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Renting vs. Buying — Zillow Wiki Swings and Misses

April 24, 2008

In commercial real estate, there is a standard analysis that brokers conduct: the Lease-Buy analysis. It is meant to show the client the financial impact of leasing space vs. buying the building outright. For whatever reason, this is not a standard analysis that residential agents conduct on behalf of their clients. You can find online calculators like this one or this one, but they appear to be intended for consumer use and doesn’t get anywhere near the level of analysis that I expect from a professional.

Diane Tuman over at Zillow blog talks a bit about their Wiki article on Owning vs. Renting. It’s a clever way to get people over to Zillow’s wiki, but it has the benefit of offering what may be helpful advice. I went over and checked it out.

Diane’s take on the wiki article is that you can boil down a lot of the advice to the following:

  • Lifestyle — If you are happy-go-lucky, don’t like to mow the lawn or do maintenance, have an uncertain income and need flexibility, renting is probably for you.
  • Location — If you live in a vibrant real estate market where the home values have been consistently strong for decades, and you have the means and desire to own, then buying might be the right choice.
  • I think she’s being a bit generous. I find the ‘advice’ in the Wiki to be of the Oprah variety and not of the useful variety. Here are some of what the Zillow wiki (and the editors thereof) thinks are reasons to rent:

    • Flexibility. Check out neighborhoods if you are new to town or are researching where you want to buy. By renting you can test an area without committing to it.
    • Uncertainty in your career. If you think you might need to move in the near future, or are mulling job changes that span several areas of town or are located elsewhere in the country, you might want to rent, since buying ties you down to a greater extent.

    You don’t say! How could anyone have figured this out on their own without the helpful expert advice of professionals.

    • No maintenance. When the pipe leaks under the sink, you don’t head to Home Depot, you head for the telephone and call the landlord.

    And the landlord tells you that he’ll have someone take a look. 8 hours later, the pipe is still leaking, and all you’re getting is the voicemail of the landlord’s phone. Now what? If you decide to let the place just flood, guess what, there goes your security deposit.

    You do not get to trash the rental unit just because you don’t own it. You will be liable to the landlord in that case.

    • Incidental expenses. The landlord pays for many utilities such as water, sewer, garbage, and in some cases heat and hot water as well.

    Whoever wrote this understands not a thing about rentals. Does anyone really believe that the landlord pays for utilities out of his own pocket, instead of just passing the cost to you in the form of rent?

    • Not subject to downward movements in home prices. If we are in a housing bubble, you don’t lose money. (On the other hand, if house prices keep going up, you lose money).
    • May be less expensive than owning. If the cost of renting is less than the cost of buying, you can use the excess money for other purposes, such as investment or furniture.
    • If you are in a market with declining real estate values. If home values in your area are dropping you may get a better deal on the home if you wait. Let someone else take the loss instead of you.

    These three “reasons” are the worst of all, in a way, because they pretend expertise that is unproven. Rental prices are not subject to dropping home prices? Where’s the evidence of that? Landlords owning depreciating assets won’t try to recoup some of the loss via higher rent? Especially if they know that the housing market is unfriendly to buyers, leaving people no choice but the continue renting? What may be a true statement is simply unproven, and zero attempt to support such a sweeping generalization is made.

    Renting “may be” less expensive than owning? Is that even advice? “If the cost of renting is less than the cost of buying, you can use the excess money for other purposes” — gee thanks. No way anyone could have figured that out on her own.

    Isn’t this begging the question entirely? If a consumer actually wanted to know whether she should be buying or renting in XYZ market right now, is an agent supposed to tell her, “Well, renting might be less expensive… but then again, it might not be. But if the cost of renting is less than cost of buying, you can use the leftover money for other things!”

    In my ever so humble opinion, residential brokerages might want to consider investing in some systems and tools to conduct residential sensitivity/lease-buy analysis. Simple things.

    For example, not being an agent, I might start with the questions in one of the online calculators (E-Loan’s is a decent one) then ask further questions, such as:

    • What is your current pre-tax and post-tax income?
    • Any other tax shelters?
    • What are your other investments?
    • What is the current inflation rate? What is the benchmark money market interest rate? What is the 3 year average of returns from equities? From bonds?
    • Local tax rates
    • Local property rates
    • Insurance costs, both homeowner and renter
    • Maintenance costs
    • How much have homes appreciated/depreciated in the specific area, with as specific a set of comparables as possible, in the past 1/3/5 years?
    • Trends in rents for the past 1/3/5 years?

    Then I might combine all of that and run some sort of analysis looking for the various breakpoints, then sit down with the client and go over the analysis, explaining the various assumptions made. Play with the variables some with the client, and show how the picture changes.

    (Incidentally, I have to assume that some software company out there produces this kind of a tool for residential brokers. Right? Doesn’t someone offer this tool? If not… there’s an opportunity here for one of you tool makers to the industry.)

    Even if that client ends up deciding to rent instead of purchase, you have proven your expertise without a doubt and your trustworthiness. They know, walking out of your office, that you just steered them away from making a bad financial choice. If an agent did that for me, I would absolutely look for him when it did come time to buy. That’s the guy I’d want to work with.

    Furthermore, such an analysis forms a perfect basis for CRM efforts. Maybe the key variable that led the client to walk away from purchase was the mortgage interest rate compared to the stock market returns; you should then be able to contact them when those rates change materially.

    Finally, it’s just the right thing to do as a real estate professional.

    And before the client walked out of my office, I would have them sit down and watch this:

    (ED: The original video was taken down on YouTube.  If you are wondering what it is, the song is “Life for Rent” by Dido.  Just a beautiful, lovely song.  The live acoustic version above isn’t bad at all.)

    Homeownership is not just a dollars and cents issue. It’s a deeply emotional one. People are going to be willing to take a “loss” in order to have equity, to have a home that is theirs. The lease/buy analysis is simply going to make clear what they’re willing to spend for that emotional fulfillment of owning your own home.

    Of course, this was also just a great reason to post a great song and video. 🙂


    4 Comments leave one →
    1. April 24, 2008 10:43 am

      Hey Rob: My blog post and the related wiki article merely skim the surface of the decisions and data that go into making a choice of rent v. buy. Call it Oprah-like, but, that’s the beauty of a wiki — it grows over time with the input of professional and community experts. Thanks for fleshing out the topic with more info and links to helpful calculators. As a matter of fact, we intend on adding some of those calculators to our Zillow Mortgage Marketplace section very soon:

      By the way, the video you embedded above doesn’t seem to be working.
      — Diane

    2. April 24, 2008 11:30 am

      interesting article. indeed, there are too many particulars to apply a general rule.

      here are our two cents:

      also, when i clicked on the video, i received and error message

    3. April 25, 2008 5:52 am

      Buying or renting is a big decision that most will have to make. The standard analysis and the information you have given on renting Vs buying is really helpful for those who are buying or renting properties.

    4. April 28, 2008 9:44 am

      BAH! They disabled embedding on that video via YouTube. I’ve changed it to the live version I’ve found.

      Thanks for the heads-up.


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