Mohican Buys House

Yes it is true and here is how it happened.

Me, Mrs Mohican, and Baby Mohican are expecting another addition to the family soon. We don't have enough space for the new baby in our current rental unit and we were considering our options. We were looking at renting a reasonable suite or townhouse as a first option since we don't like the prospect of spending more to own than rent and we especially don't like the value of our property dropping before we even move in.

The rents for the places that would be suitable ranged from $1400 to $1700 / month and the quality range was dramatic. Suffice to say that for me and the Mrs to be happy, we would need to spend $1600 / month to rent a suitable place for a family of four in the Fraser Valley. We would also have the prospect of moving again once we found a suitable place to purchase and we didn't really like the thought of moving with two small children.

The question then came up, what could we purchase for the same amount of money? Here is the formula which you may be familiar with by now:

Fair Value = 100/(5 Year Mortgage Rate) * (Annual Rent - Taxes - Strata - Maintenance)
Fair Value = 100/5.35 * (19,200 - 3,200)
Fair Value = $299,000

So the question became, can we find something to purchase that meets that criteria? The answer, as you've probably figured out by now, is yes we did. This would have been impossible even 3 months ago as we found a brand new unit available from a developer who was trying to unload the last unit in the complex at nearly 20% off the last sale price (May 2008) and more than 20% off current listings in the development. They had several offers fall through due to others being unable to remove subjects (sale of own home) and they were very willing to consider our lowball offer. We came to an agreement at well below the Mohican Fair Market Value and the deal was done.

We are comfortable with securing a residence which costs us less per month than renting an equivalent unit. We are also cognizant of the fact that our residence will likely fall in value over the next few years, a loss that is compensated for by not having to move again and the fact we are paying less than rent to own our new home. Some solace also comes from paying $50,000 less than my neighbour did for a similar unit only three months ago. Additionally, we have a 10 year mortgage payoff plan. The plan is quite realistic so although our Loan to Value ratio is low (60%) to begin with it will decline very quickly toward zero.

I still believe that prices will likely correct 30% to 50% from peak pricing and that some areas and housing types will correct more than others. I have never been tied to the idea of buying at the perfect 'bottom of the market' so I am free to rely on my cash flow / opportunity cost metrics instead or market timing. I am comfortable buying a home for personal use using the formula above but buying an investment property is another issue. We can examine that further at a later date.