In 2013 my company moved our entire office from Santa Monica to Austin. This post is part of a series about things we learned while being first-time home buyers.
In 2013 we were moving cities (compliments of Mr. Employer), and we decided we should explore buying a place of our own. Because the move came about rather abruptly, we didn’t a have pre-determined idea of what we wanted for a starter home. I was open to almost anything: single family homes, apartments/condos, townhomes, duplexes, etc. What I soon found out was that it was hard to compare them with each other. The industry standard seems to go by dollars per square foot and leave it at that, but it became clear that this metric was an oversimplification. Here are two real examples from our search:
- Home A is 1,359 sq. ft. and was listed at $186,000 = $137/sq.ft.
- Home B is 2,668 sq. ft. and was listed at $400,000 = $150/sq.ft.
These two homes are pretty different from one another in both size and price. At first blush, Home A seems to be the better value even though it is smaller. I saw this and the sub-200k price, and that got me excited. Sure it was smaller, but we were coming from an even smaller apartment. We’d be fine.
What I didn’t tell you, and what this initial analysis failed to reflect was that Home A was a townhome that required a substantial monthly HOA fee to maintain the buildings, grounds, and amenities to the tune of $240/month. When I added up the mortgage, taxes, and HOA fees the realistic monthly payment came out to $1,511.25.
On the other hand, Home B was a single family home whose HOA was only $33/month, and it still included a community pool, parks, and vast walking trails. Its realistic monthly outlay would be $2,591.77. Yeah, the house was twice the size, but it was one-thousand more a month. House A is still the better bet, right?
Instead of looking at the purchase price divided by the square feet, let’s look at the monthly cost vs. the square feet:
- Home A: $1,511.25 / 1,359 = 1.11
- Home B: $2,591.77 / 2,668 = 0.97
By this metric Home B comes out as a better value on a per square foot basis.
We didn’t buy either home, but instead settled for something in the middle. I specifically chose two examples that were pretty far apart to show that it isn’t as black and white as real estate listing sites sometimes portray things. One could argue that you’d have $1k more to invest or allocate elsewhere with the smaller home, which is fair. On the flip side, if you are expecting your family to grow, maybe you don’t want to have to move again in a few years.
The point is that when looking at purchasing a property, don’t look at the purchase price alone or only the $/sq.ft. and think you’re getting an accurate picture of value. You also need to consider other, regular costs that come with any property. This could be property taxes, HOA fees, utility costs, deferred maintenance costs, ongoing landscaping, and much more. This monthly dollars/square feet metric aims to do that, but it only helps if you realistically understand the costs of homeownership.
Once I saw how much I would be paying the HOA of Home A, I calculated that it would result in equivalent monthly payments for a home that cost ~$53,000 more if it had no HOA. That was extremely eye-opening!
Anyone out there get fooled by only a $/sq. ft. comparison before? Have any monthly payments snuck up on you?
**Bonus: Because HOA fees are not tax deductible, you might want to calculate your after-tax monthly payment and then divide it by the square feet of the home for an even more realistic value.