenario will be that when his foreign car breaks down, he doesn’t have the money to repair it and it ends up getting repossessed after paying on it for four years. So much for the “affordable” monthly payment.

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