Qualifying the Buyer -- How to determine whether one should Own or Rent
There's an old saying in real estate sales, that an agent must "qualify the buyer." What this means is that before an agent decides to work with a prospective home buyer, the agent must ask certain questions about the buyer's financial status, employment history, wants and needs, before the agent sends the buyer listings or takes the buyer out looking at homes for sale. Essentially the agent is vetting the buyer to see if the buyer is a real, legitimate candidate for home ownership. This vetting process is crucial because it allows the agent to gather and collect critical information about the buyer so the agent can answer the fundamental question, "is this buyer suited for home ownership?"
Likewise, when one attempts to answer the question, "is it better for one to own a home or to rent a home?" there is a vetting process that needs to occur for one to make a sound decision, to argue one way or the other, about this scenario. One needs to qualify the context, establish a clear-cut scenario, to answer the question, "is it better for one to own a home or to rent a home?" Although the question is a relatively simplistic one, own vs. rent, the answer is so complex given the number of variables at play, from interests rates, home appreciation vs. rent increases, the structure of the mortgage (ARM vs. Fixed), the anticipated time of remaining in the home, subjective qualities (being able to change the aesthetics), available amenities in an owned home vs. A rented home, geographic location (living by the coasts vs. middle America), relative housing prices, credit scores, etc. (Cunningham, 2004). Therefore, the thesis of this essay is not to argue whether it is simply better for one to own a home vs. rent a home, rather it is to argue for a paradigm shift in the way this questioned is asked. In short, one needs to qualify the question, own vs. rent, and establish and isolate certain factors about the marketplace and about the prospective buyer before the question is even considered. The question shouldn't be, is it better to own or rent, rather the question should be is it better for Joe, an airline pilot, who has an outstanding credit score, and $100,000 in a bank account to purchase a 3-bedroom home in an affluent neighborhood for $365,000 with a 30-year fixed at 5.25% or is it better for Joe to rent a 4 bedroom apartment for $1,780/month?
One can argue that there are three steps to "qualifying the buyer." The first would be to find out as much about the prospective buyer's employment history as possible. Are they employed? If so, for how long have they been employed/unemployed? How much do they make each year after taxes? Do they have pay stubs available? All these questions are important because serious buyers usually have their "ducks in a row" -- pay stubs, bank account statements, employment history, yearly income, at the ready. Now, if a buyer doesn't have this information at hand, then it doesn't necessarily mean they cannot afford to purchase a home (some people purchase homes without stating their income), it just means that more due diligence is required. And really, the best way to get the buyer financially qualified is to take him/her to a loan officer, which is the second step to this vetting process (Dirk, 2011).
As mentioned, the second step to this vetting process -- "qualifying the buyer" - is to find out about the buyer's financial standing. Just because a potential buyer is employed doesn't necessarily mean he has a good cash flow situation. Does the buyer spend more than he makes? Is the buyer in debt? What is the buyer's credit score? And again, one way to answer these questions is to bring the buyer to a loan officer and have the loan officer get the buyer pre-approved or pre-qualified for a home loan. The loan officer will run the buyer's credit score, go over the buyer's financials with a fine-toothed comb, and at the end of the interview, the loan officer will determine if the buyer can afford a home. If the buyer qualifies for a home loan, the loan officer will give the buyer an approximate dollar figure, typically toward the maximum, the bank is willing to lend the buyer. So, after meeting with the loan officer, the buyer will know approximately how much money they can borrow from a bank and what their monthly payments would be on that loan. This is all very important information (Cunningham, 2004).
Now the third and final step to the vetting process is to make sure the buyer has realistic expectations and understands the opportunity costs of buying vs. renting. As far as the expectations are concerned, if a buyer has unrealistic expectations of what it costs to purchase a home, meaning they expect to get a mansion for a pittance of money, then this can be problematic and can possibly lead to hurt feelings and dissatisfaction. So a realtor must make sure a buyer has a realistic understanding of what the housing market is like. Then, the realtor must assist the buyer in making the ultimate determination of whether buying is the right move at this time. Even if a buyer qualifies for a home loan, doesn't necessarily mean that buying a home is the right move. There are other factors involved. One brief example would be to compare their current monthly rent to their potential mortgage payment. If they have a very low monthly rent, the buyer might be better off not purchasing a home and taking the money that they would have paid out to a bank and investing it in the stock market instead. There are of course other opportunity costs that should be evaluated before a final decision is made (Cunningham, 2004).
One thing that is certainly true, is every general article one reads on the own vs. rent debate, the author(s), either explicitly or implicitly, alludes to certain ambiguities about his or her own conclusion. Instead of saying in unequivocal terms that everyone should own a home, or the opposite, that everyone should rent a home, the author(s), despite firmly arguing one way for the majority of the article, will say something that contradicts or weakens his/her original argument.
Take, for example, J.D. Roth's article on the subject, "Renting vs. Buying: The Realties of Home-Ownership," which spends the majority of its time dispelling the cliches of the pro-buy side ("If you rent, you're throwing away your money," "Owning your own home is a forced savings plan." "Home ownership is an excellent path to build wealth"). Here is how J.D. Roth's (2007) article concludes, "Of course, everyone's circumstances are different, and for some (particularly those that live away from the coasts) the numbers may actually work out in favor of buying. Don't misunderstand me here. I am not saying that no one should buy a home, or that my example scenario is a golden standard of truth for all" (Roth, 2007). Here the reader notices the explicit resignation of the author to the notion that there is no "golden stand of truth for all," essentially admitting that there is no clear answer to this question without knowing details.
In a New York Times article, "A Word of Advice During a Housing Slump: Rent" by David Leonhardt, the premise is pretty clear, don't buy, rent. Whereas J.D. Roth's article was a more universal article about the own vs. rent debate, Leonhardt's article does a decent job of qualifying the context of the current housing market and his premise, don't buy, rent, is justified by his evidence-based research and reasoning. Instead of approaching the question on a universal timeline, Leonhardt adds context by approaching the question in the here and now (actually circa 2007 when the article was published) and uses metrics to show the fluctuations in the marketplace, he shows that overall costs for buying were still higher than costs for renting.
Leonhardt opens up his article discussing how a shift has taken place, "By the Realtors' way of thinking, it's always a good time to buy. Homeownership, they argue, is a way to achieve the American dream, save on taxes and earn a solid investment return all at the same time. That's how it has worked out for much of the last 15 years. But in a stark reversal, it's now clear that people who chose renting over buying in the last two years made the right move (Leonhardt 2007). Although Leonhardt is establishing his thesis for this article, he is also making a very insightful point regarding the whole rent vs. own debate. Leonhardt is making it very clear that there is a timing factor involved in this debate, that during some periods (low rents vs. high costs in home purchasing) it might be…