Financial Frontlines®

Let’s see…hmmm…what home buying tips should every military member know before buying a house?

1) Be careful of buying a house right outside the back gate.
2) Think twice before buying a house on a 10-month school assignment.
3) ….

What? Not the kind of tips you’re searching for? Okay, I’ll stop kidding and offer something more beneficial for you constantly moving military types.

For a little background, I write this as a person wearing three hats; a financial guy, a retired military member and a multiple house owner. I bought homes at most of our assignments to include North Dakota! What was I thinking? I made money on one house—a whopping $10k. Looking back, I could have put a lot more money in my IRAs or other investments had I not been pouring money into houses over the years. I never kept any of my houses as investment properties.  Thing is, I knew plenty of people who were selling with profits and that kept me in the game.  It’s a poor reason for buying a home on a limited time line.

So as you can imagine, I’m generally not for military members buying homes. Too bad I didn’t come to this conclusion until the end of my career. Now before you stop reading because you see yourself as a future home owner, give me a chance. If you are going to buy, at least glean a few ideas from my experiences (and the experiences of others I talk to) so that you’ll be a savvier consumer.

First I’ll cover some of the considerations before you decide to purchase. Afterwards I’ll provide some tips for you buyers. If I sound a bit harsh, please understand I mean well because my remarks are steeped in love for my military family. If you’re going to buy, best you go into a deal with your eyes wide open based on harsh realities and not a candy coated version of the situation.

The considerations.

The responsibility. The purchase of a home and all the associated issues are on you, only you. There won’t be anyone to help if you find yourself in a crack when the PCS orders roll around. Think that Housing Assistance Program you heard about will be around? Think again. That was a onetime good deal due to political pressure to help folks during the height of the housing crisis. That program probably did more harm to peoples’ financial psyches than good because now people think they’ll be bailed out from their bad financial decisions. Save the emotional appeal that someone owes you because you serve your country. I’ve been told by people that it’s not their fault they lost money on their home purchase. They didn’t choose to move when they had a loss on their house. Based on these types of comments I find myself explaining something I thought I would never have to explain. No one orders us to buy a house. Military members live within the context and rules of the military. We volunteer one time at enlistment or commissioning and as a result we are volunteers for every subsequent action. We have to make all our life decisions based on this fact and our unpredictable futures.

The risk. Unless you are going to keep the home for decades, buying a home for a few years is like betting the farm on the ponies at the Kentucky Derby. If you buy a home, you better have a back-up plan in case it cost you a bundle to get out of the house when the time comes. No one knows what your home market will be when it comes time to sell. Sure we know that now with the housing slump but that’s the way it’s always been. Homes are bought because of the misconception that real estate always goes up. It doesn’t. Home markets vary based on cities and regions of the country. To help paint a picture of the risk you assume, imagine you are within 3 years of retirement and you’ll need all your TSP investment value to generate additional retirement income. Would you invest 100% of your retirement account in stocks at that point? What makes buying a house on a 3-year assignment much different? Ask any member currently trying to sell a home where their home value is less than their mortgage. I’ve talked to folks $100k underwater. Buyers all have one thing in common. They all count on making a profit. No one figures to lose on the deal. Profit 100% of the time; how realistic is that?

The loss of freedom. A home restricts your freedom during PCS transitions. Owning a house is a ball and chain around your leg. PCS moves in your life are foreseeable and unforgiving. You’re told when to move in and when to move out. A house doesn’t care about your deadlines. No one in your chain of command cares that you have a house to sell. You can’t stay behind to sell a home, you have to go. So who stays behind? Kids in school? Got money to pay for two homes until the old one’s sold? What if it costs you big bucks to get out of your old house? That house will feel like concrete shoes as you’re dropped in the drink.

The emotions. I preach that emotion should never drive any investment decision because emotional investors typically lose. A short-term investment for the chance to strike it big is based on greed. There’s also that Norman Rockwell feeling we get about home ownership. Buying a home is the largest single investment we make. Sure you can win big if things go your way since a home is a leveraged investment. Leveraged investments are among the riskiest investments a person can make because leveraged investments can also bankrupt you. Heard of buying stocks “on margin”? Same principle. There is no room for greed in a huge financial transaction like this as the financial world is a cold blooded, unemotional creature. Intellect must trump emotion. As for that warm fuzzy home owner feeling we get…read the first tip for home buyers coming up next.

As promised, here are the tips for you buyers.

It’s not a “home.” It’s a short-term investment in a shelter for your family. Keep this thought firmly planted in your mind as you shop around; you are buying to sell. A home is where you put pencil marks on the wall to chart your kid’s growth over their life. You on the other hand will be a seller before you know it. You have to be more focused on selling the house, as you are buying it, than liking it for yourself and creating a “home.”

Your assignment can restrict your ability to maintain a house. Numerous deployments or long work weeks hinder efforts to mow, trim hedges, clean the gutters, rake the leaves and paint. If your free time is precious you probably won’t want to do chores in those rare moments. Maybe a condo with maintenance covered by the management better suits your lifestyle.

You want a house close to the best schools. No family wants their kids going to substandard schools. This is a primary consideration for pin pointing the location of your purchase in an unknown city. Can the kids walk to school?

Find the best neighborhood you can afford within the great school district. Drive through it slowly. Are the homes well maintained? Are there lots of renters (not usually a good thing) especially if a college is nearby? Are there families with kids the ages of your kids? Does the neighborhood have pools, parks, close by shopping, and easy access to public transportation? Are the local areas of interest within a convenient drive? Are you on a street used to get in and out of the neighborhood? Commuting time? Does the house have to be updated? Can you sell this house in the near future?

Check out your credit rating. Take action to improve it before you consider purchasing. Check into whether VA eligibility will be a benefit worth using. Compare rates and loan processes with military affiliated financial firms before shopping other financial institutions.

Buy the lesser house among the better homes in the neighborhood. You don’t want the best house among the lesser homes. The nicer homes will hold your home’s value better than if you have the better home in a lesser neighborhood.

Consider the turnover in the city or area. You want to buy a home in an area that has a lot of turnover each and every year. Granted this is a double edged sword because the more homes that sell each year mean you face more competition. But the other side of the sword is there’s no one buying when you need to sell. Better to compete for buyers than have no buyers. You can control how well your house competes. You can’t generate buyers from thin air.

Keeping a house as an investment property or because you may come back to the area someday could be a good reason to buy. However, have a solid financial plan in place for the worse case scenarios. Considerations…you can’t find a renter, renters damage the house, legal costs associated with bad renters and contracts, deductibles, property management cost, types of insurance (flood?), regular upkeep and upgrades, the neighborhood goes down the tubes, the master building plans for your area according to the county (new parkway anyone?), you have to sell the home unexpectedly.

“Investments” are long-term vehicles. Short-term is for “savers.” Investors understand their investment and the market. They take advantage of history and data as they do their analysis. They look for solid, well ran investments where the probability of growth over the long haul is the greatest. The point is they maximize the probability for success and minimize the chance for loss. Time is a crucial factor for success.

Short-term “investors” are speculators. Speculation is all about market timing and investment selection. Speculators guess wrong on market swings and their selections most of the time and that’s when they are able to control the timing and selection! How much do we hear about day traders anymore? There’s quite a bit of greed in this strategy and what did I say about emotions? Military home buyers are betting they can buy low and sell high in the housing market when they have no control over the timing or location (city/state/region). Talk about fighting with both hands tied behind your back. If a military member profits on a PCS house purchase, it’s all luck of the draw—right place, right time. Greed and luck—what a combination and terrible investment strategy.

You got a story to tell? Add your comments. Please keep it professional since we all have opinions based on our experiences and knowledge. We want to be helpful.

For those of you bumping up against the “10% decline in the market impact zone” requirement, we have an update. Plus, $323M in additional HAP funds on the way.

We spoke to the Corps of Engineers national project officer for HAP Friday. He told us that impact zone requirement can be disputed if sellers can provide data that indicate your immediate area was impacted more than the Corps of Engineers area studies show. He says every regional office has the discretion to allow other evidence and the national/regional offices accept other information. We know of examples here in Fairfax county VA where some areas of the county were hit much harder than other areas. Marketing surveys provided by real estate firms and appraisals from local/county governments can help. The other Shane who has been posting on this site mentioned a case like this previously where a family overturned the 10% rule using this regional office management flexibility.

Also, there is a bill working through Congress now that will add $323 million to the current HAP budget. This bill stands a high chance of passage from the Congress and the President. This additional money is projected to be enough to cover most HAP claims. Updates will follow.

Go to the web site www.regulations.gov.

In the Search Box labeled “Enter Key Word or ID” type RIN 0790–AI58.

When the search comes back, the HAP is in the search result box. Note the comments hypertext to the right.

Homeowner assistance program begins tomorrow

By Karen Jowers – Staff writer
Posted : Tuesday Sep 29, 2009 12:13:16 EDT

A program to help military homeowners caught in the downturn of the housing market can start processing applications Wednesday, sources said, with the scheduled publication of the implementing rules in the Federal Register.
About 4,300 homeowners have already applied for assistance under the expanded Homeowners Assistance Program, which was signed into law Feb. 17 with $555 million in funding. Eligible are people on permanent change-of-station orders, wounded warriors, surviving spouses and those affected by base realignment and closure actions.
Wounded warriors and surviving spouses receive priority in the program, although about 98 percent of the applications received so far have been in the PCS category.
The Army Corps of Engineers, which runs the program, has been increasing staff and preparing to start processing applications. Some service members have said that HAP officials have been doing initial reviews of their applications, asking for more information, to further prepare in advance.
But the primary issue that has held up the program for six months still looms: Homeowners who receive benefits under the expanded HAP will have to pay taxes, and the taxes will be withheld upfront. Recently introduced legislation that would fix the problem and make the benefits tax-exempt is still pending.
For now, the tax requirement will limit the number of people who can be helped, because service members who are “upside-down” on their mortgages — those who owe more on their mortgages than the sale price of their homes — would not have enough money to take to the table to close the sale.
Defense officials have been exploring options that could help these service members.
Each individual’s situation will be different, and service members will have to decide what is best for their circumstances.
If they qualify for the program, those who have already sold their homes at a loss can be reimbursed for part of the loss, minus the tax withholding.
The program is retroactive for those who received PCS orders on or after Feb. 1, 2006. Homeowners affected by PCS or base closure actions must have purchased homes before July 1, 2006. Additional eligibility requirements will be included in the final rules.
Although there still will be a 30-day comment period on the implementing regulations in the Federal Register, the Corps of Engineers will be able to process applications starting the day of publication.
The tax issue is out of the Defense Department’s hands, and the Office of Management and Budget and the Internal Revenue Service had tried to come up with a resolution. Assistance under the original HAP, created to help those affected by base closure actions, is not taxed. But that tax exclusion was not written into the provision that expanded the program.

Spoke to members of the HAP office Friday.  Projection is that the Federal Register is due mid- to late- August.  They are ready at the starting gate.  They are ready to reimburse folks in the PCS category of applicants who have already sold their homes.