Peter and Kate Rose, as young partners, are looking into owning their first home in the Boston area. This To Buy or What to Buy: Your First Home case study discusses the factors taken into consideration in coming up with the decision on which property to buy as the couple's first home.
Charles F Wu, Steven Hirsch, Beatrice Liem, Kevin Ryan, Derrick Snyder
Harvard Business School (215080-PDF-ENG)
Jun 11, 2015 (Revised: Jan 12, 2016)
Case questions answered:
- What did Kate and Peter do right in the home-buying process? What could they have done better?
- Aside from financial considerations, which home best meets their needs?
- Which loan should they take?
- How should they finance their equity payment?
- Suppose they wanted to rent for 10 years or buy and sell after 10 years. On what does the decision depend mostly?
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To Buy or What to Buy: Your First Home Case Answers
Question 1: What did Kate and Peter do right in the home-buying process? What could they have done better?
Kate and Peter did the right thing by calculating their potential opportunity cost by withdrawing the money from other investments such as 401K, S&P 500, and the IRA in order to buy their first home, where they could estimate their potential loss/gain and the opportunity cost.
Moreover, they were aware that there would be difficulties in the mobility of cash after buying a building, as Kate described the home as illiquid, and the majority of their net worth would be the house. However, Peter’s long-term planning for their kids and finding a home with an excellent location close to both the work and education of their future kids is an excellent lifetime investment, as Peter wants.
However, they should have considered from the financial point of view to postpone buying their first home until Peter graduates and has a stable job in a specific location. Besides, they do not have kids right now, so a bigger home is not required at this moment, regardless of the other issues they have at home, such as lousy maintenance by the landlord and loud neighbors.
Also, Kate and Peter could have started to search earlier for a home to buy, to fix issues such as the ones in the credit report, and hired more brokers to get professional opinions, knowing that doing online research on their own was a good step.
Kate and Peter did not include the lawyer fees, registration fees, and other fees they should consider in their down payment, as well as yard maintenance fees. For example, having a 5,000-square-foot yard will require plenty of expenses to maintain it and remove the snow in the winter.
Another thing they could do is ask about the repayment clauses in case they want to repay the loan at an earlier date. It could be earlier than 15 or 30 years, as Kate’s salary is $140,000 per year, without bonuses, and paying the ADS would be much less than 30% of her salary ( if she takes a 30-year loan). Peter will be working in the near future, and his salary will help in paying the ADS or in repaying the loan earlier.
Question 2: Aside from financial considerations, which home best meets their needs?
None of the three options meets their criteria 100%. However, in my opinion, the best option will be the first property, a newly renovated condo at 14 Acacia Road, Brighton.
Even though the condo does not have parking or a yard, it could meet Kate’s preferences of buying and having a new home as it is newly renovated. It looks like it is freshly constructed and best suited for young social couples who could be future parents as well, who will share the same interests and send their kids to the same schools in the future. And that is an important social aspect of the property, in addition to the gym and pool.
The unit was newly renovated, so it does not need any extra costs as the other properties. For a small fee of $150, they will provide several maintenance services that will save time and effort for Kate and Peter after having kids and both start working.
The area does not have a high-quality elementary school nearby. However, finding a close elementary school would not be a big problem, especially since it is for a short period of time and taking into consideration the benefits of having this property in terms of maintenance and convenience compared to the other two properties.
Question 3: Which loan should they take?
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MBA student, Boston