Buyer, be aware

Two coops are for sale: one for $500,000 and the other for $750,000.

Which one is cheaper?

Seems like a simple question, but it’s not. 

In the wild and wacky Manhattan real estate world, circa 2011, price isn’t absolute nor is it predictive of real cost. There are all kinds of other factors that play into affordability.

You already know that rock-bottom common charges can accompany the costliest coop, while what that ‘bargain buy’ may harbor costly structural problems.  And you’re only too aware that the bust after the boom shattered the old ‘property always appreciates in value’ assertion. But there’s one timeworn caution that is truer today than ever: Stay within your means and – for gosh sakes – know what those means are.

In this economic climate, no responsible broker advises a buyer to stretch beyond affordability. We advise would-be property owners to first take an unflinchingly honest look at their own finances.

My suggestion: assess your expected income and expenses and then play an aggressive game of devil’s advocate with yourself. What if the job went away? What if those investments dried up? What if that comfortable ‘contingency fund’ had to be tapped for an emergency? Could you still pay the mortgage? Do you have adequate reserves to stay afloat for at least six months or, even better, a year?

While we’re at it, take off those rose-colored blinders and examine:

·        What your current job pays – and how likely the position and the pay are to remain unchanged.

·        What extra income you can count on (interest payments, freelance work, rental property income), and which are precarious or market-dependent.

·        What expenses figure in to your monthly obligations (utilities, taxes, insurances, tuition, entertainment costs, second homes, memberships, you name it) and which are sheer discretionary stuff

·        How much you need to save each month to meet your financial goals, whether for college, retirement, loan repayment or other needs?

·        How likely your taxes to rise?

·        What big bills are looming? For example, is the car in its golden years? Are the kids embarking on an educational journey? Is your roof leaking, or your deck about to crumble?

Be as brutal as your bank would be. Remember: mortgage lenders cap your monthly housing costs at about 28 per percent of your gross income. They also set the maximum debt (including your mortgage payment) at 36 percent of your gross income.

Online calculators at Kiplingers, The Center for Economic and Policy Research and Decision aide can provide a rough estimate of affordability. But these offer broad general guidelines. Adjust for your individual situation.

Once you know your ideal price range, be prepared to adjust for variations. Those common charge and repair costs we talked about earlier make a big difference.

Once you’re well armed with the info, don’t let too much grass grow under your feet. Mortgage rates are likely to rise soon, and each additional one per cent hike can reduce a buyer’s maximum purchase price by nearly 11 per cent.

Screw up your courage. But first, fire up that calculator. You’ll need it.