Almost everything is a Scam Part 1: The Housing Scam

Did you ever think about how many legal scams are raging right now? Let’s look at a few of them and see just how “scammy” it all is. This is part one in this series and we are going to look at the Housing Scam.

“Your home is your biggest asset.” Have you ever heard that one before? Let me ask you when was the last time your home shoved money into your pocket? I am describing an asset as something that consistently makes money.

So you’re in your twenties and you go to buy your first “starter” home. You have a $150K purchase price and perhaps you put $15K down. After being severely pick pocketed for closing costs, filing fees, attorney costs and the payment to the real estate agent, you come out with a nice fat loan for 30 years. If you were to keep that home for thirty years, do you realize you would be buying one house for you and two more for the bankers?

However, you will not do this. Chances are that as soon as the first or second child comes along, your wife will get you to “upgrade”. So let’s say you kept this home for 5 years. Now, assuming your PITI (principle, interest, taxes and insurance) got you for just $1,000 a month you would have paid out $60,000. Using a common thirty year amortization schedule you would still owe $107,000. This is after placing $15,000 down and paying $60,000 in payments. So you are out of pocket about 75K. This is, of course, assuming you did nothing at all to the home; you never remodeled a thing or had any breakdowns at all. It’s totally unrealistic, sure, but let’s assume it was possible. Let’s assume you were to sell the house at breakeven. There are lots of scenarios here.  Some will take a loss because the market declined. Others might get lucky and make $10K or more on the sale, but let’s just go with getting out at breakeven. You sell the home for $150K 5 years later because you want to upgrade.

After the real estate agent’s fees, the lawyers and everything else, you are not going to end up with 150K. Not a chance. There are home inspections, pest inspections and $9K paid out to the closing broker who listed your home. There are attorney’s costs too. So let’s just round this off to $140K net that you received in and let’s subtract out the $107K that you owe; you got back a nice hefty $33K. But you paid out $75K over the term. This is a net loss of just $42K in 6 years. Not bad! Remember, this is assuming that you did not put a single dime into the house in maintenance and repairs during the entire 5 year span.  Unlikely, but let’s go with this.

Now you have $33K to put down on your upgraded home. Let’s assume you did this around 30 years of age and you’re a family now. Congratulations! Your next house costs $250K because you found a nice 3 or 4 bedroom and 2 baths home. A quarter mill.

Let’s look at the next 30 years, shall we?

At $250K with $33K down you have about a $1,600 payment per month for the next 30 years. Now that would be only $576,000 in payments, of course if everything would simply stay the same… but sadly this is not the way it is. Your insurance will assuredly go up every year or two. Sadly your property taxes will go up every year also, making this much more like $750K minimum out of pocket.

Oh, but we forgot to add the maintenance costs didn’t we?

One year you need a new roof and that could be as low as just $5,000 or it could be $12,000 depending on the complications of the job! While we are on the roofing subject let’s deviate for a brief moment to this scam: roofing is sold today in the USA as “asphalt” roofing, but the reality is that it has very little asphalt in it! Oh, it used to for sure… but not anymore! Now it’s sold as “architectural” shingles and it has a lot of lime and other things.  Stuff that mold, mildew and lichens love to eat to grow! In a few years you will have this “mossy” substance on it and it needs a massive power washing to get it out. This will cost a lot of money to do and if you do not do it the roots grow into your shingles and eat them.  There is no way on Earth it’s going to last the 40 to 50 years the sellers of this claim! It deteriorates fast if you don’t wash it and it deteriorates fast if you do. Sadly it is a “you’re damned if you do and damned if you don’t” scenario.

One year you need a new paint job and maybe it’s just $4K or maybe it’s 10K. It depends on the house doesn’t it? Or perhaps you decided to go “vinyl” as they say! “Vinyl is Final!”  but that is $20K to do it right.

One year your pipes burst or your well dies and that could be $5K, right?

One year the furnace goes and that could easily be another $5K.

One year you’re putting in new floors in the place and the $2.79 a square foot flooring “deal” you found at the local home improvement store. Well it sounded like a good idea until you add in the padding and the labor to install it and you ended up paying $4K for it.

One year you need new gutters and that is $1K by the Seamless Gutter Co.

One year you needed a new driveway and that was $10K.

Throw in all the $500 paint jobs. One year it’s just the kitchen and another year you redo a bedroom.

A new shed can cost you $3K. What about all that lawn mowing? Fertilizer? All the various plants you buy every year and the mulch and the tree trimming and the $300 a year you pay to the local landscaper to get your leaves raked and hauled away?

A pool can cost a ton every month to maintain. Do you have one of those?

Oh, let’s not forget that new deck you needed for the parties! Heck it was only $7K. That was a great deal.

Ah… you live in a place where your siding gets kinda crappy every year or two? Well, the power washing and chemicals are only about $500 every time.

The washer and dryer broke down this year, huh? Yeah. Well lucky you; the replacements only cost $2K but darn it. The following year you needed a new stove and it was $750 and the year after that the fridge broke down so you bought that new shiny stainless steel model for Just $2,500.

A kitchen remodel can cost as low as $5K but heck, I have seen some folks go nuts and spend $25K for that.

A bathroom remodel might be as low as $4K or as high as what… $10K?

Perhaps you see my point in all of this? You can spend easily $5K a year on a house. It’s really not that hard. I am being a bit conservative here. So when all is said and done you could easily spend $900K to one million for this $250K house you bought.

By the time you are 60 to 65 and you have paid this off and finished sending the kids to college (yet another scam!) you are ready to downsize because this is just too much for you and your wife now. The kids have long since moved out, got married and only hit you up for loans a few times but, yeah, they are gone.

And you know what? Heating costs went up, along with the taxes and everything else and it’s just not looking so great anymore, is it?

Now let’s say that you have experienced an amazing boom and this house is actually worth $750K now. It went up three times its value in all these years. Or maybe you were a genius and things went just peachy keen and your house is now worth 1 million. By the time you sell it and get paid you are either taking a loss of $250K or maybe just as small as 100K. If you did it right you might not even have to pay taxes on your proceeds but if you did it wrong you will get taxed for sure and you really do come out a net loser. But hey this is life, right? It’s just the way it goes, right? Of course you have to live somewhere!

Even if you did not sell, you still paid out about 1 million in 30 years for a $250K house and every year that passes be … even in your retirement years… you will continue to pay out  many thousands of dollars in property taxes, insurance, maintenance and upkeep even if the mortgage is gone. It’s still going to suck $12K a year or so out of you forever.

I hate to break it to you but this is just a scam. It’s not an asset at all. It’s a horrible liability that is like an alligator chewing you up a few bites at a time and it never ends.

Is there a better way? I think so. I think there can be, but it certainly takes some thought.  How about this instead… I will throw out a few scenarios below.

1. You find a place in the country with super low taxes compared to the rest of the world or the USA (if you live in the USA). You have to understand there are multiple consumer scams running at the same time; cars, credit cards, mechanics, heck even the grocery stores are a scam of sorts. They sell you stuff fashioned into various shapes, sizes and textures and get you for about $1K a month. A $12K drain on you every year for “Frankenfood” It looks like food, it kinda tastes like food, but it was grown on commercial farms with NPK dumped on the soil. Oh, plus all the herbicides, pesticides and artificial chemical fertilizers to help that GMO stuff grow!

So what if you added a great big garden to your mix? What if you started off with simple stuff your first year but gradually increased it to the point that you were basically an organic gardener at 1 hour a day? It’s relaxing, and it has great benefits! It’s pretty much an all you can eat buffet… via an all you can grow experience and… it’s organic to boot!  So you get to cut out the $50 a month worth of vitamins and supplements you are always buying. If you could grow almost all of your own veggies and many fruits and maybe even raise some chickens for eggs and meat, you could probably cut your grocery bill down to $6K a year; a savings of $6K a year.

Also, what if you learned to do everything yourself? YouTube is an incredible source. You can learn to lay your own floors, put up your own siding and install your own windows. Everything from painting to trim work to roofing and siding… right to remodeling your kitchen and your bathroom yourself. It’s not that hard and it saves a ton of money.  Contractors will hit you up for at least $50 an hour and right on up to $125 an hour for plumbing work. If you can learn it and do it yourself you can save a ton long term.

OK, so we have three ideas above to help out a little bit. Every little bit helps!

2. What if you also did something like this: So you live on a lake, pond or a river? Or maybe your land has a spectacular view? Or maybe you are in the country? Or maybe you have access to places folks want to visit badly? What if you built a nice extra little place on your property? Maybe you have a two car garage already in place that has a loft above it or something like that? What if you wired it just right, insulated it and put up sheet rock, laid down flooring and made a very nice studio apartment out of it? You could either rent it out long term to a tenant and where I live it would fetch about $700 to $800 a month or so and you could do this forever and it would pay your property taxes and a whole lot more!

You could also take this rental and put it out on AirBnB and collect 2, 3 or even 4 times the average rental by going short term rents; a day or a weekend or a week. Yes, you might not rent it all the time. I get it. Some months you might be lucky to get 20 to 25 days of rental and other months less but it could easily add double or more to your bottom line, right?

Some of you that follow me on Twitter might know that I put about $25K into a tree house. I made it very old fashioned. It has an 18th Century theme. It’s really quite lovely inside with custom wallpaper painted to look like gilded leather. It has hand painted ultra-fancy embellishments like crown moulding that cost about $135 a piece. It has a lovely antique high chest of drawers, a nice hutch with fancy old gold rim china and I plan on getting a chocolate leather jack-knife couch soon. It’s got an amazing teak hand carved coffee table and well…. right now I am using it as my office… but the thought did occur to me! I could move my office and I can put the big screen TV up and move this super nice fireplace I have into the space and it would make a very fine studio. “Tiny Houses” are kinda hot right now. Folks want to rent them. Tree houses are hot right now in the world. Folks love to rent them. It’s really pretty, and it’s on the water. Waterfront sells too. I am fairly sure I could get about $100 a night and probably get 25 nights a month rental out of this. It’s very tempting! Think about it. What you would have to do to get $2,500 a month in rental income? Chances are you would have to have about $300K worth of property to duplicate it. Two houses of around $150K each rented out could fetch around $1,250 or so in gross rent receipts, right?

So what if you bought a property that had an extra house on it or one that could easily be converted to do so? You too could gain an extra passive income to help offset the horrible costs of home ownership.

Perhaps this could be a good answer for you. It takes thought and planning and a little work but cumulatively, over the long term, this is a lot better than simply paying $900K for a $250K house over 30 years and not having a ton to show for it when it’s all said and done.

In the state I live in and over the course of my life, I have seen some very interesting deals come around. In retrospect, I do wish I had bought them. I once saw 4 tiny houses on one piece of land and it was all locked together as one property. Shared well and a shared septic. Grandfather-clause in and the selling price was $150K. I did not buy at the time because my kids were very young (this was ten years ago). If I saw that now I would really consider it! I could give one tiny house to my daughter and one to my son. My wife and I would share one. That would leave one that I just know I could fetch about $600 a month long term rental out of it to a single person that needed a cheap place to live. That would actually pay the property taxes and perhaps most if not all of our electric bill!

I once saw two very old fashioned houses on the same slice of property. Again, shared well and shared septic so it was locked. You cannot subdivide it but that is OK! Each house was around 1,200 square feet and each had three beds and a bath in it. They were built in the 1800s so had a really nice Victorian feel to them. Again, the asking price at the time was $150K. What if I had just bought it? We all could have lived in one and rented the other for $1,000 to $1,200 per month as a long term rental. This would add $12,000 a year to my bottom line forever; $120K in ten years and $360K of income in 30 years if rental prices never ever went up.

Anyway I hope this was a help to you. Hopefully it got you thinking about what you can do for the future to make things a bit brighter for you and your family. Stay tuned for the next article in this series and perhaps we can come up with some more helpful solutions.