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Is it wise to buy a single family home in Chicago now, knowing that I will have to relocate in 4yrs?

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January 21 2011 - Chicago
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Profile picture for the_country_hick
No, between amortization costs on the mortgage and realtor fees at around 5-7% you will lose money.
Then you have the real potential for 2 problems.
1 the house is worth less than you paid for it. It will cost you money to sell it.
2 You can not sell the house and still are obligated to pay for it.

However, look at your numbers. The blog below shows how to do that.
"Does it make more sense to buy, or to rent? Here is the way to find out for sure."

This gives some solid reasons for renting instead of buying even when the apparent costs are close. This is a very different perspective than many realtors would give you.
"Why rent if you could buy for less money? Valid reasons inside."

Look at the site below.
Illinois

Troubled by a state economy on the edge, lingering high unemployment and a foreclosure crisis that rivals the most devastated areas in the nation, Illinois is losing residents as they flee high state income and property taxes for greener pastures. The uncertainty of the Illinois economy signals a housing market that has made little progress in recovering from the worst real estate crash in U.S. history.

Average home prices in Chicago are forecast to decline 8.7% in 2011.
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January 21 2011
Profile picture for dacolan
Chicago is one of the metro areas that experienced the steepest and most rapid decline according to the most recent S&P Case-Shiller Index.
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January 27 2011
Profile picture for the_country_hick
Christopher, if you can only rent a property for PITI costs you are losing money every month. Taxes will cost more every year. Insurance is likely to go up every year. But far more important are the things you forgot about. Vacancies, maintenance costs, and hassles. Then you have to hire a management service to work the property when you are living 1,000 miles away. In short make at least 30% above PITI or it is a losing game.
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January 27 2011
Only if you would be in a position to rent out the detached home to atleast cover your mortgage payment. (PITI - Principle Interest, Taxes and Insurance.)
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January 27 2011
From a purely financial perspective you would only be able to answer that when you sell which as described below will be based on several factors.   I think it will probably not work out but it is not clear cut.  Great question. 

Do you want to own? or would you rather rent?  This is probably how I would decide because the rest of the decisions around this decision would at best be educated guesses.
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January 27 2011
I believe 3, 4, 5 years ago you could have "retired the saying throwing your money away for rent" as Roberto stated, but I would bring that saying right out of retirement for today's market. 

Obviously, it all depends on where you plan on buying.  If you look in the Portage and Dunning neighborhoods you have homes selling for 100, 110, 120k.  With 40-50k worth of work you can have a beautifully rehabbed home in a descent neighborhood for under 200k. 

From Lincoln Park, to Evanston, to Dunning, the number will change and the loss or reward will vary, it all depends on the neighborhood and getting a good feel on where that neighborhood will be in 4 years.

To simply say NO, it is not a good time to buy in any neighborhood, now that is being simpleminded. 
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January 27 2011
Profile picture for SteadyState
Marcin wrote -
"How much would you be willing to spend on rent?  Do you want to rent a condo?  You can probably estimate about 1k a month which translates to throwing away 48k in 4 years on rent.  If you're looking to rent a home for the space you are probably looking at 1500, 1600 a month (depending on location obviously), and you'll be throwing away 72k or more in 4 years on rent. "

Alternatively if you follow his advice and assuming your home's purchase price is $300,000your could throw away:

Investment Cost
Down payment: $60,000 (interest loss on this is added below).
Throwaway costs (money that will never come back to you)
Closing costs (commissions + title + inspection, etc.): $12,000
Interest: $9,000/year[$36,000 in 4 years]
Insurance: $1500/year[$6,000 in 4 years]
Maintenance: $3200/year [$13,000 in 4 years]
Property taxes: 3500/year [$14,000 in 4 years]
Opportunity Costs: $3000/year [$12,000 in 4 years] (this is interest on your $60,000 down payment]
-----------------------------------------------------------------------------------------------
In 4 years:

If you rent you will throw away: $72,000
if you buy you will throw away: $93,000

You can decide which is better. In 4 years your home will have to sell for
 $393,000
+ 6% of 393,000 = $24,000
-------------------------
$417,000
If you believe a home you will buy for $300,000 will sell for $417,000 in 4 years you will break even.
The whole analysis assumes that your home will increase in value at least 1% per year. If your home goes down in value, heaven help you.
Now you can decide.

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January 24 2011
marcin, retire the "throwing money away on rent" line. It makes you appear very very simpleminded.

what do you call taxes, insurance, and interest on owning a property? also 'throwing money away'..
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January 24 2011
How much would you be willing to spend on rent?  Do you want to rent a condo?  You can probably estimate about 1k a month which translates to throwing away 48k in 4 years on rent.  If you're looking to rent a home for the space you are probably looking at 1500, 1600 a month (depending on location obviously), and you'll be throwing away 72k or more in 4 years on rent. 

Why would you rent when home prices are pretty much at the bottom right now?  You can purchase a foreclosure or shortsale, put in a little bit of work, and have your own place where you can live comfortable in for the next 4 years.  You re-finish the floors, you rehab the bathrooms and kitchens, and you have a home that, if bought in the right neighborhood, is only going to come up in value in the years to come. 

Remember: You can purchase a foreclosure with an FHA 203K rehab loan and 3.5 percent down, and the bank gives you the cash to rehab the property.

There is lots of opportunity in buying right now, I don't see any in renting.

Marcin
Conlon: A Real Estate Company
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January 24 2011
It depends on where you are buying? If the home you are buying is a short sale or foreclosure, then 4 years is not too short. Usually, people do well when they hold on to the property for a longer time. In this market four years is short term. However, as I said before, if you buy a short sale or foreclosed property, you will probably make out well.
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January 24 2011
No. Read Roberto's great advice below. There is too high a risk of things going wrong in short term ownership like 4 years. The three most important words in real estate are: Long Term Ownership. It smoothes out the bumps, like price declines or major damage events...like a flood that costs you big bucks.

When you know where you will live for a long time and you find the right property that you feel you will live in for a long time, and it is in decent shape, and you can comfortably afford the payments....that is when and where you want to own. Good luck.
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January 24 2011
Yes, you should buy a home.

That's assuming you can set the wayback machine to 2002, buy a home and sell in 2006.

Even taking into account the cost of selling (which would negate any gains and potentially put you in negative numbers) most economics say we're in a downward cycle where home values will either remain flat or decrease in value.

Statistically it would be incredibly difficult to recoup your investment in just four short years unless you had some incredible luck - or a wayback machine.
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January 21 2011
NO, 4 years is too short of a time frame generally speaking...the transcation costs to sell and buy a home are about 10% of the price in total, you would need a bit of appreciation to even break even in such a short time frame. What if prices drop more in the short term? hardly unlikely given that all 20 metros are turning negative now, on the case shiller index...

Tracey's advice below mine is mindnumbly bad...
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January 21 2011
Yes, purchase now. It wouldn't make sense to put your money into a lease as you would not receive any return for your money. Please make sure you purchase a property that is below market value. You can always have an independent appraiser help you determine the properties market value - or - you can have your realtor complete a CMA (at no charge). Yes, definitely buy...it's a great time!
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January 21 2011
Profile picture for the_country_hick
Philip, " If inflation get wild prices will go up."

Not quite right. Inflation going up with increasing interest rates do something very different.

If my $1,000 a month payment can buy a
$200,000 mortgage at 4.25% paying $983.88 monthly or
$110,000 mortgage at 10%    paying $965.33 monthly or
$_47,000 mortgage at 25%    paying $979.75 monthly explain again how inflation with interest rate changes drive house prices upward as they appear to be driven further down.

Here is what really happens.
At 4.25% a 30 year $100,000 mortgage costs $491.94 a month
At 6.25% a 30 year $100,000 mortgage costs $615.72 a month
At 7.75% a 30 year $100,000 mortgage costs $716.41 a month

That does look like buying at lower interest rates does save money. But does it really make sense? Could we be missing a critical piece such as buying power dropping as interest rates rise?

Lets look at this the other way.
A 30 year $100,000 mortgage costs $491.94 a month at 4.25%.
A 30 year  $80,000 mortgage costs $492.57 a month at 6.25%
A 30 year  $69,000 mortgage costs $494.32 a month at 7.75%

That very clearly shows that as interest rates rise buying power drops. As buying power drops if incomes do not rise (how can they with around 10% unemployment?) house prices must drop as people could not afford to buy at today's prices and income with tomorrows interest rates.

p.s rents are determined by incomes in an area. If incomes do not rise dramatically rents will not increase much if at all. In fact rents could even drop as incomes get smaller compared to normal monthly expenses.
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January 21 2011
Do your homework may sure you use an experience Realtor. If you get in an up and coming neighborhood you will make out fine. 
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January 21 2011
The market is the market. A purchase now will go down in value for the rest of this year. That is the consense view. You need to be well infomed before you buy. We live in the payment not the price. The payment now will be lower than foenyhe same price next year. Rent will go Up with inflation but your cost will remain the same. If inflation get wild prices will go up. I would rather take my chances on the owned property rather than rent.
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January 21 2011

 Great question and time will tell but there is no guarantee that by renting you'll be better off or that by purchasing you'll be better off.  The other thing to consider is that your four year "plan" may change.

One thing that remains consitent with this market and that of a few years back is that only a savy investor or buyer purchases a home realizing that they made a sound investment on the purchase, not the sale.  For many that bought based on appreciation, they themselves are now either under water or foreclosed on. 

There are many great opportunities to purchase in this market that I believe will be very sound investments 4 years from now but you have to do your homework.  Purchase only after you have done plenty of research for that area, reviewed comps by a licensed realtor, and then found a home that isn't above market value. 

My business partner and I work with many investors that purchase homes and sell them in a matter of months for great profits.  If it wasn't possible to make money in the market by purchasing today and selling in four years its most likely that you over-paid to begin with. 

Best of luck!

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January 21 2011
YES,

but ONLY IF you purchase a fixer upper at a very good price and IF you are good with tools - and are blessed with two right hands; most people have one right hand and one left hand, some have two left hands, and then others are lucky to be born with two right hands - so assuming you are good with tools and do not have to hire contractors but can do all the work yourself..... YES, it can be profitable to purchase a home for 4 years as long as you can turn an ugly duckling into a swan.......
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January 21 2011
It depends. One thing we know is that prices havent hit rock bottom just yet. We do know that there is a vast inventory and low mortgage rates, and if you hold onto the property for a while, buying is a good thing. However, 4 years is at that point, where I am not sure if you will get that big of a profit when its all said and done. One thing to consider is, do you think you will ever be moving back here? Because if so, when you relocate, you can always rent it out, and then when you come back, you still have your place, or can sell it years down the line for a bigger profit. Also, four years is still a long time, you have to ask yourself if you want to be a tenant for those next years. I think it may be a tad bit risky for a big profit, but I think you may like havng your own place. Best of luck whichever direction you go!
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January 21 2011
If you buy it for under market value, an REO or short sale, it may be advantageous.  Unlike Dan, I don't have a crystal ball.  The real estate market is fluid and values vary greatly from neighborhood to neighborhood within the city limits.  Talk to a local Realtor in the area in which you are looking, get good data and make a decision based on your assumptions of the area.  You are the buyer, you set the market (for the most part)
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January 21 2011
That is a tough one. It might depend on what price you paid for the house and what neighborhood it is in.
If you can get a good price from a short sale/foreclosure or estate sale then maybe yes. Some neighborhoods seem to have bottomed out and for others it is not so clear. Some neighborhoods have held up better than others also.
Can you find a nice rental that gives you the amount of space you need in a location you like?
You need to do some homework and probably speak with an agent or two. My web site lets you search the MLS if you want to do it on your own.
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January 21 2011
 
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